PLUMAS BANCORP - Quarter Report: 2009 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

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

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

California (State or Other Jurisdiction of Incorporation or Organization)		75-2987096 (I.R.S. Employer Identification No.)
35 S. Lindan Avenue, Quincy, California (Address of Principal Executive Offices)		95971 (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 o		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 October 30, 2009. 4,776,339 shares

 

 

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

		September 30,				December 31,
		2009				2008
Assets
Cash and due from banks		$	35,158			$	18,791
Federal funds sold			—				—
Cash and cash equivalents			35,158				18,791
Investment securities (fair value of $76,404 at September 30, 2009 and $38,606 at December 31, 2008 Note 3)			75,777				38,374
Loans, less allowance for loan losses of $8,350 at September 30, 2009 and $7,224 at December 31, 2008 (Notes 4 and 5)			335,838				359,072
Premises and equipment, net			14,838				15,764
Intangible assets, net			691				821
Bank owned life insurance			10,023				9,766
Real estate and vehicles acquired through foreclosure			15,584				4,277
Accrued interest receivable and other assets			14,659				10,310
Total assets		$	502,568			$	457,175
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing		$	110,502			$	112,783
Interest bearing			313,436				258,710
Total deposits			423,938				371,493
Short-term borrowings			20,000				34,000
Accrued interest payable and other liabilities			6,648				5,935
Junior subordinated deferrable interest debentures			10,310				10,310
Total liabilities			460,896				421,738
Commitments and contingencies (Note 5)			—				—
Shareholders’ equity:
Serial preferred stock, no par value; 10,000,000 shares authorized; 11,949 issued and outstanding at September 30, 2009			11,574				—
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding — 4,776,339 shares at September 30, 2009 and 4,775,339 shares at December 31, 2008			5,907				5,302
Retained earnings			23,713				29,818
Accumulated other comprehensive income (Note 7)			478				317
Total shareholders’ equity			41,672				35,437
Total liabilities and shareholders’ equity		$	502,568			$	457,175

See notes to unaudited condensed consolidated financial statements.

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,
		2009				2008				2009				2008
Interest Income:
Interest and fees on loans		$	5,090			$	5,978			$	15,556			$	18,169
Interest on investment securities:
Taxable			440				324				1,185				1,092
Exempt from Federal income taxes			123				128				360				383
Interest on Federal funds sold			—				1				—				3
Total interest income			5,653				6,431				17,101				19,647
Interest Expense:
Interest on deposits			810				975				2,350				3,646
Interest on short-term borrowings			21				79				56				174
Interest on junior subordinated deferrable interest debentures			84				144				294				473
Other			2				4				6				13
Total interest expense			917				1,202				2,706				4,306
Net interest income before provision for loan losses			4,736				5,229				14,395				15,341
Provision for Loan Losses			2,550				700				11,300				1,690
Net interest income after provision for loan losses			2,186				4,529				3,095				13,651
Non-Interest Income:
Service charges			970				1,015				2,823				2,937
Earnings on Bank owned life insurance policies			108				107				323				314
Impairment loss on investment security			—				(415	)			—				(415	)
Other			457				309				895				946
Total non-interest income			1,535				1,016				4,041				3,782
Non-Interest Expenses:
Salaries and employee benefits			2,827				2,799				8,417				8,265
Occupancy and equipment			903				939				2,836				2,873
Other			2,013				1,247				5,788				3,811
Total non-interest expenses			5,743				4,985				17,041				14,949
Income (loss) before income taxes			(2,022	)			560				(9,905	)			2,484
Provision (Benefit) for Income Taxes			(882	)			170				(4,258	)			822
Net income (loss)		$	(1,140	)		$	390			$	(5,647	)		$	1,662
Preferred Stock Dividends and Discount Accretion			(171	)			—				(458	)			—
Net income (loss) available to common shareholders		$	(1,311	)		$	390			$	(6,105	)		$	1,662
Basic earnings (loss) per share (Note 6)		$	(0.27	)		$	0.08			$	(1.28	)		$	0.34
Diluted earnings (loss) per share (Note 6)		$	(0.27	)		$	0.08			$	(1.28	)		$	0.34
Common dividends per share		$	—			$	—			$	—			$	0.16

See notes to unaudited condensed consolidated financial statements.

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

		For the Nine Months
		Ended September 30,
		2009				2008
Cash Flows from Operating Activities:
Net income (loss)		$	(5,647	)		$	1,662
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			11,300				1,690
Change in deferred loan origination costs/fees, net			(65	)			235
Depreciation and amortization			1,468				1,475
Stock-based compensation expense			193				218
Amortization of investment security premiums			174				46
Accretion of investment security discounts			(42	)			(43	)
Impairment loss on investment security			—				415
Net loss on disposal/sale of premises and equipment			—				13
Net loss on sale of vehicles owned			42				17
Earnings on Bank owned life insurance policies			(257	)			(252	)
Provision for losses on other real estate			887				39
Net loss on sale of real estate			157				—
Increase in accrued interest receivable and other assets			(4,673	)			(97	)
Increase (decrease) in accrued interest payable and other liabilities			637				(751	)
Net cash provided by operating activities			4,174				4,667
Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities			8,000				13,475
Proceeds from matured and called held-to-maturity investment securities			1,729				100
Purchases of available-for-sale investment securities			(51,132	)			(2,990	)
Purchases of held-to-maturity investment securities			(1,520	)			—
Proceeds from principal repayments from available-for-sale government-guaranteed mortgage-backed securities			5,662				2,190
Net increase in loans			(2,208	)			(8,500	)
Proceeds from sale of other vehicles			219				298
Proceeds from sale of other real estate			1,595				—
Purchase of premises and equipment			(201	)			(2,425	)
Net cash (used in ) provided by investing activities			(37,856	)			2,148

Continued on next page.

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

		For the Nine Months
		Ended September 30,
		2009				2008
Cash Flows from Financing Activities:
Net increase in demand, interest bearing and savings deposits		$	41,944			$	17,026
Net increase (decrease) in time deposits			10,501				(25,751	)
Net (decrease) increase in short-term borrowings			(14,000	)			19,500
Net proceeds from exercise of stock options			5				21
Payment of cash dividends on common stock			—				(770	)
Payment of cash dividends on preferred stock			(325	)			—
Issuance of preferred stock, net of discount			11,517				—
Issuance of common stock warrant			407				—
Repurchase and retirement of common stock			—				(945	)
Net cash provided by financing activities			50,049				9,081
Increase in cash and cash equivalents			16,367				15,896
Cash and Cash Equivalents at Beginning of Year			18,791				13,207
Cash and Cash Equivalents at End of Period		$	35,158			$	29,103
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense		$	2,693			$	4,639
Income taxes		$	65			$	1,090
Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure		$	14,207			$	2,229
Net change in unrealized gain/loss on available-for-sale securities		$	161			$	174

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 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.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank is participating in the Federal Deposit Insurance Corporation (FDIC) Transaction Account Guarantee Program. Under the program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage under the FDIC’s general deposit insurance rules.

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, 2009 and December 31, 2008 and its results of operations for the three-month and nine-month periods ended September 30, 2009 and 2008 and its cash flows for the nine-month periods ended September 30, 2009 and 2008. Certain reclassifications have been made to prior period’s balances to conform to classifications used in 2009.

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 2008 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2009 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.

The Company evaluated subsequent events for potential recognition and/or disclosure through November 2, 2009, the date the consolidated financial statements were issued.

3. INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities at September 30, 2009 and December 31, 2008 consisted of the following:

Available-for-Sale

		September 30, 2009
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Debt securities:
U.S. Treasury securities		$	1,067,000							$	(17,000	)		$	1,050,000
U.S. Government agencies			40,839,000			$	378,000				(36,000	)			41,181,000
U.S. Government agencies collateralized by mortgage obligations			20,611,000				504,000								21,115,000
Corporate debt securities			85,000								(15,000	)			70,000
		$	62,602,000			$	882,000			$	(68,000	)		$	63,416,000

Net unrealized gains on available-for-sale investment securities totaling $814,000 were recorded, net of $336,000 in tax expense, as accumulated other comprehensive income within shareholders’ equity at September 30, 2009. There were no sales of available-for-sale investment securities during the nine months ended September 30, 2009.

		December 31, 2008
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Debt securities:
U.S. Treasury Securities		$	1,498,000			$	10,000			$				$	1,508,000
U.S. Government agencies			10,001,000			$	391,000								10,392,000
U.S. Government agencies collateralized by mortgage obligations			12,183,000				189,000				(15,000	)			12,357,000
Corporate debt securities			1,585,000				1,000				(36,000	)			1,550,000
		$	25,267,000			$	591,000			$	(51,000	)		$	25,807,000

Net unrealized gains on available-for-sale investment securities totaling $540,000 were recorded, net of $223,000 in tax expense, as accumulated other comprehensive income within shareholders’ equity at December 31, 2008. There were no sales of available-for-sale investment securities during the year ended December 31, 2008.

During the third quarter of 2008, due to the significant decline in the price a $500,000 corporate debt security issued by Lehman Brothers Holdings Inc., the Bank recorded an other than temporary impairment write down of $415,000 on this security.

Held-to-Maturity

September 30, 2009

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

Obligations of states and political subdivisions

$

12,361,000

$

627,000

$

$

12,988,000

December 31, 2008

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

Debt securities:

Obligations of states and political subdivisions

$

12,567,000

$

278,000

$

(46,000

)

$

12,799,000

There were no sales or transfers of held-to-maturity investment securities during the nine months ended September 30, 2009 or during the year ended December 31, 2008.

Investment securities with unrealized losses at September 30, 2009 are summarized and classified according to the duration of the loss period as follows:

		Less than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Debt securities:
U.S. Treasury securities		$	1,050,000			$	17,000											$	1,050,000			$	17,000
U.S. Government agencies			14,059,000				36,000												14,059,000				36,000
Corporate debt securities										$	70,000			$	15,000				70,000				15,000
		$	15,109,000			$	53,000			$	70,000			$	15,000			$	15,179,000			$	68,000

Investment securities with unrealized losses at December 31, 2008 are summarized and classified according to the duration of the loss period as follows:

		Less than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Debt securities:
Obligations of states and political subdivisions		$	1,366,000			$	39,000			$	809,000			$	7,000			$	2,175,000			$	46,000
U.S. Government agencies collateralized by mortgage obligations											3,419,000				15,000				3,419,000				15,000
Corporate debt securities											1,050,000				36,000				1,050,000				36,000
		$	1,366,000			$	39,000			$	5,278,000			$	58,000			$	6,644,000			$	97,000

At September 30, 2009, the Company held 114 securities of which 14 were in a loss position. Of the securities in a loss position, 13 were in a loss position for less than twelve months and one was in a loss position and had been in loss position for twelve months or more. Of the 14 securities one is a U.S. Treasury security, 12 are obligations of U.S. Government agencies and one is a corporate debt securities. The unrealized losses relate principally to market rate fluctuations. When analyzing an issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Company’s intent and ability to hold the security to recovery. Management has the ability and intent to hold securities classified as held to maturity until they mature, at which time the Company expects to receive full value for the securities. Furthermore, as of September 30, 2009, management also has the ability and intent to hold the securities classified as available for sale and currently impaired for a period of time sufficient for a recovery of cost. Based on the Company’s evaluation of the above and other relevant factors, the Company does not believe the securities that are in an unrealized loss position as of September 30, 2009 are other than temporarily impaired.

The amortized cost and estimated fair value of investment securities at September 30, 2009 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

		Available-for-Sale								Held-to-Maturity
						Estimated								Estimated
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Within one year		$	85,000			$	70,000			$	41,000			$	41,000
After one year through five years			41,906,000				42,231,000				3,133,000				3,273,000
After five years through ten years											9,187,000				9,674,000
			41,991,000				42,301,000				12,361,000				12,988,000
Investment securities not due at a single maturity date:
Government-guaranteed mortgage-backed securities			20,611,000				21,115,000
		$	62,602,000			$	63,416,000			$	12,361,000			$	12,988,000

Investment securities with amortized costs totaling $74,838,000 and $36,249,000 and estimated fair values totaling $76,293,000 and $37,056,000 at September 30, 2009 and December 31, 2008, respectively, were pledged to secure deposits, including public deposits and treasury, tax and loan accounts.

4. LOANS

Outstanding loans are summarized below, in thousands:

		September 30,				December 31,
		2009				2008
Commercial		$	37,578			$	42,528
Agricultural			40,760				36,020
Real estate — mortgage			162,476				151,943
Real estate — construction and land development			46,856				73,820
Consumer			56,174				61,706
			343,844				366,017
Deferred loan costs, net			344				279
Allowance for loan losses			(8,350	)			(7,224	)
		$	335,838			$	359,072

Changes in the allowance for loan losses were as follows, in thousands:

		September 30,				December 31,
		2009				2008
Balance, beginning of year		$	7,224			$	4,211
Provision charged to operations			11,300				4,600
Losses charged to allowance			(10,380	)			(1,783	)
Recoveries			206				196
Balance, end of period		$	8,350			$	7,224

The recorded investment in loans that were considered to be impaired totaled $16,655,000 and $26,444,000 at September 30, 2009 and December 31, 2008, respectively. The related allowance for loan losses for impaired loans was $2,515,000 and $3,132,000 at September 30, 2009 and December 31, 2008, respectively.

5. 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 $72,300,000 and $78,787,000 and stand-by letters of credit of $329,000 and $534,000 at September 30, 2009 and December 31, 2008, respectively.

Of the loan commitments outstanding at September 30, 2009, $6,959,000 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, 2009 or December 31, 2008.

6. EARNINGS PER SHARE

Basic earnings per share is computed by dividing income (loss) 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,
(In thousands, except per share data)		2009				2008				2009				2008
Net Income (loss):
Net income (loss)		$	(1,140	)		$	390			$	(5,647	)		$	1,662
Dividends accrued and discount accreted on preferred shares			(171	)			—				(458	)			—
Net income (loss) available to common shareholders		$	(1,311	)		$	390			$	(6,105	)		$	1,662
Earnings Per Share:
Basic earnings per share		$	(0.27	)		$	0.08			$	(1.28	)		$	0.34
Diluted earnings per share		$	(0.27	)		$	0.08			$	(1.28	)		$	0.34
Weighted Average Number of Shares Outstanding:
Basic shares			4,776				4,809				4,776				4,830
Diluted shares			4,776				4,820				4,776				4,852

Shares of common stock issuable under stock options for which the exercise prices were greater than the average market prices were not included in the computation of diluted earnings per share due to their antidilutive effect. When a net loss occurs, no difference in earnings per share is calculated because the conversion of potential common stock is anti-dilutive. Stock options not included in the computation of diluted earnings per share, due to their antidilutive effect, were 453,000 for the three months ended September 30, 2008 and 374,000 for the nine months ended September 30, 2008.

7. COMPREHENSIVE INCOME

Total comprehensive income (loss) for the three months ended September 30, 2009 and 2008 totaled $(1,024,000) and $491,000, respectively. Comprehensive income (loss) is comprised of unrealized gains, net of taxes, on available-for-sale investment securities, which were $116,000 and $101,000 for the three months ended September 30, 2009 and 2008, respectively, together with net income (loss).

Total comprehensive income (loss) for the nine months ended September 30, 2009 and 2008 totaled $(5,486,000) and $1,836,000 respectively. Comprehensive income (loss) is comprised of unrealized gains, net of taxes, on available-for-sale investment securities, which were $161,000 and $174,000 for the nine months ended September 30, 2009 and 2008, respectively, together with net income (loss).

At September 30, 2009 and December 31, 2008, accumulated other comprehensive income totaled $478,000 and $317,000, respectively, and is reflected, net of taxes, as a component of shareholders’ equity.

8. STOCK-BASED COMPENSATION

In 2001 and 1991, the Company established Stock Option Plans for which 873,185 shares of common stock remain reserved for issuance to employees and directors and 469,219 shares are available for future grants under incentive and nonstatutory agreements as of September 30, 2009. The Company did not grant options during the nine months ended September 30, 2009. The Company granted 90,300 options during the nine months ended September 30, 2008. The weighted average grant date fair value of options granted for the nine months ended September 30, 2008 was $2.54.

Compensation cost related to stock options recognized in operating results was $64,000 and $74,000 for the quarters ended September 30, 2009 and 2008, respectively. The associated future income tax benefit recognized was $5,000 and $6,000 for the quarters ended September 30, 2009 and 2008, respectively. Compensation cost related to stock options recognized in operating results was $193,000 and $218,000 for the nine months ended September 30, 2009 and 2008, respectively. Compensation expense is recognized over the vesting period on a straight-line basis. The associated future income tax benefit recognized was $15,000 and $18,000 for the nine months ended September 30, 2009 and 2008, respectively.

Excess tax benefits from the exercise of stock-based compensation awards are presented 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, 2009:

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual
						Exercise				Term				Intrinsic Value
		Shares				Price				(in years)				(in thousands)
Options outstanding at December 31, 2008			466,956			$	13.38
Options granted			—				—
Options exercised			(1,000	)			5.43
Options cancelled			(61,990	)			12.38
Options outstanding at September 30, 2009			403,966			$	13.56				5.0			$	—
Options exercisable at September 30, 2009			262,031			$	13.07				4.5			$	—
Expected to vest after September 30, 2009			123,741			$	14.45				5.9			$	—

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, 2009 was $1,000 with the amount of cash received from the exercise of those stock options totaling $5,000.

At September 30, 2009, there was $360,000 of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 1.7 years. The total fair value of options vested during the nine months ended September 30, 2009 was $211,000.

9. INCOME TAXES

The Company files its income taxes on a consolidated basis with its subsidiary. 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 amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The realization of the net deferred tax assets is dependent upon the generation of sufficient taxable income. On a quarterly basis, the Company determines whether a valuation allowance is necessary. In doing so, management considers all evidence currently available, both positive and negative, in determining whether, based on the weight of that evidence, the net deferred tax asset will be realized and whether a valuation allowance is necessary. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company establishes a tax valuation allowance when it is more likely than not that a recorded tax benefit is not expected to be realized. The expense to create the tax valuation is recorded as an additional income tax expense in the period the tax valuation allowance is established. On the 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 taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the quarter ended September 30, 2009.

10. FAIR VALUE MEASUREMENT

Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments are as follows:

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Financial assets:
Cash and cash equivalents		$	35,158,000			$	35,158,000			$	18,791,000			$	18,791,000
Investment securities			75,777,000				76,404,000				38,374,000				38,606,000
Loans			335,838,000				338,337,000				359,072,000				363,811,000
Bank owned life insurance			10,023,000				10,023,000				9,766,000				9,766,000
Accrued interest receivable			2,123,000				2,123,000				2,063,000				2,063,000
Financial liabilities:
Deposits		$	423,938,000			$	424,141,000			$	371,493,000			$	371,761,000
Short-term borrowings			20,000,000				20,000,000				34,000,000				34,000,000
Junior subordinated deferrable interest debentures			10,310,000				2,663,000				10,310,000				2,420,000
Accrued interest payable			500,000				500,000				487,000				487,000

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.

The following methods and assumptions were used by management to estimate the fair value of its financial instruments at September 30, 2009 and December 31, 2008:

Cash and cash equivalents: For cash and cash equivalents, the carrying amount is estimated to be fair value.

Investment securities: For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers.

Loans: For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values of loans held for sale, if any, are estimated using quoted market prices for similar loans. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness. The fair value of loans is adjusted for the allowance for loan losses. The fair value of accrued interest receivable approximates its fair value as adjusted for accrued interest on impaired loans.

The fair value of impaired loans is based on either the estimated fair value of underlying collateral or estimated cash flows, discounted at the loans effective rate. Assumptions regarding credit risk and cash flows are determined using available market information and specific borrower information.

Bank owned life insurance: The fair values of bank owned life insurance policies are based on current cash surrender values at each reporting date provided by the insurers.

Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis using interest rates offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

Short-term borrowings: The carrying amount of the short-term borrowings approximates its fair value.

Junior subordinated deferrable interest debentures: The fair value of junior subordinated deferrable interest debentures was determined based on the current market value for like kind instruments of a similar maturity and structure.

Commitments to extend credit and letters of credit: The fair value of commitments are estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are primarily for variable rate loans and letters of credit. For these commitments, there is no significant difference between the committed amounts and their fair values and therefore, is not included in the table above.

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, 2009, 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, 2009 Using

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

Total Fair Value

(Level 1)

(Level 2)

(Level 3)

Assets:

Available-for-sale securities

$

63,416,000

$

42,301,000

$

21,115,000

$

—

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. There were no changes in the valuation techniques used during 2009. Changes in fair market value are recorded in other comprehensive income.

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

						Fair Value Measurements at September 30, 2009 Using
						Quoted Prices in
						Active Markets for				Significant Other				Significant
						Identical Assets				Observable Inputs				Unobservable Inputs
		Total Fair Value				(Level 1)				(Level 2)				(Level 3)
Assets:
Impaired loans		$	9,128,000			$	—			$	9,128,000			$	—
Other real estate owned			15,498,000				—				15,498,000				—
		$	24,626,000			$	—			$	24,626,000			$	—

Impaired loans measured at fair value, all of which are measured for impairment using the fair value of the collateral as they are virtually all collateral dependent loans, had a principal balance of $11,643,000 with a related valuation allowance of $2,515,000 at September 30, 2009. There were no changes in the valuation techniques used during 2009. Declines in the collateral values of impaired loans during 2009 were $3.6 million which was reflected as additional specific allocations of the allowance for loan losses and/or partial charge-offs of the impaired loan.

Other real estate owned is fair valued at the lower of cost or fair value based on property appraisals at the time of transfer and as appropriate thereafter, less estimated costs to sell. Estimated costs to sell OREO were based on standard market factors. Management periodically reviews OREO to determine whether the property continues to be carried at the lower of its recorded book value or estimated fair value, net of estimated costs to sell.

11. RECENT ACCOUTING DEVELOPMENTS

FASB Accounting Standards Codification™ (ASC or Codification): In June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-01 (formerly Statement No. 168), “Topic 105 — Generally Accepted Accounting Principles — FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles.” The Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents are superseded and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification is effective for interim or annual reporting periods ending after September 15, 2009. We have made the appropriate changes to GAAP references in our financial statements.

Measuring Liabilities at Fair Value: In August 2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value”. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. We are assessing the impact of ASU 2009-05 on our financial condition, results of operations, and disclosures.

Accounting for Transfers of Financial Assets: In June 2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140” (SFAS No. 166). SFAS 166 amends the derecognition accounting and disclosure guidance relating to SFAS 140. SFAS 166 eliminates the exemption from consolidation for QSPEs, it also requires a transferor to evaluate all existing QSPEs to determine whether it must be consolidated in accordance with SFAS 167. SFAS 166 is effective as of the beginning of the first annual reporting period that begins after November 15, 2009. We are assessing the impact of SFAS 166 on our financial condition, results of operations, and disclosures.

FASB Amends Disclosures about Fair Value of Financial Instruments: In April 2009, the FASB issued ASC 825 (formerly FASB Staff Position (FSP) 107-1 and APB 28-1), “Interim Disclosures about Fair Value of Financial Instruments.” ASC 825 requires a public entity to provide disclosures about fair value of financial instruments in interim financial information. ASC 825 is effective for interim and annual financial periods ending after June 15, 2009. We adopted the provisions of ASC 825 on April 1, 2009 and the impact on our disclosures is more fully discussed in Note 10 — Fair Value Measurement.

FASB Clarifies Other-Than-Temporary Impairment: In April 2009, the FASB issued ASC 320 (formerly FSP FAS 115-2, FAS124-2 and EITF 99-20-2), “Recognition and Presentation of Other-Than-Temporary-Impairment.” ASC 320 (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. ASC 320 is effective for interim and annual periods ending after June 15, 2009. We adopted the provisions of ASC 320 on April 1, 2009. Details related to the adoption of ASC 320 and the impact on our disclosures is more fully discussed in Note 3 — Investment Securities. The provisions of ASC 320 did not have an impact on our financial condition and results of operations.

FASB Clarifies Application of Fair Value Accounting: In April 2009, the FASB issued ASC 820 (formerly FSP FAS 157-4), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” ASC 820 affirms the objective of fair value when a market is not active, clarifies and includes additional factors for determining whether there has been a significant decrease in market activity, eliminates the presumption that all transactions are distressed unless proven otherwise, and requires an entity to disclose a change in valuation technique. ASC 820 is effective for interim and annual periods ending after June 15, 2009. We adopted the provisions of ASC 820 on April 1, 2009. The provisions of ASC 820 did not have a material impact on our financial condition and results of operations.

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, 2009 and December 31, 2008 and for the three and nine month periods ended September 30, 2009 and 2008. 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, 2008.

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

COMMON STOCK CASH DIVIDEND

As it is the Company’s philosophy to pay dividends out of current period earnings, on April 24, 2009, the Company announced that it would be suspending its semi-annual common stock cash dividend for the first half of 2009. During 2008 the Company paid two semi-annual cash dividends to holders of common stock, the first was 16 cents per share paid on May 16, 2008 and the second was 8 cents per share paid on November 21, 2008. The Company’s Board of Directors will continue to evaluate the payment of a semi-annual common stock cash dividend in future quarters, but does not anticipate paying a cash dividend in 2009.

CRITICAL ACCOUNTING POLICIES

There have been no changes to the Company’s critical accounting policies from those disclosed in the Company’s 2008 Annual Report to Shareholders’ on Form 10-K.

OVERVIEW

The Company recorded a net loss of $5.65 million or ($1.28) per share for the nine months ended September 30, 2009, down from net income of $1.66 million or $0.34 per share for the nine months ended September 30, 2008. This decline in earnings resulted from a decline in net interest income of $946 thousand, an increase in the provision for loan losses of $9.6 million, and an increase in non-interest expense of $2.09 million. These items were partially offset by an increase of $259 thousand in non-interest income and a $5.08 million decrease in tax provision. The increase in the loan loss provision includes the effect of an increase in net loan charges-offs from $1.0 million during the nine months ended September 30, 2008 to $10.2 million during the current nine month period and reflects our evaluation of the required level of the allowance for loan losses necessary in the current economic environment. The increase in non-interest expense includes increases of $722 thousand in FDIC assessments and an increase of $848 thousand in the provision for OREO losses. Non-interest income during the 2008 period was adversely affected by a $415 thousand impairment charge on an investment security. Related to the reduction in pre-tax earnings the provision (benefit) for income taxes declined by $5.08 million from expense of $822 thousand during the nine months ended September 30, 2008 to a benefit of $4.26 million during the current nine month period.

Net income (loss) allocable to common shareholders declined from net income of $1.66 million during the nine months ended September 30, 2008 to a net loss of $6.10 million during the current nine month period. Included in the 2009 loss was the net loss described above of $5.65 million and an additional $458 thousand which represents dividends paid and accrued and the discount amortized on preferred stock.

Total assets increased from $457.2 million at December 31, 2008 to $502.6 million at September 30, 2009. Increases of $16.4 million in cash and due from banks, $37.4 million in investment securities, $11.3 million in real estate and vehicles acquired through foreclosure and $3.5 million in other assets was partially offset by a $23.2 million decline in net loans. Primarily related to an increase in deposits from public agencies, deposits increased by $52.4 million to $423.9 million and related to the issuance of $11.9 million in preferred stock under the government’s Capital Purchase Program (“CPP”), shareholders’ equity increased by $6.2 million. Funds generated from the increase in deposits and the preferred stock issuance were utilized to fund the increase in investments and cash and to reduce short-term borrowings. Short-term borrowings declined by $14 million from $34 million at December 31, 2008 to $20 million at September 30, 2009.

The annualized return (loss) on average assets was (1.58)% for the nine months ended September 30, 2009 down from 0.50% for the same period in 2008. The annualized return (loss) on average common equity was (23.9)% for the nine months ended September 30, 2009 down from 5.9% for the same period in 2008.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, for the nine months ended September 30, 2009 was $14.4 million, a decline of $946 thousand from the $15.3 million earned during the same period in 2008. Decreases in the yield on the Company’s loan and investment portfolios and increases in the average balance of NOW and money market deposits and short-term borrowings were partially offset by: declines in the average balances and rates paid on time deposits; an increase in the average balance in the loan and investment portfolios; and a decline in the rate paid on short-term borrowings, NOW and savings deposits and junior subordinated debentures. Net interest margin for the nine months ended September 30, 2009 decreased 48 basis points, or 9%, to 4.61%, down from 5.09% for the same period in 2008.

Interest income decreased $2.5 million or 13%, to $17.1 million for the nine months ended September 30, 2009 primarily as a result of a decline in loan yield. Interest and fees on loans decreased $2.6 million to $15.6 million for the nine months ended September 30, 2009 as compared to $18.2 million during the first nine months of 2008. The average rate earned on the Company’s loan balances decreased 109 basis points to 5.77% during the first nine months of 2009 compared to 6.86% during the first nine months of 2008. The decline in loan yield reflects a large decline in market interest rates as illustrated by a decline in the prime interest rate from 7.25% at January 1, 2008 to 3.25% at September 30, 2009. Additionally, our nonperforming loans have significantly increased during the comparison periods. While nonperforming loans are included in the average balance of loans, the vast majority of these loans are not accruing interest. The result is a decrease in loan yield and a decrease in net interest margin. Partially offsetting the decline in yield was a 2% increase in the average balance of loans outstanding from $354 million for the nine month period ended September 30, 2008 to $360 million for the nine months ended September 30, 2009. The Company experienced a $70 thousand increase in interest income on investment securities as a 43 basis point decline in yields from 4.03% during the 2008 period to 3.60% during the current nine month period was offset by an $8.5 million increase in the average balance of investment securities.

Interest expense decreased $1.6 million to $2.7 million for the nine months ended September 30, 2009, down from $4.3 million for the same period in 2008. This reduction relates to a decrease in the rates paid on our interest-bearing liabilities and a decrease in the average balances of our time deposits partially offset by an increase in the average balance of our NOW and money market accounts and short-term borrowings. Average time deposits declined by $13 million, and the average rate paid on these deposits declined by 131 basis points from 3.34% during the first nine months of 2008 to 2.03% during the current nine month period. During 2007 and into 2008 we offered a promotional time deposit product. Early in 2008 we stopped offering this product and allowed these higher rate promotional time deposits to mature, while increasing the level of short-term borrowings which offered favorable interest rates in comparison to rates we would have had to pay to attract additional time deposits.

The decline in the average balance of time deposits primarily relates to the maturity of these promotional time deposits while the decline in rate paid on time deposits includes the effect of the maturity of the promotional time balances as well as a decline in market interest rates.

Interest expense on NOW accounts increased by $32 thousand related to an increase in the average balance of these accounts of $19.6 million, partially offset by a decline in the average rate paid from 0.81% during the 2008 period to 0.69% in the current nine month period. See “FINANCIAL CONDITION — Deposits” for addition information related to the increase in NOW accounts. Interest expense on money market accounts increased by $43 thousand related to both an increase in average balance and an increase in the average rate paid. The rate paid on these accounts increased by 5 basis points from 0.79% during the nine months ended September 30, 2008 to 0.84% during the nine months ended September 30, 2009. The increase in rate and average balance is associated with the introduction of a new corporate sweep product which offers a tiered rate structure that rewards customers with a higher rate for maintaining larger balances. Interest on savings accounts declined by $56 thousand related to a decline in rate paid of 17 basis points. Interest on short-term borrowings decreased by $118 thousand as a decline in the rate paid on these borrowings of 196 basis points from 2.26% to 0.30% was partially offset by a $14.7 million increase in average balance. Interest expense paid on junior subordinated debentures, which fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate, decreased by $179 thousand as a result of a decrease in the LIBOR rate.

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, 2009												For the Nine Months Ended September 30, 2008
		Average Balance				Interest				Yield/				Average Balance				Interest				Yield/
		(in thousands)				(in thousands)				Rate				(in thousands)				(in thousands)				Rate
Interest-earning assets:
Loans (1) (2)		$	360,412			$	15,556				5.77	%		$	353,639			$	18,169				6.86	%
Investment securities (1)			57,376				1,545				3.60	%			48,911				1,475				4.03	%
Federal funds sold			16				—				0.32	%			153				3				2.62	%
Total interest-earning assets			417,804				17,101				5.47	%			402,703				19,647				6.52	%
Cash and due from banks			26,467												11,845
Other assets			34,437												32,745
Total assets		$	478,708											$	447,293
Interest-bearing liabilities:
NOW deposits		$	93,584				481				0.69	%		$	73,957				449				0.81	%
Money market deposits			41,030				259				0.84	%			36,300				216				0.79	%
Savings deposits			50,282				69				0.18	%			48,090				125				0.35	%
Time deposits			101,364				1,541				2.03	%			114,372				2,856				3.34	%
Total deposits			286,260				2,350				1.10	%			272,719				3,646				1.79	%
Short-term borrowings			25,006				56				0.30	%			10,299				174				2.26	%
Other interest-bearing liabilities			215				6				3.72	%			309				13				5.62	%
Junior subordinated debentures			10,310				294				3.81	%			10,310				473				6.13	%
Total interest-bearing liabilities			321,791				2,706				1.12	%			293,637				4,306				1.96	%
Non-interest bearing deposits			106,714												110,677
Other liabilities			5,723												5,602
Shareholders’ equity			44,480												37,377
Total liabilities & equity		$	478,708											$	447,293
Cost of funding interest-earning assets (3)											0.86	%											1.43	%
Net interest income and margin (4)						$	14,395				4.61	%						$	15,341				5.09	%

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:

		2009 over 2008 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		$	348			$	(2,889	)		$	(72	)		$	(2,613	)
Investment securities			255				(157	)			(28	)			70
Federal funds sold			(3	)			(3	)			3				(3	)
Total interest income			600				(3,049	)			(97	)			(2,546	)
Interest-bearing liabilities:
NOW deposits			119				(69	)			(18	)			32
Money market deposits			28				13				2				43
Savings deposits			6				(59	)			(3	)			(56	)
Time deposits			(324	)			(1,115	)			124				(1,315	)
Short-term borrowings			248				(151	)			(215	)			(118	)
Other interest-bearing liabilities			(4	)			(4	)			1				(7	)
Junior subordinated debentures			—				(179	)			—				(179	)
Total interest expense			73				(1,564	)			(109	)			(1,600	)
Net interest income		$	527			$	(1,485	)		$	12			$	(946	)

Provision for loan losses. The allowance for loan losses is maintained at a level that management believes will be adequate to absorb inherent losses on existing loans based on an evaluation of the collectibility of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to repay their loan. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. (See “FINANCIAL CONDITION — Analysis of allowance for loan losses”)

The Company recorded $11.3 million in provision for loan losses for the nine months ended September 30, 2009, an increase of $9.6 million from the $1.7 million recorded during the nine months ended September 30, 2008. The Company has experienced a higher level of net loan charge-offs and nonperforming loans related to the significant economic slow down affecting California and Nevada. In response, the Company has increased its level of allowance for loan losses to total loans from 1.37% at September 30, 2008 to 1.97% at December 31, 2008 and to 2.43% at September 30, 2009. The allowance for loan losses has increased from $4.9 million at September 30, 2008 to $7.2 million at December 31, 2008 and $8.4 million at September 30, 2009. Net charge-offs as an annualized percentage of average loans increased from 0.38% during the first nine months of 2008 to 3.77% during the nine months ended September 30, 2009. Net charge-offs totaled $10.2 million during the first nine months of 2009 compared to $1.0 million during the nine months ended September 30, 2008. Nonperforming loans increased from $3.8 million at September 30, 2008 to $17.2 million at September 30, 2009.

Non-interest income. During the nine months ended September 30, 2009 non-interest income increased by $259 thousand to $4.0 million, from $3.8 million during the nine months ended September 30, 2008. However, during the 2008 period non-interest income was reduced by an other-than-temporary impairment charge for an investment in a debt security issued by Lehman Brothers Holdings, Inc. totaling $415 thousand. Excluding this item non-interest income would have decreased by $156 thousand.

Reductions in non-interest income include a $114 thousand decline in service charge income related to a decline in overdraft income, an $83 thousand decline in dividends received from the Federal Home Loan Bank of San Francisco (FHLB), a $69 thousand decline in official check fees and a decline of $38 thousand in investment services income. The FHLB did not pay a dividend during the first two quarters of 2009, but paid a dividend of $4 thousand during the third quarter of 2009. This compares to dividends totaling $87 thousand paid during the first nine months of 2008. Official checks fees represent fees paid by a third party processor for the processing of our cashier and expense checks. These fees are indexed to the federal funds rate and the decrease in income from this item is primarily related to the decline in the federal funds rate. Additionally, during mid 2008 the processor changed the fee structure further reducing fees that we earn under this relationship. We attribute the decline in investment services income primarily to economic factors.

Partially offsetting these reductions in non-interest income was a $104 thousand increase in gains on the sale of loans. Gains on sale of loans relate to government guaranteed loans sold into the secondary market. We have been expanding our government guaranteed loan operations resulting in an increase in loan production from this source.

The following table describes the components of non-interest income for the nine-month periods ending September 30, 2009 and 2008, dollars in thousands:

		For the Nine Months
		Ended September 30,								Dollar				Percentage
		2009				2008				Change				Change
Service charges on deposit accounts		$	2,823			$	2,937			$	(114	)			-3.9	%
Earnings on life insurance policies			323				314				9				2.9	%
Gain on sale of loans			215				111				104				93.7	%
Merchant processing income			211				222				(11	)			-5.0	%
Customer service fees			92				87				5				5.7	%
Investment services income			61				99				(38	)			-38.4	%
Safe deposit box and night depository income			49				50				(1	)			-2.0	%
Official check fees			14				83				(69	)			-83.1	%
Federal Home Loan Bank dividends			4				87				(83	)			-95.4	%
Impairment loss on investment security			—				(415	)			415				100.0	%
Other			249				207				42				20.3	%
Total non-interest income		$	4,041			$	3,782			$	259				6.8	%

Non-interest expenses. During the nine months ended September 30, 2009, total non-interest expense increased by $2.1 million, or 14%, to $17.0 million, up from $14.9 million for the comparable period in 2008. This increase in non-interest expense was primarily the result of an increase in the provision for OREO losses of $848 thousand and an increase in FDIC insurance assessments of $722 thousand. Other significant increases included $152 thousand in salaries and employee benefits, $140 thousand in professional fees, $188 thousand in loan and collection costs and OREO costs, $183 thousand in losses on the sale of OREO and vehicles and $265 thousand in other expense. These items were partially offset by reductions in other costs the three largest of which where advertising and shareholder relations, business development and insurance expense.

A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The provision for OREO losses for the nine months ended September 30, 2009 totaled $887 thousand which represents declines in the value of several properties. During 2009 the FDIC increased regular assessments and implemented a special assessment resulting in a significant increase in FDIC assessments. Additionally, during the first quarter of 2008 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. Salaries and other employee benefits increased by $152 thousand primarily related to additional staffing in our government guaranteed lending operations which were somewhat offset by reductions in staffing in other areas including our Reno loan production office and our Redding branch. The increase in professional fees relates to consulting costs associated with our computer network and telephone system and loan related legal expense. Consistent with the increase in nonperforming loans and assets during the period (See “FINANCIAL CONDITION — Nonperforming Loans”) loan and collection and OREO expenses which include costs related to acquiring and maintaining real estate acquired through foreclosure increased by $188 thousand from $265 thousand during the first nine months of 2008 to $453 thousand for the nine months ended September 30, 2009. The losses incurred on the sale of OREO totaled $158 thousand and relate to the sale of seven properties. Proceeds received on sale of these properties totaled $1.6 million. The increase in other expense, which totaled $265 thousand, is primarily related to nonrecurring expense items, the largest of which totaled $140 thousand.

We implemented cost control initiatives which, among other things, have resulted in savings in advertising, shareholder relation costs and business development costs. These cost savings totaled $183 thousand during the first nine months of 2009 when compared to the 2008 period. We reduced our shareholder expense by eliminating the glossy section of our annual report. Business development costs declined as we reduced certain employee travel and relationship-building initiatives which generating an annual savings of approximately $75 thousand.

During the first quarter of 2009 our Chief Information and Technology officer retired from the Company. Because his retirement took place prior to the age of sixty-five he forfeited his benefits under his company provided split dollar life insurance plan. To reflect this forfeiture we recorded a one-time reduction in insurance expense totaling $83 thousand.

The following table describes the components of non-interest expense for the nine-month periods ending September 30, 2009 and 2008, dollars in thousands:

		For the Nine Months
		Ended September 30,								Dollar				Percentage
		2009				2008				Change				Change
Salaries and employee benefits		$	8,417			$	8,265			$	152				1.8	%
Occupancy and equipment			2,836				2,872				(36	)			-1.3	%
FDIC insurance and assessments			905				183				722				394.5	%
Provision for OREO losses			887				39				848				2,174.4	%
Professional fees			598				458				140				30.6	%
Outside service fees			588				530				58				10.9	%
Loan collection and OREO expenses			453				265				188				70.9	%
Telephone and data communication			301				303				(2	)			-0.7	%
Advertising and shareholder relations			249				334				(85	)			-25.4	%
Business development			241				339				(98	)			-28.9	%
Director compensation			221				264				(43	)			-16.3	%
Armored car and courier			210				218				(8	)			-3.7	%
Loss on sale of real estate and vehicles			200				17				183				1,076.5	%
Postage			154				180				(26	)			-14.4	%
Stationery and supplies			139				172				(33	)			-19.2	%
Deposit premium amortization			130				172				(42	)			-24.4	%
Insurance			85				176				(91	)			-51.7	%
Other			427				162				265				163.6	%
Total non-interest expense		$	17,041			$	14,949			$	2,092				14.0	%