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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

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.

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

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

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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENT

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

See notes to consolidated financial statements.

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

See notes to consolidated financial statements.

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PLUMAS BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

Continued on next page.

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

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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:

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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.

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:

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

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:

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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: