North Valley Bancorp (NOVB) 10-Q/A 2012 Q3 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

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

For the period ended September 30, 2012.

£ 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 number0-10652

NORTH VALLEY BANCORP

(Exact name of registrant as specified in its charter)

California	94-2751350
(State or other jurisdiction	(IRS Employer ID Number)
of incorporation or organization)
300 Park Marina Circle, Redding, CA	96001
(Address of principal executive offices)	(Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YesS  No£

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).  YesS  No£

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£	Accelerated filer£
Non-accelerated filerS	Smaller reporting company£

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

Yes£  NoS

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

Common Stock – 6,835,192 shares as of November 8, 2012.

INDEX

NORTH VALLEY BANCORP AND SUBSIDIARIES

PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets—September 30, 2012 (Restated) and December 31, 2011	5
	Condensed Consolidated Statement of Income and Comprehensive Income—For the three and nine months ended September 30, 2012 (Restated) and 2011	6-7
	Condensed Consolidated Statements of Cash Flows—For the nine months ended September 30, 2012 (Restated) and 2011	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48
Item 4.	Controls and Procedures	48
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49
SIGNATURES		50

2

EXPLANATORY NOTE

This Amendment No. 1 hereby amends our Quarterly Report on Form 10-Q (“Form 10-Q/A”) as of and for the three and nine months ended September 30, 2012  which was originally filed with the Securities and Exchange Commission on November 13, 2012 (the “Original Form 10-Q”).   The consolidated financial statements are being restated to correct an accounting error as follows:

1. Management of theCompany concludedthat there was an error in the calculation of theCompany's tax benefits recorded in the quarter ended September 30, 2012. Specifically, the tax benefits recognized in the third quarter ended September 30, 2012, resulting from the reversal of a state deferred tax asset valuation allowance of $4,277,000, did not include an offset of $1,347,000 for the increase in federal deferred tax liabilities associated with the reversal.

The table below outlines the changes to the balance sheet for the period noted:

Balance Sheet (in thousands)	September 30, 2012
	(As previously reported)			(Restated)
ASSETS
Other Assets		17,323			15,826
TOTAL ASSETS	$	894,551		$	893,054
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities		15,510			15,360
Total liabilities		795,637			795,487
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; no shares outstanding at September 30, 2012 and December 31, 2011		—			—
Common stock, no par value: authorized 60,000,000 shares; outstanding 6,835,192 and 6,833,752 at September 30, 2012 and December 31, 2011, respectively		98,443			98,443
Accumulated deficit		(3,198	)		(4,545	)
Accumulated other comprehensive income, net of tax		3,669			3,669
Total stockholders’ equity		98,914			97,567
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	894,551		$	893,054

3

The table below outlines the changes to the income statement and earnings per share for the periods noted:

Income Statement	Three months ended September 30, 2012						Nine months ended September 30, 2012
(In thousands except per share data)	(As previously reported)			(Restated)			(As previously reported)			(Restated)
Income before benefit for income taxes	$	1,458		$	1,458		$	3,841		$	3,841
Benefit for income taxes		(3,893	)		(2,546	)		(3,251	)		(1,904	)
Net income		5,351			4,004			7,092			5,745
Total other comprehensive income, net of tax		477			477			2,199			2,199
Comprehensive income	$	5,828		$	4,481		$	9,291		$	7,944
Calculation of basic earnings per share:
Numerator - net income	$	5,351		$	4,004		$	7,092		$	5,745
Denominator -
Weighted average common shares outstanding		6,835			6,835			6,834			6,834
Basic earnings per share	$	0.78		$	0.59		$	1.04		$	0.84
Calculation of diluted earnings per share:
Numerator - net income	$	5,351		$	4,004		$	7,092		$	5,745
Denominator -
Weighted average common shares outstanding		6,835			6,835			6,834			6,834
Dilutive effect of outstanding options		1			1			1			1
Weighted average common shares outstanding and common stock equivalents		6,836			6,836			6,835			6,835
Diluted earnings per share	$	0.78		$	0.59		$	1.04		$	0.84

The following sections of this Form 10-Q/A have been amended to reflect the restatement:

Part I - Item I – Financial Statements

Part I - Item – 2 – Management’s Discussion and Analysis of Financial Condition and Result of Operations

Part I - Item – 4 – Controls and Procedures

For the convenience of the reader, this Form 10-Q/A sets forth the Company’s Original Form 10-Q in its entirety, as amended by, and to reflect the restatement, as described above.  Except as discussed above, the Company has not modified or updated disclosures presented in this Amendment.  Accordingly, this Amendment does not reflect events occurring after the Original Form 10-Q or modify or update those disclosures affected by subsequent events, except as specifically referenced herein. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the Original Filing.

This Form 10-Q/A has been signed as of a current date and all certifications of the Company’s Chief Executive Officer/Principal Executive Officer and Chief Financial Officer/Principal Financial Officer are given as of a current date as applicable at September 30, 2012.  Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings with the Securities and Exchange Commission subsequent to the filing of the Original Form 10-Q, including any amendments to those filings.

4

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except share data) (Unaudited)

	September 30,			December 31,
	2012			2011
	(Restated)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	19,436		$	18,758
Federal funds sold		405			40,210
Total cash and cash equivalents		19,841			58,968
Time deposits at other financial institutions		2,210			1,959
Investment securities available-for-sale, at fair value		299,025			312,205
Investment securities held-to-maturity, at amortized cost		6			6
Loans		489,900			456,215
Less: Allowance for loan losses		(11,427	)		(12,656	)
Net loans		478,473			443,559
Premises and equipment, net		9,303			8,661
Accrued interest receivable		2,296			2,557
Other real estate owned		21,689			20,106
FHLB and FRB stock and other nonmarketable securities		8,313			8,044
Bank-owned life insurance policies		35,780			34,972
Core deposit intangibles, net		292			401
Other assets		15,826			13,528
TOTAL ASSETS	$	893,054		$	904,966
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	166,968		$	167,506
Interest-bearing		591,508			598,733
Total deposits		758,476			766,239
Accrued interest payable and other liabilities		15,360			17,301
Subordinated debentures		21,651			31,961
Total liabilities		795,487			815,501
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; no shares outstanding at September 30, 2012 and December 31, 2011		—			—
Common stock, no par value: authorized 60,000,000 shares; outstanding 6,835,192 and 6,833,752 at September 30, 2012 and December 31, 2011, respectively		98,443			98,285
Accumulated deficit		(4,545	)		(10,290	)
Accumulated other comprehensive income, net of tax		3,669			1,470
Total stockholders’ equity		97,567			89,465
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	893,054		$	904,966

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

5

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

(In thousands except per share data) (Unaudited)

	For the three months ended September 30,
	2012			2011
	(Restated)
Interest income
Loans, including fees	$	6,663		$	7,134
Taxable securities		1,622			1,926
Tax exempt securities		131			156
Federal funds sold and repurchase agreements		10			22
Total interest income		8,426			9,238
Interest expense
Deposits		462			940
Subordinated debentures		243			451
Other borrowings		8			—
Total interest expense		713			1,391
Net interest income		7,713			7,847
Provision for loan losses		700			400
Net interest income after provision for loan losses		7,013			7,447
Noninterest income
Service charges on deposit accounts		1,086			1,205
Other fees and charges		1,102			1,204
Earnings on cash surrender value of life insurance policies		340			394
Gain on sale of loans, net		769			182
Gain on sales or calls of securities, net		697			859
Other		210			168
Total noninterest income		4,204			4,012
Noninterest expense
Salaries and employee benefits		5,005			4,702
Occupancy expense		651			732
Furniture and equipment expense		237			229
FDIC and state assessments		212			294
Other real estate owned expense		817			877
Other		2,837			2,763
Total noninterest expenses		9,759			9,597
Income before (benefit from) provision for income taxes		1,458			1,862
(Benefit from) provision for income taxes		(2,546	)		542
Net income	$	4,004		$	1,320
Total other comprehensive income, net of tax		477			1,238
Comprehensive income	$	4,481		$	2,558
Per share amounts
Basic and diluted income per share	$	0.59		$	0.19

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

6

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

(In thousands except per share data) (Unaudited)

	For the nine months ended September 30,
	2012			2011
	(Restated)
Interest income
Loans, including fees	$	19,457		$	21,978
Taxable securities		5,532			5,777
Tax exempt securities		411			474
Federal funds sold and repurchase agreements		55			37
Total interest income		25,455			28,266
Interest expense
Deposits		1,800			3,034
Subordinated debentures		1,213			1,420
Other borrowings		8			1
Total interest expense		3,021			4,455
Net interest income		22,434			23,811
Provision for loan losses		2,100			2,650
Net interest income after provision for loan losses		20,334			21,161
Noninterest income
Service charges on deposit accounts		3,274			3,543
Other fees and charges		3,620			3,483
Earnings on cash surrender value of life insurance policies		1,023			1,075
Gain on sale of loans, net		1,858			957
Gain on sales or calls of securities, net		1,656			849
Other		719			741
Total noninterest income		12,150			10,648
Noninterest expense
Salaries and employee benefits		15,113			13,894
Occupancy expense		1,911			2,124
Furniture and equipment expense		709			819
FDIC and state assessments		701			1,040
Other real estate owned expense		1,793			2,506
Other		8,416			8,420
Total noninterest expenses		28,643			28,803
Income before (benefit from) provision for income taxes		3,841			3,006
(Benefit from) provision for income taxes		(1,904	)		768
Net income	$	5,745		$	2,238
Total other comprehensive income, net of tax		2,199			4,429
Comprehensive income	$	7,944		$	6,667
Per share amounts
Basic and diluted income per share	$	0.84		$	0.33

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

7

NORTH VALLEY BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands except per share data) (Unaudited)

	For the nine months ended September 30,
	2012			2011
	(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,745		$	2,238
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		808			918
Amortization of  premium on securities, net		1,616			1,171
Amortization of core deposit intangible		109			109
Provision for loan losses		2,100			2,650
Net losses on sale and write-down of other real estate owned		1,487			2,002
Gain on sale of loans		(1,858	)		(957	)
Gain on sales or calls of securities		(1,656	)		(849	)
Loss on sale of premises and equipment		1			153
Stock-based compensation expense		158			105
Effect of changes in:
Accrued interest receivable		261			264
Other assets		(4,634	)		(1,019	)
Accrued interest payable and other liabilities		(1,838	)		3,958
Net cash provided by operating activities		2,299			10,743
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of time deposits at other financial institutions		(251	)		—
Purchases of available for sale securities		(142,049	)		(60,540	)
Proceeds from sales/calls of available for sale securities		110,579			31,518
Proceeds from maturities of available-for-sale securities		48,314			28,970
Purchases of FHLB and FRB stock and other securities		(269	)		(903	)
Purchases of jumbo residential mortgages		(33,325	)		—
Net (increase) decrease in loans		(9,315	)		30,802
Proceeds from sales of other real estate owned		4,414			10,785
Purchases of premises and equipment		(1,451	)		(430	)
Net cash (used in) provided by investing activities		(23,353	)		40,202
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(7,763	)		15,618
Repayment of suborinated debentures		(10,310	)		—
Net cash  (used in) provided by financing activities		(18,073	)		15,618
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(39,127	)		66,563
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		58,968			23,634
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	19,841		$	90,197
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest	$	7,874		$	3,032
Income taxes paid	$	122		$	46
Noncash investing and financing activities:
Transfer from loans to other real estate owned	$	7,484		$	7,891

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

8

NORTH VALLEY BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

General

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, 2011. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ended December 31, 2012.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries North Valley Bank, a California banking corporation (“NVB”) and North Valley Trading Company, a California corporation, which is inactive. Significant intercompany items and transactions have been eliminated in consolidation. The Company owns the common stock of three business trusts that have issued trust preferred securities fully and unconditionally guaranteed by the Company. North Valley Capital Trust II, North Valley Capital Trust III and North Valley Capital Statutory Trust IV are unconsolidated subsidiaries and have issued an aggregate of $21,651,000 in trust preferred securities, which are reflected as debt on the Company’s condensed consolidated balance sheets. On July 25, 2012, the Company redeemed, in full, the notes associated with North Valley Capital Trust I in the amount of $10,310,000. 

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.

Restatement

Management of theCompanyconcluded that there was an error in the calculation of theCompany's tax benefits recorded in the quarter ended September 30, 2012. Specifically, the tax benefits recognized in the third quarter ended September 30, 2012, resulting from the reversal of a state deferred tax asset valuation allowance of $4,277,000, did not include an offset of $1,347,000 for the increase in federal deferred tax liabilities associated with the reversal. As a result of this error, other assets and total assets decreased, other liabilities and total liabilities decreased, equity decreased, and the benefit from income taxes (Note 7), net income, total comprehensive income and earnings per share (Note 10) decreased. The financial statements and related footnotes that follow have been updated and figures that were impacted by the amendments to this Form 10-Q have been identified with “Restated.”

9

The table below outlines the changes to the balance sheet for the period noted:

Balance Sheet (in thousands)	September 30, 2012
	(As previously reported)			(Restated)
ASSETS
Other Assets		17,323			15,826
TOTAL ASSETS	$	894,551		$	893,054
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities		15,510			15,360
Total liabilities		795,637			795,487
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; no shares outstanding at September 30, 2012 and December 31, 2011		—			—
Common stock, no par value: authorized 60,000,000 shares; outstanding 6,835,192 and 6,833,752 at September 30, 2012 and December 31, 2011,  respectively		98,443			98,443
Accumulated deficit		(3,198	)		(4,545	)
Accumulated other comprehensive income, net of tax		3,669			3,669
Total stockholders’ equity		98,914			97,567
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	894,551		$	893,054

The table below outlines the changes to the income statement and earnings per share for the periods noted:

Income Statement	Three months ended September 30, 2012						Nine months ended September 30, 2012
(In thousands except per share data)	(As previously reported)			(Restated)			(As previously reported)			(Restated)
Income before benefit for income taxes	$	1,458		$	1,458		$	3,841		$	3,841
Benefit for income taxes		(3,893	)		(2,546	)		(3,251	)		(1,904	)
Net income		5,351			4,004			7,092			5,745
Total other comprehensive income, net of tax		477			477			2,199			2,199
Comprehensive income	$	5,828		$	4,481		$	9,291		$	7,944
Calculation of basic earnings per share:
Numerator - net income	$	5,351		$	4,004		$	7,092		$	5,745
Denominator -
Weighted average common shares outstanding		6,835			6,835			6,834			6,834
Basic earnings per share	$	0.78		$	0.59		$	1.04		$	0.84
Calculation of diluted earnings per share:
Numerator - net income	$	5,351		$	4,004		$	7,092		$	5,745
Denominator -
Weighted average common shares outstanding		6,835			6,835			6,834			6,834
Dilutive effect of outstanding options		1			1			1			1
Weighted average common shares outstanding and common stock equivalents		6,836			6,836			6,835			6,835
Diluted earnings per share	$	0.78		$	0.59		$	1.04		$	0.84

10

NOTE 2 – INVESTMENT SECURITIES

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
September 30, 2012
Available-for-Sale:
Obligations of U.S. government sponsored agencies	$	15,011	$	81	$	—		$	15,092
Obligations of state and political subdivisions		10,884		612		—			11,496
Government sponsored agency mortgage-backed securities		256,491		8,356		—			264,847
Corporate debt securities		6,000		—		(1,560	)		4,440
Equity securities		3,000		150		—			3,150
	$	291,386	$	9,199	$	(1,560	)	$	299,025
Held-to-Maturity:
Government sponsored agency mortgage-backed securities	$	6	$	—	$	—		$	6
December 31, 2011
Available-for-Sale:
Obligations of U.S. government sponsored agencies	$	15,042	$	192	$	—		$	15,234
Obligations of state and political subdivisions		13,811		696		(52	)		14,455
Government sponsored agency mortgage-backed securities		270,337		5,212		(345	)		275,204
Corporate debt securities		6,000		—		(1,768	)		4,232
Equity securities		3,000		80		—			3,080
	$	308,190	$	6,180	$	(2,165	)	$	312,205
Held-to-Maturity:
Government sponsored agency mortgage-backed securities	$	6	$	—	$	—		$	6

For the three months ended September 30, 2012 and 2011 there were $697,000 and $859,000, respectively, in gross realized gains on sales or calls of available for sale securities. For the three months ended September 30, 2012 and 2011 there were no gross realized losses on sales or calls of securities categorized as available for sale securities. For the three months ended September 30, 2012 and 2011 there were $32,140,000 and $25,518,000, respectively, in gross proceeds from sales or calls of available for sale securities. There were no sales or transfers of held to maturity securities for the three months ended September 30, 2012 and 2011. For the three months ended September 30, 2012 and 2011 there were no gross proceeds from maturities or calls of held to maturity securities.

For the nine months ended September 30, 2012 and 2011 there were $1,665,000 and $859,000, respectively, in gross realized gains on sales or calls of available for sale securities. For the nine months ended September 30, 2012 and 2011 there were $9,000 and $10,000, respectively, in gross realized losses on sales or calls of securities categorized as available for sale securities. For the nine months ended September 30, 2012 and 2011 there were $110,579,000 and $31,518,000, respectively, in gross proceeds from sales or calls of available for sale securities. There were no sales or transfers of held to maturity securities for the nine months ended September 30, 2012 and 2011. For the nine months ended September 30, 2012 and 2011 there were no gross proceeds from maturities or calls of held to maturity securities. Maturities of all investment securities are consistent with those reported in the December 31, 2011 Form 10-K.

At September 30, 2012 and December 31, 2011, securities having fair value amounts of approximately $279,226,000 and $302,852,000, 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 September 30, 2012 and December 31, 2011, the Company pledges most of its securities at the Federal Home Loan Bank (“FHLB”) to provide borrowing capacity. See “Liquidity” on page 42.

11

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

A summary of investments securities in an unrealized loss for less than twelve months and twelve months or longer is as follows (in thousands).

	As of September 30, 2012
	Less than 12 Months				12 Months or Longer					Total
	Estimated Fair		Unrealized		Estimated Fair		Unrealized			Estimated Fair		Unrealized
	Value		Losses		Value		Losses			Value		Losses
Description of Securities
Corporate debt securities	$	—	$	—	$	4,440	$	(1,560	)	$	4,440	$	(1,560	)
Total impaired securities	$	—	$	—	$	4,440	$	(1,560	)	$	4,440	$	(1,560	)

	As of December 31, 2011
	Less than 12 Months					12 Months or Longer					Total
	Estimated Fair		Unrealized			Estimated Fair		Unrealized			Estimated Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Description of Securities
Obligations of states and political subdivisions	$	714	$	(4	)	$	572	$	(48	)	$	1,286	$	(52	)
Government sponsored agency mortgage-backed securities		96,629		(336	)		16,858		(9	)		113,487		(345	)
Corporate debt securities		—		—			4,232		(1,768	)		4,232		(1,768	)
Total impaired securities	$	97,343	$	(340	)	$	21,662	$	(1,825	)	$	119,005	$	(2,165	)

As of September 30, 2012 and December 31, 2011, there were two corporate debt securities in a loss position for twelve months or more. There is a current active market for these securities and management believes that the unrealized losses on the Company’s investment in these corporate debt securities is due to the yield of the securities and is not attributable to changes in credit quality. The two corporate debt securities are each a $3,000,000 single-issuer trust preferred security issued by two separate large publicly-traded financial institutions. The securities are tied to the front-end of the yield curve, three-month LIBOR (a short-term interest rate), and have a spread over that. The Company does not intend to sell and does not believe it will be required to sell these securities and expects a full recovery of value. The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2012 or December 31, 2011.

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.

NOTE 3 – LOANS

The Company originates loans for business, consumer and real estate activities. 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, the Company's major component of earning assets, increased $32,738,000 during the nine months ended September 30, 2012 to $489,257,000 at September 30, 2012 from $456,519,000 at December 31, 2011. Real estate mortgage loans increased by $33,535,000 and real estate commercial loans increased by $13,834,000 while commercial loans decreased by $8,073,000, installment loans decreased by $3,615,000 and real estate construction loans decreased by $2,231,000. The increase in real estate – mortgage loans was due to the purchase of $33,325,000 of jumbo residential mortgages during the quarter ended September 30, 2012. The remaining loan categories remained relatively unchanged from their December 31, 2011 balances.

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

	September 30,			December 31,
	2012			2011
Commercial	$	38,087		$	46,160
Real estate - commercial		290,478			276,644
Real estate - construction		25,232			27,463
Real estate - mortgage		80,897			47,362
Installment		7,310			10,925
Other		47,253			47,965
Gross loans		489,257			456,519
Deferred loan fees, net		643			(304	)
Allowance for loan losses		(11,427	)		(12,656	)
Total loans, net	$	478,473		$	443,559

Certain real estate loans receivable are pledged as collateral for available borrowings with the FHLB, FRB, and certain correspondent banks. Pledged loans totaled $121,492,000 and $137,528,000 at September 30, 2012 and December 31, 2011, respectively.

The Company did not recognize any interest income on impaired loans for the three and nine month periods ending September 30, 2012 and 2011. The following table presents impaired loans exclusive of deferred loan fees and costs and the related allowance for loan losses as of the dates indicated (in thousands):

	As of September 30, 2012						As of December 31, 2011
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no allocated allowance
Commercial	$	800	$	800	$	—	$	—	$	—	$	—
Real estate - commercial		5,711		6,130		—		1,502		1,556		—
Real estate - construction		1,760		1,810		—		4,128		4,153		—
Real estate - mortgage		692		737		—		643		751		—
Installment		109		123		—		70		75		—
Other		275		282		—		88		91		—
Subtotal		9,347		9,882		—		6,431		6,626		—
With allocated allowance
Commercial		—		—		—		1,788		1,849		450
Real estate - commercial		1,952		1,952		417		4,496		5,302		606
Real estate - construction		—		—		—		5,312		5,312		504
Real estate - mortgage		274		274		50		295		314		37
Installment		—		—		—		37		39		13
Other		—		—		—		—		—		—
Subtotal		2,226		2,226		467		11,928		12,816		1,610
Total Impaired Loans	$	11,573	$	12,108	$	467	$	18,359	$	19,442	$	1,610

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

	Average Recorded Investment				Average Recorded Investment
	for the three months ended				for the nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
Commercial	$	938	$	2,356	$	1,043	$	2,388
Real estate - commercial		7,780		5,523		7,942		5,560
Real estate - construction		1,766		3,423		1,780		3,422
Real estate - mortgage		986		1,291		1,006		1,302
Installment		123		111		133		112
Other		277		113		287		113
Total	$	11,870	$	12,817	$	12,191	$	12,897

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

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	September 30,			December 31,
	2012			2011
Nonaccrual loans	$	11,573		$	18,359
Loans 90 days past due or more but still accruing interest		6			52
Total nonperforming loans	$	11,579		$	18,411
Nonaccrual loans to total gross loans		2.36	%		4.02	%
Nonperforming loans to total gross loans		2.36	%		4.04	%

If interest on nonaccrual loans had been accrued, such income would have approximated $495,000 and $824,000 for the nine months ended September 30, 2012 and 2011, respectively.

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

	As of September 30, 2012
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	37,199	$	88	$	—	$	800	$	38,087
Real estate - commercial		282,039		776		—		7,663		290,478
Real estate - construction		23,273		199		—		1,760		25,232
Real estate - mortgage		79,733		198		—		966		80,897
Installment		7,127		68		6		109		7,310
Other		46,951		27		—		275		47,253
Total	$	476,322	$	1,356	$	6	$	11,573	$	489,257

	As of December 31, 2011
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	44,325	$	47	$	—	$	1,788	$	46,160
Real estate - commercial		264,143		6,503		—		5,998		276,644
Real estate - construction		18,023		—		—		9,440		27,463
Real estate - mortgage		45,170		1,254		—		938		47,362
Installment		10,614		152		52		107		10,925
Other		47,877		—		—		88		47,965
Total	$	430,152	$	7,956	$	52	$	18,359	$	456,519

During the period ending September 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. The following table shows information related to Troubled Debt Restructurings for the periods indicated (in thousands):

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	For the three months ended September 30, 2012						For the nine months ended September 30, 2012
	Accruing TDRs						Accruing TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Real estate - construction		—	$	—	$	—		1	$	347	$	347
Real estate - mortgage		1	$	425	$	425		1	$	425	$	425

	For the three months ended September 30, 2012						For the nine months ended September 30, 2012
	Non Accruing TDRs						Non Accruing TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		—	$	—	$	—		1	$	1,050	$	800
Real estate - commercial		—	$	—	$	—		2	$	269	$	269
Real estate - construction		—	$	—	$	—		2	$	788	$	788
Installment		—	$	—	$	—		2	$	70	$	70
Other		1	$	50	$	50		1	$	50	$	50

At September 30, 2012, there were no specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. There are no commitments to lend additional amounts at September 30, 2012 to customers with outstanding loans that are classified as troubled debt restructurings. There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period ending September 30, 2012.

There were five loans with a modification involving a reduction of the stated interest rate, three modifications involving an extension of the maturity date and the recorded investment in five loans were reduced in the aggregate amount of $322,000 for nine months ended September 30, 2012.

NOTE 4 – ALLOWANCE FOR LOAN LOSSES

The following table shows the changes in the allowance for loan losses were as follows (in thousands):

		For the three months ended September 30, 2012
					Real Estate			Real Estate			Real Estate
		Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated		Total
Allowance for Loan Losses
Balance June 30, 2012	$	1,260		$	6,586		$	1,387		$	925		$	141		$	768		$	665	$	11,732
Charge-offs		(250	)		(113	)		(492	)		(143	)		(48	)		(48	)				(1,094	)
Recoveries		13			—			43			1			29			3					89
Provisions for loan losses		(261	)		435			(23	)		422			—			60			67		700
Balance September 30, 2012	$	762		$	6,908		$	915		$	1,205		$	122		$	783		$	732	$	11,427

		For the three months ended September 30, 2011
					Real Estate			Real Estate			Real Estate
		Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated		Total
Allowance for Loan Losses
Balance June 30, 2011	$	1,931		$	8,778		$	1,339		$	1,015		$	251		$	745		$	687	$	14,746
Charge-offs		(54	)		(1,115	)		(159	)		(73	)		(42	)		(128	)				(1,571	)
Recoveries		59			—			—			2			35			—					96
Provisions for loan losses		(229	)		394			130			(13	)		(34	)		123			29		400
Balance September 30, 2011	$	1,707		$	8,057		$	1,310		$	931		$	210		$	740		$	716	$	13,671

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		For the nine months ended September 30, 2012
					Real Estate			Real Estate			Real Estate
		Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2011	$	1,333		$	7,528		$	1,039		$	935		$	185		$	736		$	900		$	12,656
Charge-offs		(456	)		(1,730	)		(822	)		(333	)		(190	)		(120	)					(3,651	)
Recoveries		39			63			80			37			94			9						322
Provisions for loan losses		(154	)		1,047			618			566			33			158			(168	)		2,100
Balance September 30, 2012	$	762		$	6,908		$	915		$	1,205		$	122		$	783		$	732		$	11,427

	As of September 30, 2012
Reserve to impaired loans	$	—	$	417	$	—	$	50	$	—	$	—	$	—	$	467
Reserve to non-impaired loans	$	762	$	6,491	$	915	$	1,155	$	122	$	783	$	732	$	10,960

		For the nine months ended September 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		(928	)		(1,973	)		(356	)		(354	)		(334	)		(429	)					(4,374	)
Recoveries		197			—			10			2			193			—						402
Provisions for loan losses		921			1,591			(280	)		327			12			503			(424	)		2,650
Balance September 30, 2011	$	1,707		$	8,057		$	1,310		$	931		$	210		$	740		$	716		$	13,671

	As of September 30, 2011
Reserve to impaired loans	$	713	$	352	$	241	$	119	$	—	$	—	$	—	$	1,425
Reserve to non-impaired loans	$	994	$	7,705	$	1,069	$	812	$	210	$	740	$	716	$	12,246

	As of December 31, 2011
Reserve to impaired loans	$	450	$	606	$	504	$	37	$	13	$	—	$	—	$	1,610
Reserve to non-impaired loans	$	883	$	6,922	$	535	$	898	$	172	$	736	$	900	$	11,046

The following table shows the loan portfolio by segment as follows (in thousands):

Loans	As of September 30, 2012
			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Mortgage		Installment		Other		Total
Total Loans	$	38,087	$	290,478	$	25,232	$	80,897	$	7,310	$	47,253	$	489,257
Impaired Loans	$	800	$	7,663	$	1,760	$	966	$	109	$	275	$	11,573
Non-impaired loans	$	37,287	$	282,815	$	23,472	$	79,931	$	7,201	$	46,978	$	477,684

	As of December 31, 2011
			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Mortgage		Installment		Other		Total
Total Loans	$	46,160	$	276,644	$	27,463	$	47,362	$	10,925	$	47,965	$	456,519
Impaired Loans	$	1,788	$	5,998	$	9,440	$	938	$	107	$	88	$	18,359
Non-impaired loans	$	44,372	$	270,646	$	18,023	$	46,424	$	10,818	$	47,877	$	438,160

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The following table shows the loan portfolio allocated by management's internal risk ratings as defined in Footnote 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (in thousands):

	As of September 30, 2012
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	36,691	$	105	$	1,291	$	—	$	38,087
Real estate - commercial		268,915		69		21,494		—		290,478
Real estate - construction		23,223		—		2,009		—		25,232
Real estate - mortgage		78,032		—		2,865		—		80,897
Installment		7,194		—		116		—		7,310
Other		46,806		—		447		—		47,253
Total	$	460,861	$	174	$	28,222	$	—	$	489,257

	As of December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	39,319	$	3,067	$	3,774	$	—	$	46,160
Real estate - commercial		248,696		5,055		22,893		—		276,644
Real estate - construction		17,624		167		9,672		—		27,463
Real estate - mortgage		43,760		886		2,716		—		47,362
Installment		10,702		—		223		—		10,925
Other		47,638		—		327		—		47,965
Total	$	407,739	$	9,175	$	39,605	$	—	$	456,519

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. Effective during the year 2012, the Company modified its method of estimating the allowance for loan losses for non-impaired loans.  This modification expanded the historical loss period to twelve rolling quarters, and incorporated historical losses from 2009. For the period ended September 30, 2012, the loss look back period began in the fourth quarter of 2009 and ended with the most recent quarter. Previously the Company utilized historical loss experience based on a rolling eight quarters.  This modification, related to the use of an expanded historical loss period, had the effect of increasing the required allowance by approximately $361,000.  The Company believes that, given the recent trend in historical losses, it was prudent to increase the period examined and that the use of a longer look back period of four additional quarters was the more appropriate methodology to capture the inherent risk in the Company’s loan portfolio. 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 periodically. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

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

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

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

17

• 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, NVB’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet and was $183,000 and $161,000, as of September 30, 2012 and December 31, 2011, respectively.

Management expects modest growth in commercial real estate lending and to a lesser extent commercial, consumer and real estate mortgage 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.

NOTE 5 – OTHER REAL ESTATE OWNED

The Company had $21,689,000 and $20,106,000 in other real estate owned (“OREO”) at September 30, 2012 and December 31, 2011, respectively. Below is a table with details of the changes in OREO (in thousands):

	September 30,			December 31,
	2012			2011
Beginning balance	$	20,106		$	25,784
Properties transferred in		7,484			10,454
Sales of property		(4,414	)		(12,036	)
Loss on sale or writedown of property		(1,487	)		(4,096	)
Total	$	21,689		$	20,106

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

	Three months ended September 30,					Nine months ended September 30,
	2012			2011		2012		2011
Operating expenses	$	79		$	121	$	306	$	504
Provision for losses		749			459		1,310		1,890
Net, (gain)loss on disposal		(11	)		297		177		112
Total OREO expense	$	817		$	877	$	1,793	$	2,506

NOTE 6 – SUBORDINATED DEBENTURES

On November 9, 2009, for the first time, 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.

On May 29, 2012, the Company received approval from the Federal Reserve Bank of San Francisco and on May 9, 2012, the Company received approval from the California Department of Financial Institutions to pay all deferred interest on its junior subordinated notes underlying its trust preferred securities in the amount of $5,854,000 and to fully redeem its North Valley Capital Trust I notes in the amount of $10,310,000, bearing an interest rate of 10.25%. On July 23, 2012, the Company paid all deferred interest on its junior subordinated notes and on July 25, 2012, it redeemed, in full, the notes associated with North Valley Capital Trust I. 

18

The obligation to pay interest on the Debentures is cumulative and will continue to accrue, currently at a variable rate of 3.70% on the 2033 Debentures, a variable rate of 3.25% on the 2034 Debentures and a variable rate of 1.88%, on the 2036 Debentures.  Interest on the remaining debentures is 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 September 30, 2012 and December 31, 2011, the amount of accrued interest payable on the Debentures was $83,000 and $4,854,000, respectively. Subject to regulatory approval, the Company may redeem some or all of the Debentures earlier than their maturity dates.

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 onlytax 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 in2010 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.

19

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 ofDecember 31, 2011.

NOTE 8 - 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 $188,000 for the three and nine months ended September 30, 2012 and 2011, 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. Components of net periodic benefit cost for the Company’s supplemental nonqualified defined benefit plans for the three and nine months ended September 30, 2012 and 2011 are presented in the following tables (in thousands):

	Three months ended September 30,					Nine months ended September 30,
Components of net periodic benefits cost:	2012		2011			2012		2011
Service cost	$	150	$	323		$	451	$	323
Interest cost		84		44			251		196
Prior service amortization		25		42			74		58
Recognized net actuarial loss		10		(2	)		30		6
Total components of net periodic cost	$	269	$	407		$	806	$	583

	September 30,		December 31,
	2012		2011
Total Liability of Pension Plan Benefits	$	7,912	$	7,397

NOTE 9 – STOCK-BASED COMPENSATION

Stock Option Plans

At September 30, 2012, the Company had two shareholder approved stock-based compensation plans: the 1998 Employee Stock Incentive Plan and the 2008 Stock Incentive Plan. A total of 480,050 shares were authorized under all plans at September 30, 2012. The plans do not provide for the settlement of awards in cash and new shares are issued upon exercise of the options. The North Valley Bancorp 1998 Employee Stock Incentive Plan provides for awards in the form of options (which may constitute incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”) to key employees) and also provides for the award of shares of Common Stock to outside directors. As provided in the 1998 Employee Stock Incentive Plan, the authorization to award incentive stock options terminated on February 19, 2008. Pursuant to the 1998 Employee Stock Incentive Plan there were outstanding options to purchase 60,834 shares of Common Stock at September 30, 2012. The North Valley Bancorp 2008 Stock Incentive Plan was adopted by the Company’s Board of Directors on February 27, 2008, effective that date, and was approved by the Company’s shareholders at the annual meeting, May 22, 2008. The terms of the 2008 Stock Incentive Plan are substantially the same as the North Valley Bancorp 1998 Employee Stock Incentive Plan. The 2008 Stock Incentive Plan provides for the grant to key employees of stock options, which may consist of NSOs and ISOs. Under the 2008 Stock Incentive Plan, options may not be granted at a price less than the fair market value at the date of the grant. Under all plans, options may be exercised over a ten year term.The vesting period is generally four years; however the vesting period can be modified at the discretion of the Company’s Board of Directors, and for all options granted after the fourth quarter in 2008 the vesting period is five years. The 2008 Stock Incentive Plan also provides for the grant to outside directors, and to consultants and advisers to the Company, of stock options, all of which must be NSOs. The shares of Common Stock reserved for issuance under the 2008 Stock Incentive Plan consisted of 189,330 shares to be issued upon the exercise of options granted and still outstanding as of September 30, 2012 and 219,821 shares reserved for future stock option grants and director stock awards at September 30, 2012. 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 are 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. Each outside director of the Company is 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 is fully vested when granted to the outside director. On July 26, 2012, the Board of Directors approved the 180 share stock award to each of the eight outside directors (total 1,440 shares) for the year 2012. The Company recognized director stock grant expense in the amount of $19,000 for the quarter ending September 30, 2012, relative to these 1,440 shares awarded to the eight 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. Outstanding options under the plans are exercisable until their expiration.

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Stock-based Compensation

There were no options granted for the three month period ended September 30, 2012. There were 65,000 options granted in the three month period ended September 30, 2011. There were 77,908 and 66,000, respectively, options granted for the nine month periods ended September 30, 2012 and 2011. For the three month periods ended September 30, 2012 and 2011, the compensation cost recognized for share based compensation was $69,000 and $45,000, respectively.  For the nine month periods ended September 30, 2012 and 2011, the compensation cost recognized for share based compensation was $158,000 and $105,000, respectively.  At September 30, 2012, the total unrecognized compensation cost related to stock-based awards granted to employees under the Company’s stock option plans was $770,000. This cost is expected to be amortized on a straight-line basis over a weighted average period of approximately 4 years and will be adjusted for subsequent changes in estimated forfeitures. The weighted average grant date fair value of options granted for the nine month period ended September 30, 2012 was $6.28 based on the following assumptions used in a Black-Scholes Merton model. The weighted average grant date fair value of options granted for the three and nine month periods ended September 30, 2011 was $6.09 and $6.07 based on the following assumptions used in a Black-Scholes Merton model.

	For nine months ended
	September 30, 2012
Weighted average grant date fair value per share of options granted	$	6.28
Significant weighted average assumptions used in calculating fair value:
Expected term		6.49 years
Expected annual volatility		58.5	%
Expected annual dividend yield		N/A
Risk-free interest rate		1.40	%

	For three months ended			For nine months ended
	September 30, 2011			September 30, 2011
Weighted average grant date fair value per share of options granted	$	6.09		$	6.07
Significant weighted average assumptions used in calculating fair value:
Expected term		7.67 years			7.67 years
Expected annual volatility		53.6	%		53.6	%
Expected annual dividend yield		N/A			N/A
Risk-free interest rate		2.26	%		2.27	%

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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, 2012		184,070		$	38.55		7 years		$8.99-$103.10	$	212
Granted		77,908		$	11.13				$9.97-$12.53	$	192
Exercised		—			—
Expired or Forfeited		(11,814	)	$	47.42				$8.99-$103.10	$	5
Outstanding at September 30, 2012		250,164		$	29.59		7 years		$9.97-$103.10	$	399
Fully vested and exercisable at September 30, 2012		101,799		$	54.61		5 years		$10.40-$103.10	$	41
Options expected to vest		148,365		$	12.42		9 years		$9.97-$23.95	$	358

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 September 30, 2012. There were no options exercised during the nine month periods ended September 30, 2012 and 2011.

NOTE 10 – EARNINGS PER SHARE (Restated)

Basic earnings per share (“EPS”), which excludes dilution, is computed by dividing income or loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted EPS. Stock options for 249,164 and 184,947 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2012 and 2011, respectively, because they were anti-dilutive.

(In thousands except per share data)	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
	(Restated)				(Restated)
Calculation of basic earnings per share:
Numerator - net income (2012 Restated)	$	4,004	$	1,320	$	5,745	$	2,238
Denominator -
Weighted average common shares outstanding		6,835		6,833		6,834		6,833
Basic earnings per share (2012 Restated)	$	0.59	$	0.19	$	0.84	$	0.33
Calculation of diluted earnings per share:
Numerator - net income (2012 Restated)	$	4,004	$	1,320	$	5,745	$	2,238
Denominator -
Weighted average common shares outstanding		6,835		6,833		6,834		6,833
Dilutive effect of outstanding options		1		—		1		—
Weighted average common shares outstanding and common stock equivalents		6,836		6,833		6,835		6,833
Diluted earnings per share (2012 Restated)	$	0.59	$	0.19	$	0.84	$	0.33

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NOTE 11 – OTHER COMPREHENSIVE INCOME

At September 30, 2012 and 2011, the Company’s other comprehensive income components were as follows (in thousands):

	Three months ended September 30, 2012							Three months ended September 30, 2011
	Before Tax		Tax Effect			After Tax		Before Tax		Tax Effect			After Tax
Other comprehensive income:
Unrealized holding gains	$	1,471	$	(603	)	$	868	$	2,957	$	(1,212	)	$	1,745
Less:  reclassification adjustment for realized gains included in net income		697		(286	)		411		859		(352	)		507
Other comprehensive income on investment securities		774		(317	)		457		2,098		(860	)		1,238
Adjustment on pension plan		34		(14	)		20		—		—			—
Total other comprehensive income	$	808	$	(331	)	$	477	$	2,098	$	(860	)	$	1,238

	Nine months ended September 30, 2012							Nine months ended September 30, 2011
	Before Tax		Tax Effect			After Tax		Before Tax		Tax Effect			After Tax
Other comprehensive income:
Unrealized holding gains	$	5,279	$	(2,164	)	$	3,115	$	8,355	$	(3,425	)	$	4,930
Less:  reclassification adjustment for realized gains included in net income		1,656		(679	)		977		849		(348	)		501
Other comprehensive income on investment securities		3,623		(1,485	)		2,138		7,506		(3,077	)		4,429
Adjustment on pension plan		103		(42	)		61		—		—			—
Total other comprehensive income	$	3,726	$	(1,527	)	$	2,199	$	7,506	$	(3,077	)	$	4,429

NOTE 12 – 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 $4,581,000 and $4,946,000 at September 30, 2012 and December 31, 2011, respectively.  At September 30, 2012, commercial and consumer lines of credit and real estate loans of approximately $48,739,000 and $33,651,000, respectively, were undisbursed.  At December 31, 2011, commercial and consumer lines of credit and real estate loans of approximately $45,033,000 and $41,077,000, 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 September 30, 2012 and December 31, 2011. 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 September 30, 2012, the Company had a reserve for unfunded commitments of $183,000.

A large portion of the loan portfolio of the Company is collateralized by real estate. At September 30, 2012, real estate served as the principal source of collateral with respect to approximately 81% of the Company’s loan portfolio. At September 30, 2012, real estate construction loans totaled $25,232,000, or 5% of the total loan portfolio, commercial loans secured by real estate totaled $290,478,000, or 59% of the total loan portfolio, and real estate mortgage loans totaled $80,897,000, or 17% of the total loan portfolio. 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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NOTE 13 – 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).

	As of September 30, 2012
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	15,092	$	—	$	15,092	$	—
Obligations of state and political subdivisions		11,496		—		11,496		—
Government sponsored agency mortgage-backed securities		264,847		—		264,847		—
Corporate debt securities		4,440		—		4,440		—
Equity securities		3,150		—		3,150		—
	$	299,025	$	—	$	299,025	$	—

	At December 31, 2011
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	15,234	$	—	$	15,234	$	—
Obligations of state and political subdivisions		14,455		—		14,455		—
Government sponsored agency mortgage-backed securities		275,204		—		275,204		—
Corporate debt securities		4,232		—		4,232		—
Equity securities		3,080		—		3,080		—
	$	312,205	$	—	$	312,205	$	—

Fair values for available-for-sale investment securities are based on quoted market prices for similar securities at September 30, 2012 and December 31, 2011. During the quarter ended September 30, 2012, there were no transfers between Levels 1, 2 and 3.

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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 U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or write-downs 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).

									Total Losses/(Gains)
	As of September 30, 2012								For three months ended September 30,				For nine months ended September 30,
	Fair Value		Level 1		Level 2		Level 3		2012		2011		2012		2011
Impaired loans:
Real estate - commercial	$	2,856	$	—	$	—	$	2,856	$	431	$	479	$	1,887	$	1,012
Real estate - construction		—		—		—		—		—		241		—		241
Real estate - mortgage		757		—		—		757		76		92		149		222
OREO:
Real estate - commercial		271		—		—		271		92		125		92		315
Real estate - construction		4,009		—		—		4,009		657		199		790		869
Real estate - mortgage		184		—		—		184		—		135		140		167
Total assets measured at fair value on a nonrecurring basis	$	8,077	$	—	$	—	$	8,077	$	1,256	$	1,271	$	3,058	$	2,826

									Total Losses
	As of December 31, 2011								Twelve months ended
	Fair Value		Level 1		Level 2		Level 3		December 31, 2011
Impaired loans:
Commercial	$	1,338	$	—	$	—	$	1,338	$	324
Real estate - commercial		4,811		—		—		4,811		1,138
Real estate - construction		5,223		—		—		5,223		504
Real estate - mortgage		268		—		—		268		37
Installment		37		—		—		37		13
OREO:
Real estate - commercial		1,270		—		—		1,270		253
Real estate - construction		14,575		—		—		14,575		2,645
Real estate - mortgage		1,276		—		—		1,276		34
Total assets measured at fair value on a nonrecurring basis	$	28,798	$	—	$	—	$	28,798	$	4,948

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

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

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2012 (in thousands)

	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Impaired loans:
Real estate - commercial	$	2,856	Comparable sales approach	Discount adjustment for differences between comparable sales	6% to 11% (9%)
Real estate - construction		—	Comparable sales approach	Discount adjustment for differences between comparable sales	2% to 3% (3%)
Real estate - mortgage		757	Comparable sales approach	Discount adjustment for differences between comparable sales	6% to 11% (9%)
OREO:
Real estate - commercial		271	Comparable sales approach	Discount adjustment for differences between comparable sales	6% to 11% (9%)
Real estate - construction		4,009	Comparable sales approach	Discount adjustment for differences between comparable sales	0% to 6% (6%)
Real estate - mortgage		184	Comparable sales approach	Discount adjustment for differences between comparable sales	6% to 11% (9%)

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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 September 30, 2012 and December 31, 2011 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 amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

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

c) Time Deposits at Other Financial Institutions - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

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

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

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

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

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

i) 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.

26

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

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

			Fair Value Measurements at
			September 30, 2012 Using
	Carrying
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS
Cash and due from banks	$	19,436	$	19,436	$	—	$	—	$	19,436
Federal funds sold		405		405		—		—		405
Time deposits at other financial institutions		2,210		2,210		—		—		2,210
FHLB, FRB and other securities		8,313		—		—		—		N/A
Securities:
Available-for-sale		299,025		—		299,025		—		299,025
Held-to-maturity		6		—		6		—		6
Loans		478,473		—		—		499,040		499,040
Accrued interest receivable		2,296		—		773		1,523		2,296
FINANCIAL LIABILITIES
Deposits:
Nonmaturity deposits	$	581,135	$	581,135	$	—	$	—	$	581,135
Time deposits		177,341		—		177,929		—		177,929
Subordinated debentures		21,651		—		—		9,315		9,315
Accrued interest payable		145		5		57		83		145

	December 31, 2011
	Carrying		Fair
	Amount		Value
FINANCIAL ASSETS
Cash and due from banks	$	18,758	$	18,758
Federal funds sold		40,210		40,210
Time deposits at other financial institutions		1,959		1,959
FHLB, FRB and other securities		8,044		N/A
Securities:
Available-for-sale		312,205		312,205
Held-to-maturity		6		6
Loans		443,559		461,205
Accrued interest receivable		2,557		2,557
FINANCIAL LIABILITIES
Deposits	$	766,239	$	767,487
Subordinated debentures		31,961		21,420
Accrued interest payable		4,998		4,998

NOTE 14 – NEW ACCOUNTING PRONOUNCEMENTS

Fair value measurement.In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition, but the additional disclosures are included in Note 13.

Comprehensive income. In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this amendment changed the presentation of the components of comprehensive income for the Company as part of the consolidated statement of shareholder’s equity.

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

Certain statements in this Form 10-Q (excluding statements of fact or historical financial information) involve forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in banking industry increases significantly; changes in the interest rate environment reduce margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions, particularly in the Northern California region; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; California state budget problems; the U.S. “war on terrorism” and military action by the U.S. in the Middle East; and changes in the securities markets.

Critical Accounting Policies

General

North Valley Bancorp’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the 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 Note 4 to the Notes to Condensed Consolidated Financial Statements in Item I above.

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

28

Other Real Estate Owned (“OREO”).OREO represents properties acquired through foreclosure or physical possession. Write-downs to fair value at the time of transfer to OREO are charged to allowance for loan losses. Subsequent to foreclosure, management periodically 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 September 30, 2012, 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 9 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 9 to the Notes to Condensed Consolidated Financial Statements in Item I above.

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

Accounting for Income Taxes (Restated).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 onlytax 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.

29

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 toestablish a partial valuation allowance in 2010 of $4,500,000 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.During the quarter ended December 31, 2011, the Company reversed the Federal portion of its valuation allowance in the amount of $223,000, and in the quarter ended September 30, 2012, the Company eliminated the remaining state deferred tax asset valuation allowance of $4,277,000.

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 ofDecember 31, 2011.

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-four branches, including two supermarket branches in eight counties in Northern California. As previously reported, the Board of Directors of NVB approved the filing of regulatory applications, the sending of customer notices, and all other actions required in order to close and consolidate two offices of North Valley Bank. The Bank will not extend the lease for its branch office located in Ukiah, California, due to expire in April 2013, and the Bank will close its branch office located at 2930 Bechelli Lane, Redding, California. The Bank has now received regulatory approval to proceed and the Bank plans to close both branches prior to the end of 2012. The Company views its service area as having four distinct markets: the Redding market, the Coastal market, the I-80 Corridor market and the Santa Rosa market.

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

30

Overview

Financial Results (Restated)

(in thousands except per share amounts)	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
	(Restated)						(Restated)
Net interest income	$	7,713		$	7,847		$	22,434		$	23,811
Provision for loan losses		700			400			2,100			2,650
Noninterest income		4,204			4,012			12,150			10,648
Noninterest expense		9,759			9,597			28,643			28,803
(Benefit) provision for income taxes		(2,546	)		542			(1,904	)		768
Net income	$	4,004		$	1,320		$	5,745		$	2,238
Per Share Amounts
Basic and Diluted Income Per Share	$	0.59		$	0.19		$	0.84		$	0.33
Annualized Return on Average Assets		1.74	%		0.58	%		0.84	%		0.33	%
Annualized Return on Average Equity		16.91	%		5.85	%		8.29	%		3.45	%

The Company had net income of $4,004,000, or $0.59 per diluted share, and $5,745,000, or $0.84 per diluted share for the three and nine months ended September 30, 2012, respectively. Net income for the three and nine months ended September 30, 2012 included a $2,930,000 tax benefit resulting from the reversal of a $4,277,000 state deferred tax asset valuation allowance which was partially offset by an increase in federal deferred tax liabilities of $1,347,000. This compares to net income of $1,320,000, or $0.19 per diluted share, and $2,238,000, or $0.33 per diluted share for the three and nine months ended September 30, 2011. The increase in net income before taxes for three and nine months ended September 30, 2012 compared to the net income for three and nine months ended September 30, 2011 was primarily attributed to gains on sale of securities and an increase in gains on real estate loans. Noninterest expense decreased for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011 due to other real estate owned expense and FDIC assessment decreases offset by higher salaries and benefit costs.

The supervisory agreement signed on January 6, 2010 by and among North Valley Bancorp, North Valley Bank and the Federal Reserve Bank of San Francisco was terminated, effective as of April 16, 2012, and resolutions adopted by the Board of Directors of NVB at the request of the California Department of Financial Institutions were previously terminated, effective March 1, 2012.

Results of Operations

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 $67,000 and $81,000 in taxable-equivalent interest income on tax-free investments for the three month periods ended September 30, 2012 and 2011, respectively.

Net interest income for the three months ended September 30, 2012 was $7,780,000, a $148,000, or 1.9%, decrease from net interest income of $7,928,000 for the same period in 2011. Interest income decreased $825,000, or 8.9%, to $8,493,000 for the three month period ended September 30, 2012 due primarily to a decrease in yields on average investments and average loans. The Company had foregone interest income for the loans placed on nonaccrual status of $138,000 during the three months ended September 30, 2012 compared to $89,000 for the same period in 2011. The average loans outstanding during the three months ended September 30, 2012 increased $1,184,000, or 0.2%, to $475,600,000. This higher loan volume increased interest income by $18,000. The average yield earned on the loan portfolio decreased 41 basis points to 5.56% for the three months ended September 30, 2012. This decrease in yield decreased interest income by $489,000. The total decrease in interest income from the loan portfolio was $471,000. The average balance of the investment portfolio increased $29,759,000, or 10.1%, which accounted for a $179,000 increase in interest income and a decrease in average yield of the investment portfolio of 69 basis points reduced interest income by $521,000.

31

Interest expense for the three months ended September 30, 2012 decreased $677,000, or 48.7%, to $713,000 compared to the same period in 2011. The largest decrease to interest expense was attributed to the reduction in average balances in time deposit accounts which decreased $26,719,000 as the average rates paid on these accounts decreased 45 basis points to 0.72% and reduced interest expense by $209,000 while a decrease in the average balances of these accounts decreased interest expense by $78,000. The average rate paid on savings and money market accounts decreased 25 basis points to 0.18% for the three month period ended September 30, 2012 compared to 0.43% for the same period in 2011, resulting in a decrease in interest expense of $144,000. This decrease was offset partially by higher average balances in transaction accounts of $16,821,000, resulting in an $8,000 increase in interest expense. On July 25, 2012, the Company redeemed, in full, its North Valley Capital Trust I subordinated notes, in the amount of $10,310,000, bearing an interest rate of 10.25%. The redemption decreased interest expense by $207,000.

The net interest margin for the three months ended September 30, 2012 decreased 12 basis points to 3.78% from 3.90% for the same period in 2011 and an 11 basis point increase from the 3.67% net interest margin for the linked quarter ended June 30, 2012.

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 September 30, 2012								Three months ended September 30, 2011
	Average			Yield/			Interest		Average			Yield/			Interest
	Balance			Rate			Amount		Balance			Rate			Amount
Assets
Earning assets:
Federal funds sold	$	17,770			0.22	%	$	10	$	38,076			0.23	%	$	22
Investment securities:
Taxable		311,736			2.06	%		1,622		279,548			2.73	%		1,924
Tax exempt (1)		11,663			6.74	%		198		14,092			6.70	%		238
Total investments		323,399			2.23	%		1,820		293,640			2.92	%		2,162
Loans (2)(3)		475,600			5.56	%		6,663		474,416			5.97	%		7,134
Total earning assets		816,769			4.13	%		8,493		806,132			4.59	%		9,318
Nonearning assets		107,942								106,699
Allowance for loan losses		(11,472	)							(14,379	)
Total nonearning assets		96,470								92,320
Total assets	$	913,239							$	898,452
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Transaction accounts	$	180,431			0.05	%	$	24	$	163,610			0.18	%	$	76
Savings and money market		226,630			0.18	%		103		221,669			0.43	%		242
Time certificates		184,802			0.72	%		335		211,521			1.17	%		622
Other borrowed funds		35,172			2.83	%		251		31,961			5.59	%		450
Total interest bearing liabilities		627,035			0.45	%		713		628,761			0.88	%		1,390
Demand deposits		168,658								161,939
Other liabilities		23,589								18,306
Total liabilities		819,282								809,006
Stockholders' equity		93,957								89,446
Total liabilities and stockholders' equity	$	913,239							$	898,452
Net interest income							$	7,780							$	7,928
Net interest spread					3.68	%							3.71	%
Net interest margin					3.78	%							3.90	%

(1)	Tax-equivalent basis; non-taxable securities are exempt from federal taxation.
(2)	Loans on nonaccrual status have been included in the computations of averages balances.
(3)	Includes loan fees of $113 and $38 for the three months ended September 30, 2012 and 2011, respectively.

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Net interest income for the nine months ended September 30, 2012 was $22,646,000, a $1,408,000, or 5.9%, decrease from net interest income of $24,054,000 for the same period in 2011. Interest income decreased $2,842,000, or 10%, to $25,667,000 for the nine months ended September 30, 2012 due primarily to a decrease in average loans. The Company had foregone interest income for the loans placed on nonaccrual status of $495,000 during the nine months ended September 30, 2012 compared to $824,000 for the same period in 2011. The average loans outstanding during the nine months ended September 30, 2012 decreased $30,866,000, or 6.3%, to $458,826,000. This lower loan volume decreased interest income by $1,385,000. The average yield earned on the loan portfolio decreased 35 basis points to 5.65% for the nine months ended September 30, 2012. This decrease in yield decreased interest income by $1,136,000. The total decrease in interest income from the loan portfolio was $2,521,000. The average balance of the investment portfolio increased $32,868,000, or 11.2%, which accounted for a $622,000 increase in interest income and a decrease in average yield of the investment portfolio of 44 basis points reduced interest income by $961,000.

Interest expense for the nine months ended September 30, 2012 decreased $1,434,000, or 32.2%, to $3,021,000 compared to the same period in 2011. The largest decrease in interest expense was in time deposit accounts which decreased $16,667,000 as the average rates paid on these accounts decreased 37 basis points to 0.88% and reduced interest expense by $552,000 while a decrease in the average balances of these accounts decreased interest expense by $156,000. The average rate paid on savings and money market accounts decreased 25 basis points to 0.22% for the nine month period ended September 30, 2012 compared to 0.47% for the same period in 2011, resulting in a decrease to interest expense of $405,000. This decrease was offset partially by higher average balances in transaction accounts of $15,585,000, resulting in a $22,000 increase in interest expense.

The net interest margin for the nine months ended September 30, 2012 decreased 30 basis points to 3.70% from 4.00% for the same period in 2011. 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 $212,000 and $243,000 in taxable-equivalent interest income on tax-free investments for the nine month periods ended September 30, 2012 and 2011, respectively):

33

Schedule of Average Daily Balance and Average Yields and Rates
(Dollars in thousands)
	Nine months ended September 30, 2012								Nine months ended September 30, 2011
	Average			Yield/			Interest		Average			Yield/			Interest
	Balance			Rate			Amount		Balance			Rate			Amount
Assets
Earning assets:
Federal funds sold	$	31,207			0.23	%	$	55	$	21,394			0.23	%	$	37
Investment securities:
Taxable		313,546			2.35	%		5,532		278,685			2.77	%		5,776
Tax exempt (1)		12,290			6.75	%		623		14,283			6.72	%		718
Total investments		325,836			2.52	%		6,155		292,968			2.96	%		6,494
Loans (2)(3)		458,826			5.65	%		19,457		489,692			6.00	%		21,978
Total earning assets		815,869			4.19	%		25,667		804,054			4.74	%		28,509
Nonearning assets		108,588								106,369
Allowance for loan losses		(12,071	)							(14,669	)
Total nonearning assets		96,517								91,700
Total assets	$	912,386							$	895,754
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Transaction accounts	$	178,725			0.08	%	$	105	$	163,140			0.19	%	$	233
Savings and money market		223,022			0.22	%		373		220,911			0.47	%		771
Time certificates		199,983			0.88	%		1,322		216,650			1.25	%		2,030
Other borrowed funds		33,076			4.92	%		1,221		31,961			5.94	%		1,421
Total interest bearing liabilities		634,806			0.63	%		3,021		632,662			0.94	%		4,455
Demand deposits		161,464								157,923
Other liabilities		23,751								18,426
Total liabilities		820,021								809,011
Stockholders' equity		92,365								86,743
Total liabilities and stockholders' equity	$	912,386							$	895,754
Net interest income							$	22,646							$	24,054
Net interest spread					3.56	%							3.80	%
Net interest margin					3.70	%							4.00	%

(1)	Tax-equivalent basis; non-taxable securities are exempt from federal taxation.
(2)	Loans on nonaccrual status have been included in the computations of averages balances.
(3)	Includes loan fees of $240 and $193 for the nine months ended September 30, 2012 and 2011, respectively.

34

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 September 30, 2012									Nine months ended September 30, 2012
	compared with									compared with
	Three months ended September 30, 2011									Nine months ended September 30, 2011
							Total									Total
	Average			Average			Increase			Average			Average			Increase
	Volume			Yield/Rate			(Decrease)			Volume			Yield/Rate			(Decrease)
Interest Income
Interest on Federal funds sold	$	(12	)	$	—		$	(12	)	$	17		$	1		$	18
Interest on investments:
Taxable securities		220			(522	)		(302	)		722			(966	)		(244	)
Tax exempt securities (1)		(41	)		1			(40	)		(100	)		5			(95	)
Total investments		179			(521	)		(342	)		622			(961	)		(339	)
Interest on loans		18			(489	)		(471	)		(1,385	)		(1,136	)		(2,521	)
Total interest income		185			(1,010	)		(825	)		(746	)		(2,096	)		(2,842	)
Interest Expense
Transaction accounts	$	8		$	(60	)	$	(52	)	$	22		$	(150	)	$	(128	)
Savings and money market		5			(144	)		(139	)		7			(405	)		(398	)
Time deposits		(78	)		(209	)		(287	)		(156	)		(552	)		(708	)
Other borrowed funds		45			(244	)		(199	)		50			(250	)		(200	)
Total interest expense		(20	)		(657	)		(677	)		(77	)		(1,357	)		(1,434	)
Total change in net interest income	$	205		$	(353	)	$	(148	)	$	(669	)	$	(739	)	$	(1,408	)

(1) Taxable equivalent

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 39.

The Company recorded provisions for loan losses of $700,000 and $2,100,000 for the three and nine months ended September 30, 2012, respectively, compared to provisions for loan losses of $400,000 and $2,650,000 for the three and nine months ended September 30, 2011, respectively. 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 $2,100,000 provision for the nine months ended September 30, 2012 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 September 30, 2012 of $11,427,000, or 2.3% of total loans, is adequate at this time. The allowance for loan losses was $12,656,000, or 2.8% of total loans, at December 31, 2011. For further information regarding our allowance for loan losses, see “Allowance for Loan Losses” starting on page 39.

Noninterest Income

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

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Service charges on deposit accounts	$	1,086	$	1,205	$	3,274	$	3,543
Other fees and charges		1,102		1,204		3,620		3,483
Increase in cash value of life insurance		340		394		1,023		1,075
Gain on sale of loans		769		182		1,858		957
Gain on sales or calls of securities, net		697		859		1,656		849
Other		210		168		719		741
Total	$	4,204	$	4,012	$	12,150	$	10,648

35

Noninterest income for the quarter ended September 30, 2012 increased $192,000, or 4.8%, to $4,204,000 compared to $4,012,000 for the same period in 2011. The increase was primarily attributed to gain on sale of loans of $769,000. Of the $769,000 gain on sale of loans for the third quarter of 2012, the sale of mortgage loans was $733,000 and the sale of SBA loans was $36,000 compared to the sale of mortgage loans of $182,000 for the third quarter of 2011. Service charges on deposits decreased by $119,000 to $1,086,000 for the third quarter of 2012 compared to $1,205,000 for the same period in 2011. All other sources of fees and charges decreased by $102,000 to $1,102,000 for the third quarter of 2012 compared to $1,204,000 for the third quarter of 2011. The Company had a $697,000 gain on sale of securities for the quarter ended September 30, 2012, a decrease of $162,000 compared to $859,000 for the same period in 2011.

Noninterest income for the nine months ended September 30, 2012 increased $1,502,000, or 14.1%, to $12,150,000 compared to $10,648,000 for the same period in 2011. The increase was primarily attributed to gain on sale of loans of $1,858,000. Of the $1,858,000 gain on sale of loans for the period ended September 30, 2012, the sale of mortgage loans was $1,716,000 and the sale of SBA loans was $142,000 compared to the sale of mortgage loans of $277,000 and the sale of SBA loans of $680,000 for the same period in 2011. Service charges on deposits decreased by $269,000 to $3,274,000 for the period ended September 30, 2012 compared to $3,543,000 for the same period in 2011. All other sources of fees and charges increased by $137,000 to $3,620,000 for the period ended September 30, 2012 compared to $3,483,000 for the same period in 2011. The Company had a $1,656,000 gain on sale of securities for the period ended September 30, 2012, an increase of $807,000 compared to $849,000 for the same period in 2011.

Noninterest Expense

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

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Salaries and employee benefits	$	5,005	$	4,702	$	15,113	$	13,894
Occupancy expense		651		732		1,911		2,124
Other real estate owned expense		817		877		1,793		2,506
Data processing		633		619		1,882		1,828
FDIC and state assessments		212		294		701		1,040
Professional services		331		250		952		858
ATM and on-line banking		159		309		620		892
Furniture and equipment expense		237		229		709		819
Marketing expense		120		137		453		429
Director expense		180		117		478		333
Loan expense		282		89		627		313
Printing and supplies		122		159		362		430
Postage		117		120		361		409
Operations expense		142		197		382		506
Messenger		112		156		340		456
Amortization of intangibles		36		36		109		109
Other		603		574		1,850		1,857
Total	$	9,759	$	9,597	$	28,643	$	28,803

Noninterest expense increased $162,000, or 1.7%, to $9,759,000 for the third quarter of 2012 from $9,597,000 for the third quarter in 2011. Salaries and employee benefits increased $303,000, for the third quarter of 2012 compared to the third quarter of 2011 due primarily due to the hiring of production personnel and the development of production incentive plans. Occupancy and furniture and equipment expense decreased $73,000 for the third quarter of 2012 compared to the third quarter of 2011 due to a decrease in depreciation and rent expense as a result of facilities consolidation initiatives completed in 2011. OREO expense decreased $60,000 to $817,000, for the third quarter of 2012 compared to $877,000 for the same period in 2011, and FDIC and state assessments decreased $82,000 to $212,000 for the third quarter of 2012, compared to $294,000 for the same period in 2011, as a result of the termination of the regulatory agreements previously discussed as well as a change in FDIC insurance assessment methodology, which changed the assessment base from total deposits to average total assets less tangible capital. All other expenses increased $74,000 to $2,837,000 for the third quarter 2012 compared to $2,763,000 for the same period in 2011.

Noninterest expense decreased $160,000, or 0.6%, to $28,643,000 for the nine months ended September 30, 2012 from $28,803,000 for the same period in 2011. Salaries and employee benefits increased $1,219,000, for the nine months ended September 30, 2012 compared to the same period in 2011 due primarily due to the hiring of production personnel and the development of production incentive plans. Occupancy and furniture and equipment expense decreased $323,000 for the nine months ended September 30, 2012 compared to the same period in 2011 due to a decrease in depreciation and rent expense as a result of facilities consolidation initiatives completed in 2011. OREO expense decreased $713,000 to $1,793,000, for the nine months ended September 30, 2012 compared to $2,506,000 for the same period in 2011, and FDIC and state assessments decreased $339,000 to $701,000 for the nine months ended September 30, 2012, compared to $1,040,000 for the same period in 2011, as a result of the termination of the regulatory agreements previously discussed as well as a change in FDIC insurance assessment methodology, which changed the assessment base from total deposits to average total assets less tangible capital. All other expenses decreased $4,000 to $8,416,000 for the nine months ended September 30, 2012 compared to $8,420,000 for the same period in 2011.

36

On November 7, 2012, based on the recommendations of the Compensation Committee and as authorized and approved by the Board of Directors, the Company entered into amended and restated employment agreements with the following executive officers of the Company: Michael J. Cushman, President and Chief Executive Officer; Kevin R. Watson, Executive Vice President and Chief Financial Officer; Scott R. Louis, Executive Vice President and Chief Operating Officer; Roger D. Nash, Executive Vice President and Chief Credit Officer; Gary S. Litzsinger, Executive Vice President and Chief Risk Officer; and Leo J. Graham, General Counsel and Corporate Secretary. Copies of the amended and restated employment agreements are attached to this report as Exhibits 99.195 through 99.200 and are incorporated here by reference. These amended and restated employment agreements substantially confirm the terms and provisions of the individual employment and compensation arrangements already in effect between the Company and each of these executive officers. They supersede and replace the Employment Agreement signed with Michael J. Cushman in 2001, the Employment Agreement signed with Kevin R. Watson in 2006; the Employment Agreements signed with Messrs. Louis, Nash and Litzsinger in 2005; and the Employment Agreement signed with Leo J. Graham in 2004 and revised in 2006.

Among other matters, the above-described amended and restated employment agreements have confirmed the following:

(a) The term of employment for each of Messrs. Cushman, Watson, Louis, Nash, Litzsinger and Graham commences on November 7, 2012 and will expire on December 13, 2013. The term will be automatically extended for additional one year periods, starting on December 31, 2013 and annually thereafter, unless the executive officer or the Company gives the other a notice of non-renewal at least 60 days prior to the end of the term or extended term.

(b) As noted in the Compensation Committee Report contained in the proxy statement for the 2012 annual meeting of shareholders, the Compensation Committee recommended and the Board of Directors approved a 5 percent increase in executive salaries, effective March 1, 2012 (executive salaries had not changed since 2008). Those salaries are reflected in the amended and restated employment agreements, subject to annual review and potential adjustment by the Compensation Committee and the Board of Directors.

(c) If the Company terminates the employment agreement for Mr. Cushman without cause or by giving notice of non-renewal, Mr. Cushman will be entitled to receive severance pay equal to two years’ base salary as then in effect; and if the Company terminates the employment agreement for Mr. Watson, Mr. Louis, Mr. Nash, Mr. Litzsinger or Mr. Graham, without cause or by giving notice of non-renewal, the executive officer so terminated will be entitled to receive severance pay equal to one year’s base salary as then in effect. However, in the event such a termination occurs in connection with a “change in control,” as defined in the Company’s Salary Continuation Plan and the Company’s Executive Deferred Compensation Plan (each amended and restated effective January 1, 2007), the amount of severance pay due an executive officer under his amended and restated employment agreement may, under certain circumstances, be subject to reduction, on a dollar for dollar basis, by the change in control benefits paid to him under those Plans.

(d) Additional amendments to the employment agreements were adopted by the Board of Directors in response to and consistent with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, as added by the American Jobs Creation Act of 2004, and the United States Treasury regulations and guidance in connection with Section 409A.

The foregoing summary of the amended and restated employment agreements is qualified in its entirety by reference to the individual agreements signed between the Company and the executive officers, copies of which are filed as Exhibits 99.195 to 99.200 to this report.

37

Income Taxes (Restated)

The Company recorded a benefit for income taxes for the quarter ended September 30, 2012 of $2,546,000, compared to a provision for income taxes of $542,000, or an effective tax rate of 29.1%, for the quarter ended September 30, 2011. The benefit for income taxes included a $2,930,000 net benefit for the three and nine month periods ended September 30, 2012, that resulted from the elimination of the $4,277,000 state deferred tax asset valuation allowance which was partially offset by an increase in federal deferred tax liabilities of $1,347,000. The benefit for income taxes for the nine month period ended September 30, 2012 was $1,904,000, compared to a provision for income taxes of $768,000, or an effective tax rate of 25.5%, for the same period in 2011. 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”.

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 toestablish a partial valuation allowance in 2010 of $4,500,000 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.During the quarter ended December 31, 2011, the Company reversed the Federal portion of its valuation allowance in the amount of $223,000, and in the quarter ended September 30, 2012, the Company eliminated the remaining state deferred tax asset valuation allowance of $4,277,000.

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 September 30, 2012 As Compared to December 31, 2011

Overview (Restated)

Total assets at September 30, 2012 decreased $11,912,000, or 1.3%, to $893,054,000, compared to $904,966,000 at December 31, 2011. Loans, net of deferred loan fees, increased $33,685,000, or 7.4%, to $489,900,000 at September 30, 2012 from $456,215,000 at December 31, 2011. Investment securities decreased $13,180,000, or 4.2%, to $299,031,000 at September 30, 2012 from $312,211,000 at December 31, 2011, and Federal funds sold decreased to $405,000 at September 30, 2012 from $40,210,000 at December 31, 2011. The decrease in Federal funds sold was due primarily to an increase in loans, net of deferred loan fees, for the nine months ended September 30, 2012. Deposits decreased $7,763,000, or 1.0%, from December 31, 2011 to $758,476,000 at September 30, 2012.

Loan Portfolio

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

Loans, the Company's major component of earning assets, increased $32,738,000 during the nine months ended September 30, 2012 to $489,257,000 at September 30, 2012 from $456,519,000 at December 31, 2011. Real estate mortgage loans increased by $33,535,000 and real estate commercial loans increased by $13,834,000 while commercial loans decreased by $8,073,000, installment loans decreased by $3,615,000 and real estate construction loans decreased by $2,231,000. The increase in real estate – mortgage loans was due to the purchase of $33,325,000 of jumbo residential mortgages during the quarter ended September 30, 2012. The remaining loan categories remained relatively unchanged from their December 31, 2011 balances.

38

The Company's average loan to deposit ratio was 62.5% for the quarters ended September 30, 2012 and 2011.

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

	September 30,			December 31,
	2012			2011
Commercial	$	38,087		$	46,160
Real estate - commercial		290,478			276,644
Real estate - construction		25,232			27,463
Real estate - mortgage		80,897			47,362
Installment		7,310			10,925
Other		47,253			47,965
Gross loans		489,257			456,519
Deferred loan fees, net		643			(304	)
Allowance for loan losses		(11,427	)		(12,656	)
Total loans, net	$	478,473		$	443,559

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.

The Company did not recognize any interest income on impaired loans for the three and nine month periods ending September 30, 2012 and 2011. The following table presents impaired loans exclusive of deferred loan fees and costs and the related allowance for loan losses as of the dates indicated (in thousands):

	As of September 30, 2012						As of December 31, 2011
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no allocated allowance
Commercial	$	800	$	800	$	—	$	—	$	—	$	—
Real estate - commercial		5,711		6,130		—		1,502		1,556		—
Real estate - construction		1,760		1,810		—		4,128		4,153		—
Real estate - mortgage		692		737		—		643		751		—
Installment		109		123		—		70		75		—
Other		275		282		—		88		91		—
Subtotal		9,347		9,882		—		6,431		6,626		—
With allocated allowance
Commercial		—		—		—		1,788		1,849		450
Real estate - commercial		1,952		1,952		417		4,496		5,302		606
Real estate - construction		—		—		—		5,312		5,312		504
Real estate - mortgage		274		274		50		295		314		37
Installment		—		—		—		37		39		13
Other		—		—		—		—		—		—
Subtotal		2,226		2,226		467		11,928		12,816		1,610
Total Impaired Loans	$	11,573	$	12,108	$	467	$	18,359	$	19,442	$	1,610

39

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

	Average Recorded Investment				Average Recorded Investment
	for the three months ended				for the nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
Commercial	$	938	$	2,356	$	1,043	$	2,388
Real estate - commercial		7,780		5,523		7,942		5,560
Real estate - construction		1,766		3,423		1,780		3,422
Real estate - mortgage		986		1,291		1,006		1,302
Installment		123		111		133		112
Other		277		113		287		113
Total	$	11,870	$	12,817	$	12,191	$	12,897

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.

Nonperforming assets are summarized as follows (in thousands):

	September 30,			December 31,
	2012			2011
Nonaccrual loans	$	11,573		$	18,359
Loans past due 90 days or more and still accruing interest		6			52
Total nonperforming loans		11,579			18,411
Other real estate owned		21,689			20,106
Total nonperforming assets	$	33,268		$	38,517
Nonaccrual loans to total gross loans		2.36	%		4.02	%
Nonperforming loans to total gross loans		2.36	%		4.04	%
Total nonperforming assets to total assets		3.72	%		4.26	%

At September 30, 2012 and December 31, 2011, the recorded investment in nonperforming loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) was approximately $11,579,000 and $18,411,000, respectively. The Company had $467,000 of specific allowance for loan losses on impaired loans of $2,226,000 at September 30, 2012 as compared to $1,610,000 of specific allowance for loan losses on impaired loans of $11,928,000 at December 31, 2011. Nonperforming assets (nonperforming loans and OREO) totaled $33,268,000 at September 30, 2012, a decrease of $5,249,000 from the total at December 31, 2011.

If interest on nonaccrual loans had been accrued, such income would have approximated $495,000 and $824,000, respectively for the nine month periods ended September 30, 2012 and 2011.

At September 30, 2012 there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual.

40

The composition of nonaccrual loans as of September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011 was as follows (in thousands):

	September					June					March					December
	2012					2012					2012					2011
			% of					% of					% of					% of
	Amount		total			Amount		total			Amount		total			Amount		total
Commercial	$	800		6.9	%	$	1,113		6.7	%	$	1,174		7.5	%	$	1,788		9.7	%
Real estate - commercial		7,663		66.2	%		5,945		35.8	%		4,390		28.1	%		5,998		32.7	%
Real estate - construction		1,760		15.2	%		8,381		50.4	%		8,869		56.7	%		9,440		51.4	%
Real estate - mortgage		966		8.3	%		941		5.7	%		905		5.8	%		938		5.1	%
Installment		109		0.9	%		136		0.8	%		159		1.0	%		107		0.6	%
Other		275		2.4	%		111		0.7	%		137		0.9	%		88		0.5	%
Total nonaccrual loans	$	11,573		100.0	%	$	16,627		100.0	%	$	15,634		100.0	%	$	18,359		100.0	%

At September 30, 2012, nonaccrual real-estate-construction loans totaled $1,760,000, or 15.2%, of the nonaccrual loans. There are five loans that make up the balance. Charge-offs of $2,000 have been taken on these loans and no specific reserves have been established for these loans as of September 30, 2012. There are three loans for nonaccrual residential construction development projects totaling $1,398,000. Charge-offs of $2,000 have been taken on these loans and no specific reserves have been established for these loans at September 30, 2012. There are two loans for nonaccrual commercial construction projects totaling $362,000. No charge offs and no specific reserves have been established for these loans at September 30, 2012.

At September 30, 2012, there were eleven real-estate-commercial loans totaling $7,663,000, or 66.2%, of the nonperforming loans. The largest real estate-commercial loan is for a building located in Sacramento County for $3,301,000. Charge-offs of $693,000 have been taken on this loan and no specific reserve has been established for this loan. The second largest is a commercial real estate loan in the amount of $1,952,000 for a building located in Sacramento County. This loan has no charge offs and a $417,000 specific reserve has been established. The third largest is a commercial real estate loan in the amount of $910,000 for a building located in Sacramento County. This loan had a $1,178,000 charge-off and no specific reserve has been established for this loan. The remaining eight real estate-commercial loans total $1,500,000 (approximate average loan balance of $188,000). Charge-offs of $440,000 have been taken on these loans and no specific reserves have been established for these loans.

At September 30, 2012, net carrying value of other real estate owned increased $1,583,000 to $21,689,000 from $20,106,000 at December 31, 2011. During the nine month period ending September 30, 2012, the Company transferred nine properties into OREO totaling $7,484,000, sold eleven properties totaling $4,414,000, had write-downs of OREO of $1,310,000, and recorded loss on sale of OREO of $177,000. As part of the financial close process, valuations of OREO are performed by management and write-downs are recorded as warranted. At September 30, 2012, OREO was comprised of twenty-five properties which consisted of the following: four residential construction properties totaling $4,338,000, seventeen residential land parcels totaling $15,491,000, one commercial land parcel for $382,000, one non-farm non-residential property totaling $271,000 and two residential properties totaling $1,207,000.

41

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

	As of September 30, 2012
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	37,199	$	88	$	—	$	800	$	38,087
Real estate - commercial		282,039		776		—		7,663		290,478
Real estate - construction		23,273		199		—		1,760		25,232
Real estate - mortgage		79,733		198		—		966		80,897
Installment		7,127		68		6		109		7,310
Other		46,951		27		—		275		47,253
Total	$	476,322	$	1,356	$	6	$	11,573	$	489,257

	As of December 31, 2011
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	44,325	$	47	$	—	$	1,788	$	46,160
Real estate - commercial		264,143		6,503		—		5,998		276,644
Real estate - construction		18,023		—		—		9,440		27,463
Real estate - mortgage		45,170		1,254		—		938		47,362
Installment		10,614		152		52		107		10,925
Other		47,877		—		—		88		47,965
Total	$	430,152	$	7,956	$	52	$	18,359	$	456,519

During the period ending September 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. The following table shows information related to Troubled Debt Restructurings for the periods indicated (in thousands):

	For the three months ended September 30, 2012						For the nine months ended September 30, 2012
	Accruing TDRs						Accruing TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Real estate - construction		—	$	—	$	—		1	$	347	$	347
Real estate - mortgage		1	$	425	$	425		1	$	425	$	425

	For the three months ended September 30, 2012						For the nine months ended September 30, 2012
	Non Accruing TDRs						Non Accruing TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		—	$	—	$	—		1	$	1,050	$	800
Real estate - commercial		—	$	—	$	—		2	$	269	$	269
Real estate - construction		—	$	—	$	—		2	$	788	$	788
Installment		—	$	—	$	—		2	$	70	$	70
Other		1	$	50	$	50		1	$	50	$	50

At September 30, 2012, there were no specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. There are no commitments to lend additional amounts at September 30, 2012 to customers with outstanding loans that are classified as troubled debt restructurings. There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the year period ending September 30, 2012.

42

There were five loans with a modification involving a reduction of the stated interest rate, three modifications involving an extension of the maturity date and the recorded investment in five loans were reduced in the aggregate amount of $322,000 for nine months ended September 30, 2012.

Allowance for Loan Losses

The following table shows the changes in the allowance for loan losses were as follows (in thousands):

	For the three months ended September 30, 2012
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated		Total
Allowance for Loan Losses
Balance June 30, 2012	$	1,260		$	6,586		$	1,387		$	925		$	141		$	768		$	665	$	11,732
Charge-offs		(250	)		(113	)		(492	)		(143	)		(48	)		(48	)				(1,094	)
Recoveries		13			—			43			1			29			3					89
Provisions for loan losses		(261	)		435			(23	)		422			—			60			67		700
Balance September 30, 2012	$	762		$	6,908		$	915		$	1,205		$	122		$	783		$	732	$	11,427

	For the three months ended September 30, 2011
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated		Total
Allowance for Loan Losses
Balance June 30, 2011	$	1,931		$	8,778		$	1,339		$	1,015		$	251		$	745		$	687	$	14,746
Charge-offs		(54	)		(1,115	)		(159	)		(73	)		(42	)		(128	)				(1,571	)
Recoveries		59			—			—			2			35			—					96
Provisions for loan losses		(229	)		394			130			(13	)		(34	)		123			29		400
Balance September 30, 2011	$	1,707		$	8,057		$	1,310		$	931		$	210		$	740		$	716	$	13,671

	For the nine months ended September 30, 2012
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2011	$	1,333		$	7,528		$	1,039		$	935		$	185		$	736		$	900		$	12,656
Charge-offs		(456	)		(1,730	)		(822	)		(333	)		(190	)		(120	)					(3,651	)
Recoveries		39			63			80			37			94			9						322
Provisions for loan losses		(154	)		1,047			618			566			33			158			(168	)		2,100
Balance September 30, 2012	$	762		$	6,908		$	915		$	1,205		$	122		$	783		$	732		$	11,427

	As of September 30, 2012
Reserve to impaired loans	$	—	$	417	$	—	$	50	$	—	$	—	$	—	$	467
Reserve to non-impaired loans	$	762	$	6,491	$	915	$	1,155	$	122	$	783	$	732	$	10,960

	For the nine months ended September 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		(928	)		(1,973	)		(356	)		(354	)		(334	)		(429	)					(4,374	)
Recoveries		197			—			10			2			193			—						402
Provisions for loan losses		921			1,591			(280	)		327			12			503			(424	)		2,650
Balance September 30, 2011	$	1,707		$	8,057		$	1,310		$	931		$	210		$	740		$	716		$	13,671

	As of September 30, 2011
Reserve to impaired loans	$	713	$	352	$	241	$	119	$	—	$	—	$	—	$	1,425
Reserve to non-impaired loans	$	994	$	7,705	$	1,069	$	812	$	210	$	740	$	716	$	12,246

	As of December 31, 2011
Reserve to impaired loans	$	450	$	606	$	504	$	37	$	13	$	—	$	—	$	1,610
Reserve to non-impaired loans	$	883	$	6,922	$	535	$	898	$	172	$	736	$	900	$	11,046

The following table shows the loan portfolio by segment as follows (in thousands):

Loans	As of September 30, 2012
			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Mortgage		Installment		Other		Total
Total Loans	$	38,087	$	290,478	$	25,232	$	80,897	$	7,310	$	47,253	$	489,257
Impaired Loans	$	800	$	7,663	$	1,760	$	966	$	109	$	275	$	11,573
Non-impaired loans	$	37,287	$	282,815	$	23,472	$	79,931	$	7,201	$	46,978	$	477,684

	As of December 31, 2011
			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Mortgage		Installment		Other		Total
Total Loans	$	46,160	$	276,644	$	27,463	$	47,362	$	10,925	$	47,965	$	456,519
Impaired Loans	$	1,788	$	5,998	$	9,440	$	938	$	107	$	88	$	18,359
Non-impaired loans	$	44,372	$	270,646	$	18,023	$	46,424	$	10,818	$	47,877	$	438,160

43

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

	As of September 30, 2012
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	36,691	$	105	$	1,291	$	—	$	38,087
Real estate - commercial		268,915		69		21,494		—		290,478
Real estate - construction		23,223		—		2,009		—		25,232
Real estate - mortgage		78,032		—		2,865		—		80,897
Installment		7,194		—		116		—		7,310
Other		46,806		—		447		—		47,253
Total	$	460,861	$	174	$	28,222	$	—	$	489,257

	As of December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	39,319	$	3,067	$	3,774	$	—	$	46,160
Real estate - commercial		248,696		5,055		22,893		—		276,644
Real estate - construction		17,624		167		9,672		—		27,463
Real estate - mortgage		43,760		886		2,716		—		47,362
Installment		10,702		—		223		—		10,925
Other		47,638		—		327		—		47,965
Total	$	407,739	$	9,175	$	39,605	$	—	$	456,519

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 periodically. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

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

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

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

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

The Company also maintains a separate allowance for off-balance-sheet commitments. A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with commitments to lend funds under existing agreements, for example, the Bank’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet and was $183,000 and $161,000, as of September 30, 2012 and December 31, 2011, respectively.

44

Management anticipates modest growth in commercial lending and commercial real estate and to a lesser extent consumer, real estate mortgage lending, and 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 decreased $7,763,000, or 1.0%, to $758,476,000 at September 30, 2012 compared to $766,239,000 at December 31, 2011. During the nine months ended September 30, 2012, interest-bearing demand deposits increased $11,178,000, or 6.6%, and savings and money market deposits increased $16,566,000, or 7.7%, while certificates of deposit decreased $34,969,000, or 16.5% and noninterest-bearing demand deposits decreased $538,000, or 0.3%.

	September 30,		December 31,
	2012		2011
Noninterest-bearing demand	$	166,968	$	167,506
Interest-bearing demand		181,302		170,124
Savings and money market		232,865		216,299
Time certificates		177,341		212,310
Total deposits	$	758,476	$	766,239

Capital Resources (Restated)

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 $8,102,000 to $97,567,000 as of September 30, 2012, as compared to $89,465,000 at December 31, 2011. The increase was the result of net income of $5,745,000, a change in accumulated other comprehensive income of $2,199,000 and stock based compensation expense of $158,000, during the first nine months of 2012. 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. The payment of cash dividends remains suspended and future dividends will be determined by the Board of Directors after consideration of the Company’s earnings, financial condition, future capital funds, regulatory requirements and other factors as the Board of Directors may deem relevant.

On June 7, 2012, the federal bank regulatory agencies published notices of proposed rulemakings that would revise and replace the current capital requirements.  The proposed rules implement the “Basel III” regulatory capital reforms released by the Basel Committee on Banking Supervision and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The proposed rules are subject to a comment period ended October 22, 2012.  Therefore, it is uncertain whether the proposed rules will be effective in the form proposed or modified in response to comments including delay of the effective date or other changes that may have a material impact upon the proposed rules and their application to our Company and the Bank.  The proposed rules include new minimum capital ratio requirements to be phased in between January 1, 2013 and January 1, 2015.  The proposed rules would also establish a “capital conservation buffer,” which requires maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements. 

45

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
	Amount		Ratio			Amount		Minimum			Amount		Minimum
	(Restated)		(Restated)			(Restated)		Ratio			(Restated)		Ratio
Company
As of September 30, 2012:  (Restated)
Total capital (to risk weighted assets)	$	110,711		18.22	%	$	48,611		8.00	%		N/A		N/A
Tier 1 capital (to risk weighted assets)	$	103,000		16.96	%	$	24,292		4.00	%		N/A		N/A
Tier 1 capital (to average assets)	$	103,000		11.43	%	$	36,045		4.00	%		N/A		N/A
As of December 31, 2011:
Total capital (to risk weighted assets)	$	116,464		19.53	%	$	47,707		8.00	%		N/A		N/A
Tier 1 capital (to risk weighted assets)	$	107,240		17.99	%	$	23,844		4.00	%		N/A		N/A
Tier 1 capital (to average assets)	$	107,240		11.82	%	$	36,291		4.00	%		N/A		N/A
North Valley Bank
As of September 30, 2012:  (Restated)
Total capital (to risk weighted assets)	$	110,783		18.25	%	$	48,562		8.00	%	$	60,703		10.00	%
Tier 1 capital (to risk weighted assets)	$	103,078		16.98	%	$	24,282		4.00	%	$	36,423		6.00	%
Tier 1 capital (to average assets)	$	103,078		11.46	%	$	35,978		4.00	%	$	44,973		5.00	%
As of December 31, 2011:
Total capital (to risk weighted assets)	$	121,221		20.33	%	$	47,701		8.00	%	$	59,627		10.00	%
Tier 1 capital (to risk weighted assets)	$	113,666		19.06	%	$	23,854		4.00	%	$	35,782		6.00	%
Tier 1 capital (to average assets)	$	113,666		12.54	%	$	36,257		4.00	%	$	45,321		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 September 30, 2012, $21,651,000 was outstanding in the form of subordinated debt issued by the Company, after the Company redeemed $10,310,000 of its subordinated notes on July 25, 2012. Unused lines of credit with correspondent banks to provide federal funds of $10,000,000 as of September 30, 2012 were also available to provide liquidity. In addition, NVB is a member of the Federal Home Loan Bank providing additional unused borrowing capacity of $303,570,000 secured by certain loans and investment securities as of September 30, 2012. The Company also has an unused line of credit with the Federal Reserve Bank of San Francisco of $5,157,000 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 $318,866,000 and $371,173,000 (or 35.65% and 41.02% of total assets) at September 30, 2012 and December 31, 2011, 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 $677,199,000 and $669,342,000 at September 30, 2012 and December 31, 2011, respectively.

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

Interest Rate Sensitivity

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

46

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

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

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

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

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

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

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

47

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, 2011.

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 nine months ended September 30, 2012 compared to December 31, 2011. Please see discussion under the caption “Interest Rate Sensitivity” on page 43.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Evaluation of Disclosure Controls and Procedures

The Company's management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2012. In connection with the revision to the consolidated financial statements as described in Notes 1 (Basis of Presentation), 7 (Income Taxes) and 10 (Earnings Per Share) to the Consolidated Financial Statements of this Amendment No. 1, Management reevaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2012. In connection therewith, Management identified a material weakness in internal control over financial reporting. Management determined that the Company did not maintain effective control over the financial reporting process utilized to calculate the correct amount of tax benefit to record in connection with the reversal of the deferred tax valuation allowance. As a result, Management believes this control deficiency resulted in an error in the reporting of total assets, stockholders’ equity, net income, and total comprehensive income. As a result of this material weakness, Management concluded that the Company’s disclosure controls were not effective as of September 30, 2012. In light of the material weakness described above, Management revised its consolidated financial statements in this Form 10-Q/A as discussed previously to ensure that the error in the deferred tax asset calculation was corrected. Management also believes that the consolidated financial statements included in this Form 10-Q/A were prepared in accordance with U.S. generally accepted accounting principles (GAAP) in all material respects.

Subsequent to September 30, 2012, Management of the Company will change certain quarterly internal control procedures to include the use of third party specialists to assist with technical computations such as income taxes. Also, the Company will focus remediation efforts on establishing additional financial reporting processes when events or transactions occur outside of the Company’s usual and routine course of business inclusive and exclusive of those related to income tax matters. Management believes these additional control procedures will be sufficient to remediate this material weakness. Management will validate, through testing of internal controls, the effectiveness of this remediation. However, the effectiveness of any system of internal controls is subject to inherent limitations and there can be no assurance that the Company’s internal control over financial reporting will prevent or detect all errors. The Company will continue toevaluate and strengthen its internal control over financial reporting system in order to prevent future errors in financial reporting.

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 September 30, 2012 that has materially affected or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

48

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, 2011.

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

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

31	Rule 13a-14(a) / 15d-14(a) Certifications
32	Section 1350 Certifications
99.195	Michael J. Cushman Employment Agreement (incorporated by reference to Exhibit 99.195 of the Company’s Form 10-Q filed on November 13, 2012)
99.196	Kevin R. Watson Employment Agreement (incorporated by reference to Exhibit 99.196 of the Company’s Form 10-Q filed on November 13, 2012)
99.197	Scott R. Louis Employment Agreement (incorporated by reference to Exhibit 99.197 of the Company’s Form 10-Q filed on November 13, 2012)
99.198	Roger D. Nash Employment Agreement (incorporated by reference to Exhibit 99.198 of the Company’s Form 10-Q filed on November 13, 2012)
99.199	Gary S. Litzsinger Employment Agreement (incorporated by reference to Exhibit 99.199 of the Company’s Form 10-Q filed on November 13, 2012)
99.200	Leo J. Graham Employment Agreement (incorporated by reference to Exhibit 99.200 of the Company’s Form 10-Q filed on November 13, 2012)
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.

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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     February 11, 2013

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)

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