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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     
(Mark One)
x   QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
    FOR THE QUARTERLY PERIOD ENDED September 30, 2003
     
o   TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
    FOR THE TRANSITION PERIOD FROM ____________ TO ______________

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

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

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

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

Yes x No o

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

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 10, 2003; 3,238,507 shares

 


TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENT
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART I – FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 31.3
EXHIBIT 32.1
EXHIBIT 32.2
EXHIBIT 32.3


Table of Contents

PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENT

PLUMAS BANCORP
CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

                         
            Unaudited   Audited
            September 30,   December 31,
            2003   2002
           
 
Assets
               
Cash and due from banks
  $ 22,771     $ 22,665  
Federal funds sold
    18,535       15,265  
Loans held for sale
    111       1,472  
Investment securities (market value of $67,909 at September 30, 2003 and $61,807 at December 31, 2002)
    67,655       61,436  
Loans less allowance for loan losses of $2,642 at September 30, 2003 and $2,471 at December 31, 2002 (Notes 3 and 4)
    212,006       204,649  
Bank premises and equipment, net
    9,127       9,323  
Intangible assets, net
    590       690  
Accrued interest receivable and other assets
    12,335       9,964  
 
   
     
 
       
Total assets
  $ 343,130     $ 325,464  
 
   
     
 
Liabilities and Shareholders’ Equity
               
Deposits:
               
 
Non-interest bearing
  $ 85,032     $ 73,552  
 
Interest bearing
    224,369       220,387  
 
   
     
 
   
Total deposits
    309,401       293,939  
Accrued interest payable and other liabilities
    2,545       2,237  
Mandatorily redeemable cumulative trust preferred securities of subsidiary grantor trust
    6,000       6,000  
 
   
     
 
     
Total liabilities
    317,946       302,176  
 
   
     
 
Commitments and contingencies (Note 4)
           
Shareholders’ equity (Notes 5 and 8):
               
 
Preferred stock, no par value; 10,000,000 shares authorized, no shares issued or outstanding
           
 
Common stock, no par value; 15,000,000 shares authorized; issued and outstanding – 3,238,407 shares at September 30, 2003 and 3,209,396 shares at December 31, 2002
    3,906       3,743  
 
Retained earnings
    21,046       19,135  
 
Accumulated other comprehensive income (Note 6)
    232       410  
 
   
     
 
     
Total shareholders’ equity
    25,184       23,288  
 
   
     
 
       
Total liabilities and shareholders’ equity
  $ 343,130     $ 325,464  
 
   
     
 

See notes to consolidated financial statements.

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PLUMAS BANCORP
CONSOLIDATED STATEMENT OF INCOME

(In thousands, except per share data)

                                         
            Unaudited   Unaudited
            For the Three Months   For the Nine Months
            Ended September 30   Ended September 30
           
 
            2003   2002   2003   2002
           
 
 
 
Interest Income:
                               
 
Interest and fees on loans
  $ 4,031     $ 4,144     $ 12,198     $ 11,997  
 
Interest on investment securities:
                               
   
Taxable
    423       461       1,360       1,435  
   
Exempt from Federal income taxes
    33       35       100       108  
 
Interest on Federal funds sold
    39       90       93       194  
 
Interest on loans held for sale
    8       7       28       26  
 
 
   
     
     
     
 
     
Total interest income
    4,534       4,737       13,779       13,760  
 
 
   
     
     
     
 
Interest Expense:
                               
 
Interest on deposits
    599       982       2,101       3,031  
 
Other
    71       3       220       5  
 
 
   
     
     
     
 
     
Total interest expense
    670       985       2,321       3,036  
 
 
   
     
     
     
 
       
Net interest income before provision for loan losses
    3,864       3,752       11,458       10,724  
Provision for Loan Losses
    175       200       625       725  
 
 
   
     
     
     
 
       
Net interest income after provision for loan losses
    3,689       3,552       10,833       9,999  
Non-Interest Income:
                               
 
Service charges
    507       498       1,483       1,417  
 
Gain on sale of loans, net
    7       11       67       36  
 
Gain on sale of available-for-sale investment securities, net
    73             189       62  
 
Gain on sale of other real estate, net
                20        
 
Earnings on cash surrender value of life insurance policies
    55       54       164       162  
 
Other income
    251       211       649       561  
 
 
   
     
     
     
 
     
Total non-interest income
    893       774       2,572       2,238  
 
 
   
     
     
     
 
Non-Interest Expense:
                               
 
Salaries and employee benefits
    1,887       1,554       5,382       4,593  
 
Occupancy and equipment
    591       479       1,696       1,300  
 
Other expense
    821       958       2,543       2,674  
 
 
   
     
     
     
 
     
Total non-interest expense
    3,299       2,991       9,621       8,567  
 
 
   
     
     
     
 
       
Income before income taxes
    1,283       1,335       3,784       3,670  
Income Tax Expense
    501       514       1,486       1,430  
 
 
   
     
     
     
 
       
Net income
  $ 782     $ 821     $ 2,298     $ 2,240  
 
 
   
     
     
     
 
Basic earnings per share (Notes 5 and 8)
  $ 0.24     $ 0.26     $ 0.71     $ 0.70  
 
 
   
     
     
     
 
Diluted earnings per share (Notes 5 and 8)
  $ 0.24     $ 0.25     $ 0.69     $ 0.69  
 
 
   
     
     
     
 

See notes to consolidated financial statements.

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PLUMAS BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

                       
          Unaudited
          For the Nine Months
          Ended September 30
          2003   2002
Cash Flows from Operating Activities:
               
 
Net income
  $ 2,298     $ 2,240  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Provision for loan losses
    625       725  
   
Deferred loan origination fees, net
    (169 )     (189 )
   
Depreciation, amortization and accretion, net
    947       768  
   
Net realized gain on available-for-sale investment securities
    (189 )     (62 )
   
Amortization of investment security premiums
    930       142  
   
Accretion of investment security discounts
    (235 )     (68 )
   
Net loss on sale of premises and equipment
    2       6  
   
Net gain on sale of other real estate
    (20 )      
   
Net decrease in loans held for sale
    1,361       190  
   
Increase in cash surrender value of life insurance
    (138 )     (162 )
   
Net increase in accrued interest receivable and other assets
    (346 )     (255 )
   
Net decrease in accrued interest payable and other liabilities
    308       9  
   
Deferred taxes, net
    171       24  
 
 
   
     
 
     
Net cash provided by operating activities
    5,545       3,368  
 
 
   
     
 
Cash Flows from Investing Activities:
               
   
Proceeds from matured and called available-for-sale investment securities
    8,500       16,996  
   
Proceeds from matured and called held-to-maturity investment securities
    4,677       5,606  
   
Proceeds from sales of available-for-sale investment securities
    17,605       530  
   
Purchases of available-for-sale investment securities
    (38,240 )     (26,355 )
   
Purchases of held-to-maturity investment securities
    (457 )     (687 )
   
Proceeds from principal repayments from available-for-sale government-guaranteed mortgage-backed securities
    566       585  
   
Proceeds from principal repayments from held-to-maturity government-guaranteed mortgage-backed securities
    135       726  
   
Net increase in loans
    (7,988 )     (22,143 )
   
Proceeds from sale of other real estate
    145        
   
Purchase of premises and equipment
    (652 )     (1,760 )
   
Deposits on single premium cash surrender value life insurance policies
    (1,695 )     (510 )
 
 
   
     
 
     
Net cash used in investing activities
    (17,404 )     (27,012 )
 
 
   
     
 

Continued on next page.

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PLUMAS BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)
(Continued)

                         
            Unaudited
            For the Nine Months
            Ended September 30
           
            2003   2002
           
 
Cash Flows from Financing Activities:
               
   
Net increase in demand, interest bearing and savings deposits
  $ 17,203     $ 31,071  
   
Net decrease in time deposits
    (1,741 )     (3,521 )
   
Proceeds from exercise of stock options
    160       88  
   
Proceeds from issuance of mandatorily redeemable cumulative trust preferred securities of subsidiary grantor trust
            6,000  
   
Cash dividends paid
    (387 )     (703 )
   
 
   
     
 
     
Net cash provided by financing activities
    15,235       32,935  
   
 
   
     
 
       
Increase in cash and cash equivalents
    3,376       9,291  
Cash and Cash Equivalents at Beginning of Year
    37,930       30,088  
   
 
   
     
 
Cash and Cash Equivalents at End of Period
  $ 41,306     $ 39,379  
   
 
   
     
 
Supplemental Disclosure of Cash Flow Information:
               
 
Cash paid during the period for:
               
   
Interest expense
  $ 2,300     $ 3,088  
   
Income taxes
  $ 1,452     $ 1,681  
Non-Cash Investing Activities:
               
 
Real estate acquired through foreclosure
  $ 175     $ 46  
 
Net change in unrealized gain on available-for-sale securities
  $ (178 )   $ 488  
Non-Cash Financing Activities:
               
 
Common stock retired in connection with the exercise of stock options
  $ 74     $  
 
See notes to consolidated financial statements.
               

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PLUMAS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

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

The Company’s subsidiaries include the Bank and Plumas Statutory Trust I, which was formed solely to facilitate the issuance of trust preferred securities. The Bank operates nine branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Portola, Quincy, Susanville, Truckee and Westwood. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank’s primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

2. CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at September 30, 2003 and December 31, 2002, the results of operations for the three months ended September 30, 2003 and 2002 and the results of operations and cash flows for the nine months ended September 30, 2003 and 2002. Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2003.

Certain disclosures normally presented in the notes to the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2002 Annual Report to Shareholders. The results of operations for the three-month and nine-month periods ended September 30, 2003 and 2002 may not necessarily be indicative of future operating results.

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

3. LOANS

Outstanding loans are summarized below:

                 
    September 30,   December 31,
    2003   2002
   
 
Commercial
  $ 49,762     $ 52,432  
Agricultural
    29,048       25,610  
Real estate – mortgage
    63,747       66,039  
Real estate – construction and land development
    25,598       15,175  
Consumer
    46,925       48,465  
 
   
     
 
 
    215,080       207,721  
Deferred loans fees, net
    (432 )     (601 )
Allowance for loan losses
    (2,642 )     (2,471 )
 
   
     
 
 
  $ 212,006     $ 204,649  
 
   
     
 

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4. COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the financial statements, including loan commitments of $52,222,000 and $49,267,000 and letters of credit of $1,947,000 and $509,000 at September 30, 2003 and December 31, 2002, respectively.

Approximately $12,218,000 of the loan commitments outstanding at September 30, 2003 are for real estate construction loans and 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.

On April 30, 2003 the Company announced that it has entered into an agreement with Placer Sierra Bank to purchase five branches from the Auburn, California based bank, subject to regulatory approval. The five branches are in the communities of Quincy, Portola, Loyalton, Truckee and Kings Beach, California. As of September 30, 2003, total deposits at these branches amounted to $52.7 million. It is expected that assets acquired will include premises and equipment of approximately $600 thousand and a core deposit intangible estimated to range between $2.2 million and $2.5 million that will be amortized using the straight-line method over a period of ten years.

5. EARNINGS PER SHARE COMPUTATION

Basic earnings per share are computed by dividing net income by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised. Diluted earnings per share are computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of options. Earnings per share computations have been retroactively adjusted for stock splits for all periods presented.

                                   
      For the Three Months   For the Nine Months
      Ended September 30   Ended September 30
     
 
      2003   2002   2003   2002
     
 
 
 
Earnings Per Share:
                               
 
Basic earnings per share
  $ 0.24     $ 0.26     $ 0.71     $ 0.70  
 
Diluted earnings per share
  $ 0.24     $ 0.25     $ 0.69     $ 0.69  
Weighted Average Number of Shares Outstanding:
                               
 
Basic shares
    3,236,521       3,199,819       3,227,648       3,196,157  
 
Diluted shares
    3,327,606       3,283,127       3,314,789       3,263,960  

6. COMPREHENSIVE INCOME

Total comprehensive income for the three months ended September 30, 2003 and 2002 totaled $473,000 and $969,000, respectively. Comprehensive income is comprised of net unrealized (losses) gains, net of taxes, on available-for-sale investment securities, which were $(309,000) and $148,000 for the three months ended September 30, 2003 and 2002, respectively, together with net income.

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Total comprehensive income for the nine months ended September 30, 2003 and 2002 totaled $2,120,000 and $2,503,000, respectively. Comprehensive income is comprised of net unrealized (losses) gains, net of taxes, on available-for-sale investment securities, which were $(178,000) and $263,000 for the nine months ended September 30, 2003 and 2002, respectively, along with net income. At September 30, 2003 and December 31, 2002, accumulated other comprehensive income totaled $232,000 and $410,000, respectively, and is reflected as a component of shareholders’ equity.

7. ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which requires the consolidation of variable interest entities, as defined. FIN 46 is currently applicable to variable interest entities created after January 31, 2003. In October 2003, the FASB agreed to defer the effective date of FIN 46 for variable interests held by public companies in all entities that were acquired prior to February 1, 2003. This deferral is to allow time for certain implementation issues to be addressed through the issuance of a potential modification to the interpretation. The deferral revised the effective date for consolidation of these entities to the period ended December 31, 2003 for calendar year end companies. Based on the current rules, the Company does not believe that the implementation of the interpretation will have a material impact on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified by the Company after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has previously accounted for its mandatorily redeemable cumulative trust preferred securities in a manner consistent with the Statement and, in management’s opinion, adoption of this Statement did not have a material effect on the Company’s consolidated financial position or results of operations.

On April 30, 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies the accounting for derivative instruments by providing guidance related to circumstances under which a contract with a net investment meets the characteristics of a derivative as discussed in Statement 133. The Statement also clarifies when a derivative contains a financing component. The Statement is intended to result in more consistent reporting for derivative contracts and must be applied prospectively for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. In management’s opinion, adoption of this statement is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

8. STOCK-BASED COMPENSATION

At September 30, 2003, the Company had two stock-based compensation plans, the Plumas Bank 2001 and 1991 Stock Option Plans. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

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

                                   
      For the Three Months   For the Nine Months
      Ended September 30   Ended September 30
     
 
      2003   2002   2003   2002
Net income as reported
  $ 782     $ 821     $ 2,298     $ 2,240  
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects
    23             65       165  
 
   
     
     
     
 
 
Pro forma net income
  $ 759     $ 821     $ 2,233     $ 2,075  
 
   
     
     
     
 
Basic earnings per share – as reported
  $ 0.24     $ 0.26     $ 0.71     $ 0.70  
 
   
     
     
     
 
Basic earnings per share – pro forma
  $ 0.23     $ 0.26     $ 0.69     $ 0.65  
 
   
     
     
     
 
Diluted earnings per share – as reported
  $ 0.24     $ 0.25     $ 0.69     $ 0.69  
 
   
     
     
     
 
Diluted earnings per share – pro forma
  $ 0.23     $ 0.25     $ 0.68     $ 0.63  
 
   
     
     
     
 

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

                 
    For the Nine-Months Ended,
   
    September 30, 2003   September 30, 2002
   
 
Weighted average fair value of options granted
  $ 4.06       N/A  
Dividend yield
    1.4 %     N/A  
Expected volatility
    17.3 %     N/A  
Risk-free interest rate
    2.5 %     N/A  
Expected option life in years
    5.0       N/A  

There were no option grants made during the nine-month period ended September 30, 2002. There were no option grants made during the three-month periods ended September 30, 2003 and September 30, 2002.

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PART I – FINANCIAL INFORMATION

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

INTRODUCTION

Plumas Bancorp (the “Company”) is traded on the OTC Bulletin Board under the ticker symbol “PLBC”. The following discussion and analysis sets forth certain statistical information relating to the Company as of September 30, 2003 and December 31, 2002, for the three months ended September 30, 2003 and September 30, 2002 and for the nine months ended September 30, 2003 and September 30, 2002. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-KSB for the year ended December 31, 2002. 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, are 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. Such risks and uncertainties include, but are not limited to, those described in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp.

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

OVERVIEW

The Company’s net income increased $58,000, or 2.6%, to $2,298,000 for the nine months ended September 30, 2003 from $2,240,000 for the same period in 2002. The primary contributors to the increase in net income for the first nine months of 2003 were a $734 thousand increase in net interest income, a $100 thousand decrease in provision for loan losses and a $334 thousand increase in non-interest income, partially offset by a $1,054 thousand increase in non-interest expenses and a $56 thousand increase in income tax expense.

Total assets at September 30, 2003 were $343.1 million, an increase of $17.7 million, or 5.4%, from the $325.5 million at December 31, 2002. Growth in assets was primarily directed to the Company’s loan and investment portfolios. The loan portfolio grew $7.4 million, or 3.6%, to $212.0 million while the investment portfolio grew $6.2 million, or 10.1%, to $67.7 million during this same period. The growth in assets was funded by growth in the Company’s deposits. Deposits grew $15.5 million, or 5.3%, to $309.4 million at September 30, 2003 from the $293.9 million at December 31, 2002.

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The return on average assets was 0.94% for the nine months ended September 30, 2003 compared to 1.05% for the same period in 2002. The return on average equity was 12.5% for the nine months ended September 30, 2003 compared to 13.9% for the same period in 2002. Although the Company’s earnings increased during the first nine months of 2003 when compared to the same period in 2002, the Company’s rapid growth during this same time-frame resulted in declines in the return on average asset and equity ratios. Total average assets for the nine months ended September 30, 2003 increased $41.0 million, or 14%, from the same period in 2002. Total average equity for the nine months ended September 30, 2003 increased $3.1 million, or 14%, from the same period in 2002.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $11.5 million for the nine months ended September 30, 2003, an increase of $734,000, or 7%, from $10.7 million for the same period in 2002. The increase in net interest income was primarily attributed to declines in rates paid on the Company’s deposits combined with volume increases in the Company’s average loan and investment balances that were mostly offset by declines in the yield on the Company’s interest-earning assets.

Interest income remained relatively unchanged at $13.8 million for both nine month periods ended September 30, 2003 and 2002. Interest income was static as a result of volume increases in both the loan and investment portfolios being offset by falling yields in both the loan and investment portfolios. The Company’s average loan balances were $214 million for the nine months ended September 30, 2003, up $19 million, or 10%, from the $195 million for the same period in 2002. Significantly offsetting the benefits of the increased loan volume was the impact of falling weighted-average interest rates in the Company’s loan portfolio. The Company’s average loan yield was 7.66% for the nine months ended September 30, 2003, down 59 basis points, or 7%, from the 8.25% for the same period in 2002.

Interest expense decreased $715,000, or 24%, to $2.3 million for the nine months ended September 30, 2003, down from $3.0 million for the same period in 2002. The decrease in interest expense was primarily attributed to rate decreases on time deposits partially offset by interest expense on the Company’s trust preferred securities issued in September of 2002. The Company’s average rate paid on time deposits was 2.28% for the nine months ended September 30, 2003, down 95 basis points, or 29%, from the 3.23% paid for the same period in 2002.

The net interest margin for the nine months ended September 30, 2003 decreased 32 basis points, or 6%, to 5.33%, down from 5.65% for the same period in 2002. Similar to most of the banking industry, the Company’s net interest margin continues to be challenged by the impact of the numerous decreases to the Federal funds rate which have occurred over the past three years. The most recent Federal funds rate cut occurred in June 2003 and amounted to 25 basis points. This latest rate cut resulted in the Federal funds target rate hitting the historic low rate of 1%. Maintaining the spread between loan yields and the effective rates paid on deposits has become increasingly difficult as deposit rates may be near the bottom of consumer tolerance and customers may seek higher yielding alternatives outside of the Bank.

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

                                                     
        For the Nine Months Ended September 30, 2003   For the Nine Months Ended September 30, 2002
       
 
        Average Balance   Interest   Yield/   Average Balance   Interest   Yield/
        (in thousands)   (in thousands)   Rate   (in thousands)   (in thousands)   Rate
       
 
 
 
 
 
Interest-earning assets:
                                               
 
Loans (1) (2)
  $ 213,503     $ 12,226       7.66 %   $ 194,920     $ 12,023       8.25 %
 
Investment securities (1)
    61,854       1,460       3.16 %     43,106       1,543       4.79 %
 
Federal funds sold
    11,815       93       1.05 %     15,578       194       1.67 %
 
   
     
             
     
         
   
Total earning assets
    287,172       13,779       6.42 %     253,604       13,760       7.25 %
 
           
                     
         
Cash and demand deposits with banks
    20,851                       15,501                  
Other assets
    18,203                       16,166                  
 
   
                     
                 
   
Total assets
  $ 326,226                     $ 285,271                  
 
   
                     
                 
Interest-bearing liabilities:
                                               
 
NOW deposits
  $ 34,067       64       0.25 %   $ 32,630       87       0.36 %
 
Money market deposits
    57,731       395       0.91 %     49,509       579       1.56 %
 
Savings deposits
    46,393       247       0.71 %     37,717       319       1.13 %
 
Time deposits
    81,907       1,395       2.28 %     84,673       2,046       3.23 %
 
Other borrowings (3)
    6,187       220       4.75 %     96       5       6.96 %
 
   
     
             
     
         
   
Total interest-bearing liabilities
    226,285       2,321       1.37 %     204,625       3,036       1.98 %
 
           
                     
         
Non-interest bearing deposits
    73,165                       57,049                  
Other liabilities
    2,247                       2,131                  
Shareholders’ equity
    24,529                       21,466                  
 
   
                     
                 
   
Total liabilities & equity
  $ 326,226                     $ 285,271                  
 
   
                     
                 
Cost of funding interest-earning assets (4)
                    1.08 %                     1.60 %
Net interest income and margin (5)
          $ 11,458       5.33 %           $ 10,724       5.65 %
 
           
                     
         


(1)   Not computed on a tax-equivalent basis.
 
(2)   Loan fees included in loan interest income for the nine-month periods ended September 30, 2003 and 2002 amounted to $566 and $527, respectively.
 
(3)   For the purpose of this schedule the interest expense related to the Company’s junior subordinated debentures is included in other borrowings. These debentures were issued in September 2002.
 
(4)   Total interest expense divided by the average balance of total earning assets.
 
(5)   Net interest income divided by the average balance of total earning assets.

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

                                     
        2003 over 2002 change in net interest income
       
                (in thousands)        
        Volume (1)   Rate (2)   Mix (3)   Total
       
 
 
 
Interest-earning assets:
                               
Loans
  $ 1,146     $ (861 )   $ (82 )   $ 203  
Investment securities
    671       (526 )     (228 )     (83 )
Federal funds sold
    (47 )     (71 )     17       (101 )
 
   
     
     
     
 
   
Total interest income
    1,770       (1,458 )     (293 )     19  
 
   
     
     
     
 
Interest-bearing liabilities:
                               
 
NOW deposits
    4       (26 )     (1 )     (23 )
 
Money market deposits
    96       (240 )     (40 )     (184 )
 
Savings deposits
    73       (118 )     (27 )     (72 )
 
Time deposits
    (67 )     (603 )     20       (650 )
 
Other borrowings
    318       (2 )     (102 )     214  
 
   
     
     
     
 
   
Total interest expense
    424       (989 )     (150 )     (715 )
 
   
     
     
     
 
Net interest income
  $ 1,346     $ (469 )   $ (143 )   $ 734  
 
   
     
     
     
 


(1)   The volume change in net interest income represents the change in average balance divided by the 2002 rate.
 
(2)   The rate change in net interest income represents the change in rate divided by the 2002 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. The Company recorded $625,000 in provision for loan losses for the nine months ended September 30, 2003, down $100,000, or 14%, from the $725,000 provision for the same period in 2002. The Company assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the nine months ended September 30, 2003, total non-interest income increased $334,000, or 15%, to $2.6 million, up from $2.2 million for the comparable period in 2002. The increase in non-interest income is primarily due to increases in the number of fee generating accounts, gains on the sale of investment securities, income from mortgage loan activity and gains on the sale of mortgage loans.

Non-interest expenses. Non-interest expenses consist of salaries and related employee benefits, occupancy and equipment expenses, professional fees, business development expenses, telephone expense, stationery and supplies expense, armored car and courier expense, advertising and promotion expense, loan expenses, directors’ fees, and other operating expenses. For the nine months ended September 30, 2003, non-interest expense increased $1.1 million, or 12%, to $9.6 million, up from $8.6 million for the comparable period in 2002.

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Salaries and employee benefits increased $789,000, or 17%, over the same nine-month period last year. This increase was due primarily to the continued expansion of the Company’s centralized lending function, staffing additions to manage the overall growth and expansion of the Company and increased employee benefit costs related to health-care and life insurance.

Occupancy and equipment expense increased $396,000, or 30%, over the same nine-month period last year. This increase was due primarily to additional depreciation and operating costs associated with new network security and monitoring systems, upgrades to the network’s operating system, enhancements to the item processing system, installation of a new automated teller platform system, the Company’s new centralized lending facility, remodeling costs associated with the Company’s administrative building and leasing cost on the Tahoe City branch that is scheduled to be opened in later part of 2003.

The following table describes the components of non-interest expense for the nine-month periods ending September 30, 2003 and 2002:

                   
      Unaudited
      For the Nine Months
      Ended September 30
     
      2003   2002
     
 
Salaries and employee benefits
  $ 5,382     $ 4,593  
Occupancy and equipment
    1,696       1,300  
Professional fees
    426       550  
Business development
    281       258  
Armored car and courier
    257       236  
Telephone
    245       259  
Stationery and supplies
    218       250  
Advertising and promotion
    207       202  
Director compensation
    190       167  
Postage
    190       147  
Loan expenses
    165       193  
Other expense
    364       412  
 
   
     
 
 
Total non-interest expense
  $ 9,621     $ 8,567  
 
   
     
 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $3.9 million for the three months ended September 30, 2003, an increase of $112,000, or 3%, from $3.8 million for the same period in 2002. The increase in net interest income was primarily attributed to declines in rates paid on the Company’s deposits combined with volume increases in the Company’s average loan and investment balances, mostly offset by declines in the yield on the Company’s interest-earning assets.

Interest income decreased $203,000 or 4%, to $4.5 million for the three months ended September 30, 2003, down from $4.7 million for the same period in 2002. The decrease in interest income was primarily attributed to falling yields on loan and investment balances that were largely offset by volume increases in loans and investment balances. The Company’s average loan yield was 7.39% for the three months ended September 30, 2003, down 72 basis points, or 9%, from the 8.11% for the same period in 2002. Significantly offsetting the negative impact of the declining loan yields was the increased loan volume. The Company’s average loan balances were $217 million for the three months ended September 30, 2003, up $14 million, or 7%, from the $203 million for the same period in 2002.

Interest expense decreased $315,000, or 32%, to $670,000 for the three months ended September 30, 2003, down from $985,000 for the same period in 2002. The decrease in interest expense was primarily attributed to rate decreases for time and money market deposits partially offset by interest expense on the Company’s trust preferred securities issued in September of 2002. The Company’s average rate paid on

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time deposits was 2.07% for the three months ended September 30, 2003, down 90 basis points, or 30%, from the 2.96% paid for the same period in 2002.

The net interest margin for the three months ended September 30, 2003 decreased 38 basis points, or 7%, to 5.19%, down from 5.57% for the same period in 2002.

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

                                                     
        For the Three Months Ended September 30,   For the Three Months Ended September 30,
        2003   2002
       
 
        Average Balance   Interest   Yield/   Average Balance   Interest   Yield/
        (in thousands)   (in thousands)   Rate   (in thousands)   (in thousands)   Rate
       
 
 
 
 
 
Interest-earning assets:
                                               
 
Loans (1) (2)
  $ 216,811     $ 4,039       7.39 %   $ 203,172     $ 4,151       8.11 %
 
Investment securities (1)
    61,828       456       2.93 %     42,736       496       4.60 %
 
Federal funds sold
    16,757       39       0.92 %     21,178       90       1.69 %
 
   
     
             
     
         
   
Total earning assets
    295,396       4,534       6.09 %     267,086       4,737       7.04 %
 
           
                     
         
Cash and demand deposits with banks
    23,243                       15,947                  
Other assets
    19,225                       16,895                  
 
   
                     
                 
   
Total assets
  $ 337,864                     $ 299,928                  
 
   
                     
                 
Interest-bearing liabilities:
                                               
 
NOW deposits
  $ 35,181       16       0.18 %   $ 34,406       30       0.35 %
 
Money market deposits
    58,389       105       0.71 %     52,017       214       1.63 %
 
Savings deposits
    48,575       55       0.45 %     39,801       113       1.13 %
 
Time deposits
    81,237       423       2.07 %     83,889       625       2.96 %
 
Other borrowings (3)
    6,195       71       4.55 %     197       3       6.04 %
 
   
     
             
     
         
   
Total interest-bearing liabilities
    229,577       670       1.16 %     210,310       985       1.86 %
 
           
                     
         
Non-interest bearing deposits
    80,517                       65,401                  
Other liabilities
    2,395                       2,001                  
Shareholders’ equity
    25,375                       22,216                  
 
   
                     
                 
   
Total liabilities & equity
  $ 337,864                     $ 299,928                  
 
   
                     
                 
Cost of funding interest-earning assets (4)
                    0.90 %                     1.46 %
Net interest income and margin (5)
          $ 3,864       5.19 %           $ 3,752       5.57 %
 
           
                     
         


(1)   Not computed on a tax-equivalent basis.
 
(2)   Loan fees included in loan interest income for the three-month periods ended September 30, 2003 and 2002 amounted to $206 and $141, respectively.
 
(3)   For the purpose of this schedule the interest expense related to the Company’s junior subordinated debentures is included in other borrowings. These debentures were issued in September 2002.
 
(4)   Total interest expense divided by the average balance of total earning assets.
 
(5)   Net interest income divided by the average balance of total earning assets.

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

                                     
        2003 over 2002 change in net interest income
       
        (in thousands)
        Volume (1)   Rate (2)   Mix (3)   Total
       
 
 
 
Interest-earning assets:
                               
Loans
  $ 279     $ (366 )   $ (25 )   $ (112 )
Investment securities
    222       (181 )     (81 )     (40 )
Federal funds sold
    (19 )     (41 )     9       (51 )
 
   
     
     
     
 
   
Total interest income
    482       (588 )     (97 )     (203 )
 
   
     
     
     
 
Interest-bearing liabilities:
                               
 
NOW deposits
    1       (14 )           (13 )
 
Money market deposits
    26       (120 )     (15 )     (109 )
 
Savings deposits
    25       (68 )     (15 )     (58 )
 
Time deposits
    (20 )     (189 )     6       (203 )
 
Other borrowings
    91       (1 )     (22 )     68  
 
   
     
     
     
 
   
Total interest expense
    123       (392 )     (46 )     (315 )
 
   
     
     
     
 
Net interest income
  $ 359     $ (196 )   $ (51 )   $ 112  
 
   
     
     
     
 


(1)   The volume change in net interest income represents the change in average balance divided by the 2002 rate.
 
(2)   The rate change in net interest income represents the change in rate divided by the 2002 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. The Company recorded $175,000 in provision for loan losses for the three months ended September 30, 2003, down $25,000, or 13%, from the $200,000 provision for the same period in 2002. The Company assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the three months ended September 30, 2003, total non-interest income increased $119,000, or 15%, to $893,000, up from $774,000 for the comparable period in 2002. The increase in non-interest income is primarily due to gains on the sale of investment securities, income from mortgage loan activity and loan servicing income.

Non-interest expenses. Non-interest expenses consist of salaries and related employee benefits, occupancy and equipment expenses, professional fees, business development expenses, telephone expense, stationery and supplies expense, armored car and courier expense, advertising and promotion expense, loan expenses, directors’ fees, and other operating expenses. For the three months ended September 30, 2003, non-interest expense increased $308,000, or 10%, to $3.3 million, up from $3.0 million for the comparable period in 2002.

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Salaries and employee benefits increased $333,000, or 21%, over the same three-month period last year. This increase was due primarily to the expansion of the Company’s centralized lending function, staffing additions to manage the overall growth and expansion of the Company and increased employee benefit costs related to health-care and life insurance.

Occupancy and equipment increased $112,000, or 23%, over the same three-month period last year. This increase was due primarily to additional depreciation and operating costs associated with new network security and monitoring systems, upgrades to the network’s operating system, enhancements to the item processing system, the Company’s new centralized lending facility, remodeling costs associated with the administrative building and leasing cost on the soon-to-be opened branch in Tahoe City.

The following table describes the components of non-interest expense for the three-month periods ending September 30, 2003 and 2002.

                   
      Unaudited
      For the Three Months
      Ended September 30
     
      2003   2002
     
 
Salaries and employee benefits
  $ 1,887     $ 1,554  
Occupancy and equipment
    591       479  
Professional fees
    140       220  
Business development
    81       73  
Advertising and promotion
    74       64  
Armored car and courier
    92       80  
Loan expenses
    21       83  
Stationery and supplies
    82       76  
Telephone
    88       87  
Director compensation
    63       61  
Postage
    61       39  
Other expense
    119       175  
 
   
     
 
 
Total non-interest expense
  $ 3,299     $ 2,991  
 
   
     
 

FINANCIAL CONDITION

Loan portfolio composition. The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of 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 commercial 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 of September 30, 2003, agricultural loans grew to 13.5% of the loan portfolio versus 12.3% at December 31, 2002. Real estate loans increased to 41.6% of the loan portfolio versus 39.1% at December 31, 2002. Commercial loans decreased to 23.1% of the portfolio as of September 30, 2003 as compared to 25.3% at December 31, 2002. Consumer loans also decreased to 21.8% of the loan portfolio at September 30, 2003 compared to 23.3% at December 31, 2002.

Nonperforming assets. Nonperforming loans increased $996,000, or 56%, to $2,782,000 as of September 30, 2003 as compared to $1,786,000 as of December 31, 2002.

In September 2003, the Bank purchased a $756,000 first-lien position agricultural real estate loan from another institution. This loan was purchased to improve the Bank’s collateral position on a $442,000 nonperforming second-lien agricultural real estate loan to the same borrower. With this purchase total nonperforming loans at September 30, 2003 to this agricultural borrower amounted to $1,198,000, or 43%

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of total nonperforming loans outstanding. Management believes that this nonperforming agricultural loan balance will be satisfactory resolved without loss to the Company.

As a result of the increase in the non-performing loan balance, nonperforming loans as a percent of total loans increased to 1.29% as of September 30, 2003 up from the 0.86% as of December 31, 2002. Nonperforming assets as a percent of total assets were 0.90% as of September 30, 2003 up from 0.59% at December 31, 2002.

Analysis of allowance for loan losses. Net charge-offs during the nine months ended September 30, 2003 totaled $454,000, or 0.21% of total loans, compared to $390,000, or 0.19% of total loans, for the comparable period in 2002. Net charge-offs during the nine months ended September 30, 2003 were comprised of $598,000 of less $144,000 recoveries, compared to $451,000 of charge-offs less $61,000 for the comparable period in 2002. The allowance for loan losses stood at 1.23% of total loans as of September 30, 2003, versus 1.19% of total loans as of December 31, 2002. Based on an evaluation of the credit quality of the loan portfolio and delinquency trends and charge-offs, management believes the allowance for loan losses to be adequate.

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

                   
      2003   2002
     
 
Balance at January 1,
  $ 2,471     $ 2,153  
 
   
     
 
Charge-offs:
               
 
Commercial and agricultural
    187       127  
 
Real estate mortgage
    26       13  
 
Real estate construction
           
 
Consumer
    385       311  
 
   
     
 
Total charge-offs
    598       451  
 
   
     
 
Recoveries:
               
 
Commercial and agricultural
    20       8  
 
Real estate mortgage
          1  
 
Real estate construction
           
 
Consumer
    124       52  
 
   
     
 
Total recoveries
    144       61  
 
   
     
 
Net charge-offs
    454       390  
 
   
     
 
Provision for loan losses
    625       725  
 
   
     
 
Balance at September 30,
  $ 2,642     $ 2,488  
 
   
     
 
Net charge-offs during the nine-month period to average loans
    0.21 %     0.20 %
Allowance for loan losses to total Loans
    1.23 %     1.21 %

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Investment securities and Federal funds sold. Total investment securities and Federal funds sold increased $9.5 million, or 12%, to $86.2 million as of September 30, 2003, up from $76.7 million at December 31, 2002.

The Company’s investment in U.S. Treasury securities and direct obligations of U.S. agencies decreased to 78.5% of the investment portfolio at September 30, 2003, versus 87.3% at December 31, 2002. The Company’s investment in corporate bonds rose to 15.9% of the investment portfolio at September 30, 2003, versus 7.3% at December 31, 2002. The remainder of the Company’s investment portfolio consists of municipal obligations.

Accrued interest receivable and other assets. Accrued interest receivable and other assets increased $2.4 million, or 24%, to $12.3 million as of September 30, 2003, up from $9.9 million at December 31, 2002. Included in this balance at September 30, 2003, was $6.4 million of Bank-owned life insurance policies on executive officers and directors, $2.1 million of accrued interest receivable, $1.3 of deferred tax benefits and $2.5 million of prepaid balances and other assets.

Of the $2.4 million increase in accrued interest receivable and other assets, $1.7 million related to the purchase of additional Bank-owned life insurance policies in conjunction with deferred compensation agreements with an executive officer and director.

Deposits. Total deposits were $309.4 million as of September 30, 2003, an increase of $15 million, or 5%, from the December 31, 2002 balance of $293.9 million. The Company continues to manage the mix of its deposits consistent with its identity as a community bank serving the financial needs of its customers. Non-interest bearing demand deposits and interest checking deposits increased to 38.3% of total deposits as of September 30, 2003, up from 36.7% of total deposits as of December 31, 2002. Money market and savings deposits increased slightly to 35.4% of total deposits as of September 30, 2003 compared to 35.1% as of December 31, 2002. Time deposits decreased to 26.3% of total deposits as of June 30, 2003, versus 28.2% as of December 31, 2002.

CAPITAL RESOURCES

Shareholders’ equity as of September 30, 2003 increased $1.9 million, or 8%, to $25.2 million from $23.3 million as of December 31, 2002. This increase was primarily due to the retention of current period earnings partially offset by a $387 thousand semi-annual cash dividend payment in the second quarter of 2003 and a $178 thousand decrease in accumulated comprehensive income.

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Each of these components is defined in the regulations. Management believes that the Bank met all its capital adequacy requirements as of September 30, 2003.

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    Plumas Bancorp
   
    Actual   Minimum
   
  Capital
    Capital   Ratio   Requirement
   
 
 
Leverage
  $ 30,362       8.9 %     4.0 %
Tier 1 Risk-Based
    30,362       11.5 %     4.0 %
Total Risk-Based
    33,004       12.6 %     8.0 %
                         
    Plumas Bank
   
    Actual   Minimum
   
  Capital
    Capital   Ratio   Requirement
   
 
 
Leverage
  $ 29,918       8.9 %     4.0 %
Tier 1 Risk-Based
    29,918       11.4 %     4.0 %
Total Risk-Based
    32,560       12.4 %     8.0 %

LIQUIDITY

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

Customer deposits are the Company’s primary source of funds. Those funds are held in various types of accounts with varying maturities. The Company does not accept brokered deposits. During the first nine months of 2003, deposits increased $15.5 million, or 5%, from the December 31, 2002 balance of $293.9 million. Deposit growth during the first nine months of 2003 was used to fund growth in the loan and investment securities portfolios. The Company has historically experienced a seasonal trend in regards to deposits; whereas the majority of the Company’s annual deposit growth occurs in the summer and fall months.

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

In management’s opinion there has not been a material change in the Company’s market risk profile for the nine months ended September 30, 2003 compared to December 31, 2002 as discussed in the Company’s 2002 annual report and form 10-KSB.

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ITEM 4. CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer, Chief Financial Officer and Controller, based on their evaluation within 90 days prior to the date of this report of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a—14(c)), have concluded that the Company’s disclosure controls and procedures are adequate and effective for purposes of Rule 13a—14(c) in timely alerting them to material information relating to the Company required to be included in the Company’s filings with the SEC under the Securities Exchange Act of 1934.

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

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

     
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 included as exhibit 3.2 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by 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.
     
10.1   Employment Agreement of William E. Elliott dated May 16, 2001, is included as Exhibit 10.1 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.2   Incentive Stock Option Agreement as amended of William E. Elliott dated November 18, 1998, is included as Exhibit 10.2 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.3   Executive Salary Continuation Agreement as amended of William E. Elliott dated October 13, 1993, is included as Exhibit 10.3 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

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10.4   Split Dollar Agreements of William E. Elliott dated January 23, 2002, is included as Exhibit 10.4 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.5   Incentive Stock Option Agreement as amended of Douglas N. Biddle dated November 18, 1998, is included as Exhibit 10.5 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.6   Executive Salary Continuation Agreement as amended of Douglas N. Biddle dated June 2, 1994, is included as Exhibit 10.6 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.7   Split Dollar Agreements of Douglas N. Biddle dated January 24, 2002, is included as Exhibit 10.7 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.8   Incentive Stock Option Agreement as amended of Dennis C. Irvine dated November 18, 1998, is included as Exhibit 10.8 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.9   Executive Salary Continuation Agreement as amended of Dennis C. Irvine dated June 2, 1994, is included as Exhibit 10.9 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.10   Split Dollar Agreements of Dennis C. Irvine dated January 24, 2002, is included as Exhibit 10.10 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.11   Incentive Stock Option Agreement as amended of Robert T. Herr dated July 19, 2000, is included as Exhibit 10.11 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.12   Non-Qualified Stock Option Agreement as amended of Jerry V. Kehr dated November 18, 1998, is included as Exhibit 10.12 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.13   Deferred Fee Agreement as amended of Jerry V. Kehr dated August 19, 1998, is included as Exhibit 10.13 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.14   Amended and Restated Director Retirement Agreement of Jerry V. Kehr dated April 28, 2000, is included as Exhibit 10.14 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.15   Consulting Agreement of Jerry V. Kehr dated May 10, 2000, is included as Exhibit 10.15 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.16   Non-Qualified Stock Option Agreement as amended of Daniel E. West dated November 19, 1997, is included as Exhibit 10.16 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.17   Non-Qualified Stock Option Agreement as amended of Daniel E. West dated November 18, 1998, is included as Exhibit 10.17 to the Registrant’s 10-QSB for June 30, 2002, 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.
     
10.20   Non-Qualified Stock Option Agreement as amended of Alvin G. Blickenstaff dated November 18, 1998, is included as Exhibit 10.20 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.21   Amended and Restated Director Retirement Agreement of Alvin G. Blickenstaff dated April 19, 2000, is included as Exhibit 10.21 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.22   Consulting Agreement of Alvin G. Blickenstaff dated May 8, 2000, is included as Exhibit 10.22 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

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10.23   Non-Qualified Stock Option Agreement as amended of Gerald W. Fletcher dated November 18, 1998, is included as Exhibit 10.23 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.
     
10.26   Non-Qualified Stock Option Agreement as amended of Arthur C. Grohs dated November 18, 1998, is included as Exhibit 10.26 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.27   Amended and Restated Director Retirement Agreement of Arthur C. Grohs dated May 9, 2000, is included as Exhibit 10.27 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.28   Consulting Agreement of Arthur C. Grohs dated May 9, 2000, is included as Exhibit 10.28 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.29   Non-Qualified Stock Option Agreement as amended of Christine McArthur dated August 16, 2000, is included as Exhibit 10.29 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.30   Amended and Restated Director Retirement Agreement of Christine McArthur dated May 12, 2000, is included as Exhibit 10.30 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.31   Consulting Agreement of Christine McArthur dated May 12, 2000, is included as Exhibit 10.31 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.32   Non-Qualified Stock Option Agreement as amended of Terrance J. Reeson dated November 18, 1998, is included as Exhibit 10.32 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.
     
10.35   Non-Qualified Stock Option Agreement as amended of Walter Sphar dated November 18, 1998, is included as Exhibit 10.35 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.36   Amended and Restated Director Retirement Agreement of Walter Sphar dated April 20, 2000, is included as Exhibit 10.36 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.37   Consulting Agreement of Walter Sphar dated May 9, 2000, is included as Exhibit 10.37 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.38   Non-Qualified Stock Option Agreement as amended of Thomas Watson dated November 21, 2001, is included as Exhibit 10.38 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.39   Deferred Fee Agreement of Thomas Watson dated March 3, 2001, is included as Exhibit 10.39 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.40   Form of Indemnification Agreement, is included as Exhibit 10.41 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
     
10.41   2001 Stock Option Plan as amended is included as exhibit 99.1 of the Form S-8 filed July 23, 2002, File No. 333-96957

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10.42   1991 Stock Option Plan as amended is included as exhibit 99.1 of the Form S-8 filed August 19, 2002, File No. 333-98319
     
10.43   Plumas Bank 401(k) Profit Sharing Plan as amended is included as exhibit 99.1 of the Form S-8 filed February 14, 2003, File No. 333-103229
     
10.44   Executive Salary Continuation Agreement of Robert T. Herr dated June 4, 2002, is included as Exhibit 10.44 to the Registrant’s 10-Q for March 31, 2003, which is incorporated by this reference herein.
     
10.45   Branch Purchase and Assumption Agreement dated April 25, 2003, is included as Exhibit 10.45 to the Registrant’s 10-Q for March 31, 2003, which is incorporated by this reference herein.
     
10.46   Incentive Stock Option Agreement of William E. Elliott dated December 18, 2002, is included as Exhibit 10.46 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.47   Incentive Stock Option Agreement of Douglas N. Biddle dated December 18, 2002, is included as Exhibit 10.47 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.48   Incentive Stock Option Agreement of Dennis C. Irvine dated December 18, 2002, is included as Exhibit 10.48 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.49   Incentive Stock Option Agreement of Robert T. Herr dated December 18, 2002, is included as Exhibit 10.49 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.50   Non-Qualified Stock Option Agreement of Jerry V. Kehr dated December 18, 2002, is included as Exhibit 10.50 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.51   Non-Qualified Stock Option Agreement of Daniel E. West dated December 18, 2002, is included as Exhibit 10.51 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.52   Non-Qualified Stock Option Agreement of Alvin G. Blickenstaff dated December 18, 2002, is included as Exhibit 10.52 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.53   Non-Qualified Stock Option Agreement of Gerald W. Fletcher dated December 18, 2002, is included as Exhibit 10.53 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.54   Non-Qualified Stock Option Agreement of Arthur C. Grohs dated December 18, 2002, is included as Exhibit 10.54 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.55   Non-Qualified Stock Option Agreement of Christine McArthur dated December 18, 2002, is included as Exhibit 10.55 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.56   Non-Qualified Stock Option Agreement of Terrance J. Reeson dated December 18, 2002, is included as Exhibit 10.56 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.57   Non-Qualified Stock Option Agreement of Walter Sphar dated December 18, 2002, is included as Exhibit 10.57 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.58   Non-Qualified Stock Option Agreement of Thomas Watson dated December 18, 2002, is included as Exhibit 10.58 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.59   Director Retirement Agreement of Thomas Watson dated May 1, 2003, is included as Exhibit 10.59 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.
     
10.60   Consulting Agreement of Thomas Watson dated May 1, 2003, is included as Exhibit 10.60 to the Registrant’s 10-Q for June 30, 2003, which is incorporated by this reference herein.

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11   Computation of per share earnings appears in the attached 10-Q under Plumas Bancorp Notes to Consolidated Financial Statements as Footnote 5 – Earnings Per Share Computation.
     
31.1   Rule 13a-14(a) [Section 302] Certification of Principal Accounting Officer dated November 10, 2003.
     
31.2   Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated November 10, 2003.
     
31.3   Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated November 10, 2003.
     
32.1   Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 10, 2003.
     
32.2   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 November 10, 2003.
     
32.3   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 November 10, 2003.

(b)  Reports on Form 8-K

    On September 29, 2003, the Company filed a Current Report on Form 8-K. The Current Report included as an exhibit, the press release dated September 29, 2003, filed by the Company announcing final regulatory approval for the planned purchase of five branches located in Northeastern California from Placer Sierra Bank.
 
    On October 16, 2003, the Company filed a Current Report on Form 8-K. The Current Report included as an exhibit, the press release dated October 16, 2003, filed by the Company containing unaudited financial information and third quarter earnings.
 
    On October 20, 2003, the Company filed a Current Report on Form 8-K. The Current Report included as an exhibit, the press release dated October 20, 2003, filed by the Company containing unaudited financial information and announcement of a semi-annual cash dividend.

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Table of Contents

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: November 10, 2003

     
    /s/ William E. Elliott
   
    William E. Elliott
President/Chief Executive Officer
     
    /s/ Douglas N. Biddle
   
    Douglas N. Biddle
Executive Vice President Chief Financial Officer
     
    /s/ Andrew J. Ryback
   
    Andrew J. Ryback
Senior Vice President Controller

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