NOTE 7 - INCOME TAXES

9 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Text Block]

NOTE 7 – INCOME TAXES (Restated)

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

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

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

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

During the quarter ended September 30, 2012, the Company recorded a $2,546,000 (Restated) income tax benefit, which was the net result of reversing the state deferred tax asset valuation allowance of $4,277,000 less a $1,347,000 increase in federal deferred tax liabilities against the three and nine month ended September 30, 2012 current period tax expense. The deferred tax asset valuation allowance was established in 2010 due to the Company’s prior net operating losses, its inability to meet its financial projections and because of elevated levels of credit losses. To determine if the benefit of its net deferred tax asset will more likely than not be realized, the Company’s management analyzed both positive and negative evidence that may affect the realization of the deferred tax asset. Management of the Company determined that it was more likely than not that all of its net deferred tax asset would be realized based on:

• The quarter ended September 30, 2012 marked the Company’s eighth consecutive quarter of positive earnings

• Continued profitability is expected for the foreseeable future

• At September 2012 classified loans as a percent of total loans were 5.8% as compared to 13.3% as of December 2010

• At September 2012 nonaccrual loans as a percent of total loans were 2.4% as compared to 3.6% as of December 2010

• Other real estate owned totaled $21,689,000 at September 2012 compared to $25,784,000 at December 2010

• Effective April 2012 the supervisory agreement by and among North Valley Bancorp, North Valley Bank, and the Federal Reserve Bank of San Francisco was terminated

• Implementation of various cost savings measures including reductions in the number of personnel and regulatory approval to consolidate two of its branches during the current quarter; one located in Redding, California and the other in Ukiah, California

• Approval by the Federal Reserve Bank of San Francisco and the California Department of Financial Institutions allowing North Valley Bank upstream $16.5 million to the Company to pay all deferred interest on its subordinated debentures and to fully redeem its North Valley Capital Trust I subordinated notes in the amount of $10.3 million

• Redemption of the Company’s North Valley Capital Trust I on July 25, 2012

• The length of the carryforward period in which the Company has to utilize its net operating losses and tax credits

• The reduction of nonperforming assets and classified assets significantly reduces the risk associated with future financial projections.

As of September 30, 2012, the net deferred tax asset was $11,973,000 (Restated). This is compared to a net deferred tax asset of $10,721,000, which included a valuation allowance of $4,277,000, as of December 31, 2011.