---

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

FORM 10-Q

|           |                                                                                                   
|---------- | --------------------------------------------------------------------------------------------------
|(Mark One)
|x          | Quarterly
 Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934          
|           | For the
 period ended March 31, 2008.                                                             
|           |                                                                                                   
|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 x        
| |                            |                             
| | Non-accelerated
 filer o   | Smaller
 reporting company o

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

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

Common Stock 
7,422,366 shares as of May 8, 2008.

---



INDEX

NORTH VALLEY BANCORP AND SUBSIDIARIES

|                              |                                                                                                     |   
|----------------------------- | --------------------------------------------------------------------------------------------------- | --
|PART I. FINANCIAL INFORMATION | 3                                                                                                  
|                              |                                                                                                     |   
|Item 1.                       | Financial Statements (Unaudited)                                                                    | 3 
|                              |                                                                                                     |   
|                              | Condensed Consolidated Balance SheetsMarch 31, 2008 and December 31,
 2007                         | 3 
|                              |                                                                                                     |   
|                              | Condensed Consolidated Statements of IncomeFor the three months
 ended March 31, 2008 and 2007     | 4 
|                              |                                                                                                     |   
|                              | Condensed Consolidated Statements of Cash FlowsFor the three months
 ended March 31, 2008 and 2007 | 5 
|                              |                                                                                                     |   
|                              | Notes to Condensed Consolidated Financial Statements                                                | 6 
|                              |                                                                                                     |   
|Item 2.                       | Managements Discussion and Analysis of Financial Condition and
 Results of Operations              | 12
|                              |                                                                                                     |   
|Item 3.                       | Quantitative and Qualitative Disclosures about Market Risk                                          | 24
|                              |                                                                                                     |   
|Item 4.                       | Controls and Procedures                                                                             | 24
|                              |                                                                                                     |   
|PART II. OTHER INFORMATION    | 25                                                                                                 
|                              |                                                                                                     |   
|Item 1.                       | Legal Proceedings                                                                                   | 25
|                              |                                                                                                     |   
|Item 1A.                      | Risk Factors                                                                                        | 25
|                              |                                                                                                     |   
|Item 2.                       | Unregistered Sales of Equity Securities and Use of Proceeds                                         | 25
|                              |                                                                                                     |   
|Item 3.                       | Defaults Upon Senior Securities                                                                     | 25
|                              |                                                                                                     |   
|Item 4.                       | Submission of Matters to a Vote of Security Holders                                                 | 25
|                              |                                                                                                     |   
|Item 5.                       | Other Information                                                                                   | 25
|                              |                                                                                                     |   
|Item 6.                       | Exhibits                                                                                            | 25
|                              |                                                                                                     |   
|SIGNATURES                    | 26                                                                                                 

2

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

|                                                                                                                                        |  |                 |         |                    |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------------------ | - | ------- | -
|                                                                                                                                        |  | March 31,
 2008 |         | December 31,
 2007 |  
|                                                                                                                                        |  |                 |         |                    |  
|ASSETS                                                                                                                                  |  |                 |         |                    |   |         |  
|Cash and cash equivalents:                                                                                                              |  |                 |         |                    |   |         |  
|Cash and due from banks                                                                                                                 |  | $               | 28,793  |                    | $ | 28,569  |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Total cash and cash equivalents                                                                                                         |  |                 | 28,793  |                    |   | 28,569  |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Investment securities available for sale,
 at fair value                                                                                |  |                 | 98,586  |                    |   | 104,341 |  
|Investment securities held to maturity, at
 amortized cost                                                                              |  |                 | 31      |                    |   | 31      |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Loans and leases                                                                                                                        |  |                 | 750,588 |                    |   | 746,253 |  
|Less: Allowance for loan and lease losses                                                                                               |  |                 | (13,022 | )                  |   | (10,755 | )
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Net loans and leases                                                                                                                    |  |                 | 737,566 |                    |   | 735,498 |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Premises and equipment, net                                                                                                             |  |                 | 12,066  |                    |   | 12,431  |  
|Accrued interest receivable                                                                                                             |  |                 | 3,246   |                    |   | 3,912   |  
|Other real estate owned                                                                                                                 |  |                 | 902     |                    |   | 902     |  
|FHLB and FRB stock and other securities                                                                                                 |  |                 | 6,843   |                    |   | 6,238   |  
|Bank-owned life insurance policies                                                                                                      |  |                 | 30,797  |                    |   | 30,526  |  
|Core deposit intangibles, net                                                                                                           |  |                 | 1,073   |                    |   | 1,236   |  
|Goodwill                                                                                                                                |  |                 | 15,187  |                    |   | 15,187  |  
|Other assets                                                                                                                            |  |                 | 10,391  |                    |   | 10,148  |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|TOTAL ASSETS                                                                                                                            |  | $               | 945,481 |                    | $ | 949,019 |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                    |  |                 |         |                    |   |         |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|LIABILITIES:                                                                                                                            |  |                 |         |                    |   |         |  
|Deposits:                                                                                                                               |  |                 |         |                    |   |         |  
|Noninterest-bearing                                                                                                                     |  | $               | 158,529 |                    | $ | 167,615 |  
|Interest-bearing                                                                                                                        |  |                 | 604,220 |                    |   | 569,124 |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Total deposits                                                                                                                          |  |                 | 762,749 |                    |   | 736,739 |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Other borrowed funds                                                                                                                    |  |                 | 58,395  |                    |   | 87,192  |  
|Accrued interest payable and other
 liabilities                                                                                         |  |                 | 10,857  |                    |   | 11,656  |  
|Subordinated debentures                                                                                                                 |  |                 | 31,961  |                    |   | 31,961  |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Total liabilities                                                                                                                       |  |                 | 863,962 |                    |   | 867,548 |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Commitments and Contingencies (Note G)                                                                                                  |  |                 |         |                    |   |         |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|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 7,422,366 and 7,413,066 at March 31, 2008 and
 December 31, 2007 |  |                 | 40,911  |                    |   | 40,642  |  
|Retained earnings                                                                                                                       |  |                 | 41,751  |                    |   | 42,212  |  
|Accumulated other comprehensive loss, net
 of tax                                                                                       |  |                 | (1,143  | )                  |   | (1,383  | )
|                                                                                                                                        |  |                 |         |                    |   |         |  
|Total stockholders equity                                                                                                              |  |                 | 81,519  |                    |   | 81,471  |  
|                                                                                                                                        |  |                 |         |                    |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                              |  | $               | 945,481 |                    | $ | 949,019 |  
|                                                                                                                                        |  |                 |         |                    |   |         |  

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

3

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

|                                                               |  |                                      |        |      |   |        | 
|-------------------------------------------------------------- |  | ------------------------------------ | ------ | ---- | - | ------ | 
|                                                               |  | For the three months ended March 31, |       
|                                                               |  | 2008                                 |        | 2007 |  
|                                                               |  |                                      |        |      |  
|INTEREST INCOME:                                               |  |                                      |        |      |   |        | 
|Interest and fees on loans and leases                          |  | $                                    | 12,976 |      | $ | 12,824 | 
|Interest on investments:                                       |  |                                      |        |      |   |        | 
|Taxable interest income                                        |  |                                      | 934    |      |   | 1,286  | 
|Nontaxable interest income                                     |  |                                      | 235    |      |   | 249    | 
|Interest on Federal funds sold and
 repurchase agreements      |  |                                      | 5      |      |   | 137    | 
|                                                               |  |                                      |        |      |   |        | 
|Total interest income                                          |  |                                      | 14,150 |      |   | 14,496 | 
|                                                               |  |                                      |        |      |   |        | 
|                                                               |  |                                      |        |      |   |        | 
|INTEREST EXPENSE:                                              |  |                                      |        |      |   |        | 
|Deposits                                                       |  |                                      | 3,828  |      |   | 3,256  | 
|Subordinated debentures                                        |  |                                      | 595    |      |   | 608    | 
|Other borrowings                                               |  |                                      | 599    |      |   | 295    | 
|                                                               |  |                                      |        |      |   |        | 
|Total interest expense                                         |  |                                      | 5,022  |      |   | 4,159  | 
|                                                               |  |                                      |        |      |   |        | 
|                                                               |  |                                      |        |      |   |        | 
|NET INTEREST INCOME                                            |  |                                      | 9,128  |      |   | 10,337 | 
|                                                               |  |                                      |        |      |   |        | 
|PROVISION FOR LOAN AND LEASE LOSSES                            |  |                                      | 2,400  |      |   |       | 
|                                                               |  |                                      |        |      |   |        | 
|                                                               |  |                                      |        |      |   |        | 
|NET INTEREST INCOME AFTER PROVISION FOR
 LOAN AND LEASE LOSSES |  |                                      | 6,728  |      |   | 10,337 | 
|                                                               |  |                                      |        |      |   |        | 
|                                                               |  |                                      |        |      |   |        | 
|NONINTEREST INCOME:                                            |  |                                      |        |      |   |        | 
|Service charges on deposit accounts                            |  |                                      | 1,716  |      |   | 1,644  | 
|Other fees and charges                                         |  |                                      | 965    |      |   | 892    | 
|Earnings on cash surrender value of life
 insurance policies   |  |                                      | 330    |      |   | 311    | 
|Gain on sale of loans                                          |  |                                      | 88     |      |   | 53     | 
|Gain on sales or calls of investment
 securities               |  |                                      | 1      |      |   |       | 
|Other                                                          |  |                                      | 391    |      |   | 234    | 
|                                                               |  |                                      |        |      |   |        | 
|Total noninterest income                                       |  |                                      | 3,491  |      |   | 3,134  | 
|                                                               |  |                                      |        |      |   |        | 
|                                                               |  |                                      |        |      |   |        | 
|NONINTEREST EXPENSES:                                          |  |                                      |        |      |   |        | 
|Salaries and employee benefits                                 |  |                                      | 5,536  |      |   | 5,559  | 
|Occupancy expense                                              |  |                                      | 754    |      |   | 769    | 
|Furniture and equipment expense                                |  |                                      | 465    |      |   | 535    | 
|Other                                                          |  |                                      | 3,050  |      |   | 3,367  | 
|                                                               |  |                                      |        |      |   |        | 
|Total noninterest expenses                                     |  |                                      | 9,805  |      |   | 10,230 | 
|                                                               |  |                                      |        |      |   |        | 
|                                                               |  |                                      |        |      |   |        | 
|INCOME BEFORE PROVISION FOR INCOME TAXES                       |  |                                      | 414    |      |   | 3,241  | 
|                                                               |  |                                      |        |      |   |        | 
|PROVISION FOR INCOME TAXES                                     |  |                                      | 134    |      |   | 1,037  | 
|                                                               |  |                                      |        |      |   |        | 
|                                                               |  |                                      |        |      |   |        | 
|NET INCOME                                                     |  | $                                    | 280    |      | $ | 2,204  | 
|                                                               |  |                                      |        |      |   |        | 
|                                                               |  |                                      |        |      |   |        | 
|Per Share Amounts                                              |  |                                      |        |      |   |        | 
|Basic Earnings Per Share                                       |  | $                                    | 0.04   |      | $ | 0.30   | 
|                                                               |  |                                      |        |      |   |        | 
|Diluted Earnings Per Share                                     |  | $                                    | 0.04   |      | $ | 0.29   | 
|                                                               |  |                                      |        |      |   |        | 
|Cash Dividends Per Common Share                                |  | $                                    | 0.10   |      | $ | 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 CASH FLOWS (Unaudited)
|(In
 thousands except per share data)                       
|                                                            

|                                                                                   |  |                                      |         |      |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | ---- | - | ------- | -
|                                                                                   |  | For the three months ended March 31, |        
|                                                                                   |  | 2008                                 |         | 2007 |  
|                                                                                   |  |                                      |         |      |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                                      |         |      |   |         |  
|Net Income                                                                         |  | $                                    | 280     |      | $ | 2,204   |  
|Adjustments to reconcile net income to net cash provided by operating
 activities: |  |                                      |         |      |   |         |  
|Depreciation and amortization                                                      |  |                                      | 513     |      |   | 559     |  
|Amortization of premium on securities                                              |  |                                      | 6       |      |   | 29      |  
|Amortization of core deposit intangible                                            |  |                                      | 163     |      |   | 162     |  
|Provision for loan and lease losses                                                |  |                                      | 2,400   |      |   |        |  
|Gain on sales or calls of investment
securities                                    |  |                                      | (1      | )    |   |        |  
|Gain on sale of loans                                                              |  |                                      | (88     | )    |   | (53     | )
|Gain on sale of premises and equipment                                             |  |                                      | (1      | )    |   |        |  
|FHLB stock dividends                                                               |  |                                      | (50     | )    |   | 104     |  
|Stock-based compensation expense                                                   |  |                                      | 178     |      |   | 157     |  
|Excess tax benefit from exercise of stock
options                                  |  |                                      | (18     | )    |   | (42     | )
|Effect of changes in:                                                              |  |                                      |         |      |   |         |  
|Accrued interest receivable                                                        |  |                                      | 666     |      |   | 345     |  
|Other assets                                                                       |  |                                      | (682    | )    |   | (467    | )
|Accrued interest payable and other
liabilities                                     |  |                                      | (781    | )    |   | 582     |  
|                                                                                   |  |                                      |         |      |   |         |  
|Net cash provided by operating activities                                          |  |                                      | 2,585   |      |   | 3,580   |  
|                                                                                   |  |                                      |         |      |   |         |  
|                                                                                   |  |                                      |         |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                                      |         |      |   |         |  
|Proceeds from maturities/calls of available for sale
securities                    |  |                                      | 6,158   |      |   | 9,623   |  
|Purchases of FHLB and FRB stock and other
securities                               |  |                                      | (555    | )    |   | (158    | )
|Net (decrease) increase in loans and
leases                                        |  |                                      | (4,380  | )    |   | 9,268   |  
|Purchases of premises and equipment                                                |  |                                      | (147    | )    |   | (600    | )
|                                                                                   |  |                                      |         |      |   |         |  
|Net cash provided by investing activities                                          |  |                                      | 1,076   |      |   | 18,133  |  
|                                                                                   |  |                                      |         |      |   |         |  
|                                                                                   |  |                                      |         |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                                      |         |      |   |         |  
|Net increase in deposits                                                           |  |                                      | 26,010  |      |   | 10,411  |  
|Net decrease in other borrowed funds                                               |  |                                      | (28,797 | )    |   | (12,500 | )
|Cash dividends paid                                                                |  |                                      | (741    | )    |   | (734    | )
|Exercise of stock options, including tax
benefit                                   |  |                                      | 91      |      |   | 502     |  
|                                                                                   |  |                                      |         |      |   |         |  
|Net cash used in financing activities                                              |  |                                      | (3,437  | )    |   | (2,321  | )
|                                                                                   |  |                                      |         |      |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |  |                                      | 224     |      |   | 19,392  |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                       |  |                                      | 28,569  |      |   | 41,496  |  
|                                                                                   |  |                                      |         |      |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |  | $                                    | 28,793  |      | $ | 60,888  |  
|                                                                                   |  |                                      |         |      |   |         |  
|                                                                                   |  |                                      |         |      |   |         |  
|Supplemental Disclosures of Cash Flow Information                                  |  |                                      |         |      |   |         |  
|Cash paid during the year for:                                                     |  |                                      |         |      |   |         |  
|Interest                                                                           |  | $                                    | 5,414   |      | $ | 5,148   |  

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

5

---



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

NOTE A  BASIS OF PRESENTATION

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

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

The preparation of condensed
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

Management has determined
that since all of the banking products and services offered by the Company are
available in each branch of NVB, all branches are located within the same
economic environment and management does not allocate resources based on the
performance of different lending or transaction activities, it is appropriate
to aggregate NVB branches and report them as a single operating segment. No
single customer accounts for more than 10 percent of revenues for the Company
or NVB.

NOTE B  INVESTMENT SECURITIES

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

|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|----------------------------------------------- |  | --------------- | ------- | ------------------------ | - | ------------------------- |  | --------------------- | ------ | - | - | ------- | 
|                                                |  | Amortized
 Cost |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Estimated
 Fair Value |       
|                                                |  |                 |         |                          |   |                           |  |                       |       
|Available for sale securities:                  |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|March 31, 2008                                  |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|Obligations of U.S. government agencies         |  | $               | 2,500   |                          | $ | 87                        |  | $                     |       |   | $ | 2,587   | 
|Obligations of state and political
subdivisions |  |                 | 20,351  |                          |   | 598                       |  |                       | (25    | ) |   | 20,924  | 
|Mortgage-backed securities                      |  |                 | 64,483  |                          |   | 105                       |  |                       | (742   | ) |   | 63,846  | 
|Corporate debt securities                       |  |                 | 6,008   |                          |   |                          |  |                       | (1,368 | ) |   | 4,640   | 
|Equity securities                               |  |                 | 6,284   |                          |   | 305                       |  |                       |       |   |   | 6,589   | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|                                                |  | $               | 99,626  |                          | $ | 1,095                     |  | $                     | (2,135 | ) | $ | 98,586  | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|December 31, 2007                               |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|Obligations of U.S. government agencies         |  | $               | 3,499   |                          | $ | 46                        |  | $                     | (11    | ) | $ | 3,534   | 
|Obligations of state and political
subdivisions |  |                 | 20,563  |                          |   | 526                       |  |                       | (11    | ) |   | 21,078  | 
|Mortgage-backed securities                      |  |                 | 69,433  |                          |   | 57                        |  |                       | (1,350 | ) |   | 68,140  | 
|Corporate debt securities                       |  |                 | 6,009   |                          |   |                          |  |                       | (670   | ) |   | 5,339   | 
|Equity securities                               |  |                 | 6,284   |                          |   |                          |  |                       | (34    | ) |   | 6,250   | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|                                                |  | $               | 105,788 |                          | $ | 629                       |  | $                     | (2,076 | ) | $ | 104,341 | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|Held to maturity securities:                    |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|March 31, 2008                                  |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|Mortgage-backed securities                      |  | $               | 31      |                          | $ |                          |  | $                     |       |   | $ | 31      | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|December 31, 2007                               |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 
|Mortgage-backed securities                      |  | $               | 31      |                          | $ |                          |  | $                     |       |   | $ | 31      | 
|                                                |  |                 |         |                          |   |                           |  |                       |        |   |   |         | 

6

---



For the three months ended
March 31, 2008 there was $1,000 in gross realized gains on sales or calls of
available for sale securities. For the three months ended March 31, 2007 there
were no gross realized gains on sales or calls of available for sale
securities. For the three months ended March 31, 2008 and 2007 there were no
gross realized losses on sales or calls of available for sale securities. There
were no sales or transfers of held to maturity securities for the three months
ended March 31, 2008 and 2007.

At March 31, 2008 and
December 31, 2007, securities having fair value amounts of approximately
$64,051,000 and $68,410,000 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 March 31, 2008, the
Company held $49,659,000 of available for sale investment securities in an
unrealized loss position of which $26,203,000 were in an unrealized loss
position for less than twelve months and $23,456,000 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.

NOTE C  STOCK-BASED COMPENSATION

Stock Option Plans

At March 31, 2008, the
Company had three shareholder approved stock-based compensation plans: the
North Valley Bancorp 1989 Director Stock Option Plan, the 1998 Employee Stock
Incentive Plan and the 1999 Director Stock Option Plan. The plans do not
provide for the settlement of awards in cash and new shares are issued upon
exercise of the options. Under the North Valley Bancorp 1989 Director Stock
Option Plan each member of the Board of Directors, including employees who are
Directors, automatically received every January a non-statutory stock option to
purchase 1,000 shares of the Corporations Common Stock. Effective upon
adoption of the North Valley Bancorp 1999 Director Stock Option Plan, no
further grants of options have been made or will be made under the 1989
Director Plan. Pursuant to the 1989 Director Plan, there were outstanding
options to purchase 1,200 shares of Common Stock at March 31, 2008. The North
Valley Bancorp 1998 Employee Stock Incentive Plan provides for awards in the
form of options (which may constitute incentive stock options or non-statutory
stock options 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 538,540 shares of Corporation Common Stock
at March 31, 2008. As provided in the Stock Incentive Plan, the authorization
to award incentive stock options terminated on February 19, 2008. The 1999
Director Stock Option Plan replaced the existing North Valley Bancorp 1989
Director Stock Option Plan. As of March 31, 2008, there were options
outstanding under the 1999 Director Stock Option Plan for the purchase of
307,251 shares of Common Stock. Thus, a total of 225,767 shares of Common Stock were
available for the grant of additional options under the 1999 Director Stock
Option Plan at March 31, 2008.

7

---



Stock Option Compensation

There were
135,899 and 63,613 options granted in the three month periods ended March 31,
2008 and 2007, respectively. The weighted average grant date fair value of
options granted for the three month period ended March 31, 2008 and 2007 was
$3.03 and $5.26, respectively. For the three month periods ended March 31, 2008
and 2007, the compensation cost recognized for stock option compensation was
$139,000 and $112,000, respectively. Director stock grant expense for the three
month periods ended March 31, 2008 and 2007 was $39,000 and $45,000,
respectively. The recognized tax benefit for stock option compensation expense
was $18,000 and $42,000, for the three month periods ended March 31, 2008 and
2007, respectively. At March 31, 2008, the total unrecognized compensation cost
related to stock-based awards granted to employees under the Companys stock
option plans was $631,000. This cost will be amortized on a straight-line basis
over a weighted average period of approximately 1.7 years and will be adjusted
for subsequent changes in estimated forfeitures.

The fair value
of each option is estimated on the date of grant with the following
assumptions:

|                                        |  |                              |            |      |   |            |  
|--------------------------------------- |  | ---------------------------- | ---------- | ---- | - | ---------- | -
|                                        |  | Three months ended March 31, |           
|                                        |  |                              |           
|                                        |  | 2008                         |            | 2007 |  
|                                        |  |                              |            |      |  
|                                        |  |                              |            |      |   |            |  
|Average
 dividend yield                 |  |                              | 3.08       | %    |   | 2.25       | %
|Expected
 volatility                    |  |                              | 27.08      | %    |   | 23.51      | %
|Average
 risk-free interest rate        |  |                              | 3.67       | %    |   | 4.85       | %
|Expected
 option life                   |  |                              | 6.52 years |      |   | 6.25 years |  
|Weighted
 average grant date fair value |  | $                            | 3.03       |      | $ | 5.26       |  

Stock-Based Compensation

Under the
Companys stock option plans as of March 31, 2008, 225,767 shares of the
Companys common stock are available for future grants to directors and
employees of the Company. Under the Director Plan, options may not be granted
at a price less than 85% of fair market value at the date of the grant. Under
the Employee Plan, options may not be granted at a price less than the fair
market value at the date of the grant. Under both plans, options may be
exercised over a ten year term and vest ratably over four years from the date
of the grant. A summary of outstanding stock options follows:

|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|---------------------------------------------- |  | ------ | ------- | ------------------------------- | - | ------------------------------------------- |  | -------------------- | -------- | -------------------------------- | - | ----------- |  | - | ----- | 
|                                               |  | Shares |         | Weighted
Average
Exercise
Price |   | Weighted
Average
Remaining
Contractual
Term |  | Exercise
Price
Range |          | Aggregate
Intrinsic
Value ($000) |  
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |  
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |  
|Outstanding at January 1, 2008                 |  |        | 723,642 |                                 | $ | 10.75                                       |  |                      | 4 years  |                                  | $ | 5.36-24.75  |  |   |       | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|Granted                                        |  |        | 135,899 |                                 |   | 13.01                                       |  |                      |          |                                  | $ | 13.01       |  |   |       | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|Exercised                                      |  |        | (9,300  | )                               |   | 7.82                                        |  |                      |          |                                  | $ | 6.87-8.27   |  |   |       | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|Expired or Forfeited                           |  |        | (3,250  | )                               |   | 17.31                                       |  |                      |          |                                  | $ | 16.38-20.62 |  |   |       | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|Outstanding at March 31, 2008                  |  |        | 846,991 |                                 | $ | 11.12                                       |  |                      | 4
 years |                                  | $ | 5.36-24.75  |  | $ | 1,998 | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|Fully vested and exercisable at March 31, 2008 |  |        | 666,714 |                                 | $ | 9.97                                        |  |                      | 3
 years |                                  | $ | 5.36-24.75  |  | $ | 1,998 | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 
|Options expected to vest                       |  |        | 180,277 |                                 | $ | 15.34                                       |  |                      | 9
 years |                                  | $ | 13.01-24.75 |  | $ |      | 
|                                               |  |        |         |                                 |   |                                             |  |                      |          |                                  |   |             |  |   |       | 

The aggregate
intrinsic value is calculated as the difference between the exercise price of
the underlying awards and the quoted price of the Companys common stock as of
March 31, 2008. The intrinsic value of options exercised during the three
months ended March 31, 2008 and 2007 totaled $44,000 and $864,000,
respectively.

8

---



NOTE D  COMPREHENSIVE INCOME

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

|                                        |  |                              |     |      |   |       | 
|--------------------------------------- |  | ---------------------------- | --- | ---- | - | ----- | 
|                                        |  | Three months ended March 31, |    
|                                        |  | 2008                         |     | 2007 |  
|                                        |  |                              |     |      |  
|                                        |  |                              |     |      |   |       | 
|Net income                              |  | $                            | 280 |      | $ | 2,204 | 
|Other comprehensive income, net of tax: |  |                              |     |      |   |       | 
|Holding gain arising during period      |  |                              | 240 |      |   | 490   | 
|                                        |  |                              |     |      |   |       | 
|Total comprehensive income              |  | $                            | 520 |      | $ | 2,694 | 
|                                        |  |                              |     |      |   |       | 

NOTE E  IMPAIRED AND NONPERFORMING LOANS AND
LEASES

At March 31,
2008 and December 31, 2007, the recorded investment in impaired loans and
leases was approximately $25,750,000 and $1,608,000, respectively. Of the March
31, 2008 balance, there was a related valuation allowance of $4,178,000 and of
the December 31, 2007 balance, there was a related valuation allowance of
$83,000. If interest had been accruing on the nonperforming loans, such income
would have approximated $526,000 for the three months ended March 31, 2008. The
increase in nonperforming loans is centered in four real estate projects with
loans totaling $24,047,000 at March 31, 2008.

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

|                                                                |  |                 |        |                    |   |       |  
|--------------------------------------------------------------- |  | --------------- | ------ | ------------------ | - | ----- | -
|                                                                |  | March 31,
 2008 |        | December 31,
 2007 |  
|                                                                |  |                 |        |                    |  
|                                                                |  |                 |        |                    |   |       |  
|Nonaccrual loans and leases                                     |  | $               | 25,750 |                    | $ | 1,608 |  
|Loans and leases past due 90 days and
 accruing interest        |  |                 |       |                    |   | 156   |  
|Other real estate owned                                         |  |                 | 902    |                    |   | 902   |  
|                                                                |  |                 |        |                    |   |       |  
|Total nonperforming assets                                      |  | $               | 26,652 |                    | $ | 2,666 |  
|                                                                |  |                 |        |                    |   |       |  
|                                                                |  |                 |        |                    |   |       |  
|Nonaccrual loans and leases to total gross
 loans and leases    |  |                 | 3.43   | %                  |   | 0.22  | %
|Nonperforming loans and leases to total
 gross loans and leases |  |                 | 3.43   | %                  |   | 0.24  | %
|Total nonperforming assets to total assets                      |  |                 | 2.82   | %                  |   | 0.28  | %
|                                                                |  |                 |        |                    |   |       |  

NOTE F  EARNINGS PER SHARE

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

9

---



There was no
difference in the numerator, net income, used in the calculation of basic
earnings per share and diluted earnings per share. The denominator used in the
calculation of basic earnings per share and diluted earnings per share for the
three month periods ended March 31, 2008 and 2007 is reconciled as follows (in
thousands, except per share amounts):

|                                                                         |  |                              |       |      |   |       | 
|------------------------------------------------------------------------ |  | ---------------------------- | ----- | ---- | - | ----- | 
|                                                                         |  | Three months ended March 31, |      
|                                                                         |  | 2008                         |       | 2007 |  
|                                                                         |  |                              |       |      |  
|Calculation of basic earnings per share:                                 |  |                              |       |      |   |       | 
|Numerator  net income                                                   |  | $                            | 280   |      | $ | 2,204 | 
|Denominator  weighted average common
 shares outstanding                |  |                              | 7,417 |      |   | 7,340 | 
|                                                                         |  |                              |       |      |   |       | 
|                                                                         |  |                              |       |      |   |       | 
|Basic earnings per share                                                 |  | $                            | 0.04  |      | $ | 0.30  | 
|                                                                         |  |                              |       |      |   |       | 
|                                                                         |  |                              |       |      |   |       | 
|Calculation of diluted earnings per share:                               |  |                              |       |      |   |       | 
|Numerator  net income                                                   |  | $                            | 280   |      | $ | 2,204 | 
|Denominator:                                                             |  |                              |       |      |   |       | 
|Weighted average common shares outstanding                               |  |                              | 7,417 |      |   | 7,340 | 
|Dilutive effect of outstanding options                                   |  |                              | 128   |      |   | 295   | 
|                                                                         |  |                              |       |      |   |       | 
|Weighted average common shares outstanding
 and common stock equivalents |  |                              | 7,545 |      |   | 7,635 | 
|                                                                         |  |                              |       |      |   |       | 
|                                                                         |  |                              |       |      |   |       | 
|Diluted earnings per share                                               |  | $                            | 0.04  |      | $ | 0.29  | 
|                                                                         |  |                              |       |      |   |       | 

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 March 31, 2008 and 2007.
Components of net periodic benefit cost for the Companys supplemental
nonqualified defined benefit plans for the three months ended March 31, 2008
and 2007 are presented in the following table (in thousands):

|                                          |  |                              |     |      |   |     | 
|----------------------------------------- |  | ---------------------------- | --- | ---- | - | --- | 
|                                          |  | Three months ended March 31, |    
|                                          |  | 2008                         |     | 2007 |  
|                                          |  |                              |     |      |  
|Components of net periodic benefits cost: |  |                              |     |      |   |     | 
|Service cost                              |  | $                            | 137 |      | $ | 117 | 
|Interest cost                             |  |                              | 75  |      |   | 63  | 
|Prior service amortization                |  |                              | 8   |      |   | 8   | 
|Recognized net actuarial loss             |  |                              | 12  |      |   | 8   | 
|                                          |  |                              |     |      |   |     | 
|Total components of net periodic cost     |  | $                            | 232 |      | $ | 196 | 
|                                          |  |                              |     |      |   |     | 

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 $9,412,000 and $10,314,000 at March 31, 2008 and
December 31, 2007. At March 31, 2008, commercial and consumer lines of credit
and real estate loans of approximately $85,502,000 and $121,826,000 were
undisbursed. At December 31, 2007, commercial and consumer lines of credit and
real estate loans of approximately $79,024,000 and $134,570,000 were
undisbursed.

Loan
commitments are typically contingent upon the borrower meeting certain
financial and other covenants and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these commitments are
expected to expire without being drawn upon, the total commitments do not
necessarily represent future cash requirements. The Company evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt
securities, equity securities or business or personal assets.

10

---



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 March 31, 2008 and December 31, 2007. The
Company recognizes these fees as revenues over the term of the commitment or
when the commitment is used.

Loan
commitments and standby letters of credit involve, to varying degrees, elements
of credit and market risk in excess of the amounts recognized in the balance
sheet and do not necessarily represent the actual amount subject to credit
loss. However, at March 31, 2008, no losses are anticipated as a result of
these commitments.

A large
portion of the loan portfolio of the Company is dependent on real estate. At
December 31, 2007, and at March 31, 2008, real estate served as the principal
source of collateral with respect to approximately 77% of the Companys loan
portfolio. At March 31, 2008, real estate construction loans totaled
$216,543,000, or 29% of the total loan portfolio, and commercial loans secured
by real estate totaled $313,823,000, or 42% of the total loan portfolio. See
the discussion under Loan and Lease Portfolio starting on page 18. A
substantial decline in the state and national economy, in general, combined
with further deterioration in real estate values in the Companys primary
operating market areas, would have an adverse effect on the value of real
estate as well as other collateral securing loans, plus the ability of certain
borrowers to repay their outstanding loans and the overall demand for new
loans, and this could have a material impact on the Companys financial
position or results of operations or its cash flows.

NOTE I  INCOME TAXES

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

Accounting for
uncertainty in income taxes - The benefit of a tax position is recognized in
the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or
litigation processes, if any. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying
balance sheet along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. The Company recognizes
accrued interest and penalties related to unrecognized tax benefits, if
applicable, as a component of interest expense in the consolidated statements
of income. There have been no significant changes to unrecognized tax benefits
or accrued interest and penalties for the three months ended March 31, 2008.

NOTE J  FAIR VALUE MEASUREMENT

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

The following
tables present information about the Companys assets measured at fair value on
a recurring and nonrecurring basis as of March 31, 2008, and indicates the fair
value hierarchy of the valuation techniques utilized by the Company to
determine such fair value. In general, fair values determined by Level 1 inputs
utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access. Fair values determined
by Level 2 inputs utilize inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs include quoted prices for similar assets and liabilities in
active markets, and inputs other than quoted prices that are observable for the
asset or liability, such as interest rates and yield curves that are observable
at commonly quoted intervals. Level 3 inputs are unobservable inputs for the
asset or liability, and includes situations where there is little, if any,
market activity for the asset or liability. In certain cases, the inputs used
to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy within which
the fair value measurement in its entirety falls has been determined based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Companys assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.

11

---



Assets
measured at fair value on a recurring basis are summarized below:

(in thousands)

|                                                         |  |                          |        |                                                             |   |                                |  |                                        |     |  |   |   | 
|-------------------------------------------------------- |  | ------------------------ | ------ | ----------------------------------------------------------- | - | ------------------------------ |  | -------------------------------------- | --- |  | - | - | 
|                                                         |  |                          |        | Fair Value Measurements
 at March 31, 2008, Using           |  
|                                                         |  |                          |        |                                                             |  
|Description                                              |  | Fair ValueMarch 31, 2008 |        | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | OtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3) |    
|                                                         |  |                          |        |                                                             |   |                                |  |                                        |    
|Available-for-sale securities                            |  |                          | 98,586 |                                                             |   | 98,586                         |  |                                        |     |  |   |   | 
|Mortgage Servicing Rights                                |  |                          | 681    |                                                             |   |                                |  |                                        | 681 |  |   |   | 
|                                                         |  |                          |        |                                                             |   |                                |  |                                        |     |  |   |   | 
|Total assets measured at fair value on a recurring basis |  | $                        | 99,267 |                                                             | $ | 98,586                         |  | $                                      | 681 |  | $ |  | 
|                                                         |  |                          |        |                                                             |   |                                |  |                                        |     |  |   |   | 

Available-for-Sale
Securities- Fair values for investment securities
are based on quoted market prices. Mortgage Servicing
Rights The fair value of mortgage servicing rights is
estimated using a discounted cash flow model.

Assets
measured at fair value on a nonrecurring basis are summarized below:

(in thousands)

|                                                            |  |                          |        |                                                             |   |                                |  |                                        |        |  |   |   | 
|----------------------------------------------------------- |  | ------------------------ | ------ | ----------------------------------------------------------- | - | ------------------------------ |  | -------------------------------------- | ------ |  | - | - | 
|                                                            |  |                          |        | Fair Value Measurementsat March 31, 2008, Using             |  
|                                                            |  |                          |        |                                                             |  
|Description                                                 |  | Fair ValueMarch 31, 2008 |        | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | OtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3) |       
|                                                            |  |                          |        |                                                             |   |                                |  |                                        |       
|Impaired Loans                                              |  |                          | 21,572 |                                                             |   |                                |  |                                        | 21,572 |  |   |   | 
|                                                            |  |                          |        |                                                             |   |                                |  |                                        |        |  |   |   | 
|Total assets measured at fair value on a nonrecurring basis |  | $                        | 21,572 |                                                             | $ |                               |  | $                                      | 21,572 |  | $ |  | 
|                                                            |  |                          |        |                                                             |   |                                |  |                                        |        |  |   |   | 

Impaired loans impaired
loans, which are measured for impairment using the fair value of the collateral
for the collateral dependent loans, had a carrying amount of $25,750,000, with
a specific reserve of $4,178,000.

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.

12

---



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 March 31,
2008, the Company had three shareholder approved stock-based compensation
plans: the North Valley Bancorp 1989 Director Stock Option Plan, the 1998
Employee Stock Incentive Plan and the 1999 Director Stock Option Plan. Under
the North Valley Bancorp 1989 Director Stock Option Plan each member of the
Board of Directors, including employees who are Directors, automatically
received every January a non statutory stock option to purchase 1,000 shares of
the Corporations Common Stock. Effective upon adoption of the North Valley
Bancorp 1999 Director Stock Option Plan, no further grants of options have been
made or will be made under the 1989 Director Plan. Pursuant to the 1989
Director Plan, there were outstanding options to purchase 1,200 shares of Common
Stock at March 31, 2008. The North Valley Bancorp 1998 Employee Stock Incentive
Plan provides for awards in the form of options (which may constitute incentive
stock options or non-statutory stock options 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 538,540
shares of Corporation Common Stock at March 31, 2008. As provided in the Stock
Incentive Plan, the authorization to award incentive stock options terminated
on February 19, 2008. The 1999 Director Stock Option Plan replaced the existing
North Valley Bancorp 1989 Director Stock Option Plan. As of March 31, 2008,
there were options outstanding under the 1999 Director Stock Option Plan for
the purchase of 307,251 shares of Common Stock. On the same date, there were
7,422,366 shares of Common Stock issued and outstanding. Thus, a total of
225,767 shares of Common Stock were available for the grant of additional
options under the 1999 Director Stock Option Plan at March 31, 2008.

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

13

---



Goodwill

Business
combinations involving the Companys acquisition of the equity interests or net
assets of another enterprise may give rise to goodwill. Goodwill represents the
excess of the cost of an acquired entity over the net of the amounts assigned
to assets acquired and liabilities assumed in transactions accounted for under
the purchase method of accounting. Goodwill of $15,187,000 was recorded in the
Companys acquisition of Yolo Community Bank. The value of goodwill is
ultimately derived from the Companys ability to generate net earnings. A
decline in net earnings could be indicative of a decline in the fair value of
goodwill and result in impairment. For that reason, goodwill will be assessed
for impairment at a reporting unit level at least annually. Management will
conduct its annual assessment of impairment during the fourth quarter of 2008.

Impairment of Investment Securities

Investment
securities are evaluated for other-than-temporary impairment on at least a
quarterly basis and more frequently when economic or market conditions warrant
such an evaluation to determine whether a decline in their value below
amortized cost is other-than-temporary. Management utilizes criteria such as
the magnitude and duration of the decline, the financial condition of the
issuer, rating agency changes related to the issuers securities and the intent
and ability of the Bank to retain its investment in the issues for a period of
time sufficient to allow for an anticipated recovery in fair value, in addition
to the reasons underlying the decline, to determine whether the loss in value
is other-than-temporary. The term other-than-temporary is not intended to
indicate that the decline is permanent, but indicates that the prospects for a
near-term recovery of value is not necessarily favorable, or that there is a
lack of evidence to support a realizable value equal to or greater than the
carrying value of the investment. Once a decline in value is determined to be
other-than-temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized. See Note B to 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 I of
theNotes to Condensed Consolidated
Financial Statements for additional information about the financial
instruments carried at fair value.

Overview

North Valley Bancorp (the
Company) is a bank holding company headquartered in Redding, California. The
Companys wholly owned subsidiary, North Valley Bank (NVB), a state-chartered
bank, operates out of its main office located at 300 Park Marina Circle,
Redding, CA 96001, with twenty-six commercial banking offices, including two
supermarket branches, in Northern California. The Companys principal business
consists of attracting deposits from the general public and using the funds to
originate commercial, real estate and installment loans to customers, who are
predominately small and middle market businesses and middle income individuals.
The Companys primary source of revenues is interest income from its loan and
investment securities portfolios. The Company is not dependent on any single
customer for more than ten percent of its revenues.

14

---



Earnings Summary

|                                        |  |                              |       |      |   |        |  
|--------------------------------------- |  | ---------------------------- | ----- | ---- | - | ------ | -
|                                        |  | Three months ended March 31, |      
|(in thousands except per share amounts) |  | 2008                         |       | 2007 |  
|                                        |  |                              |       |      |  
|Net interest
 income                    |  | $                            | 9,128 |      | $ | 10,337 |  
|Provision
 for loan and lease losses    |  |                              | 2,400 |      |   |       |  
|Noninterest
 income                     |  |                              | 3,491 |      |   | 3,134  |  
|Noninterest
 expense                    |  |                              | 9,805 |      |   | 10,230 |  
|Provision
 for income taxes             |  |                              | 134   |      |   | 1,037  |  
|                                        |  |                              |       |      |   |        |  
|Net income                              |  | $                            | 280   |      | $ | 2,204  |  
|                                        |  |                              |       |      |   |        |  
|                                        |  |                              |       |      |   |        |  
|Earnings Per
 Share                     |  |                              |       |      |   |        |  
|Basic                                   |  | $                            | 0.04  |      | $ | 0.30   |  
|Diluted                                 |  | $                            | 0.04  |      | $ | 0.29   |  
|                                        |  |                              |       |      |   |        |  
|Annualized
 Return on Average Assets    |  |                              | 0.12  | %    |   | 1.00   | %
|Annualized
 Return on Average Equity    |  |                              | 1.35  | %    |   | 11.69  | %

Net income for
the three months ended March 31, 2008 decreased by $1,924,000, or 87.3%,
compared to the same period in 2007. Diluted earnings per share decreased
$0.25, or 86.2%, for the three months ended March 31, 2008 compared to the same
period in 2007. The decrease in net income for the first quarter of 2008,
compared to the same period in 2007, was principally driven by a $2,400,000
provision for loan and lease losses for the three months ended March 31, 2008
compared to no provision for the same period in 2007, and secondarily due to a
decrease in net interest income of $1,209,000 for the three months ended March
31, 2008 compared to the same period in 2007. These changes were partially
offset by an increase in noninterest income of $357,000 and a decrease in
noninterest expense of $425,000 for the three months ended March 31, 2008
compared to the same period in 2007.

Net Interest Income

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

15

---



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 March 31, 2008 |         | Three months ended March 31, 2007 | 
|                                           |  |                                   |         |                                   | 
|                                           |  | Average
 Balance                  |         | Yield/
 Rate                      |  | Interest
 Amount |   | Average
 Balance |        | Yield/
 Rate |   | Interest
 Amount |  
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |  
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Assets                                     |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Earning assets:                            |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Federal funds sold                         |  | $                                 | 591     |                                   |  | 3.39             | % | $                | 5      |              | $ | 10,294           |   |  | 5.40 | % | $ | 137    | 
|Investment securities:                     |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Taxable                                    |  |                                   | 85,324  |                                   |  | 4.11             | % |                  | 875    |              |   | 102,689          |   |  | 4.52 | % |   | 1,144  | 
|Non-taxable (1)                            |  |                                   | 20,539  |                                   |  | 6.76             | % |                  | 346    |              |   | 21,789           |   |  | 6.81 | % |   | 366    | 
|FNMA preferred stock (1)                   |  |                                   | 3,284   |                                   |  | 9.53             | % |                  | 78     |              |   | 10,617           |   |  | 7.22 | % |   | 189    | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Total investments                          |  |                                   | 109,147 |                                   |  | 4.77             | % |                  | 1,299  |              |   | 135,095          |   |  | 5.10 | % |   | 1,699  | 
|Loans and leases (2)(3)                    |  |                                   | 743,004 |                                   |  | 7.00             | % |                  | 12,976 |              |   | 653,710          |   |  | 7.96 | % |   | 12,824 | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Total earning assets                       |  |                                   | 852,742 |                                   |  | 6.72             | % |                  | 14,280 |              |   | 799,099          |   |  | 7.44 | % |   | 14,660 | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Non earning assets                         |  |                                   | 99,331  |                                   |  |                  |   |                  |        |              |   | 100,808          |   |  |      |   |   |        | 
|Allowance for loan and lease losses        |  |                                   | (10,755 | )                                 |  |                  |   |                  |        |              |   | (8,837           | ) |  |      |   |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Total non-earning assets                   |  |                                   | 88,576  |                                   |  |                  |   |                  |        |              |   | 91,971           |   |  |      |   |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Total assets                               |  | $                                 | 941,318 |                                   |  |                  |   |                  |        |              | $ | 891,070          |   |  |      |   |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Liabilities and Shareholders Equity       |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Interest bearing liabilities:              |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Transaction accounts                       |  | $                                 | 154,950 |                                   |  | 0.64             | % | $                | 249    |              | $ | 160,598          |   |  | 0.44 | % | $ | 173    | 
|Savings and money market                   |  |                                   | 181,670 |                                   |  | 1.79             | % |                  | 810    |              |   | 199,529          |   |  | 1.79 | % |   | 880    | 
|Time certificates                          |  |                                   | 248,202 |                                   |  | 4.47             | % |                  | 2,769  |              |   | 202,795          |   |  | 4.41 | % |   | 2,203  | 
|Other borrowed funds                       |  |                                   | 104,924 |                                   |  | 4.56             | % |                  | 1,194  |              |   | 60,757           |   |  | 6.03 | % |   | 903    | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Total interest bearing liabilities         |  |                                   | 689,746 |                                   |  | 2.92             | % |                  | 5,022  |              |   | 623,679          |   |  | 2.70 | % |   | 4,159  | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Demand deposits                            |  |                                   | 155,541 |                                   |  |                  |   |                  |        |              |   | 178,232          |   |  |      |   |   |        | 
|Other liabilities                          |  |                                   | 12,895  |                                   |  |                  |   |                  |        |              |   | 12,702           |   |  |      |   |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Total liabilities                          |  |                                   | 858,182 |                                   |  |                  |   |                  |        |              |   | 814,613          |   |  |      |   |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Shareholders equity                       |  |                                   | 83,136  |                                   |  |                  |   |                  |        |              |   | 76,457           |   |  |      |   |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Total liabilities and shareholders equity |  | $                                 | 941,318 |                                   |  |                  |   |                  |        |              | $ | 891,070          |   |  |      |   |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Net interest income                        |  |                                   |         |                                   |  |                  |   | $                | 9,258  |              |   |                  |   |  |      |   | $ | 10,501 | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Net interest spread                        |  |                                   |         |                                   |  | 3.80             | % |                  |        |              |   |                  |   |  | 4.74 | % |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 
|Net interest margin                        |  |                                   |         |                                   |  | 4.35             | % |                  |        |              |   |                  |   |  | 5.33 | % |   |        | 
|                                           |  |                                   |         |                                   |  |                  |   |                  |        |              |   |                  |   |  |      |   |   |        | 

|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|   
|   
|(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 $207 and $398 for the three months ended March 31, 2008 and
 2007, respectively.

16

---



Net interest income
has been adjusted to a fully taxable equivalent basis (FTE) for tax-exempt
investments included in earning assets. The decrease in net interest income
(FTE) for the three month period ended March 31, 2008 compared to the three
month period ended March 31, 2007 was driven by a decrease in interest income
of $380,000 and an increase in interest expense of $863,000. During the three
month period ended March 31, 2008, the Company reversed interest income of
$526,000 that was previously recorded as a result of loans being placed on
nonaccrual status. Average earning assets increased $53,643,000 for the three
months ended March 31, 2008 compared to the same period in 2007, and average
interest bearing liabilities increased $66,067,000 for the three months ended
March 31, 2008 compared to the same period in 2007. The yield on average
earning assets, for the three months ended March 31, 2008, decreased by 72
basis points from the same period last year and yields on average interest
bearing liabilities increased by 22 basis points. The Companys net interest
margin (FTE) decreased significantly by 98 basis points for the three months
ended March 31, 2008 to 4.35% compared to the net interest margin of 5.33% for
the same period in 2007, and it decreased 54 basis points from the net interest
margin of 4.89% for the linked quarter. The contraction occurred due to the
Companys variable-rate loans repricing with prime, which declined in response
to the 300 basis point reduction by the Federal Reserve Bank since September
2007, and the reversal of interest income due to the placing of additional
loans on nonaccrual status. Additionally, there was a change in mix of
interest-bearing liabilities with an increase in the average balances of time
deposits and borrowed funds for the three months ended March 31, 2008 compared
to the same period in 2007 which resulted in higher interest expense.

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

Provision for Loan and Lease Losses

The Company
recorded a provision for loan and lease losses of $2,400,000 for the three
months ended March 31, 2008 compared to none for the three months ended March
31, 2007. The process for determining allowance adequacy and the resultant
provision for loan losses includes a comprehensive analysis of the loan
portfolio. Factors in the analysis include size and mix of the loan portfolio,
nonperforming loan levels, charge-off/recovery activity and other qualitative
factors including economic environment and activity. The decision to record the
$2,400,000 provision 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 March 31, 2008 of $13,022,000, or
1.73% of total loans and leases, is adequate at this time. The allowance for
loan and lease losses was $10,755,000, or 1.44% of total loans and leases, at
December 31, 2007. For further information regarding our allowance for loan and
lease losses, see Allowance for Loan and Lease Losses on page 20.

Noninterest Income

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

|                                                             |  |                              |       |      |   |       | 
|------------------------------------------------------------ |  | ---------------------------- | ----- | ---- | - | ----- | 
|                                                             |  | Three months ended March 31, |      
|                                                             |  | 2008                         |       | 2007 |  
|                                                             |  |                              |       |      |  
|                                                             |  |                              |       |      |  
|Service charges on deposit accounts                          |  |                              | 1,716 |      | $ | 1,644 | 
|Other fees and charges                                       |  |                              | 965   |      |   | 892   | 
|Earnings on cash surrender value of life
 insurance policies |  |                              | 330   |      |   | 311   | 
|Gain on sale of loans                                        |  |                              | 88    |      |   | 53    | 
|Gain on sales or calls of investment
 securities             |  |                              | 1     |      |   |      | 
|Other                                                        |  |                              | 391   |      |   | 234   | 
|                                                             |  |                              |       |      |   |       | 
|Total noninterest income                                     |  | $                            | 3,491 |      | $ | 3,134 | 
|                                                             |  |                              |       |      |   |       | 

Noninterest income increased
from $3,134,000 for the three months ended March 31, 2007 to $3,491,000 for the
three months ended March 31, 2008. Service charges on deposits increased
$72,000 from the three months ended March 31, 2007 compared to the same period
in 2008, driven by growth in the number of demand accounts. Other fees and
charges increased $73,000 from $892,000 for the three months ended March 31,
2007 to $965,000 for the same period in 2008. The increase in fees is
attributable to the increase in debit card activity, specifically,
point-of-sale and foreign ATM use. The Company recorded $88,000 in gains on
sales of mortgages for the three months ended March 31, 2008 compared to
$53,000 in gains on sales of mortgages for the same period in 2007. Other income
increased $158,000 to $392,000 for the three months ended March 31, 2008 from
$234,000 for the same period in 2007. The increase in other noninterest income
was due to the mandatory redemption of shares from the VISA initial public
offering and an increase in sales of annuity and other nondeposit investment
products to customers.

17

---



Noninterest Expense

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

|                              |  |                              |       |      |   |        | 
|----------------------------- |  | ---------------------------- | ----- | ---- | - | ------ | 
|                              |  | Three months ended March 31, |      
|                              |  | 2008                         |       | 2007 |  
|                              |  |                              |       |      |  
|                              |  |                              |       |      |   |        | 
|Salaries
 & employee benefits |  | $                            | 5,536 |      | $ | 5,559  | 
|Occupancy
 expense            |  |                              | 754   |      |   | 769    | 
|Data
 processing expenses     |  |                              | 532   |      |   | 594    | 
|Equipment
 expense            |  |                              | 465   |      |   | 535    | 
|Professional
 services        |  |                              | 287   |      |   | 435    | 
|ATM expense                   |  |                              | 227   |      |   | 259    | 
|Director                      |  |                              | 223   |      |   | 168    | 
|Marketing                     |  |                              | 200   |      |   | 221    | 
|Printing
 & supplies          |  |                              | 198   |      |   | 239    | 
|Operations
 expense           |  |                              | 189   |      |   | 214    | 
|Amortization
 of intangibles  |  |                              | 163   |      |   | 163    | 
|Postage                       |  |                              | 149   |      |   | 126    | 
|Other                         |  |                              | 882   |      |   | 948    | 
|                              |  |                              |       |      |   |        | 
|Total noninterest expense     |  | $                            | 9,805 |      | $ | 10,230 | 
|                              |  |                              |       |      |   |        | 

Noninterest
expense totaled $9,805,000 for the three months ended March 31, 2008, compared
to $10,230,000 for the same period in 2007. This represents a decrease of
$425,000, or 4.2%, for the three months ended March 31, 2008 from the
comparable period in 2007 due primarily to a decrease in professional services
expenses of $148,000. Professional services expenses were higher in the first
quarter of 2007 due to the Companys announced planned merger with Sterling
Financial Corporation on April 10, 2007 that was ultimately terminated on
December 1, 2007. Salaries and benefits decreased by $23,000 to $5,536,000 for
the three months ended March 31, 2008 compared to $5,559,000 for the same
period in 2007. Data processing expense decreased $62,000 for the three months
ended March 31, 2008 compared to the same period in 2007. Most other expense
categories for the three months ended March 31, 2008 experienced relatively
small changes from the same respective period in 2007. The Companys ratio of
noninterest expense to average assets was 4.17% for the three months ended
March 31, 2008 compared to 4.66% for the same period in 2007. The Companys
efficiency ratio was 77.7% and 75.9% for the three months ended March 31, 2008
and 2007, respectively.

Income Taxes

The provision
for income taxes for the three months ended March 31, 2008 was $134,000 as
compared to $1,037,000 for the same period in 2007. The effective income tax
rate for state and federal income taxes was 32.4% for the three months ended
March 31, 2008 compared to 32.0% for the same period in 2007. The difference in
the effective tax rate compared to the statutory tax rate (approximately
42.05%) is primarily the result of the Companys investment in municipal
securities, FNMA Preferred Stock, and Company-owned life insurance policies
whose income is exempt from Federal taxes. In addition, the Company receives
special tax benefits from the State of California Franchise Tax Board for
operating and providing loans, as well as jobs, in designated Enterprise
Zones.

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

Total assets
at March 31, 2008 decreased slightly to $945,481,000, compared to $949,019,000
at December 31, 2007. Loans and leases increased $4,335,000, or 0.6%, to
$750,588,000 at March 31, 2008 from $746,253,000 at December 31, 2007. Deposits
increased $26,010,000, or 3.5%, from December 31, 2007 to $762,749,000 at March
31, 2008. Investment securities and federal funds sold decreased to $98,617,000
at March 31, 2008, compared to $104,372,000 at December 31, 2007. Other
borrowed funds decreased to $58,395,000 at March 31, 2008 compared to
$87,192,000 at December 31, 2007.

Loan and Lease Portfolio

Loans and
leases, the Companys major component of earning assets, increased during the
first three months of 2008 to $750,588,000 at March 31, 2008 from $746,253,000
at December 31, 2007. Commercial real estate loans increased by $16,551,000,
which was partially offset due to real estate construction loans decreasing by
$9,215,000, commercial loans decreasing by $1,386,000, and installment loans
decreasing by $2,274,000. Real estate  mortgage loans, direct financing
leases, and other loans increased from December 31, 2007 by $620,000.

18

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The Companys
average loan to deposit ratio was 100.4% for the quarter ended March 31, 2008
compared to 88.2% for the same period in 2007. The increase in the Companys
average loan to deposit ratio is driven by an increase in total average loans
of $89,294,000 while total average deposits decreased by $791,000.

|                                     |  |                 |         |                    |   |         |  
|------------------------------------ |  | --------------- | ------- | ------------------ | - | ------- | -
|(in thousands)                       |  | March 31,
 2008 |         | December 31,
 2007 |  
|                                     |  |                 |         |                    |  
|                                     |  |                 |         |                    |   |         |  
|Commercial                           |  | $               | 91,033  |                    | $ | 92,419  |  
|Real estate - commercial             |  |                 | 313,823 |                    |   | 297,272 |  
|Real estate - construction           |  |                 | 216,543 |                    |   | 225,758 |  
|Real estate - mortgage               |  |                 | 50,024  |                    |   | 50,131  |  
|Installment                          |  |                 | 38,887  |                    |   | 41,161  |  
|Direct financing leases              |  |                 | 1,309   |                    |   | 1,307   |  
|Other                                |  |                 | 40,022  |                    |   | 39,297  |  
|                                     |  |                 |         |                    |   |         |  
|                                     |  |                 | 751,641 |                    |   | 747,345 |  
|                                     |  |                 |         |                    |   |         |  
|Deferred loan fees, net              |  |                 | (1,053  | )                  |   | (1,092  | )
|Allowance for loan and
 lease losses |  |                 | (13,022 | )                  |   | (10,755 | )
|                                     |  |                 |         |                    |   |         |  
|                                     |  | $               | 737,566 |                    | $ | 735,498 |  
|                                     |  |                 |         |                    |   |         |  

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

The Company
considers a loan or lease impaired if, based on current information and events,
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the
loan agreement. The measurement of impaired loans and leases is generally based
on the present value of expected future cash flows discounted at the historical
effective interest rate, except that all collateral-dependent loans and leases
are measured for impairment based on the fair value of the collateral.

At March 31,
2008, the recorded investment in loans and leases for which impairment had been
recognized was approximately $25,750,000 compared to $459,000 at March 31,
2007. Of the 2008 balance, there was a related valuation allowance of
$4,178,000. If interest had been accrued on the nonperforming loans, such
income would have approximated $526,000 and $5,000 for the three months ended
March 31, 2008 and 2007, respectively. The Company did not recognize any
interest income for cash payments received in the first quarter 2008.

The increase
in nonperforming loans is centered in four real estate projects with loans
totaling $24,047,000 at March 31, 2008: two loans are for residential
development projects and the other two are residential acquisition and
development loans. The two largest loans are residential development projects
for $9,509,000 and $6,750,000 located in Placer County and Shasta County,
respectively. The other two loans are residential acquisition and development
loans totaling $4,876,000 and $2,911,000, respectively, and both are located in
Shasta County. The Company has established a specific reserve in the amount of
$4,100,000 for these four loans.

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

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

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.

19

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Nonperforming
assets at March 31, 2008, and December 31, 2007, are summarized as follows (in
thousands):

|                                                                |  |                 |        |                    |   |       |  
|--------------------------------------------------------------- |  | --------------- | ------ | ------------------ | - | ----- | -
|                                                                |  | March 31,
 2008 |        | December 31,
 2007 |  
|                                                                |  |                 |        |                    |  
|                                                                |  |                 |        |                    |   |       |  
|Nonaccrual
 loans and leases                                    |  | $               | 25,750 |                    | $ | 1,608 |  
|Loans and
 leases past due 90 days and accruing interest        |  |                 |       |                    |   | 156   |  
|Other real
 estate owned                                        |  |                 | 902    |                    |   | 902   |  
|                                                                |  |                 |        |                    |   |       |  
|Total nonperforming assets                                      |  | $               | 26,652 |                    | $ | 2,666 |  
|                                                                |  |                 |        |                    |   |       |  
|                                                                |  |                 |        |                    |   |       |  
|Nonaccrual
 loans and leases to total gross loans and leases    |  |                 | 3.43   | %                  |   | 0.22  | %
|Nonperforming
 loans and leases to total gross loans and leases |  |                 | 3.43   | %                  |   | 0.24  | %
|Total
 nonperforming assets to total assets                     |  |                 | 2.82   | %                  |   | 0.28  | %
|                                                                |  |                 |        |                    |   |       |  

Allowance for Loan and Lease Losses

A summary of
the allowance for loan and lease losses at March 31, 2008 and March 31, 2007 is
as follows (in thousands):

|                                                               |  |                              |        |      |   |       |  
|-------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ----- | -
|                                                               |  | Three months ended March 31, |       
|                                                               |  | 2008                         |        | 2007 |  
|                                                               |  |                              |        |      |  
|                                                               |  |                              |        |      |   |       |  
|Balance
 beginning of period                                   |  | $                            | 10,755 |      | $ | 8,831 |  
|Provision
 for loan and lease losses                           |  |                              | 2,400  |      |   |      |  
|Net
 (charge-offs) recoveries                                  |  |                              | (133   | )    |   | (16   | )
|                                                               |  |                              |        |      |   |       |  
|Balance end
 of period                                         |  | $                            | 13,022 |      | $ | 8,815 |  
|                                                               |  |                              |        |      |   |       |  
|                                                               |  |                              |        |      |   |       |  
|Allowance
 for loan and lease losses to total loans and leases |  |                              | 1.73   | %    |   | 1.35  | %

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.

20

---



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
 March 31, 2008 included the following, which existed at the balance sheet
 date:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | --------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |  | General
 business and economic conditions effecting the Companys key lending areas   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |  | Real estate
 values and market trends in Northern California                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |  | Loan volumes
 and concentrations, including trends in past due and nonperforming loans
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |  | Seasoning of
 the loan portfolio                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |  | Status of
 the current business cycle                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |  | Specific
 industry or market conditions within portfolio segments                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                        |  | Model
 imprecision                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| | 2. | Specific
 Allowance                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Specific
 allowances are established in cases where management has identified
 significant conditions or circumstances related to an individually impaired
 credit. In other words, these allowances are specific to the loss inherent in
 a particular loan. The amount for a specific allowance is calculated in
 accordance with SFAS No. 114, Accounting
 By Creditors For Impairment Of A Loan.

The
$13,022,000 in formula and specific allowances reflects managements estimate
of the inherent loss in various pools or segments in the portfolio and
individual loans and leases, and includes adjustments for general economic
conditions, trends in the portfolio and changes in the mix of the portfolio.

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

Deposits

Total deposits
increased $26,010,000, or 3.5%, to $762,749,000 at March 31, 2008 compared to
$736,739,000 at December 31, 2007. Interest-bearing demand deposits increased
$27,270,000, or 18.5%, from December 31, 2007, certificates of deposits
increased $7,220,000, or 3.0%, and savings increased $606,000, or 0.3%, while
noninterest-bearing demand deposits decreased $9,086,000, or 5.4%. During the
first quarter of 2008, the Company continued to experience a shift in deposits
from noninterest-bearing demand to interest-bearing demand and time
certificates.

|                            |  |                 |         |                    |   |         | 
|--------------------------- |  | --------------- | ------- | ------------------ | - | ------- | 
|(in thousands)              |  | March 31,
 2008 |         | December 31,
 2007 |  
|                            |  |                 |         |                    |  
|                            |  |                 |         |                    |   |         | 
|Noninterest-bearing
 demand |  | $               | 158,529 |                    | $ | 167,615 | 
|Interest-bearing
 demand    |  |                 | 174,326 |                    |   | 147,056 | 
|Savings                     |  |                 | 181,799 |                    |   | 181,192 | 
|Time
 certificates          |  |                 | 248,095 |                    |   | 240,876 | 
|                            |  |                 |         |                    |   |         | 
|                            |  |                 |         |                    |   |         | 
|Total deposits              |  | $               | 762,749 |                    | $ | 736,739 | 
|                            |  |                 |         |                    |   |         | 

As a result of
the deposit increase, the Company relied less on other borrowed funds which
decreased $28,797,000, or 33.0%, to $58,395,000 at March 31, 2008 compared to
$87,192,000 at December 31, 2007.

Liquidity

The objective
of liquidity management is to ensure the continuous availability of funds to
meet the demands of depositors and borrowers. Collection of principal and
interest on loans and leases, the liquidations and maturities of investment
securities, deposits with other banks, customer deposits and short term
borrowings, when needed, are primary sources of funds that contribute to
liquidity. Unused lines of credit from correspondent banks to provide federal
funds of $25,000,000 as of March 31, 2008 were also available to provide
liquidity. In addition, NVB is a member of the Federal Home Loan Bank (FHLB)
providing additional unused borrowing capacity of $81,925,000 secured by
certain loans and investment securities as of March 31, 2008. The Company also
has a line of credit with Federal Reserve Bank of San Francisco (FRB) of
$1,807,000 secured by first deeds of trust on eligible commercial real estate
loans and leases. As of March 31, 2008, borrowings consisted of long-term
borrowings of $25,000,000 outstanding, overnight advances of $33,395,000 with
the FHLB and correspondent bank lines of credit, and $31,961,000 was
outstanding in the form of subordinated debt issued by the Company.

21

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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 $127,379,000 and
$132,910,000 (or 13.5% and 14.0% of total assets) at March 31, 2008 and
December 31, 2007, respectively.

Core deposits,
defined as demand deposits, interest bearing demand deposits, regular savings,
money market deposit accounts and time deposits of less than $100,000, continue
to provide a relatively stable and low cost source of funds. Core deposits
totaled $651,686,000 and $632,236,000 at March 31, 2008 and December 31, 2007,
respectively.

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

Interest Rate Sensitivity

The Company
constantly monitors earning asset and deposit levels, developments and trends
in interest rates, liquidity, capital adequacy and marketplace opportunities.
Management responds to all of these to protect and possibly enhance net
interest income while managing risks within acceptable levels as set forth in
the Companys policies. In addition, alternative business plans and
contemplated transactions are also analyzed for their impact. This process,
known as asset/liability management, is carried out by changing the maturities
and relative proportions of the various types of loans, investments, deposits
and other borrowings in the ways prescribed above.

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

Market Risk

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

Mismatch Risk

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

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.

22

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

Basis Risk

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

Net Interest Income
and Net Economic Value Simulations

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

The
hypothetical impact of sudden interest rate shocks applied to the Companys
asset and liability balances are modeled quarterly. The results of this
modeling indicate how much of the Companys net interest income and net
economic value are at risk (deviation from the base level) from various
sudden rate changes. This exercise is valuable in identifying risk exposures.
The results for the Companys most recent simulation analysis indicate that the
Companys net interest income at risk over a one-year period and net economic
value at risk from 2% shocks are within normal expectations for sudden changes
and do not materially differ from those of December 31, 2007.

For this
simulation analysis, the Company has made certain assumptions about the
duration of its non-maturity deposits that are important to determining net
economic value at risk.

Capital Resources

The Company maintains capital
to support future growth and dividend payouts while trying to effectively
manage the capital on hand. From the depositor standpoint, a greater amount of
capital on hand relative to total assets is generally viewed as positive. At
the same time, from the standpoint of the shareholder, a greater amount of
capital on hand may not be viewed as positive because it limits the Companys
ability to earn a high rate of return on stockholders equity (ROE).
Stockholders equity increased slightly to $81,519,000 as of March 31, 2008, as
compared to $81,471,000 at December 31, 2007. The increase was due to net
income of $280,000, stock option exercises of $269,000 and a decrease in
unrealized loss on available for sale securities of $241,000, partially offset
by the cash dividends paid out in the amount of $742,000. Under current
regulations, management believes that the Company meets all capital adequacy
requirements and North Valley Bank was considered well capitalized at March 31,
2008 and December 31, 2007.

23

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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
 March 31, 2008                    |  |        |         |                                |  |                                                                    |   |                |        |                 |  |                |   |   |        |  |  |       |  
|Total capital (to risk weighted assets)  |  | $      | 108,726 |                                |  | 12.10                                                              | % | $              | 71,885 |                 |  | 8.00           | % |   | N/A    |  |  | N/A   |  
|Tier 1 capital (to risk weighted assets) |  | $      | 93,888  |                                |  | 10.45                                                              | % | $              | 35,938 |                 |  | 4.00           | % |   | N/A    |  |  | N/A   |  
|Tier 1 capital (to average assets)       |  | $      | 93,888  |                                |  | 10.15                                                              | % | $              | 37,000 |                 |  | 4.00           | % |   | N/A    |  |  | N/A   |  
|                                         |  |        |         |                                |  |                                                                    |   |                |        |                 |  |                |   |   |        |  |  |       |  
|As of
 December 31, 2007                 |  |        |         |                                |  |                                                                    |   |                |        |                 |  |                |   |   |        |  |  |       |  
|Total capital (to risk weighted assets)  |  | $      | 108,098 |                                |  | 12.00                                                              | % | $              | 72,065 |                 |  | 8.00           | % |   | N/A    |  |  | N/A   |  
|Tier 1 capital (to risk weighted assets) |  | $      | 93,954  |                                |  | 10.43                                                              | % | $              | 36,032 |                 |  | 4.00           | % |   | N/A    |  |  | N/A   |  
|Tier 1 capital (to average assets)       |  | $      | 93,954  |                                |  | 10.29                                                              | % | $              | 36,522 |                 |  | 4.00           | % |   | N/A    |  |  | N/A   |  
|                                         |  |        |         |                                |  |                                                                    |   |                |        |                 |  |                |   |   |        |  |  |       |  
|North
 Valley Bank                       |  |        |         |                                |  |                                                                    |   |                |        |                 |  |                |   |   |        |  |  |       |  
|As of
 March 31, 2008                    |  |        |         |                                |  |                                                                    |   |                |        |                 |  |                |   |   |        |  |  |       |  
|Total capital (to risk weighted assets)  |  | $      | 107,826 |                                |  | 12.01                                                              | % | $              | 71,824 |                 |  | 8.00           | % | $ | 89,780 |  |  | 10.00 | %
|Tier 1 capital (to risk weighted assets) |  | $      | 96,445  |                                |  | 10.74                                                              | % | $              | 35,920 |                 |  | 4.00           | % | $ | 53,880 |  |  | 6.00  | %
|Tier 1 capital (to average assets)       |  | $      | 96,445  |                                |  | 10.44                                                              | % | $              | 36,952 |                 |  | 4.00           | % | $ | 46,190 |  |  | 5.00  | %
|                                         |  |        |         |                                |  |                                                                    |   |                |        |                 |  |                |   |   |        |  |  |       |  
|As of
 December 31, 2007                 |  |        |         |                                |  |                                                                    |   |                |        |                 |  |                |   |   |        |  |  |       |  
|Total capital (to risk weighted assets)  |  | $      | 105,715 |                                |  | 11.73                                                              | % | $              | 72,099 |                 |  | 8.00           | % | $ | 90,124 |  |  | 10.00 | %
|Tier 1 capital (to risk weighted assets) |  | $      | 94,960  |                                |  | 10.54                                                              | % | $              | 36,038 |                 |  | 4.00           | % | $ | 54,057 |  |  | 6.00  | %
|Tier 1 capital (to average assets)       |  | $      | 94,960  |                                |  | 10.43                                                              | % | $              | 36,418 |                 |  | 4.00           | % | $ | 45,523 |  |  | 5.00  | %

ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

In
managements opinion there has not been a material change in the Companys
market risk profile for the three months ended March 31, 2008 compared to
December 31, 2007. Please see discussion under the caption Interest Rate
Sensitivity on page 22.

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 March 31, 2008. Based on
this evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective.

Internal Control over
Financial Reporting

Management of
the Company is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. There was no change in the
Companys internal control over financial reporting that occurred during the
quarter ended March 31, 2008 that has materially affected or is reasonable
likely to materially affect, the Companys internal control over financial
reporting.

24

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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, 2007.

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

| |        |                                           
| | ------ | ------------------------------------------
| | 31     | Rule
 13a-14(a) / 15d-14(a) Certifications
| | 32     | Section 1350
 Certifications              
| | 99.156 | Eureka Mall
 Branch Lease                 

25

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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:                                                         | May 9, 2008
|                                                              |            
|By:                                                           |            
|                                                              |             | 
|/s/ MICHAEL J. CUSHMAN                                        |            
|                                                              |            
|Michael J. Cushman                                            |            
|President
 & Chief Executive Officer                          |            
|(Principal
 Executive Officer)                                |            
|                                                              |             | 
|/s/ KEVIN R. WATSON                                           |            
|                                                              |            
|Kevin R.
 Watson                                              |            
|Executive
 Vice President & Chief Financial Officer          
|(Principal
 Financial Officer & Principal Accounting Officer)

26

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