UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)
[x]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
      For the period ended September 30, 2007.

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

                         Commission file number 0-10652

                              NORTH VALLEY BANCORP
                              --------------------
             (Exact name of registrant as specified in its charter)

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

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

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

(Former name, former address and former fiscal year, if changed since last
report)

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):

Large accelerated filer [ ]    Accelerated filer [X]   Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

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

Common Stock - 7,374,884 shares as of November 7, 2007.

<PAGE>

                                      INDEX

                      NORTH VALLEY BANCORP AND SUBSIDIARIES

<TABLE>
<S>                                                                                                   <C>
PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)

          Condensed Consolidated Balance Sheets--September 30, 2007 and December 31, 2006               3

          Condensed Consolidated Statements of Income--For the three and nine months ended
          September 30, 2007 and 2006                                                                   4

          Condensed Consolidated Statements of Cash Flows--For the nine months ended
          September 30, 2007 and 2006                                                                   6

          Notes to Condensed Consolidated Financial Statements                                          7

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations        13

Item 3.   Quantitative and Qualitative Disclosures about Market Risk                                   27

Item 4.   Controls and Procedures                                                                      27

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings                                                                            27

Item 1A.  Risk Factors                                                                                 27

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds                                  27

Item 3.   Defaults Upon Senior Securities                                                              27

Item 4.   Submission of Matters to a Vote of Security Holders                                          27

Item 5.   Other Information                                                                            27

Item 6.   Exhibits                                                                                     28

SIGNATURES                                                                                             29
</TABLE>

                                        2
<PAGE>

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

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

<TABLE>
<CAPTION>
                                                                                  September 30,   December 31,
                                                                                      2007            2006
                                                                                  -------------   ------------
<S>                                                                               <C>             <C>
ASSETS
Cash and cash equivalents:
   Cash and due from banks                                                        $      28,333   $     30,826
   Federal funds sold                                                                         -         10,670
                                                                                  -------------   ------------
         Total cash and cash equivalents                                                 28,333         41,496

Investment securities available for sale, at fair value                                 108,616        133,571
Investment securities held to maturity, at amortized cost                                    52             82

Loans and leases                                                                        717,436        659,793
   Less: Allowance for loan and lease losses                                             (9,602)        (8,831)
                                                                                  -------------   ------------
   Net loans and leases                                                                 707,834        650,962

Premises and equipment, net                                                              12,933         13,797
Accrued interest receivable                                                               3,820          3,838
Other real estate owned                                                                     902            902
FHLB and FRB stock and other securities                                                   5,635          5,495
Bank-owned life insurance policies                                                       30,256         29,483
Core deposit intangibles, net                                                             1,399          1,886
Goodwill                                                                                 15,187         15,187
Other assets                                                                              9,937          8,974
                                                                                  -------------   ------------

         TOTAL ASSETS                                                             $     924,904   $    905,673
                                                                                  =============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits:
   Noninterest-bearing                                                            $     170,457   $    194,842
   Interest-bearing                                                                     565,982        555,446
                                                                                  -------------   ------------
      Total deposits                                                                    736,439        750,288

Other borrowed funds                                                                     65,590         37,500
Accrued interest payable and other liabilities                                           10,625         10,433
Subordinated debentures                                                                  31,961         31,961
                                                                                  -------------   ------------
      Total liabilities                                                                 844,615        830,182
                                                                                  -------------   ------------

Commitments and Contingencies (Note H)

STOCKHOLDERS' EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; none
   outstanding                                                                                -              -
Common stock, no par value: authorized 20,000,000 shares; outstanding
   7,374,464 and 7,300,914 at September 30, 2007 and December 31, 2006                   40,212         39,202
Retained earnings                                                                        42,562         38,626
Accumulated other comprehensive loss, net of tax                                         (2,485)        (2,337)
                                                                                  -------------   ------------
   Total stockholders' equity                                                            80,289         75,491
                                                                                  -------------   ------------
   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     $     924,904   $    905,673
                                                                                  =============   ============
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).

                                        3

<PAGE>

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

<TABLE>
<CAPTION>
                                                                        For the three months ended September 30,
                                                                           2007                          2006
                                                                        ----------                    ----------
<S>                                                                     <C>                           <C>
INTEREST INCOME:
Interest and fees on loans and leases                                   $   13,790                    $   12,899
Interest on investments:
   Taxable interest income                                                   1,045                         1,330
   Nontaxable interest income                                                  236                           257
Interest on Federal funds sold and repurchase agreements                        12                            20
                                                                        ----------                    ----------
      Total interest income                                                 15,083                        14,506
                                                                        ----------                    ----------

INTEREST EXPENSE:
Deposits                                                                     3,760                         2,782
Subordinated debentures                                                        611                           611
Other borrowings                                                               467                           603
                                                                        ----------                    ----------
      Total interest expense                                                 4,838                         3,996
                                                                        ----------                    ----------

NET INTEREST INCOME                                                         10,245                        10,510

PROVISION FOR LOAN AND LEASE LOSSES                                            850                           555
                                                                        ----------                    ----------

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES                9,395                         9,955
                                                                        ----------                    ----------

NONINTEREST INCOME:
Service charges on deposit accounts                                          1,791                         1,723
Other fees and charges                                                         939                           902
Earnings on cash surrender value of life insurance policies                    333                           309
Gain on sale of loans                                                           34                           171
Other                                                                          253                           493
                                                                        ----------                    ----------
      Total noninterest income                                               3,350                         3,598
                                                                        ----------                    ----------

NONINTEREST EXPENSES:
Salaries and employee benefits                                               5,306                         5,407
Occupancy expense                                                              773                           772
Furniture and equipment expense                                                499                           533
Other                                                                        2,903                         3,147
                                                                        ----------                    ----------
      Total noninterest expenses                                             9,481                         9,859
                                                                        ----------                    ----------

INCOME BEFORE PROVISION FOR INCOME TAXES                                     3,264                         3,694

PROVISION FOR INCOME TAXES                                                   1,044                           775
                                                                        ----------                    ----------

NET INCOME                                                              $    2,220                    $    2,919
                                                                        ==========                    ==========

Per Share Amounts
Basic Earnings Per Share                                                $     0.30                    $     0.40
                                                                        ==========                    ==========
Diluted Earnings Per Share                                              $     0.29                    $     0.39
                                                                        ==========                    ==========
Cash Dividends Per Common Share                                         $     0.10                    $     0.10
                                                                        ==========                    ==========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).

                                        4

<PAGE>

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

<TABLE>
<CAPTION>
                                                                        For the nine months ended September 30,
                                                                           2007                          2006
                                                                        ----------                    ----------
<S>                                                                     <C>                           <C>
INTEREST INCOME:
Interest and fees on loans and leases                                   $   39,622                    $   36,862
Interest on investments:
   Taxable interest income                                                   3,437                         4,285
   Nontaxable interest income                                                  729                           800
Interest on Federal funds sold and repurchase agreements                       391                           196
                                                                        ----------                    ----------
      Total interest income                                                 44,179                        42,143
                                                                        ----------                    ----------

INTEREST EXPENSE:
Deposits                                                                    10,624                         6,913
Subordinated debentures                                                      1,829                         1,843
Other borrowings                                                             1,052                         1,789
                                                                        ----------                    ----------
      Total interest expense                                                13,505                        10,545
                                                                        ----------                    ----------

NET INTEREST INCOME                                                         30,674                        31,598

PROVISION FOR LOAN AND LEASE LOSSES                                            850                           925
                                                                        ----------                    ----------

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES               29,824                        30,673
                                                                        ----------                    ----------

NONINTEREST INCOME:
Service charges on deposit accounts                                          5,122                         4,806
Other fees and charges                                                       2,797                         2,334
Earnings on cash surrender value of life insurance policies                    942                           889
Gain on sale of loans                                                          131                           336
Loss on sale or calls on securities                                            (36)                           (3)
Other                                                                          698                         1,049
                                                                        ----------                    ----------
      Total noninterest income                                               9,654                         9,411
                                                                        ----------                    ----------

NONINTEREST EXPENSES:
Salaries and employee benefits                                              16,340                        16,458
Occupancy expense                                                            2,296                         2,255
Furniture and equipment expense                                              1,552                         1,610
Other                                                                       10,255                         9,432
                                                                        ----------                    ----------
      Total noninterest expenses                                            30,443                        29,755
                                                                        ----------                    ----------

INCOME BEFORE PROVISION FOR INCOME TAXES                                     9,035                        10,329

PROVISION FOR INCOME TAXES                                                   2,891                         2,987
                                                                        ----------                    ----------

NET INCOME                                                              $    6,144                    $    7,342
                                                                        ==========                    ==========

Per Share Amounts
Basic Earnings Per Share                                                $     0.84                    $     0.99
                                                                        ==========                    ==========
Diluted Earnings Per Share                                              $     0.80                    $     0.95
                                                                        ==========                    ==========
Cash Dividends Per Common Share                                         $     0.30                    $     0.30
                                                                        ==========                    ==========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).

                                        5

<PAGE>

NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                        For the nine months ended September 30,
                                                                           2007                          2006
                                                                        ----------                    ----------
<S>                                                                     <C>                           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                              $    6,144                    $    7,342
Adjustments to reconcile net income to net cash provided by
   operating activities:
   Depreciation and amortization                                             1,668                         1,753
   Amortization of premium on securities                                        63                            72
   Amortization of core deposit intangible                                     487                           488
   Provision for loan and lease losses                                         850                           925
   Loss on sale or calls on securities                                          36                             3
   Gain on sale of loans                                                      (131)                         (336)
   Gain on sale of premises and equipment                                       (3)                         (217)
   FHLB stock dividends                                                       (146)                         (169)
   Stock-based compensation expense                                            270                           227
   Excess tax benefit from exercise of stock options                           (92)                         (175)
Effect of changes in:
   Accrued interest receivable                                                  18                          (165)
   Other assets                                                             (1,628)                         (391)
   Accrued interest payable and other liabilities                              284                          (505)
                                                                        ----------                    ----------
      Net cash provided by operating activities                              7,820                         8,852
                                                                        ----------                    ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sales of available for sale securities                          -                            62
   Proceeds from maturities/calls of available for sale securities          24,635                        26,406
   Net change in FHLB and FRB stock and other securities                         -                           338
   Net increase in loans and leases                                        (57,590)                      (41,236)
   Proceeds from sales of premises and equipment                                 3                           329
   Purchases of premises and equipment                                        (804)                       (1,000)
                                                                        ----------                    ----------
      Net cash used in investing activities                                (33,756)                      (15,101)
                                                                        ----------                    ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net (decrease) increase in deposits                                     (13,849)                       14,205
   Net increase (decrease) in other borrowed funds                          28,090                       (18,400)
   Cash dividends paid                                                      (2,208)                       (2,204)
   Repurchase of common stock                                                    -                        (5,270)
   Exercise of stock options, including tax benefit                            740                           519
                                                                        ----------                    ----------
      Net cash provided by (used in) financing activities                   12,773                       (11,150)
                                                                        ----------                    ----------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                  (13,163)                      (17,399)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                41,496                        56,094
                                                                        ----------                    ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                $   28,333                    $   38,695
                                                                        ==========                    ==========

Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
   Interest                                                             $   14,180                    $   10,922
   Income taxes                                                         $    2,865                    $    4,075
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).

                                        6
<PAGE>

                      NORTH VALLEY BANCORP AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A - BASIS OF PRESENTATION

      The accompanying unaudited condensed consolidated financial statements of
North Valley Bancorp and subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X
of the Securities and Exchange Commission. Accordingly, certain information and
notes required by accounting principles generally accepted in the United States
of America 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, 2006. Operating results for the three and nine months ended
September 30, 2007 are not necessarily indicative of the results that may be
expected for any subsequent period or for the year ended December 31, 2007.

      The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries North Valley Bank ("NVB"), North
Valley Trading Company, which is inactive and North Valley Bank Scholarship
Fund, Inc., which is also inactive. Significant intercompany items and
transactions have been eliminated in consolidation. North Valley Capital Trust
I, North Valley Capital Trust II, North Valley Capital Trust III and North
Valley Capital Statutory Trust IV are unconsolidated subsidiaries formed solely
for the purpose of issuing trust preferred securities.

      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 10
percent of revenues for the Company or NVB.

NOTE B - ANNOUNCED PLAN OF MERGER

      As reported on the Company's Current Report on Form 8-K, filed with the
Commission on April 11, 2007 (the "April Current Report"), the Company has
entered into an Agreement and Plan of Merger dated April 10, 2007 (the "Merger
Agreement") pursuant to which the Company would merge with and into Sterling
Financial Corporation, a Washington corporation ("Sterling"), with Sterling
being the surviving corporation. A copy of the Merger Agreement (together with
certain other information regarding the proposed merger) is provided in the
April Current Report. Consummation of the merger requires approval of the
Company's shareholders, and is subject to certain other conditions specified in
the Merger Agreement, including the receipt of all necessary regulatory
approvals and the satisfaction of other closing conditions that are customary
for such transactions.

      A special meeting of the Company shareholders was held on July 31, 2007,
and the principal terms of the Merger Agreement, including the proposed merger
of the Company with and into Sterling, were approved by majority vote of the
outstanding shares of the common stock of the Company.

      On October 26, 2007, Sterling filed a Current Report on Form 8-K
announcing that it appears unlikely that the pending merger will be completed
during the fourth quarter of 2007. Sterling has revised its expectation for
regulatory approval based upon recent conversations with the Federal Deposit
Insurance Corporation (the "FDIC"). Sterling has been asked by the FDIC to
strengthen its internal regulatory compliance program to ensure that Sterling's
infrastructure is keeping pace with its growth rate. The FDIC also informed
Sterling that, at this time, it cannot advise Sterling when or if the pending
application to merge Sterling Savings Bank with North Valley Bank will be
approved. See "Announced Plan of Merger" in Item 2, on pages 15-16.

                                        7

<PAGE>

NOTE C - INVESTMENT SECURITIES

      At September 30, 2007 and December 31, 2006, the amortized cost of
securities and their approximate fair value were as follows (in thousands):

<TABLE>
<CAPTION>
                                                           Gross        Gross
                                             Amortized   Unrealized   Unrealized    Estimated
                                                Cost       Gains        Losses     Fair Value
                                             ---------   ----------   ----------   ----------
<S>                                          <C>         <C>          <C>          <C>
Available for sale securities:

September 30, 2007
   Obligations of U.S. government agencies   $   3,999   $        -   $      (15)       3,984
   Obligations of state and political
     subdivisions                               20,683          466          (27)      21,122
   Mortgage-backed securities                   73,242           13       (2,173)      71,082
   Corporate debt securities                     6,001            -         (439)       5,562
   Equity securities                             8,000            -       (1,134)       6,866
                                             ---------   ----------   ----------   ----------
                                             $ 111,925   $      479   $   (3,788)  $  108,616
                                             =========   ==========   ==========   ==========

December 31, 2006
   Obligations of U.S. government agencies   $   7,605   $        -   $     (105)       7,500
   Obligations of state and political
     subdivisions                               21,957          643          (40)      22,560
   Mortgage-backed securities                   86,028           20       (2,824)      83,224
   Corporate debt securities                     5,998            7          (17)       5,988
   Equity securities                            15,040           26         (767)      14,299
                                             ---------   ----------   ----------   ----------
                                             $ 136,628   $      696   $   (3,753)  $  133,571
                                             =========   ==========   ==========   ==========
</TABLE>

<TABLE>
<CAPTION>
                                                           Gross        Gross
                                             Amortized   Unrealized   Unrealized    Estimated
                                                Cost       Gains        Losses     Fair Value
                                             ---------   ----------   ----------   ----------
<S>                                          <C>         <C>          <C>          <C>
Held to maturity securities:

September 30, 2007
   Mortgage-backed securities                $      52                $       (1)  $       51
                                             =========   ==========   ==========   ==========
December 31, 2006
   Mortgage-backed securities                $      82    $       -   $       (1)  $       81
                                             =========   ==========   ==========   ==========
</TABLE>

      For the nine months ended September 30, 2007 and 2006, there were $17,000
and $16,000, respectively, in gross realized gains on sales or calls of
available for sale securities. For the nine months ended September 30, 2007 and
2006, there were $53,000 and $19,000, respectively, in gross realized losses on
sales or calls of available for sale securities. There were no sales or
transfers of held to maturity securities for the three and nine months ended
September 30, 2007 and 2006.

      At September 30, 2007 and December 31, 2006, securities having fair value
amounts of approximately $67,555,000 and $81,258,000 were pledged to secure
public deposits, short-term borrowings, treasury, tax and loan balances and for
other purposes required by law or contract.

      Investment securities are evaluated for other-than-temporary impairment on
at least a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation to determine whether a decline in their
value below amortized cost is other-than-temporary. Management utilizes criteria
such as the magnitude and duration of the decline and the intent and ability of
the Company to retain its investment in the issues for a period of time
sufficient to allow for an anticipated recovery in fair value, in addition to
the reasons underlying the decline, to determine whether the loss in value is
other-than-temporary. The term "other-than-temporary" is not intended to
indicate that the decline is permanent, but indicates that the prospects for a
near-term recovery of value is not necessarily favorable, or that there is a
lack of evidence to support a realizable value equal to or greater than the
carrying value of the investment. Once a decline in value is determined to be
other-than-temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized.

      At September 30, 2007, the Company held $89,478,000 of available for sale
investment securities in an unrealized loss position of which $5,965,000 were in
an unrealized loss position for less than twelve months and $83,513,000 were in
an unrealized loss position and had been in an unrealized loss position for
twelve months or

                                        8

<PAGE>

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

      Included in the above securities at September 30, 2007 are 100,000 shares
of FNMA, Series M perpetual preferred stock. The coupon rate is fixed at 4.75%
with a taxable-equivalent yield of 6.31%. The securities are owned at par, or
$50.00 per share, for a total investment of $5,000,000 and an unrealized loss of
$1,035,000 at September 30, 2007 as compared to $724,000 at December 31, 2006.
The securities are callable at par on June 10, 2008. The market value per share
as of September 30, 2007 was $39.65 compared to $42.76 per share at December 31,
2006. At September 30, 2007, these securities had been in a loss position for
approximately 51 months.

      Management carefully evaluated the FNMA preferred stock to determine
whether the decline in fair value below book value of these securities is
other-than-temporary. Among other items, management reviewed relevant accounting
literature which included Statement of Financial Accounting Standards ("SFAS")
No. 115, Statement of Auditing Standard ("SAS") 92, and Staff Accounting
Bulletin ("SAB") No. 59. In conducting this assessment, management evaluated a
number of factors including, but not limited to:

      o     How far fair value has declined below book value

      o     How long the decline in fair value has existed

      o     The financial condition of the issuer

      o     Rating agency changes on the issuer

      o     Management's intent and ability to hold the security for a period of
            time sufficient to allow for any anticipated recovery in fair value

      Based on this evaluation, management concluded that these securities were
not deemed to be other-than-temporarily impaired. Management's assessment
weighed heavily on its intent and ability to hold the securities to recovery,
normal market fluctuations during this holding period, FNMA's response to its
weaker financial condition, and analysis of FNMA by rating agencies and
investment bankers.

NOTE D - STOCK-BASED COMPENSATION

Stock Option Plans

      At September 30, 2007, the Company had three shareholder approved
stock-based compensation plans: the North Valley Bancorp 1989 Director Stock
Option Plan, the 1998 Employee Stock Incentive Plan and the 1999 Director Stock
Option Plan. The Plans do not provide for the settlement of awards in cash and
new shares are issued upon exercise of the options. The shares available for
grant may be granted to anyone eligible to participate in the plans. All options
granted under the Employee plan had an exercise price equal to the market value
of the underlying common stock on the date granted and the exercise price must
be paid in full at the time the option is exercised. The options under the plans
expire on dates determined by the Board of Directors, but not later than ten
years from the date of grant. The vesting period is generally four years;
however the vesting period can be modified at the discretion of the Company's
Board of Directors. Outstanding options under the plans are exercisable until
their expiration. Total options of 2,554,281 were authorized under all plans at
September 30, 2007. Under the terms of the Merger Agreement described in Note B
above, all outstanding options will become fully vested and exercisable upon
consummation of the proposed merger.

Stock Option Compensation

      There were no options grants in the three month period ended September 30,
2007. For the three month period ended September 30, 2006, 13,000 options were
granted at a weighted average grant date fair value of $2.96. For the three
month periods ended September 30, 2007 and 2006, the compensation expense
recognized for stock option compensation was $43,000 and $41,000, respectively.
Director stock grant expense for the three month periods ended September 30,
2007 and 2006 was $(23,000) and $28,000, respectively. The recognized tax
benefit for stock option compensation expense was $6,000 for the three month
period ended September 30, 2007. No tax benefit was recognized for stock option
compensation expense for the three month period ended September 30, 2006. At
September 30, 2007, the total unrecognized compensation expense related to
stock-based awards

                                        9

<PAGE>

granted to employees under the Company's stock option plans was $424,000. This
expense will be amortized on a straight-line basis over a weighted average
period of approximately 1.5 years and will be adjusted for subsequent changes in
estimated forfeitures.

Stock Option Activity

      Under the Company's stock option plans as of September 30, 2007, 1,158,149
shares of the Company's common stock are available for future grants to
directors and employees of the Company. Under the Director Plan, options may not
be granted at a price less than 85% of fair market value at the date of the
grant. Under the Employee Plan, options may not be granted at a price less than
the fair market value at the date of the grant. Under both plans, options may be
exercised over a ten year term and vest ratably over four years from the date of
the grant. A summary of outstanding stock options follows:

<TABLE>
<CAPTION>
                                                                           Weighted
                                                               Weighted     Average
                                                                Average    Remaining       Exercise        Aggregate
                                                               Exercise   Contractual        Price         Intrinsic
                                                      Shares     Price       Term            Range        Value ($000)
                                                    -------------------------------------------------------------------
<S>                                                  <C>       <C>         <C>          <C>               <C>
Outstanding at January 1, 2007                       778,712   $   9.77    3.8 years     $5.36 - 19.86

Granted                                               63,613      20.41        N/A      $20.03 - 24.75

Exercised                                            (70,550)      8.83        N/A       $5.36 - 20.62

Expired or Forfeited                                  (9,231)     19.50        N/A      $17.09 - 20.62

                                                    -------------------------------------------------------------------
Outstanding at September 30, 2007                    762,544   $  10.63    3.8 years     $5.36 - 24.75   $       9,283
                                                    -------------------------------------------------------------------

Fully vested and exercisable at September 30, 2007   658,181   $   9.33    3.0 years     $5.36 - 24.75   $       8,866
                                                    ===================================================================

Options expected to vest                             104,363   $  18.85    8.6 years    $15.72 - 24.75   $         417
                                                    ===================================================================
</TABLE>

      The aggregate intrinsic value of outstanding, fully vested and exercisable
and expected to vest options are 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, 2007. The intrinsic value of exercised options
is calculated as the difference between exercise price of the underlying awards
and the quoted price of the Company's common stock at the date of exercise. The
intrinsic value of options exercised during the three months ended September 30,
2007 and 2006 totaled $93,000 and $177,000, respectively.

NOTE E - COMPREHENSIVE INCOME

      Comprehensive income includes net income and other comprehensive income or
loss. The Company's only sources of other comprehensive income (loss) are
unrealized gains and losses on available for sale investment securities and
adjustments to the minimum pension liability. Reclassification adjustments
resulting from gains or losses on investment securities that were realized and
included in net income of the current period that also had been included in
other comprehensive income (loss) as unrealized holding gains or losses in the
period in which they arose are excluded from comprehensive income in the current
period. The Company's total comprehensive income was as follows:

<TABLE>
<CAPTION>
(in thousands)                                       Three months ended September 30,   Nine months ended September 30,
                                                          2007              2006            2007               2006
                                                     -------------       ------------   -------------      ------------
<S>                                                  <C>                 <C>            <C>                <C>
Net income                                           $       2,220       $      2,919   $       6,144      $      7,342
Other comprehensive income (loss), net of tax:
   Holding gain (loss) arising during period                   292              1,885            (127)              451
   Reclassification adjustment                                   -                  9             (21)               (2)
                                                     -------------       ------------   -------------      ------------

Total comprehensive income                           $       2,512       $      4,813   $       5,996      $      7,791
                                                     =============       ============   =============      ============
</TABLE>

                                       10

<PAGE>

NOTE F - EARNINGS PER SHARE

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

      There was no difference in the numerator, net income, used in the
calculation of basic earnings per share and diluted earnings per share. The
denominator used in the calculation of basic earnings per share and diluted
earnings per share for the three and nine month periods ended September 30, 2007
and 2006 is reconciled as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                              Three months ended September 30,   Nine months ended September 30,
                                                                2007                    2006         2007                2006
                                                              ---------              ---------   -----------          -----------
<S>                                                           <C>                    <C>         <C>                  <C>
Calculation of basic earnings per share:
   Numerator - net income                                     $   2,220              $   2,919   $     6,144          $    7,342
   Denominator - weighted average common shares outstanding       7,366                  7,277         7,355               7,411
                                                              ---------              ---------   -----------          ----------

         Basic earnings per share                             $    0.30              $    0.40   $      0.84          $     0.99
                                                              =========              =========   ===========          ==========

Calculation of diluted earnings per share:
   Numerator - net income                                     $   2,220              $   2,919   $     6,144          $    7,342
   Denominator:
      Weighted average common shares outstanding                  7,366                  7,277         7,355               7,411
      Dilutive effect of outstanding options                        271                    253           293                 280
                                                              ---------              ---------   -----------          ----------
         Weighted average common shares outstanding and
            common stock equivalents                              7,637                  7,530         7,648               7,691
                                                              ---------              ---------   -----------          ----------

         Diluted earnings per share                           $    0.29              $    0.39   $      0.80          $     0.95
                                                              =========              =========   ===========          ==========
</TABLE>

NOTE G - 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 for the three months ended September 30, 2007 and 2006 are
$62,000 and $141,000, respectively. Components of net periodic benefit cost for
the Company's supplemental nonqualified defined benefit plans for the three and
nine months ended September 30, 2007 and 2006 are presented in the following
table (in thousands):

<TABLE>
<CAPTION>
                                                              Three months ended September 30,   Nine months ended September 30,
                                                                 2007                   2006        2007                 2006
                                                              ---------              ---------   -----------          -----------
<S>                                                           <C>                    <C>         <C>                  <C>
Components of net periodic benefits cost:
   Service cost                                               $     118              $     123   $       351          $      367
   Interest cost                                                     63                     67           189                 201
   Amortization of net obligation at transition                       -                      -             -                   -
   Prior service amortization                                         7                      8            23                  24
   Recognized net actuarial loss                                      8                     14            24                  44
                                                              ---------              ---------   -----------          ----------
Total components of net periodic cost                         $     196              $     212   $       587          $      636
                                                              =========              =========   ===========          ==========
</TABLE>

NOTE H - COMMITMENTS AND CONTINGENCIES

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

      The Company was contingently liable under standby letters of credit issued
on behalf of its customers in the amount of $9,992,000 and $13,067,000 at
September 30, 2007 and December 31, 2006. At September 30, 2007, commercial and
consumer lines of credit and real estate loans of approximately $76,953,000 and
$144,177,000 were undisbursed. At December 31, 2006, commercial and consumer
lines of credit and real estate loans of approximately $88,061,000 and
$145,034,000 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

                                       11

<PAGE>

represent future cash requirements. The Company evaluates each potential
borrower and the necessary collateral on an individual basis. Collateral varies,
but may include real property, bank deposits, debt securities, equity securities
or business or personal assets.

      Standby letters of credit are conditional commitments written by the
Company to guarantee the performance of a customer to a third party. These
guarantees are issued primarily relating to inventory purchases by the Company's
commercial customers and such guarantees are typically short term. Credit risk
is similar to that involved in extending loan commitments to customers and the
Company, accordingly, uses evaluation and collateral requirements similar to
those for loan commitments. Virtually all of such commitments are
collateralized. The fair value of the liability related to these standby letters
of credit, which represents the fees received for issuing the guarantees, was
not significant at September 30, 2007 and December 31, 2006. 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. However, at September 30, 2007, no losses are anticipated as a
result of these commitments.

      In management's opinion, a concentration exists in real estate-related
loans which represent approximately 77% at September 30, 2007 and 78% at
December 31, 2006 of the Company's loan portfolio. Although management believes
such concentrations to have no more than the normal risk of collectibility, a
substantial decline in the economy in general, or a decline in real estate
values in the Company's primary market areas in particular, could have an
adverse impact on collectibility of these loans. However, personal and business
income represents the primary source of repayment for a majority of these loans.

NOTE I - INCOME TAXES

      In June 2006, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and
measurement standard for the financial statement recognition and measurement of
an income tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions. The Company has
adopted FIN 48 as of January 1, 2007.

      The Company previously recognized income tax positions based on
management's estimate of whether it is reasonably possible that a liability has
been incurred for unrecognized income tax benefits by applying FASB Statement
No. 5, Accounting for Contingencies.

      The provisions of FIN 48 have been applied to all tax positions of the
Company as of January 1, 2007. There was no cumulative effect of applying the
provisions of FIN 48 and there was no significant effect on the Company's
provision for income taxes for the three and nine months ended September 30,
2007. The Company recognizes interest accrued related to unrecognized tax
benefits and accruals for penalties in income tax expense.

NOTE J - NEW ACCOUNTING PRONOUNCEMENTS

Fair Value Option for Financial Assets and Financial Liabilities

      In February 2007, the FASB issued Statement No. 159 (SFAS 159), The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
Amendment of FASB Statement No. 115. This standard permits an entity to choose
to measure many financial instruments and certain other items at fair value at
specified election dates. The entity will report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date. The fair value option: (a) may be applied instrument
by instrument, with a few exceptions, such as investments otherwise accounted
for by the equity method; (b) is irrevocable (unless a new election date
occurs); and (c) is applied only to entire instruments and not to portions of
instruments. The provisions of SFAS 159 are effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007. Management did
not elect to early adopt SFAS 159 and has not yet completed its evaluation of
the impact that SFAS 159 will have.

                                       12

<PAGE>

Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Collateral Assignment Split-Dollar Life Insurance Arrangements

      In March 2007, the Emerging Issues Task Force (EITF) reached a final
consensus on Issue No. 06-10 (EITF 06-10), Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements. EITF 06-10 requires employers to
recognize a liability for the post-retirement benefit related to collateral
assignment split-dollar life insurance arrangements in accordance with SFAS No.
106 or APB Opinion No. 12. EITF 06-10 also requires employers to recognize and
measure an asset based on the nature and substance of the collateral assignment
split-dollar life insurance arrangement. The provisions of EITF 06-10 are
effective for the Company on January 1, 2008, with earlier application
permitted, and are to be applied as a change in accounting principle either
through a cumulative-effect adjustment to retained earnings or other components
of equity or net assets in the statement of financial position as of the
beginning of the year of adoption; or as a change in accounting principle
through retrospective application to all prior periods. The Company does not
expect adoption of EITF 06-10 to have a significant impact on its consolidated
financial statements, results of operations or liquidity.

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; the
California power crises; 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 and lease 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 and Lease Losses

      The allowance for loan and lease losses is based on the probable estimated
losses in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accounting Standards (SFAS)
No. 5 "Accounting for Contingencies," which requires that losses be accrued when
they are probable of occurring and estimable; and (2) SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," which requires that losses be accrued on
impaired loans (as defined) based on the differences between the value of
collateral, present value of future cash flows or values that are observable in
the secondary market and the loan balance.

                                       13

<PAGE>

      The allowance for loan and lease losses is established through a provision
for loan and lease losses based on management's evaluation of the risks inherent
in the loan and lease 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 and lease loss
experience, and the Company's underwriting policies. The allowance for loan and
lease losses is maintained at an amount management considers adequate to cover
losses in loans and leases receivable which are considered probable and
estimable. 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. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan and
lease losses. Such agencies may require the Company to recognize additions to
the allowance based on judgments different from those of management.

Share Based Compensation

      On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R). Under SFAS
No.123R, compensation expense is recognized for options granted prior to the
adoption date in an amount equal to the fair value of the unvested amounts over
their remaining vesting period, based on the grant date fair value estimated in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation" and
compensation expense for all share based payments granted after adoption based
on the grant date fair values estimated in accordance with SFAS No. 123R. The
estimates of the grant date fair values are based on an option pricing model
that uses assumptions based on the expected option life, the level of estimated
forfeitures, expected stock volatility and the risk-free interest rate. The
calculation of the fair value of share based payments is by nature inexact, and
represents management's best estimate of the grant date fair value of the share
based payments.

Goodwill

      Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise may give rise to goodwill.
Goodwill represents the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed in transactions
accounted for under the purchase method of accounting. Goodwill of $15,187,000
was recorded in the Company's acquisition of Yolo Community Bank. The value of
goodwill is ultimately derived from the Company's ability to generate net
earnings. A decline in net earnings could be indicative of a decline in the fair
value of goodwill and result in impairment. For that reason, goodwill will be
assessed for impairment at a reporting unit level at least annually. Management
will conduct its annual assessment of impairment during the fourth quarter of
2007.

Impairment of Investment Securities

      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, the financial condition of
the issuer, rating agency changes related to the issuer's securities and the
intent and ability of the Bank to retain its investment in the issues for a
period of time sufficient to allow for an anticipated recovery in fair value, in
addition to the reasons underlying the decline, to determine whether the loss in
value is other-than-temporary. The term "other-than-temporary" is not intended
to indicate that the decline is permanent, but indicates that the prospects for
a near-term recovery of value is not necessarily favorable, or that there is a
lack of evidence to support a realizable value equal to or greater than the
carrying value of the investment. Once a decline in value is determined to be
other-than-temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized. See Note C to Unaudited Condensed Consolidated
Financial Statements in Item 1 - Financial Statements.

                                       14

<PAGE>

Announced Plan of Merger

      As reported on the Company's Current Report on Form 8-K, filed with the
Commission on April 11, 2007 (the "April Current Report"), the Company has
entered into an Agreement and Plan of Merger dated April 10, 2007 (the "Merger
Agreement") pursuant to which the Company would merge with and into Sterling
Financial Corporation, a Washington corporation ("Sterling"), with Sterling
being the surviving corporation. A copy of the Merger Agreement (together with
certain other information regarding the proposed merger) is provided in the
April Current Report. Consummation of the merger requires approval of the
Company's shareholders, and is subject to certain other conditions specified in
the Merger Agreement, including the receipt of all necessary regulatory
approvals and the satisfaction of other closing conditions that are customary
for such transactions.

      A special meeting of the Company shareholders was held on July 31, 2007,
and the principal terms of the Merger Agreement, including the proposed merger
of the Company with and into Sterling, were approved by majority vote of the
outstanding shares of the common stock of the Company.

      Even though the Company shareholders have approved the principal terms of
the Merger Agreement, the Company and Sterling can agree at any time, by mutual
consent, not to complete the proposed merger. Also, either the Company or
Sterling can decide, without the consent of the other, not to complete the
merger in a number of situations as described in the Merger Agreement. For
example, the Board of Directors of the Company can decide, at its discretion, to
terminate the Merger Agreement (without Sterling's consent) if the average
closing price of Sterling's common stock during the 20-day period just prior to
the closing date of the proposed merger is less than $28.23 per share and the
Sterling common stock price has also declined from a price of $33.21 per share
by 15 percent or more relative to a weighted average index of a certain group of
financial institution holding companies (the "Index Group"). A copy of Exhibit F
to the Merger Agreement, listing the financial institution holding companies
currently comprising the Index Group, was filed with the Company's Form 10-Q
Quarterly Report for the period ended June 30, 2007 as Exhibit 99.140 and is
incorporated here by this reference. In the example given above, Sterling would
have the option to avoid termination of the Merger Agreement by increasing the
consideration to be paid to the Company shareholders, as provided in Section
8.1(j). The Merger Agreement provides that each share of Company common stock
will be converted into 0.7364 shares of Sterling common stock and $2.80 in cash
(subject to certain conditions). An adjustment in such consideration could be
effected by an increase in the cash portion, the stock portion, or a combination
of cash and stock, at Sterling's discretion.

      In short, a "Sterling Determination Price" of less than $28.23 on the
"Determination Date," combined with a "Sterling Change Ratio" which is less than
the "Index Change Ratio, as such terms are defined in Section 8.1(j) of the
Merger Agreement, would trigger the possibility of a decision by the Company
Board of Directors to give Sterling a notice of termination (as summarized in
the example given above). On the last trading date immediately preceding the
filing of this report, the closing price per share of Sterling common stock on
the Nasdaq Global Select Market was below $28.23. However, it should be noted
that the "Determination Date" will be the date that is ten (10) business days
before the "Closing Date" and the "Closing Date" is defined in Section 9.1 of
the Merger Agreement as the last day of the month following the receipt of all
regulatory approvals. Applications for the required regulatory approvals have
been submitted by Sterling and remain pending as of the date of this report. On
October 26, 2007, Sterling announced that it appears unlikely that the pending
merger between Sterling and the Company will be completed during the fourth
quarter of 2007. Sterling has revised its expectation for regulatory approval of
the merger based upon recent conversations between Sterling and the Federal
Deposit Insurance Corporation (the "FDIC"). Sterling has been asked by the FDIC
to strengthen its internal regulatory compliance program to ensure that
Sterling's infrastructure is keeping pace with its growth rate. The FDIC has
also informed Sterling that, at this time, it cannot advise Sterling when or if
the pending application to merge Sterling Savings Bank with North Valley Bank
will be approved. Sterling and the Company are currently in discussions
regarding an amendment to the Merger Agreement to extend the date after which
either party may terminate the Merger Agreement if the merger has not been
consummated, which is currently November 30, 2007; however, no agreement to
amend the Merger Agreement has yet been reached.

      Any change in the market price of Sterling common stock prior to the
completion of the proposed merger will affect the value of the merger
consideration that Company shareholders will receive upon completion of the
merger. Stock price changes may result from a variety of factors, including
general market and economic conditions, changes in the businesses, operations
and prospects of Sterling or the Company, and regulatory considerations, and
many of these factors are beyond the control of Sterling or the Company.
Therefore, Company shareholders and investors in the common stock of the Company
are urged to review and carefully consider the provisions regarding merger
consideration set forth in the Merger Agreement, including Section 8.1(j) of the

                                       15

<PAGE>

Merger Agreement, and the potential consequences of the changes that may occur
in the stock trading prices for shares of Sterling common stock and the
financial institutions listed in the Index Group, after the date of this report
and prior to the "Closing Date."

Overview

      North Valley Bancorp (the "Company") is a bank holding company
headquartered in Redding, California. The Company's wholly owned subsidiary,
North Valley Bank ("NVB"), a state-chartered bank, operates out of its main
office located at 300 Park Marina Circle, Redding, CA 96001, with twenty-six
commercial banking offices, including two supermarket branches, in Northern
California. 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.

Earnings Summary

Earnings Summary

<TABLE>
<CAPTION>
                                                       Three months ended September 30,   Nine months ended September 30,
(in thousands except per share amounts)                      2007           2006              2007             2006
                                                       --------------   ---------------   -------------   ---------------
<S>                                                    <C>              <C>               <C>             <C>
Net interest income                                    $       10,245   $        10,510   $      30,674   $        31,598
Provision for loan and lease losses                               850               555             850               925
Noninterest income                                              3,350             3,598           9,654             9,411
Noninterest expense                                             9,481             9,859          30,443            29,755
Provision for income taxes                                      1,044               775           2,891             2,987
                                                       --------------   ---------------   -------------   ---------------
Net income                                             $        2,220   $         2,919   $       6,144   $         7,342
                                                       ==============   ===============   =============   ===============

Earnings Per Share
   Basic                                               $         0.30   $          0.40   $        0.84   $          0.99
   Diluted                                             $         0.29   $          0.39   $        0.80   $          0.95

Annualized Return on Average Assets                              0.97%             1.28%           0.92%             1.09%
Annualized Return on Average Equity                             11.15%            16.49%          10.55%            13.75%
</TABLE>

      Net income for the three and nine months ended September 30, 2007
decreased by $699,000, or 23.9%, and $1,198,000, or 16.3%, respectively,
compared to the same periods in 2006. Diluted earnings per share decreased
$0.10, or 25.6%, for the three months ended September 30, 2007 compared to the
same period in 2006. Diluted earnings per share decreased $0.15, or 15.8%, for
the nine months ended September 30, 2007 compared to the same period in 2006.
For the three and nine month periods ended September 30, 2007, the Company had
$26,000 and $1,086,000, respectively, of merger related expenses resulting from
the pending merger with and into Sterling Financial Corporation, announced on
April 11, 2007. Results for the three and nine month periods ended September 30,
2007, on a non-GAAP basis, excluding these non-core merger related expenses were
net income of $2,237,000, or $0.29 per diluted share and $6,882,000, or $0.90
per diluted share, respectively.

Net Interest Income

      Net interest income is the principal source of the Company's operating
earnings and represents the difference between interest earned on loans and
leases and other investments and interest paid on deposits and other borrowings.
The amount of interest income and expense is affected by changes in the volume
and mix of earning assets and interest-bearing deposits and borrowings, along
with changes in interest rates.

                                       16

<PAGE>

      The following table is a summary of the Company's net interest income,
presented on a fully taxable equivalent (FTE) basis for tax-exempt investments
included in earning assets, for the periods indicated:

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

<TABLE>
<CAPTION>
                                         Three months ended September 30, 2007    Three months ended September 30, 2006
                                         -------------------------------------   --------------------------------------
                                            Average       Yield/     Interest       Average      Yield/     Interest
                                            Balance        Rate       Amount        Balance       Rate       Amount
                                         -------------   -------   -----------   -------------   ------   -------------
<S>                                      <C>                <C>    <C>           <C>               <C>    <C>
Assets
Earning assets:
   Federal funds sold                    $         977      4.87%  $        12   $       1,517     5.23%  $          20
   Investment securities:
      Taxable                                   90,946      4.30%          986         111,624     4.04%          1,136
      Non-taxable (1)                           20,748      6.73%          352          22,504     6.77%            384
      FNMA preferred stock (1)                   5,000      6.19%           78          12,041     6.52%            198
                                         -------------   -------   -----------   -------------   ------   -------------
   Total investments                           116,694      4.81%        1,416         146,169     4.66%          1,718
   Loans and leases (2)(3)                     696,861      7.85%       13,790         651,367     7.86%         12,899
                                         -------------   -------   -----------   -------------   ------   -------------
Total earning assets                           814,532      7.41%       15,218         799,053     7.27%         14,637

Non earning assets                              99,286                                 111,818
Allowance for loan and lease losses             (8,786)                                 (8,498)
                                         -------------                           -------------
Total non-earning assets                        90,500                                 103,320

Total assets                             $     905,032                           $     902,373
                                         =============                           =============

Liabilities and Shareholders' Equity
Interest bearing liabilities:
   Transaction accounts                  $     156,414      0.51%  $       200   $     185,339     0.31%  $         144
   Savings and money market                    189,995      1.92%          918         180,273     1.84%            835
   Time certificates                           224,154      4.68%        2,642         183,363     3.90%          1,803
   Other borrowed funds                         71,269      6.00%        1,078          86,195     5.59%          1,214
                                         -------------   -------   -----------   -------------   ------   -------------
Total interest bearing liabilities             641,832      2.99%        4,838         635,170     2.50%          3,996
                                                         -------   -----------                   ------   -------------
Demand deposits                                174,123                                 187,497
Other liabilities                               10,098                                   9,496
                                         -------------                           -------------
Total liabilities                              826,053                                 832,163
                                         -------------                           -------------
Shareholders' equity                            78,979                                  70,210
                                         -------------                           -------------
Total liabilities and
   shareholders' equity                  $     905,032                           $     902,373
                                         =============                           =============
Net interest income                                                $    10,380                            $      10,641
                                                                   ===========                            =============
Net interest spread                                         4.42%                                  4.77%
                                                         =======                                 ======
Net interest margin                                         5.06%                                  5.28%
                                                         =======                                 ======
</TABLE>

--------------------------------------------------------------------------------

(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 $351 and $228 for the three months ended September 30,
2007 and 2006, respectively.

                                       17

<PAGE>

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

<TABLE>
<CAPTION>
                                          Nine months ended September 30, 2007    Nine months ended September 30, 2006
                                         -------------------------------------   --------------------------------------
                                            Average       Yield/    Interest        Average      Yield/     Interest
                                            Balance        Rate      Amount         Balance       Rate       Amount
                                         -------------   -------   -----------   -------------   ------   -------------
<S>                                      <C>                <C>    <C>           <C>               <C>    <C>
Assets
Earning assets:
   Federal funds sold                    $       9,933      5.26%  $       391   $       5,398     4.85%  $         196
   Investment securities:
      Taxable                                   96,972      4.38%        3,177         120,769     4.09%          3,697
      Non-taxable (1)                           21,007      6.82%        1,072          23,121     6.90%          1,194
      FNMA preferred stock (1)                   7,175      6.45%          346          12,061     6.57%            593
                                         -------------   -------   -----------   -------------   ------   -------------
   Total investments                           125,154      4.91%        4,595         155,951     4.70%          5,484
   Loans and leases (2)(3)                     670,469      7.90%       39,622         634,837     7.76%         36,862
                                         -------------   -------   -----------   -------------   ------   -------------
Total earning assets                           805,556      7.40%       44,608         796,186     7.14%         42,542

Non earning assets                              99,603                                 111,019
Allowance for loan and lease losses             (8,809)                                 (8,155)
                                         -------------                           -------------
Total non-earning assets                        90,794                                 102,864

Total assets                             $     896,350                           $     899,050
                                         =============                           =============

Liabilities and Shareholders' Equity
Interest bearing liabilities:
   Transaction accounts                  $     158,883      0.48%  $       574   $     191,011     0.30%  $         435
   Savings and money market                    195,453      1.88%        2,746         179,297     1.38%          1,848
   Time certificates                           214,403      4.55%        7,304         175,399     3.53%          4,631
   Other borrowed funds                         63,551      6.06%        2,881          88,839     5.46%          3,631
                                         -------------   -------   -----------   -------------   ------   -------------
Total interest bearing liabilities             632,290      2.86%       13,505         634,546     2.22%         10,545
                                                         -------   -----------                   ------   -------------
Demand deposits                                175,200                                 182,976
Other liabilities                               10,970                                  10,131
                                         -------------                           -------------
Total liabilities                              818,460                                 827,653
                                         -------------                           -------------
Shareholders' equity                            77,890                                  71,397
                                         -------------                           -------------
Total liabilities and
   shareholders' equity                  $     896,350                           $     899,050
                                         =============                           =============
Net interest income                                                $    31,103                            $      31,997
                                                                   ===========                            =============
Net interest spread                                         4.54%                                  4.92%
                                                         =======                                 ======
Net interest margin                                         5.16%                                  5.37%
                                                         =======                                 ======
</TABLE>

--------------------------------------------------------------------------------

(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 $1,076 and $909 for the nine months ended September
30, 2007 and 2006, respectively.

      Net interest income has been adjusted to a fully taxable equivalent basis
(FTE) for tax-exempt investments included in earning assets. The decrease in net
interest income (FTE) for the three and nine month periods ended September 30,
2007 resulted primarily from the change in the mix of interest bearing
liabilities with the most significant increase in time deposits and the increase
in average rate paid on all types of interest bearing liabilities somewhat
offset by a shift in earning asset composition to higher yielding loans.
Management is proactive in attempting to manage the Company's net interest
margin, that is, trying to maximize current net interest income without placing
an undue risk on future earnings. Currently the Company is retaining fixed-rate
15-and 30-year conforming residential mortgages to better diversify the
portfolio. The Company expects to continue to sell the fixed rate jumbo mortgage
loans it originates.

      While the yield on average earning assets, for the three and nine months
ended September 30, 2007, increased by 14 and 26 basis points, respectively,
from the same period last year, the rates paid on average interest bearing
liabilities increased by 49 and 64 basis points, respectively. As a result, the
Company's net interest margin (FTE) contracted 22 basis points to 5.06% for the
three months ended September 30, 2007 from the 5.28% for the same period in
2006, and decreased 5 basis points from 5.11% for the linked quarter. The net
interest margin for the nine months ended September 30, 2007 contracted 21 basis
points to 5.16% from 5.37% for the same period in 2006.

                                       18

<PAGE>

Provision for Loan and Lease Losses

      The Company recorded $850,000 in provision for loan and lease losses for
the three months ended September 30, 2007 to total $850,000 for the nine months
ended September 30, 2007. The Company recorded $555,000 for the three months
ended September 30, 2006 to total $925,000 for the nine months ended September
30, 2006. The process for determining allowance adequacy 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
activity. The decision to record additional provision reflects the growth in the
loan portfolio and management's assessment of the overall adequacy of the
allowance for loan and lease losses. Management believes that the current level
of allowance for loan and lease losses as of September 30, 2007 of $9,602,000,
or 1.34% of total loans and leases, is adequate at this time. The allowance for
loan and lease losses was $8,831,000, or 1.34% of total loans and leases, at
December 31, 2006. For further information regarding our allowance for loan and
lease losses, see "Allowance for Loan and Lease Losses" on page 22.

Noninterest Income

      The following table is a summary of the Company's noninterest income for
the periods indicated:

<TABLE>
<CAPTION>
                                                              Three months ended September 30,   Nine months ended September 30,
(In thousands)                                                   2007                   2006        2007                  2006
                                                              ----------              --------   ---------              --------
<S>                                                           <C>                     <C>        <C>                    <C>
Service charges on deposit accounts                           $    1,791              $  1,723   $   5,122              $  4,806
Other fees and charges                                               939                   902       2,797                 2,334
Earnings on cash surrender value of life insurance
policies                                                             333                   309         942                   889
Gain on sale of loans                                                 34                   171         131                   336
Other                                                                253                   493         662                 1,046
                                                              ----------              --------   ---------              --------
   Total noninterest income                                   $    3,350              $  3,598   $   9,654              $  9,411
                                                              ==========              ========   =========              ========
</TABLE>

      Noninterest income decreased from $3,598,000 for the three months ended
September 30, 2006 to $3,350,000 for the same period in 2007. Service charges on
deposits increased $68,000 from the three months ended September 30, 2006
compared to the same period in 2007, driven by growth in the number of demand
accounts. Other fees and charges increased $37,000 from $902,000 for the three
months ended September 30, 2006 to $939,000 for the same period in 2007. The
increase in fees is attributable to the increase in debit card activity,
specifically, point-of-sale and foreign ATM use. These increases in service
charges and fees were more than offset by a decrease in the gain on sales of
mortgages of $137,000 to $34,000 for the three months ended September 30, 2007
compared to $171,000 for the same period in 2006 and a decrease in other income
of $240,000 due primarily to a gain from a one-time sale of Company property in
the third quarter of 2006 of $198,000.

      Noninterest income increased $243,000 to $9,654,000 for the nine months
ended September 30, 2007 from $9,411,000 for the same period in 2006. The
increase was primarily driven by the increase in service charges on deposit
accounts of $316,000 and the increase in other fees and charges of $463,000 as
discussed above, partially offset by the decrease in gain on sale of loans of
$205,000 and other noninterest income of $384,000.

                                       19

<PAGE>

Noninterest Expense

      The following table is a summary of the Company's noninterest expense for
the periods indicated:

<TABLE>
<CAPTION>
                                         Three months ended September 30,   Nine months ended September 30,
(In thousands)                               2007                2006           2007               2006
                                         ------------        ------------   -----------        ------------
<S>                                      <C>                 <C>            <C>                <C>
Salaries & employee benefits             $      5,306        $      5,407   $    16,340        $     16,458
Occupancy expense                                 773                 772         2,296               2,255
Data processing expenses                          552                 658         1,674               1,752
Equipment expense                                 499                 533         1,552               1,610
Professional services                             161                 383           971               1,099
Marketing                                         266                 270           794                 826
ATM expense                                       237                 229           742                 656
Printing & supplies                               143                 151           531                 509
Operations expense                                215                 244           651                 655
Director                                           92                 139           407                 440
Amortization of intangibles                       163                 163           488                 488
Postage                                           141                  90           395                 390
Merger expense                                      5                   -           761                   -
Other                                             928                 820         2,841               2,617
                                         ------------        ------------   -----------        ------------
   Total noninterest expense             $      9,481        $      9,859   $    30,443        $     29,755
                                         ============        ============   ===========        ============
</TABLE>

      Noninterest expense totaled $9,481,000 for the three months ended
September 30, 2007, compared to $9,859,000 for the same period in 2006. This
represents a decrease of $378,000, or 3.8%, for the three months ended September
30, 2007 from the comparable period in 2006 due primarily to decreases in
salaries and employee benefit expenses, data processing expenses as well as
professional services expense. Salaries and benefits decreased by $101,000, or
1.9%, to $5,306,000 for the three months ended September 30, 2007 compared to
$5,407,000 for the same period in 2006. Data processing expense decreased
$106,000 for the three months ended September 30, 2007 compared to the same
period in 2006, while professional services expenses decreased by $222,000
during the same period. The Company's ratio of noninterest expense to average
assets decreased to 4.19% for the three months ended September 30, 2007 compared
to 4.37% for the same period in 2006. The Company's efficiency ratio decreased
slightly to 69.74% for the three months ended September 30, 2007 from 69.88% for
the same period in 2006.

      Noninterest expense totaled $30,443,000 for the nine months ended
September 30, 2007, compared to $29,755,000 for the same period in 2006. This
represents an increase of $688,000, or 2.3%, for the nine months ended September
30, 2007 from the comparable period in 2006 due primarily to expenses related to
the pending merger with Sterling Financial Corporation of $1,086,000, for the
nine months ended September 30, 2007, $761,000 of which is included in the
merger expense category and $325,000 of which is legal fees and auditing fees
for the merger included in the professional services category in the above
table. The merger related expenses were partially offset by decreases in
professional services expenses of $128,000, salaries and employee benefit
expenses of $118,000 and data processing expenses of $78,000. The Company's
ratio of noninterest expense to average assets increased slightly to 4.53% for
the nine months ended September 30, 2007 compared to 4.41% for the same period
in 2006. The Company's efficiency ratio increased slightly to 75.49% for the
nine months ended September 30, 2007 from 72.56% for the same period in 2006.

Income Taxes

      The provision for income taxes for the three months ended September 30,
2007 was $1,044,000 compared to $775,000 for the same period in 2006. The
provision for income taxes for the nine months ended September 30, 2007 was
$2,891,000 compared to $2,987,000 for the same period in 2006. The effective
income tax rate for state and federal income taxes was 32.0% for both the three
and nine month periods ended September 30, 2007 compared to 21.0% and 28.9%,
respectively, for the same periods in 2006. The increase in the effective income
tax rate for 2007 compared to the same periods in 2006 is due to management,
following the filing of the Company's 2005 tax returns during the third quarter
of 2006, determined that the Company's estimated tax rate that had been applied
to previously reported net income was overstated as a result of an underestimate
of California job credits (which are determined subsequent to year-end through a
process employed by the State of California) and an overestimate of the federal
statutory tax rate (resulting from the Company's pre-tax income falling between
the federal statutory rates of 34% and 35%). As a result, the 2006 tax provision
was adjusted on a cumulative basis to reflect this change in accounting
estimate. The difference in the effective tax rate compared to the statutory tax
rate (approximately 42.05%) is primarily the result of the Company's investment
in municipal securities, FNMA Preferred Stock, and Bank-owned life insurance
policies whose income is exempt from Federal taxes. In addition, the Company
receives special tax benefits from the State of California Franchise Tax Board
for operating and providing loans, as well as jobs, in designated 'Enterprise
Zones'.

                                       20

<PAGE>

Financial Condition as of September 30, 2007 As Compared to December 31, 2006

      Total assets at September 30, 2007 increased $19,231,000, or 2.2% to
$924,904,000, compared to $905,673,000 at December 31, 2006. Loans and leases
increased $57,643,000, or 8.7%, to $717,436,000 at September 30, 2007 from
$659,793,000 at December 31, 2006. Investment securities and federal funds sold
decreased $35,655,000, or 24.7%, to $108,668,000 at September 30, 2007, compared
to $144,323,000 at December 31, 2006. On the liability side, deposits decreased
$13,849,000, or 1.8%, from December 31, 2006 to $736,439,000 at September 30,
2007.

Loan and Lease Portfolio

      Loans and leases, the Company's major component of earning assets,
increased during the first nine months of 2007 to $717,436,000 at September 30,
2007 from $659,793,000 at December 31, 2006. Commercial loans increased by
$3,977,000, commercial real estate loans increased by $20,165,000, real estate -
construction loans increased by $16,851,000, real estate - mortgage loans
increased by $3,556,000, installment loans increased by $10,439,000 and other
loans increased by $3,158,000. Direct financing leases decreased by $530,000
from December 31, 2006.

      The Company's average loan to deposit ratio was 93.6% for the quarter
ended September 30, 2007 compared to 88.4% for the same period in 2006. The
increase in the Company's average loan to deposit ratio is driven by an increase
in total average loans of $45,494,000 while total average deposits increased by
$8,214,000.

(Dollars in thousands)                          September 30,     December 31,
                                                    2007              2006
                                               ---------------   --------------

Commercial                                     $        82,099   $       78,122
Real estate - commercial                               283,488          263,323
Real estate - construction                             230,050          213,199
Real estate - mortgage                                  44,043           40,487
Installment                                             38,390           27,951
Direct financing leases                                  1,455            1,985
Other                                                   38,986           35,828
                                               ---------------   --------------
                                                       718,511          660,895

Deferred loan fees, net                                 (1,075)          (1,102)
Allowance for loan and lease losses                     (9,602)          (8,831)
                                               ---------------   --------------
                                               $       707,834   $      650,962
                                               ===============   ==============

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

      The Company considers a loan or lease 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
and leases 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 and leases are measured for impairment based on the
fair value of the collateral.

      At September 30, 2007, the recorded investment in loans and leases for
which impairment had been recognized was approximately $3,359,000 compared to
$24,000 at September 30, 2006. The increase was primarily due to one credit,
which is a commercial building and a notice of default was filed. The loan is
well-secured and no loss is anticipated. Of the 2007 balance, there was a
related valuation allowance of $538,000. During the portion of the year that the
loans and leases were impaired, the Company recognized interest income of
approximately $5,000 for cash payments received in 2007.

      At December 31, 2006, the recorded investment in loans and leases for
which impairment had been recognized was approximately $72,000. Of the 2006
balance, there was a related valuation allowance of $36,000.

                                       21

<PAGE>

For the year ended December 31, 2006, the average recorded investment in loans
and leases for which impairment had been recognized was approximately $63,000.
During the portion of the year that the loans and leases were impaired, the
Company recognized interest income of approximately $9,000 for cash payments
received in 2006.

      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 at September 30, 2007, and December 31, 2006, are
summarized as follows:

<TABLE>
<CAPTION>
                                                                         September 30,   December 31,
                                                                             2007            2006
                                                                         -------------   ------------
<S>                                                                      <C>             <C>
Nonaccrual loans and leases                                              $       3,359   $         72
Loans and leases past due 90 days and accruing interest                              8            403
Other real estate owned                                                            902            902
                                                                         -------------   ------------
   Total nonperforming assets                                            $       4,269   $      1,377
                                                                         =============   ============

Nonaccrual loans and leases to total gross loans and leases                       0.47%          0.01%
Nonperforming loans and leases to total gross loans and leases                    0.47%          0.07%
Total nonperforming assets to total assets                                        0.46%          0.15%
</TABLE>

Allowance for Loan and Lease Losses

      A summary of the allowance for loan and lease losses at September 30, 2007
and September 30, 2006 is as follows:

<TABLE>
<CAPTION>
                                                                         Nine months ended September 30,
                                                                              2007             2006
                                                                         -------------   ---------------
<S>                                                                      <C>             <C>
Balance beginning of period                                              $       8,831   $         7,864
Provision for loan and lease losses                                                850               925
Net (charge-offs) recoveries                                                       (79)               64
                                                                         -------------   ---------------
Balance end of period                                                    $       9,602   $         8,853
                                                                         =============   ===============

Allowance for loan and lease losses to total loans and leases                     1.34%             1.33%
</TABLE>

      The allowance for loan and lease losses is established through a provision
for loan and lease losses based on management's evaluation of the risks inherent
in the loan and lease 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 and lease loss
experience, and the Company's underwriting policies. 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. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of the Company's allowance for loan and lease
losses. Such agencies may require the Company to recognize additions to the
allowance based on judgments different from those of management.

                                       22

<PAGE>

      The allowance for loan and lease losses is comprised of two primary types
of allowances:

            1.    Formula Allowance

                  Formula allowances are based upon loan and lease loss factors
                  that reflect management's estimate of the inherent loss in
                  various segments of pools within the loan and lease portfolio.
                  The loss factor is multiplied by the portfolio segment (e.g.
                  multifamily permanent mortgages) balance to derive the formula
                  allowance amount. The loss factors are updated periodically by
                  the Company to reflect current information that has an effect
                  on the amount of loss inherent in each segment.

                  The formula allowance is adjusted for qualitative factors that
                  are based upon management's evaluation of conditions that are
                  not directly measured in the determination of the formula and
                  specific allowance. The evaluation of inherent loss with
                  respect to these conditions is subject to a higher degree of
                  uncertainty because they are not identified with specific
                  problem credits or historical performance of loan and lease
                  portfolio segments. The conditions evaluated to determine the
                  adjustment to the formula allowance at September 30, 2007
                  included the following, which existed at the balance sheet
                  date:

                        o     General business and economic conditions effecting
                              the Company's key lending areas

                        o     Real estate values and market trends in Northern
                              California

                        o     Loan volumes and concentrations

                        o     Seasoning of the loan portfolio, including trends
                              in past due and nonperforming loans

                        o     Status of the current business cycle

                        o     Specific industry or market conditions within
                              portfolio segments

                        o     Model imprecision

            2.    Specific Allowance

                  Specific allowances are established in cases where management
                  has identified significant conditions or circumstances related
                  to an individually impaired credit. In other words, these
                  allowances are specific to the loss inherent in a particular
                  loan. The amount for a specific allowance is calculated in
                  accordance with SFAS No. 114, "Accounting By Creditors For
                  Impairment Of A Loan."

      The $9,602,000 in allowance at September 30, 2007 reflects management's
estimate of the inherent loss in various pools or segments in the portfolio, and
includes adjustments for general economic conditions, trends in the portfolio
and changes in the mix of the portfolio.

      Future provisions may be required and the ratio of the allowance for loan
and lease losses to loans outstanding may increase. Experience across the
financial services industry indicates that commercial business and income
property loans may present greater risks than residential real estate loans, and
therefore should be accompanied by suitably higher levels of reserves.

Deposits

      Total deposits decreased $13,849,000, or 1.8%, to $736,439,000 at
September 30, 2007 compared to $750,288,000 at December 31, 2006.
Noninterest-bearing demand deposits decreased $24,385,000 or 12.5% from December
31, 2006, interest-bearing demand deposits decreased $8,977,000 or 5.6%, money
market accounts decreased $2,660,000 or 2.4%, and savings decreased $9,081,000
or 10.4%, while certificates of deposits increased $31,254,000 or 15.8% from
December 31, 2006. The Company experienced a shift in deposits to time
certificates as time deposit rates increased.

                                       23

<PAGE>

                                     September 30,   December 31,
                                         2007            2006
                                     -------------   -------------

Noninterest-bearing demand           $     170,457   $     194,842
Interest-bearing demand                    151,962         160,939
Money market and savings                   185,092         196,833
Time certificates                          228,928         197,674

                                     -------------   -------------
   Total deposits                    $     736,439   $     750,288
                                     =============   =============

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 and leases, 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. Unused lines of credit from correspondent banks to
provide federal funds of $25,000,000 as of September 30, 2007 were also
available to provide liquidity. In addition, NVB is a member of the Federal Home
Loan Bank ("FHLB") providing additional unused borrowing capacity of $44,180,000
secured by certain loans and investment securities as of September 30, 2007. The
Company also has a line of credit with Federal Reserve Bank of San Francisco
("FRB") of $2,311,000 secured by first deeds of trust on eligible commercial
real estate loans and leases. As of September 30, 2007, borrowings consisted of
term borrowings of $25,000,000 and overnight borrowings of $40,590,000
outstanding with the FHLB, and $31,961,000 was outstanding in the form of
subordinated debt issued by the Company.

      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
$136,949,000 and $175,067,000 (or 14.8% and 19.3% of total assets) at September
30, 2007 and December 31, 2006, 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 $639,241,000 and $673,303,000 at September 30,
2007 and December 31, 2006, 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

      The Company constantly monitors earning asset and deposit levels,
developments and trends in interest rates, liquidity, capital adequacy and
marketplace opportunities. 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 in the ways prescribed above.

      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 three specific types of risks: market
risk, mismatch risk, and basis risk.

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,

                                       24

<PAGE>

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, mismatch 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 FHLB with the
appropriate maturity or repricing characteristics.

Basis Risk

      The third interest-related risk, basis risk, arises from the fact that
interest rates rarely change in a parallel or equal manner. The interest rates
associated with the various assets and liabilities differ in how often they
change, the extent to which they change, and whether they change sooner or later
than other interest rates. For example, while the repricing of a specific asset
and a specific liability may occur at roughly the same time, the interest rate
on the liability may rise one percent in response to rising market rates while
the asset increases only one-half percent. While the Company would appear to be
evenly matched with respect to mismatch risk, it would suffer a decrease in net
interest income. This exposure to basis risk is the type of interest risk least
able to be managed, but is also the least dramatic. Avoiding concentration 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

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

      The hypothetical impact of sudden interest rate shocks applied to the
Company's asset and liability balances are modeled quarterly. The results of
this modeling indicate how much of the Company's net interest income and net
economic value are "at risk" (deviation from the base level) from various sudden
rate changes.

                                       25

<PAGE>

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, 2006.

      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.

Capital Resources

      The Company maintains capital to support future growth and dividend
payouts 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 to $80,289,000 as
of September 30, 2007, as compared to $75,491,000 at December 31, 2006. The
increase was due to net income of $6,144,000, stock based compensation of
$240,000 and stock option exercises of $1,010,000, partially offset by the
increase in unrealized loss on available for sale securities of $148,000, and
the cash dividends paid out in the amount of $2,208,000. Under current
regulations, management believes that the Company meets all capital adequacy
requirements and North Valley Bank was considered well capitalized at September
30, 2007 and December 31, 2006.

      The Company's and North Valley Bank's capital amounts and risk-based
capital ratios are presented below.

<TABLE>
<CAPTION>
                                                                                              To be Well Capitalized
                                                                       For Capital Adequacy   Under Prompt Corrective
                                                         Actual             Purposes             Action Provisions
                                                ---------------------------------------------------------------------
                                                                        Minimum     Minimum    Minimum      Minimum
                                                  Amount      Ratio     Amount       Ratio      Amount       Ratio
                                                ---------------------------------------------------------------------
<S>                                             <C>           <C>      <C>           <C>      <C>            <C>
Company
As of September 30, 2007
   Total capital (to risk weighted assets)      $ 106,049     11.95%   $  70,995     8.00%          N/A         N/A
   Tier 1 capital (to risk weighted assets)     $  92,815     10.46%   $  35,493     4.00%          N/A         N/A
   Tier 1 capital (to average assets)           $  92,815     10.45%   $  35,527     4.00%          N/A         N/A

As of December 31, 2006
   Total capital (to risk weighted assets)      $ 100,065     11.88%   $  67,384     8.00%          N/A         N/A
   Tier 1 capital (to risk weighted assets)     $  86,032     10.21%   $  33,705     4.00%          N/A         N/A
   Tier 1 capital (to average assets)           $  86,032      9.66%   $  35,624     4.00%          N/A         N/A

North Valley Bank
As of September 30, 2007
   Total capital (to risk weighted assets)      $ 103,928     11.75%   $  70,759     8.00%    $  88,449       10.00%
   Tier 1 capital (to risk weighted assets)     $  94,326     10.66%   $  35,394     4.00%    $  53,092        6.00%
   Tier 1 capital (to average assets)           $  94,326     10.63%   $  35,494     4.00%    $  44,368        5.00%

As of December 31, 2006
   Total capital (to risk weighted assets)      $  97,642     11.61%   $  67,281     8.00%    $  84,102       10.00%
   Tier 1 capital (to risk weighted assets)     $  88,811     10.56%   $  33,641     4.00%    $  50,461        6.00%
   Tier 1 capital (to average assets)           $  88,811      9.97%   $  35,631     4.00%    $  44,539        5.00%
</TABLE>

                                       26

<PAGE>

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, 2007
compared to December 31, 2006. Please see discussion under the caption "Interest
Rate Sensitivity" on page 24.

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 and Internal Control over
Financial Reporting. 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, 2007. Based on this evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. An evaluation of any changes in the Company's internal
control over financial reporting that occurred during the Company's fiscal
quarter ended September 30, 2007 was carried out under the supervision and with
the participation of the Company's Chief Executive Officer, Chief Financial
Officer and other members of the Company's senior management group. The
Company's Chief Executive Officer and Chief Financial Officer concluded that no
change identified in connection with such evaluation has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

      There are no material legal proceedings pending against the Company or
against any of its property. The Company, because of the nature of its business,
is generally subject to various legal actions, threatened or filed, which
involve ordinary, routine litigation incidental to its business. Some of the
pending cases seek punitive damages in addition to other relief. 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, 2006.

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

      None

Item 3. Defaults Upon Senior Securities

      Not applicable

Item 4.  Submission of Matters to a Vote of Security Holders

      As previously reported under PART II- OTHER INFORMATION Item 4 of the Form
10-Q filed for the period ended June 30, 2007.

Item 5. Other Information

      None

                                       27

<PAGE>

Item 6. Exhibits

        31        Rule 13a-14(a) / 15d-14(a) Certifications
        32        Section 1350 Certifications
        99.143    Park Marina Lease Extension Agreement dated July 30, 2007,
                  between The McConnell Foundation and North Valley Bank


                                       28

<PAGE>

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 November 8, 2007

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)

                                       29