PLUMAS BANCORP - Quarter Report: 2006 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2006

o		TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                       TO                     

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

California		75-2987096
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
35 S. Lindan Avenue, Quincy, California		95971
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code (530) 283-7305

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.
Yes þ  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act (check one):

Large Accelerated Filer o      Accelerated Filer þ      Non-Accelerated Filer 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 þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 6, 2006; 5,009,042 shares

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLUMAS BANCORP
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except share data)

		September 30,				December 31,
		2006				2005
Assets
Cash and due from banks		$	13,899			$	17,271
Federal funds sold			505				7,325
Cash and cash equivalents			14,404				24,596
Investment securities (fair value of $81,108 at September 30, 2006 and $97,712 at December 31, 2005)			80,968				97,844
Loans, less allowance for loan losses of $3,905 at September 30, 2006 and $3,256 at December 31, 2005 (Notes 3 and 4)			346,898				319,156
Premises and equipment, net			14,444				11,404
Intangible assets, net			1,413				1,638
Bank owned life insurance			9,366				8,930
Accrued interest receivable and other assets			9,609				9,235
Total assets		$	477,102			$	472,803
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing		$	130,848			$	129,734
Interest bearing			287,165				296,826
Total deposits			418,013				426,560
Federal Home Loan Bank advances			9,500				—
Accrued interest payable and other liabilities			4,447				4,796
Junior subordinated deferrable interest debentures			10,310				10,310
Total liabilities			442,270				441,666
Commitments and contingencies (Note 4)			—				—
Shareholders’ equity (Notes 5, 7 and 8):
Serial preferred stock, no par value; 10,000,000 shares authorized, none issued			—				—
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,007,927 shares at September 30, 2006 and 4,976,654 shares at December 31, 2005			4,650				4,412
Retained earnings			31,046				27,816
Accumulated other comprehensive loss (Note 6)			(864	)			(1,091	)
Total shareholders’ equity			34,832				31,137
Total liabilities and shareholders’ equity		$	477,102			$	472,803

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share data)

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
Interest Income:
Interest and fees on loans		$	6,837			$	5,862			$	19,221			$	16,025
Interest on investment securities:
Taxable			608				640				1,940				2,030
Exempt from Federal income taxes			133				133				397				405
Interest on Federal funds sold			14				30				158				34
Total interest income			7,592				6,665				21,716				18,494
Interest Expense:
Interest on deposits			1,561				1,107				4,342				2,817
Interest on Federal Home Loan Bank advances			69				44				108				210
Interest on junior subordinated deferrable interest debentures			215				111				599				295
Other			6				4				15				9
Total interest expense			1,851				1,266				5,064				3,331
Net interest income before provision for loan losses			5,741				5,399				16,652				15,163
Provision for Loan Losses			300				300				900				900
Net interest income after provision for loan losses			5,441				5,099				15,752				14,263
Non-Interest Income:
Service charges			1,022				868				2,731				2,531
Gain (loss) on sale of other real estate and vehicles, net			4				8				6				(37	)
Earnings on Bank owned life insurance policies			100				84				291				263
Other			267				346				825				962
Total non-interest income			1,393				1,306				3,853				3,719
Non-Interest Expenses:
Salaries and employee benefits			2,500				2,405				7,366				7,071
Occupancy and equipment			827				775				2,387				2,268
Other			1,253				1,234				3,579				3,595
Total non-interest expenses			4,580				4,414				13,332				12,934
Income before provision for income taxes			2,254				1,991				6,273				5,048
Provision for Income Taxes			858				743				2,392				1,820
Net income		$	1,396			$	1,248			$	3,881			$	3,228
Basic earnings per share (Notes 5 and 7)		$	0.28			$	0.25			$	0.78			$	0.65
Diluted earnings per share (Notes 5 and 7)		$	0.27			$	0.24			$	0.76			$	0.64

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)

		For the Nine Months
		Ended September 30,
		2006				2005
Cash Flows from Operating Activities:
Net income		$	3,881			$	3,228
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			900				900
Change in deferred loan origination costs/fees, net			(398	)			(967	)
Depreciation and amortization			1,582				1,565
Stock-based compensation expense			130				—
Net loss on sale of available-for-sale investment securities			—				8
Amortization of investment security premiums			312				541
Accretion of investment security discounts			(67	)			(52	)
Net loss on disposal/sale of premises and equipment			6				4
Net (gain) loss on sale of other real estate and vehicles			(6	)			37
Earnings on Bank owned life insurance policies			(291	)			(263	)
Expenses on Bank owned life insurance policies			55				51
Increase in accrued interest receivable and other assets			(673	)			(1,405	)
(Decrease) increase in accrued interest payable and other liabilities			(349	)			1,954
Net cash provided by operating activities			5,082				5,601
Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities			14,346				11,000
Proceeds from matured and called held-to-maturity investment securities			—				1,097
Proceeds from sales of available-for-sale investment securities			—				1,992
Purchases of held-to-maturity investment securities			(155	)			—
Proceeds from principal repayments from available-for-sale government-guaranteed mortgage-backed securities			2,782				2,780
Proceeds from principal repayments from held-to-maturity government-guaranteed mortgage-backed securities			45				79
Net increase in loans			(28,591	)			(47,167	)
Proceeds from sale of other real estate and vehicles			124				183
Purchase of bank owned life insurance			(200	)			(281	)
Purchase of premises and equipment			(4,035	)			(2,467	)
Net cash used in investing activities			(15,684	)			(32,784	)

Continued on next page.

PLUMAS BANCORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
(Continued)

		For the Nine Months
		Ended September 30,
		2006				2005
Cash Flows from Financing Activities:
Net (decrease) increase in demand, interest bearing and savings deposits		$	(1,779	)		$	36,718
Net (decrease) increase in time deposits			(6,768	)			9,494
Proceeds from issuance of junior subordinated deferrable interest debentures			—				4,124
Proceeds (payment of) from Federal Home Loan Bank advances			9,500				(1,035	)
Proceeds from exercise of stock options			108				289
Payment of cash dividends			(651	)			(536	)
Net cash provided by financing activities			410				49,054
(Decrease) increase in cash and cash equivalents			(10,192	)			21,871
Cash and Cash Equivalents at Beginning of Year			24,596				11,444
Cash and Cash Equivalents at End of Period		$	14,404			$	33,315
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense		$	4,945			$	3,075
Income taxes		$	2,585			$	730
Non-Cash Investing Activities:
Vehicles acquired through foreclosure		$	117			$	141
Loan transferred to other assets		$	230			$	—
Net change in unrealized loss on available-for-sale securities		$	227			$	(409	)
Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options		$	354			$	80

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. GENERAL

Plumas Bancorp (the “Company”) was incorporated on January 17, 2002 and became the sole shareholder of Plumas Bank (the “Bank”) on June 21, 2002. The Company formed Plumas Statutory Trust I for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II for the sole purpose of issuing trust preferred securities on September 28, 2005.

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. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary, Plumas Bank. Plumas Statutory Trust I and Plumas Statutory Trust II are not consolidated into the Company’s consolidated financial statements and, accordingly, are accounted for under the equity method. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at September 30, 2006 and December 31, 2005 and its results of operations for the three-month and nine-month periods ended September 30, 2006 and 2005 and its cash flows for the nine-month periods ended September 30, 2006 and 2005. Certain reclassifications have been made to prior periods balances to conform to classifications used in 2006.

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, 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. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2005 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2006 and 2005 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.

Management has determined that because all of the commercial banking products and services offered by the Company are available in each branch of the Bank, 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 the Bank branches and report them as a single operating segment. No single customer accounts for more than 10% of the revenues of the Company or the Bank.

3. LOANS

Outstanding loans are summarized below, in thousands:

		September 30,				December 31,
		2006				2005
Commercial		$	35,467			$	42,252
Agricultural			34,818				31,018
Real estate – mortgage			114,469				110,686
Real estate – construction and land development			74,987				56,370
Consumer			89,898				81,320
			349,639				321,646
Deferred loan costs, net			1,164				766
Allowance for loan losses			(3,905	)			(3,256	)
		$	346,898			$	319,156

4. COMMITMENTS AND CONTINGENCIES

The Company is 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 result of operations of the Company taken as a whole.

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 $101,733,000 and $107,500,000 and stand-by letters of credit of $1,012,000 and $1,195,000 at September 30, 2006 and December 31, 2005, respectively.

Of the loan commitments outstanding at September 30, 2006, $32,216,000 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. The deferred liability related to the Company’s stand-by letters of credit was not significant at September 30, 2006 or December 31, 2005.

5. EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted earnings per share.

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2006				2005				2006				2005
Earnings Per Share:
Basic earnings per share		$	0.28			$	0.25			$	0.78			$	0.65
Diluted earnings per share		$	0.27			$	0.24			$	0.76			$	0.64
Weighted Average Number of Shares Outstanding:
(in thousands)
Basic shares			5,005				4,951				4,998				4,939
Diluted shares			5,090				5,133				5,090				5,083

There were 10,000 stock options during the three-month and nine-month periods ended September 30, 2006, considered to be antidilutive and therefore omitted from the above calculation of diluted earnings per share. There were no stock options in the three-month and nine-month periods ended September 30, 2005 considered to be antidilutive.

6. COMPREHENSIVE INCOME

Total comprehensive income for the three months ended September 30, 2006 and 2005 totaled $1,977,000 and $1,000,000, respectively. Comprehensive income is comprised of unrealized gains (losses), net of taxes, on available-for-sale investment securities, which were $581,000 and $(248,000) for the three months ended September 30, 2006 and 2005, respectively, together with net income.

Total comprehensive income for the nine months ended September 30, 2006 and 2005 totaled $4,108,000 and $2,819,000, respectively. Comprehensive income is comprised of unrealized gains (losses), net of taxes, on available-for-sale investment securities, which were $227,000 and $(409,000) for the nine months ended September 30, 2006 and 2005, respectively, together with net income.

At September 30, 2006 and December 31, 2005, accumulated other comprehensive loss totaled $864,000 and $1,091,000, respectively, and is reflected, net of taxes, as a component of shareholders’ equity.

7. STOCK-BASED COMPENSATION

At September 30, 2006, the Company had two stock-based compensation plans, the Plumas Bank 2001 and 1991 Stock Option Plans, which are described below. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share Based Payment (“SFAS 123 (R)”), using the modified prospective application transition method, which requires recognizing expense for options granted prior to the adoption date equal to the fair value of the unvested amounts over their remaining vesting period based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 Accounting for Stock Based Compensation and compensation cost for all share based payments granted subsequent to January 1, 2006 based on the grant date fair values estimated in accordance with the provisions of SFAS 123 (R). There were 7,500 options granted during each of the nine-month periods ended September 30, 2006 and September 30, 2005. Results for prior periods have not been restated. Prior to January 1, 2006, the Company accounted for the Stock Option 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 was recorded prior to January 1, 2006, 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 the grant.

As a result of adopting SFAS 123 (R), the Company’s income before provision for income taxes and net income for the three months ended September 30, 2006 was $43,000 and $39,000, respectively, and for the nine months ended September 30, 2006 was $130,000 and $115,000, respectively, lower than if we had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the quarter ended September 30, 2006 would have been $0.29 and $0.28, respectively, without the adoption of SFAS 123 (R) compared to $0.28 and $0.27, respectively, as reported. Basic and diluted earnings per share for the nine months ended September 30, 2006 would have been $0.80 and $0.78, respectively, without the adoption of SFAS 123 (R) compared to $0.78 and $0.76, respectively, as reported.

SFAS 123 (R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as a cash flow from financing in the statement of cash flows. These excess tax benefits were not significant for the Company.

The following table illustrates the pro forma SFAS 123 adjustment on consolidated net income and earnings per share had the Company recorded compensation expense in accordance with SFAS 123 for the three months and nine months ended September 30, 2005, dollars in thousands except per share amounts:

		For the Three				For the Nine
		Months Ended				Months Ended
		September 30,				September 30,
		2005				2005
Net income as reported		$	1,248			$	3,228
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects			45				132
Pro forma net income		$	1,203			$	3,096
Basic earnings per share – as reported		$	0.25			$	0.65
Basic earnings per share – pro forma		$	0.24			$	0.63
Diluted earnings per share – as reported		$	0.24			$	0.64
Diluted earnings per share – pro forma		$	0.23			$	0.61

8. STOCK OPTION PLANS

In 2001 and 1991, the Company established Stock Option Plans for which 925,101 shares of common stock remain reserved for issuance to employees and directors and 615,037 shares are available for future grants under incentive and nonstatutory agreements as of September 30, 2006. The plans require that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash or with Company common stock previously acquired by the optionee and held by the optionee for a period of at least six months. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. Upon grant, options vest ratably over a three to five year period.

A summary of the option activity during the nine months ended September 30, 2006 within the Stock Options Plans follows:

										Weighted Average
						Weighted Average				Remaining				Intrinsic Value
		Shares				Exercise Price				Contractual Term				(in thousands)
Incentive:
Options outstanding at January 1, 2006			242,845				11.05
Options granted			5,000				16.89
Options exercised			48,656				8.94
Options cancelled			4,756				12.68
Options outstanding at September 30, 2006			194,433				11.68				6.7			$	926
Options exercisable at September 30, 2006			92,895				9.92				5.9			$	606
Nonstatutory:
Options outstanding at January 1, 2006			113,131				10.59
Options granted			2,500				18.79
Options exercised			—				—
Options cancelled			—				—
Options outstanding at September 30, 2006			115,631				10.77				6.0			$	656
Options exercisable at September 30, 2006			70,386				9.15				5.0			$	513

The intrinsic value represents the value of the Company’s closing stock price on September 29, 2006 in excess of the exercise price multiplied by the number of options outstanding or exercisable.

There were a total of 7,500 options granted during each of the nine-month periods ended September 30, 2006 and September 30, 2005. The fair value of each option grant is estimated on the date of grant using a Black-Scholes option-pricing model that uses assumptions based on expected option life, expected stock volatility, risk free interest rate, and dividend yield. The Company uses historical data to estimate expected option life and pre-vesting option forfeitures. Stock volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant.

A summary of the weighted average assumptions and results for options granted during the periods presented is as follows:

		For the Three Months Ended
		September 30, 2006				September 30, 2005
Weighted average fair value of options granted		$	4.54			$	4.77
Dividend yield			1.5	%			1.4	%
Expected volatility			23.7	%			13.7	%
Risk-free interest rate			4.7	%			4.1	%
Expected option life in years			5.0				5.0

		For the Nine Months Ended
		September 30, 2006				September 30, 2005
Weighted average fair value of options granted		$	4.56			$	4.77
Dividend yield			1.4	%			1.4	%
Expected volatility			21.4	%			13.7	%
Risk-free interest rate			4.7	%			4.1	%
Expected option life in years			5.0				5.0

As of September 30, 2006, there was $405,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 1991 Plan and 2001 Plan. That cost is expected to be recognized over a weighted average period of 2.7 years. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $528,000 and $692,000 respectively. The total fair value of shares vested during the quarter ended September 30, 2006 and 2005 was $6,000 and $0 respectively. The total fair value of shares vested during the nine months ended September 30, 2006 and 2005 was $12,000 and $9,000 respectively.

9. RECENT ACCOUNTING DEVELOPMENTS

Accounting for Servicing of Financial Assets

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 156 (SFAS 156), Accounting for Servicing of Financial Assets – An Amendment of FASB Statement No. 140. SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Under SFAS 156, an entity can elect subsequent fair value measurement of its servicing assets and servicing liabilities by class. An entity should apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions after the effective date. SFAS 156 permits an entity to reclassify certain available-for-sale securities to trading securities provided that they are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities subsequently measured at fair value. The provisions of SFAS 156 are effective for an entity as of the beginning of its first fiscal year that begins after September 15, 2006. Management does not expect the adoption of SFAS 156 to have a material impact on the Company’s financial position or results of operations.

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. Management does not expect the adoption of FIN 48 to have a material impact on the Company’s financial position or results of operations.

Accounting for Purchases of Life Insurance

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. FASB Technical Bulletin No. 85-4 requires that the amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset. Since the issuance of FASB Technical Bulletin No. 85-4, questions arose regarding whether “the amount that could be realized” should consider 1) any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value and 2) the contractual ability to surrender all of the individual-life policies (or certificates in a group policy) at the same time. EITF 06-5 determined that “the amount that could be realized” should 1) consider any additional amounts included in the contractual terms of the policy and 2) assume the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). Any amount that is ultimately realized by the policy holder upon the assumed surrender of the final policy (or final certificate in a group policy) shall be included in the “amount that could be realized.” An entity should apply the provisions of EITF 06-5 through either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or a change in accounting principle through retrospective application to all prior periods. The provisions of EITF 06-5 are effective for fiscal years beginning after December 15, 2006. Management has not yet completed its evaluation of the impact that EITF 06-5 will have.

Fair Value Measurements

In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions should be applied prospectively, except for certain specifically identified financial instruments. Management does not expect the adoption of SFAS 157 to have a material impact to the Company’s financial position or result of operations.

Consideration of the Effects of Prior Year Misstatements

In September 2006, the Securities and Exchange Commission published Staff Accounting Bulleting No. 108 (SAB 108) Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The interpretations in this Staff Accounting Bulleting were issued to address diversity in practice in quantifying financial statement misstatements and the potential under current practice to build up improper amounts on the balance sheet. This guidance will apply to the first fiscal year ending after November 15, 2006 and early application in interim periods is encouraged. Management does not believe the adoption of SAB 108 will have a material impact on the Company’s financial position, results of operations or cash flows.

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

On May 18, 2005, Plumas Bancorp (the “Company”) began trading on The NASDAQ Capital Market under the ticker symbol “PLBC”. Prior to May 18, 2005, the Company was traded on the Over-The-Counter Bulletin Board (“OTC BB”) also under the ticker symbol “PLBC”.

The following discussion and analysis sets forth certain statistical information relating to the Company as of September 30, 2006 and December 31, 2005 and for the three and nine month periods ended September 30, 2006 and 2005. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2005.

CASH DIVIDEND

On October 20, 2006, the Company declared a common stock cash dividend of $0.13 per share. The dividend is payable on November 24, 2006 to its shareholders of record on November 10, 2006.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share Based Payment (“SFAS 123(R)”) using the modified prospective transition method. Prior to adoption of this statement, the Company accounted for its share-based employee compensation plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock-Based Compensation. See Note 7 and 8 to the Condensed Consolidated Financial Statements for additional information related to implementation of SFAS 123(R). There have been no other changes to the Company’s critical accounting policies from those disclosed in the Company’s 2005 Annual Report to Shareholders’ on Form 10-K.

This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006

OVERVIEW

The Company’s net income increased $653 thousand, or 20%, to $3.88 million for the nine months ended September 30, 2006 from $3.23 million for the same period in 2005. The primary contributor to the increase in net income for the first nine months of 2006 was a $1.49 million increase in net interest income. In addition non-interest income increased by $134 thousand primarily as a result of an increase in service charge income of $200 thousand. Partially offsetting these revenue gains was an increase in non-interest expenses of $398 thousand which included increases of $295 thousand in salaries and benefits and $119 thousand in occupancy and equipment costs. The provision for income taxes increased by $572 thousand.

Total assets increased $4.3 million from $472.8 million at December 31, 2005 to $477.1 million at September 30, 2006. Net loans increased by $27.7 million, or 9% from $319.2 million at December 31, 2005 to $346.9 million at September 30, 2006. Funding for the increase in loans was provided by a decrease in cash and cash equivalents of $10.2 million, a decrease in investment securities of $16.9 million, and an increase in Federal Home Loan Bank (FHLB) advances of $9.5 million as deposits declined $8.6 million, or 2% from $426.6 million at December 31, 2005 to $418.0 million at September 30, 2006.

The annualized return on average assets was 1.11% for the nine months ended September 30, 2006 up from 0.97% for the same period in 2005. The annualized return on average equity was 15.7% for the nine months ended September 30, 2006 up from 14.9% for the same period in 2005.

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $16.7 million for the nine months ended September 30, 2006, an increase of $1.5 million, or 10%, from $15.2 million for the same period in 2005. The increase in net interest income was primarily attributed to volume and rate increases in the Company’s average loan balances partially offset by increases in the rates paid on interest bearing deposit account balances and in the level of and rates paid on the junior subordinated debentures.

Interest income increased $3.2 million, or 17%, to $21.7 million for the nine months ended September 30, 2006. Interest and fees on loans increased by $3.2 million from $16.0 million for the nine months ended September 30, 2005 to $19.2 million during the current nine month period. The Company’s average loan balances were $330.2 million for the nine months ended September 30, 2006, up $32.7 million, or 11%, from the $297.5 million during the same period in 2005. The average rate earned on the Company’s loan balances increased 58 basis points to 7.78% during the first nine months of 2006 versus 7.20% during the first nine months of 2005. The increase in yield is consistent with market conditions in the Company’s service area.

Interest on investment securities decreased by $98 thousand, as an increase in yield of 38 basis points was offset by a decline in average investment securities of $14.4 million. Interest earned on federal funds sold increased by $124 thousand. This item benefited both from an increase in yield of 92 basis points and an increase in average balances outstanding of $3.4 million.

Interest expense increased $1.8 million to $5.1 million for the nine months ended September 30, 2006, up from $3.3 million for the same period in 2005. The increase in interest expense was primarily attributed to rate increases on time deposits and other interest-bearing deposits and the increase in the level of and rates paid on the junior subordinated debentures. Partially offsetting these increases in interest expense was a decrease of $102 thousand in interest from FHLB borrowings, resulting from a reduction in the level of these borrowings during the 2006 period.

For the nine months ended September 30, 2006 compared to the same period in 2005, the Company’s average rate paid on time deposits increased 84 basis points to 3.44% from 2.60%. The average rate paid on all other interest-bearing deposits increased 62 basis points to 1.31% for the first nine months of 2006 versus 0.69% for the first nine months of 2005 primarily as a result of the introduction of the Money Fund Plu$ account in September 2005.

Money Fund Plu$ is a high interest bearing checking account designed to pay rates comparable to those available on a typical brokerage account. Since its introduction, there has been significant growth in the total Money Fund Plu$ balances with an average balance of $38.9 million for the nine months ended September 30, 2006 and total balances as of September 30, 2006 of $47.1 million. The average rate paid on Money Fund Plu$ accounts during the nine months ending September 30, 2006 was 3.54%.

Adding to interest expense was an increase in the average balance of the junior subordinated debentures of $4.1 million to $10.3 million and in the average rate paid of 144 basis points from 6.33% to 7.77%.

As a result of the changes noted above, the net interest margin for the nine months ended September 30, 2006 increased 22 basis points, or 4%, to 5.28%, up from 5.06% for the same period in 2005.

The following table presents for the nine-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 annualized yields expressed in both dollars and annualized yield percentages, as well as the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and annualized rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:

		For the Nine Months Ended September 30,												For the Nine Months Ended September 30,
		2006												2005
		Average Balance				Interest				Yield/				Average Balance				Interest				Yield/
		(in thousands)				(in thousands)				Rate				(in thousands)				(in thousands)				Rate
Interest-earning assets:
Loans (1) (2)		$	330,153			$	19,221				7.78	%		$	297,526			$	16,025				7.20	%
Investment securities (1)			87,142				2,337				3.59	%			101,545				2,435				3.21	%
Federal funds sold			4,679				158				4.51	%			1,267				34				3.59	%
Total interest earning assets			421,974				21,716				6.88	%			400,338				18,494				6.18	%
Cash and due from banks			13,489												16,276
Other assets			31,425												26,580
Total assets		$	466,888											$	443,194
Interest-bearing liabilities:
NOW, money market, & savings deposits		$	199,261				1,947				1.31	%		$	176,195				910				0.69	%
Time deposits			93,100				2,395				3.44	%			98,044				1,907				2.60	%
FHLB advances			2,743				108				5.26	%			9,254				210				3.03	%
Other interest-bearing liabilities			281				15				7.14	%			237				9				5.08	%
Junior subordinated debentures			10,310				599				7.77	%			6,231				295				6.32	%
Total interest-bearing liabilities			305,695				5,064				2.21	%			289,961				3,331				1.54	%
Non-interest bearing deposits			123,677												120,256
Other liabilities			4,466												4,094
Shareholders’ equity			33,050												28,883
Total liabilities & equity		$	466,888											$	443,194
Cost of funding interest-earning assets (3)											1.60	%											1.12	%
Net interest income and margin (4)						$	16,652				5.28	%						$	15,163				5.06	%

The following table sets forth changes in interest income and interest expense for the nine-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:

		2006 over 2005 change in net interest income
		for the nine months ended September 30
		(in thousands)
		Volume (1)				Rate (2)				Mix (3)				Total
Interest-earning assets:
Loans		$	1,757			$	1,297			$	142			$	3,196
Investment securities			(345	)			288				(41	)			(98	)
Federal funds sold			91				9				24				124
Total interest income			1,503				1,594				125				3,222
Interest-bearing liabilities:
NOW, money market & savings			119				812				106				1,037
Time deposits			(96	)			615				(31	)			488
FHLB advances			(148	)			155				(109	)			(102	)
Other interest-bearing liabilities			1				4				1				6
Junior subordinated debentures			193				67				44				304
Total interest expense			69				1,653				11				1,733
Net interest income		$	1,434			$	(59	)		$	114			$	1,489

Provision for loan losses. The Company recorded $900,000 in provision for loan losses for each of the nine months ended September 30, 2006 and 2005. 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 nine months ended September 30, 2006, total non-interest income increased $134 thousand, or 4%, to $3.9 million, up from $3.7 million from the comparable period in 2005. This increase was primarily related to an increase in service charges on deposit accounts of $200 thousand from the previous nine month period. This increase primarily relates to fees from increased customer usage of deposit account overdrafts privileges, the collection of fees resulting from those overdrafts and from an increase in the rate charged.

Loan commissions and servicing fees declined by $94 thousand from the 2005 nine month period. This decline primarily relates to an increase in the amortization of servicing assets and I/O strips receivable. Declines of $70 thousand in investment services income and $58 thousand related to a tax refund recorded in 2005 were mostly offset by increases of $28 thousand in earnings on life insurance policies, $48 thousand in official check fees and $43 thousand related to sales of repossessed vehicles and other real estate owned.

The following table describes the components of non-interest income for the nine-month periods ending September 30, 2006 and 2005, in thousands:

		For the Nine Months
		Ended September 30,								Dollar				Percentage
		2006				2005				Change				Change
Service charges on deposit accounts		$	2,731			$	2,531			$	200				7.9	%
Earnings on life insurance policies			291				263				28				10.6	%
Merchant processing income			242				252				(10	)			-4.0	%
Official check fees			126				78				48				61.5	%
Customer service fees			83				82				1				1.2	%
Investment services income			78				148				(70	)			-47.3	%
Federal Home Loan Bank dividends			76				59				17				28.8	%
Safe deposit box and night depository income			51				51				—				—	%
Other deposit account fees			40				25				15				60.0	%
Printed check fee income			38				31				7				22.6	%
Loan commission and servicing fees			36				130				(94	)			-72.3	%
Gain (loss) on sale of real estate and vehicles			6				(37	)			43				116.2	%
Loss on sale of securities			—				(8	)			8				100.0	%
Loss on sale of loans			(4	)			—				(4	)			-100.0	%
Tax refunds			—				58				(58	)			-100.0	%
Other			59				56				3				5.4	%
Total non-interest income		$	3,853			$	3,719			$	134				3.6	%

Non-interest expenses. During the nine months ended September 30, 2006, total non-interest expense increased $398 thousand, or 3%, to $13.3 million, up from $12.9 million for the comparable period in 2005. The increase in non-interest expense was primarily the result of increases in salaries and employee benefits, occupancy and equipment costs and other expenses.

Salaries and other employee benefits increased $295 thousand, or 4%, over the same nine-month period last year. Salaries increased $330 thousand as a result of staffing additions related to branch administration and the establishment of a customer call and resource center as well as general salary merit increases. An increase of $165 thousand in employee bonuses and $94 thousand in employee stock based compensation expense was offset by reductions in workers’ compensation costs of $61 thousand, salary continuation costs of $172 thousand and an increase in capitalized salary costs of $85 thousand related to increased loan origination activities. The decrease in salary continuation expense relates to non-recurring accruals for the Company’s former President and Chief Executive Officer who retired in December 2005.

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share Based Payment (“SFAS 123 (R)”), using the modified prospective application transition method to record stock based compensation. As a result of adopting SFAS 123 (R), the Company recorded $94,000 of employee stock based compensation expense and $36,000 of director stock based compensation expense during the first nine months of 2006. As of September 30, 2006, there was $295,000 of unrecognized employee compensation costs and $110,000 of unrecognized director compensation cost related to non-vested share-based compensation arrangements. These costs are expected to be recognized over a weighted average period of 2.7 years.

Occupancy and equipment expense increased by $119 thousand to $2.39 million during the nine months ended September 30, 2006 from $2.27 million during the first nine months of 2005. This increase included $32 thousand in utilities and $66 thousand in premises depreciation and amortization. The increase in other expenses was related to an increase in other losses of $54 thousand, from $30 thousand during the 2005 nine month period to $84 thousand for the nine months ended September 30, 2006. These losses primarily relate to a higher level of charge-offs related to overdrafts on deposit accounts.

Armored car and courier costs decreased $68 thousand, or 25%, as compared to the nine months ended September 30, 2005. Courier savings were realized as a result of the Bank’s implementation of “Check 21”. Check 21 is a federal law promoting the transmission of checks electronically between institutions rather than physically transporting the items.

The following table describes the components of non-interest expense for the nine-month periods ending September 30, 2006 and 2005.

		For the Nine Months
		Ended September 30,								Dollar				Percentage
		2006				2005				Change				Change
Salaries and employee benefits		$	7,366			$	7,071			$	295				4.2	%
Occupancy and equipment			2,387				2,268				119				5.2	%
Professional fees			533				542				(9	)			-1.7	%
Outside service fees			443				509				(66	)			-13.0	%
Business development			405				364				41				11.3	%
Advertising and shareholder relations			364				340				24				7.1	%
Telephone and data communication			286				265				21				7.9	%
Director compensation			279				237				42				17.7	%
Deposit premium amortization			226				226				—				—
Stationery and supplies			205				253				(48	)			-19.0	%
Armored car and courier			202				270				(68	)			-25.2	%
Postage			181				182				(1	)			-0.5	%
Insurance			129				177				(48	)			-27.1	%
Loan and collection expenses			111				79				32				40.5	%
Other			215				151				64				42.4	%
Total non-interest expense		$	13,332			$	12,934			$	398				3.1	%

Provision for income taxes. The provision for income taxes was $2.4 million, or 38.1% of income before provision for income taxes for the nine months ended September 30, 2006. This compares to $1.8 million or 36.1% of pre-tax income during the first nine months of 2005. The increase in provision as a percentage of income before provision for income taxes during 2006 includes the effect of employee stock based compensation expense which is included in expense during 2006, but excluded from the calculation of the provision for income taxes and a reduction in the percentage of tax exempt income as a percentage of income before tax.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006

OVERVIEW

The Company’s net income increased $148 thousand, or 12%, to $1.4 million for the three months ended September 30, 2006 from $1.25 million for the same period in 2005. The primary contributor to the increase in net income for the third quarter of 2006 was a $342 thousand increase in net interest income. In addition non-interest income increased by $87 thousand primarily as a result of an increase in service charge income of $154 thousand. Partially offsetting these revenue gains were increases of $95 thousand in salaries and benefits, $52 thousand in occupancy and equipment costs, $19 thousand in all other non-interest expense categories and $115 thousand in the provision for income taxes.

The annualized return on average assets was 1.17% for the three months ended September 30, 2006 up from 1.07% for the same period in 2005. The annualized return on average equity was 16.2% for the three months ended September 30, 2006 down from 16.5% for the same period in 2005.

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $5.7 million for the three months ended September 30, 2006, an increase of $342 thousand, or 6%, from $5.4 million for the same period in 2005. The increase in net interest income was attributed to volume and rate increases in the Company’s average loan portfolio partially offset by increases in rates paid on interest bearing deposits, an increase in the rates paid on FHLB advances and in the increases in the level of and rates paid on the junior subordinated debentures.

Interest income increased $927 thousand, or 14%, to $7.6 million for the three months ended September 30, 2006. Interest and fees on loans increased by $975 thousand from $5.9 million for the three months ended September 30, 2005 to $6.8 million during the 2006 third quarter. The increase in interest income was primarily attributed to volume and rate increases in the loan portfolio. The Company’s average loan balances were $344 million for the three months ended September 30, 2006, up $26 million, or 8%, from the $318 million for the same period in 2005. The average yield earned on loans increased by 57 basis points from 7.32% during the third quarter of 2005 to 7.89% during the 2006 quarter.

A positive yield variance of 42 basis points on investment securities was offset by a decrease in the average balance outstanding of $14.6 million, resulting in a decrease of $32 thousand in interest earned on investment securities.

Interest expense increased $585 thousand, or 46%, to $1.9 million for the three months ended September 30, 2006, up from $1.3 million for the same period in 2005. The increase in interest expense was primarily attributed to the increase in the level of and rates paid on interest bearing transaction accounts and the increase in rates paid on time deposits, partially offset by the decrease in the level of average time deposits. The Company also experienced an increase in the rates paid on FHLB advances of 179 basis points and rate and volume increases on junior subordinated debentures. Rates on these debentures increased 130 basis points while the level of average amounts outstanding increased $4.0 million.

The rate and volume increases in interest expense on deposit accounts, excluding time deposits, primarily relates to the introduction of the Company’s Money Fund Plu$ product in September 2005. Money Fund Plu$ deposits averaged $48.9 million during the third quarter of 2006 with an average rate paid of 3.59%. The average rate paid on time deposits increased from 2.92% during the 2005 third quarter to 3.64% during the quarter ended September 30, 2006.

As a result of the changes noted above, the net interest margin for the three months ended September 30, 2006 increased 20 basis points, or 4%, to 5.34%, up from 5.14% for the same period in 2005.

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 annualized yields expressed in both dollars and annualized yield percentages, as well as, the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and annualized rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:

		For the Three Months Ended September 30,												For the Three Months Ended September 30,
		2006												2005
		Average Balance				Interest				Yield/				Average Balance				Interest				Yield/
		(in thousands)				(in thousands)				Rate				(in thousands)				(in thousands)				Rate
Interest-earning assets:
Loans (1) (2)		$	343,622			$	6,837				7.89	%		$	317,730			$	5,862				7.32	%
Investment securities (1)			81,513				741				3.61	%			96,071				773				3.19	%
Federal funds sold			1,113				14				4.99	%			3,207				30				3.71	%
Total interest earning assets			426,248				7,592				7.07	%			417,008				6,665				6.34	%
Cash and due from banks			13,119												17,675
Other assets			33,114												27,467
Total assets		$	472,481											$	462,150
Interest-bearing liabilities:
NOW, money market, & savings deposits		$	200,529				730				1.44	%		$	178,964				354				0.78	%
Time deposits			90,585				831				3.64	%			102,308				753				2.92	%
Federal Home Loan Bank advances			5,137				69				5.33	%			4,935				44				3.54	%
Other interest-bearing liabilities			289				6				8.24	%			251				4				6.32	%
Junior subordinated debentures			10,310				215				8.27	%			6,320				111				6.97	%
Total interest-bearing liabilities			306,850				1,851				2.39	%			292,778				1,266				1.72	%
Non-interest bearing deposits			127,145												134,678
Other liabilities			4,350												4,670
Shareholders’ equity			34,136												30,024
Total liabilities & equity		$	472,481											$	462,150
Cost of funding interest-earning assets (3)											1.73	%											1.20	%
Net interest income and margin (4)						$	5,741				5.34	%						$	5,399				5.14	%

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:

		2006 over 2005 change in net interest income
		for the three months ended September 30
		(in thousands)
		Volume (1)				Rate (2)				Mix (3)				Total
Interest-earning assets:
Loans		$	478			$	460			$	37			$	975
Investment securities			(117	)			100				(15	)			(32	)
Federal funds sold			(19	)			10				(7	)			(16	)
Total interest income			342				570				15				927
Interest-bearing liabilities:
NOW, money market, & savings			43				297				36				376
Time deposits			(86	)			185				(21	)			78
FHLB advances			2				22				1				25
Other interest-bearing liabilities			1				1				—				2
Junior subordinated debentures			70				21				13				104
Total interest expense			30				526				29				585
Net interest income		$	312			$	44			$	(14	)		$	342

Provision for loan losses. The Company recorded $300,000 in provision for loan losses for each of the three months ended September 30, 2006 and 2005. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. 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 September 30, 2006, total non-interest income increased by $87 thousand. This increase resulted from a $154 thousand increase in service charges on deposit accounts. Partially offsetting the increase in service charge income was a $70 thousand decline in loan commission and servicing fees primarily related to an increase in the amortization of servicing assets and I/O strips receivable.

The following table describes the components of non-interest income for the three-month periods ending September 30, 2006 and 2005, in thousands:

		For the Three
		Months
		Ended September 30,								Dollar				Percentage
		2006				2005				Change				Change
Service charges on deposit accounts		$	1,022			$	868			$	154				17.7	%
Merchant processing income			111				120				(9	)			-7.5	%
Earnings on life insurance policies			100				84				16				19.0	%
Official check fees			46				32				14				43.8	%
Federal Home Loan Bank dividends			28				21				7				33.3	%
Customer service fees			23				30				(7	)			-23.3	%
Investment services income			23				46				(23	)			-50.0	%
Safe deposit box and night depository income			15				16				(1	)			-6.3	%
Other deposit account fees			12				11				1				9.1	%
Printed check fee income			7				10				(3	)			-30.0	%
Gain (loss) on sale of real estate and vehicles			4				8				(4	)			-50.0	%
Loan commission and servicing fees			(29	)			41				(70	)			-170.7	%
Other			31				19				12				63.2	%
Total non-interest income		$	1,393			$	1,306			$	87				6.7	%

Non-interest expenses. Non-interest expense increased by $166 thousand from $4.4 million during the third quarter of 2005 to $4.6 million during the current quarter. This increase is primarily related to an increase of $95 thousand in salaries and employee benefits. In addition occupancy and equipment expense increased by $52 thousand related to increased occupancy costs and outside service fees increased by $52 thousand.

The increase in salaries and employee benefits included an increase in salary expense of $64 thousand related to higher staffing levels and merit increases, an increase in bonus expense of $81 thousand, a decrease in capitalized loan origination costs of $46 thousand and employee stock based compensation expense of $31 thousand. These increases in expense were partially offset by a decrease in salary continuation expense of $104 thousand related to non-recurring accruals for the Company’s former President and Chief Executive Officer who retired in December 2005.

The following table describes the components of non-interest expense for the three-month periods ending September 30, 2006 and 2005.

		For the Three
		Months
		Ended September 30								Dollar				Percentage
		2006				2005				Change				Change
Salaries and employee benefits		$	2,500			$	2,405			$	95				4.0	%
Occupancy and equipment			827				775				52				6.7	%
Outside service fees			224				172				52				30.2	%
Professional fees			188				180				8				4.4	%
Business development			123				126				(3	)			-2.4	%
Advertising and shareholder relations			122				116				6				5.2	%
Director compensation			104				78				26				33.3	%
Telephone and data communication			89				108				(19	)			-17.6	%
Deposit premium amortization			76				76				—				—	%
Armored car and courier			70				82				(12	)			-14.6	%
Stationery and supplies			65				93				(28	)			-30.1	%
Postage			58				58				—				—	%
Insurance			45				60				(15	)			-25.0	%
Loan and collection expense			31				34				(3	)			-8.8	%
Other			58				51				7				13.7	%
Total non-interest expense		$	4,580			$	4,414			$	166				3.8	%