PLUMAS BANCORP - Quarter Report: 2004 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

Registrant’s Telephone Number, Including Area Code (530) 283-7307

Indicated by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 9, 2004; 3,265,820 shares

PART I — FINANCIAL INFORMATION

PLUMAS BANCORP

See notes to consolidated financial statements.

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PLUMAS BANCORP

See notes to consolidated financial statements.

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PLUMAS BANCORP

Continued on next page.

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CONSOLIDATED STATEMENT OF CASH FLOWS

See notes to consolidated financial statements.

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PLUMAS BANCORP

1. GENERAL

Plumas Bancorp (the “Company”) was incorporated on January 17, 2002 and subsequently obtained approval from various state and federal agencies to be a bank holding company in connection with the merger of Plumas Bank (the “Bank”). The Company became the sole shareholder of the Bank on June 21, 2002 pursuant to a Plan of Reorganization and Merger Agreement dated April 3, 2002. Pursuant to that plan, on June 21, 2002 each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company. The Company formed Plumas Statutory Trust I for the sole purpose of issuing trust preferred securities on September 26, 2002.

The Bank operates twelve branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Loyalton, Portola, Quincy, Susanville, Tahoe City, Truckee and Westwood. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank’s primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

2. CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary, Plumas Bank. Plumas Statutory Trust I is not consolidated into the Company’s consolidated financial statements and, accordingly, is accounted for under the equity method. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2004 and December 31, 2003 and the results of operations and cash flows for the three months ended June 30, 2004 and 2003 and the results of operations and cash flows for the six months ended June 30, 2004 and 2003. Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2004.

Certain disclosures normally presented in the notes to the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2003 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 2004 and 2003 may not necessarily be indicative of future operating results.

In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

3. LOANS

Outstanding loans are summarized below, in thousands;

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4. COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the financial statements, including loan commitments of $80,408,000 and $60,203,000 and letters of credit of $1,743,000 and $1,802,000 at June 30, 2004 and December 31, 2003, respectively.

Of the loan commitments outstanding at June 30, 2004, $30,612,000 are real estate construction loan commitments that are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used.

5. EARNINGS PER SHARE COMPUTATION

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 outstanding stock options were exercised. Diluted earnings per share are computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of options.

6. COMPREHENSIVE INCOME

Total comprehensive (loss) income for the three months ended June 30, 2004 and 2003 totaled $(1,151,000) and $1,014,000, respectively. Comprehensive (loss) income is comprised of net unrealized gains (losses), net of taxes, on available-for-sale investment securities, which were $(2,001,000) and $214,000 for the three months ended June 30, 2004 and 2003, respectively, together with net income.

Total comprehensive income for the six months ended June 30, 2004 and 2003 totaled $154,000 and $1,647,000, respectively. Comprehensive income is comprised of net unrealized gains (losses), net of taxes, on available-for-sale investment securities, which were $(1,422,000) and $131,000 for the six months ended June 30, 2004 and 2003, respectively, together with net income.

At June 30, 2004 and December 31, 2003, accumulated other comprehensive (loss) income totaled $(1,256,000) and $166,000, respectively, and is reflected as a component of shareholders’ equity.

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7. ACCOUNTING PRONOUCEMENTS

For a description of significant accounting policies, see Note 2 to the consolidated financial statements included in the Company’s 2003 Annual Report on Form 10-K.

8. STOCK-BASED COMPENSATION

At June 30, 2004, the Company had two stock-based compensation plans, the Plumas Bank 2001 and 1991 Stock Option Plans. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

Pro forma adjustments to the Company’s consolidated net earnings and earnings per share are disclosed during the years in which the options become vested. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statements No. 123, Accounting for Stock-Based Compensation, to stock-based compensation:

The fair value of each option grant is estimated on the date of grant using an option-pricing model with the following assumptions:

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PART I — FINANCIAL INFORMATION

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

Certain matters discussed in this Quarterly Report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressures in the financial services industry; (2) changes in the interest rate environment resulting in reduced margins; (3) general economic conditions, either nationally or regionally, maybe less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in regulatory environment; (5) loss of key personnel; (6) fluctuations in the real estate market; (7) changes in business conditions and inflation; (8) operational risks including data processing systems failures or fraud; and (9) changes in securities markets. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp.

When the Company uses in this Quarterly Report the words “anticipate”, “estimate”, “expect”, “project”, “intend”, “commit”, “believe” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and stockholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

INTRODUCTION

Plumas Bancorp (the “Company”) is traded on the OTC Bulletin Board under the ticker symbol “PLBC”. The following discussion and analysis sets forth certain statistical information relating to the Company as of June 30, 2004 and December 31, 2003 and for the three months ended June 30, 2004 and 2003 and for the six months ended June 30, 2004 and 2003. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2003.

OVERVIEW

The Company’s net income increased $60 thousand, or 4%, to $1.6 million for the six months ended June 30, 2004 from $1.5 million for the same period in 2003. The primary contributors to the increase in net income for the first six months of 2004 were a $480 thousand increase in net interest income, a $150 thousand decrease in the provision for loan losses, a $678 thousand increase in non-interest income and a $104 thousand decrease in the provision for income taxes, mostly offset by a $1.3 million increase in non-interest expenses.

Total assets at June 30, 2004 were $404 million, an increase of $14 million, or 4%, from the $390 million at December 31, 2003. The growth in assets was funded by growth in the Company’s deposits. Deposits also grew $14 million, or 4%, to $370 million at June 30, 2004 from the $356 million at December 31, 2003.

The return on average assets was 0.79% for the six months ended June 30, 2004 compared to 0.94% for the same period in 2003. The return on average equity was 11.5% for the six months ended June 30, 2004 compared to 12.5% for the same period in 2003. Although the Company’s earnings increased during the first six months of 2004 when compared to the same period in 2003, the continued growth in assets

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combined with a historically low rate environment have resulted in declines in the return on average asset and equity ratios. Total average assets for the six months ended June 30, 2004 increased $75 million, or 23%, from the same period in 2003. Total average equity for the six months ended June 30, 2004 increased $3 million, or 13%, from the same period in 2003.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $8.1 million for the six months ended June 30, 2004, an increase of $480 thousand, or 6%, from $7.6 million for the same period in 2003. The increase in net interest income was primarily attributed to volume increases in the Company’s average investment and loan balances combined with declines in rates paid on the Company’s deposits, somewhat offset by declines in the yield on the Company’s interest-earning assets.

Interest income increased $225 thousand or 2%, to $9.5 million for the six months ended June 30, 2004, up from $9.2 million for the same period in 2003. The increase in interest income was primarily attributed to volume increases in investment and loan balances largely offset by falling yields on loan balances. The Company’s average investment balances were $115 million for the six months ended June 30, 2004, up $53 million, or 85%, from the $62 million for the same period in 2003. The Company’s average loan balances were $218 million for the six months ended June 30, 2004, up $6 million, or 3%, from the $212 million for the same period in 2003. The Company’s average loan yield was 7.03% for the six months ended June 30, 2004, down 68 basis points, or 9%, from the 7.71% yield for the same period in 2003. In addition, the Company’s average investment yield was 3.00% for the six months ended June 30, 2004, down 24 basis points, or 7%, from the 3.24% yield for the same period in 2003.

Interest expense decreased $255 thousand, or 17%, to $1.4 million for the six months ended June 30, 2004, down from $1.7 million for the same period in 2003. The decrease in interest expense was primarily attributed to rate decreases for time deposits partially offset by volume increases in all of the Company’s deposit products. The Company’s average rate paid on time deposits was 1.80% for the six months ended June 30, 2004, down 56 basis points, or 24%, from the 2.36% paid for the same period in 2003.

The net interest margin for the six months ended June 30, 2004 decreased 68 basis points, or 13%, to 4.67%, down from 5.35% for the same period in 2003.

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The following table presents for the six-month periods indicated the distribution of consolidated average assets, liabilities and shareholders’ equity. It also presents the amounts of interest income from interest-earning assets and the resultant yields expressed in both dollars and yield percentages, as well as, the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and rate percentages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:

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The following table sets forth changes in interest income and interest expense, for the six-month periods indicated and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates:

Provision for loan losses. The Company recorded $300 thousand in provision for loan losses for the six months ended June 30, 2004, down $150 thousand, or 33%, from the $450 thousand provision for the same period in 2003. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the six months ended June 30, 2004, total non-interest income increased $678 thousand, or 40%, to $2.4 million, up from $1.7 million for the comparable period in 2003. The increase in non-interest income was primarily the result of increases in service charge revenue, earnings on bank-owned life insurance policies (“BOLI”) and gains on the sale of investment securities and real estate.

A large portion of the growth in service charge revenue resulted from an increase in the Bank’s overall number of fee generating accounts. As a result of the acquisition in mid-November 2003 of five branches from a competitor, the Bank began servicing over 7,300 new deposit accounts. In addition, during April 2004 the Bank implemented a new overdraft privilege program for select deposit relationships thereby increasing service charge revenue.

During the last half of 2003, the Bank increased its holding in BOLI by $3.2 million to provide additional coverage for an executive officer of the Company. As a result, the tax-exempt earnings from these policies

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increased by $98 thousand to $207 thousand for the six months ended June 30, 2004 from $109 thousand for the same period in 2003.

Lastly, the Company recorded gains of $135 thousand in June 2004 on the sale of two unused banking offices that were acquired from a competitor as part of a $45.5 million deposit purchase in mid-November 2003.

Non-interest expenses. Non-interest expenses consist of salaries and related employee benefits, occupancy and equipment expenses, professional fees, business development expenses, telephone expense, stationery and supplies expense, armored car and courier expense, advertising and promotion expense, loan expenses, directors’ fees, and other operating expenses. For the six months ended June 30, 2004, non-interest expense increased $1.4 million, or 21%, to $7.7 million, up from $6.3 million for the comparable period in 2003.

Salaries and employee benefits increased $934 thousand, or 27%, over the same six-month period last year. This increase was due primarily to the staffing additions related to the Bank’s three new branch offices, expansion of the Company’s centralized lending function, staffing additions to manage the overall growth, increased employee benefit costs related to health-care and salary continuation plans and the deferral of fewer salary dollars as part of the loan origination process.

Occupancy and equipment increased $247 thousand, or 22%, over the same six-month period last year. This increase was due primarily to additional depreciation and operating costs associated with three new branches. These new branches began serving the communities of Tahoe City, Kings Beach and Loyalton in November 2003. Other increases in occupancy and equipment relate to depreciation on capitalized upgrades to the Company’s network security and monitoring systems and network operating system.

The following table describes the components of non-interest expense for the six-month periods ending June 30, 2004 and 2003.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $4.0 million for the three months ended June 30, 2004, an increase of $137 thousand, or 4%, from $3.9 million for the same period in 2003. The increase in net interest income was primarily attributed to volume

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increases in the Company’s average investment balances combined with declines in rates paid on the Company’s deposits, largely offset by declines in the yield on the Company’s loan balances.

Interest income increased $42 thousand, or 1%, to $4.7 million for the three months ended June 30, 2004. The increase in interest income was primarily attributed to volume increases in investment balances largely offset by falling yields on loan balances. The Company’s average investment balances were $119 million for the three months ended June 30, 2004, up $59 million, or 101%, from the $59 million for the same period in 2003. The Company’s average loan yield was 6.96% for the three months ended June 30, 2004, down 90 basis points, or 11%, from the 7.86% yield for the same period in 2003.

Interest expense decreased $95 thousand, or 12%, to $690 thousand for the three months ended June 30, 2004, down from $785 thousand for the same period in 2003. The decrease in interest expense was primarily attributed to rate decreases for time deposits partially offset by volume increases in all of the Company’s deposit products. The Company’s average rate paid on time deposits was 1.79% for the three months ended June 30, 2004, down 49 basis points, or 21%, from the 2.28% paid for the same period in 2003.

The net interest margin for the three months ended June 30, 2004 decreased 91 basis points, or 16%, to 4.67%, down from 5.58% for the same period in 2003.

The following table presents for the three-month periods indicated the distribution of consolidated average assets, liabilities and shareholders’ equity. It also presents the amounts of interest income from interest-earning assets and the resultant yields expressed in both dollars and yield percentages, as well as, the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and rate percentages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:

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The following table sets forth changes in interest income and interest expense, for the three-month periods indicated and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates:

Provision for loan losses. The Company recorded $150,000 in provision for loan losses for the three months ended June 30, 2004, down $75,000, or 33%, from the $225,000 provision for the same period in 2003. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the three months ended June 30, 2004, total non-interest income increased $461 thousand, or 53%, to $1.3 million, up from $876 thousand for the comparable period in 2003. The increase in non-interest income was primarily the result of increases in service charge revenue, gains on the sale of investment securities and real estate and earnings on bank-owned life insurance policies (“BOLI”).

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A large portion of the growth in service charge revenue resulted from an increase in the Bank’s overall number of fee generating accounts. As a result of the acquisition in mid-November 2003 of five branches from a competitor, the Bank began servicing over 7,300 new deposit accounts. In addition, during April 2004 the Bank implemented a new overdraft privilege program for select deposit relationships thereby increasing service charge revenue.

During June of 2004, the Company recorded gains of $135 thousand on the sale of two unused banking offices that were acquired from a competitor as part of a $45.5 million deposit purchase in mid-November 2003.

Lastly, the Bank increased its holding in BOLI by $3.2 million to provide additional coverage for an executive officer of the Company. As a result, the tax-exempt earnings from these policies increased by $45 thousand to $100 thousand for the three months ended June 30, 2004 from $55 thousand for the same period in 2003.

Non-interest expenses. Non-interest expenses consist of salaries and related employee benefits, occupancy and equipment expenses, professional fees, business development expenses, telephone expense, stationery and supplies expense, armored car and courier expense, advertising and promotion expense, loan expenses, directors’ fees, and other operating expenses. For the three months ended June 30, 2004, non-interest expense increased $677 thousand, or 21%, to $3.9 million, up from $3.2 million for the comparable period in 2003.

Salaries and employee benefits increased $496 thousand, or 29%, over the same three-month period last year. This increase was due primarily to the staffing additions related to the Bank’s three new branch offices, expansion of the Company’s centralized lending function, staffing additions to manage the overall growth, increased employee benefit costs related to health-care and salary continuation plans and the deferral of fewer salary dollars as part of the loan origination process.

Occupancy and equipment increased $90 thousand, or 15%, over the same three-month period last year. This increase was due primarily to additional depreciation and operating costs associated with three new branches. These new branches began serving the communities of Tahoe City, Kings Beach and Loyalton in November 2003. Other increases in occupancy and equipment relate to depreciation on capitalized upgrades to the Company’s network security and monitoring systems and network operating system.

The following table describes the components of non-interest expense for the three-month periods ending June 30, 2004 and 2003.

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FINANCIAL CONDITION

Loan portfolio composition. The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of Northeastern California. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small- to medium-sized commercial businesses. These commercial loans are diversified as to the industries and types of businesses, thus limiting material exposure from any one industry concentration. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment. As of June 30, 2004, real estate mortgage loan balances as a percentage of total loans increased to 35.9% from 31.0% at December 31, 2004. Also during the first six months of 2004, agricultural loan balances increased to 13.2% of total loans from 12.2% at the end of December 2003. The increased percentages in real estate mortgage and agricultural loan balances were offset with declines in the relative percentage of commercial, consumer and real estate construction and land development loan balances which were 21.8%, 20.7% and 8.4%, respectively at June 30, 2004, versus 23.4%, 21.4% and 12.0%, respectively at December 31, 2003.

Nonperforming assets. Nonperforming loans at June 30, 2004 were $2,024,000, an increase of $1,177,000, or 139%, over the $847,000 balance at December 31, 2003.

In April 2004, the Bank classified as nonaccrual, several agricultural loans to one borrower totaling $1.3 million. These agricultural loans are collateralized by various equipment and real estate holdings. In addition to the collateral, $765 thousand of the loan balances are government guaranteed under the United States Department of Agriculture (USDA) Business and Industry program. At June 30, 2004, nonperforming loans to this one borrower represented 64% of the Bank’s total nonperforming loans outstanding. Management believes that these nonperforming loan balances will be satisfactory resolved without significant loss to the Company.

As a result of the above, nonperforming loans as a percent of total loans increased to 0.88% at June 30, 2004 up from the 0.39% at December 31, 2003. In addition, nonperforming assets (which is comprised of nonperforming loans plus foreclosed real estate holdings) as a percent of total assets were 0.54% at June 30, 2004 up from 0.22% at December 31, 2003.

Analysis of allowance for loan losses. Net charge-offs during the six months ended June 30, 2004 totaled $237 thousand, or 0.10% of total loans, compared to $280 thousand, or 0.13% of total loans, for the

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comparable period in 2003. Net charge-offs during the first half of 2004 were comprised of $328,000 of charge-offs less $91,000 in recoveries, compared to $382,000 of charge-offs less $102,000 in recoveries for the comparable period in 2003. The allowance for loan losses stood at 1.14% of total loans as of June 30, 2004, versus 1.18% of total loans as of December 31, 2003. Based on an evaluation of the credit quality of the loan portfolio and delinquency trends and charge-offs, management believes the allowance for loan losses to be adequate.

The following table provides certain information for the six-month period indicated with respect to the Company’s allowance for loan losses as well as charge-off and recovery activity.

Investment securities and Federal funds sold. Combined investment securities and Federal funds sold balances increased $3 million to $119 at June 30, 2004, from $116 million at December 31, 2003. Federal funds sold balances remained unchanged at $5 million at both June 30, 2004 and December 31, 2003.

The Company’s investment in U.S. Treasury securities and obligations of U.S. agencies decreased to 75.5% of the investment portfolio at June 30, 2004, versus 82.6% at December 31, 2003. The Company’s investment in corporate bonds increased to 12.9% of the investment portfolio at June 30, 2004, versus 10.8% at December 31, 2003. Tax-exempt municipal obligation bonds increased to 11.6% at June 30, 2004, up from 6.6% at December 31, 2003.

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Accrued interest receivable and other assets. Accrued interest receivable and other assets increased $459 thousand, or 3%, to $17.1 million as of June 30, 2004, up from $16.7 million at December 31, 2003. This increase related primarily to a $1 million additional investment in stock of the Federal Home Loan Bank (FHLB) of San Francisco offset by a $600 thousand decline in real estate investment holdings. The additional stock investment was a requirement of the FHLB’s recent revised capital plan. The Bank chose to make the additional investment in the FHLB in order to continue to have access to FHLB services, which are primarily borrowing arrangements.

Deposits. Total deposits were $370 million as of June 30, 2004, an increase of $13.8 million, or 4%, from the December 31, 2003 balance of $356 million. The Company continues to manage the mix of its deposits consistent with its identity as a community bank serving the financial needs of its customers. Non-interest bearing demand deposits and interest checking deposits increased to 40.8% of total deposits at June 30, 2004, up from 38.9% of total deposits at December 31, 2003. Money market and savings deposits decreased slightly to 34.3% of total deposits at June 30, 2004 compared to 34.9% as of December 31, 2003. Time deposits decreased to 24.9% of total deposits as of June 30, 2004 down from 26.2% as of December 31, 2003.

CAPITAL RESOURCES

Shareholders’ equity as of June 30, 2004 decreased $257 thousand, or 1%, to $25.5 million from $25.7 million as of December 31, 2003. This decrease was the result of a $1.4 million decline in accumulated other comprehensive income and payment in May of a $456 thousand cash dividend mostly offset by earning of $1.6 million during the first half 2004. The accumulated other comprehensive losses at June 30, 2004, were the result of the adverse affects of the rising interest rate environment on the market value of the Bank’s available-for-sale investment portfolio. Management believes that these accumulated other comprehensive losses are not permanent and will reverse over time as these shorter-term securities approach maturity.

The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC). Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Each of these components is defined in the regulations. Management believes that the Company and the Bank met all their capital adequacy requirements as of June 30, 2004.

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LIQUIDITY

The Company manages its liquidity to provide the ability to generate funds to support asset growth, meet deposit withdrawals (both anticipated and unanticipated), fund customers’ borrowing needs, satisfy maturity of short-term borrowings and maintain reserve requirements. The Company’s liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to Federal Funds sold, the Company maintains an investment portfolio containing U.S. government securities and agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by charging competitive offering rates on deposit products and the use of established lines of credit from correspondent financial institutions and the Federal Home Loan Bank.

The Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $10 million and $5 million. In addition, the Company can borrow up to $9.9 million from the Federal Home Loan Bank secured by residential mortgage loans. There were no short-term borrowings outstanding at June 30, 2004.

Customer deposits are the Company’s primary source of funds. Those funds are held in various types of accounts with varying maturities. The Company does not accept brokered deposits. During the first half of 2004, deposits increased $14 million, or 4%, from the December 31, 2003 balance of $356 million. The Company has historically experienced a seasonal trend in regards to deposits; whereas the majority of the Company’s annual deposit growth occurs in the summer and fall months.

The Company’s available-for-sale securities portfolio, Federal funds sold, and cash and due from banks serve as the primary sources of liquidity, providing adequate funding for loans during periods of high loan demand. During periods of decreased lending activity, proceeds from the maturity or sale of investment securities, loan payments, and new deposits are invested in short-term earning assets, such as Federal funds sold and investment securities, to serve as a source of funding for future loan growth. Management believes that the Company’s available sources of funds, including short-term borrowings, will provide adequate liquidity for its operations in the foreseeable future.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates and prices such as interest rates, commodity prices and equity prices. As a financial institution, the Company’s market risk arises primarily from interest rate risk exposure. Fluctuation in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, dependent upon the stated or estimated maturity date. Since virtually all of the Company’s interest earning assets and all of the Company’s interest bearing liabilities, with the exception of the junior subordinated debentures, are located at the Bank level, virtually all of the Company’s interest rate risk exposure lies at the Bank level. As a result, all significant interest rate risk management procedures are performed at the Bank level. Based upon the nature of its operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank’s real estate loan portfolio, concentrated primarily within northeastern California, is subject to risks associated with the local economies.

The fundamental objective of the Bank’s management of its assets and liabilities is to maximize the economic value of the Company while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Bank’s profitability is dependent to a large extent upon its net interest income which is the difference between its interest income on interest-earning assets, such as loans and securities, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Bank, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets reprice differently than its interest-bearing liabilities. The Bank manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds.

The Bank seeks to control its interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Bank has adopted formal policies and practices to monitor and manage interest rate risk exposure. As part of this effort, the Bank measures interest rate risk utilizing both an internal asset liability management system as well as employing independent third party reviews to confirm the reasonableness of the assumptions used to measure and report the Bank’s interest rate risk, enabling management to make any adjustments necessary.

Interest rate risk is managed by the Bank’s Asset Liability Committee (“ALCO”), which includes members of senior management. The ALCO monitors interest rate risk by analyzing the potential impact on the net interest income from potential changes in interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages the Bank’s balance sheet in part to maintain the potential impact on net interest income within acceptable ranges despite changes in interest rates. The Bank’s exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO.

In management’s opinion there has not been a material change in the Company’s market risk or interest rate risk profile for the three months ended June 30, 2004 compared to December 31, 2003 as discussed in the Company’s 2003 annual report on Form 10-K.

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ITEM 4. CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer, Chief Administrative Officer and Chief Financial Officer, based on their evaluation within 90 days prior to the date of this report of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e), have concluded that the Company’s disclosure controls and procedures are adequate and effective for purposes of Rule 13a-15(e) in timely alerting them to material information relating to the Company required to be included in the Company’s filings with the SEC under the Securities Exchange Act of 1934.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company and/or its subsidiaries are a party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company’s management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The voting results of the registrant’s annual meeting of the shareholders held on May 19, 2004 are as follows:

Proposal: Election of Directors

On the proposal to elect Directors of Plumas Bancorp, Management’s nominees were elected as Directors of Plumas Bancorp until the 2005 Annual Meeting of Shareholders and until their successors are duly elected and qualified. The voting results were as follows:

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

The following documents are included or incorporated by reference in this Quarterly Report on Form 10Q:

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