10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the period ended June 30, 2011.
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 of incorporation or organization)	(IRS Employer ID Number)
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 o
Non-accelerated filer x	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 – 6,833,752 shares as of August 10, 2011.

INDEX

NORTH VALLEY BANCORP AND SUBSIDIARIES

PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets—June 30, 2011 and December 31, 2010	3
	Condensed Consolidated Statement of Operations—For the three and six months ended June 30, 2011 and 2010	4
	Condensed Consolidated Statements of Cash Flows—For the six months ended June 30, 2011 and 2010	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	39
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	(removed and reserved)	40
Item 5.	Other Information	40
Item 6.	Exhibits	40
SIGNATURES		40

2

PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except share data)

	June 30,			December 31,
	2011			2010
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	18,159		$	14,629
Federal funds sold		19,355			9,005
Total cash and cash equivalents		37,514			23,634
Time deposits at other financial institutions		459			459
Investment securities available-for-sale, at fair value		296,293			265,644
Investment securities held-to-maturity, at amortized cost		6			6
Loans		482,154			513,466
Less: Allowance for loan losses		(14,746	)		(14,993	)
Net loans		467,408			498,473
Premises and equipment, net		8,361			8,799
Accrued interest receivable		2,624			2,713
Other real estate owned		23,865			25,784
FHLB and FRB stock and other nonmarketable securities		8,044			7,141
Bank-owned life insurance policies		34,422			33,871
Core deposit intangibles, net		474			546
Other assets		15,587			17,871
TOTAL ASSETS	$	895,057		$	884,941
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	157,924		$	155,499
Interest-bearing		599,950			598,291
Total deposits		757,874			753,790
Accrued interest payable and other liabilities		17,075			15,212
Subordinated debentures		31,961			31,961
TOTAL LIABILITIES		806,910			800,963
Commitments and contingencies (Note J)		—			—
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; no shares outstanding at June 30, 2011 and December 31, 2010		—			—
Common stock, no par value: authorized 60,000,000 shares; outstanding 6,832,492 at June 30, 2011 and December 31, 2010, respectively		98,188			98,128
Accumulated deficit		(12,419	)		(13,337	)
Accumulated other comprehensive income (loss), net of tax		2,378			(813	)
Total stockholders’ equity		88,147			83,978
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	895,057		$	884,941

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

3

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands except per share data)

	For the three months ended June 30,
	2011			2010
INTEREST INCOME:
Interest and fees on loans	$	7,394		$	8,463
Interest on investments:
Taxable interest income		2,057			1,142
Nontaxable interest income		152			177
Interest on federal funds sold and repurchase agreements		7			55
Total interest income		9,610			9,837
INTEREST EXPENSE:
Deposits		1,012			1,929
Subordinated debentures		439			522
Other borrowings		1			—
Total interest expense		1,452			2,451
NET INTEREST INCOME		8,158			7,386
PROVISION FOR LOAN LOSSES		1,250			2,600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,908			4,786
NONINTEREST INCOME:
Service charges on deposit accounts		1,172			1,546
Other fees and charges		1,158			1,158
Earnings on cash surrender value of life insurance policies		351			373
Gain on sale of loans, net		519			33
Loss on sale of premises and equipment		(3	)		(22	)
Other		286			289
Total noninterest income		3,483			3,377
NONINTEREST EXPENSES:
Salaries and employee benefits		4,475			4,138
Occupancy expense		700			695
Furniture and equipment expense		294			352
FDIC and state assessments		303			696
Other real estate owned expense		1,177			1,253
Other		2,786			2,738
Total noninterest expenses		9,735			9,872
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		656			(1,709	)
PROVISION (BENEFIT) FOR INCOME TAXES		137			(1,137	)
NET INCOME (LOSS)	$	519		$	(572	)
Per Share Amounts
Basic and Diluted Earnings (Loss) Per Share	$	0.08		$	(0.38	)

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

4

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands except per share data)

	For the six months ended June 30,
	2011			2010
INTEREST INCOME:
Interest and fees on loans	$	14,844		$	17,079
Interest on investments:
Taxable interest income		3,851			2,191
Nontaxable interest income		318			355
Interest on federal funds sold and repurchase agreements		15			87
Total interest income		19,028			19,712
INTEREST EXPENSE:
Deposits		2,094			3,948
Subordinated debentures		969			1,036
Other borrowings		1			—
Total interest expense		3,064			4,984
NET INTEREST INCOME		15,964			14,728
PROVISION FOR LOAN LOSSES		2,250			3,600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		13,714			11,128
NONINTEREST INCOME:
Service charges on deposit accounts		2,338			3,027
Other fees and charges		2,279			2,189
Earnings on cash surrender value of life insurance policies		681			719
Gain on sale of loans, net		775			82
Loss on sales of securities, net		(10	)		—
Loss on sale of premises and equipment		(4	)		(147	)
Other		577			519
Total noninterest income		6,636			6,389
NONINTEREST EXPENSES:
Salaries and employee benefits		9,192			8,425
Occupancy expense		1,392			1,429
Furniture and equipment expense		590			775
FDIC and state assessments		746			1,402
Other real estate owned expense		1,629			2,103
Other		5,657			5,757
Total noninterest expenses		19,206			19,891
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		1,144			(2,374	)
PROVISION (BENEFIT) FOR INCOME TAXES		226			(1,490	)
NET INCOME (LOSS)	$	918		$	(884	)
Per Share Amounts
Basic and Diluted Earnings (Loss) Per Share	$	0.13		$	(0.59	)

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

5

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the six months ended June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	918		$	(884	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		626			827
Amortization of premium on securities, net		807			410
Amortization of core deposit intangible		72			73
Provision for loan losses		2,250			3,600
Net losses on sale and write-down of other real estate owned		1,246			1,830
Gain on sale of loans		(775	)		(82	)
Loss on sales of securities		10			—
Loss on sale of premises and equipment		4			147
Stock-based compensation expense		60			94
Effect of changes in:
Accrued interest receivable		89			30
Other assets		(485	)		(1,539	)
Accrued interest payable and other liabilities		1,863			1,452
Net cash provided by operating activities		6,685			5,958
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities		(50,302	)		(64,738	)
Proceeds from sales/maturities/calls of available-for-sale securities		24,245			17,911
Proceeds from maturities/calls of held-to-maturity securities		—			2
Purchases of FHLB and FRB stock and other securities		(903	)		(301	)
Net decrease in loans		25,750			28,467
Proceeds from sales of other real estate owned		4,513			2,560
Purchases of premises and equipment		(192	)		(171	)
Net cash provided by (used in) investing activities		3,111			(16,270	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		4,084			(13,949	)
Proceeds from issuance of preferred stock, net of costs		—			37,500
Net cash provided by financing activities		4,084			23,551
NET INCREASE IN CASH AND CASH EQUIVALENTS		13,880			13,239
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		23,634			67,628
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	37,514		$	80,867
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest	$	2,078		$	4,044
Income taxes (refunded) paid		—			—
Noncash investing and financing activities:
Net change in unrealized gain on available-for-sale investment securities	$	3,191		$	2,206
Transfer from loans to other real estate owned	$	3,840		$	8,439

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

6

NORTH VALLEY BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A - 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, 2010. Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ended December 31, 2011.

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 four business trusts that have issued trust preferred securities fully and unconditionally guaranteed by the Company.  North Valley Capital Trust I, 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 $31,961,000 in trust preferred securities.

On November 9, 2009, the Company elected to defer the payment of interest on the Company’s  Junior Subordinated Deferrable Interest Debentures Due 2031 (the “2031 Debentures”) issued to North Valley Capital Trust I in 2001; the Company’s Floating Rate Junior Subordinated Debt Securities Due 2033 (the “2033 Debentures”) issued to North Valley Capital Trust II in 2003; the Company’s Floating Rate Junior Subordinated Debt Securities Due 2034 (the “2034 Debentures”) issued to North Valley Capital Trust III in 2004; and the Company’s Junior Subordinated Debt Securities Due 2036 (the “2036 Debentures”) issued to North Valley Capital Statutory Trust IV in 2005.  The 2031, 2033, 2034 and 2036 Debentures are administered under the terms and conditions of four separate Indentures and the Company gave notice of deferral to each Indenture Trustee on November 12, 2009.   

The Indentures provide generally that the payment of interest is deferrable, at the option of the Company, for up to 20 consecutive quarters (or 10 consecutive semi-annual periods).  Nonpayment of interest for more than 20 consecutive quarters (or 10 semi-annual periods) is an event of default pursuant to which the payment of principal and interest may be accelerated by the Indenture Trustee.  As of June 30, 2011, the Company had deferred the payment of interest for a total of seven consecutive quarters.

This deferral of interest was the first time that the Company has deferred payment of interest on the Debentures.  The obligation to pay interest on the Debentures is cumulative and will continue to accrue, currently at a fixed rate of 10.25% on the 2031 Debentures, variable rate of 3.52% on the 2033 Debentures, variable rate of 3.07% on the 2034 Debentures and a variable rate of 1.58%, 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.  As of June 30, 2011, the amount of accrued interest payable on the Debentures was $3,903,000.  Subject to regulatory approval, the Company may redeem the debentures earlier than their maturity dates, with certain of the debentures being redeemable beginning July 2006 and others being redeemable beginning in April 2008, July 2009 and March 2011.

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.

7

NOTE B – INVESTMENT SECURITIES

At June 30, 2011 and December 31, 2010, the amortized cost of securities and their approximate fair value were as follows (in thousands):

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2011
Available-for-Sale:
Obligations of U.S. government agencies	$	15,062	$	243	$	—		$	15,305
Obligations of state and political subdivisions		14,430		623		(131	)		14,922
Government agency mortgage-backed securities		252,993		5,290		(189	)		258,094
Corporate debt securities		6,000		—		(1,083	)		4,917
Equity securities		3,000		55		—			3,055
	$	291,485	$	6,211	$	(1,403	)	$	296,293
Held-to-Maturity:
Government agency mortgage-backed securities	$	6	$	—	$	—		$	6
December 31, 2010
Available-for-Sale:
Obligations of U.S. government agencies	$	21,096	$	135	$	(10	)	$	21,221
Obligations of state and political subdivisions		14,342		435		(226	)		14,551
Government agency mortgage-backed securities		221,807		2,729		(1,967	)		222,569
Corporate debt securities		6,000		—		(1,697	)		4,303
Equity securities		3,000		—		—			3,000
	$	266,245	$	3,299	$	(3,900	)	$	265,644
Held-to-Maturity:
Government agency mortgage-backed securities	$	6	$	—	$	—		$	6

For the six months ended June 30, 2011 and 2010 there were no gross realized gains on sales or calls of available for sale securities.  For the six months ended June 30, 2011 there were $10,000 in gross realized losses on sales, impairment or calls of securities categorized as available for sale securities.  For the six months ended June 30, 2010 there were no gross realized losses on sales of securities categorized as available for sale securities. There were no sales or transfers of held to maturity securities for the six months ended June 30, 2011 and 2010.  For the six months ended June 30, 2011 and 2010 there were $24,245,000 and $17,911,000, respectively, in gross proceeds from maturities or calls of available for sale securities.  For the six months ended June 30, 2011 there were no gross proceeds from maturities or calls of held to maturity securities. For the six months ended June 30, 2010 there were $2,000 in gross proceeds from maturities or calls of held to maturity securities.

At June 30, 2011 and December 31, 2010, securities having fair value amounts of approximately $284,213,000 and $255,199,000, respectively, were pledged to secure public deposits, short-term borrowings, treasury, tax and loan balances and for other purposes required by law or contract.   Although the Company had no short-term borrowings at June 30, 2011 and December 31, 2010, the Company pledges most of its securities at the Federal Home Loan Bank (“FHLB”) to provide borrowing capacity.  See “Liquidity” on page 37.

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, the value of the security is reduced and a corresponding charge to earnings is recognized.

At June 30, 2011, the Company held $71,542,000 of available for sale investment securities in an unrealized loss position of which $65,659,000 were in an unrealized loss position for less than twelve months and $5,883,000 were in an unrealized loss position and had been in an unrealized loss position for twelve months or more.  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.

8

NOTE C – STOCK-BASED COMPENSATION

Stock Option Plans

At June 30, 2011, the Company had two shareholder approved stock-based compensation plans: the 1998 Employee Stock Incentive Plan and the 2008 Stock Incentive Plan.  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.  Pursuant to the 1998 Employee Stock Incentive Plan there were outstanding options to purchase 71,810 shares of Common Stock at June 30, 2011. As provided in the 1998 Employee Stock Incentive Plan, the authorization to award incentive stock options terminated on February 19, 2008.  As of June 30, 2011, there were options outstanding under the 2008 Stock Incentive Plan for the purchase of 49,947 shares of Common Stock.  A total of 226,668 shares of Common Stock were available for the grant of additional options and director stock awards under the 2008 Stock Incentive Plan at June 30, 2011.

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.  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. At June 30, 2011, a total of 276,615 shares of Common Stock were reserved for issuance under the terms of the 2008 Stock Incentive Plan, consisting of 49,947 shares to be issued upon the exercise of options granted and still outstanding as of that date and 226,668 shares reserved for future stock option grants and director stock awards.  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.  Each stock award shall be fully vested when granted to the outside director.  The Board of Directors elected to forego their stock awards under the 2008 Stock Incentive Plan for years 2009 and 2010.  On July 28, 2011, the Board of Directors approved the 180 share stock award to each of the seven outside directors (total 1,256 shares) for the year 2011.  The Company expects to recognize director stock grant expense in the amount of $13,000 for the quarter ending September 30, 2011, relative to these 1,256 shares awarded to the seven outside directors.   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 Option Compensation

There were no options granted in the three month period ended June 30, 2011 and 2010, respectively. For the three month periods ended June 30, 2011 and 2010, the compensation cost recognized for share based compensation was $29,000 and $46,000, respectively.  For the six month periods ended June 30, 2011 and 2010, the compensation cost recognized for share based compensation was $60,000 and $94,000, respectively. At June 30, 2011, the total unrecognized compensation cost related to stock-based awards granted to employees under the Company’s stock option plans was $136,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.0 years and will be adjusted for subsequent changes in estimated forfeitures.

9

Stock-Based Compensation

Under the Company’s 2008 Stock Incentive Plan as of June 30, 2011, 226,668 shares of the Company’s common stock are available for future grants to directors and employees of the Company. 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.   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, 2011		152,095	$	51.02	5 years	$15.75-$123.75	$	—
Granted		1,000	$	8.99		$8.99
Exercised		—		—		—
Expired or Forfeited		31,338	$	40.19		$15.75-$123.75
Outstanding at June 30, 2011		121,757	$	53.46	6 years	$8.99-$103.10	$	1
Fully vested and exercisable at June 30, 2011		87,405	$	63.01	5 years	$17.85-$103.10
Options expected to vest		34,352	$	29.18	7 years	$8.99-$65.05	$	1

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 June 30, 2011.  There were no options exercised during the three months ended June 30, 2011 and 2010.

NOTE D – COMPREHENSIVE INCOME

Comprehensive income includes net income (loss) and other comprehensive income.  The Company’s only sources of other comprehensive income are unrealized gains on available for sale investment securities and adjustments to the minimum pension liability.  The Company’s total comprehensive income was as follows (in thousands):

	Three months ended June 30,					Six months ended June 30,
	2011		2010			2011		2010
Net income (loss)	$	519	$	(572	)	$	918	$	(884	)
Other comprehensive gain, net of tax:
Holding gain arising during period		2,840		1,561			3,191		2,206
Total comprehensive income	$	3,359	$	989		$	4,109	$	1,322

10

NOTE E – LOANS

The Company originates loans for business, consumer and real estate activities and for equipment purchases. Such loans are concentrated in the Company’s market areas which consist of Yolo, Placer, Sonoma, Shasta, Humboldt, Mendocino, Trinity and Del Norte Counties and neighboring communities.  Loans decreased $31,402,000 during the first six months of 2011 to $482,640,000 at June 30, 2011 from $514,042,000 at December 31, 2010.  At June 30, 2011 compared to December 31, 2010, real estate construction loans decreased by $18,581,000 as the Company continues to reduce its exposure in this loan type.  The Company is focused on the origination of owner-occupied commercial real estate lending and commercial loans, although they decreased by $3,821,000 and $4,528,000, respectively, as loan demand for these products remained soft during the first six months of 2011.   Major classifications of loans were as follows (in thousands):

	June 30,			December 31,
	2011			2010
Commercial	$	50,111		$	54,639
Real estate - commercial		287,693			291,514
Real estate - construction		36,600			55,181
Real estate - mortgage		48,325			49,726
Installment		12,001			14,690
Other		47,910			48,292
		482,640			514,042
Deferred loan fees, net		(486	)		(576	)
Allowance for loan losses		(14,746	)		(14,993	)
	$	467,408		$	498,473

NOTE F – ALLOWANCE FOR LOAN LOSSES

A summary of the allowance for loan losses at June 30, 2011 and 2010 is as follows (in thousands):

	Six months ended June 30,
	2011			2010
Allowance for loan losses at beginning of period	$	14,993		$	18,539
Loans charged-off		(2,803	)		(6,035	)
Recoveries on loans previously charged-off		306			277
Provisions for loan losses		2,250			3,370
Balance of allowance for loan losses at end of period	$	14,746		$	16,151
Components of allowance for credit losses
Allowance for loan losses	$	14,746		$	16,151
Reserve for unfunded commitments		241			230
Total allowance for credit losses	$	14,987		$	16,381

The following table shows the allocation of the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2011 (in thousands):

	For the three months ended June 30, 2011
			Real Estate			Real Estate			Real Estate
	Commercial		Commercial			Construction			Mortgage			Installment			Other			Unallocated		Total
Allowance for Loan Losses
Balance March 31, 2011	$	1,268	$	8,987		$	1,566		$	919		$	304		$	755		$	672	$	14,471
Charge-offs		—		(796	)		(197	)		(81	)		(124	)		—			—		(1,198	)
Recoveries		128		—			10			—			85			—			—		223
Provisions for loan losses		535		587			(40	)		177			(14	)		(10	)		15		1,250
Balance June 30, 2011	$	1,931	$	8,778		$	1,339		$	1,015		$	251		$	745		$	687	$	14,746

	For the six months ended June 30, 2011
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2010	$	1,517		$	8,439		$	1,936		$	956		$	339		$	666		$	1,140		$	14,993
Charge-offs		(874	)		(858	)		(197	)		(281	)		(292	)		(301	)		—			(2,803	)
Recoveries		138			—			10			—			158			—			—			306
Provisions for loan losses		1,150			1,197			(410	)		340			46			380			(453	)		2,250
Balance June 30, 2011	$	1,931		$	8,778		$	1,339		$	1,015		$	251		$	745		$	687		$	14,746
Reserve to impaired loans	$	835		$	915		$	—		$	130		$	—		$	—		$	—		$	1,880
Reserve to non-impaired loans	$	1,096		$	7,863		$	1,339		$	885		$	251		$	745		$	687		$	12,866
Loans
Balance June 30, 2011	$	50,111		$	287,693		$	36,600		$	48,325		$	12,001		$	47,910					$	482,640
Impaired Loans	$	2,273		$	9,847		$	4,247		$	1,146		$	22		$	50					$	17,585
Non-impaired loans	$	47,838		$	277,846		$	32,353		$	47,179		$	11,979		$	47,860					$	465,055

11

The following table shows the allocation of the allowance for loan losses by portfolio segment as of December 31, 2011 (in thousands):

	As of December 31, 2010
			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for Loan Losses
Balance December 31, 2010	$	1,517	$	8,439	$	1,936	$	956	$	339	$	666	$	1,140	$	14,993
Reserve to impaired loans	$	327	$	563	$	—	$	153	$	—	$	—	$	—	$	1,043
Reserve to non-impaired loans	$	1,190	$	7,876	$	1,936	$	803	$	339	$	666	$	1,140	$	13,950
Loans
Balance December 31, 2010	$	54,639	$	291,514	$	55,181	$	49,726	$	14,690	$	48,292			$	514,042
Impaired Loans	$	1,470	$	6,692	$	9,016	$	2,820	$	67	$	—			$	20,065
Non-impaired loans	$	53,169	$	284,822	$	46,165	$	46,906	$	14,623	$	48,292			$	493,977

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

	As of June 30, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	42,638	$	3,000	$	3,812	$	661	$	50,111
Real estate - commercial		254,731		4,688		28,274		—		287,693
Real estate - construction		23,331		671		12,598		—		36,600
Real estate - mortgage		45,153		432		2,740		—		48,325
Installment		11,872		—		129		—		12,001
Other		47,590		—		320		—		47,910
Total	$	425,315	$	8,791	$	47,873	$	661	$	482,640

	As of December 31, 2010
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	43,773	$	3,531	$	7,203	$	132	$	54,639
Real estate - commercial		259,929		2,214		29,371		—		291,514
Real estate - construction		23,542		10,171		21,468		—		55,181
Real estate - mortgage		43,655		482		5,589		—		49,726
Installment		14,499		—		191		—		14,690
Other		47,790		—		502		—		48,292
Total	$	433,188	$	16,398	$	64,324	$	132	$	514,042

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

	As of June 30, 2011
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	46,467	$	1,371	$	—	$	2,273	$	50,111
Real estate - commercial		277,469		378		—		9,846		287,693
Real estate - construction		32,353		—		—		4,247		36,600
Real estate - mortgage		46,448		731		—		1,146		48,325
Installment		11,759		219		—		23		12,001
Other		47,668		192		—		50		47,910
Total	$	462,164	$	2,891	$	—	$	17,585	$	482,640

	As of December 31, 2010
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	53,010	$	159	$	—	$	1,470	$	54,639
Real estate - commercial		284,788		34		—		6,692		291,514
Real estate - construction		46,165		—		—		9,016		55,181
Real estate - mortgage		46,068		838		—		2,820		49,726
Installment		14,450		173		—		67		14,690
Other		48,258		34		—		—		48,292
Total	$	492,739	$	1,238	$	—	$	20,065	$	514,042

12

The Company did not recognize any interest income on impaired loans for the three and six month periods ended June 30, 2011.  The following table shows information related to impaired loans at and for the period ended (in thousands):

	As of June 30, 2011
							Average		Average
			Unpaid				Recorded		Recorded
	Recorded		Principal		Related		Investment		Investment
	Investment		Balance		Allowance		Three Months Ended		Six Months Ended
With no allocated allowance
Commercial	$	—	$	—	$	—	$	—	$	—
Real estate - commercial		3,955		4,218		—		3,959		3,993
Real estate - construction		4,247		4,982		—		4,257		4,260
Real estate - mortgage		362		363		—		362		363
Installment		23		30		—		23		23
Other		50		50		—		50		50
Subtotal		8,637		9,643		—		8,651		8,689
With allocated allowance
Commercial		2,273		2,294		835		2,284		2,300
Real estate - commercial		5,891		6,582		915		6,207		6,218
Real estate - mortgage		784		848		130		791		794
Subtotal		8,948		9,724		1,880		9,282		9,312
Total Impaired Loans	$	17,585	$	19,367	$	1,880	$	17,933	$	18,001

	As of December 31, 2010
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With no allocated allowance
Commercial	$	1,121	$	1,466	$	—	$	1,531
Real estate - commercial		2,602		2,794		—		2,793
Real estate - construction		9,016		13,599		—		13,572
Real estate - mortgage		1,557		1,611		—		1,679
Installment		67		67		—		68
Subtotal		14,363		19,537		—		19,643
With allocated allowance
Commercial		349		363		327		370
Real estate - commercial		4,090		4,178		563		4,252
Real estate - mortgage		1,263		1,265		153		1,563
Subtotal		5,702		5,806		1,043		6,185
Total Impaired Loans	$	20,065	$	25,343	$	1,043	$	25,828

The following table shows information related to Troubled Debt Restructurings for the period ended June 30, 2011 (in thousands):

		Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding
	of	Recorded		Recorded
	Contracts	Investment		Investment
Real estate - commercial	3	$	2,801	$	2,801
Real estate - mortgage	2		433		433

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risks inherent 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. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable 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 each calendar quarter. 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.

13

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.

Although management believes the allowance to be adequate, ultimate losses may vary from its estimates.  At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors.  If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted.  In addition, the Company’s primary regulators, the Federal Reserve Bank of San Francisco (“FRB”) and the California Department of Financial Institutions, as an integral part of their examination process, review the adequacy of the allowance.  These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

NOTE G – OTHER REAL ESTATE OWNED

The Company had $23,865,000 and $25,784,000 in other real estate owned (“OREO”) at June 30, 2011 and December 31, 2010, respectively.  Below is a table with details of the changes in OREO (in thousands):

Balance, December 31, 2010	$	25,784
Properties transferred in		3,840
Sales of property		(4,513	)
Loss on sale or writedown of property		(1,246	)
Balance at June 30, 2011	$	23,865

The following table presents the components of OREO expense for the periods ended June 30, 2011 and 2010 (in thousands):

	Three months ended June 30,					Six months ended June 30,
	2011			2010		2011			2010
Operating expenses	$	297		$	195	$	383		$	273
Provision for losses		920			1,023		1,431			1,539
Net, (gain)/loss on disposal		(40	)		35		(185	)		291
Total other real estate owned expense	$	1,177		$	1,253	$	1,629		$	2,103

NOTE H – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average common shares outstanding for the period.  Diluted earnings (loss) per share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised and converted into common stock.  When a net loss occurs there is no effect on the calculation of diluted loss per share for common stock equivalents because the conversion is anti-dilutive.  Outstanding stock options for a total of 121,757 shares were excluded from the diluted earnings per share calculation for the six months ended June 30, 2011 because they were considered anti-dilutive.

14

NOTE I – 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 and $61,000 for the three months ended June 30, 2011 and 2010, respectively.  Effective October 1, 2009, the Company entered into an agreement to “freeze” the vested benefits under the North Valley Bancorp Salary Continuation Plan (amended and restated effective January 1, 2007) with each active officer currently participating in the Plan.  Each agreement provided that vested accrued benefits under the Plan would remain fixed at the amount determined as of September 30, 2009 until such time as the Board of Directors might elect to recommence accruals.  On July 28, 2011, the Board of Directors determined that Plan accruals should recommence, with retroactive effect to September 30, 2009.  As a result, the Company is expected to enter into agreements with the officers whose Plan benefits have been “frozen” since 2009, confirming the reinstatement of his or her accruals which are expected to be approximately $550,000 in aggregate for the remainder of 2011. Components of net periodic benefit cost for the Company’s supplemental nonqualified defined benefit plans for the three and six months ended June 30, 2011 and 2010 (excluding the service cost for the reinstatement of accruals approved by the Board of Directors on July 28, 2011) are presented in the following table (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Components of net periodic benefits cost:
Service cost	$	—	$	—	$	—	$	—
Interest cost		76		85		152		170
Prior service amortization		8		8		16		16
Recognized net actuarial loss		4		4		8		8
Total components of net periodic cost	$	88	$	97	$	176	$	194

NOTE J – 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, results of its operations or its cash flows.

The Company was contingently liable under letters of credit issued on behalf of its customers in the amount of $8,230,000 and $8,741,000 at June 30, 2011 and December 31, 2010, respectively.  At June 30, 2011, commercial and consumer lines of credit and real estate loans of approximately $46,969,000 and $40,847,000, respectively, were undisbursed.  At December 31, 2010, commercial and consumer lines of credit and real estate loans of approximately $47,650,000 and $44,169,000, respectively, were undisbursed.

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 real estate projects and 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. Most 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 June 30, 2011 and December 31, 2010. 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 June 30, 2011, the Company had a reserve for unfunded commitments of $241,000.

15

A large portion of the loan portfolio of the Company is collateralized by real estate.  At June 30, 2011 and December 31, 2010, real estate served as the principal source of collateral with respect to approximately 77% of the Company’s loan portfolio.  At June 30, 2011, real estate construction loans totaled $36,600,000, or 8% of the total loan portfolio, commercial loans secured by real estate totaled $287,693,000, or 60% of the total loan portfolio, and real estate mortgage loans totaled $48,325,000, or 10% of the total loan portfolio.  See the discussion under “Loan Portfolio” starting on page 30.  A further decline in the state and national economy, in general, combined with further deterioration in real estate values in the Company’s primary operating market areas, would have an adverse effect on the value of real estate as well as other collateral securing loans, plus the ability of certain borrowers to repay their outstanding loans and the overall demand for new loans, and this could have a material impact on the Company’s financial position, results of operations or its cash flows.

NOTE K – 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 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.

Net deferred tax assets totaled $10,292,000 and $12,511,000 at June 30, 2011 and December 31, 2010, respectively. The Company evaluates deferred income tax assets for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws, our ability to successfully implement tax planning strategies, or variances between our future projected operating performance and our actual results.  The Company is required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized.  In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each reporting period.  Future adjustments to the deferred tax asset valuation allowance, if any, will be determined based upon changes in the expected realization of net deferred tax assets. The realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the carry back and carry forward periods under the tax law. Due to the Company’s cumulative tax losses in 2009 and 2010, it was determined that as of December 31, 2010, the Company was not able to meet the ‘more likely than not” standard as to realization of a portion of its deferred tax assets and accordingly established a partial valuation allowance of $4,500,000 against such assets.  As of June 30, 2011, the valuation allowance remained unchanged.

16

NOTE L – 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.

Assets Recorded at Fair Value on a Recurring Basis

The table below presents assets measured at fair value on a recurring basis (in thousands).

	At June 30, 2011
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government agencies	$	15,305	$	—	$	15,305	$	—
Obligations of state and political subdivisions		14,922		—		14,922		—
Government agency mortgage-backed securities		258,094		—		258,094		—
Corporate debt securities		4,917		—		4,917		—
Equity securities		3,055		—		3,055		—
	$	296,293	$	—	$	296,293	$	—

	At December 31, 2010
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government agencies	$	21,221	$	—	$	21,221	$	—
Obligations of state and political subdivisions		14,551		—		14,551		—
Government agency mortgage-backed securities		222,569		—		222,569		—
Corporate debt securities		4,303		—		4,303		—
Equity securities		3,000		—		3,000		—
	$	265,644	$	—	$	265,644	$	—

17

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or writedowns of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at quarter end (in thousands).

	At June 30, 2011
	Fair Value		Level 1		Level 2		Level 3
Impaired loans
Commercial	$	1,438	$	—	$	1,438	$	—
Real estate - commercial		5,706		—		5,706		—
Real estate - construction		874		—		589		285
Real estate - mortgage		654		—		654		—
Installment		14		—		14		—
Other		—		—		—		—
Other real estate owned		17,494		5,083		8,036		4,375
Total assets measured at fair value on a nonrecurring basis	$	26,180	$	5,083	$	16,437	$	4,660

	At December 31, 2010
	Fair Value		Level 1		Level 2		Level 3
Impaired loans
Commercial	$	1,097	$	—	$	1,097	$	—
Real estate - commercial		3,527		—		3,527		—
Real estate - construction		4,114		—		3,829		285
Real estate - mortgage		1,507		—		1,507		—
Installment		16		—		16		—
Other		—		—		—		—
Other real estate owned		25,784		—		25,784		—
Total assets measured at fair value on a nonrecurring basis	$	36,045	$	—	$	35,760	$	285

Impaired Loans - The value of the impaired loan is periodically assessed by performing a property valuation, which could include a full or limited appraisal, or another alternative valuation method.

Other Real Estate Owned – Other real estate owned includes the fair value of foreclosed real estate and other collateral that were measured at fair value subsequent to their initial classification as foreclosed assets.  At the time of foreclosure, other real estate owned is recorded at the fair value of the real estate less costs to sell, which becomes the property’s new basis. Subsequent declines in fair value are written off as incurred through a valuation allowance.  The value of the OREO properties is periodically assessed by performing a property valuation, which could include a full or limited appraisal, or another alternative valuation method.

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 June 30, 2011 and December 31, 2010 to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

a)	Cash and Due From Banks - The carrying amount represents a reasonable estimate of fair value.
b)	Federal Funds Sold - The carrying amount represents a reasonable estimate of fair value.
c)	Time Deposits at Other Financial Institutions - The carrying amount represents a reasonable estimate of fair value due to the short-term nature of such deposits.
d)	FHLB, FRB Stock and Other Securities - The carrying amount represents a reasonable estimate of fair value.
e)	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.

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f)	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 value of performing loans is estimated by discounting contractual cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Assumptions regarding credit risk, cash flow, and discount rates are determined using available market information.
	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.
g)	Bank-owned Life Insurance - The carrying amount and estimated fair values are based on current cash surrender values at each reporting date provided by the insurers.
h)	Mortgage Servicing Assets – The fair value of mortgage servicing assets is estimated using projected cash flows adjusted for the effects of anticipated prepayments, using a market discount rate.
i)	Deposits – Noninterest-bearing and interest-bearing demand deposits and savings accounts are payable on demand and their carrying values are assumed to be at fair value. The fair value of the core deposit intangible has not been included as a component of the fair value estimate. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on rates currently offered for deposits of similar size and remaining maturities.
j)	Subordinated Debentures - The fair value of the subordinated debentures is estimated by discounting the contractual cash flows using the current interest rate at which similar securities with the same remaining expected life could be made.
k)	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.
l)	Accrued Interest Receivable/Payable – The carrying amount of accrued interest receivable and accrued interest payable represents a reasonable estimate of fair value.

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

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
FINANCIAL ASSETS
Cash and due from banks	$	18,159	$	18,159	$	14,629	$	14,629
Federal funds sold		19,355		19,355		9,005		9,005
Time deposits at other financial institutions		459		459		459		459
FHLB, FRB and other securities		8,044		8,044		7,141		7,141
Securities:
Available-for-sale		296,293		296,293		265,644		265,644
Held-to-maturity		6		6		6		6
Loans		467,408		483,212		498,473		514,284
Bank owned life insurance		34,422		34,422		33,871		33,871
Mortgage and SBA servicing assets		848		848		708		694
Accrued interest receivable		2,624		2,624		2,713		2,713
FINANCIAL LIABILITIES
Deposits	$	757,874	$	759,450	$	753,790	$	755,514
Subordinated debentures		31,961		17,933		31,961		18,178
Accrued interest payable		4,038		4,038		3,052		3,052

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NOTE M – NEW ACCOUNTING PRONOUNCEMENTS

Fair Value Measurements

In January 2010, the FASB issued FASB ASU 2010-06, Improving Disclosures about Fair Value Measurements, which amends and clarifies existing standards to require additional disclosures regarding fair value measurements.  Specifically, the standard requires disclosure of the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis.  This standard clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities—previously separate fair value disclosures were required for each major category of assets and liabilities.  This standard also clarifies the requirement to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements.  Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, these disclosures are effective for the year ended December 31, 2010.  The requirement to separately disclose purchases, sales, issuances, and settlements of recurring Level 3 measurements became effective for the Company for the year beginning on January 1, 2011.  The Company adopted this new accounting standard as of January 1, 2010 and the impact of adoption was not material to the financial statements.

Disclosures about Credit Quality

In July 2010, the FASB issued FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  ASU 2010-20 requires more robust and disaggregated disclosures about the credit quality of financing receivables (loans) and allowances for loan losses, including disclosure about credit quality indicators, past due information and modifications of finance receivables.  The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on and after December 15, 2010.  The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The adoption of this guidance has significantly expanded disclosure requirements related to accounting policies and disclosures related to the allowance for loan losses but did not have an impact on the Company’s financial position, results of operation or cash flows.

Troubled Debt Restructuring

On April 5, 2011 the FASB issued Accounting Standard Update No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (the “ASU”).  The ASU provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”).  The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings.  For purposes of measuring impairment of those receivables, an entity should apply the amendments retrospectively to the beginning of the annual period of adoption effective for interim or annual periods beginning on or after June 15, 2011.

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income.  This ASU improves comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income (OCI) as well as facilitate convergence with International Financial Reporting Standards.  The ASU requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total OCI, the components of OCI and total of comprehensive income.  For the Company, this standard is effective in 2012 with early adoption permitted.

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; downgrades in the credit ratings on the United States of America and on government-related entities; and changes in the securities markets.

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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 inherent loss 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 loan losses inherent 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 Notes E and F to the Notes to Condensed Consolidated Financial Statements.

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 is charged to allowance for loan losses. Subsequent to foreclosure, management periodically evaluate the value of OREO held for sale and record a valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value 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 June 30, 2011, 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 C 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 C to the Notes to Condensed Consolidated Financial Statements.

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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 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.

The Company evaluates deferred income tax assets for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws, our ability to successfully implement tax planning strategies, or variances between our future projected operating performance and our actual results.  The Company is required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized.  In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each reporting period.  Future adjustments to the deferred tax asset valuation allowance, if any, will be determined based upon changes in the expected realization of net deferred tax assets. The realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the carry back and carry forward periods under the tax law. Due to the Company’s cumulative tax losses in 2009 and 2010, it was determined that as of December 31, 2010, the Company was not able to meet the ‘more likely than not” standard as to realization of a portion of its deferred tax assets and accordingly established a partial valuation allowance of $4,500,000 against such assets.  As of June 30, 2011, the valuation allowance remained unchanged.

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-five branches, including two supermarket branches. 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.

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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

Financial Results

(in thousands except per share amounts)	Three months ended June 30,						Six months ended June 30
	2011			2010			2011			2010
Net interest income	$	8,158		$	7,386		$	15,964		$	14,728
Provision for loan losses		1,250			2,600			2,250			3,600
Noninterest income		3,483			3,377			6,636			6,389
Noninterest expense		9,735			9,872			19,206			19,891
Provision (benefit) for income taxes		137			1,137			226			(1,490	)
Net income (loss)	$	519		$	(572	)	$	918		$	(884	)
Per Share Amounts
Basic and Diluted Earnings (Loss) Per Share	$	0.08		$	(0.38	)	$	0.13		$	(0.59	)
Annualized Return (Loss) on Average Assets		0.23	%		(0.25	%)		0.21	%		(0.20	%)
Annualized Return (Loss) on Average Equity		2.42	%		(2.76	%)		2.17	%		(2.62	%)

The Company had net income of $519,000, or $0.08 per diluted share, and $918,000, or $0.13 per diluted share for the three and six months ended June 30, 2011, respectively.  This compares to a net loss of $572,000, or ($0.38) per diluted share, and $884,000, or ($0.59) per diluted share for the three and six months ended June 30, 2010.  The net income for three and six months ended June 30, 2011 compared to the net loss for three and six  months ended June 30, 2010 was primarily attributed to an increase in net interest income and a decrease in provision for loan losses.  Net interest income increased $772,000 and $1,236,000 for the three and six months ended June 30, 2011, compared to the same periods in 2010.  The Company’s provision for loan losses were $1,250,000 and $2,250,000, respectively for the three and six months ended June 30, 2011, compared to a provision for loan losses of $2,600,000 and $3,600,000, respectively  for the three and six  months ended June 30, 2010.  Noninterest income increased $106,000 and $247,000 for the three and six months ended June 30, 2011 compared to the same periods in 2010 primarily due to the recording of gains on sale of SBA loan sales.  Noninterest expense decreased for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010 due to other real estate owned expense and FDIC assessment decreases offset by higher salaries and benefit costs.

Regulatory Matters

A written agreement (the final written agreement, as executed by the parties, is herein called the “Written Agreement”) was signed on January 6, 2010 among the Company, NVB and the Federal Reserve Bank of San Francisco (the “Reserve Bank”). Among other things, the Written Agreement provides that the Company and NVB shall submit to the Reserve Bank their continuing plans to enhance lending and credit administration functions, to maintain policies and procedures for the maintenance of an adequate allowance for loan losses, to strengthen the management of commercial real estate concentrations and to update its capital plan in order to maintain capital ratios at or above the required minimums. The Written Agreement also restricts the payment of dividends, any payments on trust preferred securities, certain indemnification and severance payments, and any reduction in capital or the purchase or redemption of stock without the prior approval of the Reserve Bank. Progress reports detailing the form and manner of all actions taken to secure compliance with the Written Agreement must be submitted to the Reserve Bank at least quarterly. This description of the Written Agreement is a summary and does not purport to be a complete description of all of the terms of such agreement and is qualified in its entirety by reference to the copy of the Written Agreement filed with the Securities and Exchange Commission on January 8, 2010 as an exhibit to the Company’s Current Report on Form 8-K.

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The Directors and senior management of the Company and NVB agree with the goal of financial soundness represented by the Written Agreement and have taken appropriate actions to comply with all requirements (including timelines) specified in the Written Agreement, as follows:

Capital Plan. Within 60 days of signing the Written Agreement, the Company was required to submit to the Reserve Bank a plan to maintain sufficient capital, on a consolidated basis, and the Company and NVB were required to jointly submit to the Reserve Bank a plan to maintain sufficient capital at NVB, as a separate entity. These plans were submitted to the Reserve Bank within the 60-day period, addressing among other things, the Company’s current and future capital needs, including compliance with capital adequacy guidelines for bank holding companies; NVB’s current and future capital needs, including compliance with the capital adequacy guidelines for state member banks; the adequacy of NVB’s capital, taking into account the volume of classified credits, concentrations of credit, the allowance for loan losses, current and projected asset growth and projected retained earnings; the source and timing of additional funds to fulfill the Company’s and NVB’s future capital requirements; and the requirements of Regulation Y, that the Company serve as a source of strength to NVB. The Reserve Bank accepted these plans and the Company completed a capital raise of $40,000,000, (net $37,500,000 after costs) on April 22, 2010 and contributed $33,500,000 of the net proceeds to the capital of NVB.

Strategic Plan and Budget. Within 60 days of signing the Written Agreement, NVB was also required to submit a business plan and budget for 2010 to improve NVB’s earnings and overall condition. That plan was submitted to the Reserve Bank within the 60-day period and was implemented as agreed. NVB is also required to submit a business plan and budget for each calendar year subsequent to 2010 at least 30 days prior to the beginning of that calendar year.  That plan was submitted for 2011 within the required timeframe.

Concentrations of Credit. Within 45 days of signing the Written Agreement, NVB was required to submit a plan to strengthen NVB’s management of commercial real estate concentrations, including steps to reduce or mitigate the risk of concentrations. That plan was submitted to the Reserve Bank within the 45-day period and was accepted by the Reserve Bank and is being implemented by NVB as agreed.

Lending and Credit Administration. Within 60 days of signing the Written Agreement, NVB was required to submit a program to enhance lending and credit administration that addresses, considers and includes, at a minimum, work-out strategies for problem loans and loans on the NVB watch list; standards for interest-only loans; and standards for the timely movement of loans to non-accrual status.  Such a program was submitted to the Reserve Bank within the 60-day period and was accepted by the Reserve Bank and is being implemented by NVB as agreed.

Asset Improvement. Within 60 days of signing the Written Agreement, NVB was required to submit a plan designed to improve NVB’s position through repayment, amortization, liquidation, additional collateral or other means on loans in excess of $1,000,000 which may be past due or on NVB’s problem loan list or otherwise adversely classified. Also, for any such loan NVB is required to submit a plan to improve NVB’s position on such loan and must submit a progress report updating each improvement plan within 30 days after the end of each calendar quarter. Such a plan was submitted to and accepted by the Reserve Bank and implemented within the 60-day period and NVB has timely submitted all related plans and progress reports to date.

Allowance for Loan Losses. Within 60 days of signing the Written Agreement, NVB was required to submit an acceptable program for the maintenance of an adequate Allowance for Loan losses, to be reviewed by NVB’s Board of Directors on at least a quarterly calendar basis with reports regarding such review submitted to the Reserve Bank within 30 days after the end of each calendar quarter. Such a program was submitted to the Reserve Bank within the 60-day period and has been accepted by the Reserve Bank.  Quarterly reports have also been timely filed with the Reserve Bank.

Debt and Stock Redemption. The Company may not, directly or indirectly, incur, increase or guarantee any debt, and may not, directly or indirectly, purchase or redeem any shares of its stock, without the prior written approval of the Reserve Bank. The Company has not undertaken any of the aforementioned items.

Progress Reports. Within 30 days after the end of each calendar quarter following the date of the Written Agreement, the Company and NVB are required to submit to the Reserve Bank written progress reports detailing the actions taken to secure compliance with the Written Agreement and the results of such actions. All plans, reports and other information required by the Written Agreement are being submitted to the Reserve Bank within the requisite timeframes stipulated in the Written Agreement. The same or similar plans, reports and information are being submitted to the California Department of Financial Institutions.

Communications from the Reserve Bank have continued to confirm that the Company and NVB are in compliance with all provisions of the Written Agreement.

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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 and investments 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 $78,000 and $85,000 in taxable-equivalent interest income on tax-free investments for the three month periods ended June 30, 2011 and 2010, respectively.

Net interest income for the three months ended June 30, 2011 was $8,236,000, a $765,000, or 10.2%, increase from net interest income of $7,471,000 for the same period in 2010.  Interest income decreased $234,000, or 2.4%, to $9,688,000 for the three month period ended June 30, 2011 due primarily to a decrease in average loans.  The Company had foregone interest income for the loans placed on nonaccrual status of $476,000 during the three months ended June 30, 2011 compared to $562,000 for the same period in 2010. The average loans outstanding during the three months ended June 30, 2011 decreased $78,269,000, or 13.7%, to $492,536,000.  This lower loan volume decreased interest income by $1,161,000. The average yield earned on the loan portfolio increased 7 basis points to 6.02% for the three months ended June 30, 2011. This increase in yield increased interest income by $92,000. The total decrease to interest income from the loan portfolio was $1,069,000.  The average balance of the investment portfolio increased $127,119,000, or 74.4%, which accounted for a $925,000 increase in interest income and a decrease in average yield of the investment portfolio of 21 basis points reduced interest income by $42,000.

Interest expense for the three months ended June 30, 2011 decreased $999,000, or 40.8%, to $1,452,000 compared to the same period in 2010.  The largest decrease to interest expense was in time deposit accounts as the average rates paid on these accounts decreased 89 basis points to 1.2% and reduced interest expense by $472,000 while a decrease in the average balances of these accounts of $51,737,000 decreased interest expense by $275,000. The average rate paid on savings and money market accounts decreased 28 basis points to 0.48% for the three month period ended June 30, 2011 compared to 0.76% for the same period in 2010, resulting in a decrease to interest expense of $156,000.  This decrease was offset partially by higher average balances in savings and money market accounts of $5,710,000, resulting in an $11,000 increase in interest expense.

The net interest margin for the three months ended June 30, 2011 increased 54 basis points to 4.12% from 3.58% for the same period in 2010 and a 13 basis point increase from the 3.99% net interest margin for the linked quarter ended March 31, 2011.

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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 June 30, 2011								Three months ended June 30, 2010
	Average			Yield/			Interest		Average			Yield/			Interest
	Balance			Rate			Amount		Balance			Rate			Amount
Assets
Earning assets:
Federal funds sold	$	11,634			0.24	%	$	7	$	95,116			0.23	%	$	55
Investment securities:
Taxable		283,680			2.91	%		2,057		155,504			2.95	%		1,142
Non-taxable (1)		14,402			6.41	%		230		15,459			6.80	%		262
Total investments		298,082			3.08	%		2,287		170,963			3.29	%		1,404
Loans (2)(3)		492,536			6.02	%		7,394		570,805			5.95	%		8,463
Total earning assets		802,252			4.84	%		9,688		836,884			4.76	%		9,922
Non earning assets		107,208								100,894
Allowance for loan losses		(14,997	)							(18,067	)
Total non-earning assets		92,211								82,827
Total assets	$	894,463							$	919,711
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Transaction accounts	$	164,460			0.19	%	$	79	$	156,514			0.27	%	$	104
Savings and money market		223,483			0.48	%		270		217,773			0.76	%		415
Time certificates		214,349			1.24	%		663		266,086			2.13	%		1,410
Other borrowed funds		32,166			5.49	%		440		31,961			6.55	%		522
Total interest bearing liabilities		634,458			0.92	%		1,452		672,334			1.46	%		2,451
Demand deposits		156,265								145,284
Other liabilities		17,828								18,827
Total liabilities		808,551								836,445
Shareholders’ equity		85,912								83,266
Total liabilities and shareholders’ equity	$	894,463							$	919,711
Net interest income							$	8,236							$	7,471
Net interest spread					3.92	%							3.30	%
Net interest margin					4.12	%							3.58	%

(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 net loan fees of $95 and $105 for the three months ended June 30, 2011 and 2010, respectively.

Net interest income for the six months ended June 30, 2011 was $16,127,000, a $1,229,000, or 8.2%, increase from net interest income of $14,898,000 for the same period in 2010.  Interest income decreased $691,000, or 3.5%, to $19,191,000 for the six month period ended June 30, 2011 due primarily to a decrease in average loans.  The Company had foregone interest income for the loans placed on nonaccrual status of $735,000 during the six months ended June 30, 2011 compared to $1,147,000 for the same period in 2010. The average loans outstanding during the six months ended June 30, 2011 decreased $83,645,000, or 14.4%, to $497,456,000.  This lower loan volume decreased interest income by $2,460,000. The average yield earned on the loan portfolio increased 9 basis points to 6.02% for the six months ended June 30, 2011. This increase in yield increased interest income by $225,000. The total decrease to interest income from the loan portfolio was $2,235,000.  The average balance of the investment portfolio increased $131,313,000, or 81.8%, which accounted for a $1,965,000 increase in interest income and a decrease in average yield of the investment portfolio of 42 basis points reduced interest income by $349,000.

Interest expense for the six months ended June 30, 2011 decreased $1,920,000, or 39%, to $3,064,000 compared to the same period in 2010.  The largest decrease to interest expense was in time deposit accounts as the average rates paid on these accounts decreased 92 basis points to 1.3% and reduced interest expense by $989,000 while a decrease in the average balances of these accounts of $52,393,000 decreased interest expense by $574,000. The average rate paid on savings and money market accounts decreased 27 basis points to 0.48% for the six month period ended June 30, 2011 compared to 0.75% for the same period in 2010, resulting in a decrease to interest expense of $49,000.  This decrease was offset partially by higher average balances in savings and money market accounts of $13,193,000, resulting in a $49,000 increase in interest expense.

26

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:  These items have been adjusted to give effect to $163,000 and $170,000 in taxable-equivalent interest income on tax-free investments for the six month periods ended June 30, 2011 and 2010, respectively.

Schedule of Average Daily Balance and Average Yields and Rates
(Dollars in thousands)
	Six months ended June 30, 2011								Six months ended June 30, 2010
	Average			Yield/			Interest		Average			Yield/			Interest
	Balance			Rate			Amount		Balance			Rate			Amount
Assets
Earning assets:
Federal funds sold	$	12,915			0.23	%	$	15	$	75,651			0.23	%	$	87
Investment securities:
Taxable		277,542			2.80	%		3,852		145,095			3.05	%		2,191
Non-taxable (1)		14,380			6.73	%		480		15,514			6.82	%		525
Total investments		291,922			2.99	%		4,332		160,609			3.41	%		2,716
Loans (2)(3)		497,456			6.02	%		14,844		581,101			5.93	%		17,079
Total earning assets		802,293			4.82	%		19,191		817,361			4.91	%		19,882
Non earning assets		106,907								98,920
Allowance for loan losses		(14,817	)							(18,426	)
Total non-earning assets		92,090								80,494
Total assets	$	894,383							$	897,855
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Transaction accounts	$	162,901			0.19	%	$	157	$	156,912			0.27	%	$	208
Savings and money market		220,525			0.48	%		529		207,332			0.75	%		769
Time certificates		219,257			1.29	%		1,408		271,650			2.21	%		2,971
Other borrowed funds		32,064			6.10	%		970		31,961			6.54	%		1,036
Total interest bearing liabilities		634,747			0.97	%		3,064		667,855			1.50	%		4,984
Demand deposits		155,881								146,131
Other liabilities		18,385								15,712
Total liabilities		809,013								829,698
Shareholders’ equity		85,370								68,157
Total liabilities and shareholders’ equity	$	894,383							$	897,855
Net interest income							$	16,127							$	14,898
Net interest spread					3.85	%							3.41	%
Net interest margin					4.05	%							3.68	%

(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 net loan fees of $155 and $156 for the six months ended June 30, 2011 and 2010, respectively.

27

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 June 30, 2011									Six months ended June 30, 2011
	compared with									compared with
	Three months ended June 30, 2010									Six months ended June 30, 2010
							Total									Total
	Average			Average			Increase			Average			Average			Increase
	Volume			Yield/Rate			(Decrease)			Volume			Yield/Rate			(Decrease)
Interest Income
Interest on Federal funds sold	$	(48	)	$	—		$	(48	)	$	(72	)	$	—		$	(72	)
Interest on investments:
Taxable securities		943			(28	)		915			2,003			(342	)		1,661
Nontaxable securities (1)		(18	)		(14	)		(32	)		(38	)		(7	)		(45	)
Total investments		925			(42	)		883			1,965			(349	)		1,616
Interest on loans		(1,161	)		92			(1,069	)		(2,460	)		225			(2,235	)
Total interest income		(284	)		50			(234	)		(567	)		(124	)		(691	)
Interest Expense
Transaction accounts	$	5		$	(30	)	$	(25	)	$	8		$	(59	)	$	(51	)
Savings and money market		11			(156	)		(145	)		49			(289	)		(240	)
Time deposits		(275	)		(472	)		(747	)		(574	)		(989	)		(1,563	)
Other borrowed funds		3			(85	)		(82	)		3			(69	)		(66	)
Total interest expense		(256	)		(743	)		(999	)		(514	)		(1,406	)		(1,920	)
Total change in net interest income	$	(28	)	$	793		$	765		$	(53	)	$	1,282		$	1,229

Provision for Loan Losses

The provision for loan losses reflects changes in the credit quality of the entire loan portfolio. The provision for loan losses is recorded to bring the allowance for loan losses and the reserve for unfunded commitments to amounts considered appropriate by management based on factors which are discussed under “Allowance for Loan Losses” starting on page 32.

The Company recorded a provision for loan losses of $1,250,000 for the three months ended June 30, 2011, compared to a provision for loan losses of $2,600,000 for the three months ended June 30, 2010.  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 record the $1,250,000 provision for the three months ended June 30, 2011 reflects management’s assessment of the overall adequacy of the allowance for loan losses including the consideration of the level of nonperforming loans and the overall effect of the slowing economy, particularly in real estate.  Management believes that the current level of allowance for loan losses as of June 30, 2011 of $14,746,000, or 3.1% of total loans, is adequate at this time.  The allowance for loan losses was $14,993,000, or 2.9% of total loans, at December 31, 2010. For further information regarding our allowance for loan losses, see “Allowance for Loan Losses” starting on page 32.

Noninterest Income

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

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011			2010
Service charges on deposit accounts	$	1,172	$	1,546	$	2,338		$	3,027
Other fees and charges		1,158		1,158		2,279			2,189
Increase in cash value of life insurance		351		373		681			719
Gain on sale of loans		519		33		775			82
Loss on sales of securities, net		—		—		(10	)		—
Other		283		267		573			372
Total	$	3,483	$	3,377	$	6,636		$	6,389

28

Noninterest income for the three months ended June 30, 2011 increased $106,000, or 3.1%, to $3,483,000 compared to $3,377,000 for the same period in 2010.  Service charges on deposits decreased by $374,000 to $1,172,000 for the second quarter of 2011 compared to $1,546,000 for the same period in 2010.   The Company had a $519,000 gain on sale of loans for the quarter ended June 30, 2011, an increase of $486,000 compared to $33,000 for the same period in 2010, due primarily to a gain on sale of SBA loans of $468,000 in the second quarter of 2011.

Noninterest income for the six months ended June 30, 2011 increased $247,000, or 3.9%, to $6,636,000 compared to $6,389,000 for the same period in 2010.  Service charges on deposits decreased by $689,000 to $2,338,000 for the period ended June 30, 2011 compared to $3,027,000 for the same period in 2010.   The Company had a $775,000 gain on sale of loans for the period ended June 30, 2011, an increase of $693,000 compared to $82,000 for the same period in 2010, due primarily to a gain on sale of SBA loans of $680,000.

Noninterest Expense

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

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Salaries and employee benefits	$	4,475	$	4,138	$	9,192	$	8,425
Other real estate owned expense		1,177		1,253		1,629		2,103
Occupancy		700		695		1,392		1,429
Data processing		534		504		1,209		1,025
FDIC and state assessments		303		696		746		1,402
ATM and online banking		295		287		583		546
Furniture and equipment		294		352		590		775
Professional services		283		302		608		994
Marketing		173		141		292		309
Operations expense		167		127		309		259
Messenger		155		150		300		293
Printing and supplies		148		104		271		208
Postage		131		157		289		307
Director		114		113		216		218
Loan expense		99		171		224		291
Amortization of intangibles		37		37		73		73
Other		650		645		1,283		1,234
	$	9,735	$	9,872	$	19,206	$	19,891

Noninterest expense decreased $137,000, or 1.4%, to $9,735,000 for the second quarter of 2011 from $9,872,000 for the second quarter in 2010.  Salaries and employee benefits increased $337,000, for the second quarter of 2011 compared to the second quarter of 2010 due primarily to hiring of production personnel.  Occupancy and furniture and equipment expense decreased $53,000 for the second quarter of 2011 compared to the second quarter of 2010 due to a decrease in depreciation and rent expense.  OREO expense decreased $76,000 to $1,177,000, for the second quarter of 2011 compared to $1,253,000 for the same period in 2010, and FDIC and state assessments decreased $393,000 to $303,000 for the second quarter of 2011, compared to $696,000 for the same period in 2010.

Noninterest expense for the six months ended June 30, 2011 was $19,206,000 compared to $19,891,000 for the same period in 2010.  For the six months ended June 30, 2011, salaries and employee benefits increased $767,000, while occupancy and furniture and equipment expense decreased $222,000, and other real estate owned expense decreased $474,000 when compared to the same period in 2010.  FDIC premiums and California DFI assessments were $746,000 for the first six months of 2011 compared to $1,402,000 for the first six months of 2010.

Income Taxes

The Company recorded a provision for income taxes for the period ended June 30, 2011 of $226,000, resulting in an effective tax rate of 19.8%, compared to a benefit for income taxes of $1,490,000, or an effective benefit rate of 62.8%, for the period ended June 30, 2010. 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.  In addition, the Company receives certain tax benefits from the State of California Franchise Tax Board for operating and providing loans, as well as jobs, in designated “Enterprise Zones”.

For the three year period ended June 30, 2011, the Company is in a cumulative pretax loss position. For purposes of establishing a deferred tax valuation allowance, this cumulative pretax loss position is considered significant, objective evidence that the Company may not be able to realize some portion of its deferred tax assets in the future. Management evaluates the Company’s deferred tax assets quarterly for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. Management also considered available tax planning strategies, the scheduled reversal of deferred tax assets and liabilities, and the nature and amount of historical and projected future taxable income that provide positive evidence that some of the tax benefits will be realizable. Accordingly, the Company established a partial valuation allowance of $4,500,000 in 2010 to reflect the portion of the deferred tax assets that the Company determined to be more likely than not that it will not be realized. As of June 30, 2011, the valuation allowance remained unchanged.

29

The deferred tax assets will continue to be analyzed quarterly for changes affecting realizability and the valuation allowance may be adjusted in future periods accordingly.

Financial Condition as of June 30, 2011 As Compared to December 31, 2010

Total assets at June 30, 2011 increased $10,116,000, or 1.1%, to $895,057,000, compared to $884,941,000 at December 31, 2010.  Loans, net of deferred loan fees, decreased $31,312,000, or 6.1%, to $482,154,000 at June 30, 2011 from $513,466,000 at December 31, 2010.  Investment securities increased $30,649,000, or 11.5%, to $296,299,000 at June 30, 2011 from $265,650,000 at December 31, 2010, and Federal funds sold increased to $19,355,000 at June 30, 2011 from $9,005,000 at December 31, 2010.  The increase in investment securities was due primarily to a decrease in loans for the first six months of 2011.  Deposits increased $4,084,000, or 0.5%, from December 31, 2010 to $757,874,000 at June 30, 2011.

Loan Portfolio

Loans, the Company’s major component of earning assets, decreased $31,402,000 during the first six months of 2011 to $482,640,000 at June 30, 2011 from $514,042,000 at December 31, 2010.  Real estate construction loans decreased by $18,581,000 as the Company continues to reduce its exposure to construction lending, commercial loans decreased by $4,528,000 and real estate commercial loans decreased by $3,821,000.  The remaining loan categories remained relatively unchanged from their December 31, 2010 balances.

	June 30,			December 31,
	2011			2010
Commercial	$	50,111		$	54,639
Real estate - commercial		287,693			291,514
Real estate - construction		36,600			55,181
Real estate - mortgage		48,325			49,726
Installment		12,001			14,690
Other		47,910			48,292
		482,640			514,042
Deferred loan fees, net		(486	)		(576	)
Allowance for loan losses		(14,746	)		(14,993	)
	$	467,408		$	498,473

The Company’s average loan to deposit ratio was 64.9% for the quarter ended June 30, 2011 compared to 72.7% for the quarter ended June 30, 2010.  The decrease in the Company’s average loan to deposit ratio is driven by the decrease in total average loans of $78,269,000.

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 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.

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.

30

At June 30, 2011 and December 31, 2010, the recorded investment in nonperforming loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) was approximately $17,585,000 and $20,065,000, respectively. The Company had $1,880,000 of specific allowance for loan losses on impaired loans of $8,948,000 at June 30, 2011 as compared to $1,043,000 of specific allowance for loan losses on impaired loans of $6,103,000 at December 31, 2010.  Nonperforming loans as a percentage of total loans were 3.7% at June 30, 2011, compared to 3.9% at December 31, 2010.  Nonperforming assets (nonperforming loans and OREO) totaled $41,450,000 at June 30, 2011, a decrease of $4,399,000 from December 31, 2010.  Nonperforming assets as a percentage of total assets were 4.6% at June 30, 2011 compared to 5.2% at December 31, 2010.  If interest on nonaccrual loans had been accrued, such income would have approximated $735,000 and $1,147,000 for the first six months ended June 30, 2011 and 2010, respectively.

The overall level of nonperforming loans increased $3,091,000 to $17,585,000 at June 30, 2011 from $14,494,000 at March 31, 2011.  During the second quarter of 2011, the Company identified twelve loans totaling $7,691,000 as nonperforming loans.  The additions were offset by reductions in nonperforming loans totaling $4,600,000 due primarily to collections received on certain loans and secondarily due to charge-offs and the transfer of five properties to OREO totaling $3,024,000. Of the twelve loans totaling $7,691,000 identified as nonaccrual loans and added to nonperforming loans during the second quarter of 2011, three relationships represent $6,389,000 of the total.  The first relationship consists of two loans, a commercial loan in the amount of $1,612,000 and a commercial real estate loan in the amount of $1,769,000 located in Yolo County.  A specific reserve in the amount of $1,200,000 has been established for these two loans.  The second relationship consists of a residential development loan in the amount of $2,388,000 located in Solano County.  A specific reserve has not been established for this loan.  The third relationship in this group consists of a residential development loan in the amount of $620,000 located in Shasta County.  A specific reserve has not been established for this loan. The remaining eight loans in this group that were placed on nonaccrual during the second quarter of 2011 total $1,302,000 and specific reserves totaling $221,000 have been established.

Nonperforming assets at June 30, 2011 and December 31, 2010, are summarized as follows (in thousands):

	June 30,			December 31,
	2011			2010
Nonaccrual loans	$	17,585		$	20,065
Loans 90 days past due or more but still accruing interest		—			—
Total nonperforming loans		17,585			20,065
Other real estate owned		23,865			25,784
Total nonperforming assets	$	41,450		$	45,849
Nonaccrual loans to total gross loans		3.65	%		3.91	%
Nonperforming loans to total gross loans		3.65	%		3.91	%
Total nonperforming assets to total assets		4.63	%		5.18	%

	June 30,		December 31,
	2011		2010
Restructured loans included in nonaccrual loans	$	3,234	$	3,842
Restructured loans on accrual status and not 90 days or more past due		959		166
Total restructured loans	$	4,193	$	4,008

The composition of nonaccrual loans as of June 30, 2011, March 31, 2011, December 31, 2010, and September 30, 2010 was as follows (in thousands):

	June					March					December					September
	2011					2011					2010					2010
			% of					% of					% of					% of
	Amount		total			Amount		total			Amount		total			Amount		total
Commercial	$	2,273		12.9	%	$	544		3.8	%	$	1,470		7.3	%	$	1,106		3.7	%
Real estate - commercial		9,846		56.0	%		9,078		62.7	%		6,692		33.4	%		4,031		13.6	%
Real estate - construction		4,247		24.2	%		3,189		22.0	%		9,016		44.9	%		22,044		74.4	%
Real estate - mortgage		1,146		6.5	%		1,633		11.3	%		2,820		14.1	%		1,882		6.3	%
Installment		23		0.1	%		40		0.3	%		67		0.3	%		90		0.3	%
Other		50		0.3	%		—		—			—		—			490		1.7	%
Total nonaccrual loans	$	17,585		100.0	%	$	14,484		100.0	%	$	20,065		100.0	%	$	29,643		100.0	%

31

At June 30, 2011, there were eleven nonaccrual real-estate-commercial loans totaling $9,846,000, or 56%, of the nonaccrual loans.  Of this total, $2,290,000 consists of one loan for a commercial real estate building in Shasta County. Charge-offs of $614,000 have been taken on this loan and a $40,000 specific reserve has been established.  The second largest real estate-commercial loan is for multi-tenant light industrial buildings located in Shasta County for $1,807,000.  No specific reserve has been established for this loan. The third relationship consists of a commercial real estate loan in the amount of $1,769,000 located in Yolo County.  A $619,000 specific reserve has been established for this loan.  The remaining eight real estate-commercial loans total $3,980,000 (approximate average loan of $497,000).  Charge-offs of $54,000 have been taken on these loans and specific reserves of $256,000 have been established for these loans at June 30, 2011.

At June 30, 2011, nonaccrual real-estate-construction loans totaled $4,247,000, or 24.2%, of the nonaccrual loans.  There are five loans that make up the balance.  Charge-offs of $1,354,000 have been taken on these loans and no specific reserves have been established for these loans as of June 30, 2011.  Two of these loans are residential land loans totaling $2,976,000.  Charge-offs of $139,000 have been taken on these loans and no specific reserve has been established at June 30, 2011. There are two loans for nonaccrual residential construction development projects totaling $905,000.  Charge-offs of $1,216,000 have been taken on these loans and no specific reserves have been established for these loans at June 30, 2011.  The remaining nonaccrual residential development loan totaled $366,000.  There have been no charge-offs on this loan and no specific reserve has been established.

At June 30, 2011 there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual.

At June 30, 2011, net carrying value of other real estate owned decreased $1,919,000 to $23,865,000 from $25,784,000 at December 31, 2010.  During the three months ended June 30, 2011, the Company transferred five properties into OREO totaling $3,024,000, sold seven OREO properties totaling $1,597,000, recorded gain on sale of OREO of $39,000, and had write-downs of OREO of $920,000. At June 30, 2011, OREO was comprised of twenty-nine properties which are broken down by type as follows: residential construction of $4,353,000, residential land of $13,318,000, commercial land of $382,000, non-farm non-residential properties of $2,566,000 and residential properties of $3,246,000.

Allowance for Loan Losses

A summary of the allowance for loan losses at June 30, 2011 and 2010 is as follows (in thousands):

	Six months ended June 30,
	2011			2010
Allowance for loan losses at beginning of period	$	14,993		$	18,539
Loans charged-off		(2,803	)		(6,035	)
Recoveries on loans previously charged-off		306			277
Provisions for loan losses		2,250			3,370
Balance of allowance for loan losses at end of period	$	14,746		$	16,151
Components of allowance for credit losses
Allowance for loan losses	$	14,746		$	16,151
Reserve for unfunded commitments		241			230
Total allowance for credit losses	$	14,987		$	16,381

32

The following table shows the allocation of the allowance for loan losses by portfolio segment  for the three and six month periods ended June 30, 2011 (in thousands):

	For the three months ended June 30, 2011
			Real Estate			Real Estate			Real Estate
	Commercial		Commercial			Construction			Mortgage			Installment			Other			Unallocated		Total
Allowance for Loan Losses
Balance March 31, 2011	$	1,268	$	8,987		$	1,566		$	919		$	304		$	755		$	672	$	14,471
Charge-offs		—		(796	)		(197	)		(81	)		(124	)		—			—		(1,198	)
Recoveries		128		—			10			—			85			—			—		223
Provisions for loan losses		535		587			(40	)		177			(14	)		(10	)		15		1,250
Balance June 30, 2011	$	1,931	$	8,778		$	1,339		$	1,015		$	251		$	745		$	687	$	14,746

	For the six months ended June 30, 2011
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2010	$	1,517		$	8,439		$	1,936		$	956		$	339		$	666		$	1,140		$	14,993
Charge-offs		(874	)		(858	)		(197	)		(281	)		(292	)		(301	)		—			(2,803	)
Recoveries		138			—			10			—			158			—			—			306
Provisions for loan losses		1,150			1,197			(410	)		340			46			380			(453	)		2,250
Balance June 30, 2011	$	1,931		$	8,778		$	1,339		$	1,015		$	251		$	745		$	687		$	14,746
Reserve to impaired loans	$	835		$	915		$	—		$	130		$	—		$	—		$	—		$	1,880
Reserve to non-impaired loans	$	1,096		$	7,863		$	1,339		$	885		$	251		$	745		$	687		$	12,866
Loans
Balance June 30, 2011	$	50,111		$	287,693		$	36,600		$	48,325		$	12,001		$	47,910					$	482,640
Impaired Loans	$	2,273		$	9,847		$	4,247		$	1,146		$	22		$	50					$	17,585
Non-impaired loans	$	47,838		$	277,846		$	32,353		$	47,179		$	11,979		$	47,860					$	465,055

The following table shows the allocation of the allowance for loan losses by portfolio segment as of December 31, 2010 (in thousands):

	As of December 31, 2010
			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for Loan Losses
Balance December 31, 2010	$	1,517	$	8,439	$	1,936	$	956	$	339	$	666	$	1,140	$	14,993
Reserve to impaired loans	$	327	$	563	$	—	$	153	$	—	$	—	$	—	$	1,043
Reserve to non-impaired loans	$	1,190	$	7,876	$	1,936	$	803	$	339	$	666	$	1,140	$	13,950
Loans
Balance December 31, 2010	$	54,639	$	291,514	$	55,181	$	49,726	$	14,690	$	48,292			$	514,042
Impaired Loans	$	1,470	$	6,692	$	9,016	$	2,820	$	67	$	—			$	20,065
Non-impaired loans	$	53,169	$	284,822	$	46,165	$	46,906	$	14,623	$	48,292			$	493,977

The above table shows a negative provision for real estate – construction and unallocated segments for the six months ended June 30, 2011.  The reason for the negative provision for real estate – construction segment is due to the decrease in the balance of the construction portfolio of $18,581,000, as well as the decrease in substandard and special mention classifications of real estate – construction loans.  The reason for the negative provision for the unallocated portion of the allowance for loan losses is due to the improvement in the loan portfolio trends and general economic trends.

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

	As of June 30, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	42,638	$	3,000	$	3,812	$	661	$	50,111
Real estate - commercial		254,731		4,688		28,274		—		287,693
Real estate - construction		23,331		671		12,598		—		36,600
Real estate - mortgage		45,153		432		2,740		—		48,325
Installment		11,872		—		129		—		12,001
Other		47,590		—		320		—		47,910
Total	$	425,315	$	8,791	$	47,873	$	661	$	482,640

	As of December 31, 2010
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	43,773	$	3,531	$	7,203	$	132	$	54,639
Real estate - commercial		259,929		2,214		29,371		—		291,514
Real estate - construction		23,542		10,171		21,468		—		55,181
Real estate - mortgage		43,655		482		5,589		—		49,726
Installment		14,499		—		191		—		14,690
Other		47,790		—		502		—		48,292
Total	$	433,188	$	16,398	$	64,324	$	132	$	514,042

33

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

	As of June 30, 2011
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	46,467	$	1,371	$	—	$	2,273	$	50,111
Real estate - commercial		277,469		378		—		9,846		287,693
Real estate - construction		32,353		—		—		4,247		36,600
Real estate - mortgage		46,448		731		—		1,146		48,325
Installment		11,759		219		—		23		12,001
Other		47,668		192		—		50		47,910
Total	$	462,164	$	2,891	$	—	$	17,585	$	482,640

	As of December 31, 2010
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	53,010	$	159	$	—	$	1,470	$	54,639
Real estate - commercial		284,788		34		—		6,692		291,514
Real estate - construction		46,165		—		—		9,016		55,181
Real estate - mortgage		46,068		838		—		2,820		49,726
Installment		14,450		173		—		67		14,690
Other		48,258		34		—		—		48,292
Total	$	492,739	$	1,238	$	—	$	20,065	$	514,042

34

The Company did not recognize any interest income on impaired loans for the three and six month periods ended June 30, 2011.  The following table shows information related to impaired loans at and for the period ended (in thousands):

	As of June 30, 2011
							Average		Average
			Unpaid				Recorded		Recorded
	Recorded		Principal		Related		Investment		Investment
	Investment		Balance		Allowance		Three Months Ended		Six Months Ended
With no allocated allowance
Commercial	$	—	$	—	$	—	$	—	$	—
Real estate - commercial		3,955		4,218		—		3,959		3,993
Real estate - construction		4,247		4,982		—		4,257		4,260
Real estate - mortgage		362		363		—		362		363
Installment		23		30		—		23		23
Other		50		50		—		50		50
Subtotal		8,637		9,643		—		8,651		8,689
With allocated allowance
Commercial		2,273		2,294		835		2,284		2,300
Real estate - commercial		5,891		6,582		915		6,207		6,218
Real estate - mortgage		784		848		130		791		794
Subtotal		8,948		9,724		1,880		9,282		9,312
Total Impaired Loans	$	17,585	$	19,367	$	1,880	$	17,933	$	18,001

	As of December 31, 2010
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With no allocated allowance
Commercial	$	1,121	$	1,466	$	—	$	1,531
Real estate - commercial		2,602		2,794		—		2,793
Real estate - construction		9,016		13,599		—		13,572
Real estate - mortgage		1,557		1,611		—		1,679
Installment		67		67		—		68
Subtotal		14,363		19,537		—		19,643
With allocated allowance
Commercial		349		363		327		370
Real estate - commercial		4,090		4,178		563		4,252
Real estate - mortgage		1,263		1,265		153		1,563
Subtotal		5,702		5,806		1,043		6,185
Total Impaired Loans	$	20,065	$	25,343	$	1,043	$	25,828

The following table shows information related to Troubled Debt Restructurings for the period ended June 30, 2011 (in thousands):

		Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding
	of	Recorded		Recorded
	Contracts	Investment		Investment
Real estate - commercial	3	$	2,801	$	2,801
Real estate - mortgage	2		433		433

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risks inherent 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. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable 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 each calendar quarter. 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.

35

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.

Management anticipates modest growth in commercial lending and commercial real estate and to a lesser extent consumer and real estate mortgage lending, while it anticipates a further decline in construction lending.  As a result, future provisions may be required and the ratio of the allowance for loan losses to loans outstanding may increase to reflect portfolio risk, increasing concentrations, loan type and changes in economic conditions.  In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

Deposits

Total deposits increased $4,084,000, or 0.5%, to $757,874,000 at June 30, 2011 compared to $753,790,000 at December 31, 2010.  During the six months ended June 30, 2011, savings and money market deposits increased $21,172,000, or 9.2%, and noninterest-bearing demand deposits increased $2,425,000, or 1.5%, while certificates of deposit decreased $17,405,000, or 8.2% and interest-bearing demand deposits decreased $2,108,000, or 1.32%. Management considers all deposits to be core deposits at June 30, 2011 and December 31, 2010 and the Company does not have any brokered or internet-based deposits.  The Company had $1,628,000 and $1,615,000 in the CDARs reciprocal deposit program at June 30, 2011 and December 31, 2010, respectively, which management considers core deposits.

	June 30,		December 31,
	2011		2010
Noninterest-bearing demand	$	157,924	$	155,499
Interest-bearing demand		159,133		161,241
Savings and money market		229,648		208,476
Time certificates		211,169		228,574
Total deposits	$	757,874	$	753,790

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 $4,169,000 to $88,147,000 as of June 30, 2011, as compared to $83,978,000 at December 31, 2010. The increase was the result of net income of $918,000, a change in accumulated other comprehensive income of $3,191,000 and stock based compensation expense of $60,000, all during the first six months of 2011.  Under current regulations, management believes that the Company meets all capital adequacy requirements.  The Company suspended indefinitely the payment of quarterly cash dividends on its common stock beginning in 2009.  This Board decision was made to strengthen and preserve the Company’s capital base in these challenging economic times.  In addition, the payment of dividends is restricted by the Written Agreement signed on January 6, 2010 among the Company, NVB, and the Federal Reserve Bank.  See “Regulatory Matters” on page 23.

36

The Company’s and North Valley Bank’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 June 30, 2011:
Total capital (to risk weighted assets)	$	114,635	18.57	%	$	49,385	8.00	%		N/A	N/A
Tier 1 capital (to risk weighted assets)	$	104,392	16.91	%	$	24,694	4.00	%		N/A	N/A
Tier 1 capital (to average assets)	$	104,392	11.80	%	$	35,387	4.00	%		N/A	N/A
As of December 31, 2010:
Total capital (to risk weighted assets)	$	113,279	17.63	%	$	51,403	8.00	%		N/A	N/A
Tier 1 capital (to risk weighted assets)	$	102,422	15.94	%	$	25,702	4.00	%		N/A	N/A
Tier 1 capital (to average assets)	$	102,422	11.48	%	$	35,687	4.00	%		N/A	N/A
North Valley Bank
As of June 30, 2011:
Total capital (to risk weighted assets)	$	118,815	19.26	%	$	49,352	8.00	%	$	61,690	10.00	%
Tier 1 capital (to risk weighted assets)	$	110,990	17.99	%	$	24,678	4.00	%	$	37,017	6.00	%
Tier 1 capital (to average assets)	$	110,990	12.55	%	$	35,375	4.00	%	$	44,219	5.00	%
As of December 31, 2010:
Total capital (to risk weighted assets)	$	116,217	18.08	%	$	51,423	8.00	%	$	64,279	10.00	%
Tier 1 capital (to risk weighted assets)	$	108,092	16.82	%	$	25,706	4.00	%	$	38,558	6.00	%
Tier 1 capital (to average assets)	$	108,092	12.11	%	$	35,703	4.00	%	$	44,629	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 June 30, 2011, $31,961,000 was outstanding in the form of subordinated debt issued by the Company.  Unused lines of credit with correspondent banks to provide federal funds of $10,000,000 as of June 30, 2011 were also available to provide liquidity.  In addition, NVB is a member of the Federal Home Loan Bank (“FHLB”) providing additional unused borrowing capacity of $282,860,000 secured by certain loans and investment securities as of June 30, 2011. The Company also has an unused line of credit with the Federal Reserve Bank of San Francisco (“FRB”) of $8,369,000 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 $333,807,000 and $289,278,000 (or 37.3% and 32.7% of total assets) at June 30, 2011 and December 31, 2010, 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 $669,641,000 and $656,513,000 at June 30, 2011 and December 31, 2010, 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.

37

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 (“FHLB”) 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.

38

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 December 31, 2010.

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 six months ended June 30, 2011 compared to December 31, 2010.  Please see discussion under the caption “Interest Rate Sensitivity” on page 38.

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 June 30, 2011. 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 June 30, 2011 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.

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, 2010.

39

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

Not applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.  (removed and reserved)

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 August 12, 2011

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)

40

EX-31.1

Exhibit 31.1

Rule 13a-14(a)/15d-14(a) Certifications

I, Michael J. Cushman, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of North Valley Bancorp;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 12, 2011	/s/ Michael J. Cushman
	Michael J. Cushman, President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

Rule 13a-14(a)/15d-14(a) Certifications

I, Kevin R. Watson, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of North Valley Bancorp;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 12, 2011	/s/ Kevin R. Watson
	Kevin R. Watson, Executive Vice President & Chief Financial Officer (Principal Financial Officer & Principal Accounting Officer)

EX-32

Exhibit 32

Section 1350 Certifications

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

with Respect to the North Valley Bancorp Quarterly Report on Form 10-Q

For the Quarter ended June 30, 2011

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of North Valley Bancorp, a California corporation (the “Company”), does hereby certify that:

1.	The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.	Information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 12, 2011	/s/ Michael J. Cushman
	Michael J. Cushman
	President and Chief Executive Officer
	(Principal Executive Officer)
Dated: August 12, 2011	/s/ Kevin R. Watson
	Kevin R. Watson
	Executive Vice President & Chief Financial Officer
	(Principal Financial Officer & Principal Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to North Valley Bancorp and will be retained by North Valley Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Preferred stock authorized shares	5,000,000	5,000,000
Preferred stock, no par value (in Dollars per share)	$ 0	$ 0
Preferred stock, no shares outstanding	0	0
Common stock authorized shares	60,000,000	60,000,000
Common stock outstanding shares	6,832,492	6,832,492
Common stock, no par value (in Dollars per share)	$ 0	$ 0

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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (USD $) In Thousands, except Per Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
INTEREST INCOME:
Interest and fees on loans	$ 7,394	$ 8,463	$ 14,844	$ 17,079
Interest on investments:
Taxable interest income	2,057	1,142	3,851	2,191
Nontaxable interest income	152	177	318	355
Interest on federal funds sold and repurchase agreements	7	55	15	87
Total interest income	9,610	9,837	19,028	19,712
INTEREST EXPENSE:
Deposits	1,012	1,929	2,094	3,948
Subordinated debentures	439	522	969	1,036
Other borrowings	1		1
Total interest expense	1,452	2,451	3,064	4,984
NET INTEREST INCOME	8,158	7,386	15,964	14,728
PROVISION FOR LOAN LOSSES	1,250	2,600	2,250	3,600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	6,908	4,786	13,714	11,128
NONINTEREST INCOME:
Service charges on deposit accounts	1,172	1,546	2,338	3,027
Other fees and charges	1,158	1,158	2,279	2,189
Earnings on cash surrender value of life insurance policies	351	373	681	719
Gain on sale of loans, net	519	33	775	82
Loss on sale of premises and equipment	(3)	(22)	(4)	(147)
Other	286	289	577	519
Total noninterest income	3,483	3,377	6,636	6,389
NONINTEREST EXPENSES:
Salaries and employee benefits	4,475	4,138	9,192	8,425
Occupancy expense	700	695	1,392	1,429
Furniture and equipment expense	294	352	590	775
FDIC and state assessments	303	696	746	1,402
Other real estate owned expense	1,177	1,253	1,629	2,103
Other	2,786	2,738	5,657	5,757
Total noninterest expenses	9,735	9,872	19,206	19,891
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES	656	(1,709)	1,144	(2,374)
PROVISION (BENEFIT) FOR INCOME TAXES	137	(1,137)	226	(1,490)
NET INCOME (LOSS)	$ 519	$ (572)	$ 918	$ (884)
Basic and Diluted Earnings (Loss) Per Share (in Dollars per share)	$ 0.08	$ (0.38)	$ 0.13	$ (0.59)

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Document And Entity Information (USD $)	3 Months Ended
	Jun. 30, 2011	Aug. 10, 2011	Jun. 30, 2010
Document and Entity Information [Abstract]
Entity Registrant Name	North Valley Bancorp
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		6,833,752
Entity Public Float			$ 14,940,000
Amendment Flag	false
Entity Central Index Key	0000353191
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Non-accelerated Filer
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q1

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NOTE F – ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2011

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

NOTE F – ALLOWANCE FOR LOAN LOSSES

A summary of the allowance for loan losses at June 30, 2011 and 2010 is as follows (in thousands):

	Six months ended June 30,
	2011			2010
Allowance for loan losses at beginning of period	$	14,993		$	18,539
Loans charged-off		(2,803	)		(6,035	)
Recoveries on loans previously charged-off		306			277
Provisions for loan losses		2,250			3,370
Balance of allowance for loan losses at end of period	$	14,746		$	16,151
Components of allowance for credit losses
Allowance for loan losses	$	14,746		$	16,151
Reserve for unfunded commitments		241			230
Total allowance for credit losses	$	14,987		$	16,381

The following table shows the allocation of the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2011 (in thousands):

	For the three months ended June 30, 2011
			Real Estate			Real Estate			Real Estate
	Commercial		Commercial			Construction			Mortgage			Installment			Other			Unallocated		Total
Allowance for Loan Losses
Balance March 31, 2011	$	1,268	$	8,987		$	1,566		$	919		$	304		$	755		$	672	$	14,471
Charge-offs		—		(796	)		(197	)		(81	)		(124	)		—			—		(1,198	)
Recoveries		128		—			10			—			85			—			—		223
Provisions for loan losses		535		587			(40	)		177			(14	)		(10	)		15		1,250
Balance June 30, 2011	$	1,931	$	8,778		$	1,339		$	1,015		$	251		$	745		$	687	$	14,746

	For the six months ended June 30, 2011
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2010	$	1,517		$	8,439		$	1,936		$	956		$	339		$	666		$	1,140		$	14,993
Charge-offs		(874	)		(858	)		(197	)		(281	)		(292	)		(301	)		—			(2,803	)
Recoveries		138			—			10			—			158			—			—			306
Provisions for loan losses		1,150			1,197			(410	)		340			46			380			(453	)		2,250
Balance June 30, 2011	$	1,931		$	8,778		$	1,339		$	1,015		$	251		$	745		$	687		$	14,746
Reserve to impaired loans	$	835		$	915		$	—		$	130		$	—		$	—		$	—		$	1,880
Reserve to non-impaired loans	$	1,096		$	7,863		$	1,339		$	885		$	251		$	745		$	687		$	12,866
Loans
Balance June 30, 2011	$	50,111		$	287,693		$	36,600		$	48,325		$	12,001		$	47,910					$	482,640
Impaired Loans	$	2,273		$	9,847		$	4,247		$	1,146		$	22		$	50					$	17,585
Non-impaired loans	$	47,838		$	277,846		$	32,353		$	47,179		$	11,979		$	47,860					$	465,055

The following table shows the allocation of the allowance for loan losses by portfolio segment as of December 31, 2011 (in thousands):

	As of December 31, 2010
			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for Loan Losses
Balance December 31, 2010	$	1,517	$	8,439	$	1,936	$	956	$	339	$	666	$	1,140	$	14,993
Reserve to impaired loans	$	327	$	563	$	—	$	153	$	—	$	—	$	—	$	1,043
Reserve to non-impaired loans	$	1,190	$	7,876	$	1,936	$	803	$	339	$	666	$	1,140	$	13,950
Loans
Balance December 31, 2010	$	54,639	$	291,514	$	55,181	$	49,726	$	14,690	$	48,292			$	514,042
Impaired Loans	$	1,470	$	6,692	$	9,016	$	2,820	$	67	$	—			$	20,065
Non-impaired loans	$	53,169	$	284,822	$	46,165	$	46,906	$	14,623	$	48,292			$	493,977

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

	As of June 30, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	42,638	$	3,000	$	3,812	$	661	$	50,111
Real estate - commercial		254,731		4,688		28,274		—		287,693
Real estate - construction		23,331		671		12,598		—		36,600
Real estate - mortgage		45,153		432		2,740		—		48,325
Installment		11,872		—		129		—		12,001
Other		47,590		—		320		—		47,910
Total	$	425,315	$	8,791	$	47,873	$	661	$	482,640

	As of December 31, 2010
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	43,773	$	3,531	$	7,203	$	132	$	54,639
Real estate - commercial		259,929		2,214		29,371		—		291,514
Real estate - construction		23,542		10,171		21,468		—		55,181
Real estate - mortgage		43,655		482		5,589		—		49,726
Installment		14,499		—		191		—		14,690
Other		47,790		—		502		—		48,292
Total	$	433,188	$	16,398	$	64,324	$	132	$	514,042

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

	As of June 30, 2011
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	46,467	$	1,371	$	—	$	2,273	$	50,111
Real estate - commercial		277,469		378		—		9,846		287,693
Real estate - construction		32,353		—		—		4,247		36,600
Real estate - mortgage		46,448		731		—		1,146		48,325
Installment		11,759		219		—		23		12,001
Other		47,668		192		—		50		47,910
Total	$	462,164	$	2,891	$	—	$	17,585	$	482,640

	As of December 31, 2010
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	53,010	$	159	$	—	$	1,470	$	54,639
Real estate - commercial		284,788		34		—		6,692		291,514
Real estate - construction		46,165		—		—		9,016		55,181
Real estate - mortgage		46,068		838		—		2,820		49,726
Installment		14,450		173		—		67		14,690
Other		48,258		34		—		—		48,292
Total	$	492,739	$	1,238	$	—	$	20,065	$	514,042

The Company did not recognize any interest income on impaired loans for the three and six month periods ended June 30, 2011.  The following table shows information related to impaired loans at and for the period ended (in thousands):

	As of June 30, 2011
							Average		Average
			Unpaid				Recorded		Recorded
	Recorded		Principal		Related		Investment		Investment
	Investment		Balance		Allowance		Three Months Ended		Six Months Ended
With no allocated allowance
Commercial	$	—	$	—	$	—	$	—	$	—
Real estate - commercial		3,955		4,218		—		3,959		3,993
Real estate - construction		4,247		4,982		—		4,257		4,260
Real estate - mortgage		362		363		—		362		363
Installment		23		30		—		23		23
Other		50		50		—		50		50
Subtotal		8,637		9,643		—		8,651		8,689
With allocated allowance
Commercial		2,273		2,294		835		2,284		2,300
Real estate - commercial		5,891		6,582		915		6,207		6,218
Real estate - mortgage		784		848		130		791		794
Subtotal		8,948		9,724		1,880		9,282		9,312
Total Impaired Loans	$	17,585	$	19,367	$	1,880	$	17,933	$	18,001

	As of December 31, 2010
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With no allocated allowance
Commercial	$	1,121	$	1,466	$	—	$	1,531
Real estate - commercial		2,602		2,794		—		2,793
Real estate - construction		9,016		13,599		—		13,572
Real estate - mortgage		1,557		1,611		—		1,679
Installment		67		67		—		68
Subtotal		14,363		19,537		—		19,643
With allocated allowance
Commercial		349		363		327		370
Real estate - commercial		4,090		4,178		563		4,252
Real estate - mortgage		1,263		1,265		153		1,563
Subtotal		5,702		5,806		1,043		6,185
Total Impaired Loans	$	20,065	$	25,343	$	1,043	$	25,828

The following table shows information related to Troubled Debt Restructurings for the period ended June 30, 2011 (in thousands):

		Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding
	of	Recorded		Recorded
	Contracts	Investment		Investment
Real estate - commercial	3	$	2,801	$	2,801
Real estate - mortgage	2		433		433

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risks inherent 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. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable 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 each calendar quarter. 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.

Although management believes the allowance to be adequate, ultimate losses may vary from its estimates.  At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors.  If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted.  In addition, the Company’s primary regulators, the Federal Reserve Bank of San Francisco (“FRB”) and the California Department of Financial Institutions, as an integral part of their examination process, review the adequacy of the allowance.  These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

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NOTE K – INCOME TAXES

6 Months Ended

Jun. 30, 2011

Income Tax Disclosure [Text Block]

NOTE K – 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 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.

Net deferred tax assets totaled $10,292,000 and $12,511,000 at June 30, 2011 and December 31, 2010, respectively. The Company evaluates deferred income tax assets for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws, our ability to successfully implement tax planning strategies, or variances between our future projected operating performance and our actual results.  The Company is required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized.  In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each reporting period.  Future adjustments to the deferred tax asset valuation allowance, if any, will be determined based upon changes in the expected realization of net deferred tax assets. The realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the carry back and carry forward periods under the tax law. Due to the Company’s cumulative tax losses in 2009 and 2010, it was determined that as of December 31, 2010, the Company was not able to meet the ‘more likely than not” standard as to realization of a portion of its deferred tax assets and accordingly established a partial valuation allowance of $4,500,000 against such assets.  As of June 30, 2011, the valuation allowance remained unchanged.

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NOTE B – INVESTMENT SECURITIES

6 Months Ended

Jun. 30, 2011

Marketable Securities [Text Block]

NOTE B – INVESTMENT SECURITIES

At June 30, 2011 and December 31, 2010, the amortized cost of securities and their approximate fair value were as follows (in thousands):

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2011
Available-for-Sale:
Obligations of U.S. government agencies	$	15,062	$	243	$	—		$	15,305
Obligations of state and political subdivisions		14,430		623		(131	)		14,922
Government agency mortgage-backed securities		252,993		5,290		(189	)		258,094
Corporate debt securities		6,000		—		(1,083	)		4,917
Equity securities		3,000		55		—			3,055
	$	291,485	$	6,211	$	(1,403	)	$	296,293
Held-to-Maturity:
Government agency mortgage-backed securities	$	6	$	—	$	—		$	6
December 31, 2010
Available-for-Sale:
Obligations of U.S. government agencies	$	21,096	$	135	$	(10	)	$	21,221
Obligations of state and political subdivisions		14,342		435		(226	)		14,551
Government agency mortgage-backed securities		221,807		2,729		(1,967	)		222,569
Corporate debt securities		6,000		—		(1,697	)		4,303
Equity securities		3,000		—		—			3,000
	$	266,245	$	3,299	$	(3,900	)	$	265,644
Held-to-Maturity:
Government agency mortgage-backed securities	$	6	$	—	$	—		$	6

For the six months ended June 30, 2011 and 2010 there were no gross realized gains on sales or calls of available for sale securities.  For the six months ended June 30, 2011 there were $10,000 in gross realized losses on sales, impairment or calls of securities categorized as available for sale securities.  For the six months ended June 30, 2010 there were no gross realized losses on sales of securities categorized as available for sale securities. There were no sales or transfers of held to maturity securities for the six months ended June 30, 2011 and 2010.  For the six months ended June 30, 2011 and 2010 there were $24,245,000 and $17,911,000, respectively, in gross proceeds from maturities or calls of available for sale securities.  For the six months ended June 30, 2011 there were no gross proceeds from maturities or calls of held to maturity securities. For the six months ended June 30, 2010 there were $2,000 in gross proceeds from maturities or calls of held to maturity securities.

At June 30, 2011 and December 31, 2010, securities having fair value amounts of approximately $284,213,000 and $255,199,000, respectively, were pledged to secure public deposits, short-term borrowings, treasury, tax and loan balances and for other purposes required by law or contract.   Although the Company had no short-term borrowings at June 30, 2011 and December 31, 2010, the Company pledges most of its securities at the Federal Home Loan Bank (“FHLB”) to provide borrowing capacity.  See “Liquidity” on page 37.

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, the value of the security is reduced and a corresponding charge to earnings is recognized.

At June 30, 2011, the Company held $71,542,000 of available for sale investment securities in an unrealized loss position of which $65,659,000 were in an unrealized loss position for less than twelve months and $5,883,000 were in an unrealized loss position and had been in an unrealized loss position for twelve months or more.  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.

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NOTE H – EARNINGS (LOSS) PER SHARE

6 Months Ended

Jun. 30, 2011

Earnings Per Share [Text Block]

NOTE H – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average common shares outstanding for the period.  Diluted earnings (loss) per share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised and converted into common stock.  When a net loss occurs there is no effect on the calculation of diluted loss per share for common stock equivalents because the conversion is anti-dilutive.  Outstanding stock options for a total of 121,757 shares were excluded from the diluted earnings per share calculation for the six months ended June 30, 2011 because they were considered anti-dilutive.

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NOTE M - NEW ACCOUNTING PRONOUNCEMENTS

6 Months Ended

Jun. 30, 2011

New Accounting Pronouncement or Change in Accounting Principle, Description

NOTE M – NEW ACCOUNTING PRONOUNCEMENTS

Fair Value Measurements

In January 2010, the FASB issued FASB ASU 2010-06, Improving Disclosures about Fair Value Measurements, which amends and clarifies existing standards to require additional disclosures regarding fair value measurements.  Specifically, the standard requires disclosure of the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis.  This standard clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities—previously separate fair value disclosures were required for each major category of assets and liabilities.  This standard also clarifies the requirement to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements.  Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, these disclosures are effective for the year ended December 31, 2010.  The requirement to separately disclose purchases, sales, issuances, and settlements of recurring Level 3 measurements became effective for the Company for the year beginning on January 1, 2011.  The Company adopted this new accounting standard as of January 1, 2010 and the impact of adoption was not material to the financial statements.

Disclosures about Credit Quality

In July 2010, the FASB issued FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  ASU 2010-20 requires more robust and disaggregated disclosures about the credit quality of financing receivables (loans) and allowances for loan losses, including disclosure about credit quality indicators, past due information and modifications of finance receivables.  The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on and after December 15, 2010.  The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The adoption of this guidance has significantly expanded disclosure requirements related to accounting policies and disclosures related to the allowance for loan losses but did not have an impact on the Company’s financial position, results of operation or cash flows.

Troubled Debt Restructuring

On April 5, 2011 the FASB issued Accounting Standard Update No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (the “ASU”).  The ASU provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”).  The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings.  For purposes of measuring impairment of those receivables, an entity should apply the amendments retrospectively to the beginning of the annual period of adoption effective for interim or annual periods beginning on or after June 15, 2011.

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income.  This ASU improves comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income (OCI) as well as facilitate convergence with International Financial Reporting Standards.  The ASU requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total OCI, the components of OCI and total of comprehensive income.  For the Company, this standard is effective in 2012 with early adoption permitted.

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NOTE I - PENSION PLAN BENEFITS

6 Months Ended

Jun. 30, 2011

Pension and Other Postretirement Benefits Disclosure [Text Block]

NOTE I – 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 and $61,000 for the three months ended June 30, 2011 and 2010, respectively.  Effective October 1, 2009, the Company entered into an agreement to “freeze” the vested benefits under the North Valley Bancorp Salary Continuation Plan (amended and restated effective January 1, 2007) with each active officer currently participating in the Plan.  Each agreement provided that vested accrued benefits under the Plan would remain fixed at the amount determined as of September 30, 2009 until such time as the Board of Directors might elect to recommence accruals.  On July 28, 2011, the Board of Directors determined that Plan accruals should recommence, with retroactive effect to September 30, 2009.  As a result, the Company is expected to enter into agreements with the officers whose Plan benefits have been “frozen” since 2009, confirming the reinstatement of his or her accruals which are expected to be approximately $550,000 in aggregate for the remainder of 2011. Components of net periodic benefit cost for the Company’s supplemental nonqualified defined benefit plans for the three and six months ended June 30, 2011 and 2010 (excluding the service cost for the reinstatement of accruals approved by the Board of Directors on July 28, 2011) are presented in the following table (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Components of net periodic benefits cost:
Service cost	$	—	$	—	$	—	$	—
Interest cost		76		85		152		170
Prior service amortization		8		8		16		16
Recognized net actuarial loss		4		4		8		8
Total components of net periodic cost	$	88	$	97	$	176	$	194

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NOTE G – OTHER REAL ESTATE OWNED

6 Months Ended

Jun. 30, 2011

Real Estate Owned [Text Block]

NOTE G – OTHER REAL ESTATE OWNED

The Company had $23,865,000 and $25,784,000 in other real estate owned (“OREO”) at June 30, 2011 and December 31, 2010, respectively.  Below is a table with details of the changes in OREO (in thousands):

Balance, December 31, 2010	$	25,784
Properties transferred in		3,840
Sales of property		(4,513	)
Loss on sale or writedown of property		(1,246	)
Balance at June 30, 2011	$	23,865

The following table presents the components of OREO expense for the periods ended June 30, 2011 and 2010 (in thousands):

	Three months ended June 30,					Six months ended June 30,
	2011			2010		2011			2010
Operating expenses	$	297		$	195	$	383		$	273
Provision for losses		920			1,023		1,431			1,539
Net, (gain)/loss on disposal		(40	)		35		(185	)		291
Total other real estate owned expense	$	1,177		$	1,253	$	1,629		$	2,103

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 918	$ (884)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	626	827
Amortization of premium on securities, net	807	410
Amortization of core deposit intangible	72	73
Provision for loan losses	2,250	3,600
Net losses on sale and write-down of other real estate owned	1,246	1,830
Gain on sale of loans	(775)	(82)
Loss on sales of securities	10
Loss on sale of premises and equipment	4	147
Stock-based compensation expense	60	94
Effect of changes in:
Accrued interest receivable	89	30
Other assets	(485)	(1,539)
Accrued interest payable and other liabilities	1,863	1,452
Net cash provided by operating activities	6,685	5,958
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities	(50,302)	(64,738)
Proceeds from sales/maturities/calls of available-for-sale securities	24,245	17,911
Proceeds from maturities/calls of held-to-maturity securities		2
Purchases of FHLB and FRB stock and other securities	(903)	(301)
Net decrease in loans	25,750	28,467
Proceeds from sales of other real estate owned	4,513	2,560
Purchases of premises and equipment	(192)	(171)
Net cash provided by (used in) investing activities	3,111	(16,270)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	4,084	(13,949)
Proceeds from issuance of preferred stock, net of costs		37,500
Net cash provided by financing activities	4,084	23,551
NET INCREASE IN CASH AND CASH EQUIVALENTS	13,880	13,239
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	23,634	67,628
CASH AND CASH EQUIVALENTS, END OF PERIOD	37,514	80,867
Cash paid during the year for:
Interest	2,078	4,044
Income taxes (refunded) paid	0	0
Noncash investing and financing activities:
Net change in unrealized gain on available-for-sale investment securities	3,191	2,206
Transfer from loans to other real estate owned	$ 3,840	$ 8,439

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NOTE C – STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE C – STOCK-BASED COMPENSATION

Stock Option Plans

At June 30, 2011, the Company had two shareholder approved stock-based compensation plans: the 1998 Employee Stock Incentive Plan and the 2008 Stock Incentive Plan.  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.  Pursuant to the 1998 Employee Stock Incentive Plan there were outstanding options to purchase 71,810 shares of Common Stock at June 30, 2011. As provided in the 1998 Employee Stock Incentive Plan, the authorization to award incentive stock options terminated on February 19, 2008.  As of June 30, 2011, there were options outstanding under the 2008 Stock Incentive Plan for the purchase of 49,947 shares of Common Stock.  A total of 226,668 shares of Common Stock were available for the grant of additional options and director stock awards under the 2008 Stock Incentive Plan at June 30, 2011.

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.  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. At June 30, 2011, a total of 276,615 shares of Common Stock were reserved for issuance under the terms of the 2008 Stock Incentive Plan, consisting of 49,947 shares to be issued upon the exercise of options granted and still outstanding as of that date and 226,668 shares reserved for future stock option grants and director stock awards.  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.  Each stock award shall be fully vested when granted to the outside director.  The Board of Directors elected to forego their stock awards under the 2008 Stock Incentive Plan for years 2009 and 2010.  On July 28, 2011, the Board of Directors approved the 180 share stock award to each of the seven outside directors (total 1,256 shares) for the year 2011.  The Company expects to recognize director stock grant expense in the amount of $13,000 for the quarter ending September 30, 2011, relative to these 1,256 shares awarded to the seven outside directors.   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 Option Compensation

There were no options granted in the three month period ended June 30, 2011 and 2010, respectively. For the three month periods ended June 30, 2011 and 2010, the compensation cost recognized for share based compensation was $29,000 and $46,000, respectively.  For the six month periods ended June 30, 2011 and 2010, the compensation cost recognized for share based compensation was $60,000 and $94,000, respectively. At June 30, 2011, the total unrecognized compensation cost related to stock-based awards granted to employees under the Company’s stock option plans was $136,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.0 years and will be adjusted for subsequent changes in estimated forfeitures.

Stock-Based Compensation

Under the Company’s 2008 Stock Incentive Plan as of June 30, 2011, 226,668 shares of the Company’s common stock are available for future grants to directors and employees of the Company. 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.   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, 2011		152,095	$	51.02	5 years	$15.75-$123.75	$	—
Granted		1,000	$	8.99		$8.99
Exercised		—		—		—
Expired or Forfeited		31,338	$	40.19		$15.75-$123.75
Outstanding at June 30, 2011		121,757	$	53.46	6 years	$8.99-$103.10	$	1
Fully vested and exercisable at June 30, 2011		87,405	$	63.01	5 years	$17.85-$103.10
Options expected to vest		34,352	$	29.18	7 years	$8.99-$65.05	$	1

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 June 30, 2011.  There were no options exercised during the three months ended June 30, 2011 and 2010.

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NOTE D – COMPREHENSIVE INCOME

6 Months Ended

Jun. 30, 2011

Comprehensive Income (Loss) Note [Text Block]

NOTE D – COMPREHENSIVE INCOME

Comprehensive income includes net income (loss) and other comprehensive income.  The Company’s only sources of other comprehensive income are unrealized gains on available for sale investment securities and adjustments to the minimum pension liability.  The Company’s total comprehensive income was as follows (in thousands):

	Three months ended June 30,					Six months ended June 30,
	2011		2010			2011		2010
Net income (loss)	$	519	$	(572	)	$	918	$	(884	)
Other comprehensive gain, net of tax:
Holding gain arising during period		2,840		1,561			3,191		2,206
Total comprehensive income	$	3,359	$	989		$	4,109	$	1,322

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NOTE L – FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2011

Fair Value Disclosures [Text Block]

NOTE L – 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.

Assets Recorded at Fair Value on a Recurring Basis

The table below presents assets measured at fair value on a recurring basis (in thousands).

	At June 30, 2011
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government agencies	$	15,305	$	—	$	15,305	$	—
Obligations of state and political subdivisions		14,922		—		14,922		—
Government agency mortgage-backed securities		258,094		—		258,094		—
Corporate debt securities		4,917		—		4,917		—
Equity securities		3,055		—		3,055		—
	$	296,293	$	—	$	296,293	$	—

	At December 31, 2010
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government agencies	$	21,221	$	—	$	21,221	$	—
Obligations of state and political subdivisions		14,551		—		14,551		—
Government agency mortgage-backed securities		222,569		—		222,569		—
Corporate debt securities		4,303		—		4,303		—
Equity securities		3,000		—		3,000		—
	$	265,644	$	—	$	265,644	$	—

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or writedowns of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at quarter end (in thousands).

	At June 30, 2011
	Fair Value		Level 1		Level 2		Level 3
Impaired loans
Commercial	$	1,438	$	—	$	1,438	$	—
Real estate - commercial		5,706		—		5,706		—
Real estate - construction		874		—		589		285
Real estate - mortgage		654		—		654		—
Installment		14		—		14		—
Other		—		—		—		—
Other real estate owned		17,494		5,083		8,036		4,375
Total assets measured at fair value on a nonrecurring basis	$	26,180	$	5,083	$	16,437	$	4,660

	At December 31, 2010
	Fair Value		Level 1		Level 2		Level 3
Impaired loans
Commercial	$	1,097	$	—	$	1,097	$	—
Real estate - commercial		3,527		—		3,527		—
Real estate - construction		4,114		—		3,829		285
Real estate - mortgage		1,507		—		1,507		—
Installment		16		—		16		—
Other		—		—		—		—
Other real estate owned		25,784		—		25,784		—
Total assets measured at fair value on a nonrecurring basis	$	36,045	$	—	$	35,760	$	285

Impaired Loans - The value of the impaired loan is periodically assessed by performing a property valuation, which could include a full or limited appraisal, or another alternative valuation method.

Other Real Estate Owned – Other real estate owned includes the fair value of foreclosed real estate and other collateral that were measured at fair value subsequent to their initial classification as foreclosed assets.  At the time of foreclosure, other real estate owned is recorded at the fair value of the real estate less costs to sell, which becomes the property’s new basis. Subsequent declines in fair value are written off as incurred through a valuation allowance.  The value of the OREO properties is periodically assessed by performing a property valuation, which could include a full or limited appraisal, or another alternative valuation method.

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 June 30, 2011 and December 31, 2010 to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

a)	Cash and Due From Banks - The carrying amount represents a reasonable estimate of fair value.
b)	Federal Funds Sold - The carrying amount represents a reasonable estimate of fair value.
c)	Time Deposits at Other Financial Institutions - The carrying amount represents a reasonable estimate of fair value due to the short-term nature of such deposits.
d)	FHLB, FRB Stock and Other Securities - The carrying amount represents a reasonable estimate of fair value.
e)	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.

f)	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 value of performing loans is estimated by discounting contractual cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Assumptions regarding credit risk, cash flow, and discount rates are determined using available market information.
	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.
g)	Bank-owned Life Insurance - The carrying amount and estimated fair values are based on current cash surrender values at each reporting date provided by the insurers.
h)	Mortgage Servicing Assets – The fair value of mortgage servicing assets is estimated using projected cash flows adjusted for the effects of anticipated prepayments, using a market discount rate.
i)	Deposits – Noninterest-bearing and interest-bearing demand deposits and savings accounts are payable on demand and their carrying values are assumed to be at fair value. The fair value of the core deposit intangible has not been included as a component of the fair value estimate. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on rates currently offered for deposits of similar size and remaining maturities.
j)	Subordinated Debentures - The fair value of the subordinated debentures is estimated by discounting the contractual cash flows using the current interest rate at which similar securities with the same remaining expected life could be made.
k)	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.
l)	Accrued Interest Receivable/Payable – The carrying amount of accrued interest receivable and accrued interest payable represents a reasonable estimate of fair value.

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

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
FINANCIAL ASSETS
Cash and due from banks	$	18,159	$	18,159	$	14,629	$	14,629
Federal funds sold		19,355		19,355		9,005		9,005
Time deposits at other financial institutions		459		459		459		459
FHLB, FRB and other securities		8,044		8,044		7,141		7,141
Securities:
Available-for-sale		296,293		296,293		265,644		265,644
Held-to-maturity		6		6		6		6
Loans		467,408		483,212		498,473		514,284
Bank owned life insurance		34,422		34,422		33,871		33,871
Mortgage and SBA servicing assets		848		848		708		694
Accrued interest receivable		2,624		2,624		2,713		2,713
FINANCIAL LIABILITIES
Deposits	$	757,874	$	759,450	$	753,790	$	755,514
Subordinated debentures		31,961		17,933		31,961		18,178
Accrued interest payable		4,038		4,038		3,052		3,052

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NOTE E – LOANS

6 Months Ended

Jun. 30, 2011

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE E – LOANS

The Company originates loans for business, consumer and real estate activities and for equipment purchases. Such loans are concentrated in the Company’s market areas which consist of Yolo, Placer, Sonoma, Shasta, Humboldt, Mendocino, Trinity and Del Norte Counties and neighboring communities.  Loans decreased $31,402,000 during the first six months of 2011 to $482,640,000 at June 30, 2011 from $514,042,000 at December 31, 2010.  At June 30, 2011 compared to December 31, 2010, real estate construction loans decreased by $18,581,000 as the Company continues to reduce its exposure in this loan type.  The Company is focused on the origination of owner-occupied commercial real estate lending and commercial loans, although they decreased by $3,821,000 and $4,528,000, respectively, as loan demand for these products remained soft during the first six months of 2011.   Major classifications of loans were as follows (in thousands):

	June 30,			December 31,
	2011			2010
Commercial	$	50,111		$	54,639
Real estate - commercial		287,693			291,514
Real estate - construction		36,600			55,181
Real estate - mortgage		48,325			49,726
Installment		12,001			14,690
Other		47,910			48,292
		482,640			514,042
Deferred loan fees, net		(486	)		(576	)
Allowance for loan losses		(14,746	)		(14,993	)
	$	467,408		$	498,473

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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (USD $) In Thousands, except Per Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
INTEREST INCOME:
Interest and fees on loans	$ 7,394	$ 8,463	$ 14,844	$ 17,079
Interest on investments:
Taxable interest income	2,057	1,142	3,851	2,191
Nontaxable interest income	152	177	318	355
Interest on federal funds sold and repurchase agreements	7	55	15	87
Total interest income	9,610	9,837	19,028	19,712
INTEREST EXPENSE:
Deposits	1,012	1,929	2,094	3,948
Subordinated debentures	439	522	969	1,036
Other borrowings	1		1
Total interest expense	1,452	2,451	3,064	4,984
NET INTEREST INCOME	8,158	7,386	15,964	14,728
PROVISION FOR LOAN LOSSES	1,250	2,600	2,250	3,600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	6,908	4,786	13,714	11,128
NONINTEREST INCOME:
Service charges on deposit accounts	1,172	1,546	2,338	3,027
Other fees and charges	1,158	1,158	2,279	2,189
Earnings on cash surrender value of life insurance policies	351	373	681	719
Gain on sale of loans, net	519	33	775	82
Loss on sales of securities, net			(10)
Loss on sale of premises and equipment	(3)	(22)	(4)	(147)
Other	286	289	577	519
Total noninterest income	3,483	3,377	6,636	6,389
NONINTEREST EXPENSES:
Salaries and employee benefits	4,475	4,138	9,192	8,425
Occupancy expense	700	695	1,392	1,429
Furniture and equipment expense	294	352	590	775
FDIC and state assessments	303	696	746	1,402
Other real estate owned expense	1,177	1,253	1,629	2,103
Other	2,786	2,738	5,657	5,757
Total noninterest expenses	9,735	9,872	19,206	19,891
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES	656	(1,709)	1,144	(2,374)
PROVISION (BENEFIT) FOR INCOME TAXES	137	(1,137)	226	(1,490)
NET INCOME (LOSS)	$ 519	$ (572)	$ 918	$ (884)
Basic and Diluted Earnings (Loss) Per Share (in Dollars per share)	$ 0.08	$ (0.38)	$ 0.13	$ (0.59)

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NOTE A - BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

NOTE A - 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, 2010. Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ended December 31, 2011.

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 four business trusts that have issued trust preferred securities fully and unconditionally guaranteed by the Company.  North Valley Capital Trust I, 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 $31,961,000 in trust preferred securities.

On November 9, 2009, the Company elected to defer the payment of interest on the Company’s  Junior Subordinated Deferrable Interest Debentures Due 2031 (the “2031 Debentures”) issued to North Valley Capital Trust I in 2001; the Company’s Floating Rate Junior Subordinated Debt Securities Due 2033 (the “2033 Debentures”) issued to North Valley Capital Trust II in 2003; the Company’s Floating Rate Junior Subordinated Debt Securities Due 2034 (the “2034 Debentures”) issued to North Valley Capital Trust III in 2004; and the Company’s Junior Subordinated Debt Securities Due 2036 (the “2036 Debentures”) issued to North Valley Capital Statutory Trust IV in 2005.  The 2031, 2033, 2034 and 2036 Debentures are administered under the terms and conditions of four separate Indentures and the Company gave notice of deferral to each Indenture Trustee on November 12, 2009.   

The Indentures provide generally that the payment of interest is deferrable, at the option of the Company, for up to 20 consecutive quarters (or 10 consecutive semi-annual periods).  Nonpayment of interest for more than 20 consecutive quarters (or 10 semi-annual periods) is an event of default pursuant to which the payment of principal and interest may be accelerated by the Indenture Trustee.  As of June 30, 2011, the Company had deferred the payment of interest for a total of seven consecutive quarters.

This deferral of interest was the first time that the Company has deferred payment of interest on the Debentures.  The obligation to pay interest on the Debentures is cumulative and will continue to accrue, currently at a fixed rate of 10.25% on the 2031 Debentures, variable rate of 3.52% on the 2033 Debentures, variable rate of 3.07% on the 2034 Debentures and a variable rate of 1.58%, 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.  As of June 30, 2011, the amount of accrued interest payable on the Debentures was $3,903,000.  Subject to regulatory approval, the Company may redeem the debentures earlier than their maturity dates, with certain of the debentures being redeemable beginning July 2006 and others being redeemable beginning in April 2008, July 2009 and March 2011.

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.

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NOTE J – COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies Disclosure [Text Block]

NOTE J – 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, results of its operations or its cash flows.

The Company was contingently liable under letters of credit issued on behalf of its customers in the amount of $8,230,000 and $8,741,000 at June 30, 2011 and December 31, 2010, respectively.  At June 30, 2011, commercial and consumer lines of credit and real estate loans of approximately $46,969,000 and $40,847,000, respectively, were undisbursed.  At December 31, 2010, commercial and consumer lines of credit and real estate loans of approximately $47,650,000 and $44,169,000, respectively, were undisbursed.

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 real estate projects and 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. Most 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 June 30, 2011 and December 31, 2010. 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 June 30, 2011, the Company had a reserve for unfunded commitments of $241,000.

A large portion of the loan portfolio of the Company is collateralized by real estate.  At June 30, 2011 and December 31, 2010, real estate served as the principal source of collateral with respect to approximately 77% of the Company’s loan portfolio.  At June 30, 2011, real estate construction loans totaled $36,600,000, or 8% of the total loan portfolio, commercial loans secured by real estate totaled $287,693,000, or 60% of the total loan portfolio, and real estate mortgage loans totaled $48,325,000, or 10% of the total loan portfolio.  See the discussion under “Loan Portfolio” starting on page 30.  A further decline in the state and national economy, in general, combined with further deterioration in real estate values in the Company’s primary operating market areas, would have an adverse effect on the value of real estate as well as other collateral securing loans, plus the ability of certain borrowers to repay their outstanding loans and the overall demand for new loans, and this could have a material impact on the Company’s financial position, results of operations or its cash flows.

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
Cash and cash equivalents:
Cash and due from banks	$ 18,159	$ 14,629
Federal funds sold	19,355	9,005
Total cash and cash equivalents	37,514	23,634
Time deposits at other financial institutions	459	459
Investment securities available-for-sale, at fair value	296,293	265,644
Investment securities held-to-maturity, at amortized cost	6	6
Loans	482,154	513,466
Less: Allowance for loan losses	(14,746)	(14,993)
Net loans	467,408	498,473
Premises and equipment, net	8,361	8,799
Accrued interest receivable	2,624	2,713
Other real estate owned	23,865	25,784
FHLB and FRB stock and other nonmarketable securities	8,044	7,141
Bank-owned life insurance policies	34,422	33,871
Core deposit intangibles, net	474	546
Other assets	15,587	17,871
TOTAL ASSETS	895,057	884,941
Deposits:
Noninterest-bearing	157,924	155,499
Interest-bearing	599,950	598,291
Total deposits	757,874	753,790
Accrued interest payable and other liabilities	17,075	15,212
Subordinated debentures	31,961	31,961
TOTAL LIABILITIES	806,910	800,963
Commitments and contingencies (Note J)
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; no shares outstanding at June 30, 2011 and December 31, 2010	0	0
Common stock, no par value: authorized 60,000,000 shares; outstanding 6,832,492 at June 30, 2011 and December 31, 2010, respectively	98,188	98,128
Accumulated deficit	(12,419)	(13,337)
Accumulated other comprehensive income (loss), net of tax	2,378	(813)
Total stockholders’ equity	88,147	83,978
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$ 895,057	$ 884,941