UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


|  |                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|x | Quarterly Report Pursuant to Section 13 or 15(d) of
  the Securities Exchange Act of 1934                                                                         
|  | For the
  period ended June 30, 2008.                                                                                                                             
|  |                                                                                                                                                                   
|o | Transition Report Pursuant to Section 13 or 15(d) of
  the Securities Exchange Act of 1934For 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 o

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

|                            |  |                              
|--------------------------- |  | -----------------------------
|Large
  accelerated filer o |  | Accelerated
  filer x        
|                            |  |                              
|Non-accelerated
  filer o   |  | Smaller
  reporting company o

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

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

Common Stock 
7,491,266 shares as of August 8, 2008.

---



INDEX

NORTH
VALLEY BANCORP AND SUBSIDIARIES

|                                |                                                                                                         |     
|------------------------------- | ------------------------------------------------------------------------------------------------------- | ----
|                                |                                                                                                         | Page
|                                |                                                                                                         |     
|PART I. FINANCIAL
  INFORMATION |                                                                                                        
|                                |                                                                                                         |     
|Item 1.                         | Financial Statements (Unaudited)                                                                        |     
|                                |                                                                                                         |     
|                                | Condensed Consolidated Balance SheetsJune 30, 2008 and December 31,
  2007                             | 3   
|                                |                                                                                                         |     
|                                | Condensed Consolidated Statements of IncomeFor the three and six
  months ended June 30, 2008 and 2007 | 4   
|                                |                                                                                                         |     
|                                | Condensed Consolidated Statements of Cash FlowsFor the six months
  ended June 30, 2008 and 2007       | 6   
|                                |                                                                                                         |     
|                                | Notes to Condensed Consolidated Financial Statements                                                    | 7   
|                                |                                                                                                         |     
|Item 2.                         | Managements Discussion and Analysis of Financial Condition and
  Results of Operations                 | 14  
|                                |                                                                                                         |     
|Item 3.                         | Quantitative and Qualitative Disclosures about Market Risk                                              | 28  
|                                |                                                                                                         |     
|Item 4.                         | Controls and Procedures                                                                                 | 28  
|                                |                                                                                                         |     
|PART II. OTHER INFORMATION      |                                                                                                        
|                                |                                                                                                        
|Item 1.                         | Legal Proceedings                                                                                       | 29  
|                                |                                                                                                         |     
|Item 1A.                        | Risk Factors                                                                                            | 29  
|                                |                                                                                                         |     
|Item 2.                         | Unregistered Sales of Equity Securities and Use of Proceeds                                             | 29  
|                                |                                                                                                         |     
|Item 3.                         | Defaults Upon Senior Securities                                                                         | 29  
|                                |                                                                                                         |     
|Item 4.                         | Submission of Matters to a Vote of Security Holders                                                     | 29  
|                                |                                                                                                         |     
|Item 5.                         | Other Information                                                                                       | 30  
|                                |                                                                                                         |     
|Item 6.                         | Exhibits                                                                                                | 30  
|                                |                                                                                                         |     
|SIGNATURES                      | 31                                                                                                     

2

---



|                                                 
|-------------------------------------------------
|PART I. FINANCIAL INFORMATION                    
|ITEM 1. FINANCIAL STATEMENTS                     
|NORTH VALLEY BANCORP AND SUBSIDIARIES            
|CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
|(In thousands except share data)                 
|                                                 

|                                                                                                                                         |  |               |         |                   |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | ------- | -
|                                                                                                                                         |  | June 30, 2008 |         | December 31, 2007 |  
|                                                                                                                                         |  |               |         |                   |  
|ASSETS                                                                                                                                   |  |               |         |                   |   |         |  
|Cash and cash equivalents:                                                                                                               |  |               |         |                   |   |         |  
|Cash and due from banks                                                                                                                  |  | $             | 34,545  |                   | $ | 28,569  |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|Total cash and cash equivalents                                                                                                          |  |               | 34,545  |                   |   | 28,569  |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|Investment securities available for sale,
  at fair value                                                                                |  |               | 90,678  |                   |   | 104,341 |  
|Investment securities held to maturity, at
  amortized cost                                                                              |  |               | 31      |                   |   | 31      |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|Loans and leases                                                                                                                         |  |               | 730,283 |                   |   | 746,253 |  
|Less: Allowance for loan and lease losses                                                                                                |  |               | (13,677 | )                 |   | (10,755 | )
|                                                                                                                                         |  |               |         |                   |   |         |  
|Net loans and leases                                                                                                                     |  |               | 716,606 |                   |   | 735,498 |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|Premises and equipment, net                                                                                                              |  |               | 11,764  |                   |   | 12,431  |  
|Accrued interest receivable                                                                                                              |  |               | 3,140   |                   |   | 3,912   |  
|Other real estate owned                                                                                                                  |  |               | 8,208   |                   |   | 902     |  
|FHLB and FRB stock and other securities                                                                                                  |  |               | 5,966   |                   |   | 6,238   |  
|Bank-owned life insurance policies                                                                                                       |  |               | 31,048  |                   |   | 30,526  |  
|Core deposit intangibles, net                                                                                                            |  |               | 911     |                   |   | 1,236   |  
|Goodwill                                                                                                                                 |  |               | 15,187  |                   |   | 15,187  |  
|Other assets                                                                                                                             |  |               | 16,277  |                   |   | 10,148  |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|TOTAL ASSETS                                                                                                                             |  | $             | 934,361 |                   | $ | 949,019 |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                     |  |               |         |                   |   |         |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|LIABILITIES:                                                                                                                             |  |               |         |                   |   |         |  
|Deposits:                                                                                                                                |  |               |         |                   |   |         |  
|Noninterest-bearing                                                                                                                      |  | $             | 164,030 |                   | $ | 167,615 |  
|Interest-bearing                                                                                                                         |  |               | 580,201 |                   |   | 569,124 |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|Total deposits                                                                                                                           |  |               | 744,231 |                   |   | 736,739 |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|Other borrowed funds                                                                                                                     |  |               | 68,115  |                   |   | 87,192  |  
|Accrued interest payable and other
  liabilities                                                                                         |  |               | 11,252  |                   |   | 11,656  |  
|Subordinated debentures                                                                                                                  |  |               | 31,961  |                   |   | 31,961  |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|Total liabilities                                                                                                                        |  |               | 855,559 |                   |   | 867,548 |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|Commitments and Contingencies                                                                                                            |  |               |         |                   |   |         |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|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 7,484,066 and 7,413,066 at June 30, 2008 and
  December 31, 2007 |  |               | 41,403  |                   |   | 40,642  |  
|Retained earnings                                                                                                                        |  |               | 39,493  |                   |   | 42,212  |  
|Accumulated other comprehensive loss, net
  of tax                                                                                       |  |               | (2,094  | )                 |   | (1,383  | )
|                                                                                                                                         |  |               |         |                   |   |         |  
|Total stockholders equity                                                                                                               |  |               | 78,802  |                   |   | 81,471  |  
|                                                                                                                                         |  |               |         |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                               |  | $             | 934,361 |                   | $ | 949,019 |  
|                                                                                                                                         |  |               |         |                   |   |         |  

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

3

---



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

|                                                            |  |                                     |        |      |   |        | 
|----------------------------------------------------------- |  | ----------------------------------- | ------ | ---- | - | ------ | 
|                                                            |  | For the three months ended June 30, |       
|                                                            |  | 2008                                |        | 2007 |  
|                                                            |  |                                     |        |      |  
|INTEREST INCOME:                                            |  |                                     |        |      |   |        | 
|Interest and fees on loans and leases                       |  | $                                   | 12,246 |      | $ | 13,008 | 
|Interest on investments:                                    |  |                                     |        |      |   |        | 
|Taxable interest income                                     |  |                                     | 885    |      |   | 1,106  | 
|Nontaxable interest income                                  |  |                                     | 231    |      |   | 244    | 
|Interest on Federal funds sold and repurchase agreements    |  |                                     | 1      |      |   | 242    | 
|                                                            |  |                                     |        |      |   |        | 
|Total interest income                                       |  |                                     | 13,363 |      |   | 14,600 | 
|                                                            |  |                                     |        |      |   |        | 
|                                                            |  |                                     |        |      |   |        | 
|INTEREST EXPENSE:                                           |  |                                     |        |      |   |        | 
|Deposits                                                    |  |                                     | 3,391  |      |   | 3,608  | 
|Subordinated debentures                                     |  |                                     | 578    |      |   | 610    | 
|Other borrowings                                            |  |                                     | 325    |      |   | 290    | 
|                                                            |  |                                     |        |      |   |        | 
|Total interest expense                                      |  |                                     | 4,294  |      |   | 4,508  | 
|                                                            |  |                                     |        |      |   |        | 
|                                                            |  |                                     |        |      |   |        | 
|NET INTEREST INCOME                                         |  |                                     | 9,069  |      |   | 10,092 | 
|                                                            |  |                                     |        |      |   |        | 
|PROVISION FOR LOAN AND LEASE LOSSES                         |  |                                     | 5,200  |      |   |       | 
|                                                            |  |                                     |        |      |   |        | 
|                                                            |  |                                     |        |      |   |        | 
|NET INTEREST INCOME AFTER PROVISION                         |  |                                     |        |      |   |        | 
|FOR LOAN AND LEASE LOSSES                                   |  |                                     | 3,869  |      |   | 10,092 | 
|                                                            |  |                                     |        |      |   |        | 
|                                                            |  |                                     |        |      |   |        | 
|NONINTEREST INCOME:                                         |  |                                     |        |      |   |        | 
|Service charges on deposit accounts                         |  |                                     | 1,894  |      |   | 1,687  | 
|Other fees and charges                                      |  |                                     | 979    |      |   | 966    | 
|Earnings on cash surrender value of life insurance policies |  |                                     | 312    |      |   | 298    | 
|Gain on sale of loans                                       |  |                                     | 8      |      |   | 44     | 
|Other                                                       |  |                                     | 284    |      |   | 175    | 
|                                                            |  |                                     |        |      |   |        | 
|Total noninterest income                                    |  |                                     | 3,477  |      |   | 3,170  | 
|                                                            |  |                                     |        |      |   |        | 
|                                                            |  |                                     |        |      |   |        | 
|NONINTEREST EXPENSES:                                       |  |                                     |        |      |   |        | 
|Salaries and employee benefits                              |  |                                     | 5,105  |      |   | 5,475  | 
|Occupancy expense                                           |  |                                     | 720    |      |   | 754    | 
|Furniture and equipment expense                             |  |                                     | 488    |      |   | 518    | 
|Other                                                       |  |                                     | 3,264  |      |   | 3,985  | 
|                                                            |  |                                     |        |      |   |        | 
|Total noninterest expenses                                  |  |                                     | 9,577  |      |   | 10,732 | 
|                                                            |  |                                     |        |      |   |        | 
|                                                            |  |                                     |        |      |   |        | 
|(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES             |  |                                     | (2,231 | )    |   | 2,530  | 
|                                                            |  |                                     |        |      |   |        | 
|(BENEFIT) PROVISION FOR INCOME TAXES                        |  |                                     | (722   | )    |   | 810    | 
|                                                            |  |                                     |        |      |   |        | 
|                                                            |  |                                     |        |      |   |        | 
|NET (LOSS) INCOME                                           |  | $                                   | (1,509 | )    | $ | 1,720  | 
|                                                            |  |                                     |        |      |   |        | 
|                                                            |  |                                     |        |      |   |        | 
|Per Share Amounts                                           |  |                                     |        |      |   |        | 
|Basic (Loss) Earnings Per Share                             |  | $                                   | (0.20  | )    | $ | 0.23   | 
|                                                            |  |                                     |        |      |   |        | 
|Diluted (Loss) Earnings Per Share                           |  | $                                   | (0.20  | )    | $ | 0.22   | 
|                                                            |  |                                     |        |      |   |        | 
|Cash Dividends Per Common Share                             |  | $                                   | 0.10   |      | $ | 0.10   | 
|                                                            |  |                                     |        |      |   |        | 

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

4

---



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

|                                                              |  |                                   |        |      |   |        |  
|------------------------------------------------------------- |  | --------------------------------- | ------ | ---- | - | ------ | -
|                                                              |  | For the six months ended June 30, |       
|                                                              |  | 2008                              |        | 2007 |  
|                                                              |  |                                   |        |      |  
|INTEREST INCOME:                                              |  |                                   |        |      |   |        |  
|Interest and fees on loans and leases                         |  | $                                 | 25,222 |      | $ | 25,832 |  
|Interest on investments:                                      |  |                                   |        |      |   |        |  
|Taxable interest income                                       |  |                                   | 1,819  |      |   | 2,392  |  
|Nontaxable interest income                                    |  |                                   | 466    |      |   | 493    |  
|Interest on Federal funds sold and
  repurchase agreements    |  |                                   | 6      |      |   | 379    |  
|                                                              |  |                                   |        |      |   |        |  
|Total interest income                                         |  |                                   | 27,513 |      |   | 29,096 |  
|                                                              |  |                                   |        |      |   |        |  
|                                                              |  |                                   |        |      |   |        |  
|INTEREST EXPENSE:                                             |  |                                   |        |      |   |        |  
|Deposits                                                      |  |                                   | 7,219  |      |   | 6,864  |  
|Subordinated debentures                                       |  |                                   | 1,173  |      |   | 1,218  |  
|Other borrowings                                              |  |                                   | 924    |      |   | 585    |  
|                                                              |  |                                   |        |      |   |        |  
|Total interest expense                                        |  |                                   | 9,316  |      |   | 8,667  |  
|                                                              |  |                                   |        |      |   |        |  
|                                                              |  |                                   |        |      |   |        |  
|NET INTEREST INCOME                                           |  |                                   | 18,197 |      |   | 20,429 |  
|                                                              |  |                                   |        |      |   |        |  
|PROVISION FOR LOAN AND LEASE LOSSES                           |  |                                   | 7,600  |      |   |       |  
|                                                              |  |                                   |        |      |   |        |  
|                                                              |  |                                   |        |      |   |        |  
|NET INTEREST INCOME AFTER PROVISION                           |  |                                   |        |      |   |        |  
|FOR
  LOAN AND LEASE LOSSES                                   |  |                                   | 10,597 |      |   | 20,429 |  
|                                                              |  |                                   |        |      |   |        |  
|                                                              |  |                                   |        |      |   |        |  
|NONINTEREST INCOME:                                           |  |                                   |        |      |   |        |  
|Service charges on deposit accounts                           |  |                                   | 3,610  |      |   | 3,331  |  
|Other fees and charges                                        |  |                                   | 1,944  |      |   | 1,858  |  
|Earnings on cash surrender value of life
  insurance policies |  |                                   | 642    |      |   | 609    |  
|Gain on sale of loans                                         |  |                                   | 95     |      |   | 97     |  
|Gain (loss) on sales or calls of investment
  securities      |  |                                   | 1      |      |   | (36    | )
|Other                                                         |  |                                   | 676    |      |   | 445    |  
|                                                              |  |                                   |        |      |   |        |  
|Total noninterest income                                      |  |                                   | 6,968  |      |   | 6,304  |  
|                                                              |  |                                   |        |      |   |        |  
|                                                              |  |                                   |        |      |   |        |  
|NONINTEREST EXPENSES:                                         |  |                                   |        |      |   |        |  
|Salaries and employee benefits                                |  |                                   | 10,641 |      |   | 11,034 |  
|Occupancy expense                                             |  |                                   | 1,474  |      |   | 1,523  |  
|Furniture and equipment expense                               |  |                                   | 953    |      |   | 1,053  |  
|Other                                                         |  |                                   | 6,314  |      |   | 7,352  |  
|                                                              |  |                                   |        |      |   |        |  
|Total noninterest expenses                                    |  |                                   | 19,382 |      |   | 20,962 |  
|                                                              |  |                                   |        |      |   |        |  
|                                                              |  |                                   |        |      |   |        |  
|(LOSS) INCOME BEFORE PROVISION FOR INCOME
  TAXES             |  |                                   | (1,817 | )    |   | 5,771  |  
|                                                              |  |                                   |        |      |   |        |  
|(BENEFIT) PROVISION FOR INCOME TAXES                          |  |                                   | (588   | )    |   | 1,847  |  
|                                                              |  |                                   |        |      |   |        |  
|                                                              |  |                                   |        |      |   |        |  
|NET (LOSS) INCOME                                             |  | $                                 | (1,229 | )    | $ | 3,924  |  
|                                                              |  |                                   |        |      |   |        |  
|                                                              |  |                                   |        |      |   |        |  
|Per Share Amounts                                             |  |                                   |        |      |   |        |  
|Basic (Loss) Earnings Per Share                               |  | $                                 | (0.17  | )    | $ | 0.53   |  
|                                                              |  |                                   |        |      |   |        |  
|Diluted (Loss) Earnings Per Share                             |  | $                                 | (0.17  | )    | $ | 0.51   |  
|                                                              |  |                                   |        |      |   |        |  
|Cash Dividends Per Common Share                               |  | $                                 | 0.20   |      | $ | 0.20   |  
|                                                              |  |                                   |        |      |   |        |  

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

5

---



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

|                                                                                           |  |                                   |         |      |   |         |  
|------------------------------------------------------------------------------------------ |  | --------------------------------- | ------- | ---- | - | ------- | -
|                                                                                           |  | For the six months ended June 30, |        
|                                                                                           |  | 2008                              |         | 2007 |  
|                                                                                           |  |                                   |         |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |  |                                   |         |      |   |         |  
|Net (Loss) Income                                                                          |  | $                                 | (1,229  | )    | $ | 3,924   |  
|Adjustments to reconcile net (loss) income to net cash provided by
  operating activities: |  |                                   |         |      |   |         |  
|Depreciation and amortization                                                              |  |                                   | 1,011   |      |   | 1,122   |  
|Amortization of premium on securities                                                      |  |                                   | (1      | )    |   | 80      |  
|Amortization of core deposit intangible                                                    |  |                                   | 325     |      |   | 325     |  
|Provision for loan and lease losses                                                        |  |                                   | 7,600   |      |   |        |  
|Gain (loss) on sales or calls of investment securities                                     |  |                                   | (1      | )    |   | 36      |  
|Gain on sale of loans                                                                      |  |                                   | (95     | )    |   | (97     | )
|Gain on sale of premises and equipment                                                     |  |                                   | (1      | )    |   |        |  
|FHLB stock dividends                                                                       |  |                                   | (115    | )    |   | 144     |  
|Stock-based compensation expense                                                           |  |                                   | 229     |      |   | 250     |  
|Excess tax benefit from exercise of stock options                                          |  |                                   | (40     | )    |   | (86     | )
|Effect of changes in:                                                                      |  |                                   |         |      |   |         |  
|Accrued interest receivable                                                                |  |                                   | 772     |      |   | 204     |  
|Other assets                                                                               |  |                                   | (6,158  | )    |   | (1,453  | )
|Accrued interest payable and other liabilities                                             |  |                                   | (364    | )    |   | (502    | )
|                                                                                           |  |                                   |         |      |   |         |  
|Net cash provided by operating activities                                                  |  |                                   | 1,933   |      |   | 3,947   |  
|                                                                                           |  |                                   |         |      |   |         |  
|                                                                                           |  |                                   |         |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |  |                                   |         |      |   |         |  
|Proceeds from maturities/calls of available for sale securities                            |  |                                   | 12,460  |      |   | 19,155  |  
|Redemptions (purchases) of FHLB and FRB stock and other securities                         |  |                                   | 387     |      |   | (239    | )
|Net decrease (increase) in loans and leases                                                |  |                                   | 714     |      |   | (18,591 | )
|Proceeds from sales of other real estate owned                                             |  |                                   | 3,368   |      |   |        |  
|Purchases of premises and equipment                                                        |  |                                   | (343    | )    |   | (770    | )
|                                                                                           |  |                                   |         |      |   |         |  
|Net cash provided by (used in) investing activities                                        |  |                                   | 16,586  |      |   | (445    | )
|                                                                                           |  |                                   |         |      |   |         |  
|                                                                                           |  |                                   |         |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |  |                                   |         |      |   |         |  
|Net increase (decrease) in deposits                                                        |  |                                   | 7,492   |      |   | (10,357 | )
|Net decrease in other borrowed funds                                                       |  |                                   | (19,077 | )    |   | (5,895  | )
|Cash dividends paid                                                                        |  |                                   | (1,490  | )    |   | (1,471  | )
|Exercise of stock options, including tax benefit                                           |  |                                   | 532     |      |   | 634     |  
|                                                                                           |  |                                   |         |      |   |         |  
|Net cash used in financing activities                                                      |  |                                   | (12,543 | )    |   | (17,089 | )
|                                                                                           |  |                                   |         |      |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       |  |                                   | 5,976   |      |   | (13,587 | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                               |  |                                   | 28,569  |      |   | 41,496  |  
|                                                                                           |  |                                   |         |      |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                   |  | $                                 | 34,545  |      | $ | 27,909  |  
|                                                                                           |  |                                   |         |      |   |         |  
|                                                                                           |  |                                   |         |      |   |         |  
|Supplemental Disclosures of Cash Flow Information                                          |  |                                   |         |      |   |         |  
|Cash paid during the year for:                                                             |  |                                   |         |      |   |         |  
|Interest                                                                                   |  | $                                 | 9,638   |      | $ | 9,073   |  
|Income taxes                                                                               |  | $                                 | 1,090   |      | $ | 2,865   |  
|Loans transferred to other real estate owned                                               |  | $                                 | 10,675  |      | $ |        |  

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

6

---



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

NOTE A - BASIS OF PRESENTATION

The
accompanying unaudited condensed consolidated financial statements of North
Valley Bancorp and subsidiaries (the Company) have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X
of the Securities and Exchange Commission.
Accordingly, certain information and notes required by accounting
principles generally accepted in the United States for annual financial
statements are not included herein.
Management believes that the disclosures are adequate to make the
information not misleading.  In the opinion
of management, all adjustments (consisting solely of normal recurring adjustments)
considered necessary for a fair presentation of the results for the interim
periods presented have been included. For further information, refer to the
consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Operating results for the three and six months ended June 30, 2008 are not
necessarily indicative of the results that may be expected for any subsequent
period or for the year ended December 31, 2008.

The condensed
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries North Valley Bank (NVB) and North Valley Trading
Company, which is 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.

7

---



NOTE B  INVESTMENT SECURITIES

At June 30,
2008 and December 31, 2007, the amortized cost of securities and their
approximate fair value were as follows (in thousands):

|                                                |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 
|----------------------------------------------- |  | ---------------- | ------- | -------------------------- | - | --------------------------- |  | ---------------------- | ------ | - | - | ------- | 
|                                                |  | Amortized
  Cost |         | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair Value |       
|                                                |  |                  |         |                            |   |                             |  |                        |       
|Available
  for sale securities:                |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 
|                                                |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 
|June 30,
  2008                                 |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 
|Obligations of U.S. government agencies         |  | $                | 1,500   |                            | $ | 49                          |  | $                      |       |   | $ | 1,549   | 
|Obligations of state and political subdivisions |  |                  | 20,003  |                            |   | 284                         |  |                        | (117   | ) |   | 20,170  | 
|Mortgage-backed securities                      |  |                  | 59,535  |                            |   | 100                         |  |                        | (1,489 | ) |   | 58,146  | 
|Corporate debt securities                       |  |                  | 6,008   |                            |   |                            |  |                        | (1,270 | ) |   | 4,738   | 
|Equity securities                               |  |                  | 6,284   |                            |   |                            |  |                        | (209   | ) |   | 6,075   | 
|                                                |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 
|                                                |  | $                | 93,330  |                            | $ | 433                         |  | $                      | (3,085 | ) | $ | 90,678  | 
|                                                |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 
|                                                |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 
|December
  31, 2007                             |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 
|Obligations of U.S. government agencies         |  | $                | 3,499   |                            | $ | 46                          |  | $                      | (11    | ) | $ | 3,534   | 
|Obligations of state and political subdivisions |  |                  | 20,563  |                            |   | 526                         |  |                        | (11    | ) |   | 21,078  | 
|Mortgage-backed securities                      |  |                  | 69,433  |                            |   | 57                          |  |                        | (1,350 | ) |   | 68,140  | 
|Corporate debt securities                       |  |                  | 6,009   |                            |   |                            |  |                        | (670   | ) |   | 5,339   | 
|Equity securities                               |  |                  | 6,284   |                            |   |                            |  |                        | (34    | ) |   | 6,250   | 
|                                                |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 
|                                                |  | $                | 105,788 |                            | $ | 629                         |  | $                      | (2,076 | ) | $ | 104,341 | 
|                                                |  |                  |         |                            |   |                             |  |                        |        |   |   |         | 

|                               |  |           |    |            |   |            |  |            |    |   |   |    | 
|------------------------------ |  | --------- | -- | ---------- | - | ---------- |  | ---------- | -- | - | - | -- | 
|                               |  |           |    | Gross      |   | Gross      |  |            |   
|                               |  | Amortized |    | Unrealized |   | Unrealized |  | Estimated  |   
|                               |  | Cost      |    | Gains      |   | Losses     |  | Fair Value |   
|                               |  |           |    |            |   |            |  |            |   
|Held to
  maturity securities: |  |           |    |            |   |            |  |            |    |   |   |    | 
|                               |  |           |    |            |   |            |  |            |    |   |   |    | 
|June 30,
  2008                |  |           |    |            |   |            |  |            |    |   |   |    | 
|Mortgage-backed securities     |  | $         | 31 |            | $ |           |  | $          | (1 | ) | $ | 30 | 
|                               |  |           |    |            |   |            |  |            |    |   |   |    | 
|                               |  |           |    |            |   |            |  |            |    |   |   |    | 
|December
  31, 2007            |  |           |    |            |   |            |  |            |    |   |   |    | 
|Mortgage-backed securities     |  | $         | 31 |            | $ |           |  | $          |   |   | $ | 31 | 
|                               |  |           |    |            |   |            |  |            |    |   |   |    | 

For the six
months ended June 30, 2008 and 2007 there was $1,000 and $15,000, respectively,
in gross realized gains on sales or calls of available for sale
securities.  For the six months ended
June 30, 2008 there were no gross realized losses on sales or calls of
available for sale securities. For the six months ended June 30, 2007 there was
$51,000 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 six months ended June 30, 2008
and 2007.

At June 30,
2008 and December 31, 2007, securities having fair value amounts of
approximately $61,842,000 and $68,410,000, respectively, were pledged to secure
public deposits, short-term borrowings, treasury, tax and loan balances and for
other purposes required by law or contract.

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

At June 30,
2008, the Company held $52,643,000 of available for sale investment securities
in an unrealized loss position of which $29,888,000 were in an unrealized loss
position for less than twelve months and $22,755,000 were in an unrealized loss
position and had been in an unrealized loss position for twelve months or
more.  Management periodically evaluates
each investment security for other-than-temporary impairment, relying primarily
on industry analyst reports, observation of market conditions and interest rate
fluctuations.  Management has the
ability and intent to hold securities with established maturity dates until
recovery of fair value, which may be at maturity, and believes it will be able
to collect all amounts due according to the contractual terms for all of the
underlying investment securities; therefore, management does not consider these
investments to be other-than-temporarily impaired.

8

---



NOTE C  STOCK-BASED COMPENSATION

Stock Option Plans

At June 30,
2008, the Company had four shareholder approved stock-based compensation plans:
the North Valley Bancorp 1989 Director Stock Option Plan, the 1998 Employee
Stock Incentive Plan, the 1999 Director Stock Option Plan and the 2008 Stock
Incentive Plan.  The plans do not
provide for the settlement of awards in cash and new shares are issued upon
exercise of the options.  Under the
North Valley Bancorp 1989 Director Stock Option Plan each member of the Board
of Directors, including employees who are Directors, automatically received
every January a non-statutory stock option to purchase 1,000 shares of the
Companys Common Stock. Effective upon adoption of the North Valley Bancorp
1999 Director Stock Option Plan, no further grants of options have been made or
will be made under the 1989 Director Plan. Pursuant to the 1989 Director Plan,
there were outstanding options to purchase 1,200 shares of Common Stock at June
30, 2008. The North Valley Bancorp 1998 Employee Stock Incentive Plan provides
for awards in the form of options (which may constitute incentive stock options
(ISOs) or non-statutory stock options (NSOs) to key employees) and also
provides for the award of shares of Common Stock to outside directors.  Pursuant to the Stock Incentive Plan there
were outstanding options to purchase 536,340 shares of Common Stock at June 30,
2008. As provided in the Stock Incentive Plan, the authorization to award
incentive stock options terminated on February 19, 2008.  The 1999 Director Stock Option Plan replaced
the existing North Valley Bancorp 1989 Director Stock Option Plan.  As of June 30, 2008, there were options
outstanding under the 1999 Director Stock Option Plan for the purchase of
245,551 shares of Common Stock.  Thus, a
total of 225,767 shares of Common Stock were available for the grant of
additional options under the 1999 Director Stock Option Plan at June 30,
2008.  As of June 30, 2008, there were
no options outstanding under the 2008 Stock Incentive Plan.  Thus, a total of 400,000 shares of Common
Stock were available for the grant of additional options under the 2008 Stock
Incentive Plan at June 30, 2008.

The North
Valley Bancorp 2008 Stock Incentive Plan was adopted by the Companys Board of
Directors on February 27, 2008, effective that date, and was approved by the
Companys shareholders at the annual meeting, May 22, 2008. The terms of the
Stock Incentive Plan are substantially the same as the North Valley Bancorp
1998 Employee Stock Incentive Plan.  The
Stock Incentive Plan provides for the grant to key employees of stock options,
which may consist of NSOs and ISOs.  The
Stock Incentive Plan also provides for the grant to outside directors, and to
consultants and advisers to the Company, of stock options, all of which must be
NSOs.  The shares of Common Stock
authorized to be granted as options under the Stock Incentive Plan shall
consist of 400,000 shares of the Companys Common Stock.  Effective January 1, 2009, and on each
January 1 thereafter for the remaining term of the Stock Incentive Plan, the
aggregate number of shares of Common Stock which are reserved for issuance
pursuant to options granted under the terms of the Stock Incentive Plan shall
be increased by a number of shares of Common Stock equal to 2% of the total
number of the shares of Common Stock of the Company outstanding at the end of
the most recently concluded calendar year.
Any shares of Common Stock that have been reserved but not issued as
options during any calendar year shall remain available for grant during any
subsequent calendar year.  Each outside
director of the Company shall also be eligible to receive a stock award of 900
shares of Common Stock as part of his or her annual retainer paid by the
Company for his or her services as a director.
Such stock award shall be fully vested when granted to the outside
director.  The number of shares of
Common Stock available as stock awards to outside directors shall equal the
number of shares of Common Stock to be awarded to such outside directors.

Stock Option Compensation

There were no
options granted in the three month periods ended June 30, 2008 and 2007.   For the three month periods ended June 30,
2008 and 2007, the compensation cost recognized for stock option compensation
was $60,000 and $49,000, respectively.
Director stock grant expense for the three month periods ended June 30,
2008 and 2007 was ($9,000) and $45,000, respectively.  The recognized tax benefit for stock option compensation expense
was $22,000 and $44,000, for the three month periods ended June 30, 2008 and
2007, respectively.  At June 30, 2008,
the total unrecognized compensation cost related to stock-based awards granted
to employees under the Companys stock option plans was $562,000.  This cost will be amortized on a
straight-line basis over a weighted average period of approximately 1.7 years
and will be adjusted for subsequent changes in estimated forfeitures.

9

---



Stock-Based Compensation

Under the
Companys stock option plans as of June 30, 2008, 625,767 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:

|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|----------------------------------------------- |  | ------ | ------- | ------------------------------------- | - | --------------------------------------------------- |  | ------------------------ | --------- | ------------------------------------ | - | ----------- |  | - | - | 
|                                                |  | Shares |         | Weighted
  Average
  Exercise
  Price |   | Weighted
  Average
  Remaining
  Contractual
  Term |  | Exercise
  Price
  Range |           | Aggregate
  Intrinsic
  Value ($000) |  
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |  
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|Outstanding at January 1,
  2008                |  |        | 723,642 |                                       | $ | 10.75                                               |  |                          | 4
  years |                                      | $ | 5.36-24.75  |  |   |   | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|Granted                                         |  |        | 135,899 |                                       |   | 13.01                                               |  |                          |           |                                      |   | 13.01       |  |   |   | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|Exercised                                       |  |        | (71,000 | )                                     |   | 6.94                                                |  |                          |           |                                      |   | 6.59-8.27   |  |   |   | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|Expired or Forfeited                            |  |        | (5,450  | )                                     |   | 17.03                                               |  |                          |           |                                      |   | 13.01-20.62 |  |   |   | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|Outstanding at June 30,
  2008                  |  |        | 783,091 |                                       | $ | 11.44                                               |  |                          | 4
  years |                                      | $ | 5.36-24.75  |  | $ | 4 | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|Fully vested and
  exercisable at June 30, 2008 |  |        | 609,814 |                                       | $ | 10.35                                               |  |                          | 3
  years |                                      | $ | 5.36-24.75  |  | $ | 4 | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 
|Options expected to vest                        |  |        | 173,277 |                                       | $ | 15.29                                               |  |                          | 9
  years |                                      | $ | 13.01-24.75 |  | $ |  | 
|                                                |  |        |         |                                       |   |                                                     |  |                          |           |                                      |   |             |  |   |   | 

The aggregate
intrinsic value is calculated as the difference between the exercise price of
the underlying awards and the quoted price of the Companys common stock as of
June 30, 2008.  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 June 30, 2008 and 2007
totaled $54,000 and $160,000, respectively.

NOTE D  COMPREHENSIVE INCOME

Comprehensive
income includes net income (loss) 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 (loss) 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 of the current
period.  The Companys total
comprehensive income (loss) was as follows (in thousands):

|                                        |  |                               |        |                             |   |       |   |      |        |   |   |       |  
|--------------------------------------- |  | ----------------------------- | ------ | --------------------------- | - | ----- | - | ---- | ------ | - | - | ----- | -
|                                        |  | Three
  months ended June 30, |        | Six months
  ended June 30, |  
|                                        |  | 2008                          |        | 2007                        |   | 2008  |   | 2007 |       
|                                        |  |                               |        |                             |   |       |   |      |       
|                                        |  |                               |        |                             |   |       |   |      |        |   |   |       |  
|Net (loss) income                       |  | $                             | (1,509 | )                           | $ | 1,720 |   | $    | (1,229 | ) | $ | 3,924 |  
|Other comprehensive loss,
  net of tax: |  |                               |        |                             |   |       |   |      |        |   |   |       |  
|Holding loss arising during period      |  |                               | (951   | )                           |   | (931  | ) |      | (711   | ) |   | (440  | )
|                                        |  |                               |        |                             |   |       |   |      |        |   |   |       |  
|                                        |  |                               |        |                             |   |       |   |      |        |   |   |       |  
|Total comprehensive (loss)
  income     |  | $                             | (2,460 | )                           | $ | 789   |   | $    | (1,940 | ) | $ | 3,484 |  
|                                        |  |                               |        |                             |   |       |   |      |        |   |   |       |  

10

---



NOTE E  IMPAIRED, NONPERFORMING LOANS AND
LEASES AND OTHER REAL ESTATE OWNED

At June 30,
2008 and December 31, 2007, the recorded investment in impaired loans and
leases was approximately $22,580,000 and $1,608,000, respectively. Of the June
30, 2008 balance, there was a related valuation allowance of $4,181,000 and of
the December 31, 2007 balance, there was a related valuation allowance of
$83,000.  If interest had been accruing
on the nonperforming loans, such income would have approximated $530,000 and
$1,056,000 for the three and six months ended June 30, 2008.  The amount of nonperforming loans is
centered in three real estate projects with loans totaling $19,657,000 at June
30, 2008.

At June 30,
2008 and December 31, 2007, the recorded investment in other real estate owned
was approximately $8,208,000 and $902,000, respectively.  During the quarter ended June 30, 2008, the
Company transferred $10,675,000 from loans to other real estate owned, had
$3,368,000 in proceeds in sales of other real estate owned and did not
recognize any gains or losses on the sale.
The balance of other real estate owned is centered in two properties
totaling $7,306,000 at June 30, 2008.

Nonperforming
loans and leases include all such loans and leases that are either on
nonaccrual status or are 90 days past due as to principal or interest but still
accrue interest because such loans are well-secured and in the process of
collection. Nonperforming loans and leases and other real estate owned at June
30, 2008 and December 31, 2007 are summarized as follows (in thousands):

|                                                                 |  |                 |        |                     |   |       |  
|---------------------------------------------------------------- |  | --------------- | ------ | ------------------- | - | ----- | -
|                                                                 |  | June 30,
  2008 |        | December
  31, 2007 |  
|                                                                 |  |                 |        |                     |  
|                                                                 |  |                 |        |                     |   |       |  
|Nonaccrual
  loans and leases                                    |  | $               | 22,580 |                     | $ | 1,608 |  
|Loans and
  leases past due 90 days and accruing interest        |  |                 |       |                     |   | 156   |  
|Other real
  estate owned                                        |  |                 | 8,208  |                     |   | 902   |  
|                                                                 |  |                 |        |                     |   |       |  
|Total nonperforming assets                                       |  | $               | 30,788 |                     | $ | 2,666 |  
|                                                                 |  |                 |        |                     |   |       |  
|                                                                 |  |                 |        |                     |   |       |  
|Nonaccrual
  loans and leases to total gross loans and leases    |  |                 | 3.09   | %                   |   | 0.22  | %
|Nonperforming
  loans and leases to total gross loans and leases |  |                 | 3.09   | %                   |   | 0.24  | %
|Total
  nonperforming assets to total assets                     |  |                 | 3.30   | %                   |   | 0.28  | %

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 six month period ended
June 30, 2008 and 2007 is reconciled as follows (in thousands, except per share
amounts):

|                                                                          |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|------------------------------------------------------------------------- |  | ----------------------------- | ------ | --------------------------- | - | ----- |  | ---- | ------ | - | - | ----- | 
|                                                                          |  | Three
  months ended June 30, |        | Six months
  ended June 30, |  
|                                                                          |  | 2008                          |        | 2007                        |   | 2008  |  | 2007 |       
|                                                                          |  |                               |        |                             |   |       |  |      |       
|Calculation
  of basic (loss) earnings per share:                         |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|Numerator  net (loss) income                                             |  | $                             | (1,509 | )                           | $ | 1,720 |  | $    | (1,229 | ) | $ | 3,924 | 
|Denominator  weighted average common shares outstanding                  |  |                               | 7,439  |                             |   | 7,359 |  |      | 7,428  |   |   | 7,350 | 
|                                                                          |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|                                                                          |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|Basic (loss) earnings per share                                           |  | $                             | (0.20  | )                           | $ | 0.23  |  | $    | (0.17  | ) | $ | 0.53  | 
|                                                                          |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|                                                                          |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|Calculation
  of diluted (loss) earnings per share:                       |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|Numerator  net (loss) income                                             |  | $                             | (1,509 | )                           | $ | 1,720 |  | $    | (1,229 | ) | $ | 3,924 | 
|Denominator:                                                              |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|Weighted average common shares outstanding                                |  |                               | 7,439  |                             |   | 7,359 |  |      | 7,428  |   |   | 7,350 | 
|Dilutive effect of outstanding options                                    |  |                               |       |                             |   | 309   |  |      |       |   |   | 302   | 
|                                                                          |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|Weighted average common shares outstanding and common stock
  equivalents |  |                               | 7,439  |                             |   | 7,668 |  |      | 7,428  |   |   | 7,652 | 
|                                                                          |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|                                                                          |  |                               |        |                             |   |       |  |      |        |   |   |       | 
|Diluted (loss) earnings per share                                         |  | $                             | (0.20  | )                           | $ | 0.22  |  | $    | (0.17  | ) | $ | 0.51  | 
|                                                                          |  |                               |        |                             |   |       |  |      |        |   |   |       | 

11

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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 were $57,000 and $559,000 for each of the three
months ended June 30, 2008 and 2007, respectively. Components of net periodic benefit
cost for the Companys supplemental nonqualified defined benefit plans for the
three and six months ended June 30, 2008 and 2007 are presented in the
following table (in thousands):

|                                            |  |                               |     |                             |   |      |  |      |     |  |   |     | 
|------------------------------------------- |  | ----------------------------- | --- | --------------------------- | - | ---- |  | ---- | --- |  | - | --- | 
|                                            |  | Three
  months ended June 30, |     | Six months
  ended June 30, |  
|                                            |  |                               |     |                             |  
|                                            |  | 2008                          |     | 2007                        |   | 2008 |  | 2007 |    
|                                            |  |                               |     |                             |   |      |  |      |    
|Components
  of net periodic benefits cost: |  |                               |     |                             |   |      |  |      |     |  |   |     | 
|Service cost                                |  | $                             | 137 |                             | $ | 116  |  | $    | 274 |  | $ | 233 | 
|Interest cost                               |  |                               | 75  |                             |   | 63   |  |      | 150 |  |   | 126 | 
|Prior service amortization                  |  |                               | 8   |                             |   | 8    |  |      | 16  |  |   | 16  | 
|Recognized net actuarial loss               |  |                               | 12  |                             |   | 8    |  |      | 24  |  |   | 16  | 
|                                            |  |                               |     |                             |   |      |  |      |     |  |   |     | 
|Total
  components of net periodic cost     |  | $                             | 232 |                             | $ | 195  |  | $    | 464 |  | $ | 391 | 
|                                            |  |                               |     |                             |   |      |  |      |     |  |   |     | 

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 $11,162,000 and $10,314,000 at June 30, 2008 and
December 31, 2007.  At June 30, 2008,
commercial and consumer lines of credit and real estate loans of approximately
$90,452,000 and $118,227,000 were undisbursed.
At December 31, 2007, commercial and consumer lines of credit and real
estate loans of approximately $79,024,000 and $134,570,000 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 represent future cash requirements. The Company evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt securities,
equity securities or business or personal assets.

Standby
letters of credit are conditional commitments written by the Company to
guarantee the performance of a customer to a third party. These guarantees are
issued primarily relating to real estate projects and inventory purchases by
the Companys commercial customers and such guarantees are typically short
term. Credit risk is similar to that involved in extending loan commitments to
customers and the Company, accordingly, uses evaluation and collateral
requirements similar to those for loan commitments. Most of such commitments
are collateralized. The fair value of the liability related to these standby
letters of credit, which represents the fees received for issuing the
guarantees, was not significant at June 30, 2008 and December 31, 2007. 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 June 30, 2008, no losses are anticipated as a result of these
commitments.

A large
portion of the loan portfolio of the Company is dependent on real estate.  At June 30, 2008 and at December 31, 2007,
real estate served as the principal source of collateral with respect to
approximately 76% and 77% of the Companys loan portfolio.  At June 30, 2008, real estate construction
loans totaled $186,355,000, or 26% of the total loan portfolio, and commercial
loans secured by real estate totaled $317,033,000, or 43% of the total loan
portfolio.  See the discussion under
Loan and Lease Portfolio starting on page 21.  A substantial decline in the state and national economy, in
general, combined with further deterioration in real estate values in the
Companys primary operating market areas, would have an adverse effect on the
value of real estate as well as other collateral securing loans, plus the
ability of certain borrowers to repay their outstanding loans and the overall
demand for new loans, and this could have a material impact on the Companys
financial position or results of operations or its cash flows.  Reference should be made to the risk factors
discussed under Item 1A of Part I of the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2007, as supplemented by the response to
Item 1A of Part II of this Quarterly Report on Form 10-Q.

12

---



NOTE I  INCOME TAXES

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

Accounting for
uncertainty in income taxes - The benefit of a tax position is recognized in
the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or
litigation processes, if any.  Tax
positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with
tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying
balance sheet along with any associated interest and penalties that would be
payable to the taxing authorities upon examination.  The Company recognizes accrued interest and penalties related to
unrecognized tax benefits, if applicable, as a component of interest expense in
the consolidated statements of income.
There have been no significant changes to unrecognized tax benefits or
accrued interest and penalties for the six months ended June 30, 2008.

NOTE J  FAIR VALUE MEASUREMENT

On January 1,
2008, the Company adopted Financial Accounting Standards Board (FASB) Statement
No. 157 (SFAS 157), Fair Value Measurements.  SFAS No. 157 defines fair value, establishes
a framework for measuring fair value under GAAP, and expands disclosures about
fair value measurement.  There was no
cumulative effect adjustment to beginning retained earnings recorded upon
adoption and no impact on the financial statements in the first six months of
2008.

The following
tables present information about the Companys assets measured at fair value
on a recurring and nonrecurring basis as of June 30, 2008, and indicates the
fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value. In general, fair values determined by Level 1 inputs
utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access. Fair values determined
by Level 2 inputs utilize inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs include quoted prices for similar assets and liabilities in
active markets, and inputs other than quoted prices that are observable for the
asset or liability, such as interest rates and yield curves that are observable
at commonly quoted intervals. Level 3 inputs are unobservable inputs for the
asset or liability, and includes situations where there is little, if any,
market activity for the asset or liability. In certain cases, the inputs used
to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy within which
the fair value measurement in its entirety falls has been determined based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Companys assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.

Assets
measured at fair value on a recurring basis are summarized below (in
thousands):

|                                                         |  |                              |        |                                                                        |                                                     |                                         |  |                                                 |     |  |   |   | 
|-------------------------------------------------------- |  | ---------------------------- | ------ | ---------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------- |  | ----------------------------------------------- | --- |  | - | - | 
|                                                         |  |                              |        |                                                                        | Fair
  Value Measurements
  at June 30, 2008, Using |                                        
|                                                         |  |                              |        |                                                                        |                                                    
|Description                                              |  | Fair
  Value
  June 30, 2008 |        | Quoted
  Prices in
  Active Markets for
  Identical Assets
  (Level 1) |                                                     | Other
  Observable
  Inputs
  (Level 2) |  | Significant
  Unobservable
  Inputs
  (Level 3)
|                                                         |  |                              |        |                                                                        |                                                     |                                         |  |                                                
|Available-for-sale
  securities                          |  |                              | 90,678 |                                                                        |                                                     | 90,678                                  |  |                                                 |     |  |   |   | 
|Mortgage Servicing Rights                                |  |                              | 631    |                                                                        |                                                     |                                         |  |                                                 | 631 |  |   |   | 
|                                                         |  |                              |        |                                                                        |                                                     |                                         |  |                                                 |     |  |   |   | 
|                                                         |  |                              |        |                                                                        |                                                     |                                         |  |                                                 |     |  |   |   | 
|Total assets measured at fair value on a recurring basis |  | $                            | 91,309 |                                                                        | $                                                   | 90,678                                  |  | $                                               | 631 |  | $ |  | 
|                                                         |  |                              |        |                                                                        |                                                     |                                         |  |                                                 |     |  |   |   | 

Available-for-Sale
Securities -
Fair values for investment securities are based on quoted market prices.

Mortgage Servicing
RightsThe
fair value of mortgage servicing rights is estimated using a discounted cash
flow model.

Assets
measured at fair value on a nonrecurring basis are summarized below (in
thousands):

|                                                            |  |                              |        |                                                                        |                                                      |                                         |  |                                                 |        |  |   |   | 
|----------------------------------------------------------- |  | ---------------------------- | ------ | ---------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------- |  | ----------------------------------------------- | ------ |  | - | - | 
|                                                            |  |                              |        |                                                                        | Fair
  Value Measurements 
  at June 30, 2008, Using
|                                                            |  |                              |        |                                                                        |                                                     
|Description                                                 |  | Fair
  Value
  June 30, 2008 |        | Quoted
  Prices in
  Active Markets for
  Identical Assets
  (Level 1) |                                                      | Other
  Observable
  Inputs
  (Level 2) |  | Significant
  Unobservable
  Inputs
  (Level 3) |       
|                                                            |  |                              |        |                                                                        |                                                      |                                         |  |                                                 |       
|Impaired Loans                                              |  |                              | 18,399 |                                                                        |                                                      |                                         |  |                                                 | 18,399 |  |   |   | 
|                                                            |  |                              |        |                                                                        |                                                      |                                         |  |                                                 |        |  |   |   | 
|                                                            |  |                              |        |                                                                        |                                                      |                                         |  |                                                 |        |  |   |   | 
|Total assets measured at fair value on a nonrecurring basis |  | $                            | 18,399 |                                                                        | $                                                    |                                        |  | $                                               | 18,399 |  | $ |  | 
|                                                            |  |                              |        |                                                                        |                                                      |                                         |  |                                                 |        |  |   |   | 

Impaired loansimpaired loans, which are measured for
impairment using the fair value of the collateral for the collateral dependent
loans, had a carrying amount of $22,580,000, with a specific reserve of
$4,181,000.

13

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

Certain
statements in this Form 10-Q (excluding statements of fact or historical
financial information) involve forward-looking information within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, and are subject to the safe
harbor created by those sections. These forward-looking statements involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements.  Such risks and uncertainties include, but
are not limited to, the following factors: competitive pressure in banking
industry increases significantly; changes in the interest rate environment
reduce margins; general economic conditions, either nationally or regionally,
are less favorable than expected, resulting in, among other things, a
deterioration in credit quality and an increase in the provision for possible
loan losses; changes in the regulatory environment; changes in business conditions,
particularly in the Northern California region; volatility of rate sensitive
deposits; operational risks including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; 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 maintained to provide for losses related to
impaired loans and leases and other losses that can be reasonably expected to
occur in the normal course of business.
The allowance for loan and lease losses is established through a
provision for loan and lease losses charged to operations. Loans and leases are
charged against the allowance for loan and lease losses when management
believes that the collectibility of the principal is unlikely or, with respect
to consumer installment loans, according to an established delinquency
schedule. Management attributes formula reserves to different types of loans
using percentages which are based upon perceived risk associated with the
portfolio and underlying collateral, historical loss experience, and
vulnerability to existing economic conditions, which may affect the
collectibility of the loans.  Specific
reserves are allocated for impaired loans and leases which have experienced a
decline in internal grading and when management believes additional loss
exposure exists. The unallocated allowance is based upon managements
evaluation of various conditions that are not directly measured in the
determination of the formula and specific allowances. The evaluation of
inherent losses with respect to these conditions is subject to a higher degree
of uncertainty because they are not identified with specific problem credits or
portfolio segments. Although the allowance for loan and lease losses is
allocated to various portfolio segments, it is general in nature and is
available for the loan and lease portfolio in its entirety. The allowance is an
amount that management believes will be adequate to absorb losses inherent in
existing loans and leases. Actual amounts could differ from those estimates.

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 or lease 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.

14

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Share Based Compensation

At June 30,
2008, the Company had four shareholder approved stock-based compensation plans:
the North Valley Bancorp 1989 Director Stock Option Plan, the 1998 Employee
Stock Incentive Plan, the 1999 Director Stock Option Plan and the 2008 Stock
Incentive Plan. The 1999 Director Stock Option Plan replaced the existing North
Valley Bancorp 1989 Director Stock Option Plan. The North Valley Bancorp 2008
Stock Incentive Plan was adopted by the Companys Board of Directors on
February 27, 2008, effective that date, and was approved by the Companys
shareholders at the Annual Meeting, May 22, 2008. The terms of the Stock
Incentive Plan are substantially the same as the North Valley Bancorp 1998
Employee Stock Incentive Plan. See Note C  Stock-Based Compensation to the
Unaudited Condensed Consolidated Financial Statements in Item 1  Financial
Statements.

Prior to
January 1, 2006, the Company accounted for the plans under the recognition and
measurement provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations, as
permitted by Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation (Statement 123) and FASB Statement
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), Share-Based Payment (Statement 123
(R)), using the modified prospective transition method. Under this transition
method, compensation cost recognized in fiscal year 2007 and 2008 includes: (a)
compensation cost for all share-based payments vesting during 2007 and 2008
that were granted prior to, but not yet vested as of, January 1, 2006 based on
the grant-date fair value estimated in accordance with the original provisions
of Statement 123; and, (b) compensation cost for all share-based payments
vesting during 2007 and 2008 that were granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions
of Statement 123(R). The Company has elected the alternative method prescribed
by FASB Staff Position No. FAS 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards, commonly referred to as the short-cut method, for
accounting for the tax consequences of share-based awards.

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 2008.

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 B  Investment Securities to the
Unaudited Condensed Consolidated Financial Statements in Item 1  Financial
Statements.

Fair Value

Effective
January 1, 2008, the Company adopted SFAS No. 157,Fair Value Measurements, which among other things, requires
enhanced disclosures about financial instruments carried at fair value. SFAS
No. 157 establishes a hierarchical disclosure framework associated with the
level of observable pricing scenarios utilized in measuring financial
instruments at fair value. The degree of judgment utilized in measuring the
fair value of financial instruments generally correlates to the level of the
observable pricing scenario. Financial instruments with readily available
active quoted prices or for which fair value can be measured from actively
quoted prices generally will have a higher degree of observable pricing and a
lesser degree of judgment utilized in measuring fair value. Conversely,
financial instruments rarely traded or not quoted will generally have little or
no observable pricing and a higher degree of judgment utilized in measuring
fair value. Observable pricing scenarios are impacted by a number of factors,
including the type of financial instrument, whether the financial instrument is
new to the market and not yet established and the characteristics specific to
the transaction.

15

---



See Note J 
Fair Value Measurement to the Unaudited Condensed Consolidated Financial
Statements in Item 1  Financial Statements for additional information about
the financial instruments carried at fair value.

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

|                                          |  |                             |        |                           |   |        |   |      |        |    |   |        |  
|----------------------------------------- |  | --------------------------- | ------ | ------------------------- | - | ------ | - | ---- | ------ | -- | - | ------ | -
|                                          |  | Three months ended June 30, |        | Six months ended June 30, |  
|(in thousands except per
  share amounts) |  | 2008                        |        | 2007                      |   | 2008   |   | 2007 |       
|                                          |  |                             |        |                           |   |        |   |      |       
|                                          |  |                             |        |                           |   |        |   |      |       
|Net interest income                       |  | $                           | 9,069  |                           | $ | 10,092 |   | $    | 18,197 |    | $ | 20,429 |  
|Provision for loan and lease losses       |  |                             | 5,200  |                           |   |       |   |      | 7,600  |    |   |       |  
|Noninterest income                        |  |                             | 3,477  |                           |   | 3,170  |   |      | 6,968  |    |   | 6,304  |  
|Noninterest expense                       |  |                             | 9,577  |                           |   | 10,732 |   |      | 19,382 |    |   | 20,962 |  
|(Benefit) provision for income taxes      |  |                             | (722   | )                         |   | 810    |   |      | (588   | )  |   | 1,847  |  
|                                          |  |                             |        |                           |   |        |   |      |        |    |   |        |  
|Net (loss) income                         |  | $                           | (1,509 | )                         | $ | 1,720  |   | $    | (1,229 | )  | $ | 3,924  |  
|                                          |  |                             |        |                           |   |        |   |      |        |    |   |        |  
|                                          |  |                             |        |                           |   |        |   |      |        |    |   |        |  
|(Loss) Earnings Per Share                 |  |                             |        |                           |   |        |   |      |        |    |   |        |  
|Basic                                     |  | $                           | (0.20  | )                         | $ | 0.23   |   | $    | (0.17  | )  | $ | 0.53   |  
|Diluted                                   |  | $                           | (0.20  | )                         | $ | 0.22   |   | $    | (0.17  | )  | $ | 0.51   |  
|                                          |  |                             |        |                           |   |        |   |      |        |    |   |        |  
|Annualized Return on Average Assets       |  |                             | (0.65  | %)                        |   | 0.77   | % |      | (0.26  | %) |   | 0.89   | %
|Annualized Return on Average Equity       |  |                             | (7.35  | %)                        |   | 8.81   | % |      | (2.98  | %) |   | 10.23  | %
|                                          |  |                             |        |                           |   |        |   |      |        |    |   |        |  

The Company
had a net loss of $1,509,000, or $0.20 per diluted share, and $1,229,000, or
$0.17 per diluted share, for the three and six months ended June 30, 2008,
respectively. This represents a decrease in net income of $3,229,000 and
$5,153,000 when compared to the three and six months ended June 30, 2007. The
decrease in net income for the three and six months ended June 30, 2008
compared to the same periods in 2007 was principally driven by a $5,200,000
provision for loan and lease losses for the three months ended June 30, 2008
and a total provision of $7,600,000 for the six months ended June 30, 2008
compared to no provision for the same periods in 2007, and secondarily due to a
decrease in net interest income of $1,023,000 for the three months ended June
30, 2008 and a total decrease of $2,232,000 for the six months ended June 30,
2008 compared to the same periods in 2007. These changes were partially offset
by increases in noninterest income of $307,000 and $664,000 and decreases in
noninterest expense of $1,155,000 and $1,580,000 for the three and six months
ended June 30, 2008 compared to the same periods in 2007.

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

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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)

|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|------------------------------------------ |  | -------------------------------- | ------- | -------------------------------- |  | ----------------- | - | ----------------- | ------ | ------------- | - | ----------------- | - |  | ---- | - | - | ------ | 
|                                           |  | Three months ended June 30, 2008 |         | Three months ended June 30, 2007 | 
|                                           |  |                                  |         |                                  | 
|                                           |  | Average
  Balance                |         | Yield/
  Rate                    |  | Interest
  Amount |   | Average
  Balance |        | Yield/
  Rate |   | Interest
  Amount |  
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |  
|                                          
|Assets                                     |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Earning assets:                            |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Federal funds sold                         |  | $                                | 230     |                                  |  | 1.74              | % | $                 | 1      |               | $ | 18,630            |   |  | 5.21 | % | $ | 242    | 
|Investment securities:                     |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Taxable                                    |  |                                  | 79,844  |                                  |  | 4.14              | % |                   | 825    |               |   | 97,410            |   |  | 4.31 | % |   | 1,047  | 
|Non-taxable (1)                            |  |                                  | 20,189  |                                  |  | 6.85              | % |                   | 345    |               |   | 20,497            |   |  | 7.12 | % |   | 364    | 
|FNMA preferred stock (1)                   |  |                                  | 3,284   |                                  |  | 9.89              | % |                   | 81     |               |   | 5,969             |   |  | 5.24 | % |   | 78     | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total investments                          |  |                                  | 103,317 |                                  |  | 4.86              | % |                   | 1,251  |               |   | 123,876           |   |  | 4.82 | % |   | 1,489  | 
|Loans and leases (2)(3)                    |  |                                  | 747,414 |                                  |  | 6.57              | % |                   | 12,246 |               |   | 660,362           |   |  | 7.90 | % |   | 13,008 | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total earning assets                       |  |                                  | 850,961 |                                  |  | 6.36              | % |                   | 13,498 |               |   | 802,868           |   |  | 7.36 | % |   | 14,739 | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Non earning assets                         |  |                                  | 97,708  |                                  |  |                   |   |                   |        |               |   | 99,094            |   |  |      |   |   |        | 
|Allowance for loan and lease losses        |  |                                  | (13,103 | )                                |  |                   |   |                   |        |               |   | (8,803            | ) |  |      |   |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total non-earning assets                   |  |                                  | 84,605  |                                  |  |                   |   |                   |        |               |   | 90,291            |   |  |      |   |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total assets                               |  | $                                | 935,566 |                                  |  |                   |   |                   |        |               | $ | 893,159           |   |  |      |   |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Liabilities and Shareholders Equity       |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Interest bearing liabilities:              |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Transaction accounts                       |  | $                                | 157,526 |                                  |  | 0.65              | % | $                 | 256    |               | $ | 159,683           |   |  | 0.50 | % | $ | 200    | 
|Savings and money market                   |  |                                  | 184,164 |                                  |  | 1.62              | % |                   | 743    |               |   | 196,941           |   |  | 1.93 | % |   | 948    | 
|Time certificates                          |  |                                  | 247,988 |                                  |  | 3.87              | % |                   | 2,391  |               |   | 216,025           |   |  | 4.57 | % |   | 2,460  | 
|Other borrowed funds                       |  |                                  | 92,435  |                                  |  | 3.92              | % |                   | 904    |               |   | 58,512            |   |  | 6.17 | % |   | 900    | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total interest bearing liabilities         |  |                                  | 682,113 |                                  |  | 2.52              | % |                   | 4,294  |               |   | 631,161           |   |  | 2.86 | % |   | 4,508  | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Demand deposits                            |  |                                  | 159,403 |                                  |  |                   |   |                   |        |               |   | 173,562           |   |  |      |   |   |        | 
|Other liabilities                          |  |                                  | 11,689  |                                  |  |                   |   |                   |        |               |   | 10,130            |   |  |      |   |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total liabilities                          |  |                                  | 853,205 |                                  |  |                   |   |                   |        |               |   | 814,853           |   |  |      |   |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Shareholders equity                       |  |                                  | 82,361  |                                  |  |                   |   |                   |        |               |   | 78,306            |   |  |      |   |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total liabilities and shareholders equity |  | $                                | 935,566 |                                  |  |                   |   |                   |        |               | $ | 893,159           |   |  |      |   |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Net interest income                        |  |                                  |         |                                  |  |                   |   | $                 | 9,204  |               |   |                   |   |  |      |   | $ | 10,231 | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Net interest spread                        |  |                                  |         |                                  |  | 3.84              | % |                   |        |               |   |                   |   |  | 4.50 | % |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Net interest margin                        |  |                                  |         |                                  |  | 4.34              | % |                   |        |               |   |                   |   |  | 5.11 | % |   |        | 
|                                           |  |                                  |         |                                  |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 

|                                                                                                            
|------------------------------------------------------------------------------------------------------------
|                                                                                                            
|(1) Tax-equivalent basis;
  non-taxable securities are exempt from federal taxation.                        
|                                                                                                            
|(2) Loans on nonaccrual status
  have been included in the computations of averages balances.               
|                                                                                                            
|(3) Includes loan fees of
  $113 and $409 for the three months ended June 30, 2008 and 2007,
  respectively.

17

---



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

|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|------------------------------------------ |  | ------------------------------ | ------- | ------------------------------ |  | ----------------- | - | ----------------- | ------ | ------------- | - | ----------------- | - |  | ---- | - | - | ------ | 
|                                           |  | Six months ended June 30, 2008 |         | Six months ended June 30, 2007 | 
|                                           |  |                                |         |                                | 
|                                           |  | Average
  Balance              |         | Yield/
  Rate                  |  | Interest
  Amount |   | Average
  Balance |        | Yield/
  Rate |   | Interest
  Amount |  
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |  
|                                          
|Assets                                     |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Earning assets:                            |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Federal funds sold                         |  | $                              | 411     |                                |  | 2.93              | % | $                 | 6      |               | $ | 14,485            |   |  | 5.28 | % | $ | 379    | 
|Investment securities:                     |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Taxable                                    |  |                                | 83,317  |                                |  | 4.09              | % |                   | 1,700  |               |   | 100,035           |   |  | 4.42 | % |   | 2,191  | 
|Non-taxable (1)                            |  |                                | 20,364  |                                |  | 6.75              | % |                   | 685    |               |   | 21,139            |   |  | 6.92 | % |   | 725    | 
|FNMA preferred stock (1)                   |  |                                | 3,284   |                                |  | 9.65              | % |                   | 158    |               |   | 8,280             |   |  | 6.50 | % |   | 267    | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total investments                          |  |                                | 106,965 |                                |  | 4.77              | % |                   | 2,543  |               |   | 129,454           |   |  | 4.96 | % |   | 3,183  | 
|Loans and leases (2)(3)                    |  |                                | 745,209 |                                |  | 6.79              | % |                   | 25,222 |               |   | 657,054           |   |  | 7.93 | % |   | 25,832 | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total earning assets                       |  |                                | 852,585 |                                |  | 6.53              | % |                   | 27,771 |               |   | 800,993           |   |  | 7.40 | % |   | 29,394 | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Non earning assets                         |  |                                | 97,786  |                                |  |                   |   |                   |        |               |   | 99,761            |   |  |      |   |   |        | 
|Allowance for loan and lease losses        |  |                                | (11,929 | )                              |  |                   |   |                   |        |               |   | (8,820            | ) |  |      |   |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total non-earning assets                   |  |                                | 85,857  |                                |  |                   |   |                   |        |               |   | 90,941            |   |  |      |   |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total assets                               |  | $                              | 938,442 |                                |  |                   |   |                   |        |               | $ | 891,934           |   |  |      |   |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Liabilities and Shareholders Equity       |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Interest bearing liabilities:              |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Transaction accounts                       |  | $                              | 156,238 |                                |  | 0.65              | % | $                 | 505    |               | $ | 160,138           |   |  | 0.47 | % | $ | 373    | 
|Savings and money market                   |  |                                | 182,916 |                                |  | 1.70              | % |                   | 1,553  |               |   | 198,228           |   |  | 1.86 | % |   | 1,828  | 
|Time certificates                          |  |                                | 248,095 |                                |  | 4.17              | % |                   | 5,161  |               |   | 209,447           |   |  | 4.49 | % |   | 4,663  | 
|Other borrowed funds                       |  |                                | 98,679  |                                |  | 4.26              | % |                   | 2,097  |               |   | 59,628            |   |  | 6.10 | % |   | 1,803  | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total interest bearing liabilities         |  |                                | 685,928 |                                |  | 2.72              | % |                   | 9,316  |               |   | 627,441           |   |  | 2.79 | % |   | 8,667  | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Demand deposits                            |  |                                | 157,474 |                                |  |                   |   |                   |        |               |   | 175,748           |   |  |      |   |   |        | 
|Other liabilities                          |  |                                | 12,292  |                                |  |                   |   |                   |        |               |   | 11,418            |   |  |      |   |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total liabilities                          |  |                                | 855,694 |                                |  |                   |   |                   |        |               |   | 814,607           |   |  |      |   |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Shareholders equity                       |  |                                | 82,748  |                                |  |                   |   |                   |        |               |   | 77,327            |   |  |      |   |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Total liabilities and shareholders equity |  | $                              | 938,442 |                                |  |                   |   |                   |        |               | $ | 891,934           |   |  |      |   |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Net interest income                        |  |                                |         |                                |  |                   |   | $                 | 18,455 |               |   |                   |   |  |      |   | $ | 20,727 | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Net interest spread                        |  |                                |         |                                |  | 3.81              | % |                   |        |               |   |                   |   |  | 4.61 | % |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 
|Net interest margin                        |  |                                |         |                                |  | 4.34              | % |                   |        |               |   |                   |   |  | 5.22 | % |   |        | 
|                                           |  |                                |         |                                |  |                   |   |                   |        |               |   |                   |   |  |      |   |   |        | 

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|                                                                                                        
|(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
  $292 and $807 for the six months ended June 30, 2008 and 2007, respectively.

Net interest
income has been adjusted to a fully taxable equivalent basis (FTE) for
tax-exempt investments included in earning assets. Net interest income, which
represents the Companys largest component of revenues and is the difference
between interest earned on loans and investments and interest paid on deposits
and borrowings, decreased $1,027,000, or 10.1%, for the three months ended June
30, 2008 compared to the same period in 2007. Interest income decreased by
$1,241,000, primarily due to foregone interest income of $530,000 due to loans
placed on nonaccrual status and a reduction in the interest earned on
investment securities and Federal funds sold due to the decreases in the
average balances. Interest expense decreased $214,000 as the increase in the
average balance of interest bearing liabilities of $50,952,000 was more than
offset by the decrease on rates paid on deposits and borrowings for the quarter
ended June 30, 2008 compared to the same period in 2007. Average loans
increased $87,052,000 in the second quarter of 2008 compared to the second
quarter of 2007, however the yield on the loan portfolio for the quarter ended June
30, 2008 compared to the same quarter in 2007 decreased 133 basis points to
6.57%, reflective of the declining interest rate environment and the impact of
reversing the interest income on the loans placed on nonaccrual. Interest rates
from the Federal Reserve Board have declined 325 basis points since September
2007. The increase in average total loans was primarily funded by a decrease in
average investments and Federal funds sold of $38,959,000 and an increase in
average borrowings of $33,923,000. Average yields on earning assets decreased
100 basis points from the quarter ended June 30, 2007, to 6.36% for the quarter
ended June 30, 2008 and the average rate paid on interest-bearing liabilities
decreased by 33 basis points to 2.53%. As a result of the above, the Companys
net interest margin for the quarter ended June 30, 2008 was 4.34%, a decrease
of 77 basis points from the net interest margin of 5.11% for the quarter ended
June 30, 2007 and consistent with the 4.35% net interest margin for the linked
quarter ended March 31, 2008.

18

---



Net interest
income decreased $2,272,000 for the six months ended June 30, 2008 compared to
the same period in 2007. Interest income decreased by $1,623,000, primarily due
to foregone interest income of $1,056,000 due to loans placed on nonaccrual
status and a reduction in the interest earned on investment securities and
Federal funds sold as a result of both lower average balances and lower yields.
Interest expense increased $649,000 due primarily to an increase in average
interest bearing liabilities of $58,487,000 for the six months ended June 30,
2008 compared to the same period in 2007. The net interest margin for the six
months ended June 30, 2008 decreased 88 basis points to 4.34% from 5.22% for
the six months ended June 30, 2007.

Currently the
Company is retaining fixed-rate 15-and 30-year conforming residential mortgages
to better diversify the portfolio and also adding fixed rate mortgages with the
steepening of the yield curve in this declining rate environment. The Company
will continue to sell the fixed rate jumbo mortgage loans it originates.

Provision for Loan and Lease Losses

The Company
recorded a provision for loan and lease losses of $5,200,000 for the three
months ended June 30, 2008 and a total provision of $7,600,000 for the six
months ended June 30, 2008. The Company did not record any provision for the
three and six months ended June 30, 2007. The process for determining allowance
adequacy and the resultant provision for loan losses includes a comprehensive
analysis of the loan portfolio. Factors in the analysis include size and mix of
the loan portfolio, nonperforming loan levels, charge-off/recovery activity and
other qualitative factors including economic environment and activity. The
decision to record the $5,200,000 and $7,600,000 provision for the three and
six months ended June 30, 2008 reflects managements assessment of the overall
adequacy of the allowance for loan and lease losses including the consideration
of the increase in nonperforming loans and the overall effect of the slowing
economy, particularly in real estate. Management believes that the current
level of allowance for loan and lease losses as of June 30, 2008 of
$13,677,000, or 1.87% of total loans and leases, is adequate at this time. The
allowance for loan and lease losses was $10,755,000, or 1.44% of total loans
and leases, at December 31, 2007. For further information regarding our
allowance for loan and lease losses, see Allowance for Loan and Lease Losses
on page 24.

Noninterest Income

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

|                                                            |  |                             |       |                           |   |       |  |      |       |  |   |       |  
|----------------------------------------------------------- |  | --------------------------- | ----- | ------------------------- | - | ----- |  | ---- | ----- |  | - | ----- | -
|                                                            |  | Three months ended June 30, |       | Six months ended June 30, |  
|(In thousands)                                              |  | 2008                        |       | 2007                      |   | 2008  |  | 2007 |      
|                                                            |  |                             |       |                           |   |       |  |      |      
|                                                            |  |                             |       |                           |   |       |  |      |      
|Service charges on deposit accounts                         |  | $                           | 1,894 |                           | $ | 1,687 |  | $    | 3,610 |  | $ | 3,331 |  
|Other fees and charges                                      |  |                             | 979   |                           |   | 966   |  |      | 1,944 |  |   | 1,858 |  
|Earnings on cash surrender value of life insurance policies |  |                             | 312   |                           |   | 298   |  |      | 642   |  |   | 609   |  
|Gain on sale of loans                                       |  |                             | 8     |                           |   | 44    |  |      | 95    |  |   | 97    |  
|Gain (loss) on sales or calls of investment securities      |  |                             |      |                           |   |      |  |      | 1     |  |   | (36   | )
|Other                                                       |  |                             | 284   |                           |   | 175   |  |      | 676   |  |   | 445   |  
|                                                            |  |                             |       |                           |   |       |  |      |       |  |   |       |  
|Total noninterest income                                    |  | $                           | 3,477 |                           | $ | 3,170 |  | $    | 6,968 |  | $ | 6,304 |  
|                                                            |  |                             |       |                           |   |       |  |      |       |  |   |       |  

Noninterest
income increased $307,000 from $3,170,000 for the three months ended June 30,
2007 to $3,477,000 for the same period in 2008. Service charges on deposits
increased $207,000 from the three months ended June 30, 2007 compared to the
same period in 2008, driven by growth in the number of demand accounts. Other
fees and charges were $979,000 for the three months ended June 30, 2008
compared to $966,000 for the same period in 2007. The Company recorded $7,000
in gains on sales of mortgages for the three months ended June 30, 2008
compared to $44,000 in gains on sales of mortgages for the same period in 2007.
Other income increased to $284,000 for the three months ended June 30, 2008
from $175,000 for the same period in 2007 primarily due to an increase in
income from sales of annuity and other nondeposit investment products to
customers.

Noninterest income increased
$664,000 to $6,968,000 for the six months ended June 30, 2008 from $6,304,000
for the same period in 2007. The increase was primarily driven by the increase
in service charges on deposit accounts of $279,000, an increase in other fees
and charges of $86,000, and an increase in other income of $231,000. The
increase in other noninterest income was primarily due to the mandatory
redemption of shares from the VISA initial public offering and an increase in
sales of annuity and other nondeposit investment products to customers.

19

---



Noninterest
Expense

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

|                             |  |                             |       |                           |   |        |  |      |        |  |   |        | 
|---------------------------- |  | --------------------------- | ----- | ------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|                             |  | Three months ended June 30, |       | Six months ended June 30, |  
|(In thousands)               |  | 2008                        |       | 2007                      |   | 2008   |  | 2007 |       
|                             |  |                             |       |                           |   |        |  |      |       
|                             |  |                             |       |                           |   |        |  |      |        |  |   |        | 
|Salaries & employee benefits |  | $                           | 5,105 |                           | $ | 5,475  |  | $    | 10,641 |  | $ | 11,034 | 
|Occupancy expense            |  |                             | 720   |                           |   | 754    |  |      | 1,474  |  |   | 1,523  | 
|Data processing expenses     |  |                             | 575   |                           |   | 528    |  |      | 1,107  |  |   | 1,122  | 
|Equipment expense            |  |                             | 488   |                           |   | 518    |  |      | 953    |  |   | 1,053  | 
|Professional services        |  |                             | 312   |                           |   | 375    |  |      | 599    |  |   | 810    | 
|ATM expense                  |  |                             | 262   |                           |   | 246    |  |      | 489    |  |   | 505    | 
|Marketing                    |  |                             | 248   |                           |   | 307    |  |      | 448    |  |   | 528    | 
|Operations expense           |  |                             | 231   |                           |   | 222    |  |      | 420    |  |   | 436    | 
|Director                     |  |                             | 130   |                           |   | 147    |  |      | 353    |  |   | 315    | 
|Amortization of intangibles  |  |                             | 162   |                           |   | 163    |  |      | 325    |  |   | 325    | 
|Postage                      |  |                             | 154   |                           |   | 128    |  |      | 303    |  |   | 254    | 
|Printing & supplies          |  |                             | 148   |                           |   | 149    |  |      | 346    |  |   | 388    | 
|Merger expense               |  |                             |      |                           |   | 756    |  |      |       |  |   | 756    | 
|Other                        |  |                             | 1,042 |                           |   | 964    |  |      | 1,924  |  |   | 1,913  | 
|                             |  |                             |       |                           |   |        |  |      |        |  |   |        | 
|Total noninterest expense    |  | $                           | 9,577 |                           | $ | 10,732 |  | $    | 19,382 |  | $ | 20,962 | 
|                             |  |                             |       |                           |   |        |  |      |        |  |   |        | 

Noninterest expense totaled $9,577,000 for the three
months ended June 30, 2008, compared to $10,732,000 for the same period in
2007. This represents a decrease of $1,155,000, or 10.8%, for the three months
ended June 30, 2008 from the comparable period in 2007 due primarily to
expenses related to the terminated merger with Sterling Financial Corporation
of $950,000 for the quarter ended June 30, 2007, $756,000 of which is included
in the merger expense category and $194,000 of which is legal fees for the merger
included in the professional services category in the above table. Salaries and
benefits decreased by $370,000 or 6.8% to $5,105,000 for the three months ended
June 30, 2008 compared to $5,475,000 for the same period in 2007 due primarily
to a reduction in bonus accruals and a slight reduction in staffing. Data
processing expense increased $47,000 for the three months ended June 30, 2008
compared to the same period in 2007. Most other expense categories for the
three months ended June 30, 2008 experienced relatively small decreases or
increases from the same respective period in 2007. The Companys ratio of
noninterest expense to average assets improved to 4.09% for the three months
ended June 30, 2008 from 4.81% for the same period in 2007. The Companys efficiency
ratio improved to 76.34% for the three months ended June 30, 2008 from 80.92%
for the same period in 2007.

Noninterest expense totaled $19,382,000 for the six
months ended June 30, 2008, compared to $20,962,000 for the same period in
2007. This represents a decrease of $1,580,000, or 7.54%, for the six months
ended June 30, 2008 from the comparable period in 2007 due primarily to direct
and legal expenses related to the terminated merger with Sterling Financial
Corporation of $1,060,000 for the six months ended June 30, 2007. Salaries and
benefits decreased by $393,000 to $10,641,000 for the six months ended June 30,
2008 compared to $11,034,000 for the same period in 2007. Most other expense
categories for the six months ended June 30, 2008 experienced relatively small
changes from the same respective period in 2007. The Companys ratio of
noninterest expense to average assets improved to 4.13% for the six months
ended June 30, 2008 from 4.70% for the same period in 2007. The Companys
efficiency ratio improved slightly to 77.0% from 78.4% for the six months ended
June 30, 2008 and 2007, respectively.

Income
Taxes

The Company recorded a benefit for income taxes for
the quarter ended June 30, 2008 of $722,000, resulting in an effective tax
benefit rate of 32.4%, compared to a provision for income taxes of $810,000, or
an effective tax rate of 32.0%, for the quarter ended June 30, 2007. The
benefit for income taxes for the six month period ended June 30, 2008 was
$588,000, resulting in an effective tax benefit rate of 32.4%, compared to a
provision for income taxes of $1,847,000, or an effective tax rate of 32.0%,
for the same period in 2007.

Financial
Condition as of June 30, 2008 As Compared to December 31, 2007

Total assets at June 30, 2008 decreased $14,658,000 to
$934,361,000, compared to $949,019,000 at December 31, 2007. Loans and leases
decreased $15,970,000, or 2.1%, to $730,283,000 at June 30, 2008 from
$746,253,000 at December 31, 2007. Deposits increased $7,492,000, or 1.0%, from
December 31, 2007 to $744,231,000 at June 30, 2008. Investment securities
decreased $13,663,000 to $90,709,000 at June 30, 2008, compared to $104,372,000
at December 31, 2007. Other borrowed funds decreased $19,077,000 to $68,115,000
at June 30, 2008 compared to $87,192,000 at December 31, 2007.

20

---



Loan and
Lease Portfolio

Loans and leases, the Companys major component of
earning assets, decreased $15,970,000 during the first six months of 2008 to
$730,283,000 at June 30, 2008, from $746,253,000 at December 31, 2007.
Commercial real estate loans and commercial loans increased by $19,761,000 and
$2,951,000, respectively, during the first six months of 2008, which was offset
due to real estate construction loans decreasing by $39,403,000 during the
first six months of 2008. Real estate  mortgage loans increased $4,877,000,
while installment loans decreased $4,751,000 during the first six months of
2008. Direct financing leases and other loans increased from December 31, 2007
by $416,000.

The Companys average loan to deposit ratio was 99.8%
for the quarter ended June 30, 2008 compared to 88.5% for the same period in
2007. The increase in the Companys average loan to deposit ratio is driven by
an increase in total average loans of $87,052,000 while total average deposits
increased by $2,870,000.

|                                      |  |               |         |                   |   |         |  
|------------------------------------- |  | ------------- | ------- | ----------------- | - | ------- | -
|(in thousands)                        |  | June 30, 2008 |         | December 31, 2007 |  
|                                      |  |               |         |                   |  
|                                      |  |               |         |                   |   |         |  
|Commercial                            |  | $             | 95,370  |                   | $ | 92,419  |  
|Real estate - commercial              |  |               | 317,033 |                   |   | 297,272 |  
|Real estate - construction            |  |               | 186,355 |                   |   | 225,758 |  
|Real estate - mortgage                |  |               | 55,008  |                   |   | 50,131  |  
|Installment                           |  |               | 36,410  |                   |   | 41,161  |  
|Direct financing leases               |  |               | 1,168   |                   |   | 1,307   |  
|Other                                 |  |               | 39,852  |                   |   | 39,297  |  
|                                      |  |               |         |                   |   |         |  
|                                      |  |               |         |                   |   |         |  
|                                      |  |               | 731,196 |                   |   | 747,345 |  
|                                      |  |               |         |                   |   |         |  
|Deferred loan fees, net               |  |               | (913    | )                 |   | (1,092  | )
|Allowance for loan and
  lease losses |  |               | (13,677 | )                 |   | (10,755 | )
|                                      |  |               |         |                   |   |         |  
|                                      |  |               |         |                   |   |         |  
|                                      |  | $             | 716,606 |                   | $ | 735,498 |  
|                                      |  |               |         |                   |   |         |  

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 June 30, 2008, the recorded investment in loans and
leases for which impairment had been recognized was approximately $22,580,000
compared to $368,000 at June 30, 2007 and $1,608,000 at December 31, 2007. Of
the 2008 balance, there was a related valuation allowance of $4,181,000. If
interest had been accrued on the nonperforming loans, such income would have
approximated $530,000 and $1,056,000 for the three and six months ended June
30, 2008, respectively, compared to $5,000 and $20,000 for the three and six
months ended June 30, 2007, respectively.

At December 31, 2007, the recorded investment in loans
and leases for which impairment had been recognized was approximately
$1,608,000. Of the 2007 balance, there was a related valuation allowance of
$83,000. For the year ended December 31, 2007, the average recorded investment
in loans and leases for which impairment had been recognized was approximately
$1,572,000. During the portion of the year that the loans and leases were
impaired, the Company recognized interest income of approximately $38,000 for
cash payments received in 2007.

Nonperforming loans (defined as nonaccrual loans and
loans 90 days or more past due and still accruing interest) totaled $22,580,000
at June 30, 2008, an increase of $19,677,000 from the total at June 30, 2007
and an increase of $20,816,000 from December 31, 2007. Nonperforming loans as a
percentage of total loans were 3.09% at June 30, 2008, compared to 0.43% at
June 30, 2007, and 0.24% at December 31, 2007. Nonperforming assets
(nonperforming loans and OREO) totaled $30,788,000 at June 30, 2008, an
increase of $26,983,000 from June 30, 2007, and an increase of $28,122,000 from
December 31, 2007. Nonperforming assets as a percentage of total assets were
3.30% at June 30, 2008 compared to 0.43% at June 30, 2007, and 0.28% at
December 31, 2007.

21

---



The level of nonperforming loans decreased $3,170,000
to $22,580,000 at June 30, 2008 from $25,750,000 at March 31, 2008 primarily as
a result of moving certain loans to OREO which increased $7,306,000 to total
$8,208,000 at June 30, 2008. Overall, nonperforming assets increased $4,136,000
to $30,788,000 at June 30, 2008 from $26,652,000 at March 31, 2008. As
discussed in the Companys first quarter Form 10-Q, there were four real estate
projects with loans totaling $24,047,000 which were the primary reason for the
increase in nonperforming loans at March 31, 2008: two loans were for
residential development projects for $9,509,000 and $6,750,000, respectively,
and the other two were residential acquisition and development loans for
$4,876,000 and $2,912,000, respectively. Set forth below is a discussion and
update on those four loans.

The larger of the two residential development project
loans (for $9,509,000) was included in our classified loans and risk-rated  Substandard
at December 31, 2007 based on slower sales and a weakening real estate market.
During the first quarter of 2008, the projects absorption rates slowed from
the current one sale per month to an estimated one sale per two to three months
and the updated sales projections through March 31, 2008 raised a concern as to
whether the borrower could continue to make the scheduled interest payments.
Interest payments were current at December 31, 2007 (last payment for this loan
was December 20, 2007). The Company met with the borrower in the first quarter
of 2008 to discuss the status of the project and potential other sources of
payments on the project and concluded the best strategy would be for the
borrower to finish the houses under construction, have no new house starts and
sell the finished lots. To understand the potential loss exposure and properly
value the collateral support provided by the property with the continuing
decline in real estate values in California, a new appraisal was ordered on the
project in February 2008. The Company received the appraisal on March 7, 2008
and the appraisal demonstrated the continuing decline in the value of the
underlying project. Although interest payments were current at December 31,
2007, the Companys assessment that the borrower did not have the ability to
continue to make the scheduled interest payments coupled with the decline in
appraised value caused the decision to consider this loan as impaired, place
the loan on nonaccrual and revaluate the level of specific reserve for the
credit. This loan was placed on nonaccrual on March 25, 2008. As of June 30,
2008, this loan remains on nonaccrual. The specific reserve for this loan at
June 30, 2008 was $2,650,000.

The second of the two residential development project
loans (for $6,750,000) was included in our classified loans and risk-rated 
Substandard at December 31, 2007 based on slower sales and a weakening real
estate market. During the first quarter of 2008, the projects absorption rates
slowed and the updated sales projections through March 31, 2008 raised a
concern as to whether the borrower could continue to make the scheduled
interest payments. Interest payments were current at December 31, 2007 (last
payment for this loan was January 3, 2008). The Company met with the borrower
in the first quarter of 2008 to discuss the status of the project and potential
other sources of payments on the project and concluded the best strategy would
be for the borrower to finish the houses under construction, have no new house
starts and sell the finished lots. To understand the potential loss exposure
and properly value the collateral support provided by the properties with the
continuing decline in real estate values in California, a new appraisal was
ordered on the project in January 2008. The Company received the appraisal on
February 25, 2008 and the appraisal demonstrated the continuing decline in the
values of the underlying project. Although interest payments were current at
December 31, 2007, the Companys assessment that the borrower did not have the
ability to continue to make the scheduled interest payments coupled with the
decline in appraised value caused the decision to consider this loan as
impaired, place the loan on nonaccrual and revaluate the level of specific
reserves for the credit. This loan was placed on nonaccrual on March 25, 2008.
This loan was paid down by $1.75 million to $5.0 million during the second
quarter of 2008, and on June 27, 2008 the Company negotiated a deed in lieu of
foreclosure and took the property into OREO (21 finished lots and 8 homes) at a
carrying value of $3.3 million which represented the fair value of the property
less estimated costs to sell at the time of transfer. On transfer to OREO, the
Company took a charge to the Allowance for Loan and Lease Losses (ALLL) of $2.0
million to reflect the fair value of the OREO compared to the specific reserve
at that time of $1.3 million. The Company sold the 21 lots for $1.4 million on
June 30, 2008, and the remaining 8 homes remain in OREO at a carrying value of
$1.9 million. On this loan, the Company charged-off $2.0 million in which there
was a specific reserve of $1.3 million. The charge-off taken was $700 thousand
greater than the reserve established as a result of the actual sales price of
the lots being less than the value established based on the February 25, 2008
appraisal. This decline is reflective of the continued decline in real estate
values and the business decision to liquidate this asset.

The larger of the two residential acquisition and
development loans (for $4,876,000) was risk-rated  Special Mention at December
31, 2007. Interest payments were current at December 31, 2007 (last payment was
February 8, 2008). The Company met with the borrower during the first quarter of
2008 and concluded from the meeting that due to a lack of sales the borrower
was not capable of making the scheduled interest payments and the loan was
placed on nonaccrual on March 31, 2008. The Company ordered a new appraisal on
the property in May 2008 as part of the Companys comprehensive review of its
construction portfolio. The appraisal was received on May 23, 2008 and it
demonstrated the continuing decline in the value of the underlying project.
Although interest payments were current through February 2008, the Companys
assessment that the borrower did not have the ability to continue to make the
scheduled interest payments coupled with the decline in appraised value
resulted in the decision to consider this loan as impaired, place the loan on nonaccrual
and revaluate the level of the related specific reserve for the credit. The
Company negotiated a deed in lieu of foreclosure with the borrower as a
strategy to avoid the threat of bankruptcy and potentially create an extended
workout period. The deed in lieu of foreclosure represented the best course of
action for the Company as we had spoken to interested buyers for the collateral
and because we believed that having control of the asset improved our overall
business position given the continuing decline in real estate values and the
time requirements to work through a lengthy bankruptcy and foreclosure process.
In negotiating the deed in lieu of foreclosure, we released certain existing
collateral positions back to the borrower which resulted in a deficiency in the
remaining available collateral supporting this loan. Additionally, we obtained
a new appraisal on May 23, 2008 for the 57 multi-family lots which indicated a
further decline in value. At June 30, 2008, we took $5.4 million of property into
OREO consisting of 57 multi-family lots at a carrying value of $2.9 million and
11 rental homes at a carrying value of $2.5 million (the homes were from
another loan that was cross-collateralized) and we took a charge against the
allowance for loan and lease losses on the transfer to OREO of $1.3 million. We
did not have any specific reserves on this borrowing prior to the transfer.

22

---



The second of the two residential acquisition and
development loans (for $2,912,000) was risk-rated  Substandard at December 31,
2007. The loan was 30 days past due at December 31, 2007 (last payment was
November 21, 2007). The Company met with the borrower during the first quarter
of 2008 and concluded from the meeting that due to a lack of sales the borrower
was not capable of making the scheduled interest payments and the loan was
placed on nonaccrual on March 4, 2008. The Company ordered a new appraisal on
the property in January 2008 as part of the Companys comprehensive review of
its construction portfolio. The appraisal was received on February 29, 2008 and
it demonstrated the continuing decline in the value of the underlying project.
The Companys assessment that the borrower did not have the ability to continue
to make the scheduled interest payments coupled with the decline in appraised
value resulted in the decision to consider this loan as impaired, place the
loan on nonaccrual and revaluate the level of the related specific reserves for
this credit. During the second quarter of 2008, the Company negotiated a deed
in lieu of foreclosure and transferred the property into OREO at a carrying
value of $2.0 million which represented the fair value of the property less
estimated costs to sell at the time of the transfer. Upon transfer the Company
took a charge to the allowance of $1.0 million, compared to the specific
reserve established of $900 thousand. On June 30, 2008, the Company sold the
OREO property for $2.0 million with no additional gain or loss on the sale
being recorded.

The total dollar amount of reductions in nonperforming
loans from pay downs and the transfers to OREO during the second quarter of
2008 was $15,195,000. This decrease was offset by increases in certain other
identified nonperforming loans totaling $12,025,000. This was primarily due to
the addition in the second quarter of 2008 of two construction loans in the
amount of $7,262,000 and $2,939,000, respectively. Set forth below is a
discussion of those two loans.

The larger of the two loans (for $7,262,000) is a
mixed-use construction loan for a project located in Sonoma County and was
risk-rated  Substandard at March 31, 2008. Interest payments were current at
June 30, 2008 (last payment was June 13, 2008). The Company ordered a new
appraisal on the property in April, 2008 as part of the Companys comprehensive
review of its construction portfolio. The appraisal was received on May 9, 2008
and it demonstrated the continuing decline in the value of the underlying
project. When the Company received the updated appraisal showing the decline in
collateral values on this loan, the Company met with the borrower, requiring
them to bring in additional cash to re-margin the loan and establish interest
reserves. When the borrower was unable to comply with the requests, the Company
determined that the loan was impaired, placed the loan on nonaccrual status,
reversed all accrued and unpaid interest and recorded a specific reserve of
$750,000 representing the amount of the probable loss based on the estimated
fair value of the underlying collateral, per the updated appraisal less
estimated costs to sell. Although interest payments were current at June 30,
2008, the Companys assessment that the borrower did not have the ability to
continue to make the scheduled interest payments coupled with a decline in the
recently appraised value caused the decision to consider this loan as impaired
and to place the loan on nonaccrual.

The second of the two loans (for $2,939,000) is a
residential development project located in Placer County and was risk-rated 
Substandard at March 31, 2008. Interest payments were current at June 30, 2008
(last payment was June 25, 2008). The Company ordered a new appraisal on the
property in February, 2008 as part of the Companys comprehensive review of its
construction portfolio. The appraisal was received on March 26, 2008 and it
demonstrated the continuing decline in the value of the underlying project.
When the Company received the updated appraisal showing the decline in
collateral values on this loan, the Company met with the borrower, requiring
them to bring in additional cash to re-margin the loan and establish interest
reserves. When the borrower was unable to comply with the requests, the Company
determined that the loan was impaired, placed the loan on nonaccrual status,
reversed all accrued and unpaid interest and recorded a specific reserve of
$250,000 representing the amount of the probable loss based on the estimated
fair value of the underlying collateral, per the updated appraisal less
estimated costs to sell. Although interest payments were current at June 30,
2008, the Companys assessment that the borrower did not have the ability to
continue to make the scheduled interest payments coupled with a decline in the
recently appraised value caused the decision to consider this loan as impaired
and to place the loan on nonaccrual.

Gross loan and lease charge offs for the second
quarter of 2008 were $4,591,000 and recoveries totaled $46,000 resulting in net
charge offs of $4,545,000. This compares to net charge-offs of $69,000 for the
second quarter of 2007. Gross charge offs for the six months ended June 30,
2008 were $4,776,000 and recoveries totaled $98,000 resulting in net charge
offs of $4,678,000. This compares to net charge-offs of $85,000 for the six
months ended June 30, 2007.

23

---



The Company continues to evaluate the loan and lease
portfolio as part of a focused internal credit review process. As part of the
ongoing evaluation, the Company has identified additional internal downgrades
to certain credits subsequent to June 30, 2008. If these credits deteriorate
further, the Company may have additional increases in nonperforming loans and
it may require additional provisions for loan and lease losses.

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 June 30, 2008, and December
31, 2007, are summarized as follows (in thousands):

|                                                                 |  |                 |        |                     |   |       |  
|---------------------------------------------------------------- |  | --------------- | ------ | ------------------- | - | ----- | -
|                                                                 |  | June
  30, 2008 |        | December
  31, 2007 |  
|                                                                 |  |                 |        |                     |  
|                                                                 |  |                 |        |                     |   |       |  
|Nonaccrual loans
  and leases                                    |  | $               | 22,580 |                     | $ | 1,608 |  
|Loans and leases
  past due 90 days and accruing interest        |  |                 |       |                     |   | 156   |  
|Other real
  estate owned                                        |  |                 | 8,208  |                     |   | 902   |  
|                                                                 |  |                 |        |                     |   |       |  
|Total
  nonperforming assets                                     |  | $               | 30,788 |                     | $ | 2,666 |  
|                                                                 |  |                 |        |                     |   |       |  
|                                                                 |  |                 |        |                     |   |       |  
|Nonaccrual loans and leases to total gross loans and
  leases    |  |                 | 3.09   | %                   |   | 0.22  | %
|Nonperforming loans and leases to total gross loans
  and leases |  |                 | 3.09   | %                   |   | 0.24  | %
|Total nonperforming assets to total assets                       |  |                 | 3.30   | %                   |   | 0.28  | %

Allowance
for Loan and Lease Losses

A summary of the allowance for loan and lease losses
at June 30, 2008 and June 30, 2007 is as follows (in thousands):

|                                                                |  |                             |        |      |   |       |  
|--------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ----- | -
|                                                                |  | Six
  months ended June 30, |       
|                                                                |  | 2008                        |        | 2007 |  
|                                                                |  |                             |        |      |  
|                                                                |  |                             |        |      |  
|Balance beginning of period                                     |  | $                           | 10,755 |      | $ | 8,831 |  
|Provision for loan and lease losses                             |  |                             | 7,600  |      |   |      |  
|Net (charge-offs) recoveries                                    |  |                             | (4,678 | )    |   | (85   | )
|                                                                |  |                             |        |      |   |       |  
|Balance end of period                                           |  | $                           | 13,677 |      | $ | 8,746 |  
|                                                                |  |                             |        |      |   |       |  
|                                                                |  |                             |        |      |   |       |  
|Allowance for loan and lease losses to total loans
  and leases |  |                             | 1.87   | %    |   | 1.29  | %

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 the probable losses in loans and leases receivable. While
management uses the best information available to make these estimates, future
adjustments to allowances may be necessary due to economic, operating,
regulatory, and other conditions that may be beyond the Companys control. The
Company also engages a third party credit review consultant to analyze the
Companys loan and lease loss adequacy. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
reviews 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.

24

---



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 probable losses in various
  segments or pools within the loan and lease portfolio. The loss factor for
  each segment or pool 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
  allowances. 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 June 30, 2008 included the following, which existed
  at the balance sheet date:
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | · | General business and economic conditions effecting
  the Companys key lending areas   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | · | Real estate values and market trends in Northern
  California                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | · | Loan volumes and concentrations, including trends in
  past due and nonperforming loans
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | · | Seasoning of the loan portfolio                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | · | Status of the current business cycle                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | · | Specific industry or market conditions within
  portfolio segments                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | · | 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 $13,677,000 in formula and specific allowances
reflects managements estimate of the inherent loss in various pools or
segments in the portfolio and individual loans and leases, and includes
adjustments for general economic conditions, trends in the portfolio and
changes in the mix of the portfolio.

Management anticipates continued growth in commercial
lending and commercial real estate and to a lesser extent consumer and real
estate mortgage lending. As a result, future provisions will be required and
the ratio of the allowance for loan and lease losses to loans and leases
outstanding may increase to reflect portfolio risk, increasing concentrations,
loan type and changes in economic conditions.

Deposits

Total deposits increased $7,492,000, or 1.0%, to
$744,231,000 at June 30, 2008 compared to $736,739,000 at December 31, 2007.
Time certificate deposits and interest-bearing demand deposits increased
$12,904,000, or 5.4%, and $1,365,000, or 0.9%, respectively from December 31,
2007. These increases were partially offset by decreases in noninterest-bearing
demand deposits and savings and money market deposits of $3,585,000, or 2.14%,
and $3,192,000, or 1.76%, respectively from December 31, 2007. During the first
six months of 2008, the Company continued to experience a shift in deposits
from noninterest-bearing demand to interest-bearing demand and time certificates.

|                             |  |                 |         |                     |   |         | 
|---------------------------- |  | --------------- | ------- | ------------------- | - | ------- | 
|(in thousands)               |  | June
  30, 2008 |         | December
  31, 2007 |  
|                             |  |                 |         |                     |  
|                             |  |                 |         |                     |  
|Noninterest-bearing
  demand |  | $               | 164,030 |                     | $ | 167,615 | 
|Interest-bearing
  demand    |  |                 | 148,421 |                     |   | 147,056 | 
|Savings                      |  |                 | 178,000 |                     |   | 181,192 | 
|Time
  certificates          |  |                 | 253,780 |                     |   | 240,876 | 
|                             |  |                 |         |                     |   |         | 
|                             |  |                 |         |                     |   |         | 
|Total deposits               |  | $               | 744,231 |                     | $ | 736,739 | 
|                             |  |                 |         |                     |   |         | 

As a result of the deposit increase, the Company
relied less on other borrowed funds which decreased $19,077,000, or 21.9%, to
$68,115,000 at June 30, 2008 compared to $87,192,000 at December 31, 2007.

25

---



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 $22,695,000 as of June 30, 2008
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 $61,537,000 secured by certain loans and investment securities as of June 30,
2008. The Company also has a line of credit with Federal Reserve Bank of San
Francisco (FRB) of $1,722,000 secured by first deeds of trust on eligible
commercial real estate loans and leases. As of June 30, 2008, borrowings
consisted of overnight advances of $68,115,000 with the FHLB and correspondent
bank lines of credit, 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 $125,223,000 and $132,910,000 (or 13.4% and 14.0% of total
assets) at June 30, 2008 and December 31, 2007, 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 $627,812,000 and
$632,236,000 at June 30, 2008 and December 31, 2007, 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, 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.

26

---



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. 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,
2007.

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 decreased to
$78,802,000 as of June 30, 2008, as compared to $81,471,000 at December 31,
2007. The decrease was due to a net loss of $1,229,000, cash dividends paid out
in the amount of $1,490,000 and an increase in unrealized loss on available for
sale securities of $711,000, partially offset by the stock option exercises of
$761,000. Under current regulations, management believes that the Company meets
all capital adequacy requirements and North Valley Bank was considered well
capitalized at June 30, 2008 and December 31, 2007.

27

---



The Companys and North Valley Banks capital amounts
and risk-based capital ratios are presented below (in thousands).

|                                           |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|------------------------------------------ |  | ------ | ------- | -------------------- |  | ----------------------- | ----- | ------- |  | ------- | ------ | ------- |  |  | ---- | - |  | - | ------ |  |  |  | ----- | - | 
|                                           |  |        |         |                      |  | To be Well Capitalized  |      
|                                           |  |        |         | For Capital Adequacy |  | Under Prompt Corrective |      
|                                           |  | Actual |         | Purposes             |  | Action Provisions       |      
|                                           |  |        |        
|                                           |  |        |         |                      |  | Minimum                 |       | Minimum |  | Minimum |        | Minimum | 
|                                           |  | Amount |         | Ratio                |  | Amount                  |       | Ratio   |  | Amount  |        | Ratio   | 
|                                           |  |        |        
|                                           |  |        |        
|Company                                    |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|As of June 30, 2008                        |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|Total capital
  (to risk weighted assets)  |  | $      | 106,639 |                      |  |                         | 12.12 | %       |  | $       | 70,389 |         |  |  | 8.00 | % |  |   | N/A    |  |  |  | N/A   |   | 
|Tier 1 capital
  (to risk weighted assets) |  | $      | 91,536  |                      |  |                         | 10.41 | %       |  | $       | 35,172 |         |  |  | 4.00 | % |  |   | N/A    |  |  |  | N/A   |   | 
|Tier 1 capital
  (to average assets)       |  | $      | 91,536  |                      |  |                         | 9.96  | %       |  | $       | 36,761 |         |  |  | 4.00 | % |  |   | N/A    |  |  |  | N/A   |   | 
|                                           |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|As of December 31,
2007                    |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|Total capital
  (to risk weighted assets)  |  | $      | 108,098 |                      |  |                         | 12.00 | %       |  | $       | 72,065 |         |  |  | 8.00 | % |  |   | N/A    |  |  |  | N/A   |   | 
|Tier 1 capital
  (to risk weighted assets) |  | $      | 93,954  |                      |  |                         | 10.43 | %       |  | $       | 36,032 |         |  |  | 4.00 | % |  |   | N/A    |  |  |  | N/A   |   | 
|Tier 1 capital
  (to average assets)       |  | $      | 93,954  |                      |  |                         | 10.29 | %       |  | $       | 36,522 |         |  |  | 4.00 | % |  |   | N/A    |  |  |  | N/A   |   | 
|                                           |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|North Valley Bank                          |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|As of June 30, 2008                        |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|Total capital
  (to risk weighted assets)  |  | $      | 106,811 |                      |  |                         | 12.15 | %       |  | $       | 70,328 |         |  |  | 8.00 | % |  | $ | 87,910 |  |  |  | 10.00 | % | 
|Tier 1 capital
  (to risk weighted assets) |  | $      | 95,788  |                      |  |                         | 10.89 | %       |  | $       | 35,184 |         |  |  | 4.00 | % |  | $ | 52,776 |  |  |  | 6.00  | % | 
|Tier 1 capital
  (to average assets)       |  | $      | 95,788  |                      |  |                         | 10.44 | %       |  | $       | 36,700 |         |  |  | 4.00 | % |  | $ | 45,875 |  |  |  | 5.00  | % | 
|                                           |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|As of December 31,
2007                    |  |        |         |                      |  |                         |       |         |  |         |        |         |  |  |      |   |  |   |        |  |  |  |       |   | 
|Total capital
  (to risk weighted assets)  |  | $      | 105,715 |                      |  |                         | 11.73 | %       |  | $       | 72,099 |         |  |  | 8.00 | % |  | $ | 90,124 |  |  |  | 10.00 | % | 
|Tier 1 capital
  (to risk weighted assets) |  | $      | 94,960  |                      |  |                         | 10.54 | %       |  | $       | 36,038 |         |  |  | 4.00 | % |  | $ | 54,057 |  |  |  | 6.00  | % | 
|Tier 1 capital
  (to average assets)       |  | $      | 94,960  |                      |  |                         | 10.43 | %       |  | $       | 36,418 |         |  |  | 4.00 | % |  | $ | 45,523 |  |  |  | 5.00  | % | 

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In managements opinion there has not been a material
change in the Companys market risk profile for the six months ended June 30,
2008 compared to December 31, 2007. Please see discussion under the caption
Interest Rate Sensitivity on page 26.

ITEM 4.
CONTROLS AND PROCEDURES

Disclosure
Controls and Procedures

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

Evaluation
of Disclosure Controls and Procedures

The Companys management, including the Chief
Executive Officer and the Chief Financial Officer, evaluated the Companys
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of June 30, 2008. Based on this evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective.

Internal
Control over Financial Reporting

Management of the Company is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. There was no change in the Companys internal control over
financial reporting that occurred during the quarter ended June 30, 2008 that
has materially affected or is reasonable likely to materially affect, the
Companys internal control over financial reporting.

28

---



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 to the risk factors as previously disclosed by the Company in its response
to Item 1A of Part I of Form 10-K for the fiscal year ended December 31, 2007,
other than with respect to the risk factor identified as Real Estate Values.A decline in
residential real estate values in the State of California, and more specifically
in the Companys market areas, has occurred and is continuing into 2008.
Further declines in residential real estate values would increase the
likelihood of a negative impact on general economic conditions in the Companys
market areas, and on the Company. This could result in increased credit losses
and/or reduced opportunities for future growth, thereby adversely affecting the
Companys results of operations and financial condition and the market price of
the Companys common stock.

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

The Annual Meeting of Shareholders of North Valley
Bancorp was held on Thursday, May 22, 2008. Shareholders of the Company
approved the following proposals:

|   |                                                                                                
|-- | -----------------------------------------------------------------------------------------------
|1. | To elect the following nine (9)
  nominees as Director of the Company for a one year term:     
|   |                                                                                                
|   | Michael J. Cushman                                                                             
|   | William W. Cox                                                                                 
|   | Royce L. Friesen                                                                               
|   | Dante W. Ghidinelli                                                                            
|   | Kevin D. Hartwick                                                                              
|   | Roger B. Kohlmeier                                                                             
|   | Martin A. Mariani                                                                              
|   | Dolores M. Vellutini                                                                           
|   | J.M. (Mike) Wells, Jr.                                                                         
|   |                                                                                                
|2. | To ratify and approve the North
  Valley Bancorp 2008 Stock Incentive Plan                     
|   |                                                                                                
|3. | To ratify the appointment of
  Perry-Smith LLP as Independent Auditor for the Company for 2008.

29

---



The
voting results at the 2008 Annual Meeting of Shareholders are presented below:

|                          |  |     |           |  |  |          |  |  |         |  |  |  | 
|------------------------- |  | --- | --------- |  |  | -------- |  |  | ------- |  |  |  | 
|Proposal 1:               |  |     |           |  |  |          |  |  |        
|                          |  |     |           |  |  |          |  |  |        
|Nominees                  |  | For |           |  |  | Withheld |  |  |        
|                          |  |     |           |  |  |          |  |  |        
|Michael J. Cushman        |  |     | 5,737,998 |  |  |          |  |  | 348,375 |  |  |  | 
|William W. Cox            |  |     | 5,652,809 |  |  |          |  |  | 433,564 |  |  |  | 
|Royce L. Friesen          |  |     | 5,660,738 |  |  |          |  |  | 425,635 |  |  |  | 
|Dante W. Ghidinelli       |  |     | 5,830,366 |  |  |          |  |  | 256,007 |  |  |  | 
|Kevin D. Hartwick         |  |     | 5,838,066 |  |  |          |  |  | 248,307 |  |  |  | 
|Roger B. Kohlmeier        |  |     | 5,832,237 |  |  |          |  |  | 254,136 |  |  |  | 
|Martin A. Mariani         |  |     | 5,665,738 |  |  |          |  |  | 420,635 |  |  |  | 
|Doloroes M. Vellutini     |  |     | 5,830,440 |  |  |          |  |  | 255,933 |  |  |  | 
|J. M. (Mike) Wells, Jr. |  |     | 5,632,672 |  |  |          |  |  | 453,701 |  |  |  | 

|                                               |  |     |           |         |  |           |  |          |         |  |  |           | 
|---------------------------------------------- |  | --- | --------- | ------- |  | --------- |  | -------- | ------- |  |  | --------- | 
|Proposal 2:                                    |  |     |           |         |  |           |  |          |         |  |  |           | 
|                                               |  |     |           |         |  |           |  |          |         |  |  |           | 
|                                               |  | For |           | Against |  | Abstain   |  | Non-vote |        
|                                               |  |     |           |         |  |           |  |          |        
|North Valley Bancorp 2008 Stock Incentive Plan |  |     | 2,576,499 |         |  | 1,770,028 |  |          | 123,723 |  |  | 1,616,123 | 

|                |  |     |           |         |  |         |  |  |        |  |  |  | 
|--------------- |  | --- | --------- | ------- |  | ------- |  |  | ------ |  |  |  | 
|Proposal 3:     |  |     |           |         |  |         |  |  |        |  |  |  | 
|                |  |     |           |         |  |         |  |  |        |  |  |  | 
|                |  | For |           | Against |  | Abstain |  |  |       
|                |  |     |           |         |  |         |  |  |       
|Perry-Smith LLP |  |     | 5,931,872 |         |  | 90,924  |  |  | 63,577 |  |  |  | 

ITEM 5.
OTHER INFORMATION

None

ITEM 6.
EXHIBITS

| |    |                                          
| | -- | -----------------------------------------
| | 31 | Rule 13a-14(a) / 15d-14(a) Certifications
| |    |                                          
| | 32 | Section 1350 Certifications              

30

---



SIGNATURES

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

|                                                               |                
|-------------------------------------------------------------- | ---------------
|NORTH VALLEY BANCORP                                          
|(Registrant)                                                  
|                                                              
|Date                                                           | August 11, 2008
|                                                               |                
|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)

31

---