10-Q 1 nvb_1q14.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended March 31, 2014.

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly
	Transition Period From ___________ to ___________

Commission file number 0-10652

NORTH VALLEY BANCORP

(Exact name of registrant as specified in its charter)

California	94-2751350
(State or other jurisdiction	(IRS Employer ID Number)
of incorporation or organization)

300 Park Marina Circle, Redding, CA	96001
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code (530) 226-2900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 (Check one):

Large accelerated filer o	Accelerated filer x

Non-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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock – 6,836,463 shares as of May 8, 2014.

INDEX

NORTH VALLEY BANCORP AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets—March 31, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Income—For the three months ended March 31, 2014 and 2013	4
	Consolidated Statements of Comprehensive Income—For the three months ended March 31, 2014 and 2013	5
	Condensed Consolidated Statements of Cash Flows—For the three months ended March 31, 2014 and 2013	6
	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	45

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	46

SIGNATURES		46

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)

	March 31,			December 31,
	2014			2013
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	22,718		$	19,348
Federal funds sold		44,750			38,135
Total cash and cash equivalents		67,468			57,483

Interest-bearing deposits in other financial institutions		2,226			2,226
Investment securities available-for-sale, at fair value		273,143			279,479
Investment securities held-to-maturity, at amortized cost		2			2

Loans		508,056			509,244
Less: Allowance for loan losses		(9,058	)		(9,301	)
Net loans		498,998			499,943

Premises and equipment, net		7,583			7,833
Accrued interest receivable		2,099			2,124
Other real estate owned		2,633			3,454
FHLB and FRB stock and other nonmarketable securities		8,408			8,402
Bank-owned life insurance		37,476			37,209
Core deposit intangibles, net		73			109
Other assets		18,863			19,500

TOTAL ASSETS	$	918,972		$	917,764

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:
Deposits:
Non-interest bearing	$	176,951		$	184,971
Interest bearing		608,866			602,878
Total deposits		785,817			787,849

Accrued interest payable and other liabilities		15,893			14,835
Subordinated debentures		21,651			21,651
Total liabilities		823,361			824,335

Commitments and contingencies (Note 11)

STOCKHOLDERS’ EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; no shares outstanding at March 31, 2014 and December 31, 2013		—			—
Common stock, no par value: authorized 60,000,000 shares; outstanding 6,836,463 at March 31, 2014 and December 31, 2013		98,922			98,824
Retained earnings (accumulated deficit)		544			(375	)
Accumulated other comprehensive loss, net of tax		(3,855	)		(5,020	)
Total stockholders’ equity		95,611			93,429

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	918,972		$	917,764

The accompanying notes are an integral part of these consolidated financial statements.

NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)

	Three months ended March 31,
	2014		2013
INTEREST INCOME:
Interest and fees on loans	$	6,395	$	6,366
Interest on investments:
Taxable interest income		1,639		1,376
Nontaxable interest income		59		107
Interest on federal funds sold and repurchase agreements		26		19
Total interest income		8,119		7,868

INTEREST EXPENSE:
Deposits		226		299
Subordinated debentures		131		133
Total interest expense		357		432

Net interest income		7,762		7,436
Provision for loan losses		—		—
Net interest income after provision for loan losses		7,762		7,436

NONINTEREST INCOME:
Service charges on deposit accounts		698		952
Other fees and charges		1,012		1,120
Earnings on cash surrender value of life insurance policies		347		463
Gain on sale of loans, net		229		925
Gain on sales and calls of securities, net		—		543
Other		144		326
Total noninterest income		2,430		4,329

NONINTEREST EXPENSE:
Salaries and employee benefits		5,023		5,162
Occupancy expense		623		633
Furniture and equipment expense		216		220
FDIC and state assessments		141		218
Other real estate owned expense		10		376
Other		2,743		3,279
Total noninterest expenses		8,756		9,888

Income before provision for income taxes		1,436		1,877

Provision for income taxes		517		616

Net income	$	919	$	1,261

Per Common Share Amounts
Basic and Diluted Income Per Common Share	$	0.13	$	0.18

The accompanying notes are an integral part of these consolidated financial statements.

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

	For three months ended March 31,
	2014			2013

Net income	$	919		$	1,261
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period		2,012			(647	)
Tax effect		(825	)		265
Reclassification adjustment for gains included in gain on sales or calls of securities, net		—			(543	)
Provision for income taxes		—			223
Net of tax		1,187			(702	)
Defined benefit pension plans:
Net (losses) gains arising during the period		(96	)		168
Tax effect		39			(69	)
Reclassification adjustment for amortization of prior service cost and net gain included in salaries and employee benefits		60			74
Benefit for income taxes		(25	)		(30	)
Net of tax		(22	)		143
Total other comprehensive income (loss)		1,165			(559	)
Comprehensive income	$	2,084		$	702

The accompanying notes are an integral part of these consolidated financial statements.

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	For three months ended March 31,
	2014			2013
Cash flows from operating activities
Net income	$	919		$	1,261
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		252			254
Amortization of premium on securities, net		291			446
Amortization of core deposit intangible		36			36
Provision for loan losses		—			—
Net (gains) losses on sale and write-down of other real estate owned		(175	)		234
Gain on sale of loans		(229	)		(925	)
Gain on sale and calls of securities		—			(543	)
Gain on sale of premises and equipment		—			(7	)
Stock based compensation expense		98			83
Effect of changes in:
Accrued interest receivable		25			35
Other assets		(440	)		(931	)
Accrued interest payable and other liabilities		1,022			996
Proceeds from sales of loans originated for sale		6,358			27,999
Loans originated for sale		(6,869	)		(29,397	)
Net cash provided by (used in) operating activities		1,288			(459	)

Cash flows from investing activities
Purchases of available-for-sale securities		—			(37,800	)
Proceeds from sales/calls of available-for-sale securities		830			17,085
Proceeds from maturities/prepayments of available-for-sale securities		7,226			21,716
Purchases of FHLB and FRB stock and other securities		(6	)		—
Net decrease in loans		454			4,519
Proceeds from sales of other real estate owned		2,227			939
Proceeds from sales of premises and equipment		—			11
Purchases of premises and equipment		(2	)		(55	)
Net cash provided by investing activities		10,729			6,415

Cash flows from financing activities
Net (decrease) increase in deposits		(2,032	)		7,340
Net cash (used in) provided by financing activities		(2,032	)		7,340

Net increase in cash and cash equivalents		9,985			13,296
Cash and cash equivalents, beginning of year		57,483			38,519
Cash and cash equivalents, end of year	$	67,468		$	51,815

Supplemental cash flow information:
Interest paid	$	358		$	447
Income taxes paid	$	—		$	—

Supplemental noncash disclosures:
Transfer from loans to other real estate owned	$	1,231		$	602

The accompanying notes are an integral part of these consolidated financial statements.

NORTH VALLEY BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of North Valley Bancorp and subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, certain information and notes required by accounting principles generally accepted in the United States for annual financial statements are not included herein. Management believes that the disclosures are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods presented have been included. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2014.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries North Valley Bank, a California banking corporation (“NVB”) and North Valley Trading Company, a California corporation, which is inactive. Significant intercompany items and transactions have been eliminated in consolidation. The Company owns the common stock of three business trusts that have issued trust preferred securities fully and unconditionally guaranteed by the Company. North Valley Capital Trust II, North Valley Capital Trust III and North Valley Capital Statutory Trust IV are unconsolidated subsidiaries and have issued an aggregate of $21,651,000 in trust preferred securities, which are reflected as debt on the Company’s condensed consolidated balance sheets.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Management has determined that since all of the banking products and services offered by the Company are available in each branch of NVB, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate NVB branches and report them as a single operating segment. No single customer accounts for more than ten percent of revenues for the Company or NVB.

As announced by the Company on January 21, 2014 and reported in the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 22, 2014 (the "Current Report"), the Company has entered into an Agreement and Plan of Merger and Reorganization dated January 21, 2014 (the "Merger Agreement"), pursuant to which the Company would merge with and into TriCo Bancshares, a California corporation ("TriCo"), with TriCo being the surviving corporation. Immediately thereafter, the Company's subsidiary bank, North Valley Bank, would be merged with and into TriCo's subsidiary bank, Tri Counties Bank. Under the terms of the Merger Agreement, the Company shareholders would receive a fixed exchange ratio of 0.9433 shares of TriCo common stock for each share of Company common stock. Holders of the Company's outstanding in-the-money stock options would receive cash, net of applicable taxes withheld, for the value of their unexercised stock options. The transactions contemplated by the Merger Agreement are expected to close in the third quarter of 2014, pending approvals of the Company shareholders and the TriCo shareholders, the receipt of all necessary regulatory approvals, and the satisfaction of other closing conditions which are customary for such transactions. For additional information, reference should be made to the text of the Agreement and Plan of Merger and Reorganization, filed as an exhibit to the Current Report, and to other information regarding TriCo and the Company, their respective businesses and the status of their proposed merger, as reported from time to time in other filings with the Securities and Exchange Commission.

2. INVESTMENT SECURITIES

The amortized cost of investment securities and their estimated fair value as of the dates indicated were as follows (in thousands):

	As of March 31, 2014
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:
Obligations of U.S. government sponsored agencies	$	19,669	$	—	$	(1,132	)	$	18,537
Obligations of state and political subdivisions		4,427		134		(18	)		4,543
Government sponsored agency mortgage-backed securities		244,364		2,862		(4,972	)		242,254
Corporate debt securities		6,000		—		(1,140	)		4,860
Equity securities		3,000		—		(51	)		2,949
Total available-for-sale	$	277,460	$	2,996	$	(7,313	)	$	273,143
Held-to-Maturity:
Government sponsored agency mortgage-backed securities	$	2	$	—	$	—		$	2

	As of December 31, 2013
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:
Obligations of U.S. government sponsored agencies	$	19,669	$	—	$	(1,471	)	$	18,198
Obligations of state and political subdivisions		5,216		151		(50	)		5,317
Government sponsored agency mortgage-backed securities		251,923		2,528		(6,174	)		248,277
Corporate debt securities		6,000		—		(1,245	)		4,755
Equity securities		3,000		—		(68	)		2,932
Total available-for-sale	$	285,808	$	2,679	$	(9,008	)	$	279,479
Held-to-Maturity:
Government sponsored agency mortgage-backed securities	$	2	$	—	$	—		$	2

Net unrealized losses on available-for-sale securities totaling ($4,317,000) and ($6,329,000) were recorded, net of ($1,770,000) and ($2,595,000) in tax benefits, as accumulated other comprehensive loss within stockholders’ equity at March 31, 2014 and December 31, 2013, respectively. All government sponsored agency mortgage-backed securities are residential mortgages for the periods ended March 31, 2014 and December 31, 2013.

For the three months ended March 31, 2014 there were no gross realized gains on sales or calls of available for sale securities. For the three months ended March 31, 2013 there were $543,000 in gross realized gains on sales or calls of available for sale securities. For the three months ended March 31, 2014 and 2013 there were no gross realized losses on sales or calls of securities categorized as available for sale securities. For the three months ended March 31, 2014 and 2013 there were $830,000 and $17,085,000, respectively, in gross proceeds from sales or calls of available for sale securities. There were no sales or transfers of held to maturity securities for the three months ended March 31, 2014 and 2013. For the three months ended March 31, 2014 and 2013 there were no gross proceeds from maturities and calls of held to maturity securities. Expected maturities of all investment securities are consistent with those reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

At March 31, 2014 and December 31, 2013, securities having fair value amounts of approximately $265,554,000 and $272,092,000, respectively, were pledged to secure public deposits, short-term borrowings, treasury tax and loan balances and for other purposes required by law or contract.

Investment securities are evaluated for other-than-temporary impairment on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the issues for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings. For debt securities, the credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

The following tables show gross unrealized losses and the estimated fair value of available-for-sale investment securities, aggregated by investment category, for investment securities that are in an unrealized loss position (in thousands). Unrealized losses for held-to-maturity investment securities during the same period were not significant.

	As of March 31, 2014
	Less than 12 Months					12 Months or Longer					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Description of Securities
Obligations of U.S. government sponsored agencies	$	18,537	$	(1,132	)	$	—	$	—		$	18,537	$	(1,132	)
Obligations of state and political subdivisions		671		(18	)		—		—			671		(18	)
Government sponsored agency mortgage-backed securities		137,062		(4,177	)		17,021		(795	)		154,083		(4,972	)
Corporate debt securities		—		—			4,860		(1,140	)		4,860		(1,140	)
Equity securities		2,949		(51	)		—		—			2,949		(51	)
Total impaired securities	$	159,219	$	(5,378	)	$	21,881	$	(1,935	)	$	181,100	$	(7,313	)

	As of December 31, 2013
	Less than 12 Months					12 Months or Longer					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Description of Securities
Obligations of U.S. government sponsored agencies	$	18,198	$	(1,471	)	$	—	$	—		$	18,198	$	(1,471	)
Obligations of state and political subdivisions		1,145		(50	)		—		—			1,145		(50	)
Government sponsored agency mortgage-backed securities		156,421		(5,163	)		17,296		(1,011	)		173,717		(6,174	)
Corporate debt securities		—		—			4,755		(1,245	)		4,755		(1,245	)
Equity securities		2,932		(68	)		—		—			2,932		(68	)
Total impaired securities	$	178,696	$	(6,752	)	$	22,051	$	(2,256	)	$	200,747	$	(9,008	)

As of March 31, 2014 and December 31, 2013, there were two corporate debt securities in a loss position for twelve months or more. There is a current active market for these securities and management believes that the unrealized losses on the Company’s investment in these corporate debt securities is due to the yield of the securities and is not attributable to changes in credit quality. The two corporate debt securities are each a $3,000,000 single-issuer trust preferred security issued by two separate large publicly-traded financial institutions. The securities are tied to the front-end of the yield curve, three-month LIBOR (a short-term interest rate) and have a spread over that rate. In addition, the payments on both of these securities have been made as agreed and are considered current. The Company does not intend to sell and does not believe it will be required to sell these securities and expects a full recovery of value. The Company did not consider these investments to be other-than-temporarily impaired at March 31, 2014 or December 31, 2013.

Management periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Management has the ability and intent to hold securities with established maturity dates until recovery of fair value, which may be at maturity, and believes it will be able to collect all amounts due according to the contractual terms for all of the underlying investment securities; therefore, management does not consider these investments to be other-than-temporarily impaired.

3. LOANS

The Company originates loans for business, consumer and real estate activities and for equipment purchases. Such loans are concentrated in Yolo, Placer, Sonoma, Shasta, Humboldt, Mendocino, Trinity and Del Norte Counties and neighboring communities. Substantially all loans are collateralized. Generally, real estate loans are secured by real property. Commercial and other loans are secured by bank deposits, real estate or business or personal assets. Leases are generally secured by equipment. The Company’s policy for requiring collateral reflects the Company’s analysis of the borrower, the borrower’s industry and the economic environment in which the loan would be granted. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrower.

Major classifications of loans as of the dates indicated were as follows (in thousands):

	March 31,			December 31,
	2014			2013
Commercial	$	50,040		$	47,526
Real estate - commercial		324,759			326,631
Real estate - construction		26,267			27,472
Real estate - mortgage		62,936			63,120
Installment		4,949			5,376
Other		39,352			39,311
Gross loans		508,303			509,436
Deferred loan (fees) costs, net		(247	)		(192	)
Allowance for loan losses		(9,058	)		(9,301	)
Loans, net	$	498,998		$	499,943

Salaries and employee benefits totaling $157,000 and $275,000 have been deferred as loan origination costs for the three month periods ended March 31, 2014 and 2013, respectively.

Certain real estate loans receivable are pledged as collateral for available borrowings with the FHLB. Pledged loans totaled $143,180,000 and $106,380,000 at March 31, 2014 and 2013.

The following table presents impaired loans and the related allowance for loan losses as of the dates indicated (in thousands):

	As of March 31, 2014						As of December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no allocated allowance
Commercial	$	98	$	101	$	—	$	458	$	481	$	—
Real estate - commercial		3,747		3,885		—		4,193		4,284		—
Real estate - construction		429		444		—		435		449		—
Real estate - mortgage		1,616		1,658		—		919		948		—
Installment		84		104		—		96		115		—
Other		273		291		—		374		397		—
Subtotal		6,247		6,483		—		6,475		6,674		—

With allocated allowance
Commercial		162		166		104		240		240		150
Real estate - commercial		113		113		6		113		113		28
Real estate - mortgage		414		414		2		416		416		50
Subtotal		689		693		112		769		769		228
Total Impaired Loans	$	6,936	$	7,176	$	112	$	7,244	$	7,443	$	228

The following table presents the average balance related to impaired loans for the periods indicated (in thousands):

	Three Months ended March 31,
	2014				2013
	Average Book		Interest Income		Average Book		Interest Income
	Balance		Recognized		Balance		Recognized

Commercial	$	300	$	—	$	571	$	—
Real estate - commercial		4,025		19		5,540		21
Real estate - construction		446		5		916		7
Real estate - mortgage		2,091		12		819		10
Installment		114		1		96		1
Other		293		—		158		—
Total	$	7,269	$	37	$	8,100	$	39

Nonperforming loans include all such loans that are either on nonaccrual status or are 90 days past due as to principal or interest but still accrue interest because such loans are well-secured and in the process of collection. Nonperforming loans are summarized as of the periods indicated as follows (in thousands):

					Loans Past Due Over
	Nonaccrual				89 Days Still Accruing
	March 31,		December 31,		March 31,		December 31,
	2014		2013		2014		2013
Commercial	$	260	$	698	$	—	$	—
Real estate - commercial		2,989		3,425		—		—
Real estate - construction		109		110		—		—
Real estate - mortgage		1,116		417		—		—
Installment		57		69		—		—
Other		274		374		—		—
Total	$	4,805	$	5,093	$	—	$	—

If interest on nonaccrual loans had been accrued, such income would have approximated $10,000 and $85,000 for the three month periods ended March 31, 2014 and 2013.

At March 31, 2014 there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual.

The following table shows an aging analysis of the loan portfolio by the amount of time past due (in thousands):

	As of March 31, 2014
	Accruing Interest
					Greater than
			30-89 Days		89 Days
	Current		Past Due		Past Due		Nonaccrual		Total

Commercial	$	48,589	$	1,191	$	—	$	260	$	50,040
Real estate - commercial		321,721		49		—		2,989		324,759
Real estate - construction		26,158		—		—		109		26,267
Real estate - mortgage		61,307		513		—		1,116		62,936
Installment		4,888		4		—		57		4,949
Other		38,976		102		—		274		39,352
Total	$	501,639	$	1,859	$	—	$	4,805	$	508,303

	As of December 31, 2013
	Accruing Interest
					Greater than
			30-89 Days		89 Days
	Current		Past Due		Past Due		Nonaccrual		Total

Commercial	$	46,587	$	241	$	—	$	698	$	47,526
Real estate - commercial		322,773		433		—		3,425		326,631
Real estate - construction		27,362		—		—		110		27,472
Real estate - mortgage		62,178		525		—		417		63,120
Installment		5,273		34		—		69		5,376
Other		38,594		343		—		374		39,311
Total	$	502,767	$	1,576	$	—	$	5,093	$	509,436

A troubled debt restructuring (“TDRs”) is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

At March 31, 2014, accruing TDRs were $2,131,000 and nonaccrual TDRs were $841,000 compared to accruing TDRs of $2,151,000 and nonaccrual TDRs of $905,000 at December 31, 2013. At March 31, 2014, there were $8,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. At December 31, 2013, there were $78,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. There were no commitments to lend additional amounts at March 31, 2014 and December 31, 2013 to customers with outstanding loans classified as troubled debt restructurings. There were no TDRs that subsequently defaulted during the periods ended March 31, 2014 and 2013 for which there was a modification in the preceding twelve months.

The following table presents loans that were modified and recorded as TDRs during the periods indicated below (dollars in thousands):

	For the period ended March 31, 2014						For the period ended December 31, 2013
	Accruing TDRs						Accruing TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Real estate - commercial		—	$	—	$	—		1	$	435	$	435
Real estate - mortgage		—	$	—	$	—		1	$	209	$	209

	Nonaccrual TDRs						Nonaccrual TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		1	$	162	$	162		1	$	36	$	36
Real estate - construction		—	$	—	$	—		1	$	110	$	110
Real estate - mortgage		1	$	97	$	98		1	$	113	$	113
Other		1	$	46	$	47		3	$	210	$	210

The following table presents a summary of TDRs by type of concession and by type of loan as of the periods indicated below (dollars in thousands):

	March 31, 2014
Accruing TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Real estate - commercial		5	$	—	$	193	$	678	$	871
Real estate-construction		1	$	—	$	320	$	—	$	320
Real estate - mortgage		3	$	—	$	292	$	622	$	914
Installment		1	$	—	$	—	$	26	$	26

Nonaccrual TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Commercial		2	$	—	$	162	$	31	$	193
Real estate-construction		1	$	—	$	110	$	—	$	110
Real estate - mortgage		2	$	97	$	—	$	110	$	207
Installment		2	$	—	$	—	$	57	$	57
Other		5	$	149	$	58	$	67	$	274

	December 31, 2013
Accruing TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Real estate - commercial		5	$	—	$	195	$	686	$	881
Real estate-construction		1	$	—	$	325	$	—	$	325
Real estate - mortgage		3	$	—	$	293	$	625	$	918
Installment		1	$	—	$	—	$	27	$	27

Nonaccrual TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Commercial		2	$	—	$	—	$	391	$	391
Real estate-construction		1	$	—	$	110	$	—	$	110
Real estate - mortgage		1	$	—	$	—	$	113	$	113
Installment		2	$	—	$	—	$	59	$	59
Other		4	$	104	$	60	$	68	$	232

Allowance for Loan Losses

The following table presents the activity in the allowance for loan losses by portfolio segment (in thousands):

	For the three months ended March 31, 2014
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total

Allowance for Loan Losses
Balance December 31, 2013	$	876		$	5,196		$	610		$	842		$	131		$	832		$	814		$	9,301
Charge-offs		—			(13	)		—			(252	)		(33	)		—						(298	)
Recoveries		50			—			—			—			4			1						55
Provisions for loan losses		(132	)		(39	)		(29	)		269			18			(35	)		(52	)		—
Balance March 31, 2014	$	794		$	5,144		$	581		$	859		$	120		$	798		$	762		$	9,058

	For the three months ended March 31, 2013
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total

Allowance for Loan Losses
Balance December 31, 2012	$	843		$	6,295		$	690		$	982		$	98		$	721		$	829		$	10,458
Charge-offs		(83	)		(437	)		(369	)		(156	)		(11	)		—						(1,056	)
Recoveries		242			—			2			—			5			—						249
Provisions for loan losses		168			(138	)		272			112			(5	)		(45	)		(364	)		—
Balance March 31, 2013	$	1,170		$	5,720		$	595		$	938		$	87		$	676		$	465		$	9,651

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (in thousands):

			Real Estate		Real Estate		Real Estate
March 31, 2014	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	104	$	6	$	—	$	2	$	—	$	—	$	—	$	112
Collectively evaluated for impairment		690		5,138		581		857		120		798		762		8,946
Total ending allowance balance	$	794	$	5,144	$	581	$	859	$	120	$	798	$	762	$	9,058

Loans:
Loans individually evaluated for impairment	$	260	$	3,860	$	429	$	2,030	$	84	$	273			$	6,936
Loans collectively evaluated for impairment		49,780		320,899		25,838		60,906		4,865		39,079				501,367
Total ending loans balance	$	50,040	$	324,759	$	26,267	$	62,936	$	4,949	$	39,352			$	508,303

			Real Estate		Real Estate		Real Estate
December 31, 2013	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	150	$	28	$	—	$	50	$	—	$	—	$	—	$	228
Collectively evaluated for impairment		726		5,168		610		792		131		832		814		9,073
Total ending allowance balance	$	876	$	5,196	$	610	$	842	$	131	$	832	$	814	$	9,301

Loans:
Loans individually evaluated for impairment	$	698	$	4,306	$	435	$	1,335	$	96	$	374			$	7,244
Loans collectively evaluated for impairment		46,828		322,325		27,037		61,785		5,280		38,937				502,192
Total ending loans balance	$	47,526	$	326,631	$	27,472	$	63,120	$	5,376	$	39,311			$	509,436

The following table shows the loan portfolio allocated by management’s internal risk ratings (in thousands):

	As of March 31, 2014
	Pass		Special Mention		Substandard		Total
Commercial	$	45,352	$	3,989	$	699	$	50,040
Real estate - commercial		313,209		3,089		8,461		324,759
Real estate - construction		25,908		250		109		26,267
Real estate - mortgage		60,850		—		2,086		62,936
Installment		4,872		—		77		4,949
Other		38,757		—		595		39,352
Total	$	488,948	$	7,328	$	12,027	$	508,303

	As of December 31, 2013
	Pass		Special Mention		Substandard		Total
Commercial	$	45,446	$	1,107	$	973	$	47,526
Real estate - commercial		309,828		6,213		10,590		326,631
Real estate - construction		27,101		261		110		27,472
Real estate - mortgage		61,200		—		1,920		63,120
Installment		5,278		—		98		5,376
Other		38,611		—		700		39,311
Total	$	487,464	$	7,581	$	14,391	$	509,436

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the probable incurred losses in the loan portfolio. In determining levels of risk, management considers a variety of factors, including, but not limited to, asset classifications, economic trends, industry experience and trends, geographic concentrations, estimated collateral values, historical loan loss experience, and the Company’s underwriting policies. During the second quarter of 2013, there was a change in the Bank’s method of calculating the historical loss factors applied to loans identified as “homogenous segments” of the loan portfolio as follows: Losses from the past twelve quarters are applied to loan pools based on a “Migration Analysis” method. The method calculates Net Charge Offs (charge offs less corresponding recoveries) and measures them against average balances in loan pools based on the risk grade in effect on charged-off loans four quarters prior to the actual charge off date. The logic behind this four quarter “look back” is to account for management’s estimate of the typical time lapse between the recognition of the problem loan and the recognition of some or all of the loan as uncollectable. In addition, the loss ratios are calculated using “factored” logic which systematically reduces the Net Charge Off value so that charge offs occurring in older periods do not have as much weight as more recent charge offs. Management of the Company believes that, given the recent trends in historical losses and the correlation of those losses with a loans identified risk grade, that incorporation of a migration analysis in the current and future analyses was a prudent refinement of the allowance methodology. In addition, management believes that the decreases in the overall level of the allowance for loan losses over the past several quarters is directionally consistent with the improving credit quality trends of the loan portfolio. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable incurred losses in loans receivable. While management uses the best information available to make these estimates, future adjustments to allowances may be necessary due to economic, operating, regulatory, and other conditions that may be beyond the Company’s control. The Company also engages a third party credit review consultant to analyze the Company’s loan loss adequacy periodically. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

The allowance for loan losses is comprised of several components including the specific, formula and unallocated allowance relating to loans in the loan portfolio. Our methodology for determining the allowance for loan losses consists of several key elements, which include:

Specific Allowances. A specific allowance is established when management has identified unique or particular risks that were related to a specific loan that demonstrated risk characteristics consistent with impairment. Specific allowances are established when management can estimate the amount of an impairment of a loan.

Formula Allowance. The formula allowance is calculated by applying loss factors through the assignment of loss factors to homogenous pools of loans. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and such other data as management believes to be pertinent. Management, also, considers a variety of subjective factors, including regional economic and business conditions that impact important segments of our portfolio, loan growth rates, the depth and skill of lending staff, the interest rate environment, and the results of bank regulatory examinations and findings of our internal credit examiners to establish the formula allowance.

Unallocated Allowance. The unallocated loan loss allowance represents an amount for imprecision or uncertainty that is inherent in estimates used to determine the allowance.

The Company also maintains a separate allowance for off-balance-sheet commitments. A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with commitments to lend funds under existing agreements, for example, the Bank’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet and was $146,000, as of March 31, 2014 and December 31, 2013.

4. OTHER REAL ESTATE OWNED

The table shows the changes in other real estate owned (OREO) as of the periods indicated as follows (in thousands):

	March 31,			December 31,
	2014			2013
Balance, January 1	$	3,454		$	22,423
Loans transferred to other real estate owned		1,231			818
Premises transferred to other real estate owned		—			627
Sales of other real estate owned		(2,227	)		(17,204	)
Gain (loss) on sale or write-down of other real estate owned		175			(3,210	)
Balance, end of period	$	2,633		$	3,454

The following table presents the components of OREO expense (in thousands):

	Three months ended March 31,
	2014			2013
Operating expenses	$	185		$	142
Provision for unrealized losses		—			261
Net gain on sales		(175	)		(27	)
Total other real estate owned expense	$	10		$	376

5. FAIR VALUE MEASUREMENTS

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

• Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

• Significant other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets or liabilities, quoted prices for securities in inactive markets and inputs derived principally from, or corroborated by, observable market data by correlation or other means.

• Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis (in thousands):

Recurring Basis

	Fair Value Measurements at March 31, 2014 Using:
	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	18,537	$	—	$	18,537	$	—
Obligations of state and political subdivisions		4,543		—		4,543		—
Government sponsored agency mortgage-backed securities		242,254		—		242,254		—
Corporate debt securities		4,860		—		4,860		—
Equity securities		2,949		—		2,949		—
	$	273,143	$	—	$	273,143	$	—

	Fair Value Measurements at December 31, 2013 Using:
	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	18,198	$	—	$	18,198	$	—
Obligations of state and political subdivisions		5,317		—		5,317		—
Government sponsored agency mortgage-backed securities		248,277		—		248,277		—
Corporate debt securities		4,755		—		4,755		—
Equity securities		2,932		—		2,932		—
	$	279,479	$	—	$	279,479	$	—

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the year ended March 31, 2014, there were no transfers between Levels 1 and 2.

There were no liabilities measured at fair value on a recurring basis at March 31, 2014 or 2013.

Nonrecurring Basis



	Total at								Total Losses
	March 31,		Fair Value Measurements Using:						For three months ended March 31,
	2014		Level 1		Level 2		Level 3		2014		2013

Impaired loans:
Commercial	$	—	$	—	$	—	$	—	$	—	$	287
Real estate - commercial		—		—		—		—		—		437
Real estate - construction		—		—		—		—		—		357
Real estate - mortgage		863		—		—		863		217		86
Other		46		—		—		46		34		—
Other real estate owned:
Real estate - commercial		—		—		—		—		—		215
Real estate - construction		—		—		—		—		—		46
Total assets measured at fair value on a nonrecurring basis	$	909	$	—	$	—	$	909	$	251	$	1,428

	Total at
	December 31,		Fair Value Measurements Using:
	2013		Level 1		Level 2		Level 3		Total Losses

Impaired loans:
Commercial	$	157	$	—	$	—	$	157	$	63
Real estate - commercial		593		—		—		593		239
Real estate - construction		110		—		—		110		71
Real estate - mortgage		291		—		—		291		42
Other		164		—		—		164		71
Other real estate owned:
Real estate - commercial		570		—		—		570		57
Real estate - construction		2,147		—		—		2,147		1,125
Total assets measured at fair value on a nonrecurring basis	$	4,032	$	—	$	—	$	4,032	$	1,668

Impaired Loans - The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, and additional discounts by management for known market factors and time since the last appraisal. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned – Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis (in thousands):

March 31, 2014	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)

Impaired loans:
Real estate - mortgage	$	863	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Other	$	46	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)

December 31, 2013	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)

Impaired loans:
Commercial	$	157	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Real estate - commercial	$	593	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Real estate - construction	$	110	Sales comparison approach	Adjustment for differences between the comparable sales	2% to 3% (3%)
Real estate - mortgage	$	291	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Other	$	164	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Other real estate owned:
Real estate - commercial	$	570	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Real estate - construction	$	2,147	Sales comparison approach	Adjustment for differences between the comparable sales	0% to 6% (6%)

Disclosures about Fair Value of Financial Instruments

The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities.

The following assumptions were used as of March 31, 2014 and 2013 to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Cash and Due From Banks - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Federal Funds Sold - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Time Deposits at Other Financial Institutions - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 2.

FHLB, FRB Stock and Other Securities - It was not practicable to determine the fair value of FHLB or FRB stock due to the restrictions placed on its transferability.

Investment Securities – The fair value of investment securities are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Available-for-sale securities are carried at fair value.

Loans - Commercial loans, residential mortgages, construction loans and direct financing leases are segmented by fixed and adjustable rate interest terms, by maturity, and by performing and nonperforming categories.

The fair values of performing loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of nonperforming loans is estimated by discounting estimated future cash flows using current interest rates with an additional risk adjustment reflecting the individual characteristics of the loans, or using the fair value of underlying collateral for collateral dependent loans as a practical expedient.

Deposits – The fair values disclosed for noninterest-bearing and interest-bearing demand deposits and savings and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Subordinated Debentures - The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Commitments to Fund Loans/Standby Letters of Credit - The fair values of commitments are 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. The differences between the carrying value of commitments to fund loans or standby letters of credit and their fair value are not significant and therefore not included in the following table.

Accrued Interest Receivable/Payable – The carrying amounts of accrued interest approximate fair value and therefore follow the same classification as the related asset or liability.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (in thousands):

			Fair Value Measurements at
			March 31, 2014 Using
	Carrying
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS
Cash and due from banks	$	22,718	$	22,718	$	—	$	—	$	22,718
Federal funds sold		44,750		44,750		—		—		44,750
Time deposits at other financial institutions		2,226		—		2,226		—		2,226
FHLB, FRB and other securities		8,408		—		—		—		N/A
Securities:
Available-for-sale		273,143		—		273,143		—		273,143
Held-to-maturity		2		—		2		—		2
Loans		498,998		—				508,901		508,901
Accrued interest receivable		2,099		—		661		1,438		2,099

FINANCIAL LIABILITIES
Deposits:
Nonmaturity deposits	$	642,403	$	642,403	$	—	$	—	$	642,403
Time deposits		143,414		—		143,495		—		143,495
Subordinated debentures		21,651		—		—		7,961		7,961
Accrued interest payable		107		2		30		75		107

			Fair Value Measurements at
			December 31, 2013 Using
	Carrying
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS
Cash and due from banks	$	19,348	$	19,348	$	—	$	—	$	19,348
Federal funds sold		38,135		38,135		—		—		38,135
Time deposits at other financial institutions		2,226		—		2,226		—		2,226
FHLB, FRB and other securities		8,402		—		—		—		N/A
Securities:
Available-for-sale		279,479		—		279,479		—		279,479
Held-to-maturity		2		—		2		—		2
Loans		499,943		—				510,611		510,611
Accrued interest receivable		2,124		—		692		1,432		2,124

FINANCIAL LIABILITIES
Deposits:
Nonmaturity deposits	$	638,112	$	638,112	$	—	$	—	$	638,112
Time deposits		149,737		—		149,899		—		149,899
Subordinated debentures		21,651		—		—		7,702		7,702
Accrued interest payable		108		2		29		77		108

6. DEPOSITS

The following table summarizes the Company’s deposits by type for the periods indicated below (in thousands):

	March 31,		December 31,
	2014		2013
Noninterest-bearing demand	$	176,951	$	184,971
Interest-bearing demand		210,207		202,508
Savings and money market		255,245		250,633
Time certificates		143,414		149,737
Total deposits	$	785,817	$	787,849

7. SUBORDINATED DEBENTURES

The Company owns the common stock of three business trusts that have issued an aggregate of $21.0 million in trust preferred securities that are fully and unconditionally guaranteed by the Company. The entire proceeds of each respective issuance of trust preferred securities were invested by the separate business trusts into junior subordinated debentures issued by the Company, with identical maturity, repricing and payment terms as the respective issuance of trust preferred securities. The aggregate amount of junior subordinated debentures issued by the Company is $21.7 million, with the maturity dates for the respective debentures ranging from 2033 through 2036. Subject to regulatory approval, the Company may redeem the respective junior subordinated debentures earlier than the maturity date, with certain of the debentures being redeemable beginning in April 2008, July 2009 and March 2011.

The obligation to pay interest on the Debentures is cumulative and will continue to accrue, currently at a variable rate of 3.49% on the 2033 Debentures, variable rate of 3.04% on the 2034 Debentures and a variable rate of 1.56% on the 2036 Debentures. Interest is generally set at variable rates based on the three-month LIBOR, reset and payable quarterly, plus 3.25% for the 2033 Debentures, plus 2.80% for the 2034 Debentures, and plus 1.33% for the 2036 Debentures. At March 31, 2014 and December 31, 2013, the Company had recorded accrued and unpaid interest payments of $75,000 and $77,000, respectively.

The trust preferred securities issued by the trusts are currently included in Tier 1 capital in the amount of $21,000,000 for purposes of determining Leverage, Tier 1 and Total Risk-Based capital ratios for the year ending March 31, 2014 and December 31, 2013.

The following table summarizes the terms of each subordinated debenture issuance (dollars in thousands):

Fixed or

Date

Variable

Current

Rate

Redemption

March 31,

December 31,

Series

Issued

Maturity

Rate

Index

Date

2014

2013

North Valley Capital Trust II

4/10/03

4/24/33

Variable

3.49%

LIBOR + 3.25%

4/24/08

6,186

North Valley Capital Trust III

5/5/04

4/24/34

Variable

3.04%

LIBOR + 2.80%

7/23/09

5,155

North Valley Capital Statutory Trust IV

12/29/05

3/15/36

Variable

1.56%

LIBOR + 1.33%

3/15/11

10,310

21,651

8. INCOME TAXES

The Company files its income taxes on a consolidated basis with NVB. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.

The Company applies the asset and liability method to account for income taxes. Deferred tax assets and liabilities are calculated by applying applicable tax laws to the differences between the financial statement basis and the tax basis of assets and liabilities. The effect on deferred taxes of changes in tax laws and rates is recognized in income in the period that includes the enactment date. On the consolidated balance sheet, net deferred tax assets are included in other assets.

The Company accounts for uncertainty in income taxes by recording only tax positions that met the more likely than not recognition threshold, that the tax position would be sustained in a tax examination.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. At March 31, 2014 and December 31, 2013, unrecognized tax benefits totaled $519,000.

Net deferred tax assets totaled $14,499,000 and $15,309,000 at March 31, 2014 and December 31, 2013, respectively.

9. PENSION PLAN BENEFITS

The Company has a supplemental retirement plan for key executives and a supplemental retirement plan for certain retired key executives and directors. These plans are nonqualified defined benefit plans and are unsecured. Total contributions paid were $63,000 for the three months ended March 31, 2014 and 2013. Components of net periodic benefit cost for the Company’s supplemental nonqualified defined benefit plans for the three months ended March 31, 2014 and 2013 are presented in the following table (in thousands):

	Three months ended March 31,
Components of net periodic benefits cost:	2014		2013
Service cost	$	169	$	170
Interest cost		117		93
Prior service amortization		25		25
Recognized net actuarial loss		35		49
Total components of net periodic cost	$	346	$	337

	March 31, 2014		December 31, 2013

Total Liability of Pension Plan Benefits	$	10,291	$	9,973

10. STOCK-BASED COMPENSATION

Stock Option Plans

At March 31, 2014, the Company had two shareholder approved stock-based compensation plans: the 1998 Employee Stock Incentive Plan and the 2008 Stock Incentive Plan. A total of 734,443 shares were authorized under all plans at March 31, 2014. The plans do not provide for the settlement of awards in cash and new shares are issued upon exercise of the options. The North Valley Bancorp 1998 Employee Stock Incentive Plan provides for awards in the form of options (which may constitute incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”) to key employees) and also provides for the award of shares of Common Stock to outside directors. As provided in the 1998 Employee Stock Incentive Plan, the authorization to award incentive stock options terminated on February 19, 2008. Pursuant to the 1998 Employee Stock Incentive Plan there were outstanding options to purchase 47,718 shares of Common Stock at March 31, 2014. The North Valley Bancorp 2008 Stock Incentive Plan was adopted by the Company’s Board of Directors on February 27, 2008, effective that date, and was approved by the Company’s shareholders at the annual meeting, May 22, 2008. The terms of the 2008 Stock Incentive Plan are substantially the same as the North Valley Bancorp 1998 Employee Stock Incentive Plan. The 2008 Stock Incentive Plan provides for the grant to key employees of stock options, which may consist of NSOs and ISOs. Under the 2008 Stock Incentive Plan, options may not be granted at a price less than the fair market value at the date of the grant. Under all plans, options may be exercised over a ten year term. The vesting period is generally four years; however the vesting period can be modified at the discretion of the Company’s Board of Directors, and for all options granted after the fourth quarter in 2008 the vesting period is five years. The 2008 Stock Incentive Plan also provides for the grant to outside directors, and to consultants and advisers to the Company, of stock options, all of which must be NSOs. The shares of Common Stock authorized to be granted as options under the 2008 Stock Incentive Plan consist 686,725 shares of Common Stock reserved for issuance under the terms of the 2008 Stock Incentive Plan, consisting of 302,780 shares to be issued upon the exercise of options granted and still outstanding as of that date, 5,580 shares issued as stock awards and 378,365 shares reserved for future stock option grants and director stock awards at March 31, 2014. Effective January 1, 2009, and on each January 1 thereafter for the remaining term of the 2008 Stock Incentive Plan, the aggregate number of shares of Common Stock which are reserved for issuance pursuant to options granted under the terms of the 2008 Stock Incentive Plan shall be increased by a number of shares of Common Stock equal to 2% of the total number of the shares of Common Stock of the Company outstanding at the end of the most recently concluded calendar year. Any shares of Common Stock that have been reserved but not issued as options during any calendar year shall remain available for grant during any subsequent calendar year. Outstanding options under the plans are exercisable until their expiration. Each outside director of the Company shall also be eligible to receive a stock award of 180 shares of Common Stock as part of his or her annual retainer paid by the Company for his or her services as a director. The number of shares of Common Stock available as stock awards to outside directors shall equal the number of shares of Common Stock to be awarded to such outside directors.

Stock-based Compensation

There were no options granted in the three month period ended March 31, 2014. There were 114,234 options granted for the three month period ended March 31, 2013. For the three month periods ended March 31, 2014 and 2013, the compensation cost recognized for share based compensation was $98,000 and $83,000, respectively. At March 31, 2014, the total unrecognized compensation cost related to stock-based awards granted to employees under the Company’s stock option plans was $1,306,000. This cost is expected to be amortized on a straight-line basis over a weighted average period of approximately 3.4 years and will be adjusted for subsequent changes in estimated forfeitures. The following table summarizes the weighted average grant date fair value of options granted for the three month period ended March 31, 2013, based on the following assumptions used in a Black-Scholes Merton model.

	For three months ended March 31,
	2014		2013
Weighted average grant date fair value per share of options granted		N/A	$	9.53
Significant weighted average assumptions used in calculating fair value:
Expected term		N/A		6.32 years
Expected annual volatility		N/A		60	%
Expected annual dividend yield		N/A		N/A
Risk-free interest rate		N/A		1.38	%

A summary of outstanding stock options follows:

						Weighted
				Weighted		Average
				Average		Remaining		Exercise		Aggregate
				Exercise		Contractual		Price		Intrinsic
	Shares			Price		Term		Range		Value ($000)

Outstanding at January 1, 2014		354,710		$	24.55		8 years		$9.97-$103.10	$	2,782

Granted		—
Exercised		—
Expired or Forfeited		(4,212	)	$	78.60

Outstanding at March 31, 2014		350,498		$	23.90		7 years		$9.97-$103.10	$	2,782
Fully vested and exercisable at March 31, 2014		172,862		$	34.18		6 years		$9.97-$103.10	$	954
Options expected to vest at March 31, 2014		177,636		$	13.89		8 years		$9.97-$16.80	$	1,828

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock as of March 31, 2014. There were no options exercised during the three month periods ended March 31, 2014 and 2013.

11. COMMITMENTS AND CONTINGENCIES

The Company is involved in legal actions arising from normal business activities. Management, based upon the advice of legal counsel, believes that the ultimate resolution of all pending legal actions will not have a material effect on the Company’s financial position or results of its operations or its cash flows.

On January 24, 2014, a putative shareholder class action lawsuit titled John Solak v. North Valley Bancorp, et al. was filed in the Superior Court of the State of California, County of Shasta. TriCo Bancshares and all of the individuals serving as Directors of the Company are also named as defendants. The complaint alleges breach of fiduciary duty and aiding and abetting breach of fiduciary duty in connection with the Agreement and Plan of Merger and Reorganization signed between the Company and TriCo Bancshares on January 21, 2014. The Company and the Directors have not yet responded to the complaint. The Company and its legal counsel believe the complaint’s claims are without merit. The resolution of this matter is not expected to have a material impact on the Company’s business, financial condition or results of operations, though no assurance can be given in this regard.

The Company was contingently liable under letters of credit issued on behalf of its customers in the amount of $4,417,000 and $4,557,000 at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014, commercial and consumer lines of credit and real estate loans of approximately $33,704,000 and $32,967,000, respectively, were undisbursed. At December 31, 2013, commercial and consumer lines of credit and real estate loans of approximately $38,683,000 and $35,264,000, respectively, were undisbursed. Approximately 87% of these undisbursed loan commitments are associated with variable rate loans.

Loan commitments are typically contingent upon the borrower meeting certain financial and other covenants and such commitments typically have fixed expiration dates and require payment of a fee. As many of these commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The Company evaluates each potential borrower and the necessary collateral on an individual basis. Collateral varies, but may include real property, bank deposits, debt securities, equity securities or business or personal assets.

Standby letters of credit are conditional commitments written by the Company to guarantee the performance of a customer to a third party. These guarantees are issued primarily relating to inventory purchases by the Company’s commercial customers and such guarantees are typically short term. Credit risk is similar to that involved in extending loan commitments to customers and the Company, accordingly, uses evaluation and collateral requirements similar to those for loan commitments. Virtually all of such commitments are collateralized. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at March 31, 2014 and 2013. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.

Loan commitments and standby letters of credit involve, to varying degrees, elements of credit and market risk in excess of the amounts recognized in the balance sheet and do not necessarily represent the actual amount subject to credit loss. At March 31, 2014 and December 31, 2013, the reserve for unfunded commitments totaled $146,000.

In management’s opinion, a concentration exists in real estate-related loans which represent approximately 81% and 80% of the Company’s loan portfolio for periods ended March 31, 2014 and 2013. Although management believes such concentrations to have no more than the normal risk of collectibility, a continued substantial decline in the economy in general, or a continued decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on collectibility of these loans. However, personal and business income represents the primary source of repayment for a majority of these loans.

12. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if options or other contracts to issue common stock were exercised and converted into common stock.

There was no difference in the numerator used in the calculation of basic earnings per share and diluted earnings per share for the three months ended March 31, 2014 and 2013 (in thousands except earnings per share data):

	March 31,
	2014		2013
Basic
Net income	$	919	$	1,261
Weighted average common shares outstanding		6,836		6,835
Basic earnings per common share	$	0.13	$	0.18

Diluted
Net income	$	919	$	1,261
Weighted average common shares outstanding		6,836		6,835
Dilutive effect of outstanding stock options		53		10
Average shares and dilutive potential common shares		6,889		6,845
Diluted earnings per common share	$	0.13	$	0.18

Stock options for 204,890 and 214,302 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2014 and 2013, respectively, because they were antidilutive.

13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

Changes in each component of accumulated other comprehensive (loss) income for the periods ended March 31, 2014 and 2013 were as follows (in thousands):

	Net Unrealized Gains (Losses) on Securities			Adjustments Related to Defined Benefit Pension Plan			Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2013	$	(3,734	)	$	(1,286	)	$	(5,020	)
Net unrealized gain on securities available for sale, net of tax, $825		1,187			—			1,187
Reclassification adjustment for gains on securities, net of tax,		—			—			—
Net loss arising during the period, net of tax, ($39)		—			(57	)		(57	)
Reclassification adjustment for amortization of prior service cost and net gain included in salaries and employee benefits, net of tax $25		—			35			35
Balance at March 31, 2014	$	(2,547	)	$	(1,308	)	$	(3,855	)

Balance at December 31, 2012	$	3,287		$	(1,621	)	$	1,666
Net unrealized losses on securities available for sale, net of tax, ($265)		(382	)		—			(382	)
Reclassification adjustment for gains on securities, net of tax, ($223)		(320	)		—			(320	)
Net gain arising during the period, net of tax, $69		—			99			99
Reclassification adjustment for amortization of prior service cost and net gain included in salaries and employee benefits, net of tax $30		—			44			44
Balance at March 31, 2013	$	2,585		$	(1,478	)	$	1,107

Amounts reclassified out of accumulated other comprehensive income were as follows (in thousands):

March 31, 2014

Details About Accumulated Other Comprehensive (Loss) Income Components	Amount Reclassified From Accumulated Other Comprehensive (Loss) Income			Affected Line Item in the Statement Where Net Income is Presented
Gain on investment securities	$	—		Gain on sales or calls of securities, net
Amortization of prior service cost and net gain included in net periodic pension cost		(60	)	Salaries and employee benefits
		(60	)	Total before tax
		25		Provision for income tax
	$	(35	)	Net of tax

March 31, 2013

Details About Accumulated Other Comprehensive (Loss) Income Components	Amount Reclassified From Accumulated Other Comprehensive (Loss) Income			Affected Line Item in the Statement Where Net Income is Presented
Gain on investment securities	$	543		Gain on sales or calls of securities, net
Amortization of prior service cost and net gain included in net periodic pension cost		(74	)	Salaries and employee benefits
		469		Total before tax
		(193	)	Provision for income tax
	$	276		Net of tax

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Certain statements in this Form 10-Q (excluding statements of fact or historical financial information) involve forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections. 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 following factors: competitive pressure in banking industry increases significantly; changes in the interest rate environment reduce margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions, particularly in the Northern California region; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; California state budget problems; the U.S. “war on terrorism” and military action by the U.S. in the Middle East; and changes in the securities markets.

Critical Accounting Policies

General

North Valley Bancorp’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our financial statements is, to a significant extent, financial information that is based on 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. We use historical loss factors as one factor in determining the probable incurred losses that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. Another estimate that we use is related to the expected useful lives of our depreciable assets. In addition, 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.

Allowance for Loan Losses. The allowance for loan losses is an estimate of probable incurred loan losses in the Company’s loan portfolio as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to non-impaired loans. Non-impaired loans are evaluated collectively for impairment as a group by loan type and common risk characteristics.

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, including principal and interest, according to the contractual terms of the original agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For further information on the allowance for loan losses, see Note 3 to the Notes to Condensed Consolidated Financial Statements in Item 1 above.

Allowance for Loan Losses on Off-Balance-Sheet Credit Exposures. The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet.

Other Real Estate Owned (“OREO”). OREO represents properties acquired through foreclosure or physical possession. Write-downs to fair value at the time of transfer to OREO are charged to allowance for loan losses. Subsequent to foreclosure, management periodically evaluates the value of OREO and records a valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. The reported value of OREO is based on our assessment of information available to us at the end of a reporting period and depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual properties. Management’s evaluation of these factors involves subjective estimates and judgments that may change.

Share Based Compensation. At March 31, 2014, the Company had two stock-based compensation plans: the 1998 Employee Stock Incentive Plan and the 2008 Stock Incentive Plan, which are described more fully in Note 10 to the Notes to Condensed Consolidated Financial Statements. Compensation cost is recognized on all share-based payments over the requisite service periods of the awards based on the grant-date fair value of the options determined using the Black-Scholes-Merton based option valuation model. Critical assumptions that are assessed in computing the fair value of share-based payments include stock price volatility, expected dividend rates, the risk free interest rate and the expected lives of such options. Compensation cost recorded is net of estimated forfeitures expected to occur prior to vesting. For further information on the computation of the fair value of share-based payments, see Note 10 to the Notes to Condensed Consolidated Financial Statements in Item 1 above.

Impairment of Investment Securities. An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.

Accounting for Income Taxes. The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.

The Company applies the asset and liability method to account for income taxes. Deferred tax assets and liabilities are calculated by applying applicable tax laws to the differences between the financial statement basis and the tax basis of assets and liabilities. The effect on deferred taxes of changes in tax laws and rates is recognized in operations in the period that includes the enactment date. On the consolidated balance sheet, net deferred tax assets are included in other assets.

Business Organization

North Valley Bancorp (the “Company”) is a California corporation and a bank holding company for North Valley Bank, a California state-chartered, Federal Reserve member bank (“NVB”). NVB operates out of its main office located at 300 Park Marina Circle, Redding, California 96001, with twenty-two branches, including two supermarket branches in eight counties in Northern California. The Company views its service area as having four distinct markets: the Redding market, the Coastal market, the I-80 Corridor market and the Santa Rosa market.

The Company’s principal business consists of attracting deposits from the general public and using the funds to originate commercial, real estate and installment loans to customers, who are predominately small and middle market businesses and middle income individuals. The Company’s primary source of revenues is interest income from its loan and investment securities portfolios. The Company is not dependent on any single customer for more than ten percent of its revenues.

Overview

Proposed Merger with TriCo Bancshares

As announced by the Company on January 21, 2014 and reported in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 22, 2014 (the “Current Report”), the Company has entered into an Agreement and Plan of Merger and Reorganization dated January 21, 2014 (the “Merger Agreement”), pursuant to which the Company would merge with and into TriCo Bancshares, a California corporation (“TriCo”), with TriCo being the surviving corporation. Immediately thereafter, the Company’s subsidiary bank, North Valley Bank, would be merged with and into TriCo’s subsidiary bank, Tri Counties Bank. Under the terms of the Merger Agreement, the Company shareholders would receive a fixed exchange ratio of 0.9433 shares of TriCo common stock for each share of Company common stock. Holders of the Company’s outstanding in-the-money stock options would receive cash, net of applicable taxes withheld, for the value of their unexercised stock options. The transactions contemplated by the Merger Agreement are expected to close in the third quarter of 2014, pending approvals of the Company shareholders and the TriCo shareholders, the receipt of all necessary regulatory approvals, and the satisfaction of other closing conditions which are customary for such transactions. For additional information, reference should be made to the text of the Agreement and Plan of Merger and Reorganization, filed as an exhibit to the Current Report, and to other information regarding TriCo and the Company, their respective businesses and the status of their proposed merger, as reported from time to time in other filings with the Securities and Exchange Commission.

Financial Results

(in thousands except per share amounts)	Three months ended March 31,
	2014			2013
Net interest income	$	7,762		$	7,436
Provision for loan losses		—			—
Noninterest income		2,430			4,329
Noninterest expense		8,756			9,888
Provision for income taxes		517			616
Net income	$	919		$	1,261

Per Share Amounts
Basic and Diluted Earnings Per Share	$	0.13		$	0.18

Annualized Return on Average Assets		0.41	%		0.57	%
Annualized Return on Average Equity		3.92	%		5.30	%

The Company had net income of $919,000, or $0.13 per diluted share, for the three months ended March 31, 2014. This compares to net income of $1,261,000, or $0.18 per diluted share, for the three months ended March 31, 2013. The decrease in net income for three months ended March 31, 2014 compared to the three months ended March 31, 2013 was primarily due to a decrease in noninterest income, which was partially offset by an increase in net interest income and a decrease in noninterest expense.

Results of Operation

Net Interest Income and Net Interest Margin (fully taxable equivalent basis)

Net interest income is the difference between interest earned on loans, investments and other earning assets, and interest paid on deposits and borrowings, and is the primary revenue source for the Company. Net interest margin is net interest income expressed as a percentage of average earning assets. These items have been adjusted to give effect to $31,000 and $55,000 in taxable-equivalent interest income on tax-free investments for the three month periods ended March 31, 2014 and 2013, respectively.

Net interest income for the three months ended March 31, 2014 was $7,793,000, a $302,000, or 4.0%, increase from net interest income of $7,491,000 for the same period in 2013. Interest income increased $227,000, or 2.9%, to $8,150,000 for the three month period ended March 31, 2014 compared to the same period in 2013, due primarily to both an increase in average loan balances and an increase in rates paid on average securities. The Company had foregone interest income for the loans placed on nonaccrual status of $10,000 during the three months ended March 31, 2014 compared to $85,000 for the same period in 2013. Average loans outstanding during the three months ended March 31, 2014 increased $22,734,000, or 4.7%, to $507,149,000 compared to the same period in 2013. This higher loan volume increased interest income by $303,000. The average yield earned on the loan portfolio decreased 22 basis points to 5.11% for the three months ended March 31, 2014 compared to the same period in 2013. This decrease in yield decreased interest income for the three months ended March 31, 2014 by $274,000. The increase to interest income from the loan portfolio was $29,000 for the three months ended March 31, 2014. The average balance of the entire investment portfolio increased $5,921,000, or 2.1%. However, the Company’s higher yielding tax-exempt securities decreased $4,876,000 which caused a $25,000 reduction in interest income although the average balance increased. This decrease was offset by an increase in average yield of the investment portfolio of 22 basis points which increased interest income by $216,000.

Interest expense for the three months ended March 31, 2014 compared to the same period in 2013, decreased $75,000, or 17.4%, to $357,000. The average rate paid on other borrowed funds decreased 4 basis points to 2.45% for the quarter ended March 31, 2014 compared to 2.49% for the same period in 2013, resulting in a decrease to interest expense of $2,000. The average rates paid on time deposits decreased 13 basis points to 0.37% and reduced interest expense by $45,000 along with a decrease in average time deposits of $19,794,000 which reduced interest expense by $25,000 for the quarter ended March 31, 2014.

The net interest margin for the three months ended March 31, 2014 decreased 4 basis points to 3.77% from 3.81% for the same period in 2013 and an increase of 6 basis points from the 3.71% net interest margin for the linked quarter ended December 31, 2013.

The following table sets forth the Company’s consolidated condensed average daily balances and the corresponding average yields received and average rates paid of each major category of assets, liabilities, and stockholders’ equity for the periods indicated:

Schedule of Average Daily Balance and Average Yields and Rates
(Dollars in thousands)

	Three months ended March 31, 2014								Three months ended March 31, 2013
	Average			Yield/			Interest		Average			Yield/			Interest
	Balance			Rate			Amount		Balance			Rate			Amount

Assets
Earning assets:
Federal funds sold	$	45,487			0.23	%	$	26	$	33,113			0.23	%	$	19
Investment securities:
Taxable		281,290			2.36	%		1,639		270,493			2.06	%		1,376
Tax exempt (1)		4,964			7.35	%		90		9,840			6.68	%		162
Total investments		286,254			2.45	%		1,729		280,333			2.23	%		1,538
Loans (2)(3)		507,149			5.11	%		6,395		484,415			5.33	%		6,366
Total earning assets		838,890			3.94	%		8,150		797,861			4.03	%		7,923

Nonearning assets		90,022								109,804
Allowance for loan losses		(9,283	)							(10,487	)
Total nonearning assets		80,739								99,317

Total assets	$	919,629							$	897,178

Liabilities and Stockholders’ Equity
Interest bearing liabilities:
Transaction accounts	$	206,635			0.04	%	$	19	$	188,138			0.04	%	$	18
Savings and money market		254,360			0.12	%		74		238,785			0.13	%		78
Time certificates		146,404			0.37	%		133		166,198			0.50	%		203
Other borrowed funds		21,651			2.45	%		131		21,651			2.49	%		133
Total interest bearing liabilities		629,050			0.23	%		357		614,772			0.28	%		432
Demand deposits		180,295								169,080
Other liabilities		15,283								16,843
Total liabilities		824,628								800,695
Stockholders’ equity		95,001								96,483
Total liabilities and stockholders’ equity	$	919,629							$	897,178
Net interest income							$	7,793							$	7,491
Net interest spread					3.71	%							3.75	%
Net interest margin					3.77	%							3.81	%

(1)	Tax-equivalent basis; non-taxable securities are exempt from federal taxation.

(2)	Loans on nonaccrual status have been included in the computations of averages balances.

(3)	Includes loan fees of $67 and $118 for the three months ended March 31, 2014 and 2013, respectively.

The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate.

Changes in Volume/Rate
(Dollars in thousands)

	Three months ended March 31, 2014
	compared with
	Three months ended March 31, 2013
							Total
	Average			Average			Increase
	Volume			Yield/Rate			(Decrease)
Interest Income
Interest on Federal funds sold	$	7		$	—		$	7
Interest on investments:
Taxable securities		56			207			263
Tax exempt securities (1)		(81	)		9			(72	)
Total investments		(25	)		216			191
Interest on loans		303			(274	)		29
Total interest income		285			(58	)		227

Interest Expense
Transaction accounts	$	2		$	(1	)	$	1
Savings and money market		5			(9	)		(4	)
Time deposits		(25	)		(45	)		(70	)
Other borrowed funds		—			(2	)		(2	)
Total interest expense		(18	)		(57	)		(75	)

Total change in net interest income	$	303		$	(1	)	$	302

(1) Taxable equivalent

Provision for Loan Losses

The provision for loan losses is recorded to bring the allowance for loan losses to a level considered appropriate by management based on factors which are discussed under “Allowance for Loan Losses” starting on page 40.

The Company did not record a provision for loan losses for the three months ended March 31, 2014 and 2013. The process for determining allowance adequacy and the resultant provision for loan losses includes a comprehensive analysis of the loan portfolio. Factors in the analysis include size and mix of the loan portfolio, nonperforming loan levels, charge-off/recovery activity and other qualitative factors including economic environment and activity. The decision to not record a provision for the three months ended March 31, 2014 reflects management’s assessment of the overall adequacy of the allowance for loan losses including the consideration of the level of nonperforming loans, other trends in the quality and performance of our loan portfolio, and other general economic factors. Management believes that the current level of allowance for loan losses as of March 31, 2014 of $9,058,000, or 1.78% of total loans, is adequate at this time. The allowance for loan losses was $9,301,000, or 1.83% of total loans, at December 31, 2013.

Noninterest Income

The following table is a summary of the Company’s noninterest income for the periods indicated (in thousands):

	Three months ended March 31,
	2014		2013
Service charges on deposit accounts	$	698	$	952
Other fees and charges		1,012		1,120
Earnings on cash surrender value of life insurance policies		347		463
Gain on sale of loans, net		229		925
Gain on sales or calls of securities, net		—		543
Other		144		326
Total	$	2,430	$	4,329

Noninterest income for the quarter ended March 31, 2014 decreased $1,899,000, or 43.9%, to $2,430,000 compared to $4,329,000 for the same period in 2013. Service charges on deposits decreased by $254,000 to $698,000 for the first quarter of 2014 compared to $952,000 for the same period in 2013. Other fees and charges decreased by $108,000 to $1,012,000 for the first quarter of 2014 compared to $1,120,000 for the first quarter of 2013, and earnings on cash surrender value of life insurance policies decreased by $116,000 to $347,000 for the first quarter of 2014 compared to $463,000 for the first quarter of 2013. The Company recorded gains on the sale of mortgage loans of $184,000, and gains on the sale of SBA loans of $45,000 for the first quarter of 2014 compared to gains of $757,000 and $168,000, respectively, for the same period in 2013. The Company did not record a gain on the sale of investments securities for the first quarter of 2014 compared to gains on the sale of investment securities of $543,000 for the same period in 2013. Other noninterest income decreased $182,000, to $144,000 for the quarter ended March 31, 2014 compared to $326,000 for the same period in 2013. The decrease in other noninterest income was primarily attributed to a decrease in OREO rental income received from an OREO property sold in the second quarter 2013.

Noninterest Expense

The following table is a summary of the Company’s noninterest expense for the periods indicated (in thousands):


	Three months ended March 31,
	2014		2013
Salaries and employee benefits	$	5,023	$	5,162
Data processing		651		661
Occupancy expense		623		633
Professional services		240		269
Furniture and equipment expense		216		220
Director expense		201		193
Merger expenses		200		—
Loan expense		160		305
ATM and on-line banking		154		139
FDIC and state assessments		141		218
Marketing expense		138		150
Postage		109		122
Messenger		108		106
Printing and supplies		103		127
Operations expense		97		116
Amortization of intangibles		36		36
Other real estate owned expense		10		376
Other		546		1,055
Total	$	8,756	$	9,888

Noninterest expense decreased $1,132,000, or 11.5%, to $8,756,000 for the first quarter of 2014 from $9,888,000 for the first quarter in 2013. Salaries and employee benefits decreased $139,000, for the first quarter of 2014 compared to the first quarter of 2013. Occupancy and furniture and equipment expense decreased $14,000 for the first quarter of 2014 compared to the first quarter of 2013, OREO expense decreased $366,000 to $10,000, for the first quarter of 2014 compared to $376,000 for the same period in 2013, and FDIC and state assessments decreased $77,000 to $141,000 for the first quarter of 2014, compared to $218,000 for the same period in 2013. Other expense decreased $536,000 to $2,743,000 for the first quarter of 2014 compared to $3,279,000 for the same period in 2013. The Company had approximately $290,000 of merger-related expenses during the first quarter of 2014 resulting from the pending merger with TriCo Bancshares. These expenses are included in the line items “merger expenses” and “professional services”.

Income Taxes

The Company recorded a provision for income taxes of $517,000 resulting in an effective tax rate of 36.0% for the three months ended March 31, 2014. This compares to a provision for income taxes of $616,000 resulting in an effective tax rate of 32.8% for the three months ended March 31, 2013. The increase in the effective tax rate was caused by the capitalization of certain merger expenses and by California's revision to its enterprise zone program which eliminated the favorable tax treatment of loans made in an enterprise zone and reduced the tax credits available for employees hired in an enterprise zone. The difference in the effective tax rate compared to the statutory tax rate is primarily the result of the Company’s investment in municipal securities and Company-owned life insurance policies whose income is exempt from Federal taxes.

Financial Condition as of March 31, 2014 As Compared to December 31, 2013

Overview

Total assets at March 31, 2014 increased $1,208,000, or 0.13%, to $918,972,000, compared to $917,764,000 at December 31, 2013. Loans, net of deferred loan fees, decreased $1,188,000, or 0.23%, to $508,056,000 at March 31, 2014 from $509,244,000 at December 31, 2013. Investment securities decreased $6,336,000, or 2.3%, to $273,145,000 at March 31, 2014 from $279,481,000 at December 31, 2013. Fed Funds sold increased $6,615,000 to $44,750,000 as of March 31, 2014 as compared to $38,135,000 at December 31, 2013.

Loan Portfolio

The Company originates loans for business, consumer and real estate activities for equipment purchases. Such loans are concentrated in the primary markets in which the Company operates. Substantially all loans are collateralized. Generally, real estate loans are secured by real property. Commercial and other loans are secured by bank deposits or business or personal assets and leases are generally secured by equipment. The Company’s policy for requiring collateral is through analysis of the borrower, the borrower’s industry and the economic environment in which the loan would be granted. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrower.

Loans, the Company’s primary component of earning assets, decreased $1,133,000 during the three months ended March 31, 2014 to $508,303,000 from $509,436,000 at December 31, 2013. Commercial loans and other loans, primarily home equity loans, increased by $2,514,000 and $41,000, respectively. These increases were offset by decreases in real estate commercial loans of $1,872,000, real estate construction loans of $1,205,000, real estate mortgage loans of $184,000, and installment loans of $427,000.

The Company’s average loan to deposit ratio was 64.7% for the three months ended March 31, 2014 compared to 64.6% for the year ended December 31, 2013.

Major classifications of loans are summarized as follows (in thousands):

	March 31,			December 31,
	2014			2013
Commercial	$	50,040		$	47,526
Real estate - commercial		324,759			326,631
Real estate - construction		26,267			27,472
Real estate - mortgage		62,936			63,120
Installment		4,949			5,376
Other		39,352			39,311
Gross loans		508,303			509,436
Deferred loan (fees) costs, net		(247	)		(192	)
Allowance for loan losses		(9,058	)		(9,301	)
Loans, net	$	498,998		$	499,943

Impaired, Nonaccrual, Past Due and Restructured Loans and Other Nonperforming Assets

The Company considers a loan impaired if, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the original contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.

The following table presents impaired loans and the related allowance for loan losses as of the dates indicated (in thousands):

	As of March 31, 2014						As of December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no allocated allowance
Commercial	$	98	$	101	$	—	$	458	$	481	$	—
Real estate - commercial		3,747		3,885		—		4,193		4,284		—
Real estate - construction		429		444		—		435		449		—
Real estate - mortgage		1,616		1,658		—		919		948		—
Installment		84		104		—		96		115		—
Other		273		291		—		374		397		—
Subtotal		6,247		6,483		—		6,475		6,674		—

With allocated allowance
Commercial		162		166		104		240		240		150
Real estate - commercial		113		113		6		113		113		28
Real estate - mortgage		414		414		2		416		416		50
Subtotal		689		693		112		769		769		228
Total Impaired Loans	$	6,936	$	7,176	$	112	$	7,244	$	7,443	$	228

The following table presents the average balance related to impaired loans for the period indicated (in thousands):

	Three Months ended March 31,
	2014				2013
	Average Book		Interest Income		Average Book		Interest Income
	Balance		Recognized		Balance		Recognized

Commercial	$	300	$	—	$	571	$	—
Real estate - commercial		4,025		19		5,540		21
Real estate - construction		446		5		916		7
Real estate - mortgage		2,091		12		819		10
Installment		114		1		96		1
Other		293		—		158		—
Total	$	7,269	$	37	$	8,100	$	39

Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal, or when a loan becomes contractually past due by 90 days or more with respect to interest or principal (except that when management believes a loan is well secured and in the process of collection, interest accruals are continued on loans deemed by management to be fully collectible). When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest and borrower has made timely payments for a minimum period of six months.

Nonperforming assets are summarized as follows (in thousands):

	March 31,			December 31,
	2014			2013
Nonaccrual loans	$	4,805		$	5,093
Loans past due 90 days or more and still accruing interest		—			—
Total nonperforming loans		4,805			5,093
Other real estate owned		2,633			3,454
Total nonperforming assets	$	7,438		$	8,547

Nonaccrual loans to total gross loans		0.95	%		1.00	%
Nonperforming loans to total gross loans		0.95	%		1.00	%
Total nonperforming assets to total assets		0.81	%		0.93	%

At March 31, 2014 and December 31, 2013, the recorded investment in nonperforming loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) was approximately $4,805,000 and $5,093,000, respectively. The Company had $104,000 of specific allowance for loan losses on impaired loans of $162,000 at March 31, 2014 as compared to $150,000 of specific allowance for loan losses on impaired loans of $240,000 at December 31, 2013. Nonperforming loans as a percentage of total loans were 0.95% at March 31, 2014, as compared to 1.00% at December 31, 2013.

At March 31, 2014, net carrying value of other real estate owned decreased $821,000 to $2,633,000 from $3,454,000 at December 31, 2013. During the three month period ending March 31, 2014, the Company transferred one property into OREO totaling $1,231,000, sold three properties totaling $2,227,000 and recorded gain on sale of OREO of $175,000. As part of the financial close process, valuations of OREO are performed by management and write-downs are recorded as warranted. At March 31, 2014, OREO was comprised of six properties which consisted of the following: three residential land properties totaling $2,237,000, one commercial construction property for $161,000, one commercial land parcel for $41,000 and one residential property totaling $194,000.

Subsequent to March 31, 2014, the Company sold an OREO property located in Shasta County at its recorded value of $2,154,000. The transaction closed on April 4, 2014.

Nonperforming assets (nonperforming loans and OREO) totaled $7,438,000 at March 31, 2014, a decrease of $20,376,000 from the March 31, 2013 balance of $27,814,000, and a $1,109,000 decrease from the December 31, 2013 balance of $8,547,000. Nonperforming assets as a percentage of total assets were 0.81% at March 31, 2014 compared to 3.05% at March 31, 2013 and 0.93% at December 31, 2013.

If interest on nonaccrual loans had been accrued, such income would have approximated $10,000 and $85,000, respectively for the three month periods ended March 31, 2014 and 2013.

At March 31, 2014 there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual.

The composition of nonaccrual loans as of March 31, 2014, December 31, 2013, September 30, 2013 and June 30, 2013. was as follows (in thousands):

	March					December					September					June
	2014					2013					2013					2013
			% of					% of					% of					% of
	Amount		total			Amount		total			Amount		total			Amount		total
Commercial	$	260		5.4	%	$	698		13.7	%	$	582		11.2	%	$	648		11.0	%
Real estate - commercial		2,989		62.2	%		3,425		67.2	%		3,391		65.0	%		3,669		62.5	%
Real estate - construction		109		2.3	%		110		2.2	%		438		8.4	%		450		7.7	%
Real estate - mortgage		1,116		23.2	%		417		8.2	%		412		7.9	%		622		10.6	%
Installment		57		1.2	%		69		1.4	%		82		1.6	%		89		1.5	%
Other		274		5.7	%		374		7.3	%		311		6.0	%		393		6.7	%
Total nonaccrual loans	$	4,805		100.0	%	$	5,093		100.0	%	$	5,216		100.0	%	$	5,871		100.0	%

At March 31, 2014, there were seven real-estate-commercial loans totaling $2,989,000, or 62.2%, of the nonperforming loans. The largest real estate-commercial loan is for a commercial real estate property located in Stanislaus County for $865,000. There have been no charge-offs or specific reserves required for this loan. The remaining six real estate-commercial loans total $2,124,000 (approximate average loan balance of $354,000). Charge-offs of $239,000 have been taken on these loans and no specific reserves have been required for these loans.

At March 31, 2014, nonaccrual real-estate-mortgage loans totaled $1,116,000, or 23.2%, of the nonaccrual loans. There are six loans that make up the balance. Charge-offs of $260,000 have been taken on these loans and no specific reserves have been established for these loans as of March 31, 2014. There were two residential income properties totaling $661,000. Charge-offs of $215,000 have been taken on these loans and no specific reserve has been required. The remaining four loans were residential loans totaling $455,000. Charge-offs of $45,000 have been taken on these loans and no specific reserves have been required.

The following table shows an aging analysis of the loan portfolio by the amount of time past due (in thousands):

	As of March 31, 2014
	Accruing Interest
					Greater than
			30-89 Days		89 Days
	Current		Past Due		Past Due		Nonaccrual		Total

Commercial	$	48,589	$	1,191	$	—	$	260	$	50,040
Real estate - commercial		321,721		49		—		2,989		324,759
Real estate - construction		26,158		—		—		109		26,267
Real estate - mortgage		61,307		513		—		1,116		62,936
Installment		4,888		4		—		57		4,949
Other		38,976		102		—		274		39,352
Total	$	501,639	$	1,859	$	—	$	4,805	$	508,303

	As of December 31, 2013
	Accruing Interest
					Greater than
			30-89 Days		89 Days
	Current		Past Due		Past Due		Nonaccrual		Total

Commercial	$	46,587	$	241	$	—	$	698	$	47,526
Real estate - commercial		322,773		433		—		3,425		326,631
Real estate - construction		27,362		—		—		110		27,472
Real estate - mortgage		62,178		525		—		417		63,120
Installment		5,273		34		—		69		5,376
Other		38,594		343		—		374		39,311
Total	$	502,767	$	1,576	$	—	$	5,093	$	509,436

At March 31, 2014, accruing TDRs were $2,131,000 and nonaccrual TDRs were $841,000 compared to accruing TDRs of $2,151,000 and nonaccrual TDRs of $905,000 at December 31, 2013. At March 31, 2014, there were $8,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. At December 31, 2013, there were $78,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. There were no commitments to lend additional amounts at March 31, 2014 and December 31, 2013 to customers with outstanding loans classified as troubled debt restructurings. There were no TDRs that subsequently defaulted during the period ended March 31, 2014 and 2013 for which there was a modification in the preceding twelve months.

The following table presents loans that were modified and recorded as TDRs during the periods indicated below (dollars in thousands):

	For the period ended March 31, 2014						For the period ended December 31, 2013
	Accruing TDRs						Accruing TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Real estate - commercial		—	$	—	$	—		1	$	435	$	435
Real estate - mortgage		—	$	—	$	—		1	$	209	$	209

	Nonaccrual TDRs						Nonaccrual TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		1	$	162	$	162		1	$	36	$	36
Real estate - construction		—	$	—	$	—		1	$	110	$	110
Real estate - mortgage		1	$	97	$	98		1	$	113	$	113
Other		1	$	46	$	47		3	$	210	$	210

A summary of TDRs by type of concession and by type of loan as of the periods indicated below (dollars in thousands):

	March 31, 2014
Accruing TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Real estate - commercial		5	$	—	$	193	$	678	$	871
Real estate-construction		1	$	—	$	320	$	—	$	320
Real estate - mortgage		3	$	—	$	292	$	622	$	914
Installment		1	$	—	$	—	$	26	$	26

Nonaccrual TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Commercial		2	$	—	$	162	$	31	$	193
Real estate-construction		1	$	—	$	110	$	—	$	110
Real estate - mortgage		2	$	97	$	—	$	110	$	207
Installment		2	$	—	$	—	$	57	$	57
Other		5	$	149	$	58	$	67	$	274

	December 31, 2013
Accruing TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Real estate - commercial		5	$	—	$	195	$	686	$	881
Real estate-construction		1	$	—	$	325	$	—	$	325
Real estate - mortgage		3	$	—	$	293	$	625	$	918
Installment		1	$	—	$	—	$	27	$	27

Nonaccrual TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Commercial		2	$	—	$	—	$	391	$	391
Real estate-construction		1	$	—	$	110	$	—	$	110
Real estate - mortgage		1	$	—	$	—	$	113	$	113
Installment		2	$	—	$	—	$	59	$	59
Other		4	$	104	$	60	$	68	$	232

Allowance for Loan Losses

The following table presents the activity in the allowance for loan losses by portfolio segment (in thousands):

	For the three months ended March 31, 2014
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total

Allowance for Loan Losses
Balance December 31, 2013	$	876		$	5,196		$	610		$	842		$	131		$	832		$	814		$	9,301
Charge-offs		—			(13	)		—			(252	)		(33	)		—						(298	)
Recoveries		50			—			—			—			4			1						55
Provisions for loan losses		(132	)		(39	)		(29	)		269			18			(35	)		(52	)		—
Balance March 31, 2014	$	794		$	5,144		$	581		$	859		$	120		$	798		$	762		$	9,058

	For the three months ended March 31, 2013
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total

Allowance for Loan Losses
Balance December 31, 2012	$	843		$	6,295		$	690		$	982		$	98		$	721		$	829		$	10,458
Charge-offs		(83	)		(437	)		(369	)		(156	)		(11	)		—						(1,056	)
Recoveries		242			—			2			—			5			—						249
Provisions for loan losses		168			(138	)		272			112			(5	)		(45	)		(364	)		—
Balance March 31, 2013	$	1,170		$	5,720		$	595		$	938		$	87		$	676		$	465		$	9,651

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (in thousands):

			Real Estate		Real Estate		Real Estate
March 31, 2014	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	104	$	6	$	—	$	2	$	—	$	—	$	—	$	112
Collectively evaluated for impairment		690		5,138		581		857		120		798		762		8,946
Total ending allowance balance	$	794	$	5,144	$	581	$	859	$	120	$	798	$	762	$	9,058

Loans:
Loans individually evaluated for impairment	$	260	$	3,860	$	429	$	2,030	$	84	$	273			$	6,936
Loans collectively evaluated for impairment		49,780		320,899		25,838		60,906		4,865		39,079				501,367
Total ending loans balance	$	50,040	$	324,759	$	26,267	$	62,936	$	4,949	$	39,352			$	508,303

			Real Estate		Real Estate		Real Estate
December 31, 2013	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	150	$	28	$	—	$	50	$	—	$	—	$	—	$	228
Collectively evaluated for impairment		726		5,168		610		792		131		832		814		9,073
Total ending allowance balance	$	876	$	5,196	$	610	$	842	$	131	$	832	$	814	$	9,301

Loans:
Loans individually evaluated for impairment	$	698	$	4,306	$	435	$	1,335	$	96	$	374			$	7,244
Loans collectively evaluated for impairment		46,828		322,325		27,037		61,785		5,280		38,937				502,192
Total ending loans balance	$	47,526	$	326,631	$	27,472	$	63,120	$	5,376	$	39,311			$	509,436

The following table shows the loan portfolio allocated by management’s internal risk ratings (in thousands):


	As of March 31, 2014
	Pass		Special Mention		Substandard		Total
Commercial	$	45,352	$	3,989	$	699	$	50,040
Real estate - commercial		313,209		3,089		8,461		324,759
Real estate - construction		25,908		250		109		26,267
Real estate - mortgage		60,850		—		2,086		62,936
Installment		4,872		—		77		4,949
Other		38,757		—		595		39,352
Total	$	488,948	$	7,328	$	12,027	$	508,303

	As of December 31, 2013
	Pass		Special Mention		Substandard		Total
Commercial	$	45,446	$	1,107	$	973	$	47,526
Real estate - commercial		309,828		6,213		10,590		326,631
Real estate - construction		27,101		261		110		27,472
Real estate - mortgage		61,200		—		1,920		63,120
Installment		5,278		—		98		5,376
Other		38,611		—		700		39,311
Total	$	487,464	$	7,581	$	14,391	$	509,436

●

Unallocated Allowance. The unallocated loan loss allowance represents an amount for imprecision or uncertainty that is inherent in estimates used to determine the allowance.

Deposits

Total deposits decreased $2,032,000 to $785,817,000 at March 31, 2014 compared to $787,849,000 at December 31, 2013. During the three months ended March 31, 2014, interest-bearing demand deposits increased $7,699,000, and savings and money market deposits increased $4,612,000, while noninterest-bearing demand deposits decreased $8,020,000 and certificates of deposit decreased $6,323,000. There were no changes in the deposit products or deposit promotions offered by the Company during the three months ended March 31, 2014.

	March 31,		December 31,
	2014		2013
Noninterest-bearing demand	$	176,951	$	184,971
Interest-bearing demand		210,207		202,508
Savings and money market		255,245		250,633
Time certificates		143,414		149,737
Total deposits	$	785,817	$	787,849

Capital Resources

The Company maintains capital to support future growth and maintain financial strength while trying to effectively manage the capital on hand. From the depositor standpoint, a greater amount of capital on hand relative to total assets is generally viewed as positive. At the same time, from the standpoint of the shareholder, a greater amount of capital on hand may not be viewed as positive because it limits the Company’s ability to earn a high rate of return on stockholders’ equity (ROE). Stockholders’ equity increased $2,182,000 to $95,611,000 as of March 31, 2014, as compared to $93,429,000 at December 31, 2013. The increase was the result of a change in accumulated other comprehensive loss of $1,165,000, net income of $919,000, and stock based compensation expense of $98,000, during the first three months of 2014. Under current regulations, management believes that the Company meets all capital adequacy requirements.

The Company’s and NVB’s capital amounts and risk-based capital ratios are presented below (in thousands).

											To be Well Capitalized
						For Capital					Under Prompt Corrective
						Adequacy Purposes					Action Provisions
	Actual					Minimum		Minimum			Minimum		Minimum
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Company
As of March 31, 2014:
Total capital (to risk weighted assets)	$	120,196		19.31	%	$	49,796		8.00	%		N/A		N/A
Tier 1 capital (to risk weighted assets)	$	112,398		18.06	%	$	24,894		4.00	%		N/A		N/A
Tier 1 capital (to average assets)	$	112,398		12.33	%	$	36,463		4.00	%		N/A		N/A

As of December 31, 2013:
Total capital (to risk weighted assets)	$	119,178		19.04	%	$	50,075		8.00	%		N/A		N/A
Tier 1 capital (to risk weighted assets)	$	111,333		17.79	%	$	25,033		4.00	%		N/A		N/A
Tier 1 capital (to average assets)	$	111,333		12.16	%	$	36,623		4.00	%		N/A		N/A

North Valley Bank
As of March 31, 2014:
Total capital (to risk weighted assets)	$	118,348		19.05	%	$	49,700		8.00	%	$	62,125		10.00	%
Tier 1 capital (to risk weighted assets)	$	110,563		17.79	%	$	24,860		4.00	%	$	37,289		6.00	%
Tier 1 capital (to average assets)	$	110,563		12.14	%	$	36,429		4.00	%	$	45,537		5.00	%

As of December 31, 2013:
Total capital (to risk weighted assets)	$	116,783		18.68	%	$	50,014		8.00	%	$	62,518		10.00	%
Tier 1 capital (to risk weighted assets)	$	108,947		17.42	%	$	25,017		4.00	%	$	37,525		6.00	%
Tier 1 capital (to average assets)	$	108,947		11.90	%	$	36,621		4.00	%	$	45,776		5.00	%

Liquidity

The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors and borrowers. Collection of principal and interest on loans, the liquidations and maturities of investment securities, deposits with other banks, customer deposits and short term borrowings, when needed, are primary sources of funds that contribute to liquidity. As of March 31, 2014, $21,651,000 was outstanding in the form of subordinated debentures issued by the Company. Unused lines of credit with correspondent banks to provide federal funds of $10,000,000 as of March 31, 2014 were also available to provide liquidity. In addition, NVB is a member of the Federal Home Loan Bank providing additional unused borrowing capacity of $269,290,000 secured by certain loans and investment securities as of March 31, 2014. The Company also has an unused line of credit with the Federal Reserve Bank of San Francisco of $2,116,000 secured by investment securities.

The Company manages both assets and liabilities by monitoring asset and liability mixes, volumes, maturities, yields and rates in order to preserve liquidity and earnings stability. Total liquid assets (cash and due from banks, Federal funds sold and available for sale investment securities) totaled $340,611,000 and $336,962,000 (or 37.1% and 36.7% of total assets) at March 31, 2014 and December 31, 2013, respectively.

Core deposits, defined as demand deposits, interest bearing demand deposits, regular savings, money market deposit accounts and time deposits of less than $100,000, continue to provide a relatively stable and low cost source of funds. Core deposits totaled $718,253,000 and $716,631,000 at March 31, 2014 and December 31, 2013, respectively.

In assessing liquidity, historical information such as seasonal loan demand, local economic cycles and the economy in general are considered along with current ratios, management goals and unique characteristics of the Company. Management believes the Company is in compliance with its policies relating to liquidity.

Interest Rate Sensitivity

Overview. The Company constantly monitors earning asset and deposit levels, developments and trends in interest rates, liquidity, capital adequacy and marketplace opportunities with the view towards maximizing shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue market risk. Management responds to all of these to protect and possibly enhance net interest income while managing risks within acceptable levels as set forth in the Company’s policies. In addition, alternative business plans and contemplated transactions are also analyzed for their impact. This process, known as asset/liability management is carried out by changing the maturities and relative proportions of the various types of loans, investments, deposits and other borrowings.

Market Risk. Market risk results from the fact that the market values of assets or liabilities on which the interest rate is fixed will increase or decrease with changes in market interest rates. If the Company invests in a fixed-rate, long term security and then interest rates rise, the security is worth less than a comparable security just issued because the older security pays less interest than the newly issued security. If the security had to be sold before maturity, then the Company would incur a loss on the sale. Conversely, if interest rates fall after a fixed-rate security is purchased, its value increases, because it is paying at a higher rate than newly issued securities. The fixed rate liabilities of the Company, like certificates of deposit and fixed-rate borrowings, also change in value with changes in interest rates. As rates drop, they become more valuable to the depositor and hence more costly to the Company. As rates rise, they become more valuable to the Company. Therefore, while the value changes when rates move in either direction, the adverse impacts of market risk to the Company’s fixed-rate assets are due to rising rates and for the Company’s fixed-rate liabilities, they are due to falling rates. In general, the change in market value due to changes in interest rates is greater in financial instruments that have longer remaining maturities. Therefore, the exposure to market risk of assets is lessened by managing the amount of fixed-rate assets and by keeping maturities relatively short. These steps, however, must be balanced against the need for adequate interest income because variable-rate and shorter-term assets generally yield less interest than longer-term or fixed-rate assets.

Mismatch Risk. The second interest-related risk, mismatched risk, arises from the fact that when interest rates change, the changes do not occur equally in the rates of interest earned and paid because of differences in the contractual terms of the assets and liabilities held. A difference in the contractual terms, a mismatch, can cause adverse impacts on net interest income.

The Company has a certain portion of its loan portfolio tied to the national prime rate. If these rates are lowered because of general market conditions, e.g., the prime rate decreases in response to a rate decrease by the Federal Reserve Open Market Committee (“FOMC”), these loans will be repriced. If the Company were at the same time to have a large proportion of its deposits in long-term fixed-rate certificates, interest earned on loans would decline while interest paid on the certificates would remain at higher levels for a period of time until they mature. Therefore, net interest income would decrease immediately. A decrease in net interest income could also occur with rising interest rates if the Company had a large portfolio of fixed-rate loans and securities that was funded by deposit accounts on which the rate is steadily rising.

This exposure to mismatch risk is managed by attempting to match the maturities and repricing opportunities of assets and liabilities. This may be done by varying the terms and conditions of the products that are offered to depositors and borrowers. For example, if many depositors want shorter-term certificates while most borrowers are requesting longer-term fixed rate loans, the Company will adjust the interest rates on the certificates and loans to try to match up demand for similar maturities. The Company can then partially fill in mismatches by purchasing securities or borrowing funds from the Federal Home Loan Bank with the appropriate maturity or repricing characteristics.

Basis Risk. The third interest-related risk, basis risk, arises from the fact that interest rates rarely change in a parallel or equal manner. The interest rates associated with the various assets and liabilities differ in how often they change, the extent to which they change, and whether they change sooner or later than other interest rates. For example, while the repricing of a specific asset and a specific liability may occur at roughly the same time, the interest rate on the liability may rise one percent in response to rising market rates while the asset increases only one-half percent. While the Company would appear to be evenly matched with respect to mismatch risk, it would suffer a decrease in net interest income. This exposure to basis risk is the type of interest risk least able to be managed, but is also the least dramatic. Avoiding concentrations in only a few types of assets or liabilities is the best means of increasing the chance that the average interest received and paid will move in tandem. The wider diversification means that many different rates, each with their own volatility characteristics, will come into play.

Net Interest Income and Net Economic Value Simulations. The tool used to manage and analyze the interest rate sensitivity of a financial institution is known as a simulation model and is performed with specialized software built for this specific purpose for financial institutions. This model allows management to analyze the three specific types of risks; market risk, mismatch risk, and basis risk.

To quantify the extent of all of these risks both in its current position and in transactions it might make in the future, the Company uses computer modeling to simulate the impact of different interest rate scenarios on net interest income and on net economic value. Net economic value or the market value of portfolio equity is defined as the difference between the market value of financial assets and liabilities. These hypothetical scenarios include both sudden and gradual interest rate changes, and interest rate changes in both directions. This modeling is the primary means the Company uses for interest rate risk management decisions.

The hypothetical impact of sudden interest rate shocks applied to the Company’s asset and liability balances are modeled quarterly. The results of this modeling indicate how much of the Company’s net interest income and net economic value are “at risk” (deviation from the base level) from various sudden rate changes. This exercise is valuable in identifying risk exposures. The results for the Company’s most recent simulation analysis indicate that the Company’s net interest income at risk over a one-year period and net economic value at risk from 2% shocks are within normal expectations for sudden changes and do not materially differ from those of March 31, 2014.

For this simulation analysis, the Company has made certain assumptions about the duration of its non-maturity deposits that are important to determining net economic value at risk.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In management’s opinion, there has not been a material change in the Company’s market risk profile for the three months ended March 31, 2014 compared to December 31, 2013. Please see discussion under the caption “Interest Rate Sensitivity” on page 43.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2014. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2014 that has materially affected or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no material legal proceedings pending against the Company or against any of its property. The Company, because of the nature of its business, is generally subject to various legal actions, threatened or filed, which involve ordinary, routine litigation incidental to its business. Although the amount of the ultimate exposure, if any, cannot be determined at this time, the Company does not expect that the final outcome of threatened or filed suits will have a materially adverse effect on its consolidated financial position. On January 24, 2014, a putative shareholder class action lawsuit titled John Solak v. North Valley Bancorp, et al. was filed in the Superior Court of the State of California, County of Shasta. TriCo Bancshares and all of the individuals serving as Directors of the Company are also named as defendants. The complaint alleges breach of fiduciary duty and aiding and abetting breach of fiduciary duty in connection with the Agreement and Plan of Merger and Reorganization signed between the Company and TriCo Bancshares on January 21, 2014. The Company and the Directors have not yet responded to the complaint. The Company and its legal counsel believe the complaint’s claims are without merit. The resolution of this matter is not expected to have a material impact on the Company’s business, financial condition or results of operations, though no assurance can be given in this regard.

ITEM 1A. RISK FACTORS

There have been no material changes from risk factors as previously disclosed by the Company in its response to Item 1A of Part 1 of Form 10-K for the fiscal year ended December 31, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

31	Rule 13a-14(a) / 15d-14(a) Certifications
32	Section 1350 Certifications
101.INS	XBRL Instance Document (furnished herewith)*
101.SCH	XBRL Taxonomy Extension Schema Document (furnished herewith)*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith)*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith)*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (furnished herewith)*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith)*

*The interactive data files listed above shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

SIGNATURES

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


NORTH VALLEY BANCORP
(Registrant)

Date	May 12, 2014

By:

/s/ Michael J. Cushman
Michael J. Cushman
President & Chief Executive Officer
(Principal Executive Officer)

/s/ Kevin R. Watson
Kevin R. Watson
Executive Vice President & Chief Financial Officer
(Principal Financial Officer & Principal Accounting Officer)