PLUMAS BANCORP - Quarter Report: 2008 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, 2008

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

FOR THE TRANSITION PERIOD FROM                      TO                     

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

California		75-2987096
(State or Other Jurisdiction of Incorporation or		(I.R.S. Employer Identification No.)
Organization)
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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o		Smaller Reporting Company þ

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 3, 2008 4,780,433 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,
		2008				2007
Assets
Cash and due from banks		$	17,003			$	13,207
Federal funds sold			12,100				—
Cash and cash equivalents			29,103				13,207
Investment securities (fair value of $42,340 at September 30, 2008 and $55,367 at December 31, 2007)			42,396				55,292
Loans, less allowance for loan losses of $4,896 at September 30, 2008 and $4,211 at December 31, 2007 (Notes 3 and 4)			353,648				349,302
Premises and equipment, net			16,017				14,666
Intangible assets, net			865				1,037
Bank owned life insurance			9,680				9,428
Real estate and vehicles acquired through foreclosure			2,412				537
Accrued interest receivable and other assets			9,378				9,646
Total assets		$	463,499			$	453,115
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing		$	118,175			$	111,240
Interest bearing			265,040				280,700
Total deposits			383,215				391,940
Short-term borrowings			27,000				7,500
Accrued interest payable and other liabilities			5,899				6,226
Junior subordinated deferrable interest debentures			10,310				10,310
Total liabilities			426,424				415,976
Commitments and contingencies (Note 4)			—				—
Shareholders’ equity (Notes 5, 7 and 10):
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 — 4,793,713 shares at September 30, 2008 and 4,869,130 shares at December 31, 2007			5,203				5,042
Retained earnings			31,805				32,204
Accumulated other comprehensive income (loss) (Note 6)			67				(107	)
Total shareholders’ equity			37,075				37,139
Total liabilities and shareholders’ equity		$	463,499			$	453,115

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP

(Unaudited)
(In thousands, except per share data)

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Interest Income:
Interest and fees on loans		$	5,978			$	6,898			$	18,169			$	20,908
Interest on investment securities:
Taxable			324				448				1,092				1,413
Exempt from Federal income taxes			128				131				383				397
Interest on Federal funds sold			1				83				3				91
Total interest income			6,431				7,560				19,647				22,809
Interest Expense:
Interest on deposits			975				1,864				3,646				5,348
Interest on short-term borrowings			79				29				174				465
Interest on junior subordinated deferrable interest debentures			144				213				473				627
Other			4				6				13				17
Total interest expense			1,202				2,112				4,306				6,457
Net interest income before provision for loan losses			5,229				5,448				15,341				16,352
Provision for Loan Losses			700				125				1,690				500
Net interest income after provision for loan losses			4,529				5,323				13,651				15,852
Non-Interest Income:
Service charges			1,015				1,009				2,937				2,766
Earnings on Bank owned life insurance policies			107				105				314				311
Impairment loss on investment security			(415	)			—				(415	)			—
Other			303				314				890				918
Total non-interest income			1,010				1,428				3,726				3,995
Non-Interest Expenses:
Salaries and employee benefits			2,799				2,675				8,265				8,142
Occupancy and equipment			939				870				2,873				2,659
Other			1,241				1,139				3,755				3,631
Total non-interest expenses			4,979				4,684				14,893				14,432
Income before provision for income taxes			560				2,067				2,484				5,415
Provision for Income Taxes			170				789				822				2,055
Net income		$	390			$	1,278			$	1,662			$	3,360
Basic earnings per share (Note 5)		$	0.08			$	0.26			$	0.34			$	0.67
Diluted earnings per share (Note 5)		$	0.08			$	0.26			$	0.34			$	0.67
Cash dividends per share		$	0.16			$	0.15			$	0.16			$	0.15

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP

(Unaudited)
(In thousands)

		For the Nine Months
		Ended September 30,
		2008				2007
Cash Flows from Operating Activities:
Net income		$	1,662			$	3,360
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,690				500
Change in deferred loan origination costs/fees, net			235				357
Depreciation and amortization			1,475				1,665
Stock-based compensation expense			218				209
Amortization of investment security premiums			46				125
Accretion of investment security discounts			(43	)			(47	)
Impairment loss on investment security			415				—
Net loss on disposal/sale of premises and equipment			13				32
Net loss (gain) on sale of vehicles owned			17				(24	)
Earnings on Bank owned life insurance policies			(252	)			(251	)
Write-down of other real estate to market value			39				—
Increase in accrued interest receivable and other assets			(97	)			(456	)
(Decrease) increase in accrued interest payable and other liabilities			(751	)			62
Net cash provided by operating activities			4,667				5,532
Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities			13,475				21,375
Proceeds from matured and called held-to-maturity investment securities			100				435
Purchases of available-for-sale investment securities			(2,990	)			(11,009	)
Proceeds from principal repayments from available-for-sale government-guaranteed mortgage-backed securities			2,190				2,288
Net (increase) decrease in loans			(8,500	)			1,295
Proceeds from sale of other vehicles			298				354
Purchase of premises and equipment			(2,425	)			(835	)
Net cash provided by investing activities			2,148				13,903

Continued on next page.

PLUMAS BANCORP

(Unaudited)
(In thousands)
(Continued)

		For the Nine Months
		Ended September 30,
		2008				2007
Cash Flows from Financing Activities:
Net increase (decrease) in demand, interest bearing and savings deposits		$	17,026			$	(15,973	)
Net (decrease) increase in time deposits			(25,751	)			30,618
Net increase (decrease) in short-term borrowings			19,500				(20,000	)
Net proceeds from exercise of stock options			21				40
Payment of cash dividends			(770	)			(750	)
Repurchase and retirement of common stock			(945	)			(1,451	)
Net cash provided by (used in) financing activities			9,081				(7,516	)
Increase in cash and cash equivalents			15,896				11,919
Cash and Cash Equivalents at Beginning of Year			13,207				11,293
Cash and Cash Equivalents at End of Period		$	29,103			$	23,212
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense		$	4,639			$	5,995
Income taxes		$	1,090			$	2,475
Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure		$	2,229			$	534
Net change in unrealized loss on available-for-sale securities		$	174			$	367
Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options		$	—			$	49

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP

1. GENERAL

During 2002, Plumas Bancorp (the “Company”) was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the “Bank”) in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation expansion and diversification. The Company formed Plumas Statutory Trust I (“Trust I”) for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II (“Trust II”) for the sole purpose of issuing trust preferred securities on September 28, 2005.

The Bank operates thirteen branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Loyalton, Portola, Quincy, Redding, Susanville, Tahoe City, Truckee and Westwood. In addition to its branch network, the Bank operates a commercial lending office in Reno, Nevada and a lending office specializing in government-guaranteed lending in Auburn, California. 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 interest and fee income 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, 2008 and December 31, 2007 and its results of operations for the three-month and nine-month periods ended September 30, 2008 and 2007 and its cash flows for the nine-month periods ended September 30, 2008 and 2007. Certain reclassifications have been made to prior period’s balances to conform to classifications used in 2008.

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 annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 2007 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2008 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,
		2008				2007
Commercial		$	33,624			$	39,584
Agricultural			34,903				35,762
Real estate — mortgage			152,745				128,357
Real estate — construction and land development			75,383				76,478
Consumer			61,560				72,768
			358,215				352,949
Deferred loan costs, net			329				564
Allowance for loan losses			(4,896	)			(4,211	)
		$	353,648			$	349,302

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 $81,743,000 and $96,867,000 and stand-by letters of credit of $2,667,000 and $655,000 at September 30, 2008 and December 31, 2007, respectively.

Of the loan commitments outstanding at September 30, 2008, $16,487,000 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, 2008 or December 31, 2007.

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,
		2008				2007				2008				2007
Earnings Per Share:
Basic earnings per share		$	0.08			$	0.26			$	0.34			$	0.67
Diluted earnings per share		$	0.08			$	0.26			$	0.34			$	0.67
Weighted Average Number of Shares Outstanding:
(in thousands)
Basic shares			4,809				4,945				4,830				4,980
Diluted shares			4,820				4,976				4,852				5,025

Stock options not included in the computation of diluted earnings per share, due to their antidilutive effect, were 453,000 and 276,000 for the three months ended September 30, 2008 and 2007, respectively and 374,000 and 186,000 for the nine months ended September 30, 2008 and 2007, respectively.

6. COMPREHENSIVE INCOME

Total comprehensive income for the three months ended September 30, 2008 and 2007 totaled $491,000 and $1,558,000, respectively. Comprehensive income is comprised of unrealized gains, net of taxes, on available-for-sale investment securities, which were $101,000 and $280,000 for the three months ended September 30, 2008 and 2007, respectively, together with net income.

Total comprehensive income for the nine months ended September 30, 2008 and 2007 totaled $1,836,000 and $3,727,000, respectively. Comprehensive income is comprised of unrealized gains, net of taxes, on available-for-sale investment securities, which were $174,000 and $367,000 for the nine months ended September 30, 2008 and 2007, respectively, together with net income.

At September 30, 2008 and December 31, 2007, accumulated other comprehensive income (loss), net of taxes, totaled $67,000 and $(107,000), respectively, and is reflected as a component of shareholders’ equity.

7. STOCK-BASED COMPENSATION

In 2001 and 1991, the Company established Stock Option Plans for which 883,461 shares of common stock remain reserved for issuance to employees and directors and 403,589 shares are available for future grants under incentive and nonstatutory agreements as of September 30, 2008. The Company granted 90,300 and 155,700 options during the nine months ended September 30, 2008 and 2007 respectively. The weighted average grant date fair value of options granted for the nine months ended September 30, 2008 and 2007 was $2.54 and $4.53, respectively.

Compensation cost related to stock options recognized in operating results under SFAS No. 123R was $74,000 and $78,000 for the quarters ended September 30, 2008 and 2007, respectively. The associated future income tax benefit recognized was $6,000 and $7,000 for the quarters ended September 30, 2008 and 2007, respectively. Compensation cost related to stock options recognized in operating results under SFAS No. 123R was $218,000 and $209,000 in the nine months ended September 30, 2008 and 2007, respectively. Compensation expense is recognized over the vesting period of the stock options on a straight-line basis. The associated future income tax benefit recognized was $18,000 and $19,000 for the nine months ended September 30, 2008 and 2007, respectively.

In accordance with SFAS 123 (R) the Company has presented excess tax benefits from the exercise of stock-based compensation awards as a financing activity in the consolidated statement of cash flows.

The following table summarizes information about stock option activity for the nine months ended September 30, 2008:

										Weighted Average
										Remaining
						Weighted Average				Contractual Term				Intrinsic Value
		Shares				Exercise Price				(in years)				(in thousands)
Options outstanding at December 31, 2007			395,772			$	13.37
Options granted			90,300				12.40
Options exercised			(3,200	)			6.59
Options cancelled			(3,000	)			14.53
Options outstanding at September 30, 2008			479,872			$	13.23				5.8			$	141
Options exercisable at September 30, 2008			243,381			$	11.98				4.8			$	141
Expected to vest after September 30, 2008			236,491			$	14.52				6.7			$	—

The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the nine months ended September 30, 2008 was $18,000. During the nine months ended September 30, 2008, the amount of cash received from the exercise of stock options was $21,000.

At September 30, 2008, there was $628,000 of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 2.5 years. The total fair value of options vested during the nine months ended September 30, 2008 was $176,000.

8. INCOME TAXES

The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the condensed consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

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

9. FAIR VALUE MEASUREMENT

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

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non recurring basis as of September 30, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value based on the hierarchy:

Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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

Fair Value Measurements at September 30, 2008 Using

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

(in 000’s)

September 30, 2008

(Level 1)

(Level 2)

(Level 3)

Assets:

Available-for-sale securities

$

29,010

$

16,257

$

12,753

$

—

The fair value of securities available for sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities. Changes in fair market value are recorded in other comprehensive income.

Financial assets and liabilities measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements at September 30, 2008 Using

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

(in 000’s)

September 30, 2008

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

$

3,687

$

—

$

3,687

$

—

Impaired loans, all of which are measured for impairment using the fair value of the collateral as they are collateral dependent loans, had a principal balance of $3,776,000 with a related valuation allowance of $89,000 at September 30, 2008. Declines in the collateral values of impaired loans during the first nine months of 2008 were $34,000 which was reflected as additional specific allocations of the allowance for loan losses.

10. STOCK REPURCHASE

In connection with the Company’s stock repurchase plan for the year ending December 31, 2008, a total of 78,617 shares were repurchased during the nine months ended September 30, 2008 at an average price of $12.03 per share. Management of the Company is authorized to repurchase an additional 165,383 shares; however, the Board of Directors may suspend, terminate or modify the repurchase plan at any time.

11. NEW ACCOUNTING PRONOUNCEMENTS

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles"(SFAS No. 162). This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. The provisions of SFAS No. 162 did not have a material impact on the Company’s condensed consolidated financial statements.

On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective immediately, and includes prior period financial statements that have not yet been issued, and therefore the Company is subject to the provision of the FSP effective September 30, 2008. The implementation of FSP FAS 157-3 did not affect the Company’s fair value measurement as of September 30, 2008.

12. SUBSEQUENT EVENTS

On October 24, 2008, the Company declared a common stock cash dividend of $0.08 per share. The dividend will be payable on November 21, 2008 to its shareholders of record on November 7, 2008.

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 (the “Company”).

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

The following discussion and analysis sets forth certain statistical information relating to the Company as of September 30, 2008 and December 31, 2007 and for the three and nine month periods ended September 30, 2008 and 2007. 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, 2007.

Plumas Bancorp trades on The NASDAQ Capital Market under the ticker symbol “PLBC”.

CASH DIVIDEND

On October 24, 2008, the Company declared a semi-annual common stock cash dividend of $0.08 per share. This follows the cash dividend paid in May of $0.16 per share, for total cash dividends in 2008 of $0.24 per share. Cash dividends in 2007 totaled $0.30 per share.

CRITICAL ACCOUNTING POLICIES

There have been no changes to the Company’s critical accounting policies from those disclosed in the Company’s 2007 Annual Report to Shareholders’ on Form 10-K.

OVERVIEW

The Company’s net income declined by $1.7 million, or 50%, to $1.66 million for the nine months ended September 30, 2008 from $3.36 million for the same period in 2007. This decline in net income resulted from a decline in net interest income of $1.0 million an increase in the provision for loan losses of $1.2 million, an increase of $461 thousand in non-interest expense and a decrease in non-interest income of $269 thousand, primarily from a $415 thousand impairment charge on an investment security. Related to the reduction in pre-tax earnings, the provision for income taxes declined by $1.2 million.

Total assets increased by $10.4 million from $453.1 million at December 31, 2007 to $463.5 at September 30, 2008. Cash and cash equivalents increased by $15.9 million from $13.2 million at December 31, 2007 to $29.1 million at September 30, 2008. Investment securities declined by $12.9 million from $55.3 million at December 31, 2007 to $42.4 million at September 30, 2008. Net loans increased by $4.3 million from $349.3 million at December 31, 2007 to $353.6 million at September 30, 2008. Real estate and vehicles acquired through foreclosure increased by $1.9 million to $2.4 million.

Short-term borrowings increased by $19.5 million from $7.5 million at December 31, 2007 to $27.0 million at September 30, 2008. The increase in short-term borrowings along with the maturities and calls of investment securities provided funding for the increase in loans, cash and federal funds sold and offset a decrease in deposits of $8.7 million from $391.9 million at December 31, 2007 to $383.2 million at September 30, 2008. Total shareholders’ equity remained consistent at $37.1 million as of December 31, 2007 and September 30, 2008 as the retention of earnings during that period was offset by cash dividends paid and repurchases of the Company’s common stock.

The annualized return on average assets was 0.50% for the nine months ended September 30, 2008 down from 0.96% for the same period in 2007. The annualized return on average equity was 5.9% for the nine months ended September 30, 2008 down from 12.2% for the same period in 2007.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, for the nine months ended September 30, 2008 was $15.3 million, a decline of $1.0 million from the $16.3 million earned during the same period in 2007. Decreases in the yield on the Company’s loan portfolio along with a reduction in the average balance of investment securities were partially offset by declines in the average balances and rates paid on deposits and short-term borrowings and a decline in the rates paid on junior subordinated debentures.

Interest income declined by $3.2 million, or 14%, to $19.6 million for the nine months ended September 30, 2008. Interest and fees on loans decreased by $2.7 million from $20.9 million for the nine months ended September 30, 2007 to $18.2 million during the current nine-month period. The Company’s average loan balances were $353.6 million for the nine months ended September 30, 2008, consistent with the $354.5 million for the same period in 2007. The average rate earned on the Company’s loan balances decreased 103 basis points to 6.86% during the first nine months of 2008 from 7.89% during the first nine months of 2007. During this same period the average prime rate declined by 280 basis points. The decline in the prime rate is reflective of the 325 basis point reduction in the federal funds target rate made by the Federal Open Market Committee between September 18, 2007 and April 30, 2008. At September 30, 2008 approximately 65% of the Company’s loan portfolio was variable rate of which approximately 37% is indexed to the prime interest rate.

Interest on investment securities decreased by $335 thousand, as an increase in yield of 25 basis points was offset by a decline in average investment securities of $15.0 million. The decrease in the overall investment portfolio primarily resulted from maturities, calls and pay downs that were used to provide funding for loan growth and liquidity. During the third quarter we took an impairment charge of $415 thousand of our $500 thousand investment in a Lehman Brothers Holdings, Inc. corporate debt security. See our discussion of non-interest income for additional information on this impairment charge.

Interest expense decreased $2.2 million, or 33%, to $4.3 million for the nine months ended September 30, 2008, down from $6.5 million for the same period in 2007, due to the decrease in both the rates paid on our interest bearing liabilities and in the average balances. Average interest bearing liabilities declined by $17.3 million from $310.9 million during the nine months ended September 30, 2007 to $293.6 million during the current period. The $17.3 million decline in average interest bearing liabilities includes a $16.0 million decline in average interest bearing deposits and a $1.3 million decline in average short-term borrowings

Interest expense across all of our deposit products declined with a total reduction of $1.7 million. Interest expense on time deposits declined $984 thousand while interest expense on NOW accounts declined $594 thousand. In addition, interest on money market and savings accounts declined by $124 thousand. The average rate paid on the Company’s interest bearing deposits declined 69 basis points from 2.48% for the nine months ended September 30, 2007 to 1.79% during the current nine month period.

The decline in NOW account interest expense was primarily related to a reduction in the rate paid on our Money Fund Plu$ account balances and is consistent with recent declines in market interest rates. Money Fund Plus$ is an interest bearing checking account designed to pay rates comparable to those available on a typical brokerage account. The average balance of NOW accounts declined by $3.8 million from $77.8 million during the nine months ended September 30, 2007 to $74.0 million during the current nine-month period.

Average time deposits totaled $114.4 million during the first nine months of 2008, down $4.4 million from $118.8 million during the nine months ended September 30, 2007. The average rate paid on time deposits decreased 98 basis points from 4.32% during the nine months ended September 30, 2007 to 3.34% during the same period in 2008.

During 2007 the Company offered a promotional short-term time deposit product which we continued offering until February of 2008. At September 30, 2008 all of these promotional short-term time deposits have matured. The decline in the rate paid on time deposits reflects the maturity of the higher rate promotional time deposit product, some of which have been renewed at lower rates, and a decline in rates paid on new and renewed time deposits.

Interest expense on short-term borrowings decreased by $291 thousand from $465 thousand during the 2007 period to $174 thousand for the nine months ended September 30, 2008. This decline resulted from a decrease in the average balance outstanding of $1.3 million and a decline in the rate paid on these borrowings of 311 basis points. The average rate paid on the Company’s trust preferred securities (junior subordinated debentures) decreased 200 basis points to 6.13% for the nine months ended September 30, 2008 from 8.13% during the same period in 2007. The rate on the trust preferred securities is tied to the London Interbank Offered Rate (LIBOR) rate and will fluctuate with changes in LIBOR; however the rate resets quarterly so the effect of recent changes in LIBOR were not fully reflected in the rate paid during the nine months ended September 30, 2008.

As a result of the changes noted above, the net interest margin for the nine months ended September 30, 2008 decreased 11 basis points to 5.09%, down from 5.20% for the same period in 2007.

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, 2008												For the Nine Months Ended September 30, 2007
		Average Balance				Interest				Yield/				Average Balance				Interest				Yield/
		(in thousands)				(in thousands)				Rate				(in thousands)				(in thousands)				Rate
Interest-earning assets:
Loans (1) (2)		$	353,639			$	18,169				6.86	%		$	354,478			$	20,908				7.89	%
Investment securities (1)			48,911				1,475				4.03	%			63,955				1,810				3.78	%
Federal funds sold			153				3				2.62	%			2,384				91				5.10	%
Total interest-earning assets			402,703				19,647				6.52	%			420,817				22,809				7.25	%
Cash and due from banks			11,845												12,886
Other assets			32,745												32,413
Total assets		$	447,293											$	466,116
Interest-bearing liabilities:
NOW deposits		$	73,957				449				0.81	%		$	77,783				1,043				1.79	%
Money market deposits			36,300				216				0.79	%			40,634				266				0.88	%
Savings deposits			48,090				125				0.35	%			51,552				199				0.52	%
Time deposits			114,372				2,856				3.34	%			118,753				3,840				4.32	%
Total deposits			272,719				3,646				1.79	%			288,722				5,348				2.48	%
Short-term borrowings			10,299				174				2.26	%			11,585				465				5.37	%
Other interest-bearing liabilities			309				13				5.62	%			302				17				7.53	%
Junior subordinated debentures			10,310				473				6.13	%			10,310				627				8.13	%
Total interest-bearing liabilities			293,637				4,306				1.96	%			310,919				6,457				2.78	%
Non-interest bearing deposits			110,677												113,748
Other liabilities			5,602												4,628
Shareholders’ equity			37,377												36,821
Total liabilities & equity		$	447,293											$	466,116
Cost of funding interest-earning assets (3)											1.43	%											2.05	%
Net interest income and margin (4)						$	15,341				5.09	%						$	16,352				5.20	%

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:

		2008 over 2007 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		$	(50	)		$	(2,715	)		$	26			$	(2,739	)
Investment securities			(426	)			117				(26	)			(335	)
Federal funds sold			(85	)			(44	)			41				(88	)
Total interest income			(561	)			(2,642	)			41				(3,162	)
Interest-bearing liabilities:
NOW deposits			(51	)			(572	)			29				(594	)
Money market deposits			(29	)			(24	)			3				(50	)
Savings deposits			(13	)			(65	)			4				(74	)
Time deposits			(142	)			(878	)			36				(984	)
Short-term borrowings			(51	)			(270	)			30				(291	)
Other interest-bearing liabilities			—				(4	)			—				(4	)
Junior subordinated debentures			—				(155	)			1				(154	)
Total interest expense			(286	)			(1,968	)			103				(2,151	)
Net interest income		$	(275	)		$	(674	)		$	(62	)		$	(1,011	)

Provision for loan losses. In response to an increase in the level of adversely classified loans and net loan charge-offs and our evaluation of the overall adequacy of the allowance for loan losses in the current economic environment, particularly related to the decline in real estate values, the Company increased its loan loss provision from $500 thousand during the first nine months of 2007 to $1.7 million during the current nine-month period. 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 provide for the probable losses 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 loans and assets are further discussed under the Financial Condition section of this document.

Non-interest income. For the nine months ended September 30, 2008 non-interest income declined by $269 thousand or 7% as compared to the same period in the prior year. The primary cause for the decline was related to an other-than-temporary impairment charge for an investment in a debt security issued by Lehman Brothers Holdings, Inc. totaling $415 thousand. The after-tax impact on earnings of this item was approximately $250 thousand or $0.05 per diluted share.

In addition to this unanticipated charge, official checks fees decreased by $36 thousand, income from the sale of repossessed vehicles decreased by $41 thousand from a gain of $24 thousand during the nine months ended September 30, 2007 to a loss of $17 thousand during the current nine month period and investment services income declined by $28 thousand.

Partially offsetting these reductions in non-interest income were increases in service charge income and in the gain on sale of government-guaranteed loans. Related to a change in fee structure instituted during mid 2007, service charge income increased by $171 thousand from $2.8 million during the nine months ended September 30, 2007 to $2.9 million during the current nine month period. Related to the expansion of our SBA lending activities; gains on the sale of loans increased by $65 thousand to $111 thousand for the nine months ended September 30, 2008.

The following table describes the components of non-interest income for the nine-month periods ending September 30, 2008 and 2007, dollars in thousands:

		For the Nine Months
		Ended September 30,								Dollar				Percentage
		2008				2007				Change				Change
Service charges on deposit accounts		$	2,937			$	2,766			$	171				6.2	%
Earnings on life insurance policies			314				311				3				1.0	%
Merchant processing income			222				221				1				0.5	%
Gain on sale of loans			111				46				65				141.3	%
Investment services income			99				127				(28	)			-22.0	%
Customer service fees			87				89				(2	)			-2.2	%
Federal Home Loan Bank dividends			87				82				5				6.1	%
Official check fees			83				119				(36	)			-30.3	%
Loan servicing fees			66				84				(18	)			-21.4	%
Safe deposit box and night depository income			50				49				1				2.0	%
Other deposit account fees			27				29				(2	)			-6.9	%
Printed check fee income			18				23				(5	)			-21.7	%
(Loss) gain on sale of vehicles			(17	)			24				(41	)			-170.8	%
Impairment loss on investment security			(415	)			—				(415	)			-100.0	%
Other			57				25				32				128.0	%
Total non-interest income		$	3,726			$	3,995			$	(269	)			-6.7	%

Non-interest expenses. During the nine months ended September 30, 2008, total non-interest expense increased $461 thousand, or 3%, to $14.9 million, up from $14.4 million for the comparable period in 2007. The increase in non-interest expense was primarily the result of increases in salaries and employee benefits, occupancy and equipment expense, loan collection expenses and FDIC insurance premiums.

Net additions to salaries and employee benefit expenses of $123 thousand resulted from increases in salary expense of $344 thousand related to expansion of our SBA lending activities, growth in our Reno loan production office and increases in staffing at our Redding branch. Growth in these areas was somewhat offset by decreases of $157 thousand in salaries and employee benefits in other departments and was also partially offset by an increase in the deferral of loan origination costs totaling $64 thousand.

The largest increase in non-interest expense was a $213 thousand increase in occupancy and equipment costs primarily related to an increase in software related costs and an increase in occupancy costs at our Redding branch. Occupancy costs increased at our Redding branch as a result of the opening of our permanent branch in July, 2008. Consistent with the increase in nonperforming loans and assets during the period (See “Financial Condition”) loan collection expense, which includes legal costs as well as costs related to acquiring and maintaining real estate acquired through foreclosure, increased by $143 thousand from $122 thousand during the nine months ended September 30, 2007 to $265 thousand during the current period. Other expense increased by $142 thousand related to an increase in FDIC insurance premiums. During 2007 the Company was able to use its remaining credit balance with the FDIC to offset insurance premium billings; however by the end of the first quarter of 2008 the credit balance had been fully utilized. A $45 thousand increase in general insurance expense is primarily related to recognizing certain postretirement insurance costs for split dollar life insurance policies.

We have focused our attention on cost control initiatives and have been successful in several areas. We reduced professional fees by $98 thousand and reduced business development and advertising costs by $107 thousand. During the 2007 period professional fees included consulting costs associated with an outside evaluation of our core banking software requirements, other technology planning costs and costs associated with a strategic planning initiative. Similar costs were not incurred during the 2008 period. The savings in business development and advertising costs include reductions in our marketing budget, savings in promotional materials, and a decrease in seminar and conference costs.

The following table describes the components of non-interest expense for the nine-month periods ending September 30, 2008 and 2007, dollars in thousands:

		For the Nine Months
		Ended September 30,								Dollar				Percentage
		2008				2007				Change				Change
Salaries and employee benefits		$	8,265			$	8,142			$	123				1.5	%
Occupancy and equipment			2,872				2,659				213				8.0	%
Outside service fees			530				487				43				8.8	%
Professional fees			458				556				(98	)			-17.6	%
Business development			339				400				(61	)			-15.3	%
Advertising and shareholder relations			334				380				(46	)			-12.1	%
Telephone and data communication			303				260				43				16.5	%
Loan collection expenses			265				122				143				117.2	%
Director compensation			264				261				3				1.1	%
Armored car and courier			218				208				10				4.8	%
Postage			180				183				(3	)			-1.6	%
Insurance			176				131				45				34.4	%
Deposit premium amortization			172				226				(54	)			-23.9	%
Stationery and supplies			172				214				(42	)			-19.6	%
Other			345				203				142				70.0	%
Total non-interest expense		$	14,893			$	14,432			$	461				3.2	%

Provision for income taxes. The provision for income taxes was $822 thousand, or 33.1% of pre-tax income for the nine months ended September 30, 2008. This compares to $2.1 million or 38.0% of pre-tax income during the first nine months of 2007. The decrease of 4.9% reflects an increase during 2008 in the percentage of tax-exempt income as a percentage of pre-tax income.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008

Net Income. Primarily related to an increase in the provision for loan losses of $575 thousand and a $415 thousand other-than-temporary impairment charge for an investment in a debt security issued by Lehman Brothers Holdings, Inc., net income decreased by $888 thousand, or 69% from $1.3 million during the third quarter of 2007 to $390 thousand during the three months ended September 30, 2008. In addition to the above two items, net interest income declined by $219 thousand and non-interest expense increased by $295 thousand. Partially offsetting these items was a $619 thousand decline in the provision for income taxes.

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $5.2 million for the three months ended September 30, 2008, a decrease of $219 thousand, or 4%, from $5.4 million for the same period in 2007. The decline in net interest income was related to decreases in the yield on average loans outstanding, a reduction in the average balance of investment securities and federal funds sold and an increase in the average balance of short-term borrowings. The effect of these items on net interest income was mostly offset by a decline in the average balance and rate paid on deposit accounts and a decline in the rates paid on junior subordinated debentures.

Interest and fees on loans decreased by $920 thousand from $6.9 million for the three months ended September 30, 2007 to $6.0 million during the 2008 quarter. The Company’s average loan balances were $358.0 million for the three months ended September 30, 2008, up $8.4 million, or 2%, from the $349.6 million for the same period in 2007. The average yield earned on loans decreased by 119 basis points from 7.83% during the third quarter of 2007 to 6.64% during the 2008 quarter. This decrease in yield primarily is reflective of the declines in market interest rates. During this same period the average prime interest rate declined by 318 basis points. At September 30, 2008 approximately 37% of Plumas Bank’s loans adjust with changes in the prime interest rate.

An 11 basis points increase in yield on investment securities was more than offset by a decrease of $14.1 million in the average balance outstanding resulting in a decrease of $127 thousand in interest earned on investment securities.

Interest expense decreased by $910 thousand, or 43%, to $1.2 million for the three months ended September 30, 2008, down from $2.1 million for the same period in 2007. Average interest bearing deposits declined by $26.1 million from $290.6 million during the third quarter of 2007 to $264.5 million during the current quarter. As a result of the maturity of promotional time deposits, average time deposits declined by $20.9 million from $126.3 million during the third quarter of 2007 to $105.4 million during the current quarter. Other categories of deposits declined as well including a $3.5 million decline in average NOW accounts and a $1.7 million decline in average money market and savings accounts.

During 2008, the Company’s interest expense on deposit accounts decreased $889 thousand on a quarter over quarter basis. This reduction was due to the decline in market interest rates and, in the case of time deposits, the maturity of its higher rate short-term promotional time deposit product. The average rate paid on interest bearing deposits declined by 107 basis points from 2.54% during the three months ended September 30, 2007 to 1.47% during the current three month period. Related to a decline in the rate paid on our Money Fund Plu$ accounts, the average rate paid on NOW accounts has declined by 103 basis points from 1.72% during the third quarter of 2007 to 0.69% during the current quarter. The average rate paid on time deposits declined by 169 basis points from 4.44% during the three months ended September 30, 2007 to 2.75% during the third quarter of 2008. The average rate paid on money market accounts increased from 0.72% during the quarter ended September 30, 2007 to 0.86% during the current quarter. This increase resulted from the introduction during 2008 of an on balance sheet money market sweep product. The interest rates paid on this corporate product are similar to those paid on our Money Fund Plu$ accounts.

The average balance of short-term borrowings increased from $2.3 million during the third quarter of 2007 to $15.6 million during the three months ended September 30, 2008. The average rate paid on these borrowings decreased by 307 basis points to 2.02% during the quarter ended September 30, 2008, down from 5.09% during the third quarter of 2007. As a result interest expense on short term borrowings increased by only $50 thousand on a quarter over quarter basis. The average rate paid on junior subordinated debentures declined by 264 basis points from 8.20% during the three months ended September 30, 2007 to 5.56% during the current quarter. As a result interest expense on the debentures decreased $69 thousand on a quarter over quarter basis.

As a result of the changes noted above, the net interest margin for the three months ended September 30, 2008 decreased slightly to 5.16%. This compares to a net interest margin of 5.20% for the same period in 2007.

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, 2008												For the Three Months Ended September 30, 2007
		Average Balance				Interest				Yield/				Average Balance				Interest				Yield/
		(in thousands)				(in thousands)				Rate				(in thousands)				(in thousands)				Rate
Interest-earning assets:
Loans (1) (2)		$	357,970			$	5,978				6.64	%		$	349,598			$	6,898				7.83	%
Investment securities (1)			45,216				452				3.98	%			59,321				579				3.87	%
Federal funds sold			132				1				3.01	%			6,576				83				5.01	%
Total interest-earning assets			403,318				6,431				6.34	%			415,495				7,560				7.22	%
Cash and due from banks			11,643												13,343
Other assets			34,529												32,358
Total assets		$	449,490											$	461,196
Interest-bearing liabilities:
NOW deposits		$	72,846				126				0.69	%		$	76,329				330				1.72	%
Money market deposits			36,821				80				0.86	%			37,927				69				0.72	%
Savings deposits			49,446				41				0.33	%			50,026				50				0.40	%
Time deposits			105,391				728				2.75	%			126,353				1,415				4.44	%
Total deposits			264,504				975				1.47	%			290,635				1,864				2.54	%
Short-term borrowings			15,573				79				2.02	%			2,262				29				5.09	%
Other interest-bearing liabilities			310				4				5.13	%			304				6				7.83	%
Junior subordinated debentures			10,310				144				5.56	%			10,310				213				8.20	%
Total interest-bearing liabilities			290,697				1,202				1.64	%			303,511				2,112				2.76	%
Non-interest bearing deposits			115,691												115,890
Other liabilities			5,662												4,549
Shareholders’ equity			37,440												37,246
Total liabilities & equity		$	449,490											$	461,196
Cost of funding interest-earning assets (3)											1.18	%											2.02	%
Net interest income and margin (4)						$	5,229				5.16	%						$	5,448				5.20	%

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:

		2008 over 2007 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		$	165			$	(1,041	)		$	(44	)		$	(920	)
Investment securities			(137	)			16				(6	)			(127	)
Federal funds sold			(81	)			(33	)			32				(82	)
Total interest income			(53	)			(1,058	)			(18	)			(1,129	)
Interest-bearing liabilities:
NOW deposits			(15	)			(197	)			8				(204	)
Money market deposits			(2	)			13				—				11
Savings deposits			(1	)			(8	)			—				(9	)
Time deposits			(234	)			(538	)			85				(687	)
Short-term borrowings			170				(17	)			(103	)			50
Other interest-bearing liabilities			—				(2	)			—				(2	)
Junior subordinated debentures			—				(69	)			—				(69	)
Total interest expense			(82	)			(818	)			(10	)			(910	)
Net interest income		$	29			$	(240	)		$	(8	)		$	(219	)

Provision for loan losses. In response to an increase in the level of adversely classified loans and net loan charge-offs and our evaluation of the overall adequacy of the allowance for loan losses in the current economic environment, particularly related to the decline in real estate values, we increased our provision for loan losses. The Company recorded $700 thousand in provision for loan losses for the three months ended September 30, 2008 compared to $125 thousand for the three months ended September 30, 2007. 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 provide for the probable losses 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 loans and assets are further discussed under the Financial Condition section.

Non-interest income. During the three months ended September 30, 2008, total non-interest income decreased by $418 thousand from the same period in 2007 related to a $415 thousand other-than-temporary impairment charge for an investment in a debt security issued by Lehman Brothers Holdings, Inc. Declines of $21 thousand in investment services income and $19 thousand in official check fees were offset by increases in other non-interest income categories the largest of which was a $13 thousand increase in the gain on sale of government-guaranteed loans.

The following table describes the components of non-interest income for the three-month periods ending September 30, 2008 and 2007, dollars in thousands:

		For the Three Months
		Ended September 30,								Dollar				Percentage
		2008				2007				Change				Change
Service charges on deposit accounts		$	1,015			$	1,009			$	6				0.6	%
Earnings on life insurance policies			107				105				2				1.9	%
Merchant processing income			97				94				3				3.2	%
Gain on sale of loans			32				19				13				68.4	%
Customer service fees			30				29				1				3.4	%
Federal Home Loan Bank dividends			30				26				4				15.4	%
Loan servicing fees			25				24				1				4.2	%
Investment services income			21				42				(21	)			-50.0	%
Official check fees			20				39				(19	)			-48.7	%
Safe deposit box and night depository income			16				14				2				14.3	%
Other deposit account fees			10				8				2				25.0	%
Printed check fee income			3				2				1				50.0	%
Loss on sale of vehicles			(6	)			(4	)			(2	)			-50.0	%
Impairment loss on investment security			(415	)			—				(415	)			-100.0	%
Other			25				21				4				19.0	%
Total non-interest income		$	1,010			$	1,428			$	(418	)			-29.3	%

Non-interest expenses. During the three months ended September 30, 2008, total non-interest expenses increased $295 thousand, or 6%, to $5.0 million, up from $4.7 million for the comparable period in 2007. The increase in non-interest expense was primarily the result of increases in salaries, occupancy and equipment expense, loan collection expenses and FDIC insurance premiums.

Net additions to salary and benefit expenses totaling $124 thousand included $78 thousand related to expansion of our SBA lending activities. Increases in payroll taxes of $32 thousand, bonus expense of $38 thousand and employee recruitment costs of $33 thousand were offset by a $98 thousand increase in the deferral of loan origination costs.

Occupancy and equipment expense increased by $68 thousand. This increase includes an increase of $62 thousand related to our Redding branch which moved into its permanent facility during July, 2008. Consistent with the increase in nonperforming assets during the period, loan collection expense increased by $65 thousand from $35 thousand during the three months ended September 30, 2007 to $100 thousand during the current period. Other expense increased by $52 thousand related to a $57 thousand increase in FDIC insurance premiums. During 2007 the Company was able to use its remaining credit balance with the FDIC to offset insurance premium billings; however by the end of the first quarter of 2008 the credit balance had been fully utilized.

The largest positive variance in non-interest expense was a $33 thousand decline in deposit premium amortization. Amortization of this intangible asset has declined in 2008 as a portion of the asset is now fully amortized. The remaining asset is scheduled to amortize at the rate of $173 thousand per year until October, 2013.

The following table describes the components of non-interest expense for the three-month periods ending September 30, 2008 and 2007, dollars in thousands:

		For the Three Months
		Ended September 30,								Dollar				Percentage
		2008				2007				Change				Change
Salaries and employee benefits		$	2,799			$	2,675			$	124				4.6	%
Occupancy and equipment			938				870				68				7.8	%
Outside service fees			182				163				19				11.7	%
Professional fees			151				167				(16	)			-9.6	%
Advertising and shareholder relations			107				102				5				-4.9	%
Telephone and data communication			105				91				14				15.4	%
Business development			102				114				(12	)			-10.5	%
Loan collection expenses			100				35				65				185.7	%
Director compensation			89				87				2				2.3	%
Armored car and courier			76				74				2				2.7	%
Postage			60				62				(2	)			-3.2	%
Insurance			60				47				13				27.7	%
Stationery and supplies			56				62				(6	)			-9.7	%
Deposit premium amortization			43				76				(33	)			-43.4	%
Other			111				59				52				88.1	%
Total non-interest expense		$	4,979			$	4,684			$	295				6.3	%