PLUMAS BANCORP - Quarter Report: 2021 June (Form 10-Q)

plbc20210630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2021

☐	TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

California	75-2987096
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

5525 Kietzke Lane, Suite 100, Reno, Nevada	89511
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code (775) 786-0907

Indicate 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act:

Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☒ Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:	Trading Symbol	Name of Each Exchange on which Registered:
Common Stock, no par value	PLBC	The NASDAQ Stock Market LLC

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 2, 2021. 5,810,323 shares.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

	*June 30,*		*December 31,*
	*2021*		*2020*

Assets
Cash and cash equivalents	$	244,456	$	184,909
Investment securities available for sale		248,824		179,613
Loans, less allowance for loan losses of $10,128 at June 30, 2021 and $9,902 at December 31, 2020		725,148		700,795
Real estate acquired through foreclosure		524		403
Premises and equipment, net		13,594		14,016
Bank owned life insurance		13,701		13,526
Accrued interest receivable and other assets		21,688		18,314
Total assets	$	1,267,935	$	1,111,576

Liabilities and Shareholders’ Equity

Deposits:
Non-interest bearing	$	601,692	$	516,682
Interest bearing		530,065		457,292
Total deposits		1,131,757		973,974
Repurchase agreements		10,087		13,878
Accrued interest payable and other liabilities		8,991		8,260
Federal Home Loan Bank advances		-		5,000
Junior subordinated deferrable interest debentures		10,310		10,310
Total liabilities		1,161,145		1,011,422

Commitments and contingencies (Note 6)

Shareholders’ equity:
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,198,826 shares at June 30, 2021 and 5,182,232 at December 31, 2020		7,937		7,656
Retained earnings		95,228		87,753
Accumulated other comprehensive income, net		3,625		4,745
Total shareholders’ equity		106,790		100,154
Total liabilities and shareholders’ equity	$	1,267,935	$	1,111,576

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

	*For the Three Months Ended*				*For the Six Months Ended*
	*June 30,*				*June 30,*
	*2021*		*2020*		*2021*		*2020*
Interest Income:
Interest and fees on loans	$	9,086	$	8,561	$	18,867	$	17,101
Interest on investment securities		1,045		864		1,946		1,816
Other		52		18		104		125
Total interest income		10,183		9,443		20,917		19,042
Interest Expense:
Interest on deposits		165		199		338		458
Interest on junior subordinated deferrable interest debentures		86		94		165		210
Other		1		2		4		5
Total interest expense		252		295		507		673
Net interest income before provision for loan losses		9,931		9,148		20,410		18,369
Provision for Loan Losses		250		1,250		625		2,000
Net interest income after provision for loan losses		9,681		7,898		19,785		16,369
Non-Interest Income:
Interchange revenue		813		555		1,528		1,094
Service charges		567		508		1,107		1,214
Gain on sale of loans		-		164		591		628
Other		500		695		1,004		1,211
Total non-interest income		1,880		1,922		4,230		4,147
Non-Interest Expenses:
Salaries and employee benefits		2,231		2,917		5,755		6,446
Occupancy and equipment		904		837		1,794		1,702
Other		2,197		1,675		4,075		3,418
Total non-interest expenses		5,332		5,429		11,624		11,566
Income before provision for income taxes		6,229		4,391		12,391		8,950
Provision for Income Taxes		1,742		1,206		3,463		2,449
Net income	$	4,487	$	3,185	$	8,928	$	6,501

Basic earnings per share	$	0.86	$	0.62	$	1.72	$	1.26
Diluted earnings per share	$	0.85	$	0.61	$	1.69	$	1.24

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	*For the Three Months Ended*						*For the Six Months Ended*
	*June 30,*						*June 30,*
	*2021*			*2020*			*2021*			*2020*

Net income	$	4,487		$	3,185		$	8,928		$	6,501
Other comprehensive income:
Change in net unrealized gain on securities		1,606			173			(1,978	)		3,427
Change in unrealized gain on cash flow hedge		(278	)		(97	)		389			(97	)
Net unrealized holding gain (loss)		1,328			76			(1,589	)		3,330
Related tax effect:
Change in net unrealized gain		(476	)		(52	)		584			(1,013	)
Change in unrealized gain on cash flow hedge		83			29			(115	)		29
Income tax effect		(393	)		(23	)		469			(984	)
Other comprehensive income (loss)		935			53			(1,120	)		2,346
Total comprehensive income	$	5,422		$	3,238		$	7,808		$	8,847

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands, except shares)

	*Common Stock*				*Retained*			*Accumulated Other Comprehensive Income*			*Total Shareholders’*
	*Shares*		*Amount*		*Earnings*			*(Net of Taxes)*			*Equity*

Balance, December 31, 2019		5,165,760	$	7,312	$	75,144		$	2,049		$	84,505
Net Income						6,501						6,501
Other comprehensive income									2,346			2,346
Cash dividends on common stock						(622	)					(622	)
Exercise of stock options and tax effect		12,772		57								57
Stock-based compensation expense				133								133
Balance, June 30, 2020		5,178,532	$	7,502	$	81,023		$	4,395		$	92,920

Balance, December 31, 2020		5,182,232	$	7,656	$	87,753		$	4,745		$	100,154
Net Income						8,928						8,928
Other comprehensive loss									(1,120	)		(1,120	)
Cash dividends on common stock						(1,453	)					(1,453	)
Exercise of stock options and tax effect		16,594		163								163
Stock-based compensation expense				118								118
Balance, June 30, 2021		5,198,826	$	7,937	$	95,228		$	3,625		$	106,790

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	*For the Six Months Ended*
	*June 30,*
	*2021*			*2020*
Cash Flows from Operating Activities:
Net income	$	8,928		$	6,501
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		625			2,000
Change in deferred loan origination costs/fees, net		1,276			4,006
Depreciation and amortization		760			761
Stock-based compensation expense		118			133
Amortization of investment security premiums		542			484
Loss on sale of other vehicles		-			15
Gain on sale of loans held for sale		(591	)		(628	)
Gain on sale of building		-			(218	)
Loans originated for sale		(14,919	)		(10,947	)
Proceeds from loan sales		8,254			14,998
Earnings on bank-owned life insurance		(175	)		(175	)
Increase in accrued interest receivable and other assets		(2,432	)		(1,974	)
Increase in accrued interest payable and other liabilities		731			2,149
Net cash provided by operating activities		3,117			17,105

Cash Flows from Investing Activities:
Proceeds from principal repayments from available-for-sale mortgage-backed securities		22,790			17,688
Proceeds from matured and called available-for-sale securities		500			380
Purchases of available-for-sale securities		(94,986	)		(9,486	)
Purchase of FHLB stock		(231	)		(150	)
Purchase of FRB stock		(2	)		-
Net increase in loans		(19,459	)		(126,090	)
Proceeds from sale of OREO		56			-
Proceeds from sale of other vehicles		174			280
Proceeds from sale of building		-			1,348
Purchase of premises and equipment		(114	)		(1,218	)
Net cash used in investing activities		(91,272	)		(117,248	)

Continued on next page.

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

	*For the Six Months Ended*
	*June 30,*
	*2021*			*2020*
Cash Flows from Financing Activities:
Net increase in demand, interest bearing and savings deposits	$	156,762		$	158,000
Net increase (decrease) in time deposits		1,021			(1,332	)
Net decrease in securities sold under agreements to repurchase		(3,791	)		(5,656	)
Cash dividends paid on common stock		(1,453	)		(622	)
Proceeds from FHLB advances		-			10,000
Repayment of FHLB advances		(5,000	)		-
Proceeds from exercise of stock options		163			57
Net cash provided by financing activities		147,702			160,447
Increase in cash and cash equivalents		59,547			60,304
Cash and Cash Equivalents at Beginning of Year		184,909			46,942
Cash and Cash Equivalents at End of Period	$	244,456		$	107,246

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	524		$	686
Income taxes	$	5,430		$	2

Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure	$	327		$	254

Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options	$	29		$	46

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE BUSINESS OF PLUMAS BANCORP

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 twelve branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, Truckee and Yuba City. In December 2015 the Bank opened a branch in Reno, Nevada; its first branch outside of California and in 2018 the Bank purchased a branch located in Carson City, Nevada. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California, and commercial/agricultural lending offices in Chico California and Klamath Falls, Oregon. The Bank's primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

2. Business Combinations - Merger with Feather River Bancorp, Inc.

On July 1, 2021, pursuant to a previously announced Agreement and Plan of Reorganization and Merger dated as of March 10, 2021 (the “Merger Agreement”) between the Company and Feather River Bancorp, Inc. (“FRB”), FRB merged with and into the Company with the Company continuing as the surviving corporation (the “Merger”). Immediately after the Merger, Bank of Feather River, the wholly owned bank subsidiary of FRB (“BFR”), merged with and into the Bank, with the Bank continuing as the surviving bank. The Merger and Bank Merger are collectively referred to as the “Transaction.”

As part of its business strategy, the Company regularly reviews its business strategies and opportunities to enhance the value of its franchise, including through acquisitions. The Transaction is consistent with the Company’s business strategy, which will (1) expand Plumas’s geographic presence into new markets in Northern California, (2) diversify and bring new expertise to Plumas’s agricultural lending business, and (3) strengthen the Company’s talent base.

Pursuant to the terms of the definitive merger agreement between the Company and FRB, each issued and outstanding share of common stock of FRB (the “Common Shares”), was converted into the right to receive, at the election of each holder of Common Shares, either (i) shares of common stock of the Company (“Plumas Common Stock”) or (ii) cash (the “Merger Consideration”). Shareholder elections were subject to proration such that aggregate Merger Consideration payable by the Company was comprised of (i) $4,735,184 in cash (the “Aggregate Cash Amount”) and (ii) 598,129 shares of Plumas Common Stock (the “Aggregate Plumas Share Amount”). Holders of Common Shares received either $19.14 in cash or 0.614 shares of Plumas Common Stock. The value of the total deal consideration was approximately $23.4 million, which is based upon volume-weighted average trading price of Plumas common stock for the 10 trading days ending on the last trading day immediately preceding July 1, 2021, the closing date of the Merger.

Immediately after the Transaction, the newly combined company, operating as Plumas Bancorp with its banking subsidiary, Plumas Bank, had total assets of approximately $1.5 billion. Immediately prior to the merger on June 30, 2021, FRB had net loans of approximately $158 million, deposits of approximately $177 million, and total assets of approximately $195 million. These amounts are subject to change as the Company is in the process of determining the fair value of FRB assets and liabilities acquired in accordance with generally accepted accounting principles. The Company anticipates recording goodwill, core deposit intangibles and other intangibles with this acquisition.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated.

Plumas Statutory Trust I and Trust II are not consolidated into the Company's consolidated financial statements and, accordingly, are accounted for under the equity method. The Company's investment in Trust I of $361,000 and Trust II of $183,000 are included in accrued interest receivable and other assets on the consolidated balance sheet. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by Trust I and Trust II are reflected as debt on the consolidated balance sheet.

The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. 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 June 30, 2021 and the results of its operations and its cash flows for the three- and six-month periods ended June 30, 2021 and 2020. Our condensed consolidated balance sheet at December 31, 2020 is derived from audited financial statements.

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 2020 Annual Report to Shareholders on Form 10-K. The results of operations for the three- and six-month periods ended June 30, 2021 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.

Segment Information

Management has determined that since all of the 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 customer accounts for more than 10 percent of revenues for the Company or the Bank.

Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Most of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as the Company’s loans and investment securities. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Condensed Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Pending Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company and has not adopted provisions of the standard early, the delay is applicable to the Company. The Company has begun its implementation efforts by establishing an implementation team chaired by the Company’s Chief Lending Officer and composed of members of the Company’s credit administration and accounting departments. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-1. During the second quarter of 2021 we engaged a consultant to perform a model validation of our CECL model and to assist us in documenting all aspects of the CECL model. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.

4. INVESTMENT SECURITIES AVAILABLE FOR SALE

The amortized cost and estimated fair value of investment securities at June 30, 2021 and December 31, 2020 consisted of the following, in thousands:

Available-for-Sale	June 30, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations - residential	$	133,769	$	2,629	$	(618	)	$	135,780
U.S. Government-agencies collateralized by mortgage obligations - commercial		35,192		146		(131	)		35,207
Obligations of states and political subdivisions		75,247		2,665		(75	)		77,837
	$	244,208	$	5,440	$	(824	)	$	248,824

Unrealized gains on available-for-sale investment securities totaling $4,616,000 were recorded, net of $1,365,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at June 30, 2021. No securities were sold during the six months ended June 30, 2021.

Available-for-Sale	December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations - residential	$	106,942	$	3,749	$	(17	)	$	110,674
U.S. Government-agencies collateralized by mortgage obligations - commercial		10,400		72		-			10,472
Obligations of states and political subdivisions		55,676		2,792		(1	)		58,467
	$	173,018	$	6,613	$	(18	)	$	179,613

Unrealized gains on available-for-sale investment securities totaling $6,595,000 were recorded, net of $1,950,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2020. No securities were sold during the six months ended June 30, 2020.

There were no transfers of available-for-sale investment securities during the six months ended June 30, 2021 and twelve months ended December 31, 2020. There were no securities classified as held-to-maturity at June 30, 2021 or December 31, 2020.

Investment securities with unrealized losses at June 30, 2021 and December 31, 2020 are summarized and classified according to the duration of the loss period as follows, in thousands:

June 30, 2021	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. Government-sponsored agencies collateralized by mortgage obligations - residential	$	-	$	-	$	39,040	$	618	$	39,040	$	618
U.S. Government-agencies collateralized by mortgage obligations - commercial		-		-		16,122		131		16,122		131
Obligations of states and political subdivisions		-		-		10,603		75		10,603		75
	$	-	$	-	$	65,765	$	824	$	65,765	$	824

December 31, 2020	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. Government-sponsored agencies collateralized by mortgage obligations -residential	$	-	$	-	$	5,511	$	17	$	5,511	$	17
U.S. Government-agencies collateralized by mortgage obligations - commercial		-		-		-		-		-		-
Obligations of states and political subdivisions		-		-		531		1		531		1
	$	-	$	-	$	6,042	$	18	$	6,042	$	18

At June 30, 2021, the Company held 293 securities of which 51 were in a loss position. All of the securities in a loss position were in a loss position for less than twelve months. Of the 293 securities, 115 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations, 13 are U.S. Government- agencies collateralized by commercial mortgage obligations and 165 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All of the securities continue to pay as scheduled. 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. As of June 30, 2021, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis. 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 June 30, 2021 are other than temporarily impaired.

The amortized cost and estimated fair value of investment in debt securities at June 30, 2021 by contractual maturity are shown below, in thousands.

	Amortized Cost		Estimated Fair Value
Within one year	$	-	$	-
After one year through five years		4,235		4,385
After five years through ten years		7,851		8,275
After ten years		63,161		65,177
Investment securities not due at a single maturity date:
Government- agencies commercial mortgage-backed securities		35,192		35,207
Government-sponsored agencies residential mortage-backed securities		133,769		135,780
	$	244,208	$	248,824

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.

Investment securities with amortized costs totaling $137,808,000 and $97,972,000 and estimated fair values totaling $139,780,000 and $101,685,000 at June 30, 2021 and December 31, 2020, respectively, were pledged to secure deposits and repurchase agreements.

5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands:

	June 30,			December 31,
	2021			2020

Commercial	$	139,552		$	117,360
Agricultural		66,404			72,911
Real estate – residential		9,896			11,399
Real estate – commercial		360,659			352,552
Real estate – construction and land development		29,556			25,306
Equity lines of credit		33,985			34,744
Auto		91,544			91,080
Other		4,350			4,587
Total loans		735,946			709,939
Deferred loan (fees) costs, net		(670	)		758
Allowance for loan losses		(10,128	)		(9,902	)
Total net loans	$	725,148		$	700,795

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

	June 30,			December 31,
	2021			2020

Balance, beginning of period	$	9,902		$	7,243
Provision charged to operations		625			3,175
Losses charged to allowance		(544	)		(787	)
Recoveries		145			271
Balance, end of period	$	10,128		$	9,902

The recorded investment in impaired loans totaled $6,833,000 and $2,214,000 at June 30, 2021 and December 31, 2020, respectively. The Company had specific allowances for loan losses of $30,000 on impaired loans of $279,000 at June 30, 2021 as compared to specific allowances for loan losses of $174,000 on impaired loans of $436,000 at December 31, 2020. The balance of impaired loans in which no specific reserves were required totaled $6,554,000 and $1,778,000 at June 30, 2021 and December 31, 2020, respectively. The average recorded investment in impaired loans for the six months ended June 30, 2021 and June 30, 2020 was $2,835000 and $2,140,000, respectively. The Company recognized $31,000 in interest income for impaired loans during the six months ended June 30, 2021 and 2020. No interest was recognized on nonaccrual loans accounted on a cash basis during the six months ended June 30, 2021 and 2020.

Included in impaired loans are troubled debt restructurings. Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualifying loan modification or extension is exempt by law from classification as a Troubled Debt Restructuring ("TDR") pursuant to FASB ASC 340-10. Under Section 541 of the Consolidated Appropriations Act, 2021, Congress extended the Troubled Debt Restructurings relief for financial institutions through January 1, 2022. In addition, FIL-36-2020 issued by the FDIC on April 7, 2020 provides more limited circumstances in which a loan modification or extension is not subject to classification as a TDR pursuant to FASB ASC 340-10.

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under FIL-36-2020 in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR. Under ASC 340-10, if the Company grants a loan extension or modification to a borrower experiencing financial difficulties for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above. To determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

The carrying value of troubled debt restructurings at June 30, 2021 and December 31, 2020 was $907,000 and $914,000, respectively. The Company has allocated $30,000 and $31,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2021 and December 31, 2020. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at June 30, 2021 and December 31, 2020.

There were no troubled debt restructurings that occurred during the six months ending June 30, 2021 or June 30, 2020.

There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the six months ended June 30, 2021 and 2020, respectively.

At June 30, 2021 and December 31, 2020, nonaccrual loans totaled $6,817,000 and $2,536,000, respectively. Interest foregone on nonaccrual loans totaled $253,000 and $30,000 for the three months ended June 30, 2021 and 2020, respectively. Interest foregone on nonaccrual loans totaled $329,000 and $63,000 for the six months ended June 30, 2021 and 2020, respectively. There were no loans past due 90 days or more and on accrual status at June 30, 2021 and December 31, 2020.

Salaries and employee benefits totaling $806,000 and $704,000 have been deferred as loan origination costs during the three months ended June 30, 2021 and 2020, respectively. Salaries and employee, benefits totaling $1,513,000 and $1,200,000 have been deferred as loan origination costs during the six months ended June 30, 2021 and 2020, respectively.

The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.

The risk ratings can be grouped into three major categories, defined as follows:

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following table shows the loan portfolio allocated by management's internal risk ratings at the dates indicated, in thousands:

June 30, 2021	*Commercial Credit Exposure*
	*Credit Risk Profile by Internally Assigned Grade*
Grade:	Commercial		Agricultural		Real Estate-Residential		Real Estate-Commercial		Real Estate-Construction		Equity LOC		Total
Pass	$	139,413	$	66,326	$	9,797	$	342,350	$	29,482	$	33,525	$	620,893
Special Mention		139		78		-		12,037		-		-		12,254
Substandard		-		-		99		6,272		74		460		6,905
Doubtful		-		-		-		-		-		-		-
Total	$	139,552	$	66,404	$	9,896	$	360,659	$	29,556	$	33,985	$	640,052

December 31, 2020	*Commercial Credit Exposure*
	*Credit Risk Profile by Internally Assigned Grade*
Grade:	Commercial		Agricultural		Real Estate-Residential		Real Estate-Commercial		Real Estate-Construction		Equity LOC		Total
Pass	$	116,992	$	72,833	$	11,208	$	348,901	$	25,229	$	34,237	$	609,400
Special Mention		211		78		-		2,779		-		-		3,068
Substandard		157		-		191		872		77		507		1,804
Doubtful		-		-		-		-		-		-		-
Total	$	117,360	$	72,911	$	11,399	$	352,552	$	25,306	$	34,744	$	614,272

	*Consumer Credit Exposure*						*Consumer Credit Exposure*
	*Credit Risk Profile Based on Payment Activity*						*Credit Risk Profile Based on Payment Activity*
	*June 30, 2021*						*December 31, 2020*
	Auto		Other		Total		Auto		Other		Total
Grade:
Performing	$	91,051	$	4,323	$	95,374	$	90,396	$	4,539	$	94,935
Non-performing		493		27		520		684		48		732
Total	$	91,544	$	4,350	$	95,894	$	91,080	$	4,587	$	95,667

The following tables show the allocation of the allowance for loan losses at the dates indicated, in thousands:

Six Months Ended June 30, 2021:	Commercial			Agricultural			Real Estate-Residential			Real Estate-Commercial		Real Estate-Construction			Equity LOC			Auto			Other			Total
Allowance for Loan Losses
Beginning balance	$	950		$	757		$	164		$	5,089	$	554		$	499		$	1,768		$	121		$	9,902
Charge-offs		(161	)		-			-			-		-			-			(346	)		(37	)		(544	)
Recoveries		47			-			1			4		-			2			77			14			145
Provision		47			(76	)		(34	)		252		52			(47	)		411			20			625
Ending balance	$	883		$	681		$	131		$	5,345	$	606		$	454		$	1,910		$	118		$	10,128
Three Months Ended June 30, 2021:
Beginning balance	$	777		$	698		$	169		$	5,132	$	657		$	484		$	1,928		$	117		$	9,962
Charge-offs		(8	)		-			-			-		-			-			(128	)		(16	)		(152	)
Recoveries		5			-			-			1		-			1			58			3			68
Provision		109			(17	)		(38	)		212		(51	)		(31	)		52			14			250
Ending balance	$	883		$	681		$	131		$	5,345	$	606		$	454		$	1,910		$	118		$	10,128
Six Months Ended June 30, 2020:
Allowance for Loan Losses
Beginning balance	$	617		$	653		$	163		$	3,426	$	481		$	393		$	1,409		$	101		$	7,243
Charge-offs		(131	)		-			-			-		-			-			(363	)		(41	)		(535	)
Recoveries		7			-			2			3		-			2			107			6			127
Provision		295			38			8			976		(5	)		79			559			50			2,000
Ending balance	$	788		$	691		$	173		$	4,405	$	476		$	474		$	1,712		$	116		$	8,835
Three Months Ended June 30, 2020:
Allowance for Loan Losses
Beginning balance	$	714		$	622		$	171		$	3,830	$	397		$	422		$	1,541		$	107		$	7,804
Charge-offs		-			-			-			-		-			-			(229	)		(38	)		(267	)
Recoveries		5			-			1			2		-			1			37			2			48
Provision		69			69			1			573		79			51			363			45			1,250
Ending balance	$	788		$	691		$	173		$	4,405	$	476		$	474		$	1,712		$	116		$	8,835
June 30, 2021:
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	-		$	-		$	25		$	-	$	5		$	-		$	-		$	-		$	30
Ending balance: collectively evaluated for impairment		883			681			106			5,345		601			454			1,910			118			10,098
Ending balance	$	883		$	681		$	131		$	5,345	$	606		$	454		$	1,910		$	118		$	10,128
Loans
Ending balance: individually evaluated for impairment	$	-		$	241		$	560		$	5,651	$	106		$	275		$	-		$	-		$	6,833
Ending balance: collectively evaluated for impairment		139,552			66,163			9,336			355,008		29,450			33,710			91,544			4,350			729,113
Ending balance	$	139,552		$	66,404		$	9,896		$	360,659	$	29,556		$	33,985		$	91,544		$	4,350		$	735,946

December 31, 2020:	Commercial		Agricultural		Real Estate-Residential		Real Estate-Commercial		Real Estate-Construction		Equity LOC		Auto		Other		Total
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	143	$	-	$	26	$	-	$	5	$	-	$	-	$	-	$	174
Ending balance: collectively evaluated for impairment		807		757		138		5,089		549		499		1,768		121		9,728
Ending Balance	$	950	$	757	$	164	$	5,089	$	554	$	499	$	1,768	$	121	$	9,902
Loans
Ending balance: individually evaluated for impairment	$	154	$	243	$	563	$	859	$	108	$	288	$	-	$	-	$	2,215
Ending balance: collectively evaluated for impairment		117,206		72,668		10,836		351,693		25,198		34,456		91,080		4,587		707,724
Ending balance	$	117,360	$	72,911	$	11,399	$	352,552	$	25,306	$	34,744	$	91,080	$	4,587	$	709,939

The following table shows an aging analysis of the loan portfolio by the time past due, in thousands:

							Total
June 30, 2021			90 Days				Past Due
	30-89 Days		and Still				and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total

Commercial	$	48	$	-	$	-	$	48	$	139,504	$	139,552
Agricultural		300		-		-		300		66,104		66,404
Real estate – residential		-		-		99		99		9,797		9,896
Real estate – commercial		980		-		5,664		6,644		354,015		360,659
Real estate - construction & land		-		-		74		74		29,482		29,556
Equity Lines of Credit		103		-		460		563		33,422		33,985
Auto		658		-		493		1,151		90,393		91,544
Other		34		-		27		61		4,289		4,350
Total	$	2,123	$	-	$	6,817	$	8,940	$	727,006	$	735,946

							Total
December 31, 2020			90 Days				Past Due
	30-89 Days		and Still				and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total

Commercial	$	16	$	-	$	157	$	173	$	117,187	$	117,360
Agricultural		-		-		-		-		72,911		72,911
Real estate – residential		34		-		191		225		11,174		11,399
Real estate - commercial		56		-		872		928		351,624		352,552
Real estate - construction & land		-		-		77		77		25,229		25,306
Equity Lines of Credit		73		-		507		580		34,164		34,744
Auto		945		-		684		1,629		89,451		91,080
Other		28		-		48		76		4,511		4,587
Total	$	1,152	$	-	$	2,536	$	3,688	$	706,251	$	709,939

The following tables show information related to impaired loans at June 30, 2021, in thousands:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of June 30, 2021:	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		241		241		-		242		9
Real estate – residential		387		399		-		388		15
Real estate – commercial		5,651		5,765		-		1,642		-
Real estate – construction & land		-		-		-		-		-
Equity Lines of Credit		275		310		-		282		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
With an allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		-		-		-		-		-
Real estate – residential		173		173		25		174		4
Real estate – commercial		-		-		-		-		-
Real estate – construction & land		106		106		5		107		3
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		241		241		-		242		9
Real estate – residential		560		572		25		562		19
Real estate – commercial		5,651		5,765		-		1,642		-
Real estate – construction & land		106		106		5		107		3
Equity Lines of Credit		275		310		-		282		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total	$	6,833	$	6,994	$	30	$	2,835	$	31

The following tables show information related to impaired loans at December 31, 2020, in thousands:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of December 31, 2020:	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		243		243		-		246		19
Real estate – residential		388		399		-		390		28
Real estate – commercial		859		955		-		762		-
Real estate – construction & land		-		-		-		-		-
Equity Lines of Credit		288		317		-		298		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
With an allowance recorded:
Commercial	$	154	$	154	$	143	$	16	$	-
Agricultural		-		-		-		-		-
Real estate – residential		174		176		26		175		7
Real estate – commercial		-		-		-		-		-
Real estate – construction & land		108		108		5		109		7
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total:
Commercial	$	154	$	154	$	143	$	16	$	-
Agricultural		243		243		-		246		19
Real estate – residential		562		575		26		565		35
Real estate – commercial		859		955		-		762		-
Real estate – construction & land		108		108		5		109		7
Equity Lines of Credit		288		317		-		298		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total	$	2,214	$	2,352	$	174	$	1,996	$	61

6. 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 $133.5 million and $144.4 million and stand-by letters of credit of $227 thousand and $531 thousand at June 30, 2021 and December 31, 2020, respectively.

Of the loan commitments outstanding at June 30, 2021, $31.9 million 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 June 30, 2021 or December 31, 2020.

7. 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 Ended*				*For the Six Months Ended*
	*June 30,*				*June 30,*
(In thousands, except per share data)	*2021*		*2020*		*2021*		*2020*
Net Income:
Net income	$	4,487	$	3,185	$	8,928	$	6,501
Earnings Per Share:
Basic earnings per share	$	0.86	$	0.62	$	1.72	$	1.26
Diluted earnings per share	$	0.85	$	0.61	$	1.69	$	1.24
Weighted Average Number of Shares Outstanding:
Basic shares		5,197		5,178		5,192		5,175
Diluted shares		5,280		5,229		5,272		5,229

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. Stock options not included in the computation of diluted earnings per share, due to shares not being in-the-money and having an antidilutive effect, were approximately 5,000 and 202,000 for the three- and six-month periods ended June 30, 2021 and 2020, respectively.

8. STOCK-BASED COMPENSATION

In May 2013, the Company established the 2013 Stock Option Plan for which 373,135 shares of common stock are reserved and 121,150 shares are available for future grants as of June 30, 2021. The 2013 Plan requires that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash, with Company common stock previously acquired by the optionee and held by the optionee for a period of at least nine months, in options of the Optionee that are fully vested and exercisable or in any combination of the foregoing. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant.

No options were granted during the six months ended June 30, 2021. During the six months ended June 30, 2020 the Company granted options to purchase 5,000 shares of common stock.

The fair value of each option was estimated on the date of grant using the following assumptions.

	2020
Expected life of stock options (in years)		5.1
Risk free interest rate		1.68	%
Daily Volatility		1.64	%
Dividend yields		1.29	%
Weighted-average fair value of options granted during the six months ended June 30, 2020	$	5.92

The Company determines the fair value of options on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant.

A summary of the activity within the 2013 Plan follows:

	*Shares*			*Weighted Average Exercise Price*		*Weighted Average Remaining Contractual Term in Years*		*Intrinsic Value*
Options outstanding at January 1, 2021		272,085		$	18.25
Options cancelled		(2,600	)		22.36
Options exercised		(17,500	)		10.98
Options outstanding at June 30, 2021		251,985		$	18.71		4.8	$	3,356,440
Options exercisable at June 30, 2021		142,685		$	16.19		3.9	$	2,260,130
Expected to vest after June 30, 2021		96,916		$	22.01		6.1	$	971,312

As of June 30, 2021, there was $394,000 of total unrecognized compensation cost related to non-vested, share-based compensation. That cost is expected to be recognized over a weighted average period of 2.1 years.

The total fair value of options vested during the six months ended June 30, 2021 and 2020 was $107,000 and $186,000, respectively. The total intrinsic value of options at time of exercise was $298,000 and $257,000 for the six months ended June 30, 2021 and 2020, respectively.

Compensation cost related to stock options recognized in operating results under the stock option plans was $118,000 and $133,000 for the six months ended June 30, 2021 and 2020, respectively. The associated income tax benefit recognized was $8,000 and $10,000 for the six months ended June 30, 2021 and 2020, respectively. Compensation cost related to stock options recognized in operating results under the stock option plans was $58,000 and $55,000 for the three months ended June 30, 3032 and 2020, respectively. The associated income tax benefit recognized was $4,000 for the three months ended June 30, 2021 and 2020.

Cash received from option exercises under the plan for the six months ended June 30, 2021 and 2020 were $163,000 and $57,000, respectively. The tax benefit realized for the tax deductions from option exercise totaled $2,000 and $10,000 for the six months ended June 30, 2021 and 2020, respectively.

9. INCOME TAXES

The Company files its income taxes on a consolidated basis with its subsidiary. Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities.

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 adjusted for the effects of changes in tax laws and rates on the date of enactment. A valuation allowance is recognized if, based on the weight of available evidence management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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 statements of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the six months ended June 30, 2021.

10. FAIR VALUE MEASUREMENT

The Company measures fair value under the fair value hierarchy described below.

Level 1: Quoted prices for identical instruments traded in active exchange markets.

Level 2: Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Model based techniques that use one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

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.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at June 30, 2021 follows, in thousands:

			Fair Value Measurements at June 30, 2021, Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	244,456	$	244,456	$	-	$	-	$	244,456
Investment securities		248,824		-		248,824		-		248,824
Interest rate swaps		530		-		530		-		530
Loans, net		725,148		-		-		721,994		721,994
FHLB stock		3,898		-		-		-		N/A
FRB Stock		653		-		-		-		N/A
Accrued interest receivable		4,578		7		903		3,668		4,578
Financial liabilities:
Deposits		1,131,757		1,090,420		42,692		-		1,133,112
Repurchase agreements		10,087		-		10,087		-		10,087
Junior subordinated deferrable interest debentures		10,310		-		-		7,207		7,207
Accrued interest payable		52		7		39		6		52

The carrying amounts and estimated fair values of financial instruments, at December 31, 2020 follows, in thousands:

			Fair Value Measurements at December 31, 2020 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	184,909	$	184,909	$	-	$	-	$	184,909
Investment securities		179,613		-		179,613		-		179,613
Interest rate swaps		141		-		141		-		141
Loans, net		700,795		-		-		717,068		717,068
FHLB stock		3,667		-		-		-		N/A
FRB Stock		651		-		-		-		N/A
Accrued interest receivable		5,402		10		633		4,759		5,402
Financial liabilities:
Deposits		973,974		933,658		41,891		-		975,549
Repurchase agreements		13,878		-		13,878		-		13,878
FHLB advances		5,000		-		4,996		-		4,996
Junior subordinated deferrable interest debentures		10,310		-		-		7,340		7,340
Accrued interest payable		69		9		44		16		69

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. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level 3. Changes in assumptions could significantly affect the fair values presented.

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.

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 June 30, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Assets and liabilities measured at fair value on a recurring basis at June 30, 2021 are summarized below, in thousands:

			Fair Value Measurements at
			June 30, 2021 Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential	$	135,780	$	-	$	135,780	$	-
U.S. Government-agencies collateralized by mortgage obligations-commercial		35,207		-		35,207		-
Obligations of states and political subdivisions		77,837		-		77,837		-
Interest rate swaps		530		-		530		-
	$	249,354	$	-	$	249,354	$	-

Assets and liabilities measured at fair value on a recurring basis at December 31, 2020 are summarized below, in thousands:

			Fair Value Measurements at
			December 31, 2020 Using
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential	$	110,674	$	-	$	110,674	$	-
U.S. Government agencies collateralized by mortgage obligations-commercial		10,472		-		10,472		-
Obligations of states and political subdivisions		58,467		-		58,467		-
Interest rate swaps		141		-		141		-
	$	179,754	$	-	$	179,754	$	-

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 or matrix pricing. The fair value of the interest rate swap agreements was derived from discounted cash flow analysis based on the terms of the contract and the forward interest rate curve adjusted for our credit risk. There were no changes in the valuation techniques used during 2021 or 2020. Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.

Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2021 are summarized below, in thousands:

			Fair Value Measurements at
			June 30, 2021 Using
			Quoted
			Prices in						Total
			Active		Significant				Losses
			Markets for		Other		Significant		Six Months
			Identical		Observable		Unobservable		Ended
			Assets		Inputs		Inputs		June 30,
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)		2021
Assets:
Other real estate:
Real estate – commercial	$	524	$	-	$	-	$	524	$	-
Total other real estate	$	524	$	-	$	-	$	524	$	-

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2020 are summarized below, in thousands:

			Fair Value Measurements at
			December 31, 2020 Using
			Quoted
			Prices in						Total
			Active		Significant				Losses
			Markets for		Other		Significant		Six Months
			Identical		Observable		Unobservable		Ended
			Assets		Inputs		Inputs		June 30,
	Total Fair Value		(Level 1)		(Level 2)		(Level 3)		2020
Assets:
Impaired loans:
Real estate – commercial	$	11	$	-	$	-	$	11	$	-
Other real estate:
Real estate – commercial		347		-		-		347		-
Real estate - residential		56		-		-		56		-
Total other real estate		403		-		-		403		-
Total	$	414	$	-	$	-	$	414	$	-

The Company has no liabilities which are reported at fair value.

The following methods were used to estimate fair value.

Collateral-Dependent Impaired Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3). No impairment charges were recognized during the six months ended June 30, 2021 and 2020 related to the above impaired loans.

Other Real Estate: Nonrecurring adjustments to certain real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect current conditions and selling costs (Level 3).

Appraisals for both collateral-dependent impaired loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2021 and December 31, 2020 (dollars in thousands):

							Range				Range
	Fair Value		Fair Value		Valuation		(Weighted Average)				(Weighted Average)
Description	6/30/2021		12/31/2020		Technique	Significant Unobservable Input	6/30/2021				12/31/2020
Impaired Loans:

RE – Commercial		-	$	11	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs						28% - 80%		(61	)%

Other Real Estate:

RE – Commercial	$	524	$	347	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs		16% - 51%	(33.0	)%		16% - 17%		(16	)%

RE – Residential	$	-	$	56	Third Party appraisals	Management Adjustments to Reflect Current Conditions and Selling Costs						47	%	(47	)%

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 June 30, 2021 and December 31, 2020 and for the three- and six-month periods ended June 30, 2021 and 2020. 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, 2020.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no changes to the Company’s critical accounting policies from those disclosed in the Company’s 2020 Annual Report to Shareholders on Form 10-K.

COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income, the provision for loan losses and non-interest income. Other financial impact could occur though such potential impact is unknown at this time.

COVID-19 Loan Forbearance Programs

Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP). Under Section 541 of the Consolidated Appropriations Act, 2021, Congress extended the Troubled Debt Restructurings relief for financial institutions through January 1, 2022. In addition, FIL -36-2020 issued by the FDIC on April 7, 2020 encourages financial institutions to work constructively with borrowers affected by COVID-19; states that the FDIC will not criticize institutions for prudent loan modifications; and views prudent loan modification programs to financial institution customers affected by COVID-19 as positive actions that can effectively manage or mitigate adverse impacts on borrowers due to COVID-19, and lead to improved loan performance and reduced credit risk. Pursuant to this new guidance, we have instituted loan forbearance programs to assist borrowers with managing cash flows disrupted due to COVID-19. As of June 30, 2021, there were $1.3 million in loan balances on deferral related to this program. In July, two additional loans from one customer were placed on deferral totaling $3.3 million. These two loans were placed on nonaccrual status in June 2021. We expect full repayment on these loans either through foreclosure of the underlying collateral, or through normal payments of principal and interest once the loans are taken off deferral status.

U.S. Small Business Administration Paycheck Protection Program

The CARES Act also provided for the Paycheck Protection Program (PPP) and additional legislation has extended this program into 2021; we are actively participating in the PPP program. As of June 30, 2021 we funded 2,256 PPP loans totaling $197 million. The remaining principal balance of these loans at June 30, 2021 was $88 million. During the six months ended June 30, 2021 we funded 1,033 PPP loans totaling over $77 million. Since inception of the PPP program our borrowers have received over $108 million in loan forgiveness.

Merger Agreement with Feather River Bancorp, Inc.

On July 1, 2021, pursuant to a previously announced Agreement and Plan of Reorganization and Merger dated as of March 10, 2021 (the “Merger Agreement”) between the Company and Feather River Bancorp, Inc. (“FRB”), FRB merged with and into the Company with the Company continuing as the surviving corporation (the “Merger”). Immediately after the Merger, Bank of Feather River, the wholly owned bank subsidiary of FRB (“BFR”), merged with and into the Bank, with the Bank continuing as the surviving bank. The Merger and Bank Merger are collectively referred to as the “Transaction.”

Immediately after the Transaction, the newly combined company, operating as Plumas Bancorp with its banking subsidiary, Plumas Bank, had total assets of approximately $1.5 billion. Immediately prior to the merger on June 30, 2021, FRB had net loans of approximately $158 million, deposits of approximately $177 million, and total assets of approximately $195 million. These amounts are subject to change as the Company is in the process of determining the fair value of FRB assets and liabilities acquired in accordance with generally accepted accounting principles. The Company anticipates recording goodwill, core deposit intangibles and other intangibles with this acquisition.

RESULTS OF OPERATIONS FOR THE Six MONTHS ENDED June 30, 2021

Net Income. The Company recorded net income of $8.9 million for the six months ended June 30, 2021 up $2.4 million from net income of $6.5 million for the six months ended June 30, 2020. Increases of $2.0 million in net interest income and $83 thousand in non-interest income and a decline of $1,375 thousand in the provision for loan losses were partially offset by an increase in non-interest expense of $58 thousand and an increase in the provision for income taxes of $1,014 thousand. The annualized return on average assets was 1.50% for the six months ended June 30, 2021 up from 1.41% for the six months ended June 30, 2020. The annualized return on average equity increased from 14.6% during the first half of 2020 to 17.4% during the current period

The following is a detail discussion of each component of the change in net income.

Net interest income before provision for loan losses. Net interest income was $20.4 million for the six months ended June 30, 2020, an increase of $2.0 million from the same period in 2021. Net interest margin for the six months ended June 30, 2021 decreased 65 basis points to 3.62%, down from 4.27% for the same period in 2020.

The increase in net interest income includes an increase of $1.9 million in interest income and a reduction of $166 thousand in interest expense. Interest and fees on loans increased by $1.8 million. This increase resulted from an increase in average balance of $68 million and an increase in yield of 2 basis points to 5.21%. Included in interest income during the current six month period were the amortization of PPP fees net of costs of $2.3 million, an increase of $1.9 million from the same period in 2020. PPP fees include normal amortization on our PPP portfolio and the effect of $59 million in PPP loan forgiveness. Excluding the effect of the PPP loans, loan yield would have declined by 27 basis points to 5.07% for the current period and 5.34% during the six months ended June 30, 2020. This is consistent with a decline in market interest rates during the comparison periods. Interest on investment securities increased by $130 thousand as an increase in average balance of $50 million was mostly offset by a decline in yield of 43 basis points to 1.90%. Interest on cash balances declined by $21 thousand related to a decline in the rate paid on these balances from 0.56% during the first half of 2020 to 0.11% during the current period partially offset by an increase in average balance of $153 million to $199 million.

Interest expense on deposits decreased by $120 thousand to $338 thousand for the six months ended June 30, 2021, down from $458 thousand during the 2020 period. The largest components of this decrease were $48 thousand in interest on Now accounts, $32 thousand in interest on money market deposits and $36 thousand in interest on time deposits. The decline in money market and time is primarily related to a decline in market rates in our service areas. The decline in NOW interest expense is related to the elimination of our NOW deposit product in November 2020.

Interest expense on other interest-bearing liabilities decreased by $46 thousand from $215 thousand during the six months ended June 30, 2020 to $169 thousand during the current quarter related to a decrease in rate paid on junior subordinated debentures from 4.10% during the first half of 2020 to 3.23% during the current period. Interest on the debentures declined by $45 thousand from $210 thousand during the six months ended June 30, 2020 to $165 thousand during the current period. For most of the first half of 2020 interest on the debentures fluctuated with changes in the 3-month LIBOR rate. On May 26, 2020 we entered into two separate interest rate swap agreements, effectively converting the $10 million in Subordinated Debentures to fixed obligations effective with the quarterly payments due in September, 2020. The swaps have a 10 year maturity and fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points.

The following table presents for the six-month periods indicated the distribution of consolidated average assets, liabilities and shareholders' equity. It also presents the amounts of interest income from interest earning assets and the resultant 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 Six Months Ended							For the Six Months Ended
	June 30, 2021							June 30, 2020
	Average							Average
	Balance		Interest		Yield/			Balance		Interest		Yield/
	(in thousands)		(in thousands)		Rate			(in thousands)		(in thousands)		Rate
Interest-earning assets:
Loans (1) (2) (3)	$	730,217	$	18,867		5.21	%	$	662,315	$	17,101		5.19	%
Investment securities (1)		206,997		1,946		1.90	%		156,784		1,816		2.33	%
Interest-bearing deposits		198,622		104		0.11	%		45,137		125		0.56	%
Total interest-earning assets		1,135,836		20,917		3.71	%		864,236		19,042		4.43	%
Cash and due from banks		28,505							22,105
Other assets		37,129							39,048
Total assets	$	1,201,470						$	925,389

Interest-bearing liabilities:
NOW deposits	$	-		-		-	%	$	110,107		48		0.09	%
Money market deposits		192,842		128		0.13	%		96,680		160		0.33	%
Savings deposits		268,992		136		0.10	%		196,257		140		0.14	%
Time deposits		40,951		74		0.36	%		37,616		110		0.59	%
Total deposits		502,785		338		0.14	%		440,660		458		0.21	%
Junior subordinated debentures		10,310		165		3.23	%		10,310		210		4.10	%
Other interest-bearing liabilities		15,212		4		0.05	%		10,772		5		0.09	%
Total interest-bearing liabilities		528,307		507		0.19	%		461,742		673		0.29	%
Non-interest-bearing deposits		561,368							362,888
Other liabilities		8,617							11,022
Shareholders' equity		103,178							89,737
Total liabilities & equity	$	1,201,470						$	925,389
Cost of funding interest-earning assets (4)						0.09	%						0.16	%
Net interest income and margin (5)			$	20,410		3.62	%			$	18,369		4.27	%

(1)	Not computed on a tax-equivalent basis.

(2)	Average nonaccrual loan balances of $3.1 million for 2021 and $2.3 million for 2020 are included in average loan balances for computational purposes.

(3)	Net fees (costs) included in loan interest income for the six-month periods ended June 30, 2021 and 2020 were $2,186,000 and ($208,000), respectively.

(4)	Total annualized interest expense divided by the average balance of total earning assets.

(5)	Annualized net interest income divided by the average balance of total earning assets.

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

	2021 over 2020 change in net interest income
	for the six months ended June 30,
	(in thousands)
	Volume (1)			Rate (2)			Mix (3)			Total

Interest-earning assets:
Loans	$	1,748		$	59		$	(41	)	$	1,766
Investment securities		580			(337	)		(113	)		130
Interest bearing deposits		424			(101	)		(344	)		(21	)
Total interest income		2,752			(379	)		(498	)		1,875
Interest-bearing liabilities:
NOW deposits		(48	)		-			-			(48	)
Money market deposits		159			(95	)		(96	)		(32	)
Savings deposits		51			(40	)		(15	)		(4	)
Time deposits		10			(42	)		(4	)		(36	)
Junior subordinated debentures		-			(45	)		-			(45	)
Other		2			(2	)		(1	)		(1	)
Total interest expense		174			(224	)		(116	)		(166	)
Net interest income	$	2,578		$	(155	)	$	(382	)	$	2,041

(1)

The volume change in net interest income represents the change in average balance divided by the previous year’s rate.

(2)

The rate change in net interest income represents the change in rate divided by the previous year’s average balance.

(3)

The mix change in net interest income represents the change in average balance multiplied by the change in rate.

Provision for loan losses. During the six months ended June 30, 2021 and 2020 we recorded a provision for loan losses of $625 thousand and $2.0 million respectively. See “Analysis of Asset Quality and Allowance for Loan Losses” for a discussion of loan quality trends and the provision for loan losses.

Non-interest income. During the six months ended June 30, 2021, non-interest income totaled $4.2 million, an increase of $83 thousand from the six months ended June 30, 2020. An increase of $434 thousand in interchange fees was partially offset by a reduction in service charge fees of $107 thousand related to a reduction in NSF fees and a $218 thousand gain on sale of one of our administrative buildings during the second quarter of 2020. The decrease in NSF fees and increase in interchange income is a pattern we have observed since the onset of the Pandemic.

The following table describes the components of non-interest income for the six-month periods ended June 30, 2021 and 2020, dollars in thousands:

	For the Six Months Ended
	June 30,
	2021		2020		Dollar Change			Percentage Change
Interchange income		1,528		1,094		434			39.7	%
Service charges on deposit accounts		1,107		1,214		(107	)		-8.8	%
Gain on sale of loans, net		591		628		(37	)		-5.9	%
Loan servicing fees		423		399		24			6.0	%
Earnings on life insurance policies		175		175		-			-	%
Gain on sale of building		-		218		(218	)		-100.0	%
Other		406		419		(13	)		-3.1	%
Total non-interest income	$	4,230	$	4,147	$	83			2.0	%

Non-interest expense. During the six months ended June 30, 2021, total non-interest expense increased by $58 thousand from the comparable period in 2020. The largest components of this increase were increases of $506 thousand in professional fees and $251 thousand in outside service fees. Professional fees included legal, investment banking, consulting and accounting costs related to the acquisition of Bank of Feather River totaling $415 thousand during the current period, while outside services included $51 thousand in merger related costs. In addition to merger related costs, the single largest increase in professional fees was $42 thousand in consulting costs related to implementation of the current expected credit losses methodology for estimating allowances for credit losses. Other significant increases in outside service fees includes an increase of $93 thousand in interchange expense consistent with the increase in interchange income and $63 thousand in costs related to outsourcing of various Human Resources functions effective April 1, 2021.

Mostly offsetting the increases in non-interest expense described above was a decline of $691 thousand in salary and benefit expense. During the three months ended June 30, 2021 the Company qualified for the Employee Retention Credit (ERC). The ERC was made available under the Coronavirus Aid, Relief, and Economic Security Act and modified and extended under the Taxpayer Certainty and Disaster Tax Relief Act of 2020. We recorded an ERC of $1.1 million during the current period as a reduction of salary and benefit expense. In addition to the ERC, the deferral of loan origination costs, which reduces salary and benefit expense, increased by $313 thousand. These items were partially offset by an increase in bonus expense of $542 thousand consistent with the increase in income during the comparable periods and an increase in commission expense of $355 thousand related to an increase in SBA activity as well as commissions earned on PPP loan production and forgiveness activities.

The following table describes the components of non-interest expense for the six-month periods ended June 30, 2021 and 2020, dollars in thousands:

	For the Six Months Ended
	June 30,
	2021		2020		Dollar Change			Percentage Change
Salaries and employee benefits	$	5,755	$	6,446	$	(691	)		-10.7	%
Occupancy and equipment		1,794		1,702		92			5.4	%
Outside service fees		1,617		1,366		251			18.4	%
Professional fees		793		287		506			176.3	%
Telephone and data communication		330		302		28			9.3	%
Armored car and courier		225		199		26			13.1	%
Director compensation and expense		197		218		(21	)		-9.6	%
Advertising and shareholder relations		171		249		(78	)		-31.3	%
Deposit insurance		162		117		45			38.5	%
Business development		127		152		(25	)		-16.4	%
Loan collection expenses		94		99		(5	)		-5.1	%
Amortization of Core Deposit Intangible		84		102		(18	)		-17.6	%
Stationery and supplies		51		59		(8	)		-13.6	%
Other		224		268		(44	)		-16.4	%
Total non-interest expense	$	11,624	$	11,566	$	58			0.5	%

Provision for income taxes. The Company recorded an income tax provision of $3.5 million, or 27.9% of pre-tax income for the six months ended June 30, 2021. This compares to an income tax provision of $2.4 million, or 27.4% of pre-tax income for the six months ended June 30, 2020. The percentages for 2021 and 2020 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and securities interest decrease taxable income and during 2021 nondeductible merger expenses. The increase in the effective tax rate in the current period is primarily related to nondeductible merger expenses.

RESULTS OF OPERATIONS FOR THE three MONTHS ENDED June 30, 2021

Net Income. The Company recorded net income of $4.5 million for the three months ended June 30, 2021 up $1.3 million from net income of $3.2 million for the three months ended June 30, 2020. Increases of $783 thousand in net interest income and declines of $1,000 thousand in the provision for loan losses and $97 thousand in non-interest expense were partially offset by a decline of a $42 thousand in non-interest income and an increase in the provision for income taxes of $536 thousand. The annualized return on average assets was 1.45% for the three months ended June 30, 2021 up from 1.31% for the three months ended June 30, 2020. The annualized return on average equity increased from 14.0% during the second quarter of 2020 to 17.2% during the current quarter.

The following is a detail discussion of each component of the change in net income.

Net interest income before provision for loan losses. Net interest income was $9.9 million for the three months ended June 30, 2021, an increase of $783 thousand from the same period in 2020.

The increase in net interest income includes an increase of $740 thousand in interest income and a decrease of $43 thousand in interest expense. Interest and fees on loans increased by $525 thousand related to the amortization of loan fees/costs on PPP loans and an increase in average loan balances. During the current quarter we recorded amortization of loan fees net of loan costs on PPP loans totaling $836 thousand, an increase of $455 thousand for the same quarter in 2020. This includes normal amortization on our PPP portfolio and the effect of $18 million in PPP loan forgiveness.

Average loan balances increased by $37 million, while the average yield on loans increased by 3 basis points from 4.88% during the second quarter of 2020 to 4.91% during the current quarter. Excluding the effect of the PPP loans, loan yield would have declined by 16 basis points to 4.98% for the current quarter and 5.14% during the second quarter of 2020. The change in loan yield from 2020 includes the effect of a reduction in market rates offset by the increase in the amortization of loan fees on PPP loans as discussed above. Interest on investment securities increased by $181 thousand related to growth in the investment portfolio. Average investment securities increased by $70 million to $225 million. The average yield on investment securities during the three months ended June 30, 2021 was 1.86%, a decline of 38 basis points from 2.24% during the second quarter of 2020. Interest on cash balances increased by $34 thousand related to an increase in average balances of $147 million.

Interest expense on deposits decreased by $34 thousand to $165 thousand for the three months ended June 30, 2021, down from $199 thousand during the 2020 quarter. The largest components of this decrease were declines of $22 thousand in interest on NOW deposits and $16 thousand in interest on time deposits. The decline in NOW interest expense is related to the elimination of our NOW deposit product in November 2020.

Interest expense on other interest-bearing liabilities decreased by $9 thousand from $96 thousand during the three months ended June 30, 2020 to $87 thousand during the current quarter related to a decrease in rate paid on junior subordinated debentures from 3.67% during the second quarter of 2020 to 3.35% during the current quarter. Interest on the debentures declined by $8 thousand from $94 thousand during the three months ended June 30, 2020 to $86 thousand during the current quarter. On May 26, 2020 we entered into two separate interest rate swap agreements, effectively converting the $10 million in Subordinated Debentures to fixed obligations effective with the quarterly payments due in September, 2020. The swaps have a 10 year maturity and fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points.

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							For the Three Months Ended
	June 30, 2021							June 30, 2020
	Average							Average
	Balance		Interest		Yield/			Balance		Interest		Yield/
	(in thousands)		(in thousands)		Rate			(in thousands)		(in thousands)		Rate

Interest-earning assets:
Loans ^{(1) (2) (3)}	$	742,626	$	9,086		4.91	%	$	705,669	$	8,561		4.88	%
Investment securities ⁽¹⁾		225,250		1,045		1.86	%		155,457		864		2.24	%
Interest-bearing deposits		202,365		52		0.10	%		55,291		18		0.13	%
Total interest-earning assets		1,170,241		10,183		3.49	%		916,417		9,443		4.14	%
Cash and due from banks		29,517							22,205
Other assets		37,658							38,859
Total assets	$	1,237,416						$	977,481

Interest-bearing liabilities:
NOW deposits	$	-		-		-	%	$	112,547		22		0.08	%
Money market deposits		197,020		59		0.12	%		99,923		61		0.25	%
Savings deposits		281,828		70		0.10	%		206,431		64		0.12	%
Time deposits		41,308		36		0.35	%		37,533		52		0.56	%
Total deposits		520,156		165		0.13	%		456,434		199		0.18	%
Junior subordinated debentures		10,310		86		3.35	%		10,310		94		3.67	%
Other interest-bearing liabilities		12,576		1		0.03	%		8,949		2		0.09	%
Total interest-bearing liabilities		543,042		252		0.19	%		475,693		295		0.25	%
Non-interest-bearing deposits		581,263							395,187
Other liabilities		8,669							14,860
Shareholders' equity		104,442							91,741
Total liabilities & equity	$	1,237,416						$	977,481
Cost of funding interest-earning assets ⁽⁴⁾						0.09	%						0.13	%
Net interest income and margin ⁽⁵⁾			$	9,931		3.40	%			$	9,148		4.01	%

(1)	Not computed on a tax-equivalent basis.

(2)	Average nonaccrual loan balances of $3.9 million for 2021 and $2.4 million for 2020 are included in average loan balances for computational purposes.

(3)	Net fees included in loan interest income for the three-month periods ended June 30, 2021 and 2020 were $728,000 and $39,000, respectively.

(4)	Total annualized interest expense divided by the average balance of total earning assets.

(5)	Annualized net interest income divided by the average balance of total earning assets.

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:

	2021 over 2020 change in net interest income
	for the three months ended June 30,
	(in thousands)
	Volume (1)			Rate (2)			Mix (3)			Total

Interest-earning assets:
Loans	$	450		$	49		$	26		$	525
Investment securities		389			(145	)		(63	)		181
Interest bearing deposits		48			(4	)		(10	)		34
Total interest income		887			(100	)		(47	)		740
Interest-bearing liabilities:
NOW deposits		(22	)		-			-			(22	)
Money market deposits		59			(31	)		(30	)		(2	)
Savings deposits		23			(13	)		(4	)		6
Time deposits		5			(19	)		(2	)		(16	)
Junior subordinated debentures		-			(8	)		-			(8	)
Other		1			(1	)		(1	)		(1	)
Total interest expense		66			(72	)		(37	)		(43	)
Net interest income	$	821		$	(28	)	$	(10	)	$	783

(1)

The volume change in net interest income represents the change in average balance divided by the previous year’s rate.

(2)

The rate change in net interest income represents the change in rate divided by the previous year’s average balance.

(3)

The mix change in net interest income represents the change in average balance multiplied by the change in rate.

Provision for loan losses. During the three months ended June 30, 2021 and 2020 we recorded a provision for loan losses of $250 thousand and $1,250 thousand, respectively. See “Analysis of Asset Quality and Allowance for Loan Losses” for a discussion of loan quality trends and the provision for loan losses.

Non-interest income. During the three months ended June 30, 2021 and 2020, non-interest income totaled $1.9 million. Reductions in non-interest income included $218 thousand related to the gain on the sale of one of the Company’s administrative buildings in the second quarter of 2020 and $164 thousand in gain on sale of SBA loans. During the current quarter we did not sell SBA loans. Loans originated for sale during the current quarter totaled $6.9 million. Loans held for sale at June 30, 2021 totaled $11.1 million. This compares to $5.0 million at June 30, 2020. Offsetting these reductions were increases in interchange income of $258 thousand and service charge income of $59 thousand.

The following table describes the components of non-interest income for the three-month periods ended June 30, 2021 and 2020, dollars in thousands:

	For the Three Months Ended
	June 30,
	2021		2020		Dollar Change			Percentage Change
Interchange income		813		555		258			46.5	%
Service charges on deposit accounts		567		508		59			11.6	%
Loan servicing fees		196		230		(34	)		-14.8	%
Earnings on life insurance policies		84		85		(1	)		-1.2	%
Gain on sale of building		-		218		(218	)		-100.0	%
Gain on sale of loans, net		-		164		(164	)		-100.0	%
Other		220		162		58			35.8	%
Total non-interest income	$	1,880	$	1,922	$	(42	)		-2.2	%

Non-interest expense. During the three months ended June 30, 2021, total non-interest expense decreased by $97 thousand from the comparable period in 2020. The largest component of this decrease was a decline of $686 thousand in salary and benefit expense. During the three months ended June 30, 2021 the Company qualified for the Employee Retention Credit (ERC). We recorded an ERC of $1.1 million during the current quarter as a reduction of salary and benefit expense. In addition to the ERC, the deferral of loan origination costs, which reduces salary and benefit expense, increased by $102 thousand. These items were partially offset by an increase in bonus expense of $280 thousand consistent with the increase in income during the comparable quarters and an increase in commission expense of $219 thousand related to an increase in SBA activity as well as commissions earned on PPP loan production and forgiveness activities.

The reduction in salary and benefit expense was partially offset by increases in other categories of non-interest expense the largest of which were increases of $281 thousand in professional fees and $233 thousand in outside service fees. Professional fees included legal, consulting and accounting costs related to the acquisition of Bank of Feather River totaling $227 thousand during the current quarter, while outside services included $49 thousand in merger related costs. In addition to merger related costs, the increase in professional fees includes $42 thousand in consulting costs related to implementation of the current expected credit losses methodology for estimating allowances for credit losses. Other increases in outside service fees includes an increase of $65 thousand in interchange expense consistent with the increase in interchange income and $63 thousand in costs related to outsourcing various Human Resources functions effective April 1, 2021.

The following table describes the components of non-interest expense for the three-month periods ended June 30, 2021 and 2020, dollars in thousands:

	For the Three Months Ended
	June 30,
	2021		2020		Dollar Change			Percentage Change
Salaries and employee benefits	$	2,231	$	2,917	$	(686	)		-23.5	%
Occupancy and equipment		904		837		67			8.0	%
Outside service fees		875		642		233			36.3	%
Professional fees		451		170		281			165.3	%
Telephone and data communication		175		159		16			10.1	%
Armored car and courier		117		100		17			17.0	%
Director compensation and expense		106		99		7			7.1	%
Advertising and shareholder relations		103		131		(28	)		-21.4	%
Deposit insurance		88		59		29			49.2	%
Business development		61		52		9			17.3	%
Loan collection expenses		45		39		6			15.4	%
Amortization of Core Deposit Intangible		42		51		(9	)		-17.6	%
Stationery and supplies		25		32		(7	)		-21.9	%
Other		109		141		(32	)		-22.7	%
Total non-interest expense	$	5,332	$	5,429	$	(97	)		-1.8	%

Provision for income taxes. The Company recorded an income tax provision of $1.7 million, or 28.0% of pre-tax income for the three months ended June 30, 2021. This compares to an income tax provision of $1.2 million, or 27.5% of pre-tax income for the three months ended June 30, 2020. The percentages for 2021 and 2020 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and securities interest decrease taxable income and during 2021 nondeductible merger expenses. The increase in the effective tax rate in the current period is primarily related to nondeductible merger expenses.

FINANCIAL CONDITION

Total assets at June 30, 2021 were $1.3 billion, an increase of $156 million from December 31, 2020. Net loans increased by $24.3 million from $700.8 million at December 31, 2020 to $725.1 million at June 30, 2021. Investment securities increased by $69.2 million from $179.6 million at December 31, 2020 to $248.8 million at June 30, 2021. Cash and cash equivalents totaled $244.5 million at June 30, 2021 up $59.6 million from $184.9 million at December 31, 2020.

Deposits totaled $1.1 billion at June 30, 2021, an increase of $157.8 million from $974.0 million at December 31, 2020. Shareholders’ equity increased by $6.6 million from $100.2 million at December 31, 2020 to $106.8 million at June 30, 2021.

Loan Portfolio. Gross loans increased by $26 million, or 4%, from $710 million at December 31, 2020 to $736 million at June 30, 2021. The largest areas of growth in the Company’s loan portfolio were $22 million in commercial loans, $8 million in commercial real estate loans and $4 million in construction loans. The largest decreases were $6 million in agricultural loans and $2 million in residential real estate loans. The increase in commercial loans relates to PPP loans. As of June 30, 2021 we funded 2,256 PPP loans totaling $197 million. The remaining principal balance of these loans at June 30, 2021 was $88.2 million. During the six months ended June 30, 2021 we funded 1,033 PPP loans totaling over $77 million. Since inception of the PPP program our borrowers have received over $108 million in loan forgiveness. We expect a decline in PPP loans from current levels as borrowers continue to apply for and are granted forgiveness. The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of the area it serves. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment.

As shown in the following table the Company's largest lending categories are commercial real estate loans, commercial loans, auto loans and agricultural loans.

			Percent of					Percent of
			Loans in Each					Loans in Each
	Balance at End		Category to			Balance at End		Category to
(dollars in thousands)	of Period		Total Loans			of Period		Total Loans
	06/30/2021		06/30/2021			12/31/2020		12/31/2020
Commercial	$	139,552		19.0	%	$	117,360		16.5	%
Agricultural		66,404		9.0	%		72,911		10.3	%
Real estate – residential		9,896		1.4	%		11,399		1.6	%
Real estate – commercial		360,659		49.0	%		352,552		49.7	%
Real estate – construction & land		29,556		4.0	%		25,306		3.6	%
Equity Lines of Credit		33,985		4.6	%		34,744		4.9	%
Auto		91,544		12.4	%		91,080		12.8	%
Other		4,350		0.6	%		4,587		0.6	%
Total Gross Loans	$	735,946		100	%	$	709,939		100	%

The Company’s real estate related loans, including real estate mortgage loans, real estate construction and land development loans, consumer equity lines of credit, and agricultural loans secured by real estate comprised 65% of the total loan portfolio at June 30, 2021. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, Sierra, and Sutter and in Washoe and Carson City Counties in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the commercial real estate markets. In addition, the concentration of the Company's operations in these areas of Northeastern California and Northwestern Nevada exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions.

The rates of interest charged on variable rate loans are set at specific increments in relation to the Company's lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. The frequency in which variable rate loans reprice can vary from one day to several years. At June 30, 2021 and December 31, 2020, approximately 68%,of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate or an equivalent rate totaled approximately 19% of the Company’s loan portfolio; these loans reprice within one day to three months of a change in the prime rate. At June 30, 2021 and December 31, 2020, 47% and 43%, respectively of the variable loans were at their respective floor rate. While real estate mortgage, commercial and consumer lending remain the foundation of the Company's historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types. The most significant change in loan mix was loans generated through the PPP program which totaled 12% of the Bank's loan portfolio at June 30, 2021.

Analysis of Asset Quality and Allowance for Loan Losses. The Company attempts to minimize credit risk through its underwriting and credit review policies. The Company’s credit review process includes internally prepared credit reviews as well as contracting with an outside firm to conduct periodic credit reviews. The Company’s management and lending officers evaluate the loss exposure of classified and impaired loans on a quarterly basis, or more frequently as loan conditions change. The Management Asset Resolution Committee (MARC) reviews the asset quality of criticized and past due loans monthly and reports the findings to the full Board of Directors. In management's opinion, this loan review system helps facilitate the early identification of potential criticized loans. MARC also provides guidance for the maintenance and timely disposition of OREO properties including developing financing and marketing programs to incent individuals to purchase OREO. MARC consists of the Bank’s Chief Executive Officer, Chief Financial Officer and Chief Credit Officer, and the activities are governed by a formal written charter. The MARC meets monthly and reports to the Board of Directors.

The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses. Loan losses are charged to and recoveries are credited to the allowance for loan losses. The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The adequacy of the allowance for loan losses is based upon management's continuing assessment of various factors affecting the collectability of loans including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for loan losses, independent credit reviews, current charges and recoveries to the allowance for loan losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectability of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy.

Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on the Company’s historical loss experience as adjusted for changes in the business cycle and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Historical loss data from the beginning of the latest business cycle are incorporated in the loss factors.

The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions. We have added a new specific pandemic qualitative factor to our allowance for loan loss calculation and have increased the qualitative factor related to economic conditions. These changes resulted in the need for additional loan loss provision during 2020.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor and hired a consultant to assist in the transition to the CECL model. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company and has not adopted provisions of the standard early, the delay is applicable to the Company.

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

	For the Six Months Ended						For the Year Ended
*(dollars in thousands)*	June 30,						December 31,
	2021			2020			2020			2019			2018
Balance at beginning of period	$	9,902		$	7,243		$	7,243		$	6,958		$	6,669
Charge-offs:
Commercial and agricultural		161			131			131			587			325
Real estate mortgage		-			-			-			0			25
Real estate construction & land		-			-			-			-			-
Consumer (includes equity LOC & Auto)		383			404			656			934			841
Total charge-offs		544			535			787			1,521			1,191
Recoveries:
Commercial and agricultural		47			7			34			26			83
Real estate mortgage		5			5			23			7			114
Real estate construction & land		-			-			-			-			3
Consumer (includes equity LOC & Auto)		93			115			214			273			280
Total recoveries		145			127			271			306			480
Net charge-offs		399			408			516			1,215			711
Provision for loan losses		625			2,000			3,175			1,500			1,000
Balance at end of period	$	10,128		$	8,835		$	9,902		$	7,243		$	6,958
Net charge-offs during the period to average loans (annualized for the six-month periods)		0.11	%		0.12	%		0.07	%		0.21	%		0.14	%
Allowance for loan losses to total loans		1.38	%		1.19	%		1.39	%		1.17	%		1.23	%

During the six months ended June 30, 2021 and 2020 we recorded a provision for loan losses of $625 thousand and $2,000 thousand, respectively. Net charge-offs totaled $399 thousand during the six months ended June 30, 2021, a decrease of $9 thousand from $408 thousand during the six months ended June 30, 2020.

The following table provides a breakdown of the allowance for loan losses at June 30, 2021 and December 31, 2020:

			Percent of					Percent of
			Loans in Each					Loans in Each
	Balance at End		Category to			Balance at End		Category to
(dollars in thousands)	of Period		Total Loans			of Period		Total Loans
	2021		2021			2020		2020
Commercial and agricultural	$	1,564		28.0	%	$	1,707		26.8	%
Real estate mortgage		5,476		50.4	%		5,253		51.3	%
Real estate construction & land		606		4.0	%		554		3.6	%
Consumer (includes equity LOC & Auto)		2,482		17.6	%		2,388		18.3	%
Total	$	10,128		100.0	%	$	9,902		100.0	%

The allowance for loan losses totaled $10.1 million at June 30, 2021 and $9.9 million at December 31, 2020. At least quarterly, the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion. General reserves were $10.1 million at June 30, 2021 and $9.7 million at December 31, 2020. The allowance for loan losses as a percentage of total loans was 1.38% at June 30, 2021 and 1.39% at December 31, 2020. The percentage of general reserves to unimpaired loans totaled 1.38% at June 30, 2021 and 1.37% at December 31, 2020. Excluding PPP loans the allowance for loan losses as a percentage of total loans was 1.56% at June 30, 2021 and 1.55% at December 31, 2020 and the percentage of general reserves to unimpaired loans was 1.58% at June 30, 2021 and 1.53% at December 31, 2020

The Company places loans 90 days or more past due on nonaccrual status unless the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a loan is placed on nonaccrual status the Company's general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received, and future collection of principal is deemed by management to be probable. Where the collectability of the principal or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status prior to becoming 90 days delinquent.

Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary difference between impaired loans and nonperforming loans is that impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but also may include identified problem loans other than delinquent loans where it is considered probable that we will not collect all amounts due to us (including both principal and interest) in accordance with the contractual terms of the loan agreement.

A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.

Loans restructured (TDRs) and not included in nonperforming loans in the following table totaled $0.9 million, $0.9 million, $0.9 million, $1.0 million and $1.1 million at June 30, 2021 and December 31, 2020, 2019, 2018, and 2017, respectively. For additional information related to restructured loans see Note 5 to the condensed consolidated financial statements contained within this Form 10-Q.

The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.

	At
	June 30,			At December 31,
	2021			2020			2019			2018			2017
	*(dollars in thousands)*

Nonaccrual loans	$	6,817		$	2,536		$	2,050		$	1,117		$	1,226
Loans past due 90 days or more and still accruing		-			-			-			-			1,796
Total nonperforming loans		6,817			2,536			2,050			1,117			3,022
Other real estate owned		524			403			707			1,170			1,344
Other vehicles owned		7			31			56			53			35
Total nonperforming assets	$	7,348		$	2,970		$	2,813		$	2,340		$	4,401
Interest income forgone on nonaccrual loans	$	329		$	119		$	158		$	46		$	50
Interest income recorded on a cash basis on nonaccrual loans	$	-		$	-		$	-		$	-		$	-
Nonperforming loans to total loans		0.93	%		0.36	%		0.33	%		0.20	%		0.62	%
Nonperforming assets to total assets		0.58	%		0.27	%		0.33	%		0.28	%		0.59	%

Nonperforming loans at June 30, 2021 were $6.8 million, an increase of $4.3 million from the $2.5 million balance at December 31, 2020. This increase relates to three loans totaling $5.1 million which were on Covid related deferral at December 31, 2020. These loan are adequately secured. There were no specific reserves on nonaccrual loans at June 30, 2021. Specific reserves on nonaccrual loans totaled $143 thousand at December 31, 2020. Performing loans past due thirty to eighty-nine days were $2.1 million at June 30, 2021 up from $1.2 million at December 31, 2020.

A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Total substandard loans increased by $5.1 million from $1.8 million at December 31, 2020 to $6.9 million at June 30, 2021. Loans classified as special mention increased by $9.2 million from $3.1 million at December 31, 2020 to $12.3 million at June 30, 2021. The increase in substandard and special mention loans mostly relates to loans that were formally on Covid related deferral and had been on deferral for an extended period of time including the $5.1 million in loans transferred to nonaccrual as described above which are currently classified as substandard.

At June 30, 2021 and December 31, 2020, the Company's recorded investment in impaired loans totaled $6.8 million and $2.2 million, respectively. The specific allowance for loan losses related to impaired loans totaled $30 thousand and $174 thousand at June 30, 2021 and December 31, 2020.

It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at June 30, 2021 is appropriate. However, the determination of the amount of the allowance is judgmental and subject to economic conditions which cannot be predicted with certainty. Accordingly, the Company cannot predict whether charge-offs of loans in excess of the allowance may occur in future periods.

OREO represents real property acquired by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. OREO holdings represented three properties totaling $0.5 million at June 30, 2021 and three properties totaling $0.4 million at December 31, 2020. Nonperforming assets as a percentage of total assets were 0.58% at June 30, 2021 and 0.27% at December 31, 2020.

The following table provides a summary of the change in the number and balance of OREO properties for the six months ended June 30, 2021 and 2020 (dollars in thousands):

	Six Months Ended June 30,
	#		2021			#		2020
Beginning Balance		3	$	403			3	$	707
Additions		1		177			-		-
Dispositions		1		(56	)		-		-
Ending Balance		3	$	524			3	$	707

Investment Portfolio and Federal Funds Sold. Total investment securities were $248.8 million as of June 30, 2021 and $179.6 million as of December 31, 2020. Unrealized gains on available-for-sale investment securities totaling $4,616,000 were recorded, net of $1,365,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at June 30, 2021. Unrealized gains on available-for-sale investment securities totaling $6,595,000 were recorded, net of $1,950,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2020. No securities were sold during the six months ended June 30, 2021 and 2020.

The investment portfolio at June 30, 2021 consisted of $135.8 million in securities of U.S. Government-sponsored agencies, $35.2 million in securities of U.S. Government-agencies and 165 municipal securities totaling $77.8 million. The investment portfolio at December 31, 2020 consisted of $110.7 million in securities of U.S. Government-sponsored agencies, $10.5 million in securities of U.S. Government-agencies and 135 municipal securities totaling $58.4 million.

There were no Federal funds sold at June 30, 2021 and December 31, 2020; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $191.1 million at June 30, 2021 and $143.7 million at December 31, 2020. The balance, at June 30, 2021, earns interest at the rate of 0.15%.

The Company classifies its investment securities as available-for-sale or held-to-maturity. Currently all securities are classified as available-for-sale. Securities classified as available-for-sale may be sold to implement the Company's asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors.

Deposits. Total deposits increased by $158 million from $974 million at December 31, 2020 to $1.1 billion at June 30, 2021. We attribute much of this increase to retention of proceeds from PPP loans, a more cautious consumer, and continued growth in our customer base. The increase in deposits includes increases of $85 million in demand deposits, $54 million in savings accounts, $18 million in money market accounts and $1 million in time deposits.

During November 2020 we eliminated our interest-bearing demand deposit products transferring these accounts to either money market accounts or non-interest bearing demand accounts based on product type. We made this change to simplify our product offerings in light of the changes to Federal Reserve Board Regulation D which no longer limits the number of transfers or withdrawals from Money Market or Savings accounts.

The following table shows the distribution of deposits by type at June 30, 2021 and December 31, 2020.

			Percent of					Percent of
			Deposits in Each					Deposits in Each
	Balance at End		Category to			Balance at End		Category to
(dollars in thousands)	of Period		Total Deposits			of Period		Total Deposits
	06/30/2021		06/30/2021			12/31/2020		12/31/2020
Non-interest bearing	$	601,692		53.2	%	$	516,682		53.0	%
Money Market		191,456		16.9	%		173,557		17.8	%
Savings		297,272		26.3	%		243,419		25.0	%
Time		41,337		3.6	%		40,316		4.2	%
Total Deposits	$	1,131,757		100	%	$	973,974		100	%

Deposits represent the Bank's primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. The Company experiences, to a small degree, some seasonality with the slower growth period between November through April, and the higher growth period from May through October. To assist in meeting any funding demands, the Company maintains a secured borrowing arrangement with the FHLB. There were no brokered deposits at June 30, 2021 or December 31, 2020.

Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $209 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $393 million. The Company is required to hold FHLB stock as a condition of membership. At June 30, 2021 the Company held $3.9 million of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings the Company can borrow up to $144.4 million. To borrow the full $209 million in available credit the Company would need to purchase $1.8 million in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $50 million, $20 million and $10 million. There were $5 million in outstanding borrowings to the FHLB at December 31, 2020 and no borrowings outstanding at June 30, 2021. The $5 million matured on May 7, 2021. There were no outstanding borrowings to the correspondent banks at June 30, 2021 and December 31, 2020.

Note Payable. The Company maintains a $15 million line of credit facility with one of its correspondent banks (the "Note"). Interest on the Note is payable at the "Prime Rate". There were no borrowings on the Note during the six months ended June 30, 2021 or the year ended December 31, 2020. The Note is secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Note, the Bank is subject to several negative and affirmative covenants including, but not limited to providing timely financial information, maintaining specified levels of capital, restrictions on additional borrowings, and meeting or exceeding certain capital and asset quality ratios. The Bank was in compliance with all such covenants related to the Note at June 30, 2021 and December 31, 2020. The Note matures on March 2, 2022.

Repurchase Agreements. The Bank offers a repurchase agreement product for its larger customers which use securities sold under agreements to repurchase as an alternative to interest-bearing deposits. Securities sold under agreements to repurchase totaling $10.1 million and $13.9 million at June 30, 2021 and December 31, 2020, respectively are secured by U.S. Government agency securities with a carrying amount of $15.2 million and $19.8 million at June 30, 2021 and December 31, 2020, respectively. Interest paid on this product is similar to that which is paid on the Bank’s money market accounts; however, these are not deposits and are not FDIC insured.

Junior Subordinated Deferrable Interest Debentures. Plumas Statutory Trust I and II are business trust subsidiaries formed by the Company with capital at March 31, 2021 of $361,000 and $183,000, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.

During 2002, Trust I issued 6,000 Floating Rate Capital Trust Pass-Through Securities ("Trust Preferred Securities"), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. During 2005, Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II.

Trust I’s Subordinated Debentures mature on September 26, 2032, bear an effective interest rate of 4.15%, with payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear an effective interest rate of 2.23%, with payments due quarterly. The effective interest rate includes the effect of interest rate swaps that are associated with these borrowings. See Interest Rate Swaps below. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures.

Interest expense recognized by the Company for the six months ended June 30, 2021 and 2020 related to the subordinated debentures was $165 thousand and $210 thousand, respectively.

Interest Rate Swaps

From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. On May 26, 2020 we entered into two separate interest rate swap agreements, effectively converting the $10 million in Subordinated Debentures to fixed obligations. The swaps have a 10 year maturity and fix the LIBOR rate on the Subordinated Debentures at approximately 75 basis points. These agreements have been designated and qualify as cash flow hedging instruments and, as such changes in the fair value are recorded in accumulated other comprehensive income/loss to the extent the agreements are effective hedges. At June 30, 2021 and December 31, 2020 the carrying value of the swaps, which was included in other assets, was an unrealized gain of $530 thousand and $141 thousand, respectively.

Capital Resources

Shareholders’ equity increased by $6.6 million from $100.2 million at December 31, 2020 to $106.8 million at June 30, 2021. The $6.6 million increase was related to earnings during the first six months of 2021 of $8.9 million and $0.3 million representing stock option activity partially offset by a decrease in accumulated other comprehensive income, net of tax of $1.1 million and two quarterly cash dividends totaling of $1.5 million.

It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. The Company is subject to various restrictions on the payment of dividends. Quarterly cash dividends of $0.14, $0.14, $0.12, $0.12 and $0.12 per shares were paid on May 17, 2021, February 15, 2021, November 16, 2020, August 14, 2020 and May 15, 2020, respectively.

Capital Standards. The Company uses a variety of measures to evaluate its capital adequacy. Management reviews these capital measurements on a monthly basis and takes appropriate action to ensure that they are within established internal and external guidelines. The FDIC has promulgated risk-based capital guidelines for all state non-member banks such as the Bank. These guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.

In July, 2013, the federal bank regulatory agencies adopted rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. depository organizations, sometimes called “Basel III,” that increased the minimum regulatory capital requirements for bank holding companies and depository institutions and implemented strict eligibility criteria for regulatory capital instruments. The Basel III capital rules include a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The minimum capital levels required to be considered “well capitalized” include a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. In addition, the Basel III capital rules require that banking organizations maintain a capital conservation buffer of 2.5% above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered well capitalized: a common equity Tier 1 capital ratio of 7.0%; a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. At June 30, 2021 and December 31, 2020, the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.

Under the FRB’s Small Bank Holding Company and Savings and Loan Holding company Policy Statement (the “Policy Statement”), qualifying bank holding companies with less than $3 billion in consolidated assets are exempt from the Basel III consolidated capital rules. The Company qualifies for treatment under the Policy Statement and is not currently subject to the Basel III consolidated capital rules at the bank holding company level. The Basel III capital rules continue to apply to the Bank.

In 2019, the federal bank regulators issued a rule establishing a “community bank leverage ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) that qualifying institutions with less than $10 billion in assets may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. A qualifying banking organization that elects to use new ratio will be considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered “well capitalized, ” if it maintains community bank leverage ratio capital exceeding 9%. The new rule became effective on January 1, 2020. Plumas Bank has chosen not to opt into the community bank leverage ratio at this time.

The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):

						Minimum Amount of Capital Required
											To be Well-Capitalized
						For Capital					Under Prompt
	Actual					Adequacy Purposes (1)					Corrective Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2021
Common Equity Tier 1 Ratio	$	111,153		14.9	%	$	33,551		4.5	%	$	48,463		6.5	%
Tier 1 Leverage Ratio		111,153		9.0	%		49,244		4.0	%		61,555		5.0	%
Tier 1 Risk-Based Capital Ratio		111,153		14.9	%		44,735		6.0	%		59,647		8.0	%
Total Risk-Based Capital Ratio		120,460		16.2	%		59,647		8.0	%		74,588		10.0	%

December 31, 2020
Common Equity Tier 1 Ratio	$	103,361		14.2	%	$	32,802		4.5	%	$	47,381		6.5	%
Tier 1 Leverage Ratio		103,361		9.2	%		45,017		4.0	%		56,271		5.0	%
Tier 1 Risk-Based Capital Ratio		103,361		14.2	%		43,736		6.0	%		58,315		8.0	%
Total Risk-Based Capital Ratio		112,485		15.4	%		58,315		8.0	%		72,894		10.0	%

(1) Does not include amounts required to maintain the capital conservation buffer under the new capital rules

Management believes that Plumas Bank currently meets all its capital adequacy requirements.

The current and projected capital positions of the Bank and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company policy is to maintain the Bank’s ratios above the prescribed well-capitalized ratios at all times.

Off-Balance Sheet Arrangements

Loan Commitments. In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of June 30, 2021, the Company had $133.5 million in unfunded loan commitments and $227 thousand in letters of credit. This compares to $144.4 million in unfunded loan commitments and $531 thousand in letters of credit at December 31, 2020. Of the $133.5 million in unfunded loan commitments, $85.9 million and $47.6 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at June 30, 2021, $79.5 million were secured by real estate, of which $41.7 million was secured by commercial real estate and $37.8 million was secured by residential real estate in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.

Leases. At June 30, 2021 the Company was leasing two depository branches, two lending offices, three administrative offices and two non-branch automated teller machine locations. Including variable lease expense, total rent expense under all leases was $204 thousand and $232 thousand during the six months ended June 30, 2021 and 2020, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2021 and the last such lease expiring during 2026.

Liquidity

The Company manages its liquidity to provide the ability to generate funds to support asset growth, meet deposit withdrawals (both anticipated and unanticipated), fund customers' borrowing needs, satisfy maturity of short-term borrowings and maintain reserve requirements. The Company’s liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to cash and due from banks, the Company maintains an investment portfolio which includes unpledged U.S. Government-sponsored agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by charging competitive offering rates on deposit products and the use of established lines of credit.

The Company is a member of the FHLB and can borrow up to $209 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $393 million. See “Short-term Borrowing Arrangements” for additional information on our FHLB borrowing capacity. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $50 million, $20 million and $10 million. There were no outstanding borrowings under the FHLB or the correspondent bank borrowing lines at June 30, 2021 or December 31, 2020.

Customer deposits are the Company’s primary source of funds. Total deposits were $1.1 billion at June 30, 2021 and $974 million at December 31, 2020. Deposits are held in various forms with varying maturities. The Company’s securities portfolio, Federal funds sold, FHLB advances, and cash and due from banks serve as the primary sources of liquidity, providing adequate funding for loans during periods of high loan demand. During periods of decreased lending, funds obtained from the maturing or sale of investments, loan payments, and new deposits are invested in short-term earning assets, such as cash held at the FRB, Federal funds sold and investment securities, to serve as a source of funding for future loan growth. Management believes that the Company’s available sources of funds, including borrowings, will provide adequate liquidity for its operations in the foreseeable future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2021. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2021 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

Item 1A RISK FACTORS

In addition to the other information set forth in this Form 10-Q you should carefully consider the risk factors that appeared under Item 1A, “Risk Factors” in the Company’s 2020 Annual Report. There are no material changes from the risk factors included within the Company’s 2020 Annual Report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None.

(b) None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

3.1	Articles of Incorporation as amended of Registrant included as exhibit 3.1 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein.

3.2	Bylaws of Registrant as amended on March 16, 2011 included as exhibit 3.2 to the Registrant’s Form 10-K for December 31, 2010, which is incorporated by this reference herein.

3.3	Amendment of the Articles of Incorporation of Registrant dated November 1, 2002, is included as exhibit 3.3 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.

3.4	Amendment of the Articles of Incorporation of Registrant dated August 17, 2005, is included as exhibit 3.4 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.

4	Specimen form of certificate for Plumas Bancorp included as exhibit 4 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein.

4.1	Description of Securities of Plumas Bancorp Registered Under Section 12 of the Exchange Act, is included as exhibit 4.1 to the Registrant's 10-K for December 31, 2019, which is incorporated by this reference herein.

10.1	Executive Salary Continuation Agreement of Andrew J. Ryback dated December 17, 2008, is included as exhibit 10.1 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.

10.2	Split Dollar Agreement of Andrew J. Ryback dated August 23, 2005, is included as Exhibit 10.2 to the Registrant’s 8-K filed on October 17, 2005, which is incorporated by this reference herein.

10.3	Amendment to Salary Continuation Agreement of Andrew J. Ryback dated April 1, 2019, is included as Exhibit 10.1 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

10.4	Amendment to Salary Continuation Agreement of Richard L. Belstock dated April 1, 2019, is included as Exhibit 10.2 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

10.5	Amendment to Salary Continuation Agreement of BJ North dated April 1, 2019, is included as Exhibit 10.3 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

10.6	Salary Continuation Agreement of Aaron Boigon dated April 1, 2019, is included as Exhibit 10.4 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

10.7	Promissory Note Dated October 24, 2013, is included as Exhibit 10.6 to the Registrant’s 10-Q filed on November 7, 2013, which is incorporated by this reference herein.


10.8	Renewal, Extension , and Modification of Loan, is included as Exhibit 10.8 to the Registrant's 10-Q filed on May 6, 2020, which is incorporated by this reference herein.

10.9	Amendment to Salary Continuation Agreement of Andrew J. Ryback dated April 1, 2016, is included as Exhibit 10.1 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

10.10	Salary Continuation Agreement of Richard L. Belstock dated April 1, 2016, is included as Exhibit 10.2 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

10.11	Salary Continuation Agreement of Jeff Moore dated April 1, 2020, is included as Exhibit 10.14 to the Registrant’s 10-K filed on March 3, 2021, which is incorporated by this reference herein.

10.12	Salary Continuation Agreement of BJ North dated April 1, 2016, is included as Exhibit 10.4 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

10.13	Director Retirement Agreement of Steven M. Coldani dated December 21, 2016, is included as Exhibit 10.13 to the Registrant’s 10-K filed on March 17, 2017, which is incorporated by this reference herein.

10.14	Promissory Note and Loan Agreement dated March 2, 2021, is included as Exhibit 10.14 to the Registrant's 10-Q filed on May 5, 2021, which is incorporated by this reference herein.

10.18	Amended and Restated Director Retirement Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.18 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

10.19	Consulting Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.19 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

10.24	Amended and Restated Director Retirement Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.24 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

10.25	Consulting Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.25 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

10.33	Amended and Restated Director Retirement Agreement of Terrance J. Reeson dated April 19, 2000, is included as Exhibit 10.33 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

10.34	Consulting Agreement of Terrance J. Reeson dated May 10, 2000, is included as Exhibit 10.34 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

10.41	Form of Indemnification Agreement (Plumas Bancorp) is included as Exhibit 10.1 to the Registrant's 8-K dated August 19, 2020,which is incorporated by this reference herein.

10.42	Form of Indemnification Agreement (Plumas Bank) is included as Exhibit 10.2 to the Registrant's 8-K dated August 19, 2020,which is incorporated by this reference herein.

10.47	2013 Stock Option Plan is included as exhibit 99.1 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.

10.48	Specimen Form of Incentive Stock Option Agreement under the 2013 Stock Option Plan is included as exhibit 99.2 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.

10.49	Specimen Form of Nonqualified Stock Option Agreement under the 2013 Stock Option Plan is included as exhibit 99.3 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.

10.51	First Amendment to Split Dollar Agreement of Andrew J. Ryback, is included as exhibit 10.51 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.

10.66	Director Retirement Agreement of Robert McClintock, is included as Exhibit 10.66 to the Registrant’s 10-K filed on March 23, 2012, which is incorporated by this reference herein.

10.67	First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Terrance J. Reeson adopted on September 19, 2007, is included as Exhibit 10.67 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.

10.69	First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Daniel E. West adopted on September 19, 2007, is included as Exhibit 10.69 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.

10.70	First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Gerald W. Fletcher adopted on October 9, 2007, is included as Exhibit 10.70 to the Registrant’s 10-Q for September 30, 2007, which is incorporated by this reference herein.

31.1*	Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated August 4, 2021.

31.2*	Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated August 4, 2021.

32.1*	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated August 4, 2021.

32.2*	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated August 4, 2021.

101.INS*	Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH*	Inline XBRL Taxonomy Extension Schema Document

101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PLUMAS BANCORP
(Registrant)
Date: August 4, 2021
	/s/ Richard L. Belstock
	Richard L. Belstock
	Chief Financial Officer

	/s/ Andrew J. Ryback
	Andrew J. Ryback
	Director, President and Chief Executive Officer