----

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

**FORM 10-Q**

|       |                                                                                     |
|------------|------------------------------------------------------------------------------------------|
| (Mark One) |
| x          | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  |
|       | For the period ended June 30, 2009.                                                      |
|       |                                                                                     |
| o          | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|       | For the Quarterly Transition Period From__________to__________                           |

Commission file number 0-10652

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

|                                                                        |                              |                     |       |       |           |   |   |
|-----------------------------------------------------------------------------|-----------------------------------|--------------------------|------------|------------|----------------|--------|--------|
| ** **                                                                  | ** **                        | **California**           | ** ** | ** ** | **94-2751350** |   |   |
|                                                                        |                              |                     |       |       |           |   |   |
|                                                                        | (State or other jurisdiction      | (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 o         |
|                      |                        |
| Non-accelerated filer x   | Smaller reporting company o |

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

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

Common Stock – 7,495,817 shares as of August 10, 2009. 

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**INDEX**

**NORTH VALLEY BANCORP AND SUBSIDIARIES**

|                              |                                                                                                        |   |   |
|-----------------------------------|-------------------------------------------------------------------------------------------------------------|--------|--------|
| **PART I. FINANCIAL INFORMATION** |
|                              |                                                                                                        |   |   |
| Item 1.                           | Financial Statements (Unaudited)                                                                            |   | 3      |
|                              |                                                                                                        |   |   |
|                              | Condensed Consolidated Balance Sheets—June 30, 2009 and December 31, 2008                             |   | 3      |
|                              |                                                                                                        |   |   |
|                              | Condensed Consolidated Statements of Income—For the three and six months ended June 30, 2009 and 2008 |   | 4      |
|                              |                                                                                                        |   |   |
|                              | Condensed Consolidated Statements of Cash Flows—For the six months ended June 30, 2009 and 2008       |   | 6      |
|                              |                                                                                                        |   |   |
|                              | Notes to Condensed Consolidated Financial Statements                                                        |   | 7      |
|                              |                                                                                                        |   |   |
| Item 2.                           | Management’s Discussion and Analysis of Financial Condition and Results of Operations                 |   | 17     |
|                              |                                                                                                        |   |   |
| Item 3.                           | Quantitative and Qualitative Disclosures about Market Risk                                                  |   | 32     |
|                              |                                                                                                        |   |   |
| Item 4.                           | Controls and Procedures                                                                                     |   | 32     |
|                              |                                                                                                        |   |   |
|                              |                                                                                                        |   |   |
| **PART II. OTHER INFORMATION**    |                                                                                                        |   |
|                              |                                                                                                        |   |   |
| Item 1.                           | Legal Proceedings                                                                                           |   | 33     |
|                              |                                                                                                        |   |   |
| Item 1A.                          | Risk Factors                                                                                                |   | 33     |
|                              |                                                                                                        |   |   |
| Item 2.                           | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |   | 33     |
|                              |                                                                                                        |   |   |
| Item 3.                           | Defaults Upon Senior Securities                                                                             |   | 33     |
|                              |                                                                                                        |   |   |
| Item 4.                           | Submission of Matters to a Vote of Security Holders                                                         |   | 33     |
|                              |                                                                                                        |   |   |
| Item 5.                           | Other Information                                                                                           |   | 34     |
|                              |                                                                                                        |   |   |
| Item 6.                           | Exhibits                                                                                                    |   | 34     |
|                              |                                                                                                        |   |   |
|                              |                                                                                                        |   |   |
| SIGNATURES                        |                                                                                                        | 35     |

2

----

|                                                                                                                           |   |                                 |    |                                     |   |    |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|------------------------------------------|--------|---------|--------|
| **NORTH VALLEY BANCORP AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)****(In thousands except share data)** |   |                                 |    |                                     |   |    |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
|                                                                                                                           |   | **June 30,                    2009** |    | **December 31,                    2008** |   |
|                                                                                                                           |   |                                 |    |                                     |   |
| **ASSETS**                                                                                                                     |   |                                 |    |                                     |   |    |   |
| Cash and cash equivalents:                                                                                                     |   |                                 |    |                                     |   |    |   |
| Cash and due from banks                                                                                                        |   | $                                    | 22,184  |                                     | $      | 27,153  |   |
| Federal funds sold                                                                                                             |   |                                 | 29,395  |                                     |   | — |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Total cash and cash equivalents                                                                                                |   |                                 | 51,579  |                                     |   | 27,153  |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Time deposits at other financial institutions                                                                                  |   |                                 | 425     |                                     |   | — |   |
| Investment securities available for sale, at fair value                                                                        |   |                                 | 137,554 |                                     |   | 76,345  |   |
| Investment securities held to maturity, at amortized cost                                                                      |   |                                 | 15      |                                     |   | 21      |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Loans and leases                                                                                                               |   |                                 | 650,652 |                                     |   | 693,422 |   |
| Less: Allowance for loan and lease losses                                                                                      |   |                                 | (22,119 | )                                        |   | (11,327 | )      |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Net loans and leases                                                                                                           |   |                                 | 628,533 |                                     |   | 682,095 |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Premises and equipment, net                                                                                                    |   |                                 | 11,097  |                                     |   | 11,418  |   |
| Accrued interest receivable                                                                                                    |   |                                 | 2,587   |                                     |   | 2,742   |   |
| Other real estate owned                                                                                                        |   |                                 | 6,129   |                                     |   | 10,408  |   |
| FHLB and FRB stock and other securities                                                                                        |   |                                 | 5,833   |                                     |   | 5,825   |   |
| Bank-owned life insurance policies                                                                                             |   |                                 | 32,175  |                                     |   | 31,612  |   |
| Core deposit intangibles, net                                                                                                  |   |                                 | 765     |                                     |   | 838     |   |
| Goodwill                                                                                                                       |   |                                 | 15,187  |                                     |   | 15,187  |   |
| Other assets                                                                                                                   |   |                                 | 21,487  |                                     |   | 15,907  |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| TOTAL ASSETS                                                                                                                   |   | $                                    | 913,366 |                                     | $      | 879,551 |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                 |   |                                 |    |                                     |   |    |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| LIABILITIES:                                                                                                                   |   |                                 |    |                                     |   |    |   |
| Deposits:                                                                                                                      |   |                                 |    |                                     |   |    |   |
| Noninterest-bearing                                                                                                            |   | $                                    | 144,190 |                                     | $      | 161,748 |   |
| Interest-bearing                                                                                                               |   |                                 | 655,553 |                                     |   | 593,196 |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Total deposits                                                                                                                 |   |                                 | 799,743 |                                     |   | 754,944 |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Other borrowed funds                                                                                                           |   |                                 | — |                                     |   | 3,516   |   |
| Accrued interest payable and other liabilities                                                                                 |   |                                 | 11,584  |                                     |   | 11,872  |   |
| Subordinated debentures                                                                                                        |   |                                 | 31,961  |                                     |   | 31,961  |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Total liabilities                                                                                                              |   |                                 | 843,288 |                                     |   | 802,293 |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Commitments and Contingencies (Note H)                                                                                         |   |                                 |    |                                     |   |    |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| STOCKHOLDERS’ EQUITY:                                                                                                    |   |                                 |    |                                     |   |    |   |
| Preferred stock, no par value: authorized 5,000,000 shares; none outstanding                                                   |   |                                 | — |                                     |   | — |   |
| Common stock, no par value: authorized 20,000,000 shares; outstanding 7,495,817 for June 30, 2009 and December 31, 2008        |   |                                 | 41,699  |                                     |   | 41,553  |   |
| Retained earnings                                                                                                              |   |                                 | 30,234  |                                     |   | 37,430  |   |
| Accumulated other comprehensive loss, net of tax                                                                               |   |                                 | (1,855  | )                                        |   | (1,725  | )      |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| Total stockholders’ equity                                                                                               |   |                                 | 70,078  |                                     |   | 77,258  |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                               |   | $                                    | 913,366 |                                     | $      | 879,551 |   |
|                                                                                                                           |   |                                 |    |                                     |   |    |   |

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

3

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|                                                          |   |                                    |    |     |   |    |   |
|---------------------------------------------------------------|--------|-----------------------------------------|---------|----------|--------|---------|--------|
| **(In thousands except per share data)**                      |   |                                    |    |     |   |    |   |
|                                                          |   |                                    |    |     |   |    |   |
|                                                          |   | **For the three months ended June 30,** |    |
|                                                          |   | **2009**                                |    | **2008** |   |
|                                                          |   |                                    |    |     |   |
| **INTEREST INCOME:**                                          |   |                                    |    |     |   |    |   |
| Interest and fees on loans and leases                         |   | $                                       | 10,029  |     | $      | 12,246  |   |
| Interest on investments:                                      |   |                                    |    |     |   |    |   |
| Taxable interest income                                       |   |                                    | 1,017   |     |   | 885     |   |
| Nontaxable interest income                                    |   |                                    | 181     |     |   | 231     |   |
| Interest on Federal funds sold and repurchase agreements      |   |                                    | 14      |     |   | 1       |   |
|                                                          |   |                                    |    |     |   |    |   |
| Total interest income                                         |   |                                    | 11,241  |     |   | 13,363  |   |
|                                                          |   |                                    |    |     |   |    |   |
|                                                          |   |                                    |    |     |   |    |   |
| **INTEREST EXPENSE:**                                         |   |                                    |    |     |   |    |   |
| Deposits                                                      |   |                                    | 2,806   |     |   | 3,391   |   |
| Subordinated debentures                                       |   |                                    | 526     |     |   | 578     |   |
| Other borrowings                                              |   |                                    | — |     |   | 325     |   |
|                                                          |   |                                    |    |     |   |    |   |
| Total interest expense                                        |   |                                    | 3,332   |     |   | 4,294   |   |
|                                                          |   |                                    |    |     |   |    |   |
|                                                          |   |                                    |    |     |   |    |   |
| NET INTEREST INCOME                                           |   |                                    | 7,909   |     |   | 9,069   |   |
|                                                          |   |                                    |    |     |   |    |   |
| PROVISION FOR LOAN AND LEASE LOSSES                           |   |                                    | 9,000   |     |   | 5,200   |   |
|                                                          |   |                                    |    |     |   |    |   |
|                                                          |   |                                    |    |     |   |    |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES |   |                                    | (1,091  | )        |   | 3,869   |   |
|                                                          |   |                                    |    |     |   |    |   |
|                                                          |   |                                    |    |     |   |    |   |
| **NONINTEREST INCOME:**                                       |   |                                    |    |     |   |    |   |
| Service charges on deposit accounts                           |   |                                    | 1,640   |     |   | 1,894   |   |
| Other fees and charges                                        |   |                                    | 1,079   |     |   | 979     |   |
| Earnings on cash surrender value of life insurance policies   |   |                                    | 345     |     |   | 312     |   |
| Gain on sale of loans                                         |   |                                    | 128     |     |   | 8       |   |
| Other                                                         |   |                                    | 246     |     |   | 284     |   |
|                                                          |   |                                    |    |     |   |    |   |
| Total noninterest income                                      |   |                                    | 3,438   |     |   | 3,477   |   |
|                                                          |   |                                    |    |     |   |    |   |
|                                                          |   |                                    |    |     |   |    |   |
| **NONINTEREST EXPENSES:**                                     |   |                                    |    |     |   |    |   |
| Salaries and employee benefits                                |   |                                    | 4,905   |     |   | 5,105   |   |
| Occupancy expense                                             |   |                                    | 801     |     |   | 720     |   |
| Furniture and equipment expense                               |   |                                    | 459     |     |   | 488     |   |
| FDIC and state assessments                                    |   |                                    | 905     |     |   | 116     |   |
| Other real estate owned expense                               |   |                                    | 572     |     |   | — |   |
| Other                                                         |   |                                    | 3,140   |     |   | 3,148   |   |
|                                                          |   |                                    |    |     |   |    |   |
| Total noninterest expenses                                    |   |                                    | 10,782  |     |   | 9,577   |   |
|                                                          |   |                                    |    |     |   |    |   |
|                                                          |   |                                    |    |     |   |    |   |
| LOSS BEFORE BENEFIT FOR INCOME TAXES                          |   |                                    | (8,435  | )        |   | (2,231  | )      |
|                                                          |   |                                    |    |     |   |    |   |
| BENEFIT FOR INCOME TAXES                                      |   |                                    | (4,346  | )        |   | (722    | )      |
|                                                          |   |                                    |    |     |   |    |   |
|                                                          |   |                                    |    |     |   |    |   |
| **NET LOSS**                                                  |   | $                                       | (4,089  | )        | $      | (1,509  | )      |
|                                                          |   |                                    |    |     |   |    |   |
|                                                          |   |                                    |    |     |   |    |   |
| **Per Share Amounts**                                         |   |                                    |    |     |   |    |   |
| Basic Loss Per Share                                          |   | $                                       | (0.55   | )        | $      | (0.20   | )      |
|                                                          |   |                                    |    |     |   |    |   |
| Diluted Loss Per Share                                        |   | $                                       | (0.55   | )        | $      | (0.20   | )      |
|                                                          |   |                                    |    |     |   |    |   |
| Cash Dividends Per Common Share                               |   | $                                       | — |     | $      | 0.10    |   |
|                                                          |   |                                    |    |     |   |    |   |

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

4

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

|                                                          |   |                                  |    |     |   |    |   |
|---------------------------------------------------------------|--------|---------------------------------------|---------|----------|--------|---------|--------|
|                                                          |   | **For the six months ended June 30,** |    |
|                                                          |   | **2009**                              |    | **2008** |   |
|                                                          |   |                                  |    |     |   |
| **INTEREST INCOME:**                                          |   |                                  |    |     |   |    |   |
| Interest and fees on loans and leases                         |   | $                                     | 20,565  |     | $      | 25,222  |   |
| Interest on investments:                                      |   |                                  |    |     |   |    |   |
| Taxable interest income                                       |   |                                  | 1,711   |     |   | 1,819   |   |
| Nontaxable interest income                                    |   |                                  | 361     |     |   | 466     |   |
| Interest on Federal funds sold and repurchase agreements      |   |                                  | 23      |     |   | 6       |   |
|                                                          |   |                                  |    |     |   |    |   |
| Total interest income                                         |   |                                  | 22,660  |     |   | 27,513  |   |
|                                                          |   |                                  |    |     |   |    |   |
|                                                          |   |                                  |    |     |   |    |   |
| **INTEREST EXPENSE:**                                         |   |                                  |    |     |   |    |   |
| Deposits                                                      |   |                                  | 5,574   |     |   | 7,219   |   |
| Subordinated debentures                                       |   |                                  | 1,068   |     |   | 1,173   |   |
| Other borrowings                                              |   |                                  | 1       |     |   | 924     |   |
|                                                          |   |                                  |    |     |   |    |   |
| Total interest expense                                        |   |                                  | 6,643   |     |   | 9,316   |   |
|                                                          |   |                                  |    |     |   |    |   |
|                                                          |   |                                  |    |     |   |    |   |
| NET INTEREST INCOME                                           |   |                                  | 16,017  |     |   | 18,197  |   |
|                                                          |   |                                  |    |     |   |    |   |
| PROVISION FOR LOAN AND LEASE LOSSES                           |   |                                  | 16,000  |     |   | 7,600   |   |
|                                                          |   |                                  |    |     |   |    |   |
|                                                          |   |                                  |    |     |   |    |   |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES |   |                                  | 17      |     |   | 10,597  |   |
|                                                          |   |                                  |    |     |   |    |   |
|                                                          |   |                                  |    |     |   |    |   |
| **NONINTEREST INCOME:**                                       |   |                                  |    |     |   |    |   |
| Service charges on deposit accounts                           |   |                                  | 3,168   |     |   | 3,610   |   |
| Other fees and charges                                        |   |                                  | 2,043   |     |   | 1,944   |   |
| Earnings on cash surrender value of life insurance policies   |   |                                  | 681     |     |   | 642     |   |
| Gain on sale of loans                                         |   |                                  | 225     |     |   | 95      |   |
| Other                                                         |   |                                  | 485     |     |   | 677     |   |
|                                                          |   |                                  |    |     |   |    |   |
| Total noninterest income                                      |   |                                  | 6,602   |     |   | 6,968   |   |
|                                                          |   |                                  |    |     |   |    |   |
|                                                          |   |                                  |    |     |   |    |   |
| **NONINTEREST EXPENSES:**                                     |   |                                  |    |     |   |    |   |
| Salaries and employee benefits                                |   |                                  | 9,969   |     |   | 10,641  |   |
| Occupancy expense                                             |   |                                  | 1,562   |     |   | 1,474   |   |
| Furniture and equipment expense                               |   |                                  | 928     |     |   | 953     |   |
| FDIC and state assessments                                    |   |                                  | 1,316   |     |   | 161     |   |
| Other real estate owned expense                               |   |                                  | 1,570   |     |   | — |   |
| Other                                                         |   |                                  | 5,772   |     |   | 6,153   |   |
|                                                          |   |                                  |    |     |   |    |   |
| Total noninterest expenses                                    |   |                                  | 21,117  |     |   | 19,382  |   |
|                                                          |   |                                  |    |     |   |    |   |
|                                                          |   |                                  |    |     |   |    |   |
| LOSS BEFORE BENEFIT FOR INCOME TAXES                          |   |                                  | (14,498 | )        |   | (1,817  | )      |
|                                                          |   |                                  |    |     |   |    |   |
| BENEFIT FOR INCOME TAXES                                      |   |                                  | (7,302  | )        |   | (588    | )      |
|                                                          |   |                                  |    |     |   |    |   |
|                                                          |   |                                  |    |     |   |    |   |
| **NET LOSS**                                                  |   | $                                     | (7,196  | )        | $      | (1,229  | )      |
|                                                          |   |                                  |    |     |   |    |   |
|                                                          |   |                                  |    |     |   |    |   |
| **Per Share Amounts**                                         |   |                                  |    |     |   |    |   |
| Basic Loss Per Share                                          |   | $                                     | (0.96   | )        | $      | (0.17   | )      |
|                                                          |   |                                  |    |     |   |    |   |
| Diluted Loss Per Share                                        |   | $                                     | (0.96   | )        | $      | (0.17   | )      |
|                                                          |   |                                  |    |     |   |    |   |
| Cash Dividends Per Common Share                               |   | $                                     | — |     | $      | 0.20    |   |
|                                                          |   |                                  |    |     |   |    |   |

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

5

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|                                                            |
|-----------------------------------------------------------------|
| **NORTH VALLEY BANCORP AND SUBSIDIARIES**                       |
| **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)** |
| **FOR THE SIX MONTHS ENDED JUNE 30, (in thousands)**            |

|                                                                            |   |     |    |     |   |    |   |
|---------------------------------------------------------------------------------|--------|----------|---------|----------|--------|---------|--------|
|                                                                            |   | **2009** |    | **2008** |   |
|                                                                            |   |     |    |     |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                       |   |     |    |     |   |    |   |
| Net Loss                                                                        |   | $        | (7,196  | )        | $      | (1,229  | )      |
| Adjustments to reconcile net loss to net cash provided by operating activities: |   |     |    |     |   |    |   |
| Depreciation and amortization                                                   |   |     | 983     |     |   | 1,011   |   |
| Amortization (accretion) of premium on securities, net                          |   |     | 114     |     |   | (1      | )      |
| Amortization of core deposit intangible                                         |   |     | 73      |     |   | 325     |   |
| Provision for loan and lease losses                                             |   |     | 16,000  |     |   | 7,600   |   |
| Loss on sale/write-down of other real estate owned                              |   |     | 1,410   |     |   | — |   |
| Gain on sale or calls of investment securities                                  |   |     | — |     |   | (1      | )      |
| Gain on sale of loans                                                           |   |     | (225    | )        |   | (95     | )      |
| Gain on sale of premises and equipment                                          |   |     | (30     | )        |   | (1      | )      |
| FHLB stock dividends                                                            |   |     | — |     |   | (115    | )      |
| Stock-based compensation expense                                                |   |     | 146     |     |   | 229     |   |
| Excess tax benefit from exercise of stock options                               |   |     | — |     |   | (40     | )      |
| Effect of changes in:                                                           |   |     |    |     |   |    |   |
| Accrued interest receivable                                                     |   |     | 155     |     |   | 772     |   |
| Other assets                                                                    |   |     | (6,053  | )        |   | (6,158  | )      |
| Accrued interest payable and other liabilities                                  |   |     | (288    | )        |   | (364    | )      |
|                                                                            |   |     |    |     |   |    |   |
| Net cash provided by operating activities                                       |   |     | 5,089   |     |   | 1,933   |   |
|                                                                            |   |     |    |     |   |    |   |
|                                                                            |   |     |    |     |   |    |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                       |   |     |    |     |   |    |   |
| Purchases of time deposits at other financial institutions                      |   |     | (425    | )        |   | — |   |
| Purchases of available for sale securities                                      |   |     | (72,234 | )        |   | — |   |
| Proceeds from maturities/calls of available for sale securities                 |   |     | 10,691  |     |   | 12,460  |   |
| Proceeds from maturities/calls of held to maturity securities                   |   |     | 6       |     |   | — |   |
| Purchases of FHLB and FRB stock and other securities                            |   |     | (8      | )        |   | (563    | )      |
| Proceeds from redemptions of FHLB and FRB stock and other securities            |   |     | — |     |   | 950     |   |
| Net decrease in loans and leases                                                |   |     | 34,233  |     |   | 714     |   |
| Proceeds from sales of other real estate owned                                  |   |     | 6,423   |     |   | 3,368   |   |
| Proceeds from sales of premises and equipment                                   |   |     | 36      |     |   | — |   |
| Purchases of premises and equipment                                             |   |     | (668    | )        |   | (343    | )      |
|                                                                            |   |     |    |     |   |    |   |
| Net cash (used in) provided by investing activities                             |   |     | (21,946 | )        |   | 16,586  |   |
|                                                                            |   |     |    |     |   |    |   |
|                                                                            |   |     |    |     |   |    |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                       |   |     |    |     |   |    |   |
| Net increase in deposits                                                        |   |     | 44,799  |     |   | 7,492   |   |
| Net change in other borrowed funds                                              |   |     | (3,516  | )        |   | (19,077 | )      |
| Cash dividends paid                                                             |   |     | — |     |   | (1,490  | )      |
| Exercise of stock options, including tax benefit                                |   |     | — |     |   | 532     |   |
|                                                                            |   |     |    |     |   |    |   |
| Net cash provided by (used in) financing activities                             |   |     | 41,283  |     |   | (12,543 | )      |
|                                                                            |   |     |    |     |   |    |   |
| **NET INCREASE CASH AND CASH EQUIVALENTS**                                      |   |     | 24,426  |     |   | 5,976   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR**                                |   |     | 27,153  |     |   | 28,569  |   |
|                                                                            |   |     |    |     |   |    |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                    |   | $        | 51,579  |     | $      | 34,545  |   |
|                                                                            |   |     |    |     |   |    |   |
|                                                                            |   |     |    |     |   |    |   |
| **Supplemental Disclosures of Cash Flow Information**                           |   |     |    |     |   |    |   |
| Cash paid during the period for:                                                |   |     |    |     |   |    |   |
| Interest                                                                        |   | $        | 6,825   |     | $      | 9,638   |   |
| Income taxes                                                                    |   |     | — |     |   | 1,090   |   |
|                                                                            |   |     |    |     |   |    |   |
| Noncash investing and financing activities:                                     |   |     |    |     |   |    |   |
| Net change in unrealized loss on available for sale investment securities       |   |     | (129    | )        |   | (711    | )      |
| Transfer from loans to other real estate owned                                  |   |     | 3,554   |     |   | 10,675  |   |
| Tax benefit from stock options exercised                                        |   |     | — |     |   | 40      |   |

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

6

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

**NOTE A - BASIS OF PRESENTATION**

The accompanying unaudited condensed consolidated financial statements of North Valley Bancorp and subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, certain information and notes required by accounting principles generally accepted in the United States for annual financial statements are not included herein.        Management believes that the disclosures are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods presented have been included. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December        31, 2008. Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ended December 31, 2009. 

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. Management reviewed all        events occurring from June 30, 2009 through August 12, 2009, the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure. 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

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**NOTE B – INVESTMENT SECURITIES**

At June 30, 2009 and December 31, 2008, 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, 2009**                               |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
| Obligations of U.S. government agencies         |   | $                                     | 1,500   |                                                             | $      | 83                                                                |   | $                                           | — |   | $      | 1,583   |   |
| Obligations of state and political subdivisions |   |                                  | 15,874  |                                                             |   | 402                                                               |   |                                        | (126    | )      |   | 16,150  |   |
| Mortgage-backed securities                      |   |                                  | 113,486 |                                                             |   | 1,002                                                             |   |                                        | (845    | )      |   | 113,643 |   |
| Corporate debt securities                       |   |                                  | 6,002   |                                                             |   | —                                                           |   |                                        | (2,824  | )      |   | 3,178   |   |
| Equity securities                               |   |                                  | 3,000   |                                                             |   | —                                                           |   |                                        | — |   |   | 3,000   |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
|                                            |   | $                                     | 139,862 |                                                             | $      | 1,487                                                             |   | $                                           | (3,795  | )      | $      | 137,554 |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
| **December 31, 2008**                           |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
| Obligations of U.S. government agencies         |   | $                                     | 1,500   |                                                             | $      | 93                                                                |   | $                                           | — |   | $      | 1,593   |   |
| Obligations of state and political subdivisions |   |                                  | 16,037  |                                                             |   | 356                                                               |   |                                        | (217    | )      |   | 16,176  |   |
| Mortgage-backed securities                      |   |                                  | 51,894  |                                                             |   | 541                                                               |   |                                        | (490    | )      |   | 51,945  |   |
| Corporate debt securities                       |   |                                  | 6,002   |                                                             |   | —                                                           |   |                                        | (2,371  | )      |   | 3,631   |   |
| Equity securities                               |   |                                  | 3,000   |                                                             |   | —                                                           |   |                                        | — |   |   | 3,000   |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
|                                            |   | $                                     | 78,433  |                                                             | $      | 990                                                               |   | $                                           | (3,078  | )      | $      | 76,345  |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
|                                            |   | **Amortized                    Cost** |    | **Gross                    Unrealized                    Gains** |   | **Gross                    Unrealized                    Losses** |   | **Estimated                    Fair Value** |    |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |
| **Held to maturity securities:**                |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
| **June 30, 2009**                               |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
| Mortgage-backed securities                      |   | $                                     | 15      |                                                             | $      | —                                                           |   | $                                           | (1      | )      | $      | 14      |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
| **December 31, 2008**                           |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |
| Mortgage-backed securities                      |   | $                                     | 21      |                                                             | $      | —                                                           |   | $                                           | (1      | )      | $      | 20      |   |
|                                            |   |                                  |    |                                                             |   |                                                              |   |                                        |    |   |   |    |   |

For the six months ended June 30, 2009 and 2008 there were no gross realized gains or 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, 2009 and 2008. For the six months ended June 30, 2009 and 2008 there were $10,691,000 and $12,460,000 in gross proceeds from maturities/calls of available for sale securities. For the six months ended June 30, 2009        there were $6,000 in gross proceeds from maturities/calls of held to maturity securities. For six months ended June 30, 2008 there were no gross proceeds from maturities/calls of held to maturity securities. 

At June 30, 2009 and December 31, 2008, securities having fair value amounts of approximately $128,432,000 and $65,118,000 were pledged to secure public deposits, short-term borrowings, treasury, tax and loan balances and for other purposes required by law or contract. 

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

At June 30, 2009, the Company held $45,511,000 of available for sale investment securities in an unrealized loss position of which $36,733,000 were in an unrealized loss position for less than twelve months and $8,778,000 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

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**NOTE C – STOCK-BASED COMPENSATION**

**Stock Option Plans**

At June 30, 2009, the Company had three shareholder approved stock-based compensation plans: 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. 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 421,290 shares of Common Stock at June 30, 2009. As provided in the Stock Incentive Plan, the authorization to award incentive stock options terminated on February 19, 2008. As provided in the 1999 Stock Option Plan, the        authorization to award stock options terminated on April 1, 2009. As of June 30, 2009, there were options outstanding under the 1999 Director Stock Option Plan for the purchase of 93,000 shares of Common Stock. As of June 30, 2009, there were options outstanding under the 2008 Stock Incentive Plan for the purchase of 273,600 shares of Common Stock. A total of 276,316 shares of Common Stock were available for the grant of additional options under the 2008 Stock Incentive Plan at June 30,        2009. Options for a total of 549,916 shares were authorized under all plans at June 30, 2009. 

The North Valley Bancorp 2008 Stock Incentive Plan was adopted by the Company’s Board of Directors on February 27, 2008, effective that date, and was approved by the Company’s shareholders at the annual meeting, May 22, 2008. The terms of the 2008 Stock Incentive Plan are substantially the same as the North Valley Bancorp 1998 Employee Stock Incentive Plan. The 2008 Stock Incentive Plan provides for the grant to key employees of stock        options, which may consist of NSOs and ISOs. The 2008 Stock Incentive Plan also provides for the grant to outside directors, and to consultants and advisers to the Company, of stock options, all of which must be NSOs. The shares of Common Stock authorized to be granted as options under the 2008 Stock Incentive Plan consist of 549,916 shares of the Company’s Common Stock. Effective January 1, 2009, and on each January 1 thereafter for the remaining term of the 2008 Stock Incentive        Plan, the aggregate number of shares of Common Stock which are reserved for issuance pursuant to options granted under the terms of the 2008 Stock Incentive Plan shall be increased by a number of shares of Common Stock equal to 2% of the total number of the shares of Common Stock of the Company outstanding at the end of the most recently concluded calendar year. Any shares of Common Stock that have been reserved but not issued as options during any calendar year shall remain available        for grant during any subsequent calendar year. 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. Each 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. Outstanding options under the plans are exercisable until their expiration. 

**Stock Option Compensation**

There were no options granted in the three month periods ended June 30, 2009 and 2008, respectively. For the three month periods ended June 30, 2009 and 2008, the compensation cost recognized for stock option compensation was $58,000 and $60,000, respectively. Director stock grant expense for the three month periods ended June 30, 2009 and 2008 was $15,000 and ($9,000), respectively. The recognized tax benefit for stock option compensation expense was        $22,000 for the three month period ended June 30, 2008. There was no recognized tax benefit for stock option compensation expense for the three month period ended June 30, 2009. At June 30, 2009, the total unrecognized compensation cost related to stock-based awards granted to employees under the Company’s stock option plans was $500,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.9 years and will be adjusted for        subsequent changes in estimated forfeitures. 

9

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**Stock-Based Compensation**

Under the Company’s stock option plans as of June 30, 2009, 276,316 shares of the Company’s common stock are available for future grants to directors and employees of the Company. Under the Employee Stock Incentive Plans, 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. The vesting period is generally four years; however the        vesting period can be modified at the discretion of the Company’s Board of Directors, and for all options granted in the fourth quarter in 2008 and first quarter 2009 the vesting period is five years. 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, 2009                |   |       | 987,402  |                                                                                         | $      | 9.74                                                                                                                        |   |                                                           | 6 years |                                                                       | $      | 4.79-$24.75 |   |   |    |   |
|                                          |   |       |     |                                                                                         |   |                                                                                                                        |   |                                                           |    |                                                                       |   |        |   |   |    |   |
| Granted                                       |   |       | 19,500   |                                                                                         |   | 3.55                                                                                                                        |   |                                                           |    |                                                                       |   | 3.15-3.64   |   |   |    |   |
| Exercised                                     |   |       | —  |                                                                                         |   | —                                                                                                                     |   |                                                           |    |                                                                       |   | —     |   |   |    |   |
| Expired or Forfeited                          |   |       | (219,012 | )                                                                                            |   | 7.47                                                                                                                        |   |                                                           |    |                                                                       |   | 4.79-20.62  |   |   |    |   |
|                                          |   |       |     |                                                                                         |   |                                                                                                                        |   |                                                           |    |                                                                       |   |        |   |   |    |   |
|                                          |   |       |     |                                                                                         |   |                                                                                                                        |   |                                                           |    |                                                                       |   |        |   |   |    |   |
| Outstanding at June 30, 2009                  |   |       | 787,890  |                                                                                         | $      | 10.21                                                                                                                       |   |                                                           | 7 years |                                                                       | $      | 3.15-$24.75 |   | $      | 81      |   |
|                                          |   |       |     |                                                                                         |   |                                                                                                                        |   |                                                           |    |                                                                       |   |        |   |   |    |   |
| Fully vested and exercisable at June 30, 2009 |   |       | 402,236  |                                                                                         | $      | 12.64                                                                                                                       |   |                                                           | 4 years |                                                                       | $      | 6.51-$24.75 |   | $      | — |   |
|                                          |   |       |     |                                                                                         |   |                                                                                                                        |   |                                                           |    |                                                                       |   |        |   |   |    |   |
| Options expected to vest                      |   |       | 385,654  |                                                                                         | $      | 7.68                                                                                                                        |   |                                                           | 9 years |                                                                       | $      | 3.15-$24.75 |   | $      | 81      |   |
|                                          |   |       |     |                                                                                         |   |                                                                                                                        |   |                                                           |    |                                                                       |   |        |   |   |    |   |

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, 2009. The intrinsic value of options exercised during the three months ended June 30, 2008 totaled $54,000. There were no options exercised during the three months ended June 30, 2009. 

**NOTE D – COMPREHENSIVE LOSS**

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

|                                  |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|----------|--------|----------|--------|--------|--------|--------|--------|
|                                  |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|                                  |   | **2009**                        |   | **2008**                      |   | **2009** |   | **2008** |   |
|                                  |   |                            |   |                          |   |     |   |     |   |
|                                  |
| Net loss                              |   | $                               | (4,089 | )                             | $      | (1,509   | )      | $        | (7,196 | )      | $      | (1,229 | )      |
| Other comprehensive loss, net of tax: |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| Holding loss arising during period    |   |                            | (829   | )                             |   | (951     | )      |     | (129   | )      |   | (711   | )      |
|                                  |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
|                                  |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| Total comprehensive loss              |   | $                               | (4,918 | )                             | $      | (2,460   | )      | $        | (7,325 | )      | $      | (1,940 | )      |
|                                  |   |                            |   |                          |   |     |   |     |   |   |   |   |   |

**NOTE E – IMPAIRED AND NONPERFORMING LOANS AND LEASES AND OREO**

At June 30, 2009 and December 31, 2008, the recorded investment in nonperforming loans and leases was approximately $44,304,000 and $18,936,000, respectively. Of the June 30, 2009 balance, a specific reserve of $6,883,000 was established. Of the December 31, 2008 balance, a specific reserve of $1,755,000 was established. If interest had been accruing on the nonperforming loans, such income would have approximated $969,000 and $1,056,000 for the six        months ended June 30, 2009 and 2008, respectively. 

At June 30, 2009 and December 31, 2008, the recorded investment in other real estate owned (“OREO”) was approximately $6,129,000 and $10,408,000, respectively. For the six months ended June 30, 2009, the Company transferred property from five loans in the amount of $3,554,000 to OREO, had $6,423,000 in proceeds on sales of OREO and recorded a $1,410,000 loss on the sale/writedown of OREO in other noninterest income. The June 30, 2009 balance        of OREO of $6,129,000 consists of nine properties with the largest property representing $1,450,000 of the balance at June 30, 2009. 

10

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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. Included in nonperforming loans are $5,025,000 of troubled debt restructurings that were classified as nonperforming. Nonperforming loans and leases and OREO at June 30, 2009 and December 31, 2008 are        summarized as follows (in thousands): 

|                                                           |   |                                 |    |                                     |   |    |   |
|----------------------------------------------------------------|--------|--------------------------------------|---------|------------------------------------------|--------|---------|--------|
|                                                           |   | **June 30,                    2009** |    | **December 31,                    2008** |   |
|                                                           |   |                                 |    |                                     |   |
|                                                           |   |                                 |    |                                     |   |    |   |
| Nonaccrual loans and leases                                    |   | $                                    | 44,304  |                                     | $      | 18,936  |   |
| Loans and leases past due 90 days and accruing interest        |   |                                 | — |                                     |   | — |   |
| Other real estate owned                                        |   |                                 | 6,129   |                                     |   | 10,408  |   |
|                                                           |   |                                 |    |                                     |   |    |   |
| Total nonperforming assets                                     |   | $                                    | 50,433  |                                     | $      | 29,344  |   |
|                                                           |   |                                 |    |                                     |   |    |   |
|                                                           |   |                                 |    |                                     |   |    |   |
| Nonaccrual loans and leases to total gross loans and leases    |   |                                 | 6.81    | %                                        |   | 2.73    | %      |
| Nonperforming loans and leases to total gross loans and leases |   |                                 | 6.81    | %                                        |   | 2.73    | %      |
| Total nonperforming assets to total assets                     |   |                                 | 5.52    | %                                        |   | 3.34    | %      |
|                                                           |   |                                 |    |                                     |   |    |   |

**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. When a net loss occurs there is no effect on the calculation of diluted loss per share for common stock equivalents because the conversion is        anti-dilutive. 

There was no difference in the numerator, net loss, used in the calculation of basic earnings per share and diluted earnings per share and because of the Company’s net loss in the periods presented, there was no difference in the denominator used in the calculation of basic earnings per share and diluted earnings per share for the three and six month periods ended June 30, 2009 and 2008 (in thousands, except per share amounts): 

|                                                                    |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
|-------------------------------------------------------------------------|--------|---------------------------------|---------|-------------------------------|--------|----------|--------|----------|---------|--------|--------|---------|--------|
|                                                                    |   | **Three months ended June 30,** |    | **Six months ended June 30,** |   |
|                                                                    |   | **2009**                        |    | **2008**                      |   | **2009** |   | **2008** |    |
|                                                                    |   |                            |    |                          |   |     |   |     |    |
| **Calculation of basic loss per share:**                                |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
| Numerator - net loss                                                    |   | $                               | (4,089  | )                             | $      | (1,509   | )      | $        | (7,196  | )      | $      | (1,229  | )      |
| Denominator -                                                           |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
| Weighted average common shares outstanding                              |   |                            | 7,496   |                          |   | 7,439    |   |     | 7,496   |   |   | 7,428   |   |
|                                                                    |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
|                                                                    |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
| Basic loss per share                                                    |   | $                               | (0.55   | )                             | $      | (0.20    | )      | $        | (0.96   | )      | $      | (0.17   | )      |
|                                                                    |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
|                                                                    |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
| **Calculation of diluted loss per share:**                              |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
| Numerator - net loss                                                    |   | $                               | (4,089  | )                             | $      | (1,509   | )      | $        | (7,196  | )      | $      | (1,229  | )      |
| Denominator -                                                           |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
| Weighted average common shares outstanding                              |   |                            | 7,496   |                          |   | 7,439    |   |     | 7,496   |   |   | 7,428   |   |
| Dilutive effect of outstanding options                                  |   |                            | — |                          |   | —  |   |     | — |   |   | — |   |
|                                                                    |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
| Weighted average common shares outstanding and common stock equivalents |   |                            | 7,496   |                          |   | 7,439    |   |     | 7,496   |   |   | 7,428   |   |
|                                                                    |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
|                                                                    |   |                            |    |                          |   |     |   |     |    |   |   |    |   |
| Diluted loss per share                                                  |   | $                               | (0.55   | )                             | $      | (0.20    | )      | $        | (0.96   | )      | $      | (0.17   | )      |
|                                                                    |   |                            |    |                          |   |     |   |     |    |   |   |    |   |

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 for each of the three months ended June 30, 2009 and 2008. Components of net periodic benefit cost for the Company’s supplemental nonqualified defined benefit plans for the three and six        months ended June 30, 2009 and 2008 are presented in the following table (in thousands): 

|                                          |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
|-----------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|----------|--------|----------|--------|--------|--------|--------|--------|
|                                          |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|                                          |   |                            |   |                          |   |
|                                          |   | **2009**                        |   | **2008**                      |   | **2009** |   | **2008** |   |
|                                          |   |                            |   |                          |   |     |   |     |   |
| **Components of net periodic benefits cost:** |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| Service cost                                  |   | $                               | 135    |                          | $      | 137      |   | $        | 270    |   | $      | 274    |   |
| Interest cost                                 |   |                            | 83     |                          |   | 75       |   |     | 167    |   |   | 150    |   |
| Prior service amortization                    |   |                            | 8      |                          |   | 8        |   |     | 16     |   |   | 16     |   |
| Recognized net actuarial loss                 |   |                            | 5      |                          |   | 12       |   |     | 10     |   |   | 24     |   |
|                                          |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| **Total components of net periodic cost**     |   | $                               | 231    |                          | $      | 232      |   | $        | 463    |   | $      | 464    |   |
|                                          |   |                            |   |                          |   |     |   |     |   |   |   |   |   |

**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 letters of credit issued on behalf of its customers in the amount of $5,783,000 and $7,003,000 at June 30, 2009 and December 31, 2008. At June 30, 2009, commercial and consumer lines of credit and real estate loans of approximately $74,483,000 and $56,293,000 were undisbursed. At December 31, 2008, commercial and consumer lines of credit and real estate loans of approximately $97,110,000 and $61,820,000 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, 2009 and December 31, 2008. 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, 2009, no losses are anticipated as a result of these commitments. 

A large portion of the loan portfolio of the Company is collateralized by real estate. At June 30, 2009 and December 31, 2008, real estate served as the principal source of collateral with respect to approximately 78% of the Company’s loan portfolio. At June 30, 2009, real estate construction loans totaled $117,466,000, or 18% of the total loan portfolio, and commercial loans secured by real estate totaled $324,545,000, or 50% of the total loan        portfolio. See the discussion under “Loan and Lease Portfolio” starting on page 24. A further decline in the state and national economy, in general, combined with further deterioration in real estate values in the Company’s primary operating market areas, would have an adverse effect on the value of real estate as well as other collateral securing loans, plus the ability of certain borrowers to repay their outstanding loans and the overall demand for new loans, and        this could have a material impact on the Company’s financial position or results of operations or its cash flows. 

**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. 

12

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***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, 2009. 

The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax        asset will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Based upon management’s analysis of available evidence, it has determined that it is “more likely than not” that all of the Company’s deferred income tax assets as of June 30, 2009 and December 31, 2008        will be fully realized and therefore no valuation allowance was recorded. 

**NOTE J – FAIR VALUE MEASUREMENTS**

In accordance with FAS 157, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: 

|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** | Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.                                                                            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **•** | Significant other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets or liabilities, quoted prices for securities in inactive markets and inputs derived principally from, or corroborated by, observable market data by correlation                    or other means. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **•** | Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.                                                                                                                                                                                                                 |

**Assets Recorded at Fair Value on a Recurring Basis**

The table below presents assets measured at fair value on a recurring basis. 

|                          |   |                 |    |        |   |        |   |        |    |   |   |    |   |
|-------------------------------|--------|----------------------|---------|-------------|--------|-------------|--------|-------------|---------|--------|--------|---------|--------|
|                          |   | **At June 30, 2009** |    |
|                          |   |                 |    |
| **(in thousands)**            |   | **Fair Value**       |    | **Level 1** |   | **Level 2** |   | **Level 3** |    |
|                          |   |                 |    |        |   |        |   |        |    |
|                          |   |                 |    |        |   |        |   |        |    |   |   |    |   |
| Available for sale securities |   | $                    | 137,554 |        | $      | —     |   | $           | 137,554 |   | $      | — |   |

13

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**Assets Recorded at Fair Value on a Nonrecurring Basis**

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

|                                                        |   |                 |   |        |   |        |   |        |   |   |   |    |   |
|-------------------------------------------------------------|--------|----------------------|--------|-------------|--------|-------------|--------|-------------|--------|--------|--------|---------|--------|
|                                                        |   | **At June 30, 2009** |   |
|                                                        |   |                 |   |
| **(in thousands)**                                          |   | **Fair Value**       |   | **Level 1** |   | **Level 2** |   | **Level 3** |   |
|                                                        |   |                 |   |        |   |        |   |        |   |
|                                                        |   |                 |   |        |   |        |   |        |   |   |   |    |   |
| Impaired Loans                                              |   | $                    | 44,304 |        | $      | —     |   | $           | 44,304 |   | $      | — |   |
| Other Real Estate Owned                                     |   |                 | 6,129  |        |   | —     |   |        | 6,129  |   |   | — |   |
|                                                        |   |                 |   |        |   |        |   |        |   |   |   |    |   |
| Total assets measured at fair value on a nonrecurring basis |   | $                    | 50,433 |        | $      | —     |   | $           | 50,433 |   | $      | — |   |
|                                                        |   |                 |   |        |   |        |   |        |   |   |   |    |   |

|   |                                                                                                                                                                                                                                          |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | *Impaired loans –* represents carrying value of loans for which adjustments are predominantly based on the appraised value of the collateral and loans considered impaired under FAS 114 where a specific reserve has been established. |
|   |                                                                                                                                                                                                                                          |
|   | *Other real estate owned-* represents the fair value of foreclosed real estate owned that was measured at fair value subsequent to their initial classification as foreclosed assets.                                                         |

**Disclosures about Fair Value of Financial Instruments**

The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to discounts to        fair value which may occur when financial instruments are sold in larger quantities. Such financial instruments and their estimated fair values were: 

The following assumptions were used as of June 30, 2009 and December 31, 2008 to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. 

|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | a)     | Cash and Due From Banks - The carrying amount represents a reasonable estimate of fair value.                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | b)     | Federal Funds Sold - The carrying amount represents a reasonable estimate of fair value.                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | c)     | FHLB, FRB Stock and Other Securities - The carrying amount represents a reasonable estimate of fair value.                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | d)     | Investment Securities – The fair value of held to maturity securities are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Available for sale securities are carried at fair value. The carrying value of FHLB, FRB, and other securities are carried at cost which represents a reasonable estimate of fair value. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | e)     | Loans and Leases - Commercial loans, residential mortgages, construction loans and direct financing leases are segmented by fixed and adjustable rate interest terms, by maturity, and by performing and nonperforming categories.                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | The fair value of performing loans and leases is estimated by discounting contractual cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Assumptions regarding credit risk, cash flow, and discount rates are determined using available market information.                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | The fair value of nonperforming loans and leases is estimated by discounting estimated future cash flows using current interest rates with an additional risk adjustment reflecting the individual characteristics of the loans.                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | f)     | Bank-owned Life Insurance - The carrying amount and estimated fair values are based on current cash surrender values at each reporting date provided by the insurers.                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |

14

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|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | g)     | Mortgage servicing assets – The fair value of mortgage servicing assets is estimated using projected cash flows adjusted for the effects of anticipated prepayments, using a market discount rate.                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | h)     | Deposits – Noninterest-bearing and interest-bearing demand deposits and savings accounts are payable on demand and their carrying values are assumed to be at fair value. The fair value of the core deposit intangible has not been included as a component of the fair value estimate. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on rates currently offered for deposits                    of similar size and remaining maturities. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | i)     | Other Borrowed Funds - The fair value of other borrowed funds is estimated by discounting the contractual cash flows using the current interest rate at which similar borrowings for the same remaining maturities could be made.                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | j)     | Subordinated Debentures - The fair value of the subordinated debentures is estimated by discounting the contractual cash flows using the current interest rate at which similar securities with the same remaining expected life could be made.                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | k)     | Commitments to Fund Loans/Standby Letters of Credit - The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The differences between the carrying value of commitments to fund loans or stand by letters of credit and their fair value are not significant and therefore not                    included in the following table.               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | l)     | Accrued Interest Receivable/Payable – The carrying amount of accrued interest receivable and accrued interest payable represents a reasonable estimate of fair value.                                                                                                                                                                                                                                                                                                                                                |

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

|                           |   |                                   |    |                              |   |                                   |   |                              |    |   |   |    |   |
|--------------------------------|--------|----------------------------------------|---------|-----------------------------------|--------|----------------------------------------|--------|-----------------------------------|---------|--------|--------|---------|--------|
|                           |   | **June 30, 2009**                      |    | **December 31, 2008**             |   |
|                           |   |                                   |    |                              |   |
|                           |   | **Carrying                    Amount** |    | **Fair                    Value** |   | **Carrying                    Amount** |   | **Fair                    Value** |    |
|                           |   |                                   |    |                              |   |                                   |   |                              |    |
| **FINANCIAL ASSETS**           |   |                                   |    |                              |   |                                   |   |                              |    |   |   |    |   |
| Cash and due from banks        |   | $                                      | 22,609  |                              | $      | 22,609                                 |   | $                                 | 27,153  |   | $      | 27,153  |   |
| Federal funds sold             |   |                                   | 29,395  |                              |   | 29,395                                 |   |                              | — |   |   | — |   |
| FHLB, FRB and other securities |   |                                   | 5,833   |                              |   | 5,833                                  |   |                              | 5,825   |   |   | 5,825   |   |
| Securities:                    |   |                                   |    |                              |   |                                   |   |                              |    |   |   |    |   |
| Available for sale             |   |                                   | 137,554 |                              |   | 137,554                                |   |                              | 76,345  |   |   | 76,345  |   |
| Held to maturity               |   |                                   | 15      |                              |   | 14                                     |   |                              | 21      |   |   | 20      |   |
| Loans and leases               |   |                                   | 628,533 |                              |   | 634,870                                |   |                              | 682,095 |   |   | 687,891 |   |
| Bank owned life insurance      |   |                                   | 32,175  |                              |   | 32,175                                 |   |                              | 31,612  |   |   | 31,612  |   |
| Mortgage servicing assets      |   |                                   | 612     |                              |   | 612                                    |   |                              | 542     |   |   | 458     |   |
| Accrued interest receivable    |   |                                   | 2,587   |                              |   | 2,587                                  |   |                              | 2,742   |   |   | 2,742   |   |
|                           |   |                                   |    |                              |   |                                   |   |                              |    |   |   |    |   |
| **FINANCIAL LIABILITIES**      |   |                                   |    |                              |   |                                   |   |                              |    |   |   |    |   |
| Deposits                       |   | $                                      | 799,743 |                              | $      | 804,507                                |   | $                                 | 754,944 |   | $      | 758,387 |   |
| Other borrowed funds           |   |                                   | — |                              |   | —                                |   |                              | 3,516   |   |   | 3,516   |   |
| Subordinated debentures        |   |                                   | 31,961  |                              |   | 26,423                                 |   |                              | 31,961  |   |   | 31,605  |   |
| Accrued interest payable       |   |                                   | 1,062   |                              |   | 1,062                                  |   |                              | 1,243   |   |   | 1,243   |   |

**NOTE K - NEW ACCOUNTING PRONOUNCEMENTS**

***Employers’ Disclosures about Postretirement Benefit Plan Assets.*** In December 2008, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard No. 132R-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP 132(R)-1). This standard provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. It also includes a        technical amendment to FASB Statement No. 132(R) that requires a nonpublic entity to disclose net periodic benefit cost for each annual period for which a statement of income is presented. The objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan are to provide users of financial statements with an understanding of how investment allocation decisions are made, including the factors that are pertinent to an        understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and significant concentrations of risk within plan assets. The disclosures about plan assets required by this FSP are effective for fiscal years ending after December 15, 2009. Early        adoption is permitted. The Company is currently assessing the potential effect of FSP 132(R)-1 on its financial position, results of operations and cash flows. 

15

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In April 2009, the Financial Accounting Standards Board (FASB) issued the following three FASB Staff Positions (FSP’s) intended to provide additional guidance and enhance disclosures regarding fair value measurements and impairment of securities: 

FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also provides guidance on identifying circumstances that        indicate a transaction is not orderly. The provisions of FSP FAS 157-4 are effective for the Company’s interim period ending on June 30, 2009. 

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Company’s interim period ending on June 30, 2009. As FSP FAS 107-1 and APB        28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on the Company’s financial statements taken as a whole. 

FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to        other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s interim period ending on June 30, 2009. 

On May 28, 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (“SFAS 165”). Under SFAS 165, companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. SFAS 165 requires entities to recognize in the financial        statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. SFAS 165 also requires entities to disclose the date through which subsequent events have been        evaluated. SFAS 165 was effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the provisions of SFAS 165 for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on the Company’s financial statements taken as a whole. Management reviewed all events occurring from June 30, 2009 through August 12, 2009, the date the financial statements were issued and no subsequent events occurred requiring accrual or        disclosure. 

On June 29, 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards CodificationTM as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial        statements in conformity with US GAAP. SFAS 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superceded. The Company will adopt SFAS 168 for the quarterly period ended September 30, 2009, as required, and adoption is not expected to have a material impact on the Company’s financial statements taken as a whole.        

16

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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.

**Share Based Compensation**

At June 30, 2009, the Company had three shareholder approved stock-based compensation plans: the 1998 Employee Stock Incentive Plan, the 1999 Director Stock Option Plan and the 2008 Stock Incentive 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 2008 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.

17

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**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 conducted its assessment of impairment during the fourth quarter of 2008 and based on its evaluation determined that there was no impairment. Due to the        Company’s net loss and the continued change in the business climate, management updated its assessment of impairment in the second quarter of 2009 and determined that there was no impairment.

**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 and management has the ability and intent to hold the security to a forecasted recovery of cost, only the portion of the impairment loss representing credit exposure would be recognized as a charge to earnings, with the balance recognized a charge to other comprehensive income. If management intends to sell        the security or it is more likely than not that it will be required to sell the security before recovering its forecasted cost, the entire impairment loss would be recognized as a charge to earnings. See Note B – INVESTMENT SECURITIES to the Unaudited Condensed Consolidated Financial Statements in Item 1 – Financial Statements.

**Fair Value**

Effective January 1, 2008, we 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.

See Note J – FAIR VALUE MEASUREMENTS to the Unaudited Condensed Consolidated Financial Statements in Item 1 – Financial Statements for additional information about the financial instruments carried at fair value.

18

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**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 California state-chartered banking corporation, 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 and seven Business Banking Centers, and a        loan production office 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 10 percent of its revenues. 

**Operating Results**

|                                        |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
|---------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|----------|--------|----------|--------|--------|--------|--------|--------|
|                                        |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
| **(in thousands except per share amounts)** |   | **2009**                        |   | **2008**                      |   | **2009** |   | **2008** |   |
|                                        |   |                            |   |                          |   |     |   |     |   |
|                                        |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| Net interest income                         |   | $                               | 7,909  |                          | $      | 9,069    |   | $        | 16,017 |   | $      | 18,197 |   |
| Provision for loan and lease losses         |   |                            | 9,000  |                          |   | 5,200    |   |     | 16,000 |   |   | 7,600  |   |
| Noninterest income                          |   |                            | 3,438  |                          |   | 3,477    |   |     | 6,602  |   |   | 6,968  |   |
| Noninterest expense                         |   |                            | 10,782 |                          |   | 9,577    |   |     | 21,117 |   |   | 19,382 |   |
| Benefit for income taxes                    |   |                            | (4,346 | )                             |   | (722     | )      |     | (7,302 | )      |   | (588   | )      |
|                                        |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| Net loss                                    |   | $                               | (4,089 | )                             | $      | (1,509   | )      | $        | (7,196 | )      | $      | (1,229 | )      |
|                                        |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
|                                        |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| Loss Per Share                              |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| Basic                                       |   | $                               | (0.55  | )                             | $      | (0.20    | )      | $        | (0.96  | )      | $      | (0.17  | )      |
| Diluted                                     |   | $                               | (0.55  | )                             | $      | (0.20    | )      | $        | (0.96  | )      | $      | (0.17  | )      |
|                                        |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| Annualized Return on Average Assets         |   |                            | (1.81  | %)                            |   | (0.65    | %)     |     | (1.63  | %)     |   | (0.26  | %)     |
| Annualized Return on Average Equity         |   |                            | (21.74 | %)                            |   | (7.35    | %)     |     | (18.98 | %)     |   | (2.98  | %)     |

The Company had a net loss of $4,089,000, or $0.55 per diluted share, and $7,196,000, or $0.96 per diluted share, for the three and six months ended June 30, 2009, respectively. This compares with 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. The increase in net loss for the three and six months ended June 30, 2009 compared to the same periods in 2008        was principally driven by a $9,000,000 provision for loan and lease losses for the three months ended June 30, 2009 and a total provision of $16,000,000 for the six months ended June 30, 2009 compared to 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, and secondarily due to a decrease in net interest income of $1,160,000 for the three months ended June 30, 2009 and a        total decrease of $2,180,000 for the six months ended June 30, 2009 compared to the same periods in 2008. Noninterest income decreased $39,000 and $366,000 for the three and six months ended June 30, 2009 compared to the same periods in 2008. Noninterest expense increased $1,205,000 and $1,735,000 for the three and six months ended June 30, 2009 compared to the same periods in 2008. 

**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. 

19

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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, 2009** |    | **Three months ended June 30, 2008** |   |
|                                             |   |                                 |    |                                 |   |
|                                             |   | **Average****Balance**               |    | **Yield/****Rate**                   |   | **Interest****Amount** |   | **Average****Balance** |    | **Yield/****Rate** |   | **Interest****Amount** |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| **Assets**                                       |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Earning assets:                                  |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Federal funds sold                               |   | $                                    | 31,984  |                                 |   | 0.18                   | %      | $                      | 14      |               | $      | 230                    |   |   | 1.74   | %      | $      | 1      |   |
| Investment securities:                           |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Taxable                                          |   |                                 | 107,969 |                                 |   | 3.77                   | %      |                   | 1,016   |               |   | 79,844                 |   |   | 4.14   | %      |   | 825    |   |
| Non-taxable (1)                                  |   |                                 | 15,850  |                                 |   | 6.78                   | %      |                   | 268     |               |   | 20,189                 |   |   | 6.85   | %      |   | 345    |   |
| FNMA preferred stock (1)                         |   |                                 | — |                                 |   | —                |   |                   | — |               |   | 3,284                  |   |   | 9.89   | %      |   | 81     |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Total investments                                |   |                                 | 123,819 |                                 |   | 4.16                   | %      |                   | 1,284   |               |   | 103,317                |   |   | 4.86   | %      |   | 1,251  |   |
| Loans and leases (2)(3)                          |   |                                 | 658,068 |                                 |   | 6.11                   | %      |                   | 10,029  |               |   | 747,414                |   |   | 6.57   | %      |   | 12,246 |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Total earning assets                             |   |                                 | 813,871 |                                 |   | 5.58                   | %      |                   | 11,327  |               |   | 850,961                |   |   | 6.36   | %      |   | 13,498 |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Non earning assets                               |   |                                 | 108,298 |                                 |   |                   |   |                   |    |               |   | 97,708                 |   |   |   |   |   |   |   |
| Allowance for loan and lease losses              |   |                                 | (16,136 | )                                    |   |                   |   |                   |    |               |   | (13,103                | )      |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Total non-earning assets                         |   |                                 | 92,162  |                                 |   |                   |   |                   |    |               |   | 84,605                 |   |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Total assets                                     |   | $                                    | 906,033 |                                 |   |                   |   |                   |    |               | $      | 935,566                |   |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**   |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Interest bearing liabilities:                    |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Transaction accounts                             |   | $                                    | 151,422 |                                 |   | 0.31                   | %      | $                      | 117     |               | $      | 157,526                |   |   | 0.65   | %      | $      | 256    |   |
| Savings and money market                         |   |                                 | 172,001 |                                 |   | 1.01                   | %      |                   | 435     |               |   | 184,164                |   |   | 1.62   | %      |   | 743    |   |
| Time certificates                                |   |                                 | 320,512 |                                 |   | 2.82                   | %      |                   | 2,254   |               |   | 247,988                |   |   | 3.87   | %      |   | 2,391  |   |
| Other borrowed funds                             |   |                                 | 31,961  |                                 |   | 6.60                   | %      |                   | 526     |               |   | 92,435                 |   |   | 3.92   | %      |   | 904    |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Total interest bearing liabilities               |   |                                 | 675,896 |                                 |   | 1.98                   | %      |                   | 3,332   |               |   | 682,113                |   |   | 2.52   | %      |   | 4,294  |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Demand deposits                                  |   |                                 | 144,334 |                                 |   |                   |   |                   |    |               |   | 159,403                |   |   |   |   |   |   |   |
| Other liabilities                                |   |                                 | 10,370  |                                 |   |                   |   |                   |    |               |   | 11,689                 |   |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Total liabilities                                |   |                                 | 830,600 |                                 |   |                   |   |                   |    |               |   | 853,205                |   |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Shareholders’ equity                       |   |                                 | 75,433  |                                 |   |                   |   |                   |    |               |   | 82,361                 |   |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity |   | $                                    | 906,033 |                                 |   |                   |   |                   |    |               | $      | 935,566                |   |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Net interest income                              |   |                                 |    |                                 |   |                   |   | $                      | 7,995   |               |   |                   |   |   |   |   | $      | 9,204  |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Net interest spread                              |   |                                 |    |                                 |   | 3.60                   | %      |                   |    |               |   |                   |   |   | 3.84   | %      |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
| Net interest margin                              |   |                                 |    |                                 |   | 3.94                   | %      |                   |    |               |   |                   |   |   | 4.34   | %      |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |
|                                             |   |                                 |    |                                 |   |                   |   |                   |    |               |   |                   |   |   |   |   |   |   |   |

|   |                                                                                                 |
|--------|------------------------------------------------------------------------------------------------------|
| (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 $239 and $113 for the three months ended June 30, 2009 and 2008, respectively. |

20

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

|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
|-------------------------------------------------------------------|--------|----------------------------------------|---------|------------------------------------|--------|----------------------------------------|--------|----------------------------------------|---------|------------------------------------|--------|----------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                              |   | **Six months ended June 30, 2009**     |    | **Six months ended June 30, 2008** |   |
|                                                              |   |                                   |    |                               |   |
|                                                              |   | **Average                    Balance** |    | **Yield/                    Rate** |   | **Interest                    Amount** |   | **Average                    Balance** |    | **Yield/                    Rate** |   | **Interest                    Amount** |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |
|                                                              |
| **Assets**                                                        |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Earning assets:                                                   |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Federal funds sold                                                |   | $                                      | 23,544  |                               |   | 0.20                                   | %      | $                                      | 23      |                               | $      | 411                                    |   |   | 2.93   | %      | $      | 6      |   |
| Investment securities:                                            |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Taxable                                                           |   |                                   | 88,839  |                               |   | 3.88                                   | %      |                                   | 1,711   |                               |   | 83,317                                 |   |   | 4.09   | %      |   | 1,700  |   |
| Non-taxable (1)                                                   |   |                                   | 15,874  |                               |   | 6.78                                   | %      |                                   | 534     |                               |   | 20,364                                 |   |   | 6.75   | %      |   | 685    |   |
| FNMA preferred stock (1)                                          |   |                                   | — |                               |   | —                                |   |                                   | — |                               |   | 3,284                                  |   |   | 9.65   | %      |   | 158    |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Total investments                                                 |   |                                   | 104,713 |                               |   | 4.32                                   | %      |                                   | 2,245   |                               |   | 106,965                                |   |   | 4.77   | %      |   | 2,543  |   |
| Loans and leases (2)(3)                                           |   |                                   | 669,390 |                               |   | 6.20                                   | %      |                                   | 20,565  |                               |   | 745,209                                |   |   | 6.79   | %      |   | 25,222 |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Total earning assets                                              |   |                                   | 797,647 |                               |   | 5.77                                   | %      |                                   | 22,833  |                               |   | 852,585                                |   |   | 6.53   | %      |   | 27,771 |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Non earning assets                                                |   |                                   | 108,432 |                               |   |                                   |   |                                   |    |                               |   | 97,786                                 |   |   |   |   |   |   |   |
| Allowance for loan and lease losses                               |   |                                   | (13,798 | )                                  |   |                                   |   |                                   |    |                               |   | (11,929                                | )      |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Total non-earning assets                                          |   |                                   | 94,634  |                               |   |                                   |   |                                   |    |                               |   | 85,857                                 |   |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Total assets                                                      |   | $                                      | 892,281 |                               |   |                                   |   |                                   |    |                               | $      | 938,442                                |   |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| **Liabilities and Shareholders’                    Equity** |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |
| Interest bearing liabilities:                                     |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Transaction accounts                                              |   | $                                      | 152,403 |                               |   | 0.34                                   | %      | $                                      | 258     |                               | $      | 156,238                                |   |   | 0.65   | %      | $      | 505    |   |
| Savings and money market                                          |   |                                   | 169,913 |                               |   | 1.04                                   | %      |                                   | 875     |                               |   | 182,916                                |   |   | 1.70   | %      |   | 1,553  |   |
| Time certificates                                                 |   |                                   | 303,183 |                               |   | 2.95                                   | %      |                                   | 4,441   |                               |   | 248,095                                |   |   | 4.17   | %      |   | 5,161  |   |
| Other borrowed funds                                              |   |                                   | 32,641  |                               |   | 6.60                                   | %      |                                   | 1,069   |                               |   | 98,679                                 |   |   | 4.26   | %      |   | 2,097  |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Total interest bearing liabilities                                |   |                                   | 658,140 |                               |   | 2.04                                   | %      |                                   | 6,643   |                               |   | 685,928                                |   |   | 2.72   | %      |   | 9,316  |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Demand deposits                                                   |   |                                   | 147,158 |                               |   |                                   |   |                                   |    |                               |   | 157,474                                |   |   |   |   |   |   |   |
| Other liabilities                                                 |   |                                   | 10,521  |                               |   |                                   |   |                                   |    |                               |   | 12,292                                 |   |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Total liabilities                                                 |   |                                   | 815,819 |                               |   |                                   |   |                                   |    |                               |   | 855,694                                |   |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Shareholders’ equity                                        |   |                                   | 76,462  |                               |   |                                   |   |                                   |    |                               |   | 82,748                                 |   |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Total liabilities and shareholders’ equity                  |   | $                                      | 892,281 |                               |   |                                   |   |                                   |    |                               | $      | 938,442                                |   |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Net interest income                                               |   |                                   |    |                               |   |                                   |   | $                                      | 16,190  |                               |   |                                   |   |   |   |   | $      | 18,455 |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Net interest spread                                               |   |                                   |    |                               |   | 3.73                                   | %      |                                   |    |                               |   |                                   |   |   | 3.81   | %      |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
| Net interest margin                                               |   |                                   |    |                               |   | 4.09                                   | %      |                                   |    |                               |   |                                   |   |   | 4.34   | %      |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |
|                                                              |   |                                   |    |                               |   |                                   |   |                                   |    |                               |   |                                   |   |   |   |   |   |   |   |

|   |                                                                                               |
|--------|----------------------------------------------------------------------------------------------------|
| (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 $476 and $292 for the six months ended June 30, 2009 and 2008, 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 $1,209,000, or 13.1%, for the three months ended June 30, 2009 compared to the same period in 2008.        Interest income decreased by $2,171,000, or 16.1%, primarily due to both lower yield on earning assets and a decrease in the average balance of earning assets and secondarily due to foregone interest income of $595,000 due to loans placed on nonaccrual status. Interest expense decreased $962,000, or 22.4%, primarily due to a decrease in the rates paid on deposits and secondarily due to a decrease in the average balance of borrowings for the three months ended June 30, 2009 compared to        the same period in 2008. Average loans decreased $89,346,000 for the quarter ended June 30, 2009 compared to the same period in 2008, and the yield on the loan portfolio decreased 46 basis points to 6.11% for the quarter ended June 30, 2009 compared to the same quarter in 2008. Average earning assets decreased $37,090,000, for the quarter ended June 30, 2009 compared to the same quarter in 2008. Average yields on earning assets decreased 78 basis points from 6.36% for the quarter ended        June 30, 2008 to 5.58% for the quarter ended June 30, 2009, and the average rate paid on interest bearing liabilities decreased 54 basis points to 1.98% over the same periods. The decrease in both yields earned and rates paid is reflective of the declining interest rate environment as the Federal Reserve Board has reduced interest rates 500 basis points since September 2007. As a result of the above, the Company’s net interest margin for the quarter ended June 30, 2009 was 3.94%,        a decrease of 40 basis points from the net interest margin of 4.34% for the quarter ended June 30, 2008 and a decrease of 29 basis points from the 4.23% net interest margin for the quarter ended March 31, 2009. 

21

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Net interest income decreased $2,265,000, or 12.3%, for the six months ended June 30, 2009 compared to the same period in 2008. Interest income decreased by $4,938,000, or 17.8%, primarily due to a decrease in yield on loans and a decrease in the average balance of loans of $75,819,000. Also impacting the average yield on loans was foregone interest income of $969,000 due to loans placed on nonaccrual status. Interest expense decreased $2,673,000, or        28.7%, due primarily to a decrease in rates paid on deposits and secondarily due to a decrease in the average balance of borrowings for the six months ended June 30, 2009 compared to the same period in 2008. The net interest margin for the six months ended June 30, 2009 decreased 25 basis points to 4.09% from 4.34% for the six months ended June 30, 2008. 

The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate. 

**Changes in Volume/Rate***(Dollars in thousands**)*

|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
|-------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|---------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|
|                                |   | **Three months ended June 30, 2009                    compared with                    Three months ended June 30, 2008** |   | **Six months ended June 30, 2009                    compared with                    Six months ended June 30, 2008** |   |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |
|                                |   | **Average                    Volume**                                                                                     |   | **Average                    Rate**                                                                                   |   | **Total                    Increase                    (Decrease)** |   | **Average                    Volume** |   | **Average                    Rate** |   | **Total                    Increase                    (Decrease)** |   |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |
|                                |
| **Interest Income**                 |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
| Interest on Federal funds sold      |   | $                                                                                                                         | 138    |                                                                                                                  | $      | (125                                                                | )      | $                                     | 13     |                                | $      | 339                                                                 |   | $      | (322    | )      | $      | 17     |   |
| Interest on investments:            |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
| Taxable securities                  |   |                                                                                                                      | 291    |                                                                                                                  |   | (100                                                                | )      |                                  | 191    |                                |   | 113                                                                 |   |   | (102    | )      |   | 11     |   |
| Nontaxable securities               |   |                                                                                                                      | (74    | )                                                                                                                     |   | (3                                                                  | )      |                                  | (77    | )                                   |   | (152                                                                | )      |   | 1       |   |   | (151   | )      |
| FNMA preferred stock                |   |                                                                                                                      | (81    | )                                                                                                                     |   | —                                                             |   |                                  | (81    | )                                   |   | (158                                                                | )      |   | — |   |   | (158   | )      |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
| Total investments                   |   |                                                                                                                      | 136    |                                                                                                                  |   | (103                                                                | )      |                                  | 33     |                                |   | (197                                                                | )      |   | (101    | )      |   | (298   | )      |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
| Interest on loans and leases        |   |                                                                                                                      | (1,468 | )                                                                                                                     |   | (749                                                                | )      |                                  | (2,217 | )                                   |   | (2,574                                                              | )      |   | (2,083  | )      |   | (4,657 | )      |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
| Total interest income               |   |                                                                                                                      | (1,194 | )                                                                                                                     |   | (977                                                                | )      |                                  | (2,171 | )                                   |   | (2,432                                                              | )      |   | (2,506  | )      |   | (4,938 | )      |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
| **Interest Expense**                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
| Transaction accounts                |   | $                                                                                                                         | (10    | )                                                                                                                     | $      | (129                                                                | )      | $                                     | (139   | )                                   | $      | (12                                                                 | )      | $      | (235    | )      | $      | (247   | )      |
| Savings and money market            |   |                                                                                                                      | (49    | )                                                                                                                     |   | (259                                                                | )      |                                  | (308   | )                                   |   | (111                                                                | )      |   | (567    | )      |   | (678   | )      |
| Time deposits                       |   |                                                                                                                      | 702    |                                                                                                                  |   | (839                                                                | )      |                                  | (137   | )                                   |   | 1,149                                                               |   |   | (1,869  | )      |   | (720   | )      |
| Other borrowed funds                |   |                                                                                                                      | (593   | )                                                                                                                     |   | 215                                                                 |   |                                  | (378   | )                                   |   | (1,407                                                              | )      |   | 379     |   |   | (1,028 | )      |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
| Total interest expense              |   |                                                                                                                      | 50     |                                                                                                                  |   | (1,012                                                              | )      |                                  | (962   | )                                   |   | (381                                                                | )      |   | (2,292  | )      |   | (2,673 | )      |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |
| Total change in net interest income |   | $                                                                                                                         | (1,244 | )                                                                                                                     | $      | 35                                                                  |   | $                                     | (1,209 | )                                   | $      | (2,051                                                              | )      | $      | (214    | )      | $      | (2,265 | )      |
|                                |   |                                                                                                                      |   |                                                                                                                  |   |                                                                |   |                                  |   |                                |   |                                                                |   |   |    |   |   |   |   |

**Provision for Loan and Lease Losses**

The Company recorded a provision for loan and lease losses of $9,000,000 for the three months ended June 30, 2009 and a total provision of $16,000,000 for the six months ended June 30, 2009, compared to 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 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 $9,000,000 and $16,000,000 provision for the three and six months ended June 30, 2009 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, 2009 of $22,119,000, or 3.40% of total loans and leases, is adequate at this time. The allowance for loan and lease losses was $11,327,000, or 1.63% of total loans and leases, at December 31, 2008. For further information regarding our allowance for loan and        lease losses, see “Allowance for Loan and Lease Losses” on page 27. 

22

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**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,** |   |
|                                                        |   | **2009**                        |   | **2008**                      |   | **2009** |   | **2008** |   |
|                                                        |   |                            |   |                          |   |     |   |     |   |
|                                                        |
| Service charges on deposit accounts                         |   | $                               | 1,640  |                          | $      | 1,894    |   | $        | 3,168  |   | $      | 3,610  |   |
| Other fees and charges                                      |   |                            | 1,079  |                          |   | 979      |   |     | 2,043  |   |   | 1,944  |   |
| Earnings on cash surrender value of life insurance policies |   |                            | 345    |                          |   | 312      |   |     | 681    |   |   | 642    |   |
| Gain on sale of loans                                       |   |                            | 128    |                          |   | 8        |   |     | 225    |   |   | 95     |   |
| Other                                                       |   |                            | 246    |                          |   | 284      |   |     | 485    |   |   | 677    |   |
|                                                        |   |                            |   |                          |   |     |   |     |   |   |   |   |   |
| Total noninterest income                                    |   | $                               | 3,438  |                          | $      | 3,477    |   | $        | 6,602  |   | $      | 6,968  |   |
|                                                        |   |                            |   |                          |   |     |   |     |   |   |   |   |   |

Noninterest income decreased $39,000, or 1.1%, to $3,438,000 for the three months ended June 30, 2009 from $3,477,000 for the three months ended June 30, 2008. Service charges on deposits decreased $254,000 to $1,640,000 for the three months ended June 30, 2009 compared to $1,894,000 for the same period in 2008 while other fees and charges increased by $100,000 to $1,079,000 for the three months ended June 30, 2009 compared to $979,000 for the same        period in 2008. The Company recorded $128,000 in gains on sales of mortgages for the three months ended June 30, 2009 compared to $8,000 in gains on sales of mortgages for the same period in 2008. Other noninterest income decreased $38,000 to $246,000 for the three months ended June 30, 2009 from $284,000 for the same period in 2008. 

Noninterest income decreased $366,000 to $6,602,000 for the six months ended June 30, 2009 from $6,968,000 for the same period in 2008. Service charges on deposit accounts decreased $442,000 to $3,168,000 for the six months ended June 30, 2009 compared to $3,610,000 for the same period in 2008, while other fees and charges increased by $99,000 to $2,043,000 for the six months ended June 30, 2009 compared to $1,944,000 for the same period in 2008. The        Company recorded $225,000 in gains on sales of mortgages for the six months ended June 30, 2009 compared to $95,000 in gains on sales of mortgages for the same period in 2008. 

**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,** |   |
|                            |   | **2009**                        |   | **2008**                      |   | **2009** |   | **2008** |   |
|                            |   |                            |   |                          |   |     |   |     |   |
|                            |
| Salaries and employee benefits  |   | $                               | 4,905  |                          | $      | 5,105    |   | $        | 9,969  |   | $      | 10,641  |   |
| FDIC and state assessments      |   |                            | 905    |                          |   | 116      |   |     | 1,316  |   |   | 161     |   |
| Occupancy expense               |   |                            | 801    |                          |   | 720      |   |     | 1,562  |   |   | 1,474   |   |
| Loan Expense                    |   |                            | 612    |                          |   | 124      |   |     | 805    |   |   | 243     |   |
| Other real estate owned expense |   |                            | 572    |                          |   | —  |   |     | 1,570  |   |   | — |   |
| Data processing expenses        |   |                            | 548    |                          |   | 575      |   |     | 1,129  |   |   | 1,107   |   |
| Equipment expense               |   |                            | 459    |                          |   | 488      |   |     | 928    |   |   | 953     |   |
| Professional services           |   |                            | 343    |                          |   | 312      |   |     | 670    |   |   | 599     |   |
| ATM expense                     |   |                            | 286    |                          |   | 262      |   |     | 571    |   |   | 489     |   |
| Marketing                       |   |                            | 142    |                          |   | 248      |   |     | 263    |   |   | 448     |   |
| Postage                         |   |                            | 136    |                          |   | 154      |   |     | 300    |   |   | 303     |   |
| Directors expense               |   |                            | 135    |                          |   | 130      |   |     | 267    |   |   | 353     |   |
| Operations expense              |   |                            | 131    |                          |   | 231      |   |     | 274    |   |   | 420     |   |
| Printing and supplies           |   |                            | 119    |                          |   | 148      |   |     | 256    |   |   | 346     |   |
| Amortization of intangibles     |   |                            | 37     |                          |   | 162      |   |     | 73     |   |   | 325     |   |
| Other                           |   |                            | 651    |                          |   | 802      |   |     | 1,164  |   |   | 1,520   |   |
|                            |   |                            |   |                          |   |     |   |     |   |   |   |    |   |
| Total noninterest expense       |   | $                               | 10,782 |                          | $      | 9,577    |   | $        | 21,117 |   | $      | 19,382  |   |
|                            |   |                            |   |                          |   |     |   |     |   |   |   |    |   |

Noninterest expense totaled $10,782,000 for the three months ended June 30, 2009, compared to $9,577,000 for the same period in 2008. This represents an increase of $1,205,000, or 12.6%, for the three months ended June 30, 2009 from the comparable period in 2008. Salaries and benefits decreased by $200,000 to $4,905,000 for the three months ended June 30, 2009 compared to $5,105,000 for the same period in 2008. Offsetting this decrease was the        Company’s FDIC and state assessments which increased $789,000 to $905,000 (which includes the FDIC special assessment of $406,000) for the three months ended June 30, 2009 compared to $116,000 for the same period in 2008. This increase is expected to continue as the Company has elevated levels of nonperforming loans which impact the factors used in the calculation. The increase in noninterest expense was also driven by the recording of loss on sale, writedowns and expenses of OREO        of $572,000 for the three months ended June 30, 2009 compared to zero for the same period in 2008. Most other expense categories for the three months ended June 30, 2009 experienced relatively small changes from the same respective period in 2008. The Company’s ratio of noninterest expense to average assets was 4.77% for the three months ended June 30, 2009 compared to 4.09% for the same period in 2008. The Company’s efficiency ratio was 95.0% and 76.3% for the three months        ended June 30, 2009 and 2008, respectively.

23

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Noninterest expense totaled $21,117,000 for the six months ended June 30, 2009, compared to $19,382,000 for the same period in 2008. This represents an increase of $1,735,000, or 9.0%, for the six months ended June 30, 2009 from the comparable period in 2008 due primarily to the increase of the recording of loss on sale, writedowns and expenses of OREO of $1,570,000 for the six months ended June 30, 2009 compared to the same period in 2008 as the        company continued its focus reducing the levels of nonperforming assets since December 31, 2008. The increase is also attributed to FDIC insurance premiums and special assessment of $862,000. Salaries and benefits decreased by $672,000 to $9,969,000 for the six months ended June 30, 2009 compared to $10,641,000 for the same period in 2008. Most other expense categories for the six months ended June 30, 2009 experienced relatively small changes from the same respective period in 2008.        The Company’s ratio of noninterest expense to average assets was 4.77% for the six months ended June 30, 2009 compared to 4.13% for the same period in 2008. The Company’s efficiency ratio was 93.4% and 77.0% for the six months ended June 30, 2009 and 2008, respectively. 

**Income Taxes**

The Company recorded a benefit for income taxes for the quarter ended June 30, 2009 of $4,346,000, resulting in an effective tax benefit rate of 51.5%, compared to $722,000, or an effective tax benefit rate of 32.4%, for the quarter ended June 30, 2008. The benefit for income taxes for the six month period ended June 30, 2009 was $7,302,000, resulting in an effective tax benefit rate of 50.4%, compared to $588,000, or an effective tax benefit rate of        32.4%, for the same period in 2008. The difference in the effective tax rate compared to the statutory tax rate (approximately 42.05%) is primarily the result of the Company’s investment in municipal securities and Company-owned life insurance policies whose income is exempt from Federal taxes. In addition, the Company receives certain tax benefits from the State of California Franchise Tax Board for operating and providing loans, as well as jobs, in designated ‘Enterprise        Zones’. 

As of June 30, 2009 and December 31, 2008, the Company had recorded net deferred income tax assets (which are included in other assets in the accompanying condensed consolidated balance sheets) of approximately $8,546,000. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given        economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Based        upon management’s analysis of available evidence, it has determined that it is “more likely than not” that all of the Company’s deferred income tax assets as of June 30, 2009 and December 31, 2008 will be fully realized and therefore no valuation allowance was recorded. 

**Financial Condition as of June 30, 2009 As Compared to December 31, 2008**

Total assets at June 30, 2009 increased $33,815,000, or 3.8%, to $913,366,000, compared to $879,551,000 at December 31, 2008. Loans and leases decreased $42,770,000, or 6.2%, to $650,652,000 at June 30, 2009 from $693,422,000 at December 31, 2008. Deposits increased $44,799,000, or 5.9%, from December 31, 2008 to $799,743,000 at June 30, 2009. Investment securities increased $61,203,000, or 80.1%, to $137,569,000 at June 30, 2009 from $76,366,000 at        December 31, 2008, and Federal funds sold increased to $29,395,000 at June 30, 2009 from zero at December 31, 2008. The increase in investment securities and Federal funds sold was due to an increase in deposits and a decrease in loans and leases for the first six months of 2009. Other borrowed funds decreased $3,516,000 as the Company did not have any other borrowed funds at June 30, 2009 compared to $3,516,000 at December 31, 2008. 

**Loan and Lease Portfolio**

Loans and leases, the Company’s major component of earning assets, decreased $42,770,000 during the first six months of 2009 to $650,652,000 at June 30, 2009 from $693,422,000 at December 31, 2008. Real estate construction loans decreased by $19,289,000, and commercial loans decreased by $18,932,000, while the remaining loan categories remained relatively unchanged from their December 31, 2008 balances. 

24

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The Company’s average loan to deposit ratio was 83.5% for the quarter ended June 30, 2009 compared to 99.8% for the same period in 2008. The decrease in the Company’s average loan to deposit ratio is driven by both the decrease in total average loans of $89,346,000 and the increase in total average deposits of $39,188,000. 

|                                |   |                                 |    |                                     |   |    |   |
|-------------------------------------|--------|--------------------------------------|---------|------------------------------------------|--------|---------|--------|
| **(in thousands)**                  |   | **June 30,                    2009** |    | **December 31,                    2008** |   |
|                                |   |                                 |    |                                     |   |
|                                |   |                                 |    |                                     |   |    |   |
| Commercial                          |   | $                                    | 73,097  |                                     | $      | 92,029  |   |
| Real estate - commercial            |   |                                 | 324,545 |                                     |   | 327,098 |   |
| Real estate - construction          |   |                                 | 117,466 |                                     |   | 136,755 |   |
| Real estate - mortgage              |   |                                 | 62,897  |                                     |   | 62,155  |   |
| Installment                         |   |                                 | 26,263  |                                     |   | 29,945  |   |
| Direct financing leases             |   |                                 | 870     |                                     |   | 1,035   |   |
| Other                               |   |                                 | 46,472  |                                     |   | 45,424  |   |
|                                |   |                                 |    |                                     |   |    |   |
|                                |   |                                 |    |                                     |   |    |   |
|                                |   |                                 | 651,610 |                                     |   | 694,441 |   |
|                                |   |                                 |    |                                     |   |    |   |
| Deferred loan fees, net             |   |                                 | (958    | )                                        |   | (1,019  | )      |
| Allowance for loan and lease losses |   |                                 | (22,119 | )                                        |   | (11,327 | )      |
|                                |   |                                 |    |                                     |   |    |   |
|                                |   |                                 |    |                                     |   |    |   |
|                                |   | $                                    | 628,533 |                                     | $      | 682,095 |   |
|                                |   |                                 |    |                                     |   |    |   |

**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. 

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 loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) totaled $44,304,000 at June 30, 2009, an increase of $25,368,000 from the December 31, 2008 balance of $18,936,000. Nonperforming loans as a percentage of total loans were 6.81% at June 30, 2009, compared to 2.73% at December 31, 2008. Of the $44,304,000 balance of nonperforming loans at June 30, 2009, a specific reserve of $6,883,000 has        been established. Related to the December 31, 2008 balance, specific reserves of $1,755,000 were established. If interest had been accruing on the nonperforming loans, such income would have approximated $969,000 and $1,056,000 for the six months ended June 30, 2009 and 2008, respectively. 

The overall level of nonperforming loans increased $24,378,000 to $44,304,000 at June 30, 2009 from $19,926,000 at March 31, 2009. During the second quarter of 2009, the Company added nineteen loans totaling $29,781,000 to nonperforming loans. These additions were offset by a reduction of $5,403,000 in nonperforming loans during the second quarter of 2009, primarily due to transfers to OREO of four properties totaling $3,362,000, collections received on        certain loans and charge-offs recorded. The addition to nonperforming loans was centered in two customer relationships consisting of eight loans totaling $24,018,000 in principal amount. The largest of the two relationships consists of five loans secured by real estate located in Sonoma County totaling $16,291,000, and an unsecured line of credit totaling $3,000,000. During the quarter ended June 30, 2009, a specific reserve of $1,426,000 was established for the five real estate secured        loans, and a $3,000,000 specific reserve was established for the line of credit. The five real estate secured loans consist of three residential land loans totaling $10,377,000, a residential subdivision project totaling $3,600,000, and a commercial real estate mixed use loan for $2,314,000. These five loans were performing loans at March 31, 2009. The borrower missed his regularly scheduled monthly payment in May, which led the Company to have a discussion with the borrower to        understand the situation. After the meeting, the Company determined that the borrower would likely not be able make payments on any of the secured loans, and then placed the loans on nonaccrual in June 2009 and ordered new appraisals on the properties. Specific reserves were established on these loans based on values indicated by the latest appraisals. The Company is working with the borrower to collect or collateralize the unsecured line of credit, but as of June 30, 2009, an agreement        was not in place so the Company established a reserve for the entire amount outstanding. 

25

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The second customer relationship mentioned above consists of two loans totaling $4,727,000 secured by real estate located in Sonoma County. These two loans were performing loans at March 31, 2009. The borrower missed his regularly scheduled monthly payment in May, after which the Company requested a meeting with the borrower in order to better understand and assess the situation. After the meeting, the Company determined that the borrower would likely        not be able make payments on either of the loans, and placed the loans on nonaccrual in June 2009. The first loan is a residential land loan for $2,802,000. A specific reserve of $226,000 has been established for this loan based on the current appraised value of the real estate. The second loan is a residential development project loan for $1,925,000. The Company charged-off $967,000 of this second loan during the second quarter of 2009 in order to write the loan down to its net        realizable value based on the current appraised value of the project. 

During the first quarter of 2009, as previously reported, the Company identified sixteen additional loans in the amount of $7,604,000 as nonaccrual loans. The addition was centered in three loans totaling $4,385,000 at March 31, 2009. These three loans remained on nonaccrual at June 30, 2009. The largest loan of this group is a $2,007,000 commercial loan secured by real estate located in Shasta County. No specific reserve currently exists on this loan.        The second loan in this group is a $1,465,000 residential development loan consisting of two single-family residences located in Napa County that are listed for sale. No specific reserve currently exists on this loan. The third loan in this group is a residential land loan secured by real estate located in Nevada County with a balance of $913,000 at March 31, 2009. During the second quarter of 2009, the Company received a new appraisal on this property and charged-off $302,000 to write        the loan down to its net realizable value of $611,000 at June 30, 2009. 

Additional information regarding nonperforming loans identified during 2008 and in the first quarter of 2009 is available in the Company’s Quarterly Report filed with the Commission on Form 10-Q for the period ended March 31, 2009, under the heading “Impaired, Nonaccrual, Past Due and Restructured Loans and Leases and Other Nonperforming Assets.” 

Gross loan and lease charge-offs for the second quarter of 2009 were $2,849,000 and recoveries totaled $81,000 resulting in net charge-offs of $2,768,000 compared to gross loan and lease charge-offs for the second quarter of 2008 of $4,591,000 and recoveries of $46,000 resulting in net charge-offs of $4,545,000. Gross charge-offs for the six months ended June 30, 2009 were $5,484,000 and recoveries totaled $276,000 resulting in net charge-offs of        $5,208,000, compared to gross charge-offs for the six months ended June 30, 2008 of $4,776,000 and recoveries of $98,000 resulting in net charge-offs of $4,678,000. 

Nonperforming assets (nonperforming loans and OREO) totaled $50,433,000 at June 30, 2009, an increase of approximately 72% or $21,089,000 from the December 31, 2008 balance of $29,344,000. The Company’s OREO property decreased $4,279,000 to $6,129,000 at June 30, 2009 compared to $10,408,000 at December 31, 2008. Nonperforming assets as a percentage of total assets were 5.52% at June 30, 2009 compared to 3.34% at December 31, 2008. 

The Company’s OREO properties increased $186,000 to $6,129,000 at June 30, 2009 from $5,943,000 at March 31, 2009. The increase was due to the addition of four properties totaling $3,362,000 during the second quarter of 2009. Three of the properties are from one relationship consisting of residential lot development properties and a residential development property with a single-family residence. The properties are all located in Solano County and        total $3,094,000. The fourth property moved into OREO is commercial land located in Sacramento County for $268,000. The additions to OREO were partially offset by the disposition of three OREO properties totaling $2,656,000, loss on the sale of OREO of $293,000, and the writedown of OREO of $227,000. 

26

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Nonperforming assets at June 30, 2009, and December 31, 2008, are summarized as follows (in thousands): 

|                                                                                                                  |   |                                 |    |                                     |   |    |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|------------------------------------------|--------|---------|--------|
|                                                                                                                  |   | **June 30,                    2009** |    | **December 31,                    2008** |   |
|                                                                                                                  |   |                                 |    |                                     |   |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
| Nonaccrual loans and leases                                                                                           |   | $                                    | 44,304  |                                     | $      | 18,936  |   |
| Loans and leases past due 90 days and accruing interest                                                               |   |                                 | — |                                     |   | — |   |
| Other real estate owned                                                                                               |   |                                 | 6,129   |                                     |   | 10,408  |   |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
| Total nonperforming assets                                                                                            |   | $                                    | 50,433  |                                     | $      | 29,344  |   |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
| Nonaccrual loans and leases to total gross loans and leases                                                           |   |                                 | 6.81    | %                                        |   | 2.73    | %      |
| Nonperforming loans and leases to total gross loans and leases                                                        |   |                                 | 6.81    | %                                        |   | 2.73    | %      |
| Total nonperforming assets to total assets                                                                            |   |                                 | 5.52    | %                                        |   | 3.34    | %      |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
| **Allowance for Loan and Lease Losses**                                                                               |   |                                 |    |                                     |   |    |   |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
| A summary of the allowance for loan and lease losses at June 30, 2009 and June 30, 2008 is as follows (in thousands): |
|                                                                                                                  |   |                                 |    |                                     |   |
|                                                                                                                  |   | **Six months ended June 30,**        |    |
|                                                                                                                  |   | **2009**                             |    | **2008**                                 |   |
|                                                                                                                  |   |                                 |    |                                     |   |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
| Balance beginning of period                                                                                           |   | $                                    | 11,327  |                                     | $      | 10,755  |   |
| Provision for loan and lease losses                                                                                   |   |                                 | 16,000  |                                     |   | 7,600   |   |
| Net (charge-offs) recoveries                                                                                          |   |                                 | (5,208  | )                                        |   | (4,678  | )      |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
| Balance end of period                                                                                                 |   | $                                    | 22,119  |                                     | $      | 13,677  |   |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
|                                                                                                                  |   |                                 |    |                                     |   |    |   |
| Allowance for loan and lease losses to total loans and leases                                                         |   |                                 | 3.40    | %                                        |   | 1.87    | %      |

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. 

|   |                                                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 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, 2009 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                              |

27

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|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                           | • | 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 $22,119,000 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 modest growth in commercial lending and commercial real estate and to a lesser extent consumer and real estate mortgage lending, while it anticipates a further decline in construction lending. As a result, future provisions 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 $44,799,000, or 5.9%, to $799,743,000 at June 30, 2009 compared to $754,944,000 at December 31, 2008. During the six months ended June 30, 2009, certificates of deposit increased $48,056,000, or 16.9%, savings increased $18,032,000, or 11.5%, while noninterest-bearing demand deposits decreased $17,558,000, or 10.9% and interest-bearing demand deposits decreased $3,731,000, or 2.5%. 

|                       |   |                                 |    |                                     |   |    |   |
|----------------------------|--------|--------------------------------------|---------|------------------------------------------|--------|---------|--------|
| **(in thousands)**         |   | **June 30,                    2009** |    | **December 31,                    2008** |   |
|                       |   |                                 |    |                                     |   |
|                       |   |                                 |    |                                     |   |    |   |
| Noninterest-bearing demand |   | $                                    | 144,190 |                                     | $      | 161,748 |   |
| Interest-bearing demand    |   |                                 | 148,142 |                                     |   | 151,873 |   |
| Savings                    |   |                                 | 175,121 |                                     |   | 157,089 |   |
| Time certificates          |   |                                 | 332,290 |                                     |   | 284,234 |   |
|                       |   |                                 |    |                                     |   |    |   |
|                       |   |                                 |    |                                     |   |    |   |
| Total deposits             |   | $                                    | 799,743 |                                     | $      | 754,944 |   |
|                       |   |                                 |    |                                     |   |    |   |

As a result of the increase in deposits during the six months ended June 30, 2009, the Company was able to repay the $3,516,000 in other borrowed funds outstanding at December 31, 2008, plus increase investment securities and Federal funds sold. 

**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 $10,000,000 as of June 30, 2009 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 $183,653,000 secured by certain loans and investment securities as of June 30, 2009. The Company also has a line of credit with Federal Reserve Bank of San Francisco (“FRB”) of $1,135,000 secured by first deeds of trust on eligible commercial real estate        loans and leases. As of June 30, 2009, $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 $189,558,000 and $103,498,000 (or 20.8% and 11.8% of total assets) at June 30, 2009 and December 31, 2008, respectively.

28

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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 $647,849,000 and $633,813,000 at June 30, 2009 and December 31, 2008, 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 continuously 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.

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.

29

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***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, 2008.

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 $70,078,000 as of June 30, 2009, as compared to $77,258,000 at December 31, 2008. The decrease was due primarily to the net loss of $7,196,000. Under current regulations, management believes that the Company meets all capital adequacy requirements and North Valley Bank was considered well capitalized at June 30, 2009 and December 31, 2008. 

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”). Pursuant to the EESA, the Secretary of the Treasury was authorized to establish the Troubled Asset Relief Program (“TARP”) and to invest in financial institutions and purchase mortgages, mortgage-backed securities and certain other financial instruments from financial institutions, in an aggregate amount up to $700        billion, for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the United States Department of the Treasury (the “UST”) announced a Capital Purchase Program (“CPP”) to invest up to $250 billion of this $700 billion amount in certain eligible U.S. banks, thrifts and their holding companies in the form of non-voting, senior preferred stock. Bank holding companies and banks eligible to participate as a Qualifying        Financial Institution (“QFI”) in the CPP will be expected to comply with certain standardized terms and conditions specified by the UST, including the following:

|   |   |                                                                                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Submission of an application to the QFI’s Federal banking regulator to obtain preliminary approval to participate in the CPP;                 |
|   |   |                                                                                                                                                |
|   | • | If the QFI receives preliminary approval, it will have 30 days within which to submit final documentation and fulfill any outstanding requirements; |

30

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|   |   |                                                                                                                                                                                                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | The minimum amount of capital eligible for purchase by the UST under the CPP is 1 percent of the Total Risk-Weighted Assets of the QFI and the maximum is the lesser of (i) an amount equal to 3 percent of the Total Risk-Weighted Assets of the QFI or (ii) $25 billion; |
|   |   |                                                                                                                                                                                                                                                                       |
|   | • | Capital acquired by a QFI under the CPP will be accorded Tier 1 capital treatment;                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                       |
|   | • | The preferred stock issued to the UST will be non-voting (except in the case of class votes) senior perpetual preferred stock that ranks senior to common stock and pari passu with existing preferred stock (except junior preferred stock);                              |
|   |   |                                                                                                                                                                                                                                                                       |
|   | • | In addition to the preferred stock, the UST will be issued warrants to acquire shares of the QFI’s common stock equal in value to 15 percent of the amount of capital purchased by the UST;                                                                          |
|   |   |                                                                                                                                                                                                                                                                       |
|   | • | Dividends on the preferred stock are payable to the UST at the rate of 5% per annum for the first 5 years and 9% per annum thereafter;                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                       |
|   | • | Subject to certain exceptions and other requirements, no redemption of the preferred stock is permitted during the first 3 years;                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                       |
|   | • | Certain restrictions on the payment of dividends to shareholders of the QFI shall remain in effect while the preferred stock purchased by the UST is outstanding;                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                       |
|   | • | Any repurchase of QFI shares will require the consent of the UST, subject to certain exceptions;                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                       |
|   | • | The preferred shares must not be subject to any contractual restrictions on transfer; and                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                       |
|   | • | The QFI must agree to be bound by certain executive compensation and corporate governance requirements and senior executive officers must agree to certain compensation restrictions.                                                                                      |

Whether participation in the CPP would be in the best interest of the Company and its shareholders is a matter to be addressed by the Company Board of Directors and would depend upon various factors including, without limitation, the requirements imposed upon the Company under the investment agreement and related documentation that is provided to a participating QFI and the evaluation of other factors including the terms and conditions summarized above,        assuming the Company receives approval to participate in the CPP. 

31

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

|                                     |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
|------------------------------------------|--------|------------|---------|-----------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                     |   | **Actual** |    | **For Capital Adequacy Purposes**             |   | **To be Well Capitalized Under                    Prompt Corrective Action                    Provisions** |   |
|                                     |   |       |    |                                          |   |                                                                                                       |   |
|                                     |   | **Amount** |    |       **Ratio** |   | **Minimum                    Amount**                                                                      |   | **Minimum                    Ratio** |   | **Minimum                    Amount** |   | **Minimum                    Ratio** |   |
|                                     |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |
| **Company**                              |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
| **As of June 30, 2009**                  |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 96,670  |                                          |   | 12.59                                                                                                      | %      | $                                    | 61,427 |                                  |   | 8.00                                 | %      |   | N/A    |   |   | N/A    |   |
| Tier 1 capital (to risk weighted assets) |   | $          | 79,896  |                                          |   | 10.41                                                                                                      | %      | $                                    | 30,700 |                                  |   | 4.00                                 | %      |   | N/A    |   |   | N/A    |   |
| Tier 1 capital (to average assets)       |   | $          | 79,896  |                                          |   | 8.98                                                                                                       | %      | $                                    | 35,588 |                                  |   | 4.00                                 | %      |   | N/A    |   |   | N/A    |   |
|                                     |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
| **As of December 31, 2008**              |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 104,125 |                                          |   | 12.75                                                                                                      | %      | $                                    | 65,333 |                                  |   | 8.00                                 | %      |   | N/A    |   |   | N/A    |   |
| Tier 1 capital (to risk weighted assets) |   | $          | 89,231  |                                          |   | 10.93                                                                                                      | %      | $                                    | 32,655 |                                  |   | 4.00                                 | %      |   | N/A    |   |   | N/A    |   |
| Tier 1 capital (to average assets)       |   | $          | 89,231  |                                          |   | 10.36                                                                                                      | %      | $                                    | 34,452 |                                  |   | 4.00                                 | %      |   | N/A    |   |   | N/A    |   |
|                                     |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
| **North Valley Bank**                    |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
| **As of June 30, 2009**                  |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 93,686  |                                          |   | 12.24                                                                                                      | %      | $                                    | 61,233 |                                  |   | 8.00                                 | %      | $      | 76,541 |   |   | 10.00  | %      |
| Tier 1 capital (to risk weighted assets) |   | $          | 83,966  |                                          |   | 10.97                                                                                                      | %      | $                                    | 30,617 |                                  |   | 4.00                                 | %      | $      | 45,925 |   |   | 6.00   | %      |
| Tier 1 capital (to average assets)       |   | $          | 83,966  |                                          |   | 9.46                                                                                                       | %      | $                                    | 35,504 |                                  |   | 4.00                                 | %      | $      | 44,379 |   |   | 5.00   | %      |
|                                     |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
| **As of December 31, 2008**              |   |       |    |                                          |   |                                                                                                       |   |                                 |   |                                  |   |                                 |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 102,906 |                                          |   | 12.61                                                                                                      | %      | $                                    | 65,285 |                                  |   | 8.00                                 | %      | $      | 81,607 |   |   | 10.00  | %      |
| Tier 1 capital (to risk weighted assets) |   | $          | 92,693  |                                          |   | 11.36                                                                                                      | %      | $                                    | 32,638 |                                  |   | 4.00                                 | %      | $      | 48,958 |   |   | 6.00   | %      |
| Tier 1 capital (to average assets)       |   | $          | 92,693  |                                          |   | 10.79                                                                                                      | %      | $                                    | 34,363 |                                  |   | 4.00                                 | %      | $      | 42,953 |   |   | 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, 2009 compared to December 31, 2008. Please see discussion under the caption “Interest Rate Sensitivity” on page 29. 

**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, 2009. 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, 2009 that has materially affected or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

32

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**PART II - OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

There are no material legal proceedings pending against the Company or against any of its property. The Company, because of the nature of its business, is generally subject to various legal actions, threatened or filed, which involve ordinary, routine litigation incidental to its business. Some of the pending cases seek punitive damages in addition to other relief. Although the amount of the ultimate exposure, if any, cannot be determined at this time,        the Company does not expect that the final outcome of threatened or filed suits will have a materially adverse effect on its consolidated financial position. 

**ITEM 1A. RISK FACTORS**

There have been no material changes from risk factors as previously disclosed by the Company in its response to Item 1A of Part 1 of Form 10-K for the fiscal year ended December 31, 2008. 

**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 28, 2009. 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. |
|   |                                                                                                                                                                                                                                                                                                                               |

33

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|   |                                                                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------|
| **2.** | **To ratify the appointment of Perry-Smith LLP as the Company’s Independent Registered Public Accounting Firm for 2009.** |

The voting results at the 2009 Annual Meeting of Shareholders are presented below: 

|   |                                  |   |      |   |         |
|--------|---------------------------------------|--------|-----------|--------|--------------|
|   | **Proposal 1:**                       |   |      |   |         |
|   |                                  |   |      |   |         |
|   | **Nominees**                          |   | **For**   |   | **Withheld** |
|   |                                       |   |           |   |              |
|   | Michael J. Cushman                    |   | 5,339,059 |   | 1,013,861    |
|   | William W. Cox                        |   | 5,149,307 |   | 1,203,613    |
|   | Royce L. Friesen                      |   | 5,082,413 |   | 1,270,507    |
|   | Dante W. Ghidinelli                   |   | 5,367,786 |   | 985,134      |
|   | Kevin D. Hartwick                     |   | 5,366,840 |   | 986,080      |
|   | Roger B. Kohlmeier                    |   | 5,304,936 |   | 1,047,984    |
|   | Martin A. Mariani                     |   | 5,149,073 |   | 1,203,847    |
|   | Dolores M. Vellutini                  |   | 5,303,376 |   | 1,049,544    |
|   | J. M. (“Mike”) Wells, Jr. |   | 5,074,009 |   | 1,278,911    |

|   |            |   |      |        |        |
|--------|-----------------|--------|-----------|-------------|-------------|
|   | **Proposal 2:** |   |      |        |        |
|   |            |   | **For**   | **Against** | **Abstain** |
|   |            |   |           |             |             |
|   | Perry-Smith LLP |   | 5,881,459 | 56,982      | 414,479     |

**ITEM 5. OTHER INFORMATION**

None 

**ITEM 6. EXHIBITS**

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

34

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**SIGNATURES**

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

|                     |
|--------------------------|
| **NORTH VALLEY BANCORP** |
|                     |
| (Registrant)             |

|   |            |
|--------|-----------------|
| Date   | August 12, 2009 |

|                                                             |   |
|------------------------------------------------------------------|--------|
| 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) |   |

35

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