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, 2007
 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, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
 Large
accelerated filer oAccelerated
filer  xNon-accelerated
filer  o      Smaller
reporting company  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, 2007 (based upon the last reported sales price of such
stock on the OTC Bulletin Board on June 30, 2007) was $146,582,485.
  The
number of shares of Common Stock outstanding as of March 12, 2008 was
8,136,075.
  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
2008 Annual Meeting of Shareholders.
   
  TABLE
OF CONTENTS
 
 
 PART
      I
              PageItem  1.    Business
              3Item
      1A.   Risk Factors
              15Item
      1B.  Unresolved Staff Comments
              20Item  2.    Properties
              20Item  3.    Legal
      Proceedings
              20Item  4.    Submission
      of Matters to a Vote of Security Holders
              20PART
      IIItem  5.   Market
      for Registrant's Common Equity,  Related Stockholder Matters and
      Issuer Purchases of Equity Securities
              21Item  6.   Selected
      Financial Data
              23Item  7.   Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
              24Item
      7A.  Quantitative and Qualitative Disclosures About Market
      Risk
              44Item  8.    Financial
      Statements and Supplementary Data
              47Item  9.   Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              84Item
      9A.  Controls and Procedures
              84Item
      9B.  Other Information
              85PART
      IIIItem
      10.   Directors, Executive Officers and Corporate
      Governance
              85Item
      11.   Executive Compensation
              85Item
      12.   Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              86Item
      13.   Certain Relationships and Related Transactions and
      Director Independence
              86Item
      14.   Principal Accountant Fees and
Services
              86PART
      IVItem
      15.   Exhibits and Financial Statement
      Schedules
              87Signatures
              89
  2
 
 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 not 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 Part I, 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 throughout the
California Counties of Solano, Yolo, Placer and Sacramento.
 
 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, Folsom and Roseville
that originate residential mortgages and construction loans. The Bank also has a
Small Business Administration (“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, 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
  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 to its 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.  The
Vacaville real estate loan office was closed in 2007 in response to the current
dramatic slowdown in the housing market.
 
 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
  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, in 2007 the Bank
decided to close its Suisun City Branch and serve the Branch’s customers out of
its Fairfield Branch.  The Fairfield Branch was expanded and remodeled
to accommodate the additional customers and to include an investment &
brokerage services office.
 
 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 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.
 
 At the
end of 2007, the Bank announced its intention to open a full service branch in
the city of Auburn, the county seat of Placer County.  The Auburn
Branch is expected to open in mid-2008.
 
 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, 2007, the Company and the Bank employed 243 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
  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 member and non-member
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, regulations or policies may have a
material adverse effect on the business, financial condition or results of
operations, or 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 and managerial 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
 
 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 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 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
  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 controls and processes regarding Bank Secrecy
Act and anti-money laundering laws.  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.  Failure to comply with these additional
requirements may also adversely affect the ability to obtain regulatory
approvals for future initiatives requiring regulatory approval, including
acquisitions.
 
 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.
 
 
 
 8
 
 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.
 
 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.
 
 In
October 2007, the federal bank regulatory agencies adopted final rules
implementing the affiliate marketing provisions of the Fair and Accurate Credit
Transactions Act of 2003, which amended the Fair Credit Reporting Act
(FCRA).  The final rules, which became effective on January 1, 2008,
impose a prohibition, subject to certain exceptions, on a financial institution
using certain information received from an affiliate to make a solicitation to a
consumer unless the consumer is given notice and a reasonable opportunity to opt
out of such solicitations, and the consumer does not opt out.  The
final rules apply to information obtained from the consumer’s transactions or
account relationships with an affiliate, any application the consumer submitted
to an affiliate, and third-party sources, such as credit reports, if the
information is to be used to send marketing solicitations.  The rules
do not supersede or affect a consumer’s existing right under other provisions of
the FCRA to opt out of the sharing between a financial institution and its
affiliates of consumer information other than information relating solely to
transactions or experiences between the consumer and the financial institution
or its affiliates.
 
 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.
 
 
 
 9
  A banking
organization's risk-based capital ratios are obtained by dividing its qualifying
capital by its total risk-adjusted assets and off-balance-sheet
items.  The regulators measure risk-adjusted assets and
off-balance-sheet items against both total qualifying capital (the sum of Tier 1
capital and limited amounts of Tier 2 capital) and Tier 1
capital.  Tier 1 capital consists of common stock, retained earnings,
non-cumulative perpetual preferred stock, trust preferred securities (for up to
25% of total tier 1 capital), other types of qualifying preferred stock and
minority interests in certain subsidiaries, less most other intangible assets
and other adjustments.  Net unrealized losses on available-for-sale
equity securities with readily determinable fair value must be deducted in
determining Tier 1 capital.  For Tier 1 capital purposes, deferred tax
assets that can only be realized if an institution earns sufficient taxable
income in the future are limited to the amount that the institution is expected
to realize within one year, or 10% of Tier 1 capital, whichever is
less.  Tier 2 capital may consist of a limited amount of the allowance
for possible loan and lease losses, term preferred stock and other types of
preferred stock and trust preferred securities not qualifying as Tier 1 capital,
term subordinated debt and certain other instruments with some characteristics
of equity.  The inclusion of elements of Tier 2 capital are subject to
certain other requirements and limitations of the federal banking
agencies.  The federal banking agencies require a minimum ratio of
qualifying total capital to risk-adjusted assets and off-balance-sheet items of
8%, and a minimum ratio of Tier 1 capital to adjusted average risk-adjusted
assets and off-balance-sheet items of 4%.
 
 Under
FDIC regulations, there are also two rules governing minimum capital levels that
FDIC-supervised banks must maintain against the risks to which they are
exposed.  The first rule makes risk-based capital standards consistent
for two types of credit enhancements (i.e., recourse arrangements and direct
credit substitutes) and requires different amounts of capital for different risk
positions in asset securitization transactions.  The second rule
permits limited amounts of unrealized gains on debt and equity securities to be
recognized for risk-based capital purposes as of September 1,
1998.  The FDIC rules also provide that a qualifying institution that
sells small business loans and leases with recourse must hold capital only
against the amount of recourse retained.  In general, a qualifying
institution is one that is well capitalized under the FDIC's prompt corrective
action rules.  The amount of recourse that can receive the
preferential capital treatment cannot exceed 15% of the institution's total
risk-based capital.
 
 Effective
January 1, 2002, the federal banking agencies, including the FDIC, adopted new
regulations to change their regulatory capital standards to address the
treatment of recourse obligations, residual interests and direct credit
substitutes in asset securitizations that expose banks primarily to credit
risk.  Capital requirements for positions in securitization
transactions are varied according to their relative risk exposures, while
limited use is permitted of credit ratings from rating agencies, a banking
organization’s qualifying internal risk rating system or qualifying
software.  The regulation requires a bank to deduct from Tier 1
capital, and from assets, all credit-enhancing interest only-strips, whether
retained or purchased that exceed 25% of Tier 1
capital.  Additionally, a bank must maintain dollar-for-dollar
risk-based capital for any remaining credit-enhancing interest-only strips and
any residual interests that do not qualify for a ratings-based
approach.  The regulation specifically reserves the right to modify
any risk-weight, credit conversion factor or credit equivalent amount, on a
case-by-case basis, to take into account any novel transactions that do not fit
well into the currently defined categories.
 
 In
addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
average total assets, referred to as the leverage capital ratio.  For
a banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum lever­age ratio of
Tier 1 capital to total assets must be 3%.  It is improbable; however,
that an institution with a 3% leverage ratio would receive the highest rating by
the regulators since a strong capital position is a significant part of the
regulators' rating.  For all banking organizations not rated in the
highest category, the minimum leverage ratio must be at least 100 to 200 basis
points above the 3% minimum.  Thus, the effective minimum leverage
ratio, for all practical purposes, must be at least 4% or 5%.  In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
  10
  As of
December 31, 2007, 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, 2007 (amounts in thousands
except percentage amounts).
 
 The
      CompanyWell
              
              
              MinimumActual
              
              
              Capitalized
              
              
              CapitalCapital
              
              
              Ratio
              
              
              Ratio
              
              
              RequirementLeverage
              
              $
              64,046
              
              
              
              9.1
              %
              
              
              5.0
              %
              
              
              4.0
              %Tier 1
      Risk-Based
              
              
              64,046
              
              
              
              10.7
              %
              
              
              6.0
              %
              
              
              4.0
              %Total
      Risk-Based
              
              
              71,336
              
              
              
              11.9
              %
              
              
              10.0
              %
              
              
              8.0
              %
 
 The
      BankWell
              
              
              MinimumActual
              
              
              Capitalized
              
              
              CapitalCapital
              
              
              Ratio
              
              
              Ratio
              
              
              RequirementLeverage
              
              $
              63,065
              
              
              
              9.0
              %
              
              
              5.0
              %
              
              
              4.0
              %Tier 1
      Risk-Based
              
              
              63,065
              
              
              
              10.6
              %
              
              
              6.0
              %
              
              
              4.0
              %Total
      Risk-Based
              
              
              70,355
              
              
              
              11.8
              %
              
              
              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.
 
 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, under­capitalized, significantly
undercapitalized and critically undercapitalized.
 
 Under the
prompt corrective action provisions of FDICIA, an insured depository institution
generally will be classified in the following categories based on the capital
measures indicated below:
 
 “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%.
  11
  An
institution that, based upon its capital levels, is classified as “well
capitalized,” “adequately capitalized” or “under­capitalized” may be treated
as though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that
an unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment.  At each successive lower capital category, an insured
depository institution is subject to more restrictions.  Management
believes that at December 31, 2007, 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.
 
 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.
  12
  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 (“BIF’) and the Savings Association Insurance Fund (“SAIF) 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.
  The
Federal Deposit Insurance Reform Act of 2005, as implemented by the FDIC,
adopted a new schedule of rates that eh FDIC can adjust up or down, depending on
the revenue needs of the insurance fund.  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.  Although an
FDIC credit for prior contributions offset most of the assessment for 2007, the
insurance assessments the Bank will pay has increased our costs starting in
2008.  This new assessment system has resulted in annual assessments
on deposits of the Bank of approximately $419,000.  Any further
increases in the deposit insurance assessments the Bank pays would further
increase our costs.
  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 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 such as acquisitions or de novo
branching.
 
 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.
  13
 
 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, regulations and policies impacting the banking and financial
services industry are frequently introduced in Congress, in the state
legislatures and before the various bank regulatory agencies.  If
enacted, such legislation could significantly change the competitive environment
in which the Company operates.  The likelihood and timing of any such
changes and the impact such changes might have on the competitive situation,
financial condition or results of operations of the Company cannot be
predicted.
 
 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.
 
 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.
  14
 
 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
U.S Economy Has Experienced a Slowing of Economic Growth, Volatility in the
Financial Markets, and Significant Deterioration in Sectors of the U.S.
Residential Real Estate Markets, All of Which Present Challenges for the Banking
and Financial Services Industry and for the Bank
 
 Commencing
in 2007 and continuing into 2008, certain adverse financial developments have
impacted the U.S. economy and financial markets and present challenges for the
banking and financial services industry and for the Bank. These developments
include a general slowing of economic growth in the U.S. which has prompted the
Congress to adopt an economic stimulus bill which President Bush signed into law
on February 13, 2008, and which prompted the Federal Reserve Board to
decrease its discount rate and the federal funds rate several times in the first
quarter of 2008. These developments have contributed to substantial volatility
in the equity securities markets, as well as volatility and a tightening of
liquidity in the credit markets. In addition, financial and credit conditions in
the domestic residential real estate markets have deteriorated significantly,
particularly in the subprime sector. These conditions in turn have led to
significant deterioration in certain financial markets, particularly the markets
for subprime residential mortgage-backed securities and for collateralized debt
obligations backed by residential mortgage-backed securities. If,
notwithstanding the federal government's recent fiscal and monetary measures,
the U.S. economy were to go into a recession, this would present additional
significant challenges for the U.S. banking and financial services industry and
for the Bank. While it is difficult to predict how long these conditions will
exist and how and the extent to which the Bank may be affected, these factors
could continue to present risks for some time for the industry and the Bank’s
financial condition, results of operations, cash flows and business
prospects.
 
 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, 2007, approximately 69% 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 “The U.S. Economy Has
Experienced a Slowing of Economic Growth, Volatility in the Financial Markets
and Significant Deterioration in Sectors of the U.S. Residential Real Estate
Markets, All of Which Present Challenges for the Banking and Financial Services
Industry and for the Bank” above, and “Adverse California Economic Conditions
Could Adversely Affect the Bank’s Business” below.
  15
  The
Bank’s primary lending focus has historically been commercial (including
agricultural), construction and real estate mortgage.  At December 31,
2007, real estate mortgage (excluding loans held-for-sale) and construction
loans comprised approximately 51% and 18%, respectively, of the total loans in
the Bank’s portfolio.  At December 31, 2007, all of the Bank’s real
estate mortgage and construction loans and approximately 6% 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 further deteriorate in the
future.  Further 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, 2007, approximately 69%
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, a further downturn in the 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 significant deterioration in the California real estate market and
housing industry.  California’s state government is currently
experiencing budget shortfalls which in January 2008 prompted Governor
Schwarzenegger to declare a fiscal emergency.  This declaration could
lead to reduced spending by the State of California and its
agencies.  It is also possible that the legislative response to the
budget crisis could lead to increased state taxes in California.  The
financial and economic consequences of this situation cannot be predicted with
any certainty at this time.  If economic conditions in California
decline further or if California were to experience another recession, it is
expected that the Bank’s level of problem assets would
increase.  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, 2007, 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.
  16
  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 to the Company without regulatory
approval.  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.
 
 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 Could Adversely Affect Us
 
 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 fund and not for the benefit of shareholders of the
Company.  Regulatory authorities may also change their interpretation
of these laws and regulations.  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.
 
 We
maintain systems and procedures designed to comply with applicable laws and
regulations. However, some legal/regulatory frameworks provide for the
imposition of criminal or civil penalties (which can be substantial) for
noncompliance. In some cases, liability may attach even if the noncompliance was
inadvertent or unintentional and even if compliance systems and procedures were
in place at the time. There may be other negative consequences from a finding of
noncompliance, including restrictions on certain activities and damage to the
Company’s reputation.
  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.
  17
  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.  Although an FDIC credit for prior contributions
offset most of the assessment for 2007, the insurance assessments the Bank will
pay has increased our costs starting in 2008.  This new assessment
system has resulted in annual assessments on deposits of the Bank of
approximately $419,000.  Any further increases in the deposit
insurance assessments the Bank pays would further increase our
costs.
 
 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 employees 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.
 
 Our
Business Could Suffer if We Fail to Attract and Retain Skilled
Personnel
 
 The
Company’s future success depends to a significant extent on the efforts and
abilities of our 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.
 
 The
Continuing War on Terrorism Could Adversely Affect U.S. and Global Economic
Conditions
 
 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 disruption of U.S. economic and financial conditions and could adversely
affect business, economic and financial 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.
 
 Changes
in Accounting Standards Could Materially Impact Our Financial
Statements
 
 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.  In some cases, we could be required to apply a new or
revised standard retroactively, resulting in our restating prior period
financial statements.
  18
  Increases
in the Allowance for Loan Losses Would Adversely Affect the Bank’s Financial
Condition and Results of Operations
 
 The
Bank’s allowance for estimated losses on loans was approximately $10.9 million,
or 2.13% of total loans, at December 31, 2007, compared to $8.4 million, or
1.73% of total loans, at December 31, 2006, and 70% of total non-performing
loans at December 31, 2007, compared to 243% of total non-performing loans at
December 31, 2006.  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.
 
 Future
of Shares of the Company’s Common Stock Could Have a Material Adverse Effect on
the Market Price of the Common Stock
 
 As of
December 31, 2007, the Company had 8,169,772 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 6.5% of the unissued authorized shares of
Common Stock at exercise prices ranging from $4.03 to $26.18 have been issued to
directors and employees of the Company, over the past eight (8) years, under the
Company’s 2000 and 2006 Stock Option Plans and Outside Directors 2000 and 2006
Non-statutory Stock Option Plans, and options to acquire up to an additional
9.1% 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 Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities” below.
 
 There
is a Limited Public Market for the Company’s Common Stock which May Make it
Difficult for Shareholders to Dispose of Their Shares
 
 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.
 
 Advances
and Changes in Technology, and the Company’s Ability to Adapt Its Technology,
could Impact Its Ability to Compete and Its Business and Operations
 
 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.
  19
 
 Environmental
Hazards Could Have a Material Adverse Effect on the Company’s Business,
Financial Condition and Results of Operations
 
 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.
 
 Shareholders
of the Company Will Experience Dilution if Outstanding Options are
Exercised
 
 As of
December 31, 2007, the Company had outstanding options to purchase an aggregate
of 511,567 shares of Common Stock at exercise prices ranging from $4.03 to
$26.18 per share, or a weighted average exercise price per share of
$11.43.  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.
 
 
 ITEM
1B – UNRESOLVED STAFF COMMENTS
 
 None.
 
 ITEM
2 – PROPERTIES
 
 The
Company and the Bank are engaged in the banking business through 17 offices five
counties in Northern California operating out of four offices in Solano County,
eight in Yolo County, three in Sacramento County and two in Placer
County.  In addition, the Company owns four vacant lots, three in
northern Solano County and one in eastern Sacramento County, for possible future
bank sites.  The Company and the Bank believe all of their offices are
constructed and e quipped to meet prescribed security requirements.
 
 The Bank
owns three branch office locations and two administrative facilities and leases
14 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.
  20
 
 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 2007
              
              $17.83
              
              $14.863rd
      Quarter 2007
              
              $17.92
              
              $14.862nd
      Quarter 2007
              
              $18.16
              
              $16.361st  Quarter
      2007
              
              $20.92
              
              $17.454th
      Quarter 2006
              
              $23.14
              
              $20.253rd
      Quarter 2006
              
              $24.02
              
              $22.252nd
      Quarter 2006
              
              $25.81
              
              $23.231st  Quarter
      2006
              
              $25.58
              
              $21.20
 
 *  Price
adjusted for dividends and splits.
 
 As of
December 31, 2007, there were approximately 1,218 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
      29, 2008
              
              6%
              
              March
      31, 2008February
      28, 2007
              
              6%
              
              March
      30, 2007February
      28, 2006
              
              6%
              
              March
      31, 2006
 
 The
Company does not expect to pay a cash dividend in the foreseeable
future.  Our ability to declare and pay dividends is affected by
certain regulatory restrictions.  See“Business – Restrictions
on Dividends and Other Distributions” above.
  21
 
 Purchases
of Equity Securities by the Issuer or Affiliated Purchasers
 
 On June
22, 2007, the Company approved a new stock repurchase program effective June 22,
2007 to replace the Company’s previous stock repurchase plan that commenced May
1, 2006.  The new stock repurchase program, which will remain in
effect until June 21, 2009, allows repurchases by the Company in an aggregate of
up to 4% of the Company’s outstanding shares of common stock over each rolling
twelve-month period.  The Company repurchased 129,924 shares of the
Company’s outstanding common stock during the quarter ended December 31,
2007.
 
  The
Company made the following repurchases of its common stock during the quarter
ended December 31, 2007:
 (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, 2007
                
                
                4,843
                
                
                $
                18.24
                
                
                
                4,843
                
                
                
                209,759November
      1 – November 30,  2007
                
                
                99,842
                
                
                $
                17.84
                
                
                
                99,842
                
                
                
                109,917December
      1 – December 31,  2007
                
                
                25,239
                
                
                $
                17.40
                
                
                
                25,239
                
                
                
                84,678Total
                
                
                129,924
                
                
                $
                17.77
                
                
                
                129,924
                
                
                
                84,678
  22
 
 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, 2004, and 2003 have been
derived from the Company’s historical financial statements not included in this
Report.  The financial information for 2007, 2006 and 2005 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)
 
 2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Interest
      Income and Loan Fees
              
              $
              48,594
              
              
              $
              48,070
              
              
              $
              40,902
              
              
              $
              31,619
              
              
              $
              30,326Interest
      Expense
              
              
              (11,738
              )
              
              
              (9,426
              )
              
              
              (5,729
              )
              
              
              (3,426
              )
              
              
              (3,109
              )Net
      Interest Income
              
              
              36,856
              
              
              
              38,644
              
              
              
              35,173
              
              
              
              28,193
              
              
              
              27,217Provision
      for Loan Losses
              
              
              (4,795
              )
              
              
              (735
              )
              
              
              (600
              )
              
              
              (207
              )
              
              
              (2,153
              )Net
      Interest Income after Provision for Loan Losses
              
              
              32,061
              
              
              
              37,909
              
              
              
              34,573
              
              
              
              27,986
              
              
              
              25,064Other
      Operating Income
              
              
              7,160
              
              
              
              5,289
              
              
              
              5,720
              
              
              
              5,214
              
              
              
              7,160Other
      Operating Expense
              
              
              (28,803
              )
              
              
              (29,219
              )
              
              
              (26,813
              )
              
              
              (22,943
              )
              
              
              (22,868
              )Income
      before Taxes
              
              
              10,418
              
              
              
              13,979
              
              
              
              13,480
              
              
              
              10,257
              
              
              
              9,356Provision
      for Taxes
              
              
              (3,137
              )
              
              
              (5,169
              )
              
              
              (4,792
              )
              
              
              (3,550
              )
              
              
              (3,245
              )Net
      Income
              
              $
              7,281
              
              
              $
              8,810
              
              
              $
              8,688
              
              
              $
              6,707
              
              
              $
              6,111Basic
      Income Per Share
              
              $
              0.83
              
              
              $
              0.98
              
              
              $
              0.96
              
              
              $
              0.74
              
              
              $
              0.67Diluted
      Income Per Share
              
              $
              0.80
              
              
              $
              0.94
              
              
              $
              0.92
              
              
              $
              0.72
              
              
              $
              0.66Total
      Assets
              
              $
              709,895
              
              
              $
              685,225
              
              
              $
              660,647
              
              
              $
              629,503
              
              
              $
              559,441Total
      Investments
              
              $
              74,849
              
              
              $
              76,273
              
              
              $
              48,788
              
              
              $
              55,154
              
              
              $
              50,235Total
      Loans, including Loans Held-for-Sale, net
              
              $
              499,314
              
              
              $
              480,009
              
              
              $
              460,501
              
              
              $
              433,421
              
              
              $
              380,491Total
      Deposits
              
              $
              622,671
              
              
              $
              603,682
              
              
              $
              581,781
              
              
              $
              557,186
              
              
              $
              498,849Total
      Equity
              
              $
              63,975
              
              
              $
              61,990
              
              
              $
              56,802
              
              
              $
              51,901
              
              
              $
              46,972Weighted
      Average Shares of Common Stock outstanding used for Basic Income Per Share
      Computation 1
              
              
              8,820,846
              
              
              
              8,958,878
              
              
              
              9,020,678
              
              
              
              9,074,207
              
              
              
              9,097,007Weighted
      Average Shares of Common Stock outstanding used for Diluted Income Per
      Share Computation 1
              
              
              9,083,365
              
              
              
              9,398,017
              
              
              
              9,437,195
              
              
              
              9,312,184
              
              
              
              9,294,348Return
      on Average Total Assets
              
              
              1.05
              %
              
              
              1.32
              %
              
              
              1.35
              %
              
              
              1.14
              %
              
              
              1.18
              %Net
      Income/Average Equity
              
              
              11.59
              %
              
              
              14.90
              %
              
              
              16.17
              %
              
              
              13.73
              %
              
              
              13.56
              %Net
      Income/Average Deposits
              
              
              1.19
              %
              
              
              1.49
              %
              
              
              1.52
              %
              
              
              1.28
              %
              
              
              1.32
              %Average
      Loans/Average Deposits
              
              
              79.75
              %
              
              
              81.20
              %
              
              
              79.44
              %
              
              
              75.81
              %
              
              
              79.25
              %Average
      Equity to Average Total Assets
              
              
              9.06
              %
              
              
              8.87
              %
              
              
              8.37
              %
              
              
              8.32
              %
              
              
              8.69
              %
 
 1.  All
      years have been restated to give retroactive effect for stock dividends
      issued and stock splits.
 
  23
 
 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.
 
 Financial
highlights for 2007 include:
 
 Net
income for 2007 totaled $7.28 million, a 17.4% decrease compared to $8.81
million for 2006.  Net income per common share for 2007 of $0.83
decreased 15.3% compared to $0.98 for 2006, and net income per common share on a
fully diluted basis was $0.80 for 2007, a decrease of 14.9% compared to $0.94
for 2006.
 
 Loans
(including loans held-for-sale) increased to $499.3 million at December 31,
2007, a 4.0% increase from $480.0 million at December 31,
2006.  Commercial loans totaled $112.3 million at December 31,
2007, up 15.5% from $97.3 million a year earlier; agriculture loans were $36.8
million, down 4.8% from $38.6 million at December 31, 2006; real estate
construction loans were $91.9 million, down 13.9% from $106.8 million at
December 31, 2006; and real estate mortgage loans were $253.0 million, up
9.1% from $232.0 million a year earlier.
 
 Average
deposits grew to $612.8 million during 2007, a $23.0 million or 3.9% increase
from 2006.
 
 The
Company reported average total assets of $693.4 million at December 31,
2007, up 4.1% from $666.4 million a year earlier.
 
 The
provision for loan losses in 2007 totaled $4,795,000, an increase of 552.4% from
$735,000 in 2006.  Net charge-offs were $2,280,000 in 2007 compared to
$291,000 in 2006.  The increase in the provision for loan losses and
increase in net charge-offs can be primarily attributed to increased loan volume
combined with increased charge-offs.
 
 Net
interest income totaled $36.9 million for 2007, a decrease of 4.6% from $38.6
million in 2006, primarily due to increased deposit volumes, increased deposit
rates and decreased loan rates, which was partially offset by increased loan
volume.
 
 Other
operating income totaled $7.2 million for the year ended December 31, 2007,
an increase of 35.4% from $5.3 million for the year ended December 31,
2006.  The increase was due primarily to increases in service charges
on deposit accounts, gains on sales of available-for-sale securities, gains on
sales of loans and gains on other real estate owned.
 
 Other
operating expenses totaled $28.8 million for 2007, down 1.4% from $29.2 million
in 2006.  Contributing to the decrease was decreased salaries, which
was partially offset by increased data processing expenses.
  24
 
 In 2008,
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 a general 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
general 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.
  25
 
 Prospective
Accounting Pronouncements
 
 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 does not expect the adoption of
SFAS No. 157 to have any material impact on the Company’s financial position and
results of operations.
 
 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 does not expect the
adoption of SFAS No. 159 to have any material impact on the Company’s financial
position and results of operations.
 
 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 split-dollar life insurance arrangements within the scope of this
Issue, an employer should recognize a liability for future benefits in
accordance with SFAS 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 does not expect the adoption of EITF
06-4 to have any material impact on the Company’s financial position and results
of operations.
 
 In
November 2007, EITF Issue No. 07-6, Accounting for the Sale of Real
Estate Subject to the Requirements of FASB Statement No. 66, Accounting for
Sales of Real Estate, When the Agreement Includes a Buy-Sell Clause, was
issued. The Task Force reached a consensus that a buy-sell clause in a sale of
real estate that otherwise qualifies for partial sale accounting does not by
itself constitute a form of continuing involvement that would preclude partial
sale accounting under SFAS No. 66, Accounting for Sales of Real
Estate.  However, continuing involvement could be present if
the buy-sell clause in conjunction with other implicit and explicit terms of the
arrangement indicate that the seller has an obligation to repurchase the
property, the terms of the transaction allow the buyer to compel the seller to
repurchase the property, or the seller can compel the buyer to sell its interest
in the property back to the seller. The consensus is effective for fiscal years
beginning after December 15, 2007.  The consensus applies to new
assessments made under SFAS No, 66 after the consensus’ effective
date.  The Company does not expect the adoption of EITF Issue No. 07-6
to have any material impact on the consolidated financial statements or results
of operations of the Company.
 
 In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements, which will require non-controlling
interests (previously referred to as minority interests) to be treated as a
separate component of equity, not as a liability or other item outside of
permanent equity.  SFAS No. 160 applies to the accounting for
non-controlling interests and transactions with non-controlling interest holders
in consolidated financial statements. SFAS No. 160 is effective for periods
beginning on or after December 15, 2008. Earlier application is
prohibited.  SFAS No. 160 will be applied prospectively to all
non-controlling interests, including any that arose before the effective date
except that comparative period information must be recast to classify
non-controlling interests in equity, attribute net income and other
comprehensive income to non-controlling interests, and provide other disclosures
required by SFAS No. 160. The Company does not expect the adoption of SFAS No.
160 to have any material impact on the consolidated financial statements or
results of operations of the Company.
  26
 
 In
December 2007, the FASB issued SFAS No. 141R, Business Combinations, which
requires most identifiable assets, liabilities, non-controlling interests, and
goodwill acquired in a business combination to be recorded at “full fair value”
at the acquisition date.  SFAS No. 141R applies to all business
combinations, including combinations among mutual entities and combinations by
contract alone. Under SFAS No. 141R, all business combinations will be accounted
for by applying the acquisition method.  SFAS No. 141R is effective
for periods beginning on or after December 15, 2008. Earlier application is
prohibited.  SFAS No. 141R will be applied to business combinations
occurring after the effective date.  The Company currently does not
have any business combination contemplated that are expected to be closed after
the effective date; therefore, the adoption of SFAS No. 141R will not have an
impact, if any, on the consolidated financial statements or results of
operations of the Company.
 
 In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB No. 110”),
Certain Assumptions Used in
Valuation Methods, which extends the use of the “simplified” method,
under certain circumstances, in developing an estimate of expected term of
“plain vanilla” share options in accordance with SFAS No. 123R. Prior to SAB No.
110, SAB No. 107 stated that the simplified method was only available for grants
made up to December 31, 2007.  The Company currently plans to continue
to use the simplified method in developing an estimate of expected term of stock
options.
  27
 
 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
 (Dollars
in thousands)
 
 2007
              
              
              2006
              
              
              2005Average
              
              
              
              
              
              Average
              
              
              
              
              
              AverageBalance
              
              
              Percent
              
              
              Balance
              
              
              Percent
              
              
              Balance
              
              
              PercentASSETSCash
      and Due From Banks
              
              $
              32,518
              
              
              
              4.69
              %
              
              $
              29,934
              
              
              
              4.49
              %
              
              $
              31,287
              
              
              
              4.87
              %Federal
      Funds Sold
              
              
              52,359
              
              
              
              7.55
              %
              
              
              61,904
              
              
              
              9.29
              %
              
              
              81,948
              
              
              
              12.75
              %Investment
      Securities
              
              
              86,046
              
              
              
              12.41
              %
              
              
              64,770
              
              
              
              9.72
              %
              
              
              48,378
              
              
              
              7.53
              %Loans  1
              
              
              488,704
              
              
              
              70.47
              %
              
              
              478,908
              
              
              
              71.88
              %
              
              
              452,646
              
              
              
              70.46
              %Stock
      in Federal Home Loan Bank andother
      equity securities, at cost
              
              
              2,146
              
              
              
              0.31
              %
              
              
              2,087
              
              
              
              0.31
              %
              
              
              2,011
              
              
              
              0.31
              %Other
      Assets
              
              
              31,666
              
              
              
              4.57
              %
              
              
              28,750
              
              
              
              4.31
              %
              
              
              26,211
              
              
              
              4.08
              %Total
      Assets
              
              $
              693,439
              
              
              
              100.00
              %
              
              $
              666,353
              
              
              
              100.00
              %
              
              $
              642,481
              
              
              
              100.00
              %LIABILITIES
      &STOCKHOLDERS'
      EQUITYDeposits:Demand
              
              $
              185,563
              
              
              
              26.77
              %
              
              $
              187,766
              
              
              
              28.18
              %
              
              $
              184,171
              
              
              
              28.67
              %Interest-Bearing
      Transaction Deposits
              
              
              130,608
              
              
              
              18.83
              %
              
              
              95,180
              
              
              
              14.28
              %
              
              
              73,990
              
              
              
              11.52
              %Savings
      & MMDAs
              
              
              179,425
              
              
              
              25.87
              %
              
              
              190,036
              
              
              
              28.52
              %
              
              
              190,562
              
              
              
              29.65
              %Time
      Certificates
              
              
              117,178
              
              
              
              16.90
              %
              
              
              116,787
              
              
              
              17.53
              %
              
              
              121,067
              
              
              
              18.84
              %Borrowed
      Funds
              
              
              10,504
              
              
              
              1.51
              %
              
              
              11,350
              
              
              
              1.70
              %
              
              
              14,320
              
              
              
              2.23
              %Other
      Liabilities
              
              
              7,347
              
              
              
              1.06
              %
              
              
              6,113
              
              
              
              0.92
              %
              
              
              4,627
              
              
              
              0.72
              %Stockholders'
      Equity
              
              
              62,814
              
              
              
              9.06
              %
              
              
              59,121
              
              
              
              8.87
              %
              
              
              53,744
              
              
              
              8.37
              %Total
      Liabilities & Stockholders’ Equity
              
              $
              693,439
              
              
              
              100.00
              %
              
              $
              666,353
              
              
              
              100.00
              %
              
              $
              642,481
              
              
              
              100.00
              %1. Average
      balances for loans include loans held-for-sale and non-accrual loans and
      are net of the allowance for loan losses.
 
  28
 
 Net Interest
      EarningsAverage Balances,
      Yields and Rates(Dollars
      in thousands)2007
              
              
              2006
              
              
              2005Yields
              
              
              
              
              
              
              Yields
              
              
              
              
              
              
              YieldsInterest
              
              Earned/
              
              
              
              
              Interest
              
              Earned/
              
              
              
              
              Interest
              
              Earned/Average
              
              Income/
              
              Rates
              
              
              Average
              
              Income/
              
              Rates
              
              
              Average
              
              Income/
              
              RatesAssets
              
              
              Balance
              
              Expense
              
              Paid
              
              
              Balance
              
              Expense
              
              Paid
              
              
              Balance
              
              Expense
              
              PaidLoans
      1
              
              
              $              488,704
              
              $
      39,220
              
              8.03%
              
              
              $     
       478,908
              
              $       
      39,082
              
              8.16%
              
              
              $     
       452,646
              
              $       
       32,808
              
              7.25%Loan
      Fees
              
              
              —
              
              2,268
              
              0.46%
              
              
              —
              
              2,812
              
              0.59%
              
              
              —
              
              3,030
              
              0.67%Total
      Loans, IncludingLoan
      Fees
              
              488,704
              
              41,488
              
              8.49%
              
              
              478,908
              
              41,894
              
              8.75%
              
              
              452,646
              
              35,838
              
              7.92%Federal
      Funds Sold
              
              52,359
              
              2,660
              
              5.08%
              
              
              61,904
              
              2,986
              
              4.82%
              
              
              81,948
              
              2,587
              
              3.16%Due
      From Banks
              
              5,922
              
              273
              
              4.61%
              
              
              —
              
              —
              
              —
              
              
              —
              
              —
              
              —Investment
      Securities:Taxable
              
              56,350
              
              2,789
              
              4.95%
              
              
              50,958
              
              2,448
              
              4.80%
              
              
              36,622
              
              1,834
              
              5.01%Non-taxable2
              29,696
              
              1,271
              
              4.28%
              
              
              13,812
              
              636
              
              4.60%
              
              
              11,756
              
              562
              
              4.78%Total
      Investment Securities
              
              86,046
              
              4,060
              
              4.72%
              
              
              64,770
              
              3,084
              
              4.76%
              
              
              48,378
              
              2,396
              
              4.95%Other
      Earning Assets
              
              2,146
              
              113
              
              5.27%
              
              
              2,087
              
              106
              
              5.08%
              
              
              2,011
              
              81
              
              4.03%Total
      Earning Assets
              
              635,177
              
              $
      48,594
              
              7.65%
              
              
              607,669
              
              $       
      48,070
              
              7.91%
              
              
              584,983
              
              $        
      40,902
              
              6.99%Cash
      and Due from Banks
              
              26,596
              
              
              
              
              
              
              29,934
              
              
              
              
              
              
              31,287Premises
      and Equipment
              
              8,123
              
              
              
              
              
              
              8,188
              
              
              
              
              
              
              7,743Interest
      Receivableand
      Other Assets
              
              23,543
              
              
              
              
              
              
              20,562
              
              
              
              
              
              
              18,468Total
      Assets
              
              
              $693,439
              
              
              
              
              
              
              $666,353
              
              
              
              
              
              
              $642,481
 
 1.  Average
      balances for loans include loans held-for-sale and non-accrual loans and
      are net of the allowance for loan losses, but non-accrued
      interestthereon
      is excluded.2.  Interest
      income and yields on tax-exempt securities are not presented on a tax
      equivalent basis.
 
 
  29
 
 Continuation
of
 Net Interest
Earnings
 Average Balances, Yields and
Rates
 (Dollars
in thousands)
 
 2007
              
              
              2006
              
              
              2005Yields
              
              
              
              
              
              
              
              
              Yields
              
              
              
              
              
              
              
              
              YieldsInterest
              
              
              Earned/
              
              
              
              
              
              Interest
              
              
              Earned/
              
              
              
              
              
              Interest
              
              
              Earned/Liabilities
      and
              
              Average
              
              
              Income/
              
              
              Rates
              
              
              Average
              
              
              Income/
              
              
              Rates
              
              
              Average
              
              
              Income/
              
              
              RatesStockholders'
      Equity
              
              Balance
              
              
              Expense
              
              
              Paid
              
              
              Balance
              
              
              Expense
              
              
              Paid
              
              
              Balance
              
              
              Expense
              
              
              PaidInterest-Bearing
      Deposits:Interest-BearingTransaction
      Deposits
              
              $
              130,608
              
              
              $
              2,840
              
              
              
              2.17
              %
              
              $
              95,180
              
              
              $
              1,568
              
              
              
              1.65
              %
              
              $
              73,990
              
              
              $
              512
              
              
              
              0.69
              %Savings
      & MMDAs
              
              
              179,425
              
              
              
              4,034
              
              
              
              2.25
              %
              
              
              190,036
              
              
              
              3,813
              
              
              
              2.01
              %
              
              
              190,562
              
              
              
              2,279
              
              
              
              1.20
              %Time
      Certificates
              
              
              117,178
              
              
              
              4,551
              
              
              
              3.88
              %
              
              
              116,787
              
              
              
              3,682
              
              
              
              3.15
              %
              
              
              121,067
              
              
              
              2,443
              
              
              
              2.02
              %Total
      Interest-Bearing Deposits
              
              
              427,211
              
              
              
              11,425
              
              
              
              2.67
              %
              
              
              402,003
              
              
              
              9,063
              
              
              
              2.25
              %
              
              
              385,619
              
              
              
              5,234
              
              
              
              1.36
              %Borrowed
      Funds
              
              
              10,504
              
              
              
              313
              
              
              
              2.98
              %
              
              
              11,350
              
              
              
              363
              
              
              
              3.20
              %
              
              
              14,320
              
              
              
              495
              
              
              
              3.46
              %Total
      Interest-BearingDeposits
      and Funds
              
              
              437,715
              
              
              
              11,738
              
              
              
              2.68
              %
              
              
              413,353
              
              
              
              9,426
              
              
              
              2.28
              %
              
              
              399,939
              
              
              
              5,729
              
              
              
              1.43
              %Demand
      Deposits
              
              
              185,563
              
              
              
              —
              
              
              
              —
              
              
              
              187,766
              
              
              
              —
              
              
              
              —
              
              
              
              184,171
              
              
              
              —
              
              
              
              —Total
      Deposits andBorrowed
      Funds
              
              
              623,278
              
              
              $
              11,738
              
              
              
              1.88
              %
              
              
              601,119
              
              
              $
              9,426
              
              
              
              1.57
              %
              
              
              584,110
              
              
              $
              5,729
              
              
              
              0.98
              %Accrued
      Interest andOther
      Liabilities
              
              
              7,347
              
              
              
              
              
              
              
              
              
              
              
              6,113
              
              
              
              
              
              
              
              
              
              
              
              4,627Stockholders'
      Equity
              
              
              62,814
              
              
              
              
              
              
              
              
              
              
              
              59,121
              
              
              
              
              
              
              
              
              
              
              
              53,744Total
      Liabilities andStockholders'
      Equity
              
              $
              693,439
              
              
              
              
              
              
              
              
              
              
              $
              666,353
              
              
              
              
              
              
              
              
              
              
              $
              642,481Net
      Interest Income andNet
      Interest Margin 1
              
              
              
              
              
              $
              36,856
              
              
              
              5.80
              %
              
              
              
              
              
              $
              38,644
              
              
              
              6.36
              %
              
              
              
              
              
              $
              35,173
              
              
              
              6.01
              %Net
      Interest Spread 2
              
              
              
              
              
              
              
              
              
              
              4.97
              %
              
              
              
              
              
              
              
              
              
              
              5.63
              %
              
              
              
              
              
              
              
              
              
              
              5.56
              %
 
 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.
  30
 
 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 2007 over 2006 and 2006 over 2005.  Changes not solely due to
interest rate or volume have been allocated proportionately to interest rate and
volume.
 
 2007
      Over 2006
              
              
              2006
      Over 2005Interest
              
              
              
              
              
              
              
              
              InterestVolume
              
              
              Rate
              
              
              Change
              
              
              Volume
              
              
              Rate
              
              
              ChangeIncrease
      (Decrease) inInterest
      Income:Loans
              
              $
              626
              
              
              $
              (488
              )
              
              $
              138
              
              
              $
              1,983
              
              
              $
              4,291
              
              
              $
              6,274Loan
      Fees
              
              
              (544
              )
              
              
              —
              
              
              
              (544
              )
              
              
              (218
              )
              
              
              —
              
              
              
              (218
              )Federal
      Funds Sold
              
              
              (502
              )
              
              
              176
              
              
              
              (326
              )
              
              
              (347
              )
              
              
              746
              
              
              
              399Due
      From Banks
              
              
              273
              
              
              
              —
              
              
              
              273
              
              
              
              —
              
              
              
              —
              
              
              
              —Investment
      Securities
              
              
              1,002
              
              
              
              (26
              )
              
              
              976
              
              
              
              784
              
              
              
              (96
              )
              
              
              688Other
      Assets
              
              
              3
              
              
              
              4
              
              
              
              7
              
              
              
              3
              
              
              
              22
              
              
              
              25$
              858
              
              
              $
              (334
              )
              
              $
              524
              
              
              $
              2,205
              
              
              $
              4,963
              
              
              $
              7,168Increase
      (Decrease) inInterest
      Expense:Deposits:Interest-BearingTransaction Deposits
              
              $
              689
              
              
              $
              583
              
              
              $
              1,272
              
              
              $
              180
              
              
              $
              876
              
              
              $
              1,056Savings
      & MMDAs
              
              
              (194
              )
              
              
              415
              
              
              
              221
              
              
              
              (6
              )
              
              
              1,540
              
              
              
              1,534Time
      Certificates
              
              
              12
              
              
              
              857
              
              
              
              869
              
              
              
              (83
              )
              
              
              1,322
              
              
              
              1,239Borrowed
      Funds
              
              
              (26
              )
              
              
              (24
              )
              
              
              (50
              )
              
              
              (97
              )
              
              
              (35
              )
              
              
              (132
              )$
              481
              
              
              $
              1,831
              
              
              $
              2,312
              
              
              $
              (6
              )
              
              $
              3,703
              
              
              $
              3,697Increase
      (Decrease) inNet
      Interest Income
              
              $
              377
              
              
              $
              (2,165
              )
              
              $
              (1,788
              )
              
              $
              2,211
              
              
              $
              1,260
              
              
              $
              3,471
 
 
 Financial
Condition
 
 Summary
 
 Year Ended December 31, 2007
Compared to Year Ended December 31, 2006
  Total
assets increased by $24.7 million, or 3.6%, to $709.9 million as of December 31,
2007 compared to $685.2 million at December 31, 2006. The increase in total
assets was mainly due to a $19.3 million growth in net loans (including loans
held-for-sale) and a $16.6 million increase in cash and due from banks offset by
a 15.5 million reduction in federal funds sold. The growth in total assets was
financed primarily by the increase in deposits of $19.0 million and other
borrowings of $4.9 million.
  
 31
  Year Ended December 31, 2006
Compared to Year Ended December 31, 2005
  Total
assets increased by $24.6 million, or 3.7%, to 685.2 million as of December 31,
2006 compared to $660.6 million at December 31, 2005. The increase in total
assets was mainly due to a $19.5 million growth in net loans (including loans
held-for-sale) and a $27.5 increase in investment securities available-for-sale
offset by a $24.7 million reduction in federal funds sold.  The growth
in total assets was financed primarily by the increase in deposits of $21.9
million.
   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):
 
 2007
              
              
              2006
              
              
              2005Investment
      securities available for sale:U.S.
      Treasury Securities
              
              $
              263
              
              
              $
              253
              
              
              $
              250Securities
      of U.S. GovernmentAgencies
      and Corporations
              
              
              20,139
              
              
              
              31,703
              
              
              
              21,556Obligations
      of State &Political
      Subdivisions
              
              
              37,057
              
              
              
              30,193
              
              
              
              23,047Mortgage
      Backed Securities
              
              
              17,390
              
              
              
              12,031
              
              
              
              1,803Total
      Investments
              
              $
              74,849
              
              
              $
              74,180
              
              
              $
              46,656
 
 Maturities
of Investment Securities
 
 The
following table is a summary of the relative maturities (dollars in thousands)
and yields of the Company’s investment securities as of December 31,
2007.  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
              
              $
              —
              
              
              
              —
              
              
              $
              263
              
              
              
              5.00
              %
              
              $
              —
              
              
              
              —Securities
      of U.S. GovernmentAgencies
      and Corporations
              
              
              6,980
              
              
              
              4.06
              %
              
              
              13,159
              
              
              
              4.56
              %
              
              
              —
              
              
              
              —Obligations
      of State &Political
      Subdivisions
              
              
              3,857
              
              
              
              7.42
              %
              
              
              5,312
              
              
              
              7.34
              %
              
              
              10,175
              
              
              
              6.62
              %Mortgage
      Backed Securities
              
              
              19
              
              
              
              7.00
              %
              
              
              15,423
              
              
              
              5.17
              %
              
              
              1,948
              
              
              
              5.22
              %TOTAL
              
              $
              10,856
              
              
              
              5.26
              %
              
              $
              34,157
              
              
              
              5.27
              %
              
              $
              12,123
              
              
              
              6.39
              %
 
  After
      Ten Years
              
              
              TotalSecurity
              
              Amount
              
              
              Yield
              
              
              Amount
              
              
              YieldU.S.
      Treasury Securities
              
              $
              —
              
              
              
              —
              
              
              $
              263
              
              
              
              5.00
              %Securities
      of U.S. GovernmentAgencies  and
      Corporations
              
              
              —
              
              
              
              —
              
              
              
              20,139
              
              
              
              4.39
              %Obligations
      of State &Political
      Subdivisions
              
              
              17,713
              
              
              
              6.41
              %
              
              
              37,057
              
              
              
              6.71
              %Mortgage
      Backed Securities
              
              
              —
              
              
              
              —
              
              
              
              17,390
              
              
              
              5.18
              %TOTAL
              
              $
              17,713
              
              
              
              6.41
              %
              
              $
              74,849
              
              
              
              5.72
              %
 
  32
 
 LOAN
PORTFOLIO
 
 Composition of
Loans
 
 The mix
of loans, net of deferred origination fees and costs and allowance for loan
losses and excluding loans held-for-sale, at December 31, for the previous five
fiscal years is as follows (dollars in thousands):
 
 December
      31,2007
              
              
              2006
              
              
              2005Balance
              
              
              Percent
              
              
              Balance
              
              
              Percent
              
              
              Balance
              
              
              PercentCommercial
              
              $
              112,295
              
              
              
              22.6
              %
              
              $
              97,268
              
              
              
              20.5
              %
              
              
              87,091
              
              
              
              19.1
              %Agriculture
              
              
              36,772
              
              
              
              7.4
              %
              
              
              38,607
              
              
              
              8.1
              %
              
              
              32,808
              
              
              
              7.2
              %Real
      Estate Mortgage
              
              
              251,672
              
              
              
              50.5
              %
              
              
              227,552
              
              
              
              47.9
              %
              
              
              228,524
              
              
              
              50.1
              %Real
      Estate Construction
              
              
              91,901
              
              
              
              18.4
              %
              
              
              106,752
              
              
              
              22.4
              %
              
              
              103,422
              
              
              
              22.7
              %Installment
              
              
              5,331
              
              
              
              1.1
              %
              
              
              5,370
              
              
              
              1.1
              %
              
              
              4,216
              
              
              
              0.9
              %TOTAL
              
              $
              497,971
              
              
              
              100.0
              %
              
              $
              475,549
              
              
              
              100.0
              %
              
              $
              456,061
              
              
              
              100.0
              %
 
 2004
              
              
              2003Balance
              
              
              Percent
              
              
              Balance
              
              
              PercentCommercial
              
              $
              89,721
              
              
              
              20.9
              %
              
              $
              88,949
              
              
              
              24.1
              %Agriculture
              
              
              32,910
              
              
              
              7.7
              %
              
              
              32,766
              
              
              
              8.9
              %Real
      Estate Mortgage
              
              
              216,846
              
              
              
              50.4
              %
              
              
              174,867
              
              
              
              47.2
              %Real
      Estate Construction
              
              
              85,584
              
              
              
              19.9
              %
              
              
              68,370
              
              
              
              18.5
              %Installment
              
              
              4,641
              
              
              
              1.1
              %
              
              
              4,867
              
              
              
              1.3
              %TOTAL
              
              $
              429,702
              
              
              
              100.0
              %
              
              $
              369,819
              
              
              
              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 2007 and 2006, total loans
increased as a result of increases in commercial loans and real estate mortgage
loans which were partially offset by a decrease in agriculture loans, real
estate construction loans and installment loans.
 
 On
February 13, 2008, President Bush signed into law the Economic Stimulus Act
of 2008 which, among other provisions, authorizes the three federal mortgage
loan conduits, the Federal National Mortgage Association (known as Fannie Mae),
the Federal Home Loan Mortgage Corporation (known as Freddie Mac) and the
Federal Housing Administration, to purchase new and existing "jumbo" residential
mortgage loans originated after June 30, 2007. The legislation, which will
go into operation when the federal mortgage agencies calculate and publish new
loan limits for each Standard Metropolitan Statistical Area, based on average
housing prices, will increase the current limit on conforming loans which can be
purchased by Fannie Mae and Freddie Mac to up to $729,750 from its current
maximum of $417,000. The purpose of the increased purchase authority, which will
apply to loans originated through the end of 2008, is to provide increased
liquidity to the secondary market for "jumbo" residential loans. Loans on
residential properties in a number of counties in the State of California where
housing prices remain relatively high will be covered by the increased purchase
authority. This could result in an increased rate of loan originations and
refinancings of loans on such properties, including properties securing loans
made by the Bank. The degree to which this will occur and its overall effect on
the Bank’s residential mortgage loan portfolio cannot be determined at this
time.
  33
 
 Maturities and Sensitivities
of Loans to Changes in Interest Rates
 
 Loan
maturities of the loan portfolio at December 31,2007 are as follows
(dollars in
thousands)
(excludes loans held-for-sale):
 
 Maturing
              
              Fixed
      Rate
              
              
              Variable
      Rate
              
              
              TotalWithin
      one year
              
              $
              42,279
              
              
              $
              171,131
              
              
              $
              213,410After
      one year through five years
              
              
              64,462
              
              
              
              109,411
              
              
              
              173,873After
      five years
              
              
              25,199
              
              
              
              85,489
              
              
              
              110,688Total
              
              $
              131,940
              
              
              $
              366,031
              
              
              $
              497,971
 
 
 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 (dollars in thousands) in
each category at December 31, for the years indicated:
 
 2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Non-accrual
      Loans
              
              $
              15,173
              
              
              $
              3,399
              
              
              $
              2,073
              
              
              $
              4,907
              
              
              $
              3,87790
      Days Past Due But Still Accruing
              
              
              263
              
              
              
              37
              
              
              
              178
              
              
              
              55
              
              
              
              4Total
      Non-performing Loans
              
              
              15,436
              
              
              
              3,436
              
              
              
              2,251
              
              
              
              4,962
              
              
              
              3,881Other
      Real Estate Owned
              
              
              879
              
              
              
              375
              
              
              
              268
              
              
              
              —
              
              
              
              —Total
      Non-performing Assets
              
              $
              16,315
              
              
              $
              3,811
              
              
              $
              2,519
              
              
              $
              4,962
              
              
              $
              3,881
 
 
 If
interest on non-accrual loans had been accrued, such interest income would have
approximated $814,000, $280,000, and $101,000 during the years ended December
31, 2007, 2006 and 2005, respectively.  Income actually recognized for
these loans approximated $73,000, $113,000 and $100,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
 
 There was
a $12,504,000 increase in non-performing assets for 2007 over
2006.  At December 31, 2007, non-performing assets included three
non-accrual commercial loans totaling $511,000, four non-accrual agricultural
loans totaling $1,504,000, three non-accrual commercial real estate loans
totaling $3,816,000, twelve non-accrual residential mortgage loans totaling
$9,335,000 and one non-accrual installment loan totaling
$7,000.  Additional non-performing assets included two loans past due
more than 90 days totaling $263,000.  Other Real Estate Owned (“OREO”)
properties totaled $879,000 at December 31, 2007.  The Bank’s
management believes that nearly $14,902,000 of the $15,173,000 in non-accrual
loans at December 31, 2007, was adequately collateralized or guaranteed by a
governmental entity, and the remaining $271,000 may have some potential loss
which management believes is sufficiently covered by the Bank’s existing loan
loss reserve (Allowance for Loan Losses).
  34
 
 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 rating, 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, 2007, on January 15,
2008.  This report included all non-performing loans reported in the
table on the previous page and other potential problem
loans.  Excluding the non-performing loans cited previously, loans
totaling $19,665,000 were classified as potential problem loans.  The
Bank’s management believes that of these loans, loans totaling $17,902,000 are
adequately collateralized or guaranteed, and the remaining loans totaling
$1,763,000 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, 2007 was 2.13%.
  
 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
 (Dollars
in thousands)
 
 2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Balance
      at Beginning of Year
              
              $
              8,361
              
              
              $
              7,917
              
              
              $
              7,445
              
              
              $
              7,006
              
              
              $
              6,630Provision
      for Loan Losses
              
              
              4,795
              
              
              
              735
              
              
              
              600
              
              
              
              207
              
              
              
              2,153Loans
      Charged-Off:Commercial
              
              
              (1,428
              )
              
              
              (572
              )
              
              
              (670
              )
              
              
              (122
              )
              
              
              (143
              )Agriculture
              
              
              (82
              )
              
              
              (57
              )
              
              
              —
              
              
              
              (214
              )
              
              
              (1,662
              )Real
      Estate Mortgage
              
              
              (249
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Real
      Estate Construction
              
              
              (537
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Installment
      Loans to Individuals
              
              
              (764
              )
              
              
              (431
              )
              
              
              (185
              )
              
              
              (46
              )
              
              
              (104
              )Total
      Charged-Off
              
              
              (3,060
              )
              
              
              (1,060
              )
              
              
              (855
              )
              
              
              (382
              )
              
              
              (1,909
              )Recoveries:Commercial
              
              
              256
              
              
              
              561
              
              
              
              64
              
              
              
              199
              
              
              
              101Agriculture
              
              
              200
              
              
              
              —
              
              
              
              663
              
              
              
              399
              
              
              
              11Installment
      Loans to Individuals
              
              
              324
              
              
              
              208
              
              
              
              —
              
              
              
              16
              
              
              
              20Total
      Recoveries
              
              
              780
              
              
              
              769
              
              
              
              727
              
              
              
              614
              
              
              
              132Net  (Charge-Offs)
      Recoveries
              
              
              (2,280
              )
              
              
              (291
              )
              
              
              (128
              )
              
              
              232
              
              
              
              (1,777
              )Balance
      at End of Year
              
              $
              10,876
              
              
              $
              8,361
              
              
              $
              7,917
              
              
              $
              7,445
              
              
              $
              7,006Ratio
      of Net (Charge-Offs) RecoveriesDuring
      the Year to Average LoansOutstanding
      During the Year
              
              
              (0.47
              %)
              
              
              (0.06
              %)
              
              
              (0.03
              %)
              
              
              0.06
              %
              
              
              (0.48
              %)
 
 
  35
 
 Allocation of the Allowance
for Loan Losses
 
 The
Allowance for Loan Losses has been established as a general component 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 (dollars in thousands):
 December
      31, 2007
              
              
              December
      31, 2006
              
              
              December
      31, 2005Allocation
      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
              
              $
              2,884
              
              
              
              22.5
              %
              
              $
              2,037
              
              
              
              20.5
              %
              
              $
              1,779
              
              
              
              19.1
              %Agriculture
              
              
              865
              
              
              
              7.4
              %
              
              
              1,133
              
              
              
              8.1
              %
              
              
              1,518
              
              
              
              7.2
              %Real
      Estate Mortgage
              
              
              3,470
              
              
              
              50.5
              %
              
              
              3,016
              
              
              
              47.9
              %
              
              
              3,003
              
              
              
              50.1
              %Real
      Estate    Construction
              
              
              2,947
              
              
              
              18.5
              %
              
              
              1,535
              
              
              
              22.4
              %
              
              
              1,001
              
              
              
              22.7
              %Installment
              
              
              710
              
              
              
              1.1
              %
              
              
              640
              
              
              
              1.1
              %
              
              
              616
              
              
              
              0.9
              %Total
              
              $
              10,876
              
              
              
              100.0
              %
              
              $
              8,361
              
              
              
              100.0
              %
              
              $
              7,917
              
              
              
              100.0
              %
 
 
 December
      31, 2004
              
              
              December
      31, 2003Allocation
      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
              
              $
              1,726
              
              
              
              20.9
              %
              
              $
              1,881
              
              
              
              24.1
              %Agriculture
              
              
              1,484
              
              
              
              7.7
              %
              
              
              1,746
              
              
              
              8.9
              %Real
      Estate Mortgage
              
              
              2,766
              
              
              
              50.4
              %
              
              
              2,181
              
              
              
              47.2
              %Real
      Estate Construction
              
              
              668
              
              
              
              19.9
              %
              
              
              621
              
              
              
              18.5
              %Installment
              
              
              801
              
              
              
              1.1
              %
              
              
              577
              
              
              
              1.3
              %Total
              
              $
              7,445
              
              
              
              100.0
              %
              
              $
              7,006
              
              
              
              100.0
              %
 
 The Bank
believes that any breakdown or allocation of the allowance into loan categories
lends an appearance of exactness, which does not exist, because the allowance is
available for all loans.  The allowance 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.
  36
  Deposits
 
 The
following table sets forth the average amount and the average rate paid on each
of the listed deposit categories (dollars in thousands) during the periods
specified:
 
 2007
              
              
              2006
              
              
              2005Average
      Amount
              
              
              Average
      Rate
              
              
              Average
      Amount
              
              
              Average
      Rate
              
              
              Average
      Amount
              
              
              Average
      RateDeposit
      Type:Non-interest-Bearing
      Demand
              
              $
              185,563
              
              
              
              —
              
              
              $
              187,766
              
              
              
              —
              
              
              $
              184,171
              
              
              
              —Interest-Bearing
      Demand (NOW)
              
              $
              130,608
              
              
              
              2.17
              %
              
              $
              95,180
              
              
              
              1.65
              %
              
              $
              73,990
              
              
              
              0.69
              %Savings
      and MMDAs
              
              $
              179,425
              
              
              
              2.25
              %
              
              $
              190,036
              
              
              
              2.01
              %
              
              $
              190,562
              
              
              
              1.20
              %Time
              
              $
              117,178
              
              
              
              3.88
              %
              
              $
              116,787
              
              
              
              3.15
              %
              
              $
              121,067
              
              
              
              2.02
              %
 
 
 The
following table sets forth by time remaining to maturity the Bank’s time
deposits in the amount of $100,000 or more (dollars in thousands) as of December
31, 2007:
 
 Three
      months or less
              
              $
              29,632Over
      three months through twelve months
              
              
              34,161Over
      twelve months
              
              
              5,691Total
              
              $
              69,484
 
 
 Short-Term
Borrowings
 
 Short-term
borrowings at December 31, 2007 and 2006 consisted of secured borrowings from
the U.S. Treasury in the amounts of $878,000 and $858,000,
respectively.  The funds are placed at the discretion of the U.S.
Treasury and are callable on demand by the U.S.
Treasury.  Additionally, at December 31, 2007, the Bank had Federal
Funds purchased in the amount of $5,069,000.
 
 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, 2007, the Company had a current collateral borrowing capacity from
the FHLB of $95,555,000.  The Company also has unsecured formal lines
of credit totaling $25,700,000 with correspondent banks.
 
 
 Long-Term
Borrowings
 
 Long-term
borrowings consisted of Federal Home Loan Bank advances, totaling $9,885,000 and
$10,124,000, respectively, at December 31, 2007 and 2006.  Such
advances ranged in maturity from 0.4 years to 1.3 years at a weighted average
interest rate of 2.90% at December 31, 2007.  Maturity ranged from 1.4
years to 2.3 years at a weighted average interest rate of 2.91% at December 31,
2006.  Average outstanding balances were $10,008,000 and $10,776,000,
respectively, during 2007 and 2006.  The weighted average interest
rate paid was 2.91% in 2007 and 3.15% in 2006.
  37
  Results of
Operations
 
 Net
Income
 
 Year Ended December 31, 2007
Compared to Year Ended December 31, 2006
 
 Net
income for the year ended December 31, 2007, was $7,281,000, representing a
decrease of $1,529,000, or 17.4%, over net income of $8,810,000 for the year
ended December 31, 2006.  The decrease in net income is principally
attributable to an increase of $4,060,000 in the provision for loan losses, a
$1,788,000 decrease in net interest income, an increase of $244,000 in data
processing expense and a $489,000 increase in other operating expense, which was
partially offset by an increase of $1,871,000 in other operating income, a
$1,215,000 decrease in salaries and employee benefits, and a $2,032,000 decrease
in the provision for income taxes.
 
 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.
 
 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 $1,788,000 decrease in the Bank’s net
interest income in 2007 from 2006 was due to the effects of a higher level of
core deposits and higher funding costs, lower loan rates and lower loan fees,
which were partially offset by strong commercial and real estate loan volumes
combined with higher levels of investment securities.  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 “Analysis of Changes in
Interest Income and Interest Expense” set forth on page 31 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
91.6% in 2007, 91.2% in 2006 and 91.1% in 2005.
 
 Interest
income on loans (including loan fees) was $41,488,000 for 2007, representing a
decrease of $406,000, or 1.0%, from $41,894,000 for 2006.  This
compared to an increase in 2006 of $6,056,000, or 16.9%, greater than loan
interest income earned in 2005.  The decreased interest income on
loans in 2007 over 2006 was the result of a 13 basis point decrease in loan
interest rates, combined with a decrease of approximately $544,000 in loan fees,
which was partially offset by a 2.1% increase in loan volume.  Loan
fee comparisons were impacted by a net increase in deferred loan fees and costs
of $196,000 in 2007, a net decrease of $355,000 in 2006, and a net decrease of
$373,000 in 2005.
 
 Average
outstanding federal funds sold fluctuated during this period, ranging from
$52,359,000 in 2007 to $61,904,000, in 2006 and $81,948,000 in
2005.  At December 31, 2007, federal funds sold were
$46,940,000.  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 5.08%,
4.82% and 3.16% for 2007, 2006 and 2005, respectively.
 
 The
average total level of investment securities increased $21,276,000 in 2007 to
$86,046,000 from $64,770,000 in 2006 and increased $16,392,000 in 2006 to
$64,770,000 from $48,378,000 in 2005.  The level of interest income
attributable to investment securities increased to $4,060,000 in 2007 from
$3,084,000 in 2006 and $3,084,000 in 2006 from $2,396,000 in 2005, due to the
effects of interest rates and volume.  The Bank’s strategy for this
period emphasized the use of the investment portfolio to maintain the Bank’s
increased loan demand.  The Bank intends to continue 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 4.72%, 4.76% and 4.95% for 2007, 2006 and 2005,
respectively.
  38
 
 Total
interest expense increased to $11,738,000 in 2007 from $9,426,000 in 2006, and
increased to $9,426,000 in 2006 from $5,729,000 in 2005, representing a 24.5%
increase in 2007 over 2006 and a 64.5% increase in 2006 over
2005.  The increase in total interest expense from 2007 to 2006 was
due to increases in volume combined with increases in interest rates paid on
deposits.  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 mix
of deposits for the previous three years is as follows (dollars in
thousands):
 
 2007
              
              
              2006
              
              
              2005Average
      Balance
              
              
              Percent
              
              
              Average
      Balance
              
              
              Percent
              
              
              Average
      Balance
              
              
              PercentNon-interest-Bearing
      Demand
              
              $
              185,563
              
              
              
              30.3
              %
              
              $
              187,766
              
              
              
              31.9
              %
              
              $
              184,171
              
              
              
              32.3
              %Interest-Bearing
      Demand (NOW)
              
              
              130,608
              
              
              
              21.3
              %
              
              
              95,180
              
              
              
              16.1
              %
              
              
              73,990
              
              
              
              13.0
              %Savings
      and MMDAs
              
              
              179,425
              
              
              
              29.3
              %
              
              
              190,036
              
              
              
              32.2
              %
              
              
              190,562
              
              
              
              33.4
              %Time
              
              
              117,178
              
              
              
              19.1
              %
              
              
              116,787
              
              
              
              19.8
              %
              
              
              121,067
              
              
              
              21.3
              %Total
              
              $
              612,774
              
              
              
              100.0
              %
              
              $
              589,769
              
              
              
              100.0
              %
              
              $
              569,790
              
              
              
              100.0
              %
 
 
 The three
years ended December 31, 2007 have been characterized by fluctuating interest
rates.  Loan rates decreased and deposit rates increased in 2007 and
loan rates and deposit rates both increased in 2006 and 2005.  The net
spread between the rate for total earning assets and the rate for total deposits
and borrowed funds decreased 66 basis points in the period from 2007 to 2006 and
increased 7 basis points in the period from 2006 to 2005.
 
 The
Bank’s net interest margin (net interest income divided by average earning
assets) was 5.80% in 2007, 6.36% in 2006, and 6.01% in 2005. The decrease in net
interest margin was due to a higher cost of funds, the continued steepening of
the yield curve and a slow down in mortgage originations and was partially
offset by increased loan and investment securities volume.  Going
forward into the first half of 2008, it is Bank management’s belief that net
interest income and net interest margin will continue to fluctuate due to the
unstable 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 collectability of the loan
portfolio.  Based on this evaluation, the provision for loan losses
increased to $4,795,000 in 2007 from $735,000 in 2006, primarily as a result of
loan growth and loan quality in the Bank’s loan portfolio.  The amount
of loans charged-off increased in 2007 to $3,060,000 from $1,060,000 in 2006,
and recoveries increased to $780,000 in 2007 from $769,000 in
2006.  The increase in charge-offs was due, for the most part, to an
increase in charge-offs of commercial loans, real estate mortgage loans, real
estate construction loans and installment loans to individuals.  The
ratio of the Allowance for Loan Losses to total loans at December 31, 2007 was
2.13% compared to 1.73% at December 31, 2006.  The ratio of the
Allowance for Loan Losses to total non-accrual loans and loans past due 90 days
or more at December 31, 2007 was 70% compared to 243% at December 31,
2006.
 
 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.
  39
  Other Operating Income and
Expenses
 
 Other
operating income consisted primarily of service charges on deposit accounts, net
gains on sales of investment securities, net realized gains on loans held for
sale and gains on other real estate owned.  Service charges on deposit
accounts increased $630,000 in 2007 over 2006 and $420,000 in 2006 over
2005.  The increase in 2007 was due, for the most part, to increased
service charges on regular and business checking accounts.  Realized
gains on sale of investment securities increased $638,000 in 2007 over 2006 and
decreased $15,000 in 2006 over 2005.  The increase in 2007 was due to
the sale of securities.  Net realized gains on loans held-for-sale
increased $196,000 in 2007 over 2006 and decreased $718,000 in 2006 over
2005.  The increase in 2007 was due, for the most part, to an increase
in sold loans.  Gains on other real estate owned increased $347,000 in
2007 over 2006 and decreased $317,000 in 2006 over 2005.  The increase
in 2007 was due to the sale of previously foreclosed residential
properties.  Other income increased $60,000 in 2007 over 2006 and
increased $199,000 in 2006 over 2005.
 
 Other
operating expenses consisted primarily of salaries and employee benefits,
occupancy and equipment expense, data processing expense, stationery and
supplies expense, advertising, and other expenses.  Other operating
expenses decreased to $28,803,000 in 2007 from $29,219,000 in 2006, and
increased to $29,219,000 in 2006 from $26,813,000 in 2005, representing a
decrease of $416,000, or 1.4% in 2007 over 2006, and an increase of $2,406,000,
or 9.0% in 2006 over 2005.
 
 Following
is an analysis of the increase or decrease in the components of other operating
expenses (dollars in thousands) during the periods specified:
 2007
      over 2006
              
              
              2006
      over 2005Amount
              
              
              Percent
              
              
              Amount
              
              
              PercentSalaries
      and Employee Benefits
              
              $
              (1,215
              )
              
              
              (7.0
              %)
              
              $
              1,539
              
              
              
              9.7
              %Occupancy
      and Equipment
              
              
              (19
              )
              
              
              (0.5
              %)
              
              
              437
              
              
              
              13.5
              %Data
      Processing
              
              
              244
              
              
              
              17.6
              %
              
              
              175
              
              
              
              14.5
              %Stationery
      and Supplies
              
              
              36
              
              
              
              6.9
              %
              
              
              43
              
              
              
              8.9
              %Advertising
              
              
              (9
              )
              
              
              (1.0
              %)
              
              
              158
              
              
              
              21.5
              %Directors
      Fees
              
              
              58
              
              
              
              35.8
              %
              
              
              34
              
              
              
              26.6
              %Other
      Expense
              
              
              489
              
              
              
              9.5
              %
              
              
              20
              
              
              
              0.4
              %Total
              
              $
              (416
              )
              
              
              (1.4
              %)
              
              $
              2,406
              
              
              
              9.0
              %
 
 In 2007,
salaries and employee benefits decreased $1,215,000 to $16,240,000 from
$17,455,000 for 2006.  This decrease was due, for the most part, to
decreases incentive compensation and profit sharing payments, which was
partially offset by increases in regular salaries, stock compensation expense,
retirement compensation expense and group insurance.  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 director fees were due to increased directors’
meetings.
 
 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.
 
 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 2007, taxes decreased $2,032,000 to $3,137,000 from
$5,169,000 for 2006.  In 2006, taxes increased $377,000 to $5,169,000
from $4,792,000 for 2005.  The Bank’s effective tax rate was 30%, 37%,
and 36%, for the years ended December 31, 2007, 2006 and 2005,
respectively.  Non-taxable municipal bond income was $1,271,000,
$636,000, and $562,000 for the years ended December 31, 2007, 2006, and 2005,
respectively.
  40
  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, 2007, 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 80.2% on December
31, 2007, 79.6% on December 31, 2006, and 79.2% on December 31, 2005. At
December 31, 2007 and 2006, the Bank’s ratio of core deposits to total assets
was 77.9% and 78.5%, 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 decreased
slightly in 2007; 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, 2007,
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 0.09%, compared to 0.05% in
2006.  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 –1.78% at the end of 2007,
compared to -2.29% at year-end 2006.  These ratios indicated at
December 31, 2007, 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, 2007, the Company’s significant fixed and
determinable contractual obligations to third parties by payment date (amounts
in thousands):
 
 Payments
      due by periodContractual
      Obligations
              
              Total
              
              
              Less
      than 1 year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              More
      than 5 yearsDeposits
      without a stated maturity (a)
              
              $
              506,776
              
              
              
              506,776
              
              
              
              —
              
              
              
              —
              
              
              
              —Certificates
      of Deposit (a)
              
              
              115,895
              
              
              
              106,502
              
              
              
              7,310
              
              
              
              2,074
              
              
              
              9Short-Term
      Borrowings (a)
              
              
              5,947
              
              
              
              5,947
              
              
              
              —
              
              
              
              —
              
              
              
              —Long-Term
      Borrowings (b)
              
              
              9,923
              
              
              
              5,432
              
              
              
              4,491
              
              
              
              —
              
              
              
              —Operating
      Leases
              
              
              5,037
              
              
              
              1,144
              
              
              
              1,751
              
              
              
              999
              
              
              
              1,143Purchase
      Obligations
              
              
              1,541
              
              
              
              1,541
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              $
              645,119
              
              
              
              627,342
              
              
              
              13,552
              
              
              
              3,073
              
              
              
              1,152
 
 (a)Excludes
      interest
 (b)Includes
      interest on fixed rate
obligations.
  41
  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 and commercial 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.  Additionally, at December 31, 2007 the
Bank had Federal Funds purchased.
 
 
 The
following table details the amounts and expected maturities of commitments as of
December 31, 2007 (amounts in thousands):
 
 Maturities
      by periodCommitments
              
              Total
              
              
              Less
      than 1 year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              More
      than 5 yearsCommitments
      to extend creditCommercial
              
              $
              79,512
              
              
              
              71,436
              
              
              
              6,557
              
              
              
              1,195
              
              
              
              324Agriculture
              
              
              34,018
              
              
              
              28,777
              
              
              
              4,939
              
              
              
              302
              
              
              
              —Real
      Estate Mortgage
              
              
              59,745
              
              
              
              8,903
              
              
              
              9,141
              
              
              
              17,400
              
              
              
              24,301Real
      Estate Construction
              
              
              38,815
              
              
              
              33,458
              
              
              
              820
              
              
              
              —
              
              
              
              4,537Installment
              
              
              2,184
              
              
              
              1,334
              
              
              
              850
              
              
              
              —
              
              
              
              —Commitments
      to sell loans
              
              
              250
              
              
              
              250
              
              
              
              —
              
              
              
              —
              
              
              
              —Standby
      Letters of Credit
              
              
              15,188
              
              
              
              12,775
              
              
              
              2,413
              
              
              
              —
              
              
              
              —Total
              
              $
              229,712
              
              
              
              156,933
              
              
              
              24,720
              
              
              
              18,897
              
              
              
              29,162
 
 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 (amounts in thousands):
 
 2007
              
              
              2006Undisbursed
      loan commitments
              
              $
              214,274
              
              
              $
              198,200Standby
      letters of credit
              
              
              15,188
              
              
              
              12,222Commitments
      to sell loans
              
              
              250
              
              
              
              700$
              229,712
              
              
              $
              211,122
 
  42
  The Bank
expects its liquidity position to remain strong in 2008 as the Bank expects to
continue to grow into existing and new markets.  The stock market has
fluctuated this past year and, while the Bank did not experience a significant
outflow of deposits, the potential of additional outflows still exists if the
stock market improves.  Regardless of the outcome, the Bank
believes that it has the means to provide adequate liquidity for funding normal
operations in 2008.
 
 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, 2007, stockholders’ equity totaled $64.0 million, an increase of
$2.0 million from $62.0 million at December 31, 2006.  An important
source of capital is earnings retention.  Net income of
$7.3 million in 2007, offset by stock repurchases of $6.9 million, was the
primary factor contributing to the increase.  Also affecting capital
in 2007 was paid in capital in the amount of $1.2 million resulting from stock
options exercised, stock plan accruals and related tax benefits, and
an increase in other comprehensive income of $0.3 million, consisting of
unrealized gains on investment securities available-for-sale.  The
Bank’s Tier 1 Leverage Capital ratio at year-end 2007 was 9.0% and was also 9.0%
for 2006.
 
 On June
22, 2007, the Company approved a stock repurchase program effective June 22,
2007 to replace the Company’s previous stock purchase plan that commenced May 1,
2006. The stock repurchase program, which will remain in effect until June 21,
2009, allows repurchases by the Company in an aggregate of up to 4.0% 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 2.5% of the Company’s
outstanding shares of common stock over each rolling twelve-month
period.  During 2007, the Bank paid $6.0 million in dividends to the
Company to fund the repurchase of 370,716 shares of the Company’s outstanding
common stock.  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.  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.
  43
  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.
  44
 
 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,
2007
 (Dollars
in thousands)
 
 Expected
      Maturity/Repricing/Principal PaymentIn
      Thousands
              
              Within
      1 Year
              
              
              1
      Year to 3 Years
              
              
              3
      Years to 5 Years
              
              
              After
      5 Years
              
              
              Total
      Balance
              
              
              Fair ValueInterest-Sensitive
      Assets:Federal
      funds sold
              
              $
              46,940
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              46,940
              
              
              
              46,940Average
      interest rate
              
              
              3.88
              %
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3.88
              %
              
              
              —Due
      from interest bearing
              
              $
              25,500
              
              
              
              2,500
              
              
              
              —
              
              
              
              —
              
              
              
              28,000
              
              
              
              28,000Average
      interest rate
              
              
              4.58
              %
              
              
              4.91
              %
              
              
              —
              
              
              
              —
              
              
              
              4.61
              %
              
              
              —Fixed
      rate securities
              
              $
              10,856
              
              
              
              30,400
              
              
              
              3,757
              
              
              
              29,836
              
              
              
              74,849
              
              
              
              74,849Average
      interest rate
              
              
              5.26
              %
              
              
              5.27
              %
              
              
              5.27
              %
              
              
              6.40
              %
              
              
              5.72
              %
              
              
              —Other
      equity securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,199
              
              
              
              2,199
              
              
              
              2,199Average
      interest rate
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4.88
              %
              
              
              4.88
              %
              
              
              —Fixed
      rate loans (1)
              
              $
              42,279
              
              
              
              37,432
              
              
              
              27,030
              
              
              
              25,199
              
              
              
              131,940
              
              
              
              131,882Average
      interest rate
              
              
              6.91
              %
              
              
              7.29
              %
              
              
              7.46
              %
              
              
              6.23
              %
              
              
              7.00
              %
              
              
              —Variable
      rate loans (1)
              
              $
              171,131
              
              
              
              65,021
              
              
              
              44,390
              
              
              
              85,489
              
              
              
              366,031
              
              
              
              365,523Average
      interest rate
              
              
              7.95
              %
              
              
              7.64
              %
              
              
              7.56
              %
              
              
              7.42
              %
              
              
              7.72
              %
              
              
              —Loans
      held-for-sale
              
              $
              1,343
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,343
              
              
              
              1,343Average
      interest rate
              
              
              5.49
              %
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5.49
              %
              
              
              —Interest-Sensitive
      Liabilities:NOW
      account deposits (2)
              
              $
              8,078
              
              
              
              12,403
              
              
              
              8,341
              
              
              
              106,559
              
              
              
              135,381
              
              
              
              109,088Average
      interest rate
              
              
              0.30
              %
              
              
              0.30
              %
              
              
              0.30
              %
              
              
              0.30
              %
              
              
              0.30
              %
              
              
              —Money
      market deposits (2)
              
              $
              14,354
              
              
              
              21,530
              
              
              
              15,550
              
              
              
              68,179
              
              
              
              119,613
              
              
              
              108,928Average
      interest rate
              
              
              0.35
              %
              
              
              0.35
              %
              
              
              0.35
              %
              
              
              0.35
              %
              
              
              0.35
              %
              
              
              —Savings
      deposits (2)
              
              $
              5,852
              
              
              
              8,779
              
              
              
              5,852
              
              
              
              38,041
              
              
              
              58,524
              
              
              
              48,946Average
      interest rate
              
              
              0.80
              %
              
              
              0.80
              %
              
              
              0.80
              %
              
              
              0.80
              %
              
              
              0.80
              %
              
              
              —Certificates
      of deposit
              
              $
              106,499
              
              
              
              7,312
              
              
              
              2,074
              
              
              
              10
              
              
              
              115,895
              
              
              
              117,076Average
      interest rate
              
              
              3.73
              %
              
              
              3.93
              %
              
              
              4.40
              %
              
              
              3.05
              %
              
              
              3.76
              %
              
              
              —Borrowed
      funds
              
              $
              10,947
              
              
              
              4,885
              
              
              
              —
              
              
              
              —
              
              
              
              15,832
              
              
              
              15,849Average
      interest rate
              
              
              3.39
              %
              
              
              3.14
              %
              
              
              —
              
              
              
              —
              
              
              
              3.32
              %
              
              
              —Interest-Sensitive
      Off-Balance Sheet Items:Commitments
      to lend
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              214,274
              
              
              
              1,607Standby
      letters of credit
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              15,188
              
              
              
              152
 
 (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.
  45
  At
December 31, 2007, federal funds sold of $46.9 million with a yield of 3.88%,
due from banks of $25.6 million with a weighted-average yield of 4.58% and
investments of $10.9 million with a weighted-average, tax equivalent yield of
5.26% were scheduled to mature within one year.  In addition, net
loans (including loans held-for-sale) of $214.8 million with a weighted-average
yield of 7.73% were scheduled to mature or reprice within the same
time-frame.  Overall, interest-earning assets scheduled to mature
within one year totaled $298.0 million with a weighted-average, tax-equivalent
yield of 6.90%.  With respect to interest-bearing liabilities, based
on historical withdrawal patterns, NOW accounts, money market and savings
deposits of $28.3 million with a weighted-average cost of 0.43% were scheduled
to mature within one year.  Certificates of deposit totaling $106.5
million with a weighted-average cost of 3.73% were scheduled to mature in the
same time-frame. In addition, borrowed funds totaling $10.9 million with a
weighted-average cost of 3.39% were scheduled to mature within one
year.  Total interest-bearing liabilities scheduled to mature within
one year equaled $145.7 million with a weighted-average cost of
3.06%.
 
 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 $214.8 million or 43.0% of the total loan portfolio (including loans
held-for-sale)   at December 31, 2007 are subject to repricing
within one year.  Loan maturities in the after five year category
increased to $110.7 million at December 31, 2007 from $93.9 million at December
31, 2006.
 
 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 an
increase of $338,000 in other comprehensive income as reflected in the December
31, 2007 consolidated balance sheet.  Mark to market adjustments
during the year ended December 31, 2006 resulted in a reduction of $112,000 in
other comprehensive income.  These adjustments were the result of
fluctuating interest rates.
  46
  ITEM
8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 In
response to this Item, the information set forth on pages 51 through 89 in this
Annual Report is incorporated herein by reference.
 
 Financial Statements
Filed:
 
 Management’s
      Report
              Page
      48Reports
      of Independent Registered Public Accounting Firms
              Page
      49Consolidated
      Balance Sheets as of December 31, 2007 and 2006
              Page
      51Consolidated
      Statements of Operations for Years ended December 31, 2007, 2006, and
      2005
              Page
      52Consolidated
      Statements of Stockholders' Equity and Comprehensive Income for Years
      ended December 31, 2007, 2006, and 2005
              Page
      53Consolidated
      Statements of Cash Flows for Years ended December 31, 2007, 2006, and
      2005
              Page
      54Notes
      to Consolidated Financial Statements
              Page
      55
 
  47
  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, 2007.
 
 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, 2007, and the effectiveness of the
Company’s of internal control over financial reporting as of December 31, 2007,
as stated in their report, which is included herein.
 70
  
  /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 14,
2008
   48
  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 sheets of  First
Northern Community Bancorp and subsidiary (the Company) as of December 31, 2007
and 2006 and the related consolidated statements of operations, stockholders’
equity and comprehensive income and cash flows for each of the years in the
two-year period ended December 31, 2007.   We have also audited
First Northern Community Bancorp’s internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). First Northern Community Bancorp’s management is
responsible for these financial statements, for 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 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. 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, assessing the risk
that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
 
 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 only 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 its 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 the policies or procedures may deteriorate.
 
 In our
opinion, the 2007 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, 2007and 2006 and the results
of their operations and cash flows for each of the years in the two-year period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.    Also, in our
opinion First Northern Community Bancorp maintained, in all material respects,
effective   internal control over financial reporting as of
December 31, 2007, 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
(SFAS) No. 123(R), Share –Based Payments.
  /s/ MOSS ADAMS LLP
 
 Stockton, California
 March 14,
2008
  49
 
 Report
of Independent
Registered Public Accounting Firm
  
 The Board
of Directors and Stockholders
 First
Northern Community Bancorp:
 
 
 We have
audited the accompanying consolidated statements of operations, stockholders’
equity and comprehensive income, and cash flows of First Northern Community
Bancorp and subsidiary for the year 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 audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of First
Northern Community Bancorp and subsidiary for year ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles.
   /s/ KPMG LLP
 
 Sacramento, California
 March 15,
2006
  50
 
 FIRST
      NORTHERN COMMUNITY BANCORPAND
      SUBSIDIARYConsolidated
      Balance SheetsDecember
      31, 2007 and 2006(in
      thousands, except share amounts)2007
              
              2006AssetsCash
      and due from banks
              
              $
              52,090
              $
              35,531Federal
      funds sold
              
              
              46,940
              
              62,470Investment
      securities – available-for-sale, at fair value (includes securities
      pledged to creditors with the right to sell or repledge of $2,016 and
      $3,935, respectively)
              
              
              74,849
              
              74,180Loans,
      net
              
              
              497,971
              
              475,549Loans
      held-for-sale
              
              
              1,343
              
              4,460Stock
      in Federal Home Loan Bank and other equity   securities, at
      cost
              
              
              2,199
              
              2,093Premises
      and equipment, net
              
              
              7,872
              
              8,060Other
      real estate owned
              
              
              879
              
              375Other
      assets
              
              
              25,752
              
              22,507Total
      assets
              
              $
              709,895
              $
              685,225Liabilities
      and Stockholders' EquityDeposits:Demand
              
              $
              193,258
              $
              197,498Interest-bearing
      transaction deposits
              
              
              135,381
              
              117,620Savings
      and MMDAs
              
              
              178,137
              
              175,128Time,
      under $100,000
              
              
              46,411
              
              47,137Time,
      $100,000 and over
              
              
              69,484
              
              66,299Total
      Deposits
              
              
              622,671
              
              603,682FHLB
      advances and other borrowings
              
              
              15,832
              
              10,981Accrued
      interest payable and other liabilities
              
              
              7,417
              
              8,572Total
      Liabilities
              
              
              645,920
              
              623,235Stockholders'
      Equity:Common
      stock, no par value; 16,000,000 shares authorized; 8,169,772 and 7,980,952
      shares issued and outstanding in 2007 and 2006,
    respectively;
              
              
              50,956
              
              45,726Additional
      paid-in capital
              
              
              977
              
              977Retained
      earnings
              
              
              12,209
              
              15,792Accumulated
      other comprehensive loss, net
              
              
              (167)
              
              (505)Total
      stockholders’ equity
              
              
              63,975
              
              61,990Commitments
      and contingenciesTotal
      liabilities and stockholders’ equity
              
              $
              709,895
              $
              685,225See
      accompanying notes to consolidated financial statements.
 
 
  51
 
 FIRST
      NORTHERN COMMUNITY BANCORPAND
      SUBSIDIARYConsolidated
      Statements of OperationsYears
      Ended December 31, 2007, 2006 and 2005
                (in
      thousands, except share amounts)2007
              
              
              2006
              
              
              2005Interest
      income:Interest
      and fees on loans
              
              $
              41,488
              
              
              $
              41,894
              
              
              $
              35,838Federal
      funds sold
              
              
              2,660
              
              
              
              2,986
              
              
              
              2,587Due
      from interest bearing
              
              
              273
              
              
              
              —
              
              
              
              —Investment
      securities:Taxable
              
              
              2,789
              
              
              
              2,448
              
              
              
              1,834Non-taxable
              
              
              1,271
              
              
              
              636
              
              
              
              562Other
      earning assets
              
              
              113
              
              
              
              106
              
              
              
              81Total
      interest income
              
              
              48,594
              
              
              
              48,070
              
              
              
              40,902Interest
      expense:Time
      deposits $100,000 and over
              
              
              3,019
              
              
              
              2,315
              
              
              
              1,452Other
      deposits
              
              
              8,406
              
              
              
              6,748
              
              
              
              3,782Other
      borrowings
              
              
              313
              
              
              
              363
              
              
              
              495Total
      interest expense
              
              
              11,738
              
              
              
              9,426
              
              
              
              5,729Net
      interest income
              
              
              36,856
              
              
              
              38,644
              
              
              
              35,173Provision
      for loan losses
              
              
              4,795
              
              
              
              735
              
              
              
              600Net
      interest income after provisionfor
      loan losses
              
              
              32,061
              
              
              
              37,909
              
              
              
              34,573Other
      operating income:Service
      charges on deposit accounts
              
              
              3,450
              
              
              
              2,820
              
              
              
              2,400Net
      realized gains on available-for-sale securities
              
              
              638
              
              
              
              —
              
              
              
              15Net
      realized gains on loans held-for-sale
              
              
              241
              
              
              
              45
              
              
              
              763Net
      realized gains on other real estate owned
              
              
              353
              
              
              
              6
              
              
              
              323Other
      income
              
              
              2,478
              
              
              
              2,418
              
              
              
              2,219Total
      other operating income
              
              
              7,160
              
              
              
              5,289
              
              
              
              5,720Other
      operating expenses:Salaries
      and employee benefits
              
              
              16,240
              
              
              
              17,455
              
              
              
              15,916Occupancy
      and equipment
              
              
              3,654
              
              
              
              3,673
              
              
              
              3,236Data
      processing
              
              
              1,628
              
              
              
              1,384
              
              
              
              1,209Stationery
      and supplies
              
              
              560
              
              
              
              524
              
              
              
              481Advertising
              
              
              885
              
              
              
              894
              
              
              
              736Directors
      fees
              
              
              220
              
              
              
              162
              
              
              
              128Other
              
              
              5,616
              
              
              
              5,127
              
              
              
              5,107Total
      other operating expenses
              
              
              28,803
              
              
              
              29,219
              
              
              
              26,813Income
      before income tax expense
              
              
              10,418
              
              
              
              13,979
              
              
              
              13,480Provision
      for income tax expense
              
              
              3,137
              
              
              
              5,169
              
              
              
              4,792Net
      income
              
              $
              7,281
              
              
              $
              8,810
              
              
              $
              8,688Basic
      income per share
              
              $
              0.83
              
              
              $
              0.98
              
              
              $
              0.96Diluted
      income per share
              
              $
              0.80
              
              
              $
              0.94
              
              
              $
              0.92See
      accompanying notes to consolidated financial statements.
 
  52
 
 FIRST
      NORTHERN COMMUNITY BANCORPAND
      SUBSIDIARYConsolidated
      Statements of Stockholders' Equity and Comprehensive
IncomeYears
      Ended December 31, 2007, 2006 and 2005(in
      thousands, except share amounts)AccumulatedAdditional
              
              
              
              
              
              OtherCommon
      Stock
              
              
              Comprehensive
              
              
              Paid-in
              
              
              Retained
              
              
              ComprehensiveDescription
              
              Shares
              
              
              Amounts
              
              
              Income
              
              
              Capital
              
              
              Earnings
              
              
              Income (Loss)
              
              
              TotalBalance
      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
              )Total
      other comprehensive loss, net of tax effect of $75
              
              
              
              
              
              
              
              
              
              
              (112
              )
              
              
              
              
              
              
              
              
              
              
              (112
              )
              
              
              (112
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              $
              8,698Directors’
      and officers’ retirement plan equity adjustments, net of tax effect of
      $341
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (512
              )
              
              
              (512
              )6%
      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
              )
              
              
              61,990Comprehensive
      income:Net
      income
              
              
              
              
              
              
              
              
              
              $
              7,281
              
              
              
              
              
              
              
              7,281
              
              
              
              
              
              
              
              7,281Other
      comprehensive loss:Unrealized
      holding losses arising during the current period, net of tax effect of
      $30
              
              
              
              
              
              
              
              
              
              
              (45
              )Reclassification
      adjustment due to gains realized, net of tax effect of
$255
              
              
              
              
              
              
              
              
              
              
              383Total
      other comprehensive income, net of tax effect of $225
              
              
              
              
              
              
              
              
              
              
              338
              
              
              
              
              
              
              
              
              
              
              
              338
              
              
              
              338Comprehensive
      income
              
              
              
              
              
              
              
              
              
              $
              7,6196%
      stock dividend
              
              
              476,976
              
              
              
              10,851
              
              
              
              
              
              
              
              
              
              
              
              (10,851
              )
              
              
              
              
              
              
              —Cash
      in lieu of fractional shares
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (13
              )
              
              
              
              
              
              
              (13
              )Stock-based
      compensation and related tax benefits
              
              
              
              
              
              
              705
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              705Common
      shares issued, including tax benefits
              
              
              82,560
              
              
              
              525
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              525Stock
      repurchase and retirement
              
              
              (370,716
              )
              
              
              (6,851
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,851
              )Balance
      at December 31, 2007
              
              
              8,169,772
              
              
              $
              50,956
              
              
              
              
              
              
              $
              977
              
              
              $
              12,209
              
              
              $
              (167
              )
              
              $
              63,975
 See
accompanying notes to consolidated financial statements.
 
   53
 
 FIRST
      NORTHERN COMMUNITY BANCORPAND
      SUBSIDIARYConsolidated
      Statements of Cash FlowsYears
      Ended December 31, 2007, 2006 and 2005(in
      thousands, except share amounts)2007
              
              
              2006
              
              
              2005Cash
      flows from operating activities:Net
      income
              
              $
              7,281
              
              
              $
              8,810
              
              
              $
              8,688Adjustments
      to reconcile net income to net cash provided byoperating
      activities:Provision
      for loan losses
              
              
              4,795
              
              
              
              735
              
              
              
              600Stock
      plan accruals
              
              
              523
              
              
              
              395
              
              
              
              286Tax
      benefit for stock options
              
              
              182
              
              
              
              422
              
              
              
              268Depreciation
      and amortization
              
              
              1,112
              
              
              
              1,041
              
              
              
              1,016Accretion
      and amortization, net
              
              
              (149
              )
              
              
              (96
              )
              
              
              25Net
      realized gains on available-for-sale securities
              
              
              (638
              )
              
              
              —
              
              
              
              (15
              )Net
      realized gains on loans held-for-sale
              
              
              (241
              )
              
              
              (45
              )
              
              
              (763
              )Gain
      on sale of OREO
              
              
              (353
              )
              
              
              (6
              )
              
              
              (323
              )Gain
      on sale of bank premises and equipment
              
              
              (2
              )
              
              
              —
              
              
              
              (5
              )Benefit
      from deferred income taxes
              
              
              (2,085
              )
              
              
              (503
              )
              
              
              (666
              )Proceeds
      from sales of loans held-for-sale
              
              
              36,776
              
              
              
              38,386
              
              
              
              62,428Originations
      of loans held-for-sale
              
              
              (36,310
              )
              
              
              (38,361
              )
              
              
              (62,386
              )Decrease
      in deferred loan origination fees and costs, net
              
              
              (196
              )
              
              
              (355
              )
              
              
              (372
              )Increase
      in accrued interest receivable and other  assets
              
              
              (1,203
              )
              
              
              (2,016
              )
              
              
              (1,707
              )(Decrease)
      increase in accrued interest payable and other liabilities
              
              
              (1,155
              )
              
              
              1,477
              
              
              
              2,135Net
      cash provided by operating activities
              
              
              8,337
              
              
              
              9,884
              
              
              
              9,209Cash
      flows from investing activities:Proceeds
      from maturities of available-for-sale securities
              
              
              14,205
              
              
              
              12,900
              
              
              
              10,755Proceeds
      from sales of available-for-sale securities
              
              
              20,140
              
              
              
              —
              
              
              
              405Principal
      repayments on available-for-sale securities
              
              
              3,461
              
              
              
              1,989
              
              
              
              655Purchase
      of available-for-sale securities
              
              
              (37,125
              )
              
              
              (42,503
              )
              
              
              (6,677
              )Net
      (increase) decrease in other interest earnings assets
              
              
              (106
              )
              
              
              38
              
              
              
              (305
              )Net
      increase in loans
              
              
              (24,633
              )
              
              
              (19,975
              )
              
              
              (26,855
              )Purchases
      of bank premises and equipment
              
              
              (924
              )
              
              
              (790
              )
              
              
              (1,892
              )Proceeds
      from sale of bank premises and equipment
              
              
              2
              
              
              
              —
              
              
              
              5Proceeds
      from sale of other real estate owned
              
              
              353
              
              
              
              6
              
              
              
              323Net
      cash used in investing activities
              
              
              (24,627
              )
              
              
              (48,335
              )
              
              
              (23,586
              )Cash
      flows from financing activities:Net
      increase in deposits
              
              
              18,989
              
              
              
              21,901
              
              
              
              24,595Net
      increase (decrease) in FHLB advances and other borrowings
              
              
              4,851
              
              
              
              (3,988
              )
              
              
              (487
              )Cash
      dividends paid in lieu of fractional shares
              
              
              (13
              )
              
              
              (15
              )
              
              
              (15
              )Common
      stock issued
              
              
              525
              
              
              
              472
              
              
              
              394Tax
      benefit for stock options
              
              
              (182
              )
              
              
              (422
              )
              
              
              (268
              )Repurchase
      of common stock
              
              
              (6,851
              )
              
              
              (4,188
              )
              
              
              (3,854
              )Net
      cash provided by financing activities
              
              
              17,319
              
              
              
              13,760
              
              
              
              20,365Net
      change in cash and cash equivalents
              
              
              1,029
              
              
              
              (24,691
              )
              
              
              5,988Cash
      and cash equivalents at beginning of year
              
              
              98,001
              
              
              
              122,692
              
              
              
              116,704Cash
      and cash equivalents at end of year
              
              $
              99,030
              
              
              $
              98,001
              
              
              $
              122,692See
      accompanying notes to consolidated financial statements.
 
  54
  FIRST
      NORTHERN COMMUNITY BANCORPAND
      SUBSIDIARYNotes
      to Consolidated Financial StatementsYears
      Ended December 31, 2007, 2006 and 2005
                (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 balance sheet and measured at
fair value.  The Company did not hold any derivatives at December 31,
2007 and 2006.
   55
 
 (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.
Loan losses are charged off against the allowance for loan losses when
management believes that the collectability 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
collectability and prior loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, loan concentrations, specific problem loans,
commitments, and current and anticipated economic conditions that may affect the
borrowers’ ability to pay. While management uses these evaluations to determine
the allowance for loan losses, additional 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 and other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank’s allowance for loan losses.
Such agencies may require the Bank to recognize additional allowance based on
their judgment about information available to them at the time of their
examination.
   56
 
 (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 depreciation 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, 2007, 2006 and 2005 for cash proceeds equal to the fair
value of the loans.
  57
 
 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 $1,343 and $4,460 at December 31,
2007 and 2006, respectively.  At December 31, 2007 and 2006, the
Company serviced real estate mortgage loans for others of $116,310 and $112,742,
respectively.
 
 Mortgage
servicing rights as of December 31, 2007 were $956.  The balance as of
December 31, 2006 was $945.
 
 (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.
  58
  (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 74).
    (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 72).
 
  (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
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 was effective January
1, 2007 for the Company for financial instruments acquired, issued or subject to
a re-measurement event.  The adoption of SFAS No. 155 did not have a
material impact on the Company’s financial condition, results of operations or
cash flows.
  59
  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 was
effective for the Company in the fiscal year beginning January 1,
2007.  The adoption of SFAS No. 156 did not have a material impact on
the financial condition, results of operations or cash flows of the
Company.
 
 In June
2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for
Income Taxes.” FIN 48 clarifies the accounting and reporting for income taxes
where interpretation of the law is uncertain. FIN 48 prescribes a comprehensive
model for the financial statement recognition, measurement, presentation and
disclosure of income tax uncertainties with respect to positions taken or
expected to be taken in income tax returns. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company adopted this Interpretation on
January 1, 2007.  The Company and its subsidiaries file income tax returns
in the U.S. federal jurisdiction and California state jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal and state
examinations by tax authorities for years before 2003.  The Company will
recognize interest and penalties accrued related to unrecognized tax
benefits/liabilities in income tax expense.  The implementation of FIN
48 required the Company to recognize a $40 increase in the liability for
unrecognized tax benefits.
 
 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 adoption of EITF 06-5 did not have a material
impact on the Company’s financial condition, results of operations or cash
flows.
  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, 2007 and 2006. The Bank has met its average reserve requirements
during 2007 and 2006 and the minimum required balance at December 31, 2007 and
2006.
   61
 
 (3)
              Investment
      Securities
  The
amortized cost, unrealized gains and losses and estimated market values of
investments in debt and other securities at December 31, 2007 are summarized as
follows:
  Amortized
      cost
              
              
              Unrealized
      gains
              
              
              Unrealized
      losses
              
              
              Estimated
      market valueInvestment
      securities available for sale:U.S.
      Treasury securities
              
              $
              249
              
              
              $
              14
              
              
              $
              —
              
              
              $
              263Securities
      of U.S. government agencies and corporations
              
              
              19,960
              
              
              
              189
              
              
              
              (10
              )
              
              
              20,139Obligations
      of states and political subdivisions
              
              
              36,675
              
              
              
              446
              
              
              
              (64
              )
              
              
              37,057Mortgage
      backed securities
              
              
              17,278
              
              
              
              116
              
              
              
              (4
              )
              
              
              17,390Total
      debt securities
              
              $
              74,162
              
              
              $
              765
              
              
              $
              (78
              )
              
              $
              74,849
 
  
 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 valueInvestment
      securities available for sale:U.S.
      Treasury securities
              
              $
              249
              
              
              $
              4
              
              
              $
              —
              
              
              $
              253Securities
      of U.S. government agencies and corporations
              
              
              31,887
              
              
              
              77
              
              
              
              (261
              )
              
              
              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
              
              
              $
              474
              
              
              $
              (350
              )
              
              $
              74,180
  
  Gross
realized gains from sales of available-for-sale securities were $638, $0 and $15
for the years ended December 31, 2007, 2006 and 2005,
respectively.  Gross realized losses from sales of available-for-sale
securities were $-0- for each of the years ended December 31, 2007, 2006 and
2005.
  62
  The
amortized cost and estimated market value of debt and other securities at
December 31, 2007, by contractual maturity, are shown in the following
table:
  Amortized
                cost
              
              
              Estimated
      market
                valueDue
      in one year or less
              
              $
              9,863
              
              
              
              9,887Due
      after one year through five years
              
              
              17,082
              
              
              
              17,322Due
      after five years through ten years
              
              
              15,057
              
              
              
              15,279Due
      after ten years
              
              
              32,160
              
              
              
              32,361$
              74,162
              
              
              
              74,849
 
 
 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
$15,423.  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, 2007, follows:
  Less
      than 12 months
              
              
              12
      months or more
              
              
              TotalFair
      Value
              
              
              Unrealized
      losses
              
              
              Fair
      Value
              
              
              Unrealized
      losses
              
              
              Fair
      Value
              
              
              Unrealized
      lossesSecurities
      of U.S. government agencies and corporations
              
              $
              —
              
              
              $
              —
              
              
              $
              5,981
              
              
              $
              (10
              )
              
              $
              5,981
              
              
              $
              (10
              )Obligations
      of states and political subdivisions
              
              
              8,341
              
              
              
              (56
              )
              
              
              979
              
              
              
              (8
              )
              
              
              9,320
              
              
              
              (64
              )Mortgage
      backed securities
              
              
              1,759
              
              
              
              (4
              )
              
              
              79
              
              
              
              —
              
              
              
              1,838
              
              
              
              (4
              )Total
              
              $
              10,100
              
              
              $
              (60
              )
              
              $
              7,039
              
              
              $
              (18
              )
              
              $
              17,139
              
              
              $
              (78
              )
 
 
 
 No
decline in value was considered “other than temporary” during
2007.  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.  Twenty-one securities that had a
fair market value of $10,100 and a total unrealized loss of $60 have been in an
unrealized loss position for less than twelve months as of December 31,
2007.  In addition, ten securities with a fair market value of $7,039
and a total unrealized loss of $18 that have been in an unrealized loss position
for more than twelve months as of December 31, 2007.  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 $23,360 and $26,675 at December 31, 2007 and 2006,
respectively, were pledged to secure public deposits or for other purposes as
required or permitted by law.
   63
 
 (4)
              Loans
  The
composition of the Bank’s loan portfolio at December 31,  is as
follows:
 2007
              
              
              2006Commercial
              
              $
              114,957
              
              
              
              99,138Agriculture
              
              
              37,647
              
              
              
              39,346Real
      estate:Mortgage
              
              
              257,647
              
              
              
              231,920Construction
              
              
              94,090
              
              
              
              108,795Installment
      and other loans
              
              
              5,461
              
              
              
              5,470509,802
              
              
              
              484,669Allowance
      for loan losses
              
              
              (10,876
              )
              
              
              (8,361
              )Net
      deferred origination fees and costs
              
              
              (955
              )
              
              
              (759
              )Loans,
      net
              
              $
              497,971
              
              
              
              475,549
 
 As of
December 31, 2007, approximately 18% of the Bank’s loans are for real estate
construction. Additionally approximately 51% of the Bank’s loans are mortgage
type loans which are secured by residential real estate. Approximately 30% 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
$116,310 and $112,742 at December 31, 2007 and 2006, respectively.
  In
September 2007, the Bank transferred approximately $2,892 from its loans
held-for-sale portfolio to its loans held-for-investment portfolio.
  Non-accrual
loans totaled approximately $15,173, $3,399 and $2,073 at December 31, 2007,
2006 and 2005, respectively. If interest on these non-accrual loans had been
accrued, such income would have approximated $814, $280 and $101 during the
years ended December 31, 2007, 2006 and 2005, respectively.  The
average outstanding balance of non-accrual loans was approximately $7,822,
$2,710 and $3,221, on which $73, $113 and $100 of interest income was recognized
for the years ended December 31, 2007, 2006 and 2005, respectively.
  Loans 90
days past due and still accruing totaled approximately $263 and $37 at December
31, 2007 and 2006, respectively.
  The Bank
did not restructure any loans in 2007 or 2006.
  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 $15,173 and $3,399
at December 31, 2007 and 2006, respectively, and had related valuation
allowances of approximately $272 and $122 at December 31, 2007 and 2006,
respectively.  The average outstanding balance of impaired loans was
approximately $7,822 and $2,710 for the years ended December 31, 2007 and 2006,
respectively.
  Loans in
the amount of $169,648 and $161,222 at December 31, 2007 and 2006, respectively,
were pledged under a blanket collateral lien to secure actual and potential
borrowings from the Federal Home Loan Bank.
 
 2007
              
              
              2006
              
              
              2005Balance,
      beginning of year
              
              $
              8,361
              
              
              
              7,917
              
              
              
              7,445Provision
      for loan losses
              
              
              4,795
              
              
              
              735
              
              
              
              600Loans
      charged-off
              
              
              (3,060
              )
              
              
              (1,060
              )
              
              
              (855
              )Recoveries
      of loans previously charged-off
              
              
              780
              
              
              
              769
              
              
              
              727Balance,
      end of year
              
              $
              10,876
              
              
              
              8,361
              
              
              
              7,917
 Changes
in the allowance for loan losses for the following years ended December 31, are
summarized as follows:
   64
  (5)
              Premises
      and Equipment
  Premises
and equipment consist of the following at December 31 of the indicated
years:
  2007
              
              
              2006Land
              
              $
              2,718
              
              
              $
              2,718Buildings
              
              
              4,477
              
              
              
              4,484Furniture
      and equipment
              
              
              10,634
              
              
              
              10,325Leasehold
      improvements
              
              
              1,755
              
              
              
              1,53919,584
              
              
              
              19,066Less
      accumulated depreciation and amortization
              
              
              11,712
              
              
              
              11,006$
              7,872
              
              
              $
              8,060
 
  Depreciation
and amortization expense, included in occupancy and equipment expense, was
$1,112, $1,041 and $1,016 for the years ended December 31, 2007, 2006 and 2005,
respectively.
  (6)
              Other
      Assets
  Other
assets consisted of the following at December 31 of the indicated
years:
  2007
              
              
              2006Accrued
      interest
              
              $
              3,636
              
              
              $
              3,832Software,
      net of amortization
              
              
              387
              
              
              
              346Officer’s
      Life Insurance
              
              
              10,408
              
              
              
              9,995Prepaid
      and other
              
              
              3,842
              
              
              
              2,900Investment
      in Limited Partnerships
              
              
              1,604
              
              
              
              1,747Deferred
      tax assets, net (see note 8)
              
              
              5,875
              
              
              
              3,687$
              25,752
              
              
              $
              22,507
 
  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, was $235, $243 and
$248 for the years ended December 31, 2007, 2006 and 2005,
respectively.
  The Bank
held other real estate owned (OREO) in the amount of $879 and $375 as of
December 31, 2007 and 2006, 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.
 
 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 three participants in the plan.
  65
  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 Salary Continuation 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 31,2007
              
              
              2006
              
              
              2005Change
      in benefit obligationBenefit obligation at beginning
      of year
              
              $
              2,040
              
              
              $
              1,079
              
              
              $
              885Service cost
              
              
              121
              
              
              
              183
              
              
              
              160Interest cost
              
              
              115
              
              
              
              65
              
              
              
              53Amendments
              
              
              —
              
              
              
              798
              
              
              
              —Plan loss
(gain)
              
              
              88
              
              
              
              (40
              )
              
              
              (19
              )Benefits Paid
              
              
              (54
              )
              
              
              (45
              )
              
              
              —Benefit
      obligation at end of year
              
              $
              2,310
              
              
              $
              2,040
              
              
              $
              1,079Change
      in plan assetsEmployer
      Contribution
              
              $
              54
              
              
              $
              45
              
              
              $
              —Benefits Paid
              
              
              (54
              )
              
              
              (45
              )
              
              
              —Fair
      value of plan assets at end of year
              
              $
              —
              
              
              $
              —
              
              
              $
              —Reconciliation
      of funded statusFunded status
              
              $
              (2,310
              )
              
              $
              (2,040
              )
              
              $
              (1,079
              )Unrecognized net plan loss
      (gain)
              
              
              68
              
              
              
              (19
              )
              
              
              21Unrecognized prior service
      cost
              
              
              846
              
              
              
              933
              
              
              
              148Net
      amount recognized
              
              $
              (1,396
              )
              
              $
              (1,126
              )
              
              $
              (910
              )Amounts
      recognized in the consolidatedbalance sheets consist
      of:Accrued benefit
      liability
              
              $
              (2,310
              )
              
              $
              (2,040
              )
              
              $
              (1,079
              )Intangible
asset
              
              
              —
              
              
              
              —
              
              
              
              148Accumulated other comprehensive
      income
              
              
              914
              
              
              
              914
              
              
              
              21Net
      amount recognized
              
              $
              (1,396
              )
              
              $
              (1,126
              )
              
              $
              (910
              )
 
 66
 
 For
      the Year Ended December 31,2007
              
              
              2006
              
              
              2005Components
      of net periodic benefit costService cost
              
              $
              121
              
              
              $
              183
              
              
              $
              160Interest cost
              
              
              115
              
              
              
              65
              
              
              
              54Amortization of prior service
      cost
              
              
              88
              
              
              
              13
              
              
              
              13Net
      periodic benefit cost
              
              
              324
              
              
              
              261
              
              
              
              227Additional amounts
      recognized
              
              
              —
              
              
              
              —
              
              
              
              —Total
      benefit cost
              
              $
              324
              
              
              $
              261
              
              
              $
              227Additional
      InformationMinimum benefit obligation at
      year end
              
              $
              2,310
              
              
              $
              2,040
              
              
              $
              1,079Increase
      (decrease) in minimum liability included  in other comprehensive
      income
              
              $
              539
              
              
              $
              893
              
              
              $
              (19
              )
 
 Assumptions
      used to determine benefit obligations at December 31
              
              2007
              
              
              2006
              
              
              2005Discount rate used to determine
      net periodic benefit cost for years ended December 31
              
              
              5.40
              %
              
              
              5.30
              %
              
              
              5.10
              %Discount rate used to determine
      benefit obligations at December 31
              
              
              5.40
              %
              
              
              5.40
              %
              
              
              5.30
              %Future salary
      increases
              
              
              6.00
              %
              
              
              6.00
              %
              
              
              —
  Plan
Assets
  The Bank
informally funds the liabilities of the Salary Continuation 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 PaymentsFor
      unfunded plans, contributions to the Salary Continuation Plan are the
      benefit payments made to participants. The Bank paid $54 benefit
      payments during fiscal 2007. The following benefit payments, which
      reflect expected future service, are expected to be paid in future fiscal
      years:Year ending December 31,
              
              Pension Benefits2008
              
              $
              542009
              
              
              542010
              
              
              1802011
              
              
              1802012
              
              
              1802013-2017
              
              
              1,164
 
 Disclosure
of settlements and curtailments:
 
 There
were no events during fiscal 2007 that would constitute a curtailment or
settlement within the meaning of SFAS No. 88.
  67
 
 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 the Directors’ Retirement
Plan.
 
 For
      the Year Ended December 31,2007
              
              
              2006
              
              
              2005Change
      in benefit obligationBenefit obligation at beginning
      of year
              
              $
              469
              
              
              $
              402
              
              
              $
              347Service cost
              
              
              58
              
              
              
              54
              
              
              
              73Interest cost
              
              
              27
              
              
              
              24
              
              
              
              21Plan loss
(gain)
              
              
              —
              
              
              
              4
              
              
              
              (23
              )Benefits paid
              
              
              (15
              )
              
              
              (15
              )
              
              
              (15
              )Benefit
      obligation at end of year
              
              $
              539
              
              
              $
              469
              
              
              $
              403Change
      in plan assetsEmployer
      contribution
              
              $
              15
              
              
              $
              15
              
              
              $
              15Benefits paid
              
              
              (15
              )
              
              
              (15
              )
              
              
              (15
              )Fair
      value of plan assets at end of year
              
              $
              —
              
              
              $
              —
              
              
              $
              —Reconciliation
      of funded statusFunded status
              
              $
              (539
              )
              
              $
              (469
              )
              
              $
              (403
              )Unrecognized net plan
      loss
              
              
              50
              
              
              
              50
              
              
              
              47Net
      amount recognized
              
              $
              (489
              )
              
              $
              (419
              )
              
              $
              (356
              )Amounts
      recognized in the statement of financial position consist
    of:Accrued benefit
      liability
              
              $
              (539
              )
              
              $
              (469
              )
              
              $
              (403
              )Accumulated other comprehensive
      income
              
              
              50
              
              
              
              50
              
              
              
              47Net
      amount recognized
              
              $
              (489
              )
              
              $
              (419
              )
              
              $
              (356
              )
 
  68
 
 For
      the Year Ended December 31,2007
              
              
              2006
              
              
              2005Components
      of net periodic benefit costService cost
              
              $
              58
              
              
              $
              54
              
              
              $
              73Interest cost
              
              
              27
              
              
              
              24
              
              
              
              21Recognized actuarial
      (gain)/loss
              
              
              —
              
              
              
              1
              
              
              
              5Net
      periodic benefit cost
              
              
              85
              
              
              
              79
              
              
              
              99Additional amounts
      recognized
              
              
              —
              
              
              
              —
              
              
              
              —Total
      benefit cost
              
              $
              85
              
              
              $
              79
              
              
              $
              99Additional
      InformationMinimum benefit obligation at
      year end
              
              $
              539
              
              
              $
              469
              
              
              $
              403Increase (decrease) in minimum
      liability included in other comprehensive loss
              
              $
              —
              
              
              $
              3
              
              
              $
              (
      28
              )
   Assumptions
      used to determine benefit obligations at December 31
              
              2007
              
              
              2006
              
              
              2005Discount rate used to determine
      net periodic benefit cost for years ended December 31
              
              
              5.20
              %
              
              
              5.30
              %
              
              
              5.10
              %Discount rate used to determine
      benefit obligations at December 31
              
              
              5.20
              %
              
              
              5.20
              %
              
              
              5.30
              %
 
 Plan
Assets
 
 The Bank
informally funds the liabilities of the Directors’ Retirement 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 Directors’ Retirement Plan.
 
 Cash
Flows
 
 Contributions
      and Estimated Benefit PaymentsFor
      unfunded plans, contributions to the Directors’ Retirement Plan are the
      benefit payments made to participants. The Bank paid $15 in benefit
      payments during fiscal 2007. The following benefit payments, which
      reflect expected future service, are expected to be paid in future fiscal
      years:Year ending December 31,
              
              Pension Benefits2008
              
              $
              152009
              
              
              302010
              
              
              592011
              
              
              702012
              
              
              632013-2017
              
              
              396
 
 Disclosure
of settlements and curtailments:
 
 There
were no events during fiscal 2007 that would constitute a curtailment or
settlement within the meaning of SFAS No. 88.
  69
 
 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”) 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, 2007 and 2006 totaled
$1,821 and $1,758, respectively.  The accrued liability for the 2001
Executive Deferral Plan as of December 31, 2007 and 2006 totaled $233 and $252,
respectively.  The expenses for the 2001 Executive Deferral Plan for
the years ended December 31, 2007, 2006 and 2005 totaled $54, $43 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 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 director.   The Bank is the beneficiary and owner of
the policies.  The cash surrender value of the related insurance
policies as of December 31, 2007 and 2006 totaled $96 and $93,
respectively.  The accrued liability for the 2001 Director Deferral
Plan as of December 31, 2007 and 2006 totaled $5 and $5,
respectively.  The expenses for the 2001 Director Deferral Plan for
the years ended December 31, 2007, 2006 and 2005 totaled $1, $1 and $1,
respectively.
  70
 
 (8)
              Income
      Taxes
  The
provision for income tax expense consists of the following for the years ended
December 31:
  2007
              
              
              2006
              
              
              2005Current:Federal
              
              $
              3,939
              
              
              $
              4,461
              
              
              $
              4,076State
              
              
              1,283
              
              
              
              1,211
              
              
              
              1,3825,222
              
              
              
              5,672
              
              
              
              5,458Deferred:Federal
              
              
              (1,769
              )
              
              
              (112
              )
              
              
              (488
              )State
              
              
              (316
              )
              
              
              (391
              )
              
              
              (178
              )(2,085
              )
              
              
              (503
              )
              
              
              (666
              )$
              3,137
              
              
              $
              5,169
              
              
              $
              4,792
 
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006
consist of:
  2007
              
              
              2006Deferred
      tax assets:Allowance
      for loan losses
              
              $
              4,931
              
              
              $
              3,844Deferred
      compensation
              
              
              434
              
              
              
              336Retirement
      compensation
              
              
              775
              
              
              
              629Stock
      option compensation
              
              
              629
              
              
              
              439Post
      retirement benefits
              
              
              197
              
              
              
              386Current
      state franchise taxes
              
              
              404
              
              
              
              284Non-accrual
      interest
              
              
              44
              
              
              
              43Investment
      securities unrealized gains
              
              
              140
              
              
              
              —Other
              
              
              28
              
              
              
              6Deferred
      tax assets
              
              
              7,582
              
              
              
              5,967Less
      valuation allowance
              
              
              —
              
              
              
              —Total
      deferred tax assets
              
              
              7,582
              
              
              
              5,967Deferred
      tax liabilities:Fixed
      assets
              
              
              828
              
              
              
              1,506FHLB
      dividends
              
              
              214
              
              
              
              170Tax
      credit – loss on passthrough
              
              
              250
              
              
              
              212Deferred
      loan costs
              
              
              304
              
              
              
              231Investment
      securities unrealized gains
              
              
              —
              
              
              
              50Other
              
              
              111
              
              
              
              111Total
      deferred tax liabilities
              
              
              1,707
              
              
              
              2,280Net
      deferred tax assets (see note 6)
              
              $
              5,875
              
              
              $
              3,687
 
 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.
  2007
              
              
              2006
              
              
              2005Income
      tax expense at statutory rates
              
              $
              3,542
              
              
              $
              4,753
              
              
              $
              4,583Reduction
      for tax exempt interest
              
              
              (523
              )
              
              
              (213
              )
              
              
              (205
              )State
      franchise tax, net of federal income tax benefit
              
              
              638
              
              
              
              541
              
              
              
              750Cash
      surrender value of life insurance
              
              
              (140
              )
              
              
              (114
              )
              
              
              (90
              )Other
              
              
              (380
              )
              
              
              202
              
              
              
              (246
              )$
              3,137
              
              
              $
              5,169
              
              
              $
              4,792
 A
reconciliation of income taxes computed at the federal statutory rate of 34% and
the provision for income taxes is as follows:
   71
 
 Accounting for Uncertainty in Income
Taxes
  The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” on January 1, 2007.  As a result of the
implementation of FIN 48, the Company recognized an increase for unrecognized
tax benefits.  A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
  Balance
      at January 1, 2007
              
              $
              171Additions
      for tax positions taken in the current period
              
              
              —Reductions
      for tax positions taken in the current period
              
              
              —Additions
      for tax positions taken in prior years
              
              
              40Reductions
      for tax positions taken in prior years
              
              
              —Decreases  related
      to settlements with taxing authorities
              
              
              (89
              )Decreases
      as a result of a lapse in statue of limitations
              
              
              —Balance
      at December 31, 2007
              
              $
              122
  The
Company does not anticipate any significant increase or decrease in unrecognized
tax benefits during 2008.  If recognized, the entire amount of the
unrecognized tax benefits would affect the effective tax rate.
 
 The
Company classifies interest and penalties as a component of the provision for
income taxes.  At December 31, 2007, unrecognized interest and
penalties were $23 thousand.  The tax years ended December 31, 2006,
2005 and 2004 remain subject to examination by the Internal Revenue Service. The
tax years ended December 31, 2006, 2005, 2004 and 2003 remain subject to
examination by the California Franchise Tax Board.  The deductibility
of these tax positions will be determined through examination by the appropriate
tax jurisdictions or the expiration of the tax statute of
limitations.
 
 (9)
              Outstanding
      Shares and Earnings Per Share
  On
January 24, 2008, the Board of Directors of the Company declared a 6% stock
dividend payable as of March 31, 2008 to shareholders of record as of
February 29, 2008.  All income per share amounts have been adjusted to
give retroactive effect to stock dividends and stock splits.
 
 Earnings
Per Share (“EPS”)
 
 2007
              
              
              2006
              
              
              2005Basic
      earnings per share:Net
      income
              
              $
              7,281
              
              
              $
              8,810
              
              
              $
              8,688Weighted
      average common shares outstanding
              
              
              8,821,290
              
              
              
              8,958,878
              
              
              
              9,020,678Basic
      EPS
              
              $
              0.83
              
              
              $
              0.98
              
              
              $
              0.96Diluted
      earnings per share:Net
      income
              
              $
              7,281
              
              
              $
              8,810
              
              
              $
              8,688Weighted
      average common shares outstanding
              
              
              8,821,290
              
              
              
              8,958,878
              
              
              
              9,020,678Effect
      of dilutive options
              
              
              262,518
              
              
              
              439,139
              
              
              
              416,5179,038,808
              
              
              
              9,398,017
              
              
              
              9,437,195Diluted
      EPS
              
              $
              0.80
              
              
              $
              0.94
              
              
              $
              0.92
 Basic and
diluted earnings per share for the years ended December 31, were computed as
follows:
   72
 
 (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 $2,884
and $2,338 at December 31, 2007 and 2006, respectively.
  
 The
following is an analysis of the activity of loans to executive officers and
directors for the years ended December 31:
  2007
              
              
              2006
              
              
              2005Outstanding
      balance, beginning of year
              
              $
              273
              
              
              $
              304
              
              
              $
              217Credit
      granted
              
              
              3,005
              
              
              
              58
              
              
              
              626Repayments
              
              
              (579
              )
              
              
              (89
              )
              
              
              (539
              )Outstanding
      balance, end of year
              
              $
              2,699
              
              
              $
              273
              
              
              $
              304
 
  (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 $1,454,
$1,607 and $1,569 in 2007, 2006 and 2005, respectively.
   73
 
 (12)
              Stock
      Compensation Plans
  The
following table details the effect on net income had stock-based compensation
expense been recorded for the year ended December 31, 2005 based on the
fair-value method under SFAS No. 123 (dollars in thousands except per share
data):
 
 2005Net
      income as reported
              
              $
              8,688Add:
      Stock-based employee compensation included in reported net income, net of
      related tax effects
              
              
              286Deduct:  Total
      stock-based employee compensation expense determined under fair value
      based method for all awards, net of related tax effects
              
              
              (367
              )Net
      income Pro forma under SFAS No. 123
              
              $
              8,607Basic
      earnings per share:As
      reported
              
              $
              1.02Pro
      forma under SFAS No. 123
              
              $
              1.01Diluted
      earnings per share:As
      reported
              
              $
              0.98Pro
      forma under SFAS No. 123
              
              $
              0.97
 
 As of
December 31, 2007, the Company has the following share-based compensation
plans:
  The
Company has one fixed stock option plan. Under the 2006 Stock Incentive Plan,
the Company may grant option grants, stock appreciation rights, restricted stock
or stock units to an employee for an amount up to 25,000 total shares in any
calendar year.  With respect to awards granted to non-employee
directors under the Plan, no outside director can receive option grants, stock
appreciation rights, restricted stock or stock units in excess of 3,000 total
shares in any calendar year.  There are 807,963 shares authorized
under the plan. The plan will terminate March 15, 2016. 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, option grants vest at a rate of 25% per year after the first
anniversary of the date of grant and restricted stock awards vest at a rate of
100% after four years.  Options are granted at the fair value of the
related common stock on the date of grant.
  Stock option
and restricted stock activity for the Company’s Stock Incentive Plan during the
years indicated is as follows:
  Stock
      incentive
                planNumber
      of shares
              
              
              Weighted
      average exercise priceBalance
      at December 31, 2006
              
              
              549,000
              
              
              $
              10.32Granted
              
              
              49,924
              
              
              
              16.75Exercised
              
              
              (86,196
              )
              
              
              7.39Cancelled
              
              
              (1,161
              )
              
              
              16.80Balance
      at December 31, 2007
              
              
              511,567
              
              
              $
              11.43
 
 The 2006
Stock Incentive Plan permits stock-for-stock exercises of
shares.  During 2007, employees tendered 20,263 (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.
  74
 
 The
following table presents information on stock options and restricted stock for
the year ended December 31, 2007:
  
 Number
      of Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Aggregate
      Intrinsic Value
              
              
              Weighted
      Average Remaining Contractual TermOptions
      exercised
              
              
              86,196
              
              
              $
              7.39
              
              
              $
              944Stock options
      fully vested and expected to vest:
              
              
              511,567
              
              
              $
              11.43
              
              
              $
              2,936
              
              
              
              5.52Stock options vested
      and currently exercisable:
              
              
              352,492
              
              
              $
              8.92
              
              
              $
              2,543
              
              
              
              4.48
 
 The
aggregate intrinsic value of options exercised in calendar year 2006 and 2005
was $2,427 and $1,422, respectively.
 
 The
weighted average fair value per share of options granted during the years ended
December 31 was $9.58 in 2007, $7.31 in 2006 and $3.75 in 2005.
  At December 31, 2007, the range of exercise prices for all outstanding options
ranged from $0.00 to $26.18.
  75
 
 As of
December 31, 2007, there was $547 of total unrecognized compensation related to
non-vested stock options and restricted stock.  This cost is expected
to be recognized over a weighted average period of approximately 1.5
years.
 
 As of
December 31, 2007, there was $417 of recognized compensation related to
non-vested option grants and restricted stock awards.
 
 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 and restricted stock
granted is derived from historical data on employee exercise and post-vesting
employment termination behavior.  The risk free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of the grant.  Expected volatility is
based on both the implied volatilities from the traded option on the Company’s
stock and historical volatility on the Company’s stock.
 
 For
options granted prior to January 1, 2006, and valued in accordance with FAS 123,
the expected volatility used to estimate the fair value of the options was based
solely on the historical volatility of the Company’s stock.  The
Company recognized option forfeitures as they occurred.
  The
Company expenses the fair value of the option and restricted stock on a straight
line basis over the vesting period.  The Company estimates forfeitures
and only recognizes expense for those shares expected to vest.  The
Company’s estimated forfeiture rate for 2007, based on historical forfeiture
experience, is approximately 0.0%.
   The
following table shows our weighted average assumptions used in valuing stock
options and restricted stock granted for the years ended December
31:
  2007
              
              
              2006
              
              
              2005Risk
      Free Interest Rate
              
              
              4.67
              %
              
              
              4.57
              %
              
              
              3.73
              %Expected
      Dividend Yield
              
              
              0.00
              %
              
              
              0.00
              %
              
              
              0.00
              %Expected Life in Years
              
              
              4.18
              
              
              
              4.67
              
              
              
              6.00Expected
      Price Volatility
              
              
              26.03
              %
              
              
              26.39
              %
              
              
              26.04
              %
 
  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 265,000 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 63 percent of eligible employees are
participating in the Plan in the current participation period, which began
November 24, 2007 and will end November 23, 2008.
  Under the
Plan, at the annual stock purchase date of November 23, 2007, there were
$263 in contributions, and 17,703 shares were purchased at an average price of
$14.66, totaling $260.
   76
 
 (13)
              Short-Term
      and Long-Term Borrowings
  Short-term
borrowings at December 31, 2007 and 2006 consisted of secured borrowings from
the U.S. Treasury in the amounts of $878 and $858, respectively.  The
funds are placed at the discretion of the U.S. Treasury and are callable on
demand by the U.S. Treasury.  Additionally, at December 31, 2007, the
Bank had Federal Funds purchased in the amount of $5,069.
 
 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, 2007, the Company had a current collateral borrowing capacity with
the FHLB of $95,555.  The Company also has unsecured formal lines of
credit totaling $25,700 with correspondent banks.
 
 Long-term
borrowings consisted of FHLB advances, totaling $9,885 and $10,124,
respectively, at December 31, 2007 and 2006.  Such advances ranged in
maturity from 0.4 years to 1.3 years at a weighted average interest rate of
2.90% at December 31, 2007.  Maturity ranged from 1.4 years to 2.3
years at a weighted average interest rate of 2.91% at December 31,
2006.  Average outstanding balances were $10,008 and $10,776,
respectively, during 2007 and 2006.  The weighted average interest
rate paid was 2.91% in 2007 and 3.15% in 2006.
 
 (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
$1,227, $1,294, and $1,058 for the years ended December 31, 2007, 2006 and 2005,
respectively. At December 31, 2007, the future minimum payments under
non-cancelable operating leases with initial or remaining terms in excess of one
year were as follows:
  Year ending
      December 31:2008
              
              $
              1,1442009
              
              
              1,0102010
              
              
              7412011
              
              
              4992012
              
              
              500Thereafter
              
              
              1,143$
              5,037
 
  At
December 31, 2007, the aggregate maturities for time deposits were as
follows:
  Year
      ending December 31:2008
              
              $
              106,5022009
              
              
              3,8742010
              
              
              3,4362011
              
              
              7202012
              
              
              1,354Thereafter
              
              
              9$
              115,895
 
  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.
   77
 
 (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, were as follows:
  2007
              
              
              2006Undisbursed
      loan commitments
              
              $
              214,274
              
              
              
              198,200Standby
      letters of credit
              
              
              15,188
              
              
              
              12,222Commitments to
      sell loans
              
              
              250
              
              
              
              700$
              229,712
              
              
              
              211,122
 
  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.
  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.  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, 2007, 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, 2007, there was $15,188 issued in
performance standby letters of credit and the Bank carried no
liability.  The terms of the guarantees will expire primarily in
2008.  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 $1,105, which is recorded in
“accrued interest payable and other liabilities.”
  Commitments
to extend credit and standby letters of credit bear similar credit risk
characteristics as outstanding loans.  As of December 31, 2007, the
Company has no off-balance sheet derivatives requiring additional
disclosure.
   78
 
 (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 risk 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 Leverage Capital to average assets
ratio.
  Management
believes, as of December 31, 2007, that the Bank meets all capital adequacy
requirements to which it is subject.  As of December 31, 2007, 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. As of the date hereof, there have
been no conditions or events since that notification that management believes
have changed the institution’s category.
  The
Company and the Bank had Tier I Leverage, Tier I risk-based and Total Risk-Based
capital above the “well capitalized” levels at December 31, 2007 and 2006,
respectively, as set forth in the following tables:
  The
      CompanyWell2007
              
              
              2006
              
              
              CapitalizedCapital
              
              
              Ratio
              
              
              Capital
              
              
              Ratio
              
              
              RequirementTier
      1 Leverage Capital (to Average Assets)
              
              $
              64,046
              
              
              
              9.1
              %
              
              $
              62,400
              
              
              
              9.1
              %
              
              
              5.0
              %Tier 1
      Capital (to Risk Weighted Assets)
              
              
              64,046
              
              
              
              10.7
              %
              
              
              62,400
              
              
              
              11.1
              %
              
              
              6.0
              %Total
      Risk-Based Capital (to Risk Weighted Assets)
              
              
              71,336
              
              
              
              11.9
              %
              
              
              69,078
              
              
              
              12.3
              %
              
              
              10.0
              %
 
 The
      BankWell2007
              
              
              2006
              
              
              CapitalizedCapital
              
              
              Ratio
              
              
              Capital
              
              
              Ratio
              
              
              RequirementTier
      1 Leverage Capital (to Average Assets)
              
              $
              63,065
              
              
              
              9.0
              %
              
              $
              61,719
              
              
              
              9.0
              %
              
              
              5.0
              %Tier 1
      Capital (to Risk Weighted Assets)
              
              
              63,065
              
              
              
              10.6
              %
              
              
              61,719
              
              
              
              11.0
              %
              
              
              6.0
              %Total
      Risk-Based Capital (to Risk Weighted Assets)
              
              
              70,335
              
              
              
              11.8
              %
              
              
              68,397
              
              
              
              12.2
              %
              
              
              10.0
              %
 
 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.
   79
 
 (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.
   80
 
 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:
  2007
              
              
              2006Carrying
      amount
              
              
              Fair
                value
              
              
              Carrying
      amount
              
              
              Fair
                valueFinancial
      assets:Cash
      and federal funds sold
              
              $
              99,030
              
              
              $
              99,030
              
              
              $
              98,001
              
              
              $
              98,001Investment
      securities
              
              
              74,849
              
              
              
              74,849
              
              
              
              74,180
              
              
              
              74,180Other
      equity securities
              
              
              2,199
              
              
              
              2,199
              
              
              
              2,093
              
              
              
              2,093Loans:Net
      loans
              
              
              497,971
              
              
              
              497,405
              
              
              
              475,549
              
              
              
              475,948Loans
      held-for-sale
              
              
              1,343
              
              
              
              1,343
              
              
              
              4,460
              
              
              
              4,460Financial
      liabilities:Deposits
              
              
              622,671
              
              
              
              534,565
              
              
              
              603,682
              
              
              
              507,688FHLB
      advances and other borrowings
              
              
              15,832
              
              
              
              15,849
              
              
              
              10,981
              
              
              
              10,528
 
  2007Contract
      amount
              
              
              Fair
                valueUnrecognized
      financial instruments:Commitments
      to extend credit
              
              $
              214,274
              
              
              $
              1,607Standby
      letters of credit
              
              $
              15,188
              
              
              $
              1522006Contract
      amount
              
              
              Fair
                valueUnrecognized
      financial instruments:Commitments
      to extend credit
              
              $
              198,200
              
              
              $
              1,487Standby
      letters of credit
              
              $
              12,222
              
              
              $
              122
   81
 
 (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:
  2007
              
              
              2006
              
              
              2005Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Interest
              
              $
              11,728
              
              
              $
              9,243
              
              
              $
              5,641Income
      taxes
              
              $
              4,363
              
              
              $
              6,165
              
              
              $
              6,946Supplemental
      disclosure of non-cash investing and financing activities:Accrued
      compensation
              
              $
              —
              
              
              $
              (84
              )
              
              $
              —Stock
      dividend distributed
              
              $
              10,851
              
              
              $
              12,525
              
              
              $
              6,158Loans
      held-for-sale transferred to loans held-for-investment
              
              $
              2,892
              
              
              $
              —
              
              
              $
              —Loans
      held-for-investment transferred to other real estate owned
              
              $
              879
              
              
              $
              375
              
              
              $
              268
 
  
  (19)
              Quarterly
      Financial Information (Unaudited)
  
  March 31,
              
              
              June 30,
              
              
              September 30,
              
              
              December 31,2007:Interest
      income
              
              $
              12,192
              
              
              $
              12,388
              
              
              $
              12,321
              
              
              $
              11,693Net
      interest income
              
              
              9,223
              
              
              
              9,201
              
              
              
              9,310
              
              
              
              9,122Provision
      for loan losses
              
              
              (170
              )
              
              
              430
              
              
              
              990
              
              
              
              3,545Other
      operating income
              
              
              1,498
              
              
              
              1,708
              
              
              
              1,800
              
              
              
              2,154Other
      operating expense
              
              
              7,646
              
              
              
              7,427
              
              
              
              7,190
              
              
              
              6,540Income
      before taxes
              
              
              3,245
              
              
              
              3,052
              
              
              
              2,930
              
              
              
              1,191Net
      income
              
              
              2,090
              
              
              
              1,985
              
              
              
              2,019
              
              
              
              1,187Basic
      earnings per share
              
              
              .24
              
              
              
              .22
              
              
              
              .23
              
              
              
              .14Diluted
      earnings per share
              
              
              .23
              
              
              
              .22
              
              
              
              .22
              
              
              
              .132006:Interest
      income
              
              $
              11,331
              
              
              $
              11,896
              
              
              $
              12,408
              
              
              $
              12,435Net
      interest income
              
              
              9,392
              
              
              
              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
              
              
              .27
              
              
              
              .25
              
              
              
              .23
              
              
              
              .23Diluted
      earnings per share
              
              
              .26
              
              
              
              .24
              
              
              
              .22
              
              
              
              .22
 
   82
 
 (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
              
              2007
              
              
              2006AssetsCash
              
              $
              981
              
              
              $
              681Investment
      in wholly owned subsidiary
              
              
              62,994
              
              
              
              61,309Total
      assets
              
              $
              63,975
              
              
              $
              61,990Liabilities
      and stockholders’ equityStockholders’
      equity
              
              
              63,975
              
              
              
              61,990Total
      liabilities and stockholders’ equity
              
              $
              63,975
              
              
              $
              61,990
 
  Statements
      of Operations
              
              2007
              
              
              2006
              
              
              2005Dividends
      from subsidiary
              
              $
              6,000
              
              
              $
              2,500
              
              
              $
              3,500Other
      operating expenses
              
              
              (114
              )
              
              
              (94
              )
              
              
              (97
              )Income
      tax benefit
              
              
              48
              
              
              
              39
              
              
              
              40Income
      before undistributed earnings of subsidiary
              
              
              5,934
              
              
              
              2,445
              
              
              
              3,443Equity
      in undistributed earnings of subsidiary
              
              
              1,347
              
              
              
              6,365
              
              
              
              5,245Net
      income
              
              $
              7,281
              
              
              $
              8,810
              
              
              $
              8,688
 
  Statements
      of Cash Flows
              
              2007
              
              
              2006
              
              
              2005Net
      income
              
              $
              7,281
              
              
              $
              8,810
              
              
              $
              8,688Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDecrease  in
      other assets
              
              
              —
              
              
              
              —
              
              
              
              11Equity
      in undistributed earnings of subsidiary
              
              
              (1,347
              )
              
              
              (6,365
              )
              
              
              (5,245
              )Net
      cash provided by operating activities
              
              
              5,934
              
              
              
              2,445
              
              
              
              3,454Cash
      flows from financing activities:Common
      stock issued
              
              
              1,230
              
              
              
              1,288
              
              
              
              948Stock
      repurchases
              
              
              (6,851
              )
              
              
              (4,188
              )
              
              
              (3,854
              )Cash
      in lieu of fractional shares
              
              
              (13
              )
              
              
              (15
              )
              
              
              (15
              )Net
      cash used in financing activities
              
              
              (5,634
              )
              
              
              (2,915
              )
              
              
              (2,921
              )Net
      change in cash
              
              
              300
              
              
              
              (470
              )
              
              
              533Cash
      at beginning of year
              
              
              681
              
              
              
              1,151
              
              
              
              618Cash
      at end of year
              
              $
              981
              
              
              $
              681
              
              
              $
              1,151
 
   83
  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, 2007. In making this assessment, management used the following
criteria: criteria established in “Internal Control – Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”).  Based on Management’s assessment, they believe that, as of
December 31, 2007, 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
48.
 
 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.
  84
 
 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 49.
 
 During
the quarter ended December 31, 2007, there were no changes in the Company's
internal controls over financial reporting that 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, EXECUTIVE OFFICERS 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 2008 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 2008 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.”
  85
 
 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 2008 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, 2007.  The plans included in this table are the Company’s 2000
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 74) 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
              
              511,567
              
              $11.43
              
              758,357Equity
      compensation plans not approved by security holders
              
              —
              
              —
              
              —Total
              
              511,567
              
              $11.43
              
              758,357
 
 
 
 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 2008 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 2008 Annual Meeting of
Shareholders entitled “Audit and Non-Audit Fees.”
  86
  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:ExhibitExhibitNumber3.1
              
              Amended
      Articles of Incorporation of the Company – incorporated by reference to
      Exhibit 3.1 of the Registrant’s Current Report on Form 10-K on
      December  31, 20063.3
              
              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 *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 *
  87
 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 – incorporated herein by reference to Exhibit 10.15 to
      Registrant’s Annual Report on Form 10-K for the year ended December 31,
      2006 *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 – incorporated
      herein by reference to Exhibit 10.18 to Registrant’s Annual Report on Form
      10-K for the year ended December 31, 2006 *11
              
              Statement
      of Computation of Per Share Earnings (See Page 59 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, contract or
      arrangement.
 
  88
  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 14,
2008.
   
  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(Principal
      Accounting Officer)
  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
      14, 2008Lori
      J. Aldrete/s/ FRANK J. ANDREWS,
      JR.
              Director
      and Chairman of the Board
              March
      14, 2008Frank
      J. Andrews, Jr./s/ JOHN M. CARBAHAL
              Director
              March
      14, 2008John
      M. Carbahal/s/
      GREGORY DUPRATT
              Director
      and Vice Chairman of the Board
              March
      14, 2008Gregory
      DuPratt/s/
      JOHN F. HAMEL
              Director
              March
      14, 2008John
      F. Hamel/s/
      DIANE P. HAMLYN
              Director
              March
      14, 2008Diane
      P. Hamlyn/s/
      FOY S. MCNAUGHTON
              Director
              March
      14, 2008Foy
      S. McNaughton/s/ DAVID W.
    SCHULZE
              Director
              March
      14, 2008David
      W. Schulze/s/ ANDREW S.
      WALLACE
              Director
              March
      14, 2008Andrew
      S. Wallace
  89