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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

þ  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2004

or

o  Transaction report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 000-49883


PLUMAS BANCORP
(Exact name of Registrant as specified in its charter)
     
California   75-2987096
(State or other jurisdiction of    
incorporation or organization)   (IRS Employer Identification No.)
     
35 S. Lindan Avenue, Quincy, CA   95971
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (530) 283-7305


Securities to be registered pursuant to Section 12(b) of the Act: None.

     Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, no par value.


     Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     
Yes   No
þ   o

     Indicated by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. þ

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

     
Yes   No
o   þ

     As of June 30, 2004, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $52.6 million, based on the closing price reported to the Registrant on that date of $18.35 per share.

     Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of the affiliate status is not necessarily a conclusive determination for other purposes.

     The number of shares of Common Stock of the registrant outstanding as of March 28, 2005 was 3,287,829.

     Documents Incorporated by Reference: Portions of the definitive proxy statement for the 2005 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated by reference in Part III, Items 10-14.

 
 

 


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 EXHIBIT 23.01
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 31.3
 EXHIBIT 32.1
 EXHIBIT 32.2
 EXHIBIT 32.3

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PART I

Forward-Looking Information

This Annual Report on Form 10-K includes forward-looking statements and information is subject to the “safe harbor” provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements (which involve Plumas Bancorp’s (the “Company’s”) plans, beliefs and goals, refer to estimates or use similar terms) involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors:

  •   Competitive pressure in the banking industry, competition in the markets the Company operates in and changes in the regulatory environment
 
  •   Changes in the interest rate environment and volatility of rate sensitive deposits
 
  •   Declines in the health of the economy, nationally or regionally, which could reduce the demand for loans or reduce the value of real estate collateral securing most of the Company’s loans
 
  •   Credit quality deterioration, which could cause an increase in the provision for loan and lease losses
 
  •   Devaluation of fixed income securities
 
  •   Asset/liability matching risks and liquidity risks
 
  •   Loss of key personnel
 
  •   Operational interruptions including data processing systems failure and fraud

The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and other information in this Report.

ITEM 1. BUSINESS

General

The Company. Plumas Bancorp (the “Company”) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in Quincy, California. The Company was incorporated in January 2002 and acquired all of the outstanding shares of Plumas Bank (the “Bank”) in June 2002. The Company’s principal subsidiary is the Bank, and the Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish. At the present time, the Company’s only other subsidiary is Plumas Statutory Trust I, which was formed in September 2002 solely to facilitate the issuance of trust preferred securities.

The Company’s principal source of income is dividends from the Bank, but the Company intends to explore supplemental sources of income in the future. The cash outlays of the Company, including (but not limited to) the payment of dividends to shareholders, if and when declared by the Board of Directors, and the cost of servicing debt, will generally be paid from dividends paid to the Company by the Bank.

At December 31, 2004, the Company had consolidated assets of $417.3 million, deposits of $378.6 million and shareholders’ equity of $27.9 million. The Company’s liabilities include $6.2 million in junior

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subordinated deferrable interest debentures issued in conjunction with the trust preferred securities issued by Plumas Statutory Trust I (the “Trust”) in September 2002. The Trust is further discussed in the section titled “Trust Preferred Securities.”

References herein to the “Company,” “we,” “us” and “our” refer to Plumas Bancorp and its consolidated subsidiary, unless the context indicates otherwise. Our operations are conducted at 35 South Lindan Avenue, Quincy, California. Our annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission and are posted and are available at no cost on the Company’s website, www.plumasbank.com, as soon as reasonably practicable after the Company files such documents with the SEC. These reports are also available through the SEC’s website at www.sec.gov.

The Bank. The Bank is a California state-chartered bank that was incorporated in July 1980 and opened for business in December 1980. The Bank’s Administrative Office is also located at 35 South Lindan Avenue, Quincy, California. At December 31, 2004 the Bank had approximately $416.9 million in assets, $266.9 million in loans and $378.6 million in deposits (including a deposit of $29 thousand from the Company). It is currently the largest independent bank headquartered in Plumas County. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to maximum insurable amounts. The Bank is not a member of the Federal Reserve System.

The Bank’s primary service area covers the Northeastern corner of California, with Lake Tahoe to the South and the Oregon border to the North. The Bank through its twelve branch network, serves the seven contiguous counties of Plumas, Nevada, Sierra, Placer, Lassen, Modoc and Shasta. The branches are located in the communities of Quincy, Portola, Greenville, Westwood, Truckee, Fall River Mills, Alturas, Susanville, Chester, Tahoe City, Kings Beach and Loyalton. Additionally, within our service area, the Bank maintains sixteen automated teller machines (“ATMs”) tied in with major statewide and national networks. The Bank’s primary business is servicing the banking needs of these communities and its marketing strategy stresses its local ownership and commitment to serve the banking needs of individuals living and working in the Bank’s primary service areas.

With a predominant focus on personal service, the Bank has positioned itself as a multi-community independent bank serving the financial needs of individuals and businesses within the Bank’s geographic footprint. Our principal retail lending services include consumer, home equity and home mortgage loans. Our principal commercial lending services include term real estate, land development and construction loans. In addition, we provide commercial and industrial term, government-guaranteed and agricultural loans as well as credit lines.

The Government-guaranteed lending center, headquartered in Truckee, provides Small Business Administration (SBA) lending and USDA Rural Development lending. The Bank produces 9-12 of these types of loans annually and it is anticipated that this will continue at the same level for the foreseeable future. Also in Truckee, we have a senior commercial lender charged with the production and maintenance of a significant participation loan portfolio. $33.5 million in new participations were acquired in 2004.

The Agricultural Credit Centers located in Susanville and Alturas provide a complete line of credit services in support of the agricultural activities which are key to the continued economic development of the communities we serve. “Ag lending” clients include a full range of individual farming customers, small- to medium-sized business farming organizations and corporate farming units.

As of December 31, 2004, the principal areas in which we directed our lending activities, and the percentage of our total loan portfolio for which each of these areas was responsible, were as follows: (i) loans secured by real estate – 50.2%; (ii) commercial and industrial (including SBA) loans – 16.0%; (iii) consumer loans (including residential equity lines of credit) – 22.1%; and (iv) agricultural loans (including agricultural real estate loans) – 11.7%.

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In addition to the lending activities noted above, we offer a wide range of deposit products for the retail and commercial banking markets including checking, interest-bearing checking, business sweep, savings, time deposit and retirement accounts, as well as telephone banking and internet banking with bill-pay options. As of December 31, 2004, the Bank had 34,969 deposit accounts with balances totaling approximately $378.6 million, compared to 32,812 deposit accounts with balances totaling approximately $355.9 million at December 31, 2003. We attract deposits through our customer-oriented product mix, competitive pricing, convenient locations, extended hours and drive-up banking, all provided with the highest level of customer service.

Most of our deposits are attracted from individuals, business-related sources and smaller municipal entities. This mix of deposit customers resulted in a relatively modest average deposit balance of approximately $11,000 at December 31, 2004, but makes us less vulnerable to adverse effects from the loss of depositors who may be seeking higher yields in other markets or who may otherwise draw down balances for cash needs. We do not accept brokered deposits.

We also offer a multitude of other products and services to our customers to complement the lending and deposit services previously reviewed. These include cashier’s checks, traveler’s checks, bank-by-mail, ATMs, night depository, safe deposit boxes, direct deposit, electronic funds transfers, on-line banking, and other customary banking services.

In order to provide non-deposit investment options we have developed a strategic alliance with Financial Network Investment Corporation (“FNIC”). Through this arrangement, certain employees of the Bank are also registered and licensed representatives of FNIC. These employees provide our customers throughout our branch network with convenient access to annuities, insurance products, mutual funds, and a full range of investment products.

We have not engaged in any material research activities relating to the development of new products or services during the last two fiscal years; however, a substantial investment of time and capital has been devoted to the improvement of existing Bank services during the last twelve months. Specifically, in 2004 the bank hired a Dealer Services Manager to accommodate a growing network of auto dealers. In conjunction with this, the Bank established a dealer loan center to handle the more than 200 applications received each month. The Bank now serves more than 30 auto dealers in the Quincy, Chester, Red Bluff, Corning and Redding areas.

The officers and employees of the Bank are continually engaged in marketing activities, including the evaluation and development of new products and services to enable the Bank to retain and improve its competitive position in its service area. Alternatives for future electronic banking delivery are currently being examined in an effort to keep pace with evolving technology and continue to provide superior customer service.

We hold no patents or licenses (other than licenses required by appropriate bank regulatory agencies), franchises, or concessions. Our business has a modest seasonal component due to the heavy agricultural and tourism orientation of some of the communities we serve. As our branches in less rural areas such as Truckee have expanded, however, the agriculture-related base has become less significant. We are not dependent on a single customer or group of related customers for a material portion of our deposits, nor is a material portion of our loans concentrated within a single industry or group of related industries. There has been no material effect upon our capital expenditures, earnings, or competitive position as a result of Federal, state, or local environmental regulation.

Commitment to our Communities. The Board of Directors and Management believe that the Company plays an important role in the economic well being of the communities it serves. Our Bank has a continuing responsibility to provide a wide range of lending and deposit services to both individuals and businesses. These services are tailored to meet the needs of the communities served by the Company and the Bank.

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We offer various loan products which promote home ownership and affordable housing, fuel job growth and support community economic development. Types of loans offered range from personal and commercial loans to real estate, construction, agricultural, mortgage and government-guaranteed community infrastructure loans. Many banking decisions are made locally with the goal of maintaining customer satisfaction.

Recent Developments. In November of 2003, we expanded into Placer County with the opening of our de novo branch in the community of Tahoe City. Also in November 2003, we increased our deposit base by $45 million within our service area through the acquisition of five branches from a competitor. The branch acquisition involved the purchase of deposits and certain fixed and other assets related to the branches located in the communities of Kings Beach, Loyalton, Portola, Quincy and Truckee. The deposits of the Portola, Quincy and Truckee branches were consolidated into our existing branches in those communities while the Kings Beach and Loyalton offices were added to our existing branch network.

Trust Preferred Securities. During the third quarter of 2002, the Company formed a wholly owned Connecticut statutory business trust, Plumas Statutory Trust I (the “Trust”). On September 26, 2002, the Company issued to the Trust, Floating Rate Junior Subordinated Deferrable Interest Debentures due 2032 (the “Debentures”) in the aggregate principal amount of $6,186,000. In exchange for these debentures the Trust paid the Company $6,186,000. The Trust funded its purchase of debentures by issuing $6,000,000 in floating rate capital securities (“trust preferred securities”), which were sold to a third party. These trust preferred securities qualify as Tier I capital under current Federal Reserve Board guidelines. The Debentures are the only asset of the Trust. The interest rate and terms on both instruments are substantially the same. The rate is based on the three month LIBOR (London Interbank Offered Rate) plus 3.40%, not to exceed 11.9%, adjustable quarterly. The proceeds from the sale of the Debentures were primarily used by the Company to inject capital into the Bank.

The Debentures and trust preferred securities accrue and pay distributions quarterly based on the floating rate described above on the stated liquidation value of $1,000 per security. The Company has entered into contractual agreements which, taken collectively, fully and unconditionally guarantee payment of: (1) accrued and unpaid distributions required to be paid on the capital securities; (2) the redemption price with respect to any capital securities called for redemption by the Trust, and (3) payments due upon voluntary or involuntary dissolution, winding up, or liquidation of the Trust.

The trust preferred securities are mandatorily redeemable upon maturity of the Debentures on September 26, 2032, or upon earlier redemption as provided in the indenture.

The Trust is not consolidated into the Company’s consolidated financial statements and, accordingly, is accounted for under the equity method and the junior subordinated debentures are reflected as debt on the consolidated balance sheet.

Business Concentrations. No individual or single group of related customer accounts is considered material in relation to the Banks’ assets or deposits, or in relation to our overall business. However, at December 31, 2004 approximately 66.9% of the Bank’s total loan portfolio consisted of real estate-secured loans, including real estate mortgage loans, real estate construction loans, consumer equity lines of credit, and agricultural loans secured by real estate. Moreover, our business activities are currently focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta and Sierra. Consequently, our results of operations and financial condition are dependent upon the general trends in these California economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of our operations in these areas of California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions in California.

Competition. With respect to commercial bank competitors, the business is largely dominated by a relatively small number of major banks with many offices operating over a wide geographical area. These

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banks have, among other advantages, the ability to finance wide-ranging and effective advertising campaigns and to allocate their resources to regions of highest yield and demand. Many of the major banks operating in the area offer certain services that we do not offer directly but may offer indirectly through correspondent institutions. By virtue of their greater total capitalization, such banks also have substantially higher lending limits than we do. For customers whose loan demands exceed our legal lending limit, we attempt to arrange for such loans on a participation basis with correspondent banks.

In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions such as finance companies, leasing companies, insurance companies, brokerage firms, and investment banking firms. In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal financial software. Strong competition for deposit and loan products affects the rates of those products as well as the terms on which they are offered to customers. Mergers between financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues to remain competitive. Competition has also intensified due to federal and state interstate banking laws enacted in the mid-1990’s, which permit banking organizations to expand into other states, and the relatively large California market has been particularly attractive to out-of-state institutions. The Financial Modernization Act, which became effective March 11, 2000, has made it possible for full affiliations to occur between banks and securities firms, insurance companies, and other financial companies, and has also intensified competitive conditions.

Currently, within the Bank’s service area there are 21 traditional banking branch offices of competing institutions, including 15 branches of 4 major banks. As of June 30, 2004, the Federal Deposit Insurance Corporation estimated the Bank’s market share of insured deposits within the communities it serves to be as follows: Chester 71%, Quincy 68%, Portola 52%, Fall River Mills 47%, Alturas 38%, Kings Beach 35%, Susanville 26%, Truckee 17%, Tahoe City 2% and 100% in the communities of Greenville, Westwood and Loyalton. Tahoe City is the location of our de novo branch, which opened its doors in November 2003.

Technological innovations have also resulted in increased competition in financial services markets. Such innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously were considered traditional banking products. In addition, many customers now expect a choice of delivery systems and channels, including telephone, mail, home computer, ATMs, full-service branches, and/or in-store branches. The sources of competition in such products include traditional banks as well as savings associations, credit unions, brokerage firms, money market and other mutual funds, asset management groups, finance and insurance companies, internet-only financial intermediaries, and mortgage banking firms.

For many years we have countered rising competition by providing our own style of community-oriented, personalized service. We rely on local promotional activity, personal contacts by our officers, directors, employees, and shareholders, automated 24-hour banking, and the individualized service that we can provide through our flexible policies. This appears to be well-received by our customers throughout our service area, who appreciate a more personal and customer-oriented environment in which to conduct their financial transactions. We have also embraced the electronic age and installed telephone banking and personal computer and internet banking with bill payment capabilities to meet the needs of customers with electronic access requirements. This high tech and high touch approach allows the customers to customize their access to our services based on their particular preference.

Employees. At December 31, 2004, the Company and its subsidiary employed 194 persons. On a full-time equivalent basis, we employed 172 persons. We believe our employee relations are excellent.

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Supervision and Regulation

The Company. As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended, (the “BHCA”), and are registered with and subject to the supervision of the Federal Reserve Bank (the “FRB”). It is the policy of the FRB, that each bank holding company serve as a source of financial and managerial strength to its subsidiary banks. We are required to file reports with the FRB and provide such additional information as the FRB may require. The FRB has the authority to examine us and our subsidiary, as well as any arrangements between us and our subsidiary, with the cost of any such examination to be borne by us.

The BHCA requires us to obtain the prior approval of the FRB before acquisition of all or substantially all of the assets of any bank or ownership or control of the voting shares of any bank if, after giving effect to the acquisition, we would own or control, directly or indirectly, more than 5% of the voting shares of that bank. Amendments to the BHCA expand the circumstances under which a bank holding company may acquire control of or all or substantially all of the assets of a bank located outside the State of California.

We may not engage in any business other than managing or controlling banks or furnishing services to our subsidiary, with the exception of certain activities which, in the opinion of the FRB, are so closely related to banking or to managing or controlling banks as to be incidental to banking. In addition, we are generally prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company unless that company is engaged in such authorized activities and the Federal Reserve approves the acquisition.

We and our subsidiary are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or provision of services. For example, with certain exceptions, the bank may not condition an extension of credit on a customer obtaining other services provided by us, the bank or any other subsidiary of ours, or on a promise by the customer not to obtain other services from a competitor. In addition, federal law imposes certain restrictions on transactions between the bank and its affiliates. As affiliates, the bank and we are subject, with certain exceptions, to the provisions of federal law imposing limitations on and requiring collateral for extensions of credit by the bank to any affiliate.

The Bank. As a California state-chartered bank that is not a member of the Federal Reserve, Plumas Bank is subject to primary supervision, examination and regulation by the FDIC, the California Department of Financial Institutions (the “DFI”) and is subject to applicable regulations of the FRB. The Bank’s deposits are insured by the FDIC to applicable limits. As a consequence of the extensive regulation of commercial banking activities in California and the United States, banks are particularly susceptible to changes in California and federal legislation and regulations, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition.

Various other requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes and regulations relate to many aspects of the Bank’s operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, branching, capital requirements and disclosure obligations to depositors and borrowers. California law presently permits a bank to locate a branch office in any locality in the state. Additionally, California law exempts banks from California usury laws.

Capital Standards. The FRB and the FDIC have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0.0% for assets with low

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credit risk, such as certain U.S. government securities, to 100.0% for assets with relatively higher credit risk, such as business loans.

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for loan and lease losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Since December 31, 1992, the FRB and the FDIC have required a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance-sheet items of 8.0%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance-sheet items of 4.0%.

In addition to the risk-based guidelines, the FRB and FDIC require banking organizations to maintain a minimum amount of Tier 1 capital to average total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3.0%. It is improbable, however, that an institution with a 3.0% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators’ ratings. For all banking organizations not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3.0% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, is at least 4.0% or 5.0%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the FRB and FDIC have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC to ensure the maintenance of required capital levels. As discussed above, we are required to maintain certain levels of capital, as is the Bank. The regulatory capital guidelines as well as our actual capitalization on a consolidated basis and for the Bank and Bancorp as of December 31, 2004 follow:

                                 
    Requirement            
            For the Bank to            
    Adequately   be Well   Plumas   Plumas
    Capitalized   Capitalized   Bank   Bancorp
     
Total risk-based capital ratio
    8.0 %     10.0 %     10.8 %     10.9 %
Tier 1 risk-based capital ratio
    4.0 %     6.0 %     10.0 %     10.1 %
Tier 1 leverage capital ratio
    4.0 %     5.0 %     7.5 %     7.6 %

Prompt Corrective Action. Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including those institutions that fall below one or more prescribed minimum capital ratios described above. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions.

In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order

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that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Additionally, a holding company’s inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company.

Premiums for Deposit Insurance. Through the Bank Insurance Fund, or BIF, the FDIC insures our customer deposits up to prescribed limits for each depositor. The amount of FDIC assessments paid by each BIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required.

The assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. Due to continued growth in deposits and some recent bank failures, the BIF is nearing its minimum ratio of 1.25% of insured deposits as mandated by law. If the ratio drops below 1.25%, it is likely the FDIC will be required to assess premiums on all banks. Any increase in assessments or the assessment rate could have a material adverse effect on our business, financial condition, results of operations or cash flows, depending on the amount of the increase. Furthermore, the FDIC is authorized to raise insurance premiums under certain circumstances.

The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by the FDIC that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. The termination of deposit insurance for the bank would have a material adverse effect on our business, financial condition, results of operations or cash flows.

All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds, commonly referred to as FICO bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation. The FDIC established the FICO assessment rates effective for the first half of 2004 at approximately 1.54 cents for each $100 of assessable deposits. The FICO assessments are adjusted quarterly to reflect changes in the assessment bases of the FDIC’s insurance funds and do not vary depending on a depository institution’s capitalization or supervisory evaluations.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of San Francisco (the “FHLB-SF”). Among other benefits, each Federal Home Loan Bank (“FHLB”), serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. A new capital plan of the FHLB-SF was approved and implemented by the Federal Housing Finance Board on April 1, 2004. The new capital plan incorporates a single class of stock with a par value of $100 per share, and may be issued, exchanged, redeemed, and repurchased only at par value. As an FHLB member, the bank is required to own capital stock in an FHLB in an amount equal to the greater of:

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  •   a membership stock requirement with an initial cap of $25 million (100% of “membership asset value” as defined), or
 
  •   an activity based stock requirement (based on percentage of outstanding advances).

The new capital stock is redeemable on five years’ written notice, subject to certain conditions.

We do not believe that the FHLB-SF’s new capital plan has a material impact upon our business, financial condition, results of operations or cash flows. However, the bank could be required to purchase as much as 50% additional capital stock or sell as much as 50% of its proposed capital stock requirement at the discretion of the FHLB-SF.

Federal Reserve System. The FRB requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts and non-personal time deposits. At December 31, 2004, we were in compliance with these requirements.

Impact of Monetary Policies. The earnings and growth of the Company are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment. The earnings of the Company are affected not only by general economic conditions but also by the monetary and fiscal policies of the United States and federal agencies, particularly the FRB. The FRB can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States Government securities and by its control of the discount rates applicable to borrowings by banks from the FRB. The actions of the FRB in these areas influence the growth of bank loans and leases, investments and deposits and affect the interest rates charged on loans and leases and paid on deposits. The FRB’s policies have had a significant effect on the operating results of commercial banks and are expected to continue to do so in the future. The nature and timing of any future changes in monetary policies are not predictable.

Extensions of Credit to Insiders and Transactions with Affiliates. The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to:

  •   a bank’s or bank holding company’s executive officers, directors and principal shareholders (i.e., in most cases, those persons who own, control or have power to vote more than 10% of any class of voting securities),
 
  •   any company controlled by any such executive officer, director or shareholder, or
 
  •   any political or campaign committee controlled by such executive officer, director or principal shareholder.

Loans and leases extended to any of the above persons must comply with loan-to-one-borrower limits, require prior full board approval when aggregate extensions of credit to the person exceed specified amounts, must be made on substantially the same terms (including interest rates and collateral) as, and follow credit-underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with non-insiders, and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, Regulation O provides that the aggregate limit on extensions of credit to all insiders of a bank as a group cannot exceed the bank’s unimpaired capital and unimpaired surplus. Regulation O also prohibits a bank from paying an overdraft on an account of an executive officer or director, except pursuant to a written pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or a written pre-authorized transfer of funds from another account of the officer or director at the bank.

Consumer Protection Laws and Regulations. The banking regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations. The Company is subject to many federal consumer protection statutes and regulations, some of which are discussed below.

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The Community Reinvestment Act (the “CRA”) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial institution. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” In its last examination for CRA compliance, as of October 2002, the Bank was rated “satisfactory.”

The Equal Credit Opportunity Act (the “ECOA”) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.

The Truth in Lending Act (the “TILA”) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.

The Fair Housing Act (the “FH Act”) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.

The Home Mortgage Disclosure Act (the “HMDA”), in response to public concern over credit shortages in certain urban neighborhoods, requires public disclosure of information that shows whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.

The Right to Financial Privacy Act (the “RFPA”) imposes a new requirement for financial institutions to provide new privacy protections to consumers. Financial institutions must provide disclosures to consumers of its privacy policy, and state the rights of consumers to direct their financial institution not to share their nonpublic personal information with third parties.

Finally, the Real Estate Settlement Procedures Act (the “RESPA”) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts.

Penalties for noncompliance or violations under the above laws may include fines, reimbursement and other penalties. Due to heightened regulatory concern related to compliance with CRA, ECOA, TILA, FH Act, HMDA, RFPA and RESPA generally, the Company may incur additional compliance costs or be required to expend additional funds for investments in its local community.

Recent and Proposed Legislation. Our operations and the operations of the Bank are subject to extensive regulation by federal, state, and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of their respective operations. We believe that we are in substantial compliance in all material respects with all applicable federal, state and local laws, rules and regulations. Because our business and the business of the Bank is

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highly regulated, the laws, rules and regulations applicable to each of them are subject to regular modification and change.

From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. Certain of the potentially significant changes which have been enacted recently and others, which are currently under consideration by Congress or various regulatory agencies, are discussed below.

Sarbanes-Oxley Act. On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting fraud. The Act applies to publicly reporting companies. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the bill restricts provision of both auditing and consulting services by accounting firms. To maintain auditor independence, any non-audit services being provided to an audit client will require pre-approval by the company’s audit committee members. In addition, the audit partners must be rotated.

The Act also requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, or SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Act, legal counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. The Act also requires officers to forfeit certain bonuses and profits under certain circumstances. Specifically, if an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall be required to reimburse the issuer for (1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission (SEC) of the financial document embodying such financial reporting requirement; and (2) any profits realized from the sale of securities of the issuer during that 12-month period.

Longer prison terms and increased penalties will also be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives are restricted. The Act accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company’s securities within twenty-four hours.

The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statements materially misleading. The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to shareholders. In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) accounting principles generally accepted in the United States of America and filed with the SEC reflect all material correcting adjustments that are identified by a “registered public accounting firm” in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC.

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USA PATRIOT Act. In the wake of the tragic events of September 11th, on October 26, 2001, the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, referred to as the USA PATRIOT Act. Under the USA PATRIOT Act, financial institutions are subject to prohibitions regarding specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps:

  •   To conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction,
 
  •   To ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions,
 
  •   To ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner, and
 
  •   To ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

The USA PATRIOT Act sets forth minimum standards for anti-money laundering programs, including:

  •   The development of internal policies, procedures, and controls,
 
  •   The designation of a compliance officer,
 
  •   An ongoing employee training program, and
 
  •   An independent audit function to test the programs.

The board of directors of the Bank adopted comprehensive policies and procedures to address the requirements of the USA PATRIOT Act.

Financial Services Modernization Legislation Act. On November 12, 1999 the Gramm-Leach-Bliley Act of 1999, also known as the Financial Services Modernization Act, was signed into law. The Financial Services Modernization Act is intended to modernize the banking industry by removing barriers to affiliation among banks, insurance companies, the securities industry and other financial service providers. It provides financial organizations with the flexibility of structuring such affiliations through a holding company structure or through a financial subsidiary of a bank, subject to certain limitations. The Financial Services Modernization Act establishes a new type of bank holding company known as a financial holding company that may engage in an expanded list of activities that are financial in nature, which include securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking.

The Financial Services Modernization Act also sets forth a system of functional regulation that makes the FRB the “umbrella supervisor” for holding companies, while providing for the supervision of the holding company’s subsidiaries by other federal and state agencies. A bank holding company may not become a financial holding company if any of its subsidiary financial institutions are not well-capitalized or well-managed. Further, each bank subsidiary of the holding company must have received at least a satisfactory CRA rating. The Financial Services Modernization Act also expands the types of financial activities a national bank may conduct through a financial subsidiary, addresses state regulation of insurance, provides privacy protection for nonpublic customer information of financial institutions, modernizes the FHLB system and makes miscellaneous regulatory improvements. The FRB and the Secretary of the Treasury must coordinate their supervision regarding approval of new financial activities to be conducted through a financial holding company or through a financial subsidiary of a bank. While the provisions of the Financial Services Modernization Act regarding activities that may be conducted through a financial subsidiary directly apply only to national banks, those provisions indirectly apply to state-chartered banks.

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In addition, the Bank is subject to other provisions of the Financial Services Modernization Act, including those relating to CRA, privacy and safe-guarding confidential customer information, regardless of whether we elect to become a financial holding company or to conduct activities through a financial subsidiary of the bank. We do not, however, currently intend to file a notice with the FRB to become a financial holding company or to engage in expanded financial activities through a financial subsidiary of the Bank.

We do not believe that the Financial Services Modernization Act will have a material adverse effect on our or the Bank’s operations in the near term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this Act may have the result of increasing the amount of competition that we and the bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than us and the Bank.

Other. Various other legislation, including proposals to overhaul the bank regulatory system and to limit the investments that a depository institution may make with insured funds, is introduced into Congress or the California Legislature from time to time. We cannot determine the ultimate effect that any potential legislation, if enacted, or regulations promulgated there under, would have upon the business, financial condition, results of operations or cash flows of us or the bank.

Recent Accounting Pronouncements

Other-Than-Temporary Impairment of Securities

In June 2004, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 includes additional guidance for evaluating and recording impairment losses on debt and equity investments, as well as disclosure requirements for investments that are deemed to be temporarily impaired. The proposed guidance indicates that an investor must have the intent and ability to hold an investment until a forecasted recovery of the fair value up to or beyond the cost of the investment in order to determine that any impairment is temporary. In September 2004, the FASB delayed the effective date of the recognition and measurement guidance of EITF 03-1, pending further deliberations. The disclosures for investments that are deemed temporarily impaired are included in Note 2 to the consolidated financial statements. Once the FASB has reached a final decision on the measurement and recognition provisions, the Company will evaluate the impact of the adoption of EITF 03-1.

Share-Based Payments

In December 2004, the FASB issued Statement Number 123 (revised 2004) (FAS 123 ®), Share-Based Payments. FAS 123 ® requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. The Company is required to apply FAS 123 ® on a modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, the Company may elect to adopt FAS 123 ® by restating previously issued financial statements, basing the expense on that previously reported in their pro forma disclosures required by FAS 123. FAS 123 ® is effective for the first reporting period beginning after June 15, 2005. Management has not completed its evaluation of the effect that FAS 123 ® will have, but believes that the effect will be consistent with its previous pro forma disclosures.

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Accounting for Loans or Debt Securities Acquired in a Transfer

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP). This SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It also includes such loans acquired in purchase business combinations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be accreted and requires that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or valuation allowance.

This SOP prohibits “carrying over” or creation of valuation allowances in the initial accounting for loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination.

This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. In management’s opinion, the adoption of this pronouncement will not have a material impact on the Company’s financial position or results of operations.

ITEM 2. PROPERTIES

Of the Company’s twelve depository branches, nine are owned and three are leased. In addition the Company owns two administrative facilities and leases one administrative lending office. The Company also owns one real estate investment property that is expected to be sold and leases one property related to the 2003 branch acquisition that is expected to be either sub-let to another party or to expire at the end of the lease term in early 2006.

         
    Owned Properties
 
35 South Lindan Avenue
Quincy, California (1)
  32 Central Avenue
Quincy, California (1)
  336 West Main Street
Quincy, California
 
       
120 North Pine Street
Portola, California
  121 Crescent Street
Greenville, California
  315 Birch Street
Westwood, California (2)
 
       
43163 Highway 299E
Fall River Mills, California
  510 North Main Street
Alturas, California
  3000 Riverside Drive
Susanville, California
 
       
255 Main Street
Chester, California
  8475 North Lake Boulevard
Kings Beach, California
  100 Grand Avenue
Susanville, California (3)
         
    Leased Properties
 
11429 Donner Pass Road
Truckee, California
  243 North Lake Boulevard
Tahoe City, California
  604 Main Street
Loyalton, California
 
       
12219 Business Park Drive
Truckee, California (1)
  11317 Deerfield Drive
Truckee, California (4)
   


(1)   Non-branch administrative or credit administrative offices.
 
(2)   The Westwood branch is a mortgaged property with an outstanding balance of $80,000 at December 31, 2004.
 
(3)   Real estate investment property (vacant land) not currently in use.
 
(4)   Former branch office (from 2003 branch acquisition) not currently in use.

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Total rental expenses under all leases, including premises, totaled $264,000, $179,000 and $85,000, in 2004, 2003 and 2002 respectively. The expiration dates of the leases vary, with the first such lease expiring during 2006 and the last such lease expiring during 2008. Future minimum lease payments in dollars are as follows:

         
Year Ending        
December 31,        
2005
  $ 245,000  
2006
    176,000  
2007
    118,000  
2008
    30,000  
 
     
Total
  $ 569,000  
 
     

The Company maintains insurance coverage on its premises, leaseholds and equipment, including business interruption and record reconstruction coverage. The branch properties and non-branch offices are adequate, suitable, in good condition and have adequate parking facilities for customers and employees. The Company and Bank are limited in their investments in real property under Federal and state banking laws. Generally, investments in real property are either for the Company and Bank use or are in real property and real property interests in the ordinary course of the Bank’s business.

ITEM 3. LEGAL PROCEEDINGS

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

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

No matters were submitted to vote of the security holders during the fourth quarter of the period covered by this report.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s common stock is quoted on the Over-The-Counter (OTC) Bulletin Board under the ticker symbol “PLBC”. As of December 31, 2004, there were 3,267,465 shares of the Company’s stock outstanding held by approximately 1,600 shareholders of record as of the same date. The following table shows the high and low prices for the common stock, for each quarter as reported by Yahoo Finance.

                           
              Closing Prices  
            Quarter,   Dividends     High     Low  
   
 
4th Quarter 2004
  $ 0.14     $ 22.00     $ 19.75  
 
3rd Quarter 2004
        $ 20.00     $ 18.35  
 
2nd Quarter 2004
  $ 0.14     $ 19.50     $ 17.50  
 
1st Quarter 2004
        $ 20.10     $ 18.15  
 
 
                       
 
4th Quarter 2003
  $ 0.12     $ 20.25     $ 18.75  
 
3rd Quarter 2003
        $ 20.00     $ 18.75  
 
2nd Quarter 2003
  $ 0.12     $ 19.25     $ 16.63  
 
1st Quarter 2003
        $ 17.50     $ 15.30  

Dividends paid to shareholders by the Company are subject to restrictions set forth in California General Corporation Law, which provides that a corporation may make a distribution to its shareholders if retained earnings immediately prior to the dividend payout are at least equal to the amount of the proposed distribution. As a bank holding company without significant assets other than its equity position in the Bank, the Company’s ability to pay dividends to its shareholders depends primarily upon dividends it receives from the Bank. Such dividends paid by the Bank to the Company are subject to certain limitations. See “Item 1 Business — Supervision and Regulation — Capital Standards”.

It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors (the “Board). The Board will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. The Board by resolution shall set the amount, the record date and the payment date of any dividend after considering numerous factors, including the Company’s regulatory capital requirements, earnings, financial condition and the need for capital for expanded growth and general economic conditions. Although no assurance can be given that cash or stock dividends will be paid in the future the Company’s dividend payout ratio over the last five years has averaged approximately 25%.

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Securities Authorized for Issuance under Equity Compensation Plans. The following table sets forth securities authorized for issuance under equity compensation plans as for December 31, 2004.

                         
                    Number of securities remaining
                    available for future issuance
    Number of securities to   Weighted-average   under equity compensation
    be issued upon exercise   exercise price of   plans (excluding securities
    of outstanding options   outstanding options   reflected in column (a))
Plan Category   (a)   (b)   (c)
     
Equity compensation plans approved by security holders
    306,713     $ 15.09       397,530  
Equity compensation plans not approved by security holders
  None     Not Applicable     None  
     
Total
    306,713     $ 15.09       397,530  
     

For additional information related to the above plans see Note 10 of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K.

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents a summary of selected financial data and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included under Item 8 – Financial Statements and Supplementary Data.

                                         
    At or for the year ended December 31,  
    2004     2003     2002     2001     2000  
    (dollars in thousands except per share information)  
Statement of Income
                                       
Interest income
  $ 20,076     $ 18,413     $ 18,389     $ 19,149     $ 18,455  
Interest expense
    2,914       3,013       4,038       6,373       6,724  
     
Net interest income
    17,162       15,400       14,351       12,776       11,731  
Provision for loan losses
    750       750       825       725       500  
Noninterest income
    4,818       3,775       3,278       2,854       2,167  
Noninterest expense
    15,583       13,126       11,604       10,480       9,431  
Provision for income taxes
    2,001       2,018       2,046       1,667       1,404  
     
Net income
  $ 3,646     $ 3,281     $ 3,154     $ 2,758     $ 2,563  
     
 
                                       
Balance sheet (end of period)
                                       
Total assets
  $ 417,346     $ 390,262     $ 325,650     $ 275,090     $ 243,601  
Total loans
  $ 266,913     $ 217,957     $ 207,721     $ 183,676     $ 164,004  
Allowance for loan losses
  $ 2,762     $ 2,564     $ 2,471     $ 2,153     $ 1,888  
Total deposits
  $ 378,567     $ 355,842     $ 293,941     $ 252,206     $ 223,256  
Total shareholders’ equity
  $ 27,891     $ 25,749     $ 23,286     $ 20,617     $ 18,165  
 
                                       
Balance sheet (period average)
                                       
Total assets
  $ 409,537     $ 339,353     $ 294,708     $ 257,581     $ 229,508  
Total loans
  $ 233,632     $ 214,178     $ 197,900     $ 176,746     $ 141,562  
Total deposits
  $ 373,253     $ 304,835     $ 268,773     $ 235,840     $ 209,794  
Total shareholders’ equity
  $ 27,045     $ 25,809     $ 22,184     $ 19,423     $ 17,194  
 
                                       
Capital ratios
                                       
Leverage ratio
    7.6 %     8.4 %     8.8 %     7.4 %     7.1 %
Tier 1 risk-based capital
    10.1 %     10.4 %     11.8 %     9.3 %     9.2 %
Total risk-based capital
    10.9 %     11.3 %     12.8 %     10.3 %     10.2 %
 
                                       
Asset quality ratios
                                       
Nonperforming loans/total loans
    0.44 %     0.40 %     0.86 %     0.71 %     0.32 %
Nonperforming assets/total assets
    0.29 %     0.22 %     0.59 %     0.52 %     0.34 %
Allowance for loan losses/total loans
    1.03 %     1.18 %     1.19 %     1.17 %     1.15 %
 
                                       
Performance ratios
                                       
Return on average assets
    0.89 %     0.97 %     1.07 %     1.07 %     1.12 %
Return on average equity
    13.5 %     12.7 %     14.2 %     14.2 %     14.9 %
Net interest margin
    4.77 %     5.16 %     5.48 %     5.57 %     5.84 %
Loans to Deposits
    70.5 %     61.3 %     70.7 %     72.8 %     73.5 %
Efficiency ratio
    70.9 %     68.5 %     65.8 %     67.1 %     67.9 %
 
                                       
Per share information
                                       
Basic earnings
  $ 1.12     $ 1.02     $ 0.99     $ 0.87     $ 0.82  
Diluted earnings
  $ 1.09     $ 0.99     $ 0.96     $ 0.86     $ 0.79  
Cash dividends
  $ 0.28     $ 0.24     $ 0.27     $ 0.20     $ 0.20  
Dividend payout ratio
    25.1 %     23.7 %     27.3 %     23.0 %     24.4 %
Book value
  $ 8.54     $ 7.93     $ 7.26     $ 6.46     $ 5.89  
Common shares outstanding at period end
    3,267,465       3,242,027       3,209,317       3,192,335       3,082,457  

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We are a bank holding company for Plumas Bank, a California state-chartered commercial bank. We derive our income primarily from interest received on real estate related, commercial and consumer loans and, to a lesser extent, interest on investment securities, fees received in connection with servicing deposit and loan deposit customers and fees from the sale or referral of loans. Our major operating expenses are the interest we pay on deposits and borrowings and general operating expenses. We rely on locally-generated deposits to provide us with funds for making loans.

We are subject to competition from other financial institutions and our operating results, like those of other financial institutions operating in California, are significantly influenced by economic conditions in California, including the strength of the real estate market. In addition, both the fiscal and regulatory policies of the federal and state government and regulatory authorities that govern financial institutions and market interest rates also impact the Bank’s financial condition, results of operations and cash flows.

One of our strategic objectives is to expand our banking service activities in the Truckee/Tahoe region and the adjacent communities. Consistent with this objective, in late 2003 we opened a de novo branch in Tahoe City. Also in late 2003 we bought five branches located within our existing service area from Placer Sierra Bank. Of the five branches purchased, two were located in the Truckee/Tahoe region, specifically in the communities of Truckee and Kings Beach. This helped further strengthen our presence in this region.

During 2004 we focused on migrating the liquidity generated from the 2003 branch purchases into higher-yielding loan balances.

Critical Accounting Policies

Our accounting policies are integral to understanding the financial results reported. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. The following is a brief description of our current accounting policies involving significant management valuation judgments.

Allowance for Loan Losses. The allowance for loan losses represents our best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries.

We evaluate our allowance for loan losses quarterly. We believe that the allowance for loan losses is a “critical accounting estimate” because it is based upon management’s assessment of various factors affecting the collectibility of the loans, including current economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans.

We determine the appropriate level of the allowance for loan losses, primarily on an analysis of the various components of the loan portfolio, including all significant credits on an individual basis. We segment the loan portfolio into as many components as practical. Each component has similar characteristics, such as risk classification, past due status, type of loan or lease, industry or collateral.

We cannot provide you with any assurance that further economic difficulties or other circumstances which would adversely affect our borrowers and their ability to repay outstanding loans will not occur which would be reflected in increased losses in our loan portfolio, which could result in actual losses that exceed reserves previously established.

Available for Sale Securities. Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires that available-for-sale securities be carried at

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fair value. We believe this is a “critical accounting estimate” in that the fair value of a security is based on quoted market prices or if quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments. Adjustments to the available-for-sale securities fair value impact the consolidated financial statements by increasing or decreasing assets and shareholders’ equity.

Deferred Income Taxes. Deferred income taxes reflect the estimated future tax effects of temporary differences between the reported amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced.

Impairment of Core Deposit Intangible. The core deposit intangible represents the excess of the premiums paid over the fair value of the assets and liabilities acquired in the branch acquisitions. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets and SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the core deposit intangible will be amortized over its expected useful life and will evaluated for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the fair value of the asset is determined to be less than the carrying amount, the core deposit intangible will be written down through a charge to operations.

Stock-Based Compensation. The Company accounts for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Since the Company’s stock option plan provides for the issuance of options at a price of no less than the fair market value at the date of the grant, no compensation expense is recognized in the financial statements unless the options are modified after the grant date.

In December 2004, the Financial Accounting Standards Board issued Statement Number 123 (revised 2004) (“FAS 123 (R)”), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. The Company is required to apply FAS 123 (R) on a modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Management believes that the effect of FAS 123 (R) will be consistent with its pro forma disclosures included in Note 2 to the Consolidated Financial Statements in Item 8 — Financial Statements and Supplementary Data. The fair value of each option is estimated on the date of grant and amortized over the service period using an option pricing model. Critical assumptions that affect the estimated fair value of each option include expected stock price volatility, dividend yields, option life and forfeiture rates and the risk-free interest rate.

The following discussion is designed to provide a better understanding of significant trends related to the Company’s financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. It pertains to the Company’s financial condition, changes in financial condition and results of operations as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004. The discussion should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto and the other financial information appearing elsewhere herein.

Overview

The Company’s net income increased $365,000, or 11.1%, to $3,646,000 for the year ended December 31, 2004 from $3,281,000 for the same period in 2003. Net income was $3,154,000 for the year ended December 31, 2002. The primary contributors to the increase in net income for 2004 were a $1.7 million increase in interest income and a $1 million increase in non-interest income largely offset by a $2.5 million increase in non-interest expenses.

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Total assets at December 31, 2004 increased $27 million, or 7%, to $417 million from $390 million at December 31, 2003. Growth in total assets was concentrated in the loan portfolio. The loan portfolio grew $49 million, or 23%, to $264 million during 2004. Growth in loans was funded by growth in deposits and declines in Federal funds sold and cash and due from bank balances. Deposits grew $23 million, or 6%, to $379 million at December 31, 2004 from $356 million at December 31, 2003 while Federal funds sold and cash and due from banks decreased $19 million.

The return on average assets was 0.89% for 2004, down from 0.97% for 2003. The return on average equity was 13.5% for 2004, up from 12.7% for 2003. Although the Company reported its sixteenth consecutive year of earnings growth in 2004, this year’s growth was outpaced by growth in assets. Average assets increased $70 million, or 21%, due in large part to the acquisition, in November 2003 of five branches from Placer Sierra Bank.

Results of Operations

Net Interest Income before Provision for Loan Losses

The following table presents for the years 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:

                                                                         
    Year ended December 31,  
    2004     2003     2002  
            Interest     Rates             Interest     Rates             Interest     Rates  
    Average     income/     earned     Average     income/     earned     Average     income/     earned  
    balance     expense     / paid     balance     expense     / paid     balance     expense     / paid  
    (dollars in thousands)  
Assets
                                                                       
Federal funds sold
  $ 12,729     $ 163       1.28 %   $ 11,276     $ 116       1.03 %   $ 17,465     $ 275       1.57 %
Investment securities(1)
    113,684       3,483       3.06       72,745       2,221       3.05       46,628       2,065       4.43  
Total loans (2)(3)
    233,632       16,430       7.03       214,178       16,076       7.51       197,900       16,049       8.11  
                                     
Total earning assets
    360,045       20,076       5.58 %     298,199       18,413       6.17 %     261,993       18,389       7.02 %
 
                                                                 
Cash and due from banks
    23,813                       21,517                       16,201                  
Other assets
    25,679                       19,637                       16,514                  
 
                                                                 
Total assets
  $ 409,537                     $ 339,353                     $ 294,708                  
 
                                                                 
 
                                                                       
Liabilities and shareholders’ equity
                                                                       
Interest bearing demand deposits
  $ 44,244       58       0.13 %   $ 35,668       79       0.22 %   $ 33,070       114       0.34 %
Money market deposits
    65,026       490       0.75       58,814       498       0.85       51,776       775       1.50  
Savings deposits
    64,472       292       0.45       48,866       310       0.63       39,094       432       1.11  
Time deposits
    93,684       1,760       1.88       83,186       1,816       2.18       84,195       2,624       3.12  
Other borrowings(4)
    6,401       314       4.91       6,375       310       4.86       1,617       93       5.75  
                                     
Total interest bearing liabilities
    273,827       2,914       1.06 %     232,909       3,013       1.29 %     209,752       4,038       1.93 %
                                                             
Noninterest bearing demand deposits
    105,827                       78,301                       60,638                  
Other liabilities
    2,838                       2,334                       2,134                  
Shareholders’ equity
    27,045                       25,809                       22,184                  
 
                                                                 
Total liabilities and shareholders’ equity
  $ 409,537                     $ 339,353                     $ 294,708                  
 
                                                                 
Net interest income
          $ 17,162                     $ 15,400                     $ 14,351          
 
                                                                 
Net interest spread (5)
                    4.52 %                     4.88 %                     5.09 %
Net interest margin (6)
                    4.77 %                     5.16 %                     5.48 %

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(1)   Interest income is reflected on an actual basis and is not computed on a tax-equivalent basis.
 
(2)   Average nonaccrual loan balances of $1.6 million for 2004, $2.0 million for 2003 and $1.5 million for 2002 are included in average loan balances for computational purposes.
 
(3)   Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan fees of $317,000 for 2004, $585,000 for 2003 and $579,000 for 2002.
 
(4)   For the purpose of this schedule the interest expense related to the Company’s junior subordinated deferrable interest debentures is included in other borrowings.
 
(5)   Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
 
(6)   Net interest margin is computed by dividing net interest income by total average earning assets.

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The following table sets forth changes in interest income and interest expense, for the years 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:

                                                                 
    2004 compared to 2003     2003 compared to 2002  
    Increase (decrease) due to change in:     Increase (decrease) due to change in:  
    Average     Average                     Average     Average              
    Volume(1)     Rate(2)     Mix(3)     Total     Volume(1)     Rate(2)     Mix(3)     Total  
    (dollars in thousands)  
Interest-earning assets:
                                                               
Federal funds sold
  $ 15     $ 28     $ 4     $ 47     $ (98 )   $ (95 )   $ 34     $ (159 )
Investment securities
    1,250       8       4       1,262       1,156       (641 )     (359 )     156  
Loans
    1,460       (1,014 )     (92 )     354       1,320       (1,195 )     (98 )     27  
         
Total interest income
    2,725       (978 )     (84 )     1,663       2,378       (1,931 )     (423 )     24  
         
 
                                                               
Interest-bearing liabilities:
                                                               
Interest bearing demand deposits
    19       (32 )     (8 )     (21 )     9       (41 )     (3 )     (35 )
Money market deposits
    53       (55 )     (6 )     (8 )     106       (337 )     (46 )     (277 )
Savings deposits
    99       (89 )     (28 )     (18 )     108       (184 )     (46 )     (122 )
Time deposits
    229       (253 )     (32 )     (56 )     (31 )     (786 )     9       (808 )
Other borrowings
    1       3             4       273       (14 )     (42 )     217  
         
Total interest expense
    401       (426 )     (74 )     (99 )     465       (1,362 )     (128 )     (1,025 )
         
 
                                                               
Net interest income
  $ 2,324     $ (552 )   $ (10 )   $ 1,762     $ 1,913     $ (569 )   $ (295 )   $ 1,049  
         


(1)   The volume change in net interest income represents the change in average balance divided by the previous year’s rate.
 
(2)   The rate change in net interest income represents the change in rate divided by the previous year’s average balance.
 
(3)   The mix change in net interest income represents the change in average balance multiplied by the change in rate.

2004 compared to 2003. Net interest income before provision for loan losses is the difference between interest income and interest expense. Net interest income was $17.2 million for 2004, an increase of $1.8 million, or 11%, from $15.4 million for 2003. The increase in net interest income was attributed to volume increases in average loan and investment balances combined with declines in rates paid on deposits, partially offset by declines in loan yields and volume increases in average deposit balances. The average loan balances were $233.6 million for 2004, up $19.5 million, or 9%, from the $214.2 million for 2003. The average investment balances were $113.7 million for 2004, up $40.9 million, or 56%, from the $72.7 million for 2003. Offsetting the benefits of the increased loan volume was the continuing impact of the falling interest rate environment which began in 2001. Although rates began to rise during the second half of 2004, the average loan yield was 7.03% for 2004, down 48 basis points, or 6%, from the 7.51% for 2003.

Interest expense decreased $100,000, or 3%, to $2.9 million for 2004, down from $3.0 million for 2003. The decrease in interest expense was primarily attributed to rate decreases for all interest bearing deposits, with the largest declines in time and savings deposits. The rate decreases were offset by volume increases primarily in savings and time deposit balances. The average rate paid on time deposits was 1.88% for 2004, down 30 basis points, or 14%, from the 2.18% paid for 2003. The average rate paid on savings deposits was 0.45% for 2004, down 18 basis points, or 28%, from the 0.63% paid for 2003. The average savings deposit balances, were $64.5 million for 2004, up $15.6 million, or 32%, from the $48.9 million for 2003. The average time deposit balances, were $93.7 million for 2004, up $10.5 million, or 13%, from the $83.2 million for 2003.

Net interest margin is net interest income expressed as a percentage of average interest-earning assets. The net interest margin for 2004 declined 39 basis points to 4.77%, down from 5.16% for 2003. The adverse effects of the falling interest rate environment, which began in 2001, on the Company’s loan portfolio offset the positive affects of the increasing loan and investment balances and declining cost of funds and resulted in the decline in the net interest margin when comparing the periods of 2004 and 2003.

2003 compared to 2002. Net interest income was $15.4 million for 2003, an increase of $1.0 million, or 7%, from $14.4 million for 2002. The increase in net interest income was attributed to declines in rates paid on deposits combined with volume increases in average loan and investment balances, partially offset

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by declines in the yields on interest-earning assets. The average loan balances were $214.2 million for 2003, up $16.3 million, or 8%, from the $197.9 million for 2002. Offsetting the benefits of the increased loan volume was the continuing impact of the falling interest rate environment which began in 2001. The average loan yield was 7.51% for 2003, down 60 basis points, or 7%, from the 8.11% for 2002.

Interest expense decreased $1.0 million, or 25%, to $3.0 million for 2003, down from $4.0 million for 2002. The decrease in interest expense was primarily attributed to rate decreases for both time and money market deposits, slightly offset by volume increases in other borrowings. The average rate paid on time deposits was 2.18% for 2003, down 94 basis points, or 30%, from the 3.12% paid for 2002. The average rate paid on money market deposits was 0.85% for 2003, down 65 basis points, or 43%, from the 1.50% paid for 2002. The average other borrowings balances, which primarily represent junior subordinated deferrable interest debentures, were $6.4 million for 2003, up $4.8 million, or 294%, from the $1.6 million for 2002. In September of 2002, $6 million of junior subordinated debentures were issued by the Company.

The net interest margin for 2003 declined 32 basis points to 5.16%, down from 5.48% for 2002. The adverse effects of the falling interest rate environment, which began in 2001, on the Company’s interest-earning assets offset the positive affects of the declining cost of funds and increasing loan and investment balances and resulted in the decline in the net interest margin when comparing the periods of 2003 and 2002.

Provision for Loan Losses

The allowance for loan losses is maintained at a level that management believes will be adequate to absorb inherent losses on existing loans based on an evaluation of the collectibility of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. See the sections titled Asset Quality and Analysis of Allowance for Loan Losses for further discussion of loan quality trends and the provision for loan losses.

The Company recorded $750,000 in provision for loan losses for both 2004 and 2003 and $825,000 for 2002. There was no change in the level of the provision for loan losses from 2003 to 2004. Although there was an increase of $49 million, or 22%, in the loan portfolio during 2004, the affects of this loan growth on the provision were offset by a reduction in identified potential risks currently existing in the loan portfolio. Net charge-offs as a percentage of loans improved during 2004, declining to 0.26%, down 4 basis points, or 13%, from the 2003 level of 0.30%. Similarly, the reduction in the provision for loan losses in 2003 from 2002 was attributed to the general improvement in the overall credit quality of the loan portfolio. Nonaccrual loans ended 2003 with a balance of $847 thousand down $864 thousand, or 50%, from the $1.7 million 2002 year end balance. Additionally, loan growth for the year-ended 2003 was fairly modest at $10.2 million, or 5%. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to 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 that begins on page 29.

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Non-Interest Income

The following table sets forth the components of non-interest income for the years ended December 31, 2004, 2003 and 2002.

                                         
    Years Ended December 31,     Change during Year  
    2004     2003     2002     2004     2003  
    (dollars in thousands)  
Service charges
  $ 2,982     $ 1,988     $ 1,905     $ 994     $ 83  
Increase in cash surrender values of life insurance policies
    415       313       217       102       96  
Merchant processing
    263       235       205       28       30  
Investment services
    175       134       144       41       (10 )
Loan origination and servicing
    184       272       181       (88 )     91  
Gain on sale of investment securities, net
    235       328       117       (93 )     211  
Gain on sale of loans, net
    128       203       191       (75 )     12  
Other income
    436       302       318       134       (16 )
         
Total non-interest income
  $ 4,818     $ 3,775     $ 3,278     $ 1,043     $ 497  
         

2004 compared to 2003. During 2004, total non-interest income increased $1,043,000, or 28%, to $4.8 million, up from $3.8 million for 2003. The increase in non-interest income was primarily the result of increases in service charge revenue, increases in the cash surrender value of company-owned life insurance policies (“COLI”) and gains on sale of real estate slightly offset by declines in total gains recorded on the sale of loans and investment securities and fewer commissions on mortgage loans processed.

A large portion of the growth in service charge revenue resulted from an increase in the Company’s overall number of fee generating accounts. As a result of the acquisition in mid-November 2003 of five branches from a competitor, the Company began servicing over 7,300 new deposit accounts. In addition, during April 2004 the Company implemented a new overdraft privilege program for select deposit relationships thereby increasing service charge revenue. Lastly, beginning in 2004 the Company separated fee income from expenses related to its outsourced ATM and debit card activity. Largely as a result of this change, service fee income related to ATM and debit cards increased $332 thousand however, expenses related to these products recorded as outside service fees under non-interest expense increased by $173 thousand.

During the last half of 2003, the Company increased its holding in COLI by $3.2 million to provide additional coverage for an executive officer of the Company. As a result, during 2004 the Company realized a full year’s tax-exempt earnings from these policies as opposed to only half a year in 2003.

The increase in “other income” resulted from the Company recording gains of $135 thousand in June 2004 on the sale of two unused banking offices that were acquired from a competitor as part of the $45.5 million deposit purchase in mid-November 2003.

During the second half of 2004, as the rate environment began to shift upward, opportunities to record gains on the sale of investment securities significantly diminished.

Lastly, the increase in the rate environment also resulted in fewer mortgage loans referrals to our third party processor resulting in a decline in loan origination fee income as well as fewer non-conforming and specialty mortgage loans processed internally and sold by the Company.

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2003 compared to 2002. During 2003, total non-interest income increased $497,000, or 15%, to $3.8 million, up from $3.3 million for 2002. The increase in non-interest income is primarily attributable to gains on the sale of investment securities, earnings on additional company-owned life insurance policies (“COLI”), mortgage loan referral fees and increases in the number of fee generating accounts. Throughout 2003 the Company took advantage of opportunities to record gains by selling $32.4 million of U.S. treasury and agency available-for-sale investment securities, gains on these securities amounted to $328 thousand. Also during 2003 the Bank increased its investment in COLI by $3.2 million to provide additional coverage for an executive officer of the Company. The increase in COLI balances resulted in an additional $96 thousand in tax-exempt earnings on the policies. Lastly, during 2003 the outsourcing of the mortgage lending unit resulted in commissions of $86 thousand on mortgage loans processed by our third-party mortgage service.

Non-Interest Expense

The following table sets forth the components of other non-interest expense for the years ended December 31, 2004, 2003 and 2002.

                                         
    Years Ended December 31,     Change during Year  
    2004     2003     2002     2004     2003  
    (dollars in thousands)  
Salaries and employee benefits
  $ 8,831     $ 7,442     $ 6,269     $ 1,389     $ 1,173  
Occupancy and equipment
    2,713       2,343       1,794       370       549  
Professional fees
    596       392       673       204       (281 )
Business development
    389       357       371       32       (14 )
Armored car and courier
    371       342       318       29       24  
Advertising and promotion
    351       288       260       63       28  
Telephone
    346       357       347       (11 )     10  
Deposit premium amortization
    299       161       135       138       26  
Stationery and supplies
    292       349       324       (57 )     25  
Director compensation
    284       196       228       88       (32 )
Postage
    261       253       184       8       69  
Outside service fees
    236       201       185       35       16  
Insurance
    236       164       171       72       (7 )
Loan expenses
    191       170       244       21       (74 )
Other expense
    187       111       101       76       10  
         
Total non-interest expense
  $ 15,583     $ 13,126     $ 11,604     $ 2,457     $ 1,522  
         

2004 compared to 2003. During 2004, non-interest expense increased $2.5 million, or 19%, to $15.6 million, up from $13.1 million for 2003. The increase in non-interest expense was primarily the result of increases in salaries and employee benefits, occupancy and equipment, professional fees and deposit premium amortization.

During 2004 salaries and employee benefits increased $1.4 million, or 19%, due primarily to the staffing additions related to the full years operations of the Bank’s three new branch offices, expansion of the Company’s centralized lending function, staffing additions to manage the overall growth of the Company and increased employee benefit costs related to health-care and the Company’s salary continuation plans.

Occupancy and equipment expense increased $370 thousand, or 16%, over the prior year primarily as a result of additional depreciation and operating costs associated with the three new branches. These new branches began serving the communities of Tahoe City, Kings Beach and Loyalton in November 2003. Other increases in occupancy and equipment relate to depreciation on capitalized upgrades to the Company’s network systems.

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Professional fees increased $204 thousand, or 52%, from 2003 to 2004. The increases in professional fees related primarily to several consulting projects conducted in 2004. These projects included an operational and efficiency review of the lending function, development of a plan to enhance the customer relationship management (CRM) process and development and implementation of the new overdraft privilege program.

Lastly, deposit premium amortization increased $138 thousand, or 86%, over the prior year as a result of additional premium amortization related to $45.5 million of deposits purchased in November 2003.

2003 compared to 2002. During 2003, non-interest expense increased $1.5 million, or 13%, to $13.1 million, up from $11.6 million for 2002. The increase in non-interest expense is primarily due to increased salary and benefit costs, occupancy and equipment depreciation expense partially offset by decreases in professional fees.

Salary and benefit costs increased $1.2 million, or 19% from 2002 to 2003. The increase in salary and benefit costs was the result of continued expansion of the Company’s centralized lending efforts, additional personnel as a result of expanding the branch network with the addition of three new branches, other staffing additions to manage the overall growth and expansion of the Company and increased employee benefit costs related to health-care, executive officer salary continuation plans and workers compensation expense.

Occupancy and equipment expense increased $549 thousand, or 31% from 2002 to 2003. The increases to occupancy expense related primarily to lease costs for both the de novo branch in Tahoe City, leased centralized lending facilities in Truckee, depreciation costs associated with the Company’s new credit administration facility and remodeling costs associated with the Company’s administrative headquarters. Although opened for business in November 2003, the Tahoe City office was leased for the majority of 2003. The increases to equipment expense related 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 and installation of a new automated teller platform system.

Professional fees decreased $281 thousand, or 42%, from 2002 to 2003. The decreases in professional fees related to significant 2002 information technology consulting projects and legal costs incurred to complete the merger and reorganization of Plumas Bank under the Company.

Financial Condition

Loan Portfolio. 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.

The Company’s largest historical lending categories are real estate mortgage loans, commercial loans and consumer loans. These categories accounted for approximately 38.3%, 16.0% and 22.1%, respectively of the Company’s total loan portfolio at December 31, 2004, and approximately 31.0%, 23.4% and 21.4% respectively, of the Company’s total loan portfolio at December 31, 2003. In addition, the Company’s real estate-related loans, including real estate mortgage loans, real estate construction loans, consumer equity lines of credit, and agricultural loans secured by real estate comprised 66.9% of the total loan portfolio at December 31, 2004. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, and Sierra. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these California economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of the Company’s operations in these areas of California exposes it to greater risk than other

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banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions in California.

The rates of interest charged on variable rate loans are set at specific increments in relation to the Company’s published lending rate and vary as the Company’s lending rate changes. At December 31, 2004 and 2003, approximately 73% and 70%, respectively, of the Company’s loan portfolio was compromised of variable rate loans. While real estate mortgage, commercial and consumer lending remain the foundation of the Company’s historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types. In addition, the Company remains committed to the agricultural industry in Northeastern California and will continue to pursue high quality agricultural loans as an important component of its overall loan portfolio. Agricultural loans include both commercial and commercial real estate loans. At December 31, 2004, the Company’s agricultural loans increased slightly to $31.1 million, or 11.6% of the Company’s total loan portfolio, from $26.5 million, or 12.2%, at December 31, 2003.

The following table sets forth the amounts of loans outstanding by category as of the dates indicated.

                                         
    At December 31,  
    2004     2003     2002     2001     2000  
    (dollars in thousands)  
Real estate – mortgage
  $ 102,125     $ 67,532     $ 66,039     $ 50,865     $ 48,878  
Real estate – construction
    31,964       26,194       15,175       13,705       10,118  
Commercial
    42,689       51,073       52,432       49,910       43,464  
Consumer
    59,068       46,621       48,465       47,280       43,793  
Agriculture
    31,067       26,537       25,610       21,916       17,751  
     
Total loans
    266,913       217,957       207,721       183,676       164,004  
Less:
                                       
Deferred fees
    260       530       601       748       664  
Allowance for loan losses
    2,762       2,564       2,471       2,153       1,888  
     
Net loans
  $ 263,891     $ 214,863     $ 204,649     $ 180,775     $ 161,452  
     

The following table sets forth the maturity/repricing of gross loan categories as of December 31, 2004. Also provided with respect to such loans are the amounts due after one year, classified according to sensitivity to changes in interest rates:

                                 
       
            After One              
    Within     Through     After        
    One Year     Five Years     Five Years     Total  
    (dollars in thousands)  
Real estate – mortgage
  $ 27,123     $ 50,000     $ 25,002     $ 102,125  
Real estate – construction
    20,320       8,381       3,263       31,964  
Commercial
    27,126       11,818       3,745       42,689  
Consumer
    31,792       12,023       15,253       59,068  
Agriculture
    17,668       8,153       5,246       31,067  
     
Total
  $ 124,029     $ 90,375     $ 52,509     $ 266,913  
     
Loans maturing after one year with:
                               
Fixed interest rates
          $ 29,275     $ 33,824     $ 63,099  
Variable interest rates
            61,100       18,685       79,785  
             
Total
          $ 90,375     $ 52,509     $ 142,884  
             

Analysis of Asset Quality and Allowance for Loan Losses. The Company attempts to minimize credit risk through its underwriting and credit review policies. The Company’s credit review process includes internally prepared credit reviews as well as contracting with an outside firm to conduct periodic credit reviews. The Company’s management and lending officers evaluate the loss exposure of classified and impaired loans on a bi-weekly basis, or more frequently as loan conditions change. The Board of Directors

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through the loan committee, reviews the asset quality of new and criticized loans on a monthly basis and reports the findings to the full Board of Directors. In management’s opinion, this loan review system facilitates the early identification of potential criticized loans.

Net charge-offs during the year ended December 31, 2004 totaled $552,000, or 0.21% of total loans, compared to $657,000, or 0.30% of total loans, for the comparable period in 2003 and $507,000, or 0.24% of total loan for the comparable period of 2002. The allowance for loan losses stood at 1.03% of total loans as of December 31, 2004, versus 1.18% of total loans as of December 31, 2003.

The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses. Loan losses are charged to and recoveries are credited to the allowance for loan losses. The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in loans. The adequacy of the allowance for loan losses is based upon management’s continuing assessment of various factors affecting the collectibility of loans; including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for loan losses, independent credit reviews, current charges and recoveries to the allowance for loan losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectibility of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy. When determining the adequacy of the allowance for loan losses, the Company follows the guidelines set forth in the Interagency Policy Statement on the Allowance for Loan and Lease Losses (“Statement”) issued jointly by banking regulators during July 2001. The Statement outlines characteristics that should be used in segmentation of the loan portfolio for purposes of the analysis including risk classification, past due status, type of loan, industry or collateral in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5 “Accounting for Contingencies”. It also outlines factors to consider when adjusting the loss factors for various segments of the loan portfolio. In addition, the Company incorporates the Securities and Exchange Commission Staff Accounting Bulletin No. 102, which represents the SEC staff’s view related to methodologies and supporting documentation for the Allowance for Loan and Lease Losses that should be observed by all public companies in complying with the federal securities laws and the Commission’s interpretations.

The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements, which include but are not limited to:

  •   specific allocation for problem graded loans (“classified loans”),
 
  •   general or formula allocation,
 
  •   and discretionary allocation based on loan portfolio segmentation

In addition, the Company’s methodology incorporates the following accounting pronouncements in determining the adequacy of the allowance related to impaired loans:

  •   Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and
 
  •   SFAS 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.”

Specific allocations are established based on management’s periodic evaluation of loss exposure inherent in classified, impaired, and other loans in which management believes that the collection of principal and interest under the original terms of the loan agreement are in question. For purposes of this analysis, classified loans are grouped by internal risk classifications which are “special mention”, “substandard”, “doubtful”, and “loss”. Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends, which if not corrected, could jeopardize repayment of the loan and result in further downgrade. Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A loan classified as “doubtful” has critical

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weaknesses that make full collection of the obligation improbable. Classified loans, as defined by the Company, include loans categorized as substandard and doubtful. Loans classified as loss are immediately charged off.

Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on the Company’s historical loss experience and on the internal risk grade of those loans and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. The formula allocation analysis incorporates loan losses over the past twelve quarters (three years). Loss factors are adjusted to recognize and quantify the estimated loss exposure resulting from changes in market conditions and trends in the Company’s loan portfolio.

The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.

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

                                         
    At December 31,  
    2004     2003     2002     2001     2000  
    (dollars in thousands)  
Balance at beginning of period
  $ 2,564     $ 2,471     $ 2,153     $ 1,888     $ 1,608  
     
Charge-offs:
                                       
Commercial and agricultural
    103       295       195       215       80  
Real estate mortgage
          26       13              
Real estate construction
          6                    
Consumer
    600       520       393       345       250  
     
Total charge-offs
    703       847       601       560       330  
     
Recoveries:
                                       
Commercial and agricultural
    15       45       21       15       17  
Real estate mortgage
                             
Real estate construction
                             
Consumer
    136       145       73       85       93  
     
Total recoveries
    151       190       94       100       110  
     
Net charge-offs
    552       657       507       460       220  
Provision for loan losses
    750       750       825       725       500  
     
Balance at end of period
  $ 2,762     $ 2,564     $ 2,471     $ 2,153     $ 1,888  
     
Net charge-offs during the period to average loans
    0.24 %     0.31 %     0.26 %     0.26 %     0.16 %
Allowance for loan losses to total Loans
    1.03 %     1.18 %     1.19 %     1.17 %     1.15 %

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

Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. The

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amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary differences between impaired loans and nonperforming loans is that impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but also may include problem loans other than delinquent loans.

The following table sets forth the amount of the Company’s nonperforming assets as of the dates indicated. None of the Company’s loans were troubled debt restructurings.

                                         
    At December 31,  
    2004     2003     2002     2001     2000  
    (dollars in thousands)  
Nonaccrual loans
  $ 1,171     $ 847     $ 1,711     $ 1,203     $ 522  
Loans past due 90 days or more and still accruing
    36       29       75       98       3  
     
Total nonperforming loans
    1,207       876       1,786       1,301       525  
Other real estate owned
                125       122       300  
     
Total nonperforming assets
  $ 1,207     $ 876     $ 1,911     $ 1,423     $ 825  
     
Interest income forgone on nonaccrual loans
  $ 25     $ 51     $ 148     $ 72     $ 31  
Interest income recorded on a cash basis on nonaccrual loans
  $ 63     $ 143     $ 29     $ 1     $  
Nonperforming loans to total loans
    0.45 %     0.40 %     0.86 %     0.71 %     0.32 %
Nonperforming assets to total assets
    0.29 %     0.22 %     0.59 %     0.52 %     0.34 %
Allowance for loan losses to nonperforming loans
    229 %     293 %     138 %     165 %     360 %

At December 31, 2004 and 2003, the Company’s recorded investment in loans for which impairment has been recognized totaled $1.2 million and $0.8 million, respectively. The specific allowance for loan losses related to impaired loans was $121,000 and $59,000 at December 31, 2004 and 2003, respectively. The average recorded investment in impaired loans was $1.6 million, $2.0 million and $1.4 million during the years ended December 31, 2004, 2003 and 2002, respectively. In most cases, the Company uses the cash basis method of income recognition for impaired loans. For the years ended December 31, 2004, 2003 and 2002, the Company recognized $63,000, $143,000 and $29,000, respectively, of income on such loans.

It is the policy of management to make additions to the allowance for loan losses so that it remains adequate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at December 31, 2004 is adequate. However, the determination of the amount of the allowance is judgmental and subject to economic conditions which cannot be predicted with certainty. Accordingly, the Company cannot predict whether charge-offs of loans in excess of the allowance may be required in future periods.

Investment Portfolio and Federal Funds Sold. Total investment securities and Federal funds sold decreased $7.9 million, or 7%, to $113.3 million as of December 31, 2004, down from $121.2 million at December 31, 2003. The slight decline in these balances in 2004 directly relates to our planned migration of assets, acquired from the recent branch and deposit purchase, from the investment securities portfolio to the loan portfolio. In late 2003, when the Company initially received funds for assuming the deposit liabilities of the acquired branches, these funds were directed into shorter-term investment securities. However, over time we plan to transition these assets into higher-yielding loan balances.

The composition of the portfolio as of the end of 2004 was fairly consistent with the composition of the portfolio as of the end of 2003. The investment portfolio balances in U.S. Treasuries, U.S. Government agencies, corporate debt securities and municipal obligations comprised 9%, 69%, 9% and 13% respectively, at December 31, 2004 versus 10%, 72%, 11% and 7% respectively, at December 31, 2003.

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Two trends that continue in the investment portfolio are the growth in holdings of mortgage-backed securities and tax-exempt municipal securities.

During 2003, the Company began investing in mortgage-backed securities of U.S. Government agencies to increase interest income and provide cash flows for liquidity and reinvestment opportunities. At December 31, 2004, total balances in these mortgage-backed securities amounted to $20.6 million. Although these pass-through securities typically have final maturities of between ten and fifteen years, the pass-through nature of the monthly principal and interest payments is expected to significantly reduce the average life of these securities.

Lastly, the Company has continued to expand its holdings in longer-term municipal securities. In addition to providing diversified insured investment holdings, these securities provide attractive tax equivalent yields for the Company. Since the majority of the interest earnings on these securities are not taxable, the growth in municipal securities has resulted in significantly lowering the effective tax rate of the Company.

Investment Portfolio. The Company classifies its investment securities as available-for-sale or held-to-maturity. Plumas Bancorp’s intent is to hold all securities classified as held-to-maturity until maturity and management believes that it has the ability to do so. Securities classified as available-for-sale may be sold to implement the Company’s asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors.

The following tables summarize the values of the Company’s investment securities held on the dates indicated:

                         
    December 31,  
Available-for-sale (fair value)   2004     2003     2002  
    (dollars in thousands)  
U.S. Treasuries
  $ 10,055     $ 11,907     $ 8,654  
U.S. Government agencies
    57,083       70,442       42,201  
Corporate debt securities
    9,501       10,983        
U.S. Government agency mortgage-backed Securities
    20,640       12,832        
     
Total
  $ 97,279     $ 106,164     $ 50,855  
     
                         
    December 31,  
Held-to-maturity (amortized cost)
  2004     2003     2002  
    (dollars in thousands)  
U.S. Government agencies
  $ 507     $ 512     $ 2,753  
Corporate debt securities
    500       1,502       3,313  
Municipal obligations
    14,966       7,705       4,515  
     
Total
  $ 15,973     $ 9,719     $ 10,581  
     

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The following tables summarize the maturities of the Company’s securities at their carrying value and their weighted average yields at December 31, 2004. Yields on tax-exempt municipal obligations have been computed using a cost of funds rate of 0.71%.

                                                                                 
(dollars in thousands)                                                            
Available-for-sale   Within One Year     One to Five Years     Five to Ten Years     Over Ten Years     Total  
(market Value)   Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
     
U.S. Treasuries
  $       %   $ 10,055       2.59 %   $       %   $       %   $ 10,055       2.59 %
U.S. Government agencies
    10,984       2.06 %     46,099       2.69 %           %           %     57,083       2.57 %
Corporate debt securities
          %     9,501       3.25 %           %           %     9,501       3.25 %
U.S. Government agency mortgage-backed securities
          %           %     15,272       3.76 %     5,368       4.36 %     20,640       3.91 %
                     
Total
  $ 10,984       2.06 %   $ 65,655       2.76 %   $ 15,272       3.76 %   $ 5,368       4.36 %   $ 97,279       2.92 %
                     
Held-to-maturity (book value)
                                                                               
U.S. Government agencies
  $ 500       6.03 %   $ 7       5.13 %   $       %   $       %   $ 507       6.02 %
Corporate debt securities
    500       6.02 %           %           %           %     500       6.02 %
Municipal obligations
    795       4.62 %     1,756       6.82 %     3,652       5.71 %     8,763       5.53 %     14,966       5.68 %
                     
Total
  $ 1,795       5.40 %   $ 1,763       6.81 %   $ 3,652       5.71 %   $ 8,763       5.53 %   $ 15,973       5.70 %
                     

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Deposits. Total deposits were $378.6 million as of December 31, 2004, an increase of $22.7 million, or 6%, from the December 31, 2003 balance of $355.8 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. As of December 31, 2004, non-interest bearing demand deposits and interest checking deposits increased to 40.7% of total deposits versus 38.9% at December 31, 2003. Money market and savings deposits decreased slightly to 34.3% of total deposits as of December 31, 2004 compared to 34.9% as of December 31, 2003. Time deposits decreased to 25.0% of total deposits as of December 31, 2004 compared to 26.2% at December 31, 2003.

Deposit Structure. Deposits represent the Bank’s primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. The Company experiences to a small degree some seasonality with the slower growth period between November through April, and the higher growth period May through October. In order to assist in meeting any funding demands, the Company maintains unsecured borrowing arrangements with several correspondent banks in addition to a secured borrowing arrangement with the Federal Home Loan Bank for longer more permanent funding needs. The Company does not accept brokered deposits.

The following chart sets forth the distribution of the Company’s average daily deposits for the periods indicated.

                                                 
    2004     2003     2002  
    Average             Average             Average        
    Balance     Rate %     Balance     Rate %     Balance     Rate %  
    (dollars in thousands)  
Non-interest-bearing deposits
  $ 105,827             $ 78,301             $ 60,638          
 
                                         
Interest-bearing deposits:
                                               
NOW accounts
    44,244       0.13 %     35,668       0.22 %     33,070       0.34 %
Money market accounts
    65,026       0.75 %     58,814       0.85 %     51,776       1.50 %
Savings
    64,472       0.45 %     48,866       0.63 %     39,094       1.11 %
Time deposits
    93,684       1.88 %     83,186       2.18 %     84,195       3.12 %
 
                                         
Total interest bearing deposits
    267,426       0.97 %     226,534       1.19 %     208,135       1.90 %
 
                                         
Total deposits
  $ 373,253       0.70 %   $ 304,835       0.89 %   $ 268,773       1.47 %
 
                                         

The Company’s time deposits of $100,000 or more had the following schedule of maturities at December 31, 2004:

         
    Amount  
    (dollars in thousands)  
Remaining Maturity:
       
Three months or less
  $ 14,002  
Over three months to six months
    4,147  
Over six months to 12 months
    5,760  
Over 12 months
    7,368  
 
     
Total
  $ 31,277  
 
     

Time deposits of $100,000 or more are generally from the Company’s local business and individual customer base. The potential impact on the Company’s liquidity from the withdrawal of these deposits is discussed in the Company’s asset and liability management committee, and is considered to be minimal.

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Capital Resources

Shareholders’ Equity. Shareholders’ equity as of December 31, 2004 increased $2.1 million, or 8%, to $27.9 million from $25.7 million as of December 31, 2003. This increase was due to the retention of current period earnings of $3.6 million and to a lesser extent the net funds received from key employees and directors exercising their stock options totaling $68,000. Partially offsetting these increases were two cash dividends totaling $914,000 paid during 2004 and a decrease in the unrealized gains on available-for-sale investment securities of $658,000.

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. 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 Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators regarding components, risk-weighting and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings less goodwill) to risk-weighted assets and of Tier 1 capital to average assets. Management believes as of December 31, 2004, that both the Company and Bank exceed all capital adequacy requirements to which they are subject.

At December 31, 2004, the Company’s capital ratios decreased slightly. This decrease was primarily attributed to the continued absorption of assets related to the acquisition of five branches from a competitor in late 2003.

Capital Standards. The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as certain loans.

As of December 31, 2004, the Company’s and the Bank’s capital ratios exceeded applicable regulatory requirements. The following tables present the capital ratios for the Company and the Bank compared to the standards for bank holding companies and the regulatory minimum requirement for depository institutions as of December 31, 2004 (amounts in thousands except percentage amounts).

                         
    Plumas Bancorp     Regulatory  
    Actual     Minimum  
    Capital     Ratio     Requirement  
     
Leverage ratio
  $ 32,444       7.6 %     4.0 %
Tier 1 capital to risk-weighted assets
  $ 32,444       10.1 %     4.0 %
Total risk-based capital ratio
  $ 35,206       10.9 %     8.0 %
                         
    Plumas Bank     Regulatory  
    Actual     Minimum  
    Capital     Ratio     Requirement  
     
Leverage ratio
  $ 31,982       7.5 %     4.0 %
Tier 1 capital to risk-weighted assets
  $ 31,982       10.0 %     4.0 %
Total risk-based capital ratio
  $ 34,744       10.8 %     8.0 %

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

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the prescribed well-capitalized leverage, Tier 1 risk-based and total risk-based capital ratios of 5%, 6% and 10%, respectively, at all times.

Off-Balance Sheet Arrangements

Loan Commitments. In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of December 31, 2004, the Company had $90.1 million in unfunded loan commitments and $1.8 million in letters of credit. Of the $90.1 million in unfunded loan commitments, $59.3 million and $30.8 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at December 31, 2004, $57.0 million were secured by real estate, of which $35.9 million was secured by commercial real estate and $21.1 million was secured by residential real estate in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines. Since, some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessary represent future cash requirements.

Operating Leases. The Company leases three depository branches as well as one administrative lending office and four automated teller machine locations used in the normal course of business throughout six counties in the Company’s service area.

Total rental expenses under all operating leases, including premises, totaled $264,000, $179,000 and $85,000, in 2004, 2003 and 2002 respectively. The expiration dates of the leases vary, with the first such lease expiring during 2006 and the last such lease expiring during 2008.

Contractual Obligations and Commitments

The Company’s contractual obligations and commitments are comprised of the junior subordinated deferrable interest debentures and operating lease obligations and a mortgage for various banking facilities. As of December 31, 2004, future contractual obligations of the Company are as follows:

                                         
    Contractual Obligations Due by Period  
(dollars in thousands)   Total     Less than 1 year     1 to 3 years     3 to 5 years     More than 5 years  
     
Long-term debt obligations:
                                       
Junior subordinated deferrable Interest debentures
  $ 6,186     $     $     $     $ 6,186  
Operating lease obligations
    569       245       294       30        
Other long-term liabilities:
                                       
Salary continuation
    2,087       8       18       21       2,040  
Branch mortgage
    80       8       18       22       32  
     
Total contractual liabilities
  $ 8,922     $ 261     $ 330     $ 73     $ 8,258  
     

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 and agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by changing competitive offering rates on deposit products and the use of established lines of credit from other financial institutions and the Federal Home Loan Bank.

The Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of $10 million and $5 million. In addition, the Company can borrow up to $60.9 million from the Federal Home

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Loan Bank secured by commercial and residential mortgage loans. There was a $1 million short-term borrowing at December 31, 2004 but no borrowings outstanding at December 31, 2003 and 2002.

Customer deposits are the Company’s primary source of funds. Deposits totaled $378.6 million at December 31, 2004, an increase of $22.7 million, or 6%, from the December 31, 2003 balance of $355.8 million. Those funds are held in various forms with varying maturities. The Company does not accept brokered deposits. The Company’s 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 7A. 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. Based upon the nature of its operations, the Company is not subject to foreign currency exchange or commodity price risk. However, 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 Company’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 using floating rate loans and deposits, maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Company’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, trust preferred securities and other borrowings. The Company, 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 Company 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 Company 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 Company has adopted formal policies and practices to monitor and manage interest rate risk exposure. As part of this effort, the Company 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 Company’s interest rate risk, enabling management to make any adjustments necessary.

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

Net Interest Income Simulation. In order to measure interest rate risk at December 31, 2004, the Company used a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis which is performed quarterly by management, calculates the difference between net interest income forecasted using a rising and falling interest rate scenario and net interest income forecast using a base market interest rate derived from the current treasury yield curve. The income simulation model includes various assumptions regarding the repricing relationships for each of the Company’s products. Many of the Company’s assets are floating rate loans, which are assumed to reprice immediately and to the same extent as the change in market rates according to their contracted index. Some loans and investment vehicles include the opportunity of prepayment (imbedded options) and accordingly the simulation model uses national indexes to estimate these prepayments and reinvest their proceeds at current yields. The Company’s non-term deposit products reprice more slowly, usually changing less than the change in market rates and at the discretion of the Company.

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This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet grows modestly but that its structure will remain similar to the structure at year-end. It does not account for all factors that impact this analysis, including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to the Company’s credit risk profile as interest rates change. Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on the Company’s net interest income.

The following table reflects the Company’s projected net interest income sensitivity analysis based on year-end data:

                                 
    December 31, 2004     December 31, 2003  
    Adjusted Net     Percent     Adjusted Net     Percent  
    Interest Income     Change     Interest Income     Change  
Change in Rates   (in thousands)     From Base     (in thousands)     From Base  
 
Up 300 basis points
  $ 25,844       24.0 %   $ 20,353       18.5 %
Up 200 basis points
    24,032       15.3 %     18,972       10.4 %
Up 100 basis points
    22,304       7.0 %     17,884       4.1 %
Base scenario
    20,836       %     17,182       %
Down 100 basis points
    20,221       -2.9 %     16,391       -4.6 %
Down 200 basis points
    19,074       -8.5 %     15,374       -10.5 %
Down 300 basis points
    17,682       -15.1 %     14,804       -13.8 %

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100, 200 and 300 basis points. At December 31, 2004, with the exception of the “up 300 basis points” scenario, the Company’s net interest income exposure related to these hypothetical changes in market interest rate was within the current guidelines established by the Company. For the “up 300 basis points” scenario the Company’s net interest income exposure exceeded the guidelines established by $841 thousand, or 4%. Management expects to return the Company’s interest exposure to compliance with its internally established guidelines for a rapidly rising rate scenario by controlling the Company’s future growth in interest earning assets and interest bearing liabilities.

Unaudited Quarterly Statement of Operations Data

                                                                 
    Q4     Q3     Q2     Q1     Q4     Q3     Q2     Q1  
    2004     2004     2004     2004     2003     2003     2003     2003  
    (dollars in thousands)  
Net interest income
  $ 4,689     $ 4,414     $ 4,040     $ 4,019     $ 3,943     $ 3,863     $ 3,908     $ 3,686  
Provision for loan losses
    150       300       150       150       125       175       225       225  
Non-interest income
    1,172       1,274       1,342       1,030       1,203       893       876       803  
Non-interest expense
    3,989       3,920       3,913       3,761       3,506       3,298       3,236       3,086  
     
Income before income taxes
    1,722       1,468       1,319       1,138       1,515       1,283       1,323       1,178  
Income taxes
    583       537       469       412       532       501       523       462  
     
Net income
  $ 1,139     $ 931     $ 850     $ 726     $ 983     $ 782     $ 800     $ 716  
     
 
                                                               
Per share:
                                                               
Basic earnings per share
  $ 0.35     $ 0.29     $ 0.26     $ 0.22     $ 0.31     $ 0.24     $ 0.25     $ 0.22  
Diluted earnings per share
  $ 0.34     $ 0.28     $ 0.25     $ 0.22     $ 0.29     $ 0.24     $ 0.24     $ 0.22  

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of Plumas Bancorp and subsidiary, and independent auditor’s report included in the Annual Report of Plumas Bancorp to its shareholders for the years ended December 31, 2004, 2003 and 2002.

     
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Shareholders and
     Board of Directors
Plumas Bancorp

     We have audited the accompanying consolidated balance sheet of Plumas Bancorp and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Plumas Bancorp and subsidiary as of December 31, 2004 and 2003 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/ PERRY-SMITH LLP

Sacramento, California
March 21, 2005

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PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

December 31, 2004 and 2003

                 
    2004     2003  
ASSETS
               
 
               
Cash and due from banks
  $ 11,444,000     $ 24,717,000  
Federal funds sold
            5,295,000  
 
           
 
               
Total cash and cash equivalents
    11,444,000       30,012,000  
 
               
Loans held for sale, at lower of cost or market value
            276,000  
Investment securities (Notes 3 and 7)
    113,252,000       115,883,000  
Loans, less allowance for loan losses of $2,762,000 in 2004 and $2,564,000 in 2003 (Notes 4, 7, 9 and 13)
    263,891,000       214,863,000  
Premises and equipment, net (Note 5)
    9,793,000       10,306,000  
Intangible assets, net (Note 17)
    1,939,000       2,238,000  
Company owned life insurance (Note 14)
    8,362,000       8,013,000  
Accrued interest receivable and other assets (Note 12)
    8,665,000       8,671,000  
 
           
 
               
Total assets
  $ 417,346,000     $ 390,262,000  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Deposits:
               
Non-interest bearing
  $ 108,556,000     $ 96,830,000  
Interest bearing (Note 6)
    270,011,000       259,012,000  
 
           
 
               
Total deposits
    378,567,000       355,842,000  
 
               
Federal funds purchased (Note 7)
    1,035,000          
Accrued interest payable and other liabilities
    3,667,000       2,485,000  
Junior subordinated deferrable interest debentures (Note 8)
    6,186,000       6,186,000  
 
           
 
               
Total liabilities
    389,455,000       364,513,000  
 
           
 
               
Commitments and contingencies (Note 9)
               
 
               
Shareholders’ equity (Note 10):
               
Serial preferred stock — no par value; 10,000,000 shares authorized; none issued
           
Common stock — no par value; 15,000,000 shares authorized; issued and outstanding – 3,267,465 shares in 2004 and 3,242,027 shares in 2003
    4,013,000       3,945,000  
Retained earnings
    24,370,000       21,638,000  
Accumulated other comprehensive (loss) income (Notes 3 and 15)
    (492,000 )     166,000  
 
           
 
               
Total shareholders’ equity
    27,891,000       25,749,000  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 417,346,000     $ 390,262,000  
 
           

The accompanying notes are an integral
part of these consolidated financial statements.

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PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

For the Years Ended December 31, 2004, 2003 and 2002

                         
    2004     2003     2002  
Interest income:
                       
Interest and fees on loans
  $ 16,423,000     $ 16,046,000     $ 16,013,000  
Interest on investment securities:
                       
Taxable
    3,044,000       2,074,000       1,922,000  
Exempt from Federal income taxes
    439,000       147,000       143,000  
Interest on Federal funds sold
    163,000       116,000       275,000  
Interest on loans held for sale
    7,000       30,000       36,000  
 
                 
 
                       
Total interest income
    20,076,000       18,413,000       18,389,000  
 
                 
 
                       
Interest expense:
                       
Interest on deposits (Note 6)
    2,600,000       2,703,000       3,945,000  
Interest on short-term borrowings (Note 7)
    9,000       22,000       6,000  
Interest on junior subordinated deferrable interest debentures (Note 8)
    305,000       288,000       87,000  
 
                 
 
                       
Total interest expense
    2,914,000       3,013,000       4,038,000  
 
                 
 
                       
Net interest income before provision for loan losses
    17,162,000       15,400,000       14,351,000  
 
                       
Provision for loan losses (Note 4)
    750,000       750,000       825,000  
 
                 
 
                       
Net interest income after provision for loan losses
    16,412,000       14,650,000       13,526,000  
 
                 
 
                       
Non-interest income:
                       
Service charges
    2,982,000       1,988,000       1,905,000  
Gain on sale of loans
    128,000       203,000       191,000  
Gain on sale of available-for-sale investment securities, net (Notes 3 and 15)
    235,000       328,000       117,000  
Earnings on company owned life insurance policies (Note 14)
    415,000       313,000       217,000  
Other
    1,058,000       943,000       848,000  
 
                 
 
                       
Total non-interest income
    4,818,000       3,775,000       3,278,000  
 
                 

(Continued)

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PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME
(Continued)
For the Years Ended December 31, 2004, 2003 and 2002

                         
    2004     2003     2002  
Non-interest expenses:
                       
Salaries and employee benefits (Notes 4 and 14)
  $ 8,831,000     $ 7,442,000     $ 6,269,000  
Occupancy and equipment (Notes 5 and 9)
    2,713,000       2,343,000       1,794,000  
Other (Note 11)
    4,039,000       3,341,000       3,541,000  
 
                 
 
                       
Total non-interest expenses
    15,583,000       13,126,000       11,604,000  
 
                 
 
                       
Income before provision for income taxes
    5,647,000       5,299,000       5,200,000  
 
                       
Provision for income taxes (Note 12)
    2,001,000       2,018,000       2,046,000  
 
                 
 
                       
Net income
  $ 3,646,000     $ 3,281,000     $ 3,154,000  
 
                 
 
                       
Basic earnings per share (Note 10)
  $ 1.12     $ 1.02     $ 0.99  
 
                 
 
                       
Diluted earnings per share (Note 10)
  $ 1.09     $ 0.99     $ 0.96  
 
                 

The accompanying notes are an integral
part of these consolidated financial statements.

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PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2004, 2003 and 2002

                                                         
                                    Accumulated              
                                    Other              
                    Additional             Comprehensive     Total     Total  
    Common Stock     Paid-In     Retained     (Loss) Income     Shareholders’     Comprehensive  
    Shares     Amount     Capital     Earnings     (Net of Taxes)     Equity     Income  
Balance, January 1, 2002
    3,192,335     $ 2,347,000     $ 1,276,000     $ 16,846,000     $ 148,000     $ 20,617,000          
 
                                                       
Comprehensive income (Note 15):
                                                       
Net income
                            3,154,000               3,154,000     $ 3,154,000  
Other comprehensive income, net of tax:
                                                       
Net change in unrealized gains on available-for-sale investment securities
                                    262,000       262,000       262,000  
 
                                                     
 
                                                       
Total comprehensive income
                                                  $ 3,416,000  
 
                                                     
 
                                                       
Cash dividends — $.27 per share
                            (867,000 )             (867,000 )        
Stock options exercised and related tax benefit (Note 10)
    17,306       108,000       16,000                       124,000          
Reorganization of Plumas Bank under Plumas Bancorp – exchange of common stock
            1,292,000       (1,292,000 )                                
Fractional shares repurchased as a result of three-for-two stock split
    (324 )     (4,000 )                             (4,000 )        
 
                                           
 
                                                       
Balance, December 31, 2002
    3,209,317       3,743,000               19,133,000       410,000       23,286,000          
 
                                                       
Comprehensive income (Note 15):
                                                       
Net income
                            3,281,000               3,281,000     $ 3,281,000  
Other comprehensive loss, net of tax:
                                                       
Net change in unrealized gains on available-for-sale investment securities
                                    (244,000 )     (244,000 )     (244,000 )
 
                                                     
 
                                                       
Total comprehensive income
                                                  $ 3,037,000  
 
                                                     
 
                                                       
Cash dividends — $.24 per share
                            (776,000 )             (776,000 )        
Retirement of common stock in connection with the exercise of stock options (Note 10)
    (4,253 )     (74,000 )                             (74,000 )        
Stock options exercised and related tax benefit (Note 10)
    36,963       276,000                               276,000          
 
                                           
 
                                                       
Balance, December 31, 2003
    3,242,027       3,945,000               21,638,000       166,000       25,749,000          
 
                                           

(Continued)

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Continued)
For the Years Ended December 31, 2004, 2003 and 2002

                                                         
                                    Accumulated              
                                    Other              
                    Additional             Comprehensive     Total     Total  
    Common Stock     Paid-In     Retained     (Loss) Income     Shareholders’     Comprehensive  
    Shares     Amount     Capital     Earnings     (Net of Taxes)     Equity     Income  
Balance, December 31, 2003
    3,242,027     $ 3,945,000             $ 21,638,000     $ 166,000     $ 25,749,000          
 
                                                       
Comprehensive income (Note 15):
                                                       
Net income
                            3,646,000               3,646,000     $ 3,646,000  
Other comprehensive loss, net of tax:
                                                       
Net change in unrealized gains (losses) on available-for-sale investment securities (Note 3)
                                    (658,000 )     (658,000 )     (658,000 )
 
                                                     
 
                                                       
Total comprehensive income
                                                  $ 2,988,000  
 
                                                     
 
                                                       
Cash dividends — $.28 per share
                            (914,000 )             (914,000 )        
Retirement of common stock in connection with the exercise of stock options (Note 10)
    (8,974 )     (176,000 )                             (176,000 )        
Stock options exercised and related tax benefit (Note 10)
    34,412       244,000                               244,000          
 
                                           
 
                                                       
Balance, December 31, 2004
    3,267,465     $ 4,013,000     $     $ 24,370,000     $ (492,000 )   $ 27,891,000          
 
                                           
                         
    2004     2003     2002  
Disclosure of reclassification amount, net of taxes (Note 15):
                       
 
                       
Unrealized holding (losses) gains arising during the year
  $ (523,000 )   $ (50,000 )   $ 331,000  
Reclassification adjustment for gains included in net income
    135,000       194,000       69,000  
 
                 
 
                       
Net unrealized (losses) gains on available-for-sale investment securities
  $ (658,000 )   $ (244,000 )   $ 262,000  
 
                 

The accompanying notes are an integral
part of these consolidated financial statements.

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PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Years Ended December 31, 2004, 2003 and 2002

                         
    2004     2003     2002  
Cash flows from operating activities:
                       
Net income
  $ 3,646,000     $ 3,281,000     $ 3,154,000  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Provision for loan losses
    750,000       750,000       825,000  
Decrease in deferred loan origination fees, net
    (270,000 )     (71,000 )     (147,000 )
Depreciation and amortization
    1,625,000       1,314,000       1,060,000  
Net gain on sale of available-for- sale investment securities
    (235,000 )     (328,000 )     (117,000 )
Amortization of investment security premiums
    918,000       1,200,000       279,000  
Accretion of investment security discounts
    (87,000 )     (24,000 )     (71,000 )
Net (gain) loss on sale of premises and equipment
    (4,000 )     3,000       24,000  
Net gain on sale of other real estate
    (141,000 )     (71,000 )        
Net loss on judgement receivable
    53,000                  
Net loss on sale of other vehicles
    22,000                  
Recovery of impairment on held-to- maturity investment security
                    (60,000 )
Writedown of other real estate to fair value
    18,000               13,000  
Net decrease (increase) in loans held for sale
    276,000       1,196,000       (823,000 )
Increase in cash surrender value of life insurance policies, net
    (349,000 )     (278,000 )     (183,000 )
Increase in accrued interest receivable and other assets
    (217,000 )     (1,060,000 )     (769,000 )
Increase (decrease) in accrued interest payable and other liabilities
    2,217,000       221,000       (30,000 )
Provision for deferred income taxes
    82,000       28,000       31,000  
 
                 
 
                       
Net cash provided by operating activities
    8,304,000       6,161,000       3,186,000  
 
                 

(Continued)

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2003, 2002 and 2001

                         
    2004     2003     2002  
Cash flows from investing activities:
                       
Cash acquired in the purchase of selected assets and liabilities of another bank
          $ 42,520,000          
Proceeds from matured and called available-for-sale investment securities
  $ 2,355,000       15,000,000     $ 16,996,000  
Proceeds from matured and called held-to-maturity investment securities
    15,320,000       6,237,000       8,056,000  
Proceeds from sale of available- for-sale investment securities
    36,309,000       32,426,000       4,639,000  
Purchases of available-for-sale investment securities
    (47,147,000 )     (104,217,000 )     (47,400,000 )
Purchases of held-to-maturity investment securities
    (8,827,000 )     (6,174,000 )     (687,000 )
Proceeds from principal repayments from available-for-sale government- guaranteed mortgage-backed securities
    2,722,000       695,000       796,000  
Proceeds from principal repayments from held-to-maturity government- guaranteed mortgage-backed securities
    181,000       322,000       2,422,000  
Net increase in loans
    (49,745,000 )     (12,338,000 )     (24,690,000 )
Proceeds from sale of other real estate
    890,000       370,000          
Proceeds from sale of premises and equipment
                    3,000  
Purchases of premises and equipment
    (809,000 )     (1,587,000 )     (2,142,000 )
Purchase of company owned life insurance
            (3,170,000 )     (510,000 )
 
                 
 
                       
Net cash used in investing activities
    (48,751,000 )     (29,916,000 )     (42,517,000 )
 
                 

(Continued)

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2004, 2003 and 2002

                         
    2004     2003     2002  
Cash flows from financing activities:
                       
Net increase in demand, interest- bearing and savings deposits
  $ 21,535,000     $ 19,114,000     $ 45,275,000  
Net increase (decrease) in time deposits
    1,190,000       (2,677,000 )     (3,541,000 )
Proceeds from exercise of stock options
    68,000       176,000       124,000  
Proceeds from the issuance of junior subordinated deferrable interest debentures
                    6,186,000  
Cash paid to repurchase fractional shares
                    (4,000 )
Payment of cash dividends
    (914,000 )     (776,000 )     (867,000 )
 
                 
 
                       
Net cash provided by financing activities
    21,879,000       15,837,000       47,173,000  
 
                 
 
                       
(Decrease) increase in cash and cash equivalents
    (18,568,000 )     (7,918,000 )     7,842,000  
 
                       
Cash and cash equivalents at beginning of year
    30,012,000       37,930,000       30,088,000  
 
                 
 
                       
Cash and cash equivalents at end of year
  $ 11,444,000     $ 30,012,000     $ 37,930,000  
 
                 
 
                       
Supplemental disclosure of cash flow information:
                       
 
                       
Cash paid during the year for:
                       
Interest expense
  $ 2,881,000     $ 3,123,000     $ 4,272,000  
Income taxes
  $ 1,612,000     $ 2,052,000     $ 2,079,000  
 
                       
Non-cash investing activities:
                       
Real estate acquired through foreclosure
  $ 145,000     $ 175,000     $ 138,000  
Vehicles acquired through repossession
  $ 92,000                  
Reclassification of loans to other assets (Note 4)
          $ 1,399,000          
Net change in unrealized (loss) gain on available-for-sale investment securities
  $ (1,122,000 )   $ (415,000 )   $ 446,000  
 
                       
Non-cash financing activities:
                       
Common stock retired in connection with the exercise of stock options
  $ 176,000     $ 74,000          

(Continued)

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2004, 2003 and 2002

                         
    2004     2003     2002  
On November 17, 2003, the Company purchased certain assets and liabilities of the Kings Beach, Loyalton, Portola, Quincy and Truckee branches from Placer Sierra Bank (Note 17):
                       
Deposits assumed
          $ 45,464,000          
Loans
            (129,000 )        
Premises and equipment
            (552,000 )        
Premium paid for deposits
            (1,709,000 )        
Other assets
            (581,000 )        
Other liabilities
            27,000          
 
                     
 
                       
Cash received
          $ 42,520,000          
 
                     

The accompanying notes are an integral
part of these consolidated financial statements.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   THE BUSINESS OF PLUMAS BANCORP
 
    On January 17, 2002, Plumas Bancorp (the “Company”) was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the “Bank”) in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation expansion and diversification. The reorganization was approved by the Company’s shareholders on May 29, 2002, and all required regulatory approvals with respect to the reorganization were obtained. The reorganization was consummated on June 21, 2002, subsequent to which the Bank continued its operations as previously conducted, but as a wholly owned subsidiary of the Company. The Company formed Plumas Statutory Trust I (the “Trust”) for the sole purpose of issuing trust preferred securities on September 26, 2002.
 
    The Bank operates twelve branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Loyalton, Portola, Quincy, Susanville, Tahoe City, 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.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    Consolidation and Basis of Presentation
 
    The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated.
 
    Plumas Statutory Trust I is not consolidated into the Company’s consolidated financial statements and, accordingly, is accounted for under the equity method. The Company’s investment in the Trust of $186,000 is included in accrued interest receivable and other assets on the consolidated balance sheet. The junior subordinated debentures issued and guaranteed by the Company and held by the Trust are reflected as debt on the consolidated balance sheet.
 
    The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.
 
    Use of Estimates
 
    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
    Cash and Cash Equivalents
 
    For the purpose of the statement of cash flows, cash and due from banks and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold for one day periods. Cash held with other federally insured institutions in excess of FDIC limits as of December 31, 2004 was $49,000.
 
    Investment Securities
 
    Investments are classified into one of the following categories:

  •   Available-for-sale securities reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity.
 
  •   Held-to-maturity securities, which management has the positive intent and ability to hold, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums.

    Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value.
 
    Gains or losses on the sale of securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums.
 
    Investment securities are evaluated for impairment on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

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PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
    Investment in Federal Home Loan Bank Stock
 
    As a member of the Federal Home Loan Bank System, the Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank. The investment is carried at cost. At December 31, 2004 and 2003, Federal Home Loan Bank stock totaled $1,827,000 and $755,000, respectively. On the consolidated balance sheet, Federal Home Loan Bank stock is included in accrued interest receivable and other assets.
 
    Loans Held for Sale, Loan Sales and Servicing
 
    The Company accounts for the transfer and servicing of financial assets based on the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.
 
    Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold or securitized with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are recorded at the difference between the contractual servicing fees and adequate compensation for performing the servicing, and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing assets are periodically evaluated for impairment. Fair values are estimated using discounted cash flows based on current market interest rates. For purposes of measuring impairment, servicing assets are stratified based on note rate and term. The amount of impairment recognized is the amount by which the servicing assets for a stratum exceed their fair value.
 
    Government Guaranteed Loans
 
    Included in the portfolio are loans which are 75% to 90% guaranteed by the Small Business Administration (SBA), US Department of Agriculture Rural Business Cooperative Service (RBS) and Farm Services Agency (FSA). The guaranteed portion of these loans may be sold to a third party, with the Bank retaining the unguaranteed portion. The Company generally receives a premium in excess of the adjusted carrying value of the loan at the time of sale. The Company may be required to refund a portion of the sales premium if the borrower defaults or prepays within ninety days of the settlement date. At December 31, 2004, the premiums and guaranteed portion of these sold loans subject to these recourse provisions totaled $53,000 and $1,088,000, respectively.

F - 13


Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
    Loans Held for Sale, Loan Sales and Servicing (Continued)
 
    Government Guaranteed Loans (Continued)
 
    The Company’s investment in the loan is allocated between the retained portion of the loan, the servicing asset, the interest-only (IO) strip, and the sold portion of the loan based on their relative fair values on the date the loan is sold. The gain on the sold portion of the loan is recognized as income at the time of sale. The carrying value of the retained portion of the loan is discounted based on the estimated value of a comparable non-guaranteed loan. The servicing asset is recognized and amortized over the estimated life of the related loan (see Note 4). Assets (accounted for as interest-only (IO) strips) are recorded at the fair value of the difference between note rates and rates paid to purchasers (the interest spread) and contractual servicing fees, if applicable. IO strips are carried at fair value with gains or losses recorded as a component of shareholders’ equity, similar to available-for-sale investment securities. Significant future prepayments of these loans will result in the recognition of additional amortization of related servicing assets and an adjustment to the carrying value of related IO strips.
 
    The Company serviced SBA and RBS government guaranteed loans for others totaling $3,001,000 and $2,889,000 as of December 31, 2004 and 2003, respectively.
 
    Mortgage Loans
 
    The Company originates mortgage loans that are either held in the Company’s loan portfolio or sold in the secondary market. Loans held-for-sale are carried at the lower of cost or market value. Market value is determined by the specific identification method as of the balance sheet date or the date which the purchasers have committed to purchase the loans. At the time the loan is sold, the related right to service the loan is either retained, with the Bank earning future servicing income, or released in exchange for a one-time servicing-released premium. Loans subsequently transferred to the loan portfolio are transferred at the lower of cost or market value at the date of transfer. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method.
 
    The Company may be required to refund a portion of the premiums and repurchase a portion of the loans that are sold if the borrower defaults within one hundred and eighty days of the settlement date. At December 31, 2004, the premiums and sold loans subject to these recourse provisions totaled $10,000 and $1,064,000, respectively.
 
    The Company serviced loans for the Federal National Mortgage Association (FNMA) totaling $9,817,000 and $12,518,000 as of December 31, 2004 and 2003, respectively.
 
    Participation Loans
 
    The Company also serviced loans which it has participated with other financial institutions totaling $1,667,000 and $5,109,000 as of December 31, 2004 and 2003, respectively.

F - 14


Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
    Loans
 
    Loans are stated at principal balances outstanding, except for loans transferred from loans held for sale which are carried at the lower of principal balance or market value at the date of transfer, adjusted for accretion of discounts. Interest is accrued daily based upon outstanding loan balances. However, when, in the opinion of management, loans are considered to be impaired and the future collectibility of interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended. Any interest accrued but unpaid is charged against income. Payments received are applied to reduce principal to the extent necessary to ensure collection. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectibility of principal is not in doubt, are applied first to earned but unpaid interest and then to principal.
 
    An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical matter, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (including both principal and interest) in accordance with the contractual terms of the loan agreement.
 
    Loan origination fees, commitment fees, direct loan origination costs and purchased premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans.
 
    Allowance for Loan Losses
 
    The allowance for loan losses is maintained to provide for losses related to impaired loans and other losses that can be expected to occur in the normal course of business. The determination of the allowance is based on estimates made by management, to include consideration of the character of the loan portfolio, specifically identified problem loans, potential losses inherent in the portfolio taken as a whole and economic conditions in the Company’s service area.
 
    Loans determined to be impaired or classified are individually evaluated by management for specific risk of loss. In addition, reserve factors are assigned to currently performing loans based on management’s assessment of the following for each identified loan type: (1) inherent credit risk, (2) historical losses and, (3) where the Company has not experienced losses, the loss experience of peer banks. These estimates are particularly susceptible to changes in the economic environment and market conditions.
 
    The Bank’s Loan Committee reviews the adequacy of the allowance for loan losses at least quarterly, to include consideration of the relative risks in the portfolio and current economic conditions. The allowance is adjusted based on that review if, in management’s judgment, changes are warranted.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
    Allowance for Loan Losses (Continued)
 
    The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. The allowance for loan losses at December 31, 2004 and 2003, respectively, reflects management’s estimate of possible losses in the portfolio.
 
    Other Real Estate
 
    Other real estate includes former Bank premises with balances of $105,000 and $690,000 at December 31, 2004 and 2003, respectively. At December 31, 2004 and 2003, the Company had no investment in real estate acquired in full or partial settlement of loan obligations. When property is acquired, any excess of the Bank’s recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property less costs to sell is charged against the allowance for loan losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or writedowns resulting from permanent impairment are recorded in other income or expenses as incurred.
 
    Premises and Equipment
 
    Premises and equipment are carried at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of premises are estimated to be twenty to thirty years. The useful lives of furniture, fixtures and equipment are estimated to be two to ten years. Leasehold improvements are amortized over the life of the asset or the life of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. The Company evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.
 
    Intangible Assets
 
    Intangible assets consist of core deposit intangibles related to branch acquisitions and are amortized using the straight-line method over ten years.
 
    Income Taxes
 
    The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.

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PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
    Income Taxes (Continued)
 
    Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
 
    Earnings Per Share
 
    Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted EPS.
 
    Stock-Based Compensation
 
    At December 31, 2004, the Company had two stock-based compensation plans, the Plumas Bank 2001 and 1991 Stock Option Plans, which are described more fully in Note 10. 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 employee 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.
 
    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. With the assumption of the existing stock option plans by the Company at the time of the reorganization during the year ending December 31, 2002, the vesting schedule for all outstanding options was accelerated and the options became fully vested in accordance with the stock option plans. 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 Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.

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PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

                         
    2004     2003     2002  
Net income, as reported
  $ 3,646,000     $ 3,281,000     $ 3,154,000  
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects
    144,000       91,000       165,000  
 
                 
 
                       
Pro forma net income
  $ 3,502,000     $ 3,190,000     $ 2,989,000  
 
                 
 
                       
Basic earnings per share — as reported
  $ 1.12     $ 1.02     $ .99  
 
                       
Basic earnings per share — pro forma
  $ 1.07     $ .99     $ .93  
 
                       
Diluted earnings per share — as reported
  $ 1.09     $ .99     $ .96  
Diluted earnings per share — pro forma
  $ 1.06     $ .97     $ .92  
 
                       
Weighted average fair value of options granted during the year
  $ 5.09     $ 5.30     $ 4.72  

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

                         
    2004     2003     2002  
Dividend yield
    1.44 %     1.29 %     1.67 %
Expected volatility
    51.54 %     38.74 %     27.38 %
Risk-free interest rate
    3.46 %     3.07 %     3.01 %
 
                       
Expected option life
  5 years     5 years       3 to 5 years  

    Reclassifications
 
    Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2004.

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PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
    Impact of New Financial Accounting Standards
 
    Other-Than-Temporary Impairment of Certain Investments
 
    In June 2004, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 includes additional guidance for evaluating and recording impairment losses on debt and equity investments, as well as disclosure requirements for investments that are deemed to be temporarily impaired. The proposed guidance indicates that an investor must have the intent and ability to hold an investment until a forecasted recovery of the fair value up to or beyond the cost of the investment in order to determine that any impairment is temporary. In September 2004, the FASB delayed the effective date of the recognition and measurement guidance of EITF 03-1, pending further deliberations. The disclosures for investments that are deemed temporarily impaired are included in Note 3 to the consolidated financial statements. Once the FASB has reached a final decision on the measurement and recognition provisions, the Company will evaluate the impact of the adoption of EITF 03-1.
 
    Share-Based Payments
 
    In December 2004, the FASB issued Statement Number 123 (revised 2004) (FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. The Company is required to apply FAS 123 (R) on a modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, the Company may elect to adopt FAS 123 (R) by restating previously issued financial statements, basing the expense on that previously reported in their pro forma disclosures required by FAS 123. FAS 123 (R) is effective for the first reporting period beginning after June 15, 2005. Management has not completed its evaluation of the effect that FAS 123 (R) will have, but believes that the effect will be consistent with its previous pro forma disclosures.
 
    Accounting for Certain Loans or Debt Securities Acquired in a Transfer
 
    In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP). This SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It also includes such loans acquired in purchase business combinations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be accreted and requires that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or valuation allowance.

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PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
    Impact of New Financial Accounting Standards (Continued)
 
    Accounting for Certain Loans or Debt Securities Acquired in a Transfer (Continued)
 
    This SOP prohibits “carrying over” or creation of valuation allowances in the initial accounting for loans acquired in a transfer that are within its scope. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination.
 
    This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. In management’s opinion, the adoption of this pronouncement will not have a material impact on the Company’s financial position or results of operations.
 
3.   INVESTMENT SECURITIES
 
    The amortized cost and estimated fair value of investment securities at December 31, 2004 and 2003 consisted of the following:
 
    Available-for-Sale:

                                 
    2004  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Debt securities:
                               
U.S. Treasury securities
  $ 10,161,000             $ (106,000 )     10,055,000  
U.S. Government agencies
    57,514,000     $ 2,000       (433,000 )     57,083,000  
U.S. Government agencies collateralized by mortgage obligations
    20,848,000       8,000       (216,000 )     20,640,000  
Corporate debt securities
    9,594,000               (93,000 )     9,501,000  
 
                       
 
                               
 
  $ 98,117,000     $ 10,000     $ (848,000 )   $ 97,279,000  
 
                       

    Net unrealized losses on available-for-sale investment securities totaling $838,000 were recorded, net of $346,000 in tax benefits, as accumulated other comprehensive loss within shareholders’ equity at December 31, 2004. Proceeds and gross realized gains from the sale of available-for-sale investment securities for the year ended December 31, 2004 totaled $36,309,000 and $235,000, respectively.

                                 
    2003  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Debt securities:
                               
U.S. Treasury securities
  $ 11,861,000     $ 52,000     $ (6,000 )   $ 11,907,000  
U.S. Government agencies
    83,092,000       294,000       (112,000 )     83,274,000  
Corporate debt securities
    10,928,000       70,000       (15,000 )     10,983,000  
 
                       
 
                               
 
  $ 105,881,000     $ 416,000     $ (133,000 )   $ 106,164,000  
 
                       

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

3.   INVESTMENT SECURITIES (Continued)
 
    Available-for-Sale: (Continued)
 
    Net unrealized gains on available-for-sale investment securities totaling $283,000 were recorded, net of $117,000 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31, 2003. Proceeds and gross realized gains from the sale of available-for-sale investment securities for the year ended December 31, 2003 totaled $32,426,000 and $328,000, respectively. Proceeds and gross realized gains from the sale of available-for-sale investment securities for the year ended December 31, 2002 totaled $4,639,000 and $117,000, respectively.
 
    Held-to-Maturity:

                                 
    2004  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Debt securities:
                               
U.S. Government agencies
  $ 507,000     $ 2,000             $ 509,000  
Obligations of states and political subdivisions
    14,966,000       169,000     $ (45,000 )     15,090,000  
Corporate debt securities
    500,000       12,000               512,000  
 
                       
 
                               
 
  $ 15,973,000     $ 183,000     $ (45,000 )   $ 16,111,000  
 
                       
                                 
    2003  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Debt securities:
                               
U.S. Government agencies
  $ 512,000     $ 27,000             $ 539,000  
Obligations of states and political subdivisions
    7,705,000       155,000     $ (10,000 )     7,850,000  
Corporate debt securities
    1,502,000       47,000               1,549,000  
 
                       
 
                               
 
  $ 9,719,000     $ 229,000     $ (10,000 )   $ 9,938,000  
 
                       

    There were no sales or transfers of held-to-maturity investment securities during the years ended December 31, 2004, 2003 and 2002.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

3.   INVESTMENT SECURITIES (Continued)
 
    Investment securities with unrealized losses at December 31, 2004 are summarized and classified according to the duration of the loss period as follows:

                                                 
    Less than 12 Months     12 Months or More     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
Debt securities:
                                               
U.S. Treasury securities
  $ 5,047,000     $ 43,000     $ 5,008,000     $ 63,000     $ 10,055,000     $ 106,000  
U.S. Government agencies
    38,470,000       271,000       14,097,000       162,000       52,567,000       433,000  
Obligations of states and political subdivisions
    5,172,000       44,000       292,000       1,000       5,464,000       45,000  
U.S. Government agencies collateralized by mortgage obligations
    13,042,000       179,000       5,866,000       37,000       18,908,000       216,000  
Corporate debt securities
    5,893,000       59,000       3,608,000       34,000       9,501,000       93,000  
 
                                   
 
                                               
 
  $ 67,624,000     $ 596,000     $ 28,871,008     $ 297,000     $ 96,495,000     $ 893,000  
 
                                   

    At December 31, 2004, the Company held 149 investment securities of which 75 were in a loss position for less than twelve months and 28 were in a loss position and had been in a loss position for twelve months or more. Management periodically evaluates each investment security for other than temporary impairment, relying primarily on industry analyst reports and observation of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities and that the noted decline in fair value is considered temporary and due only to interest rate fluctuations.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

3.   INVESTMENT SECURITIES (Continued)
 
    The amortized cost and estimated fair value of investment securities at December 31, 2004 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

                                 
    Available-for-Sale     Held-to-Maturity  
            Estimated             Estimated  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
Within one year
  $ 11,019,000     $ 10,984,000     $ 1,795,000     $ 1,813,000  
After one year through five years
    66,250,000       65,655,000       1,756,000       1,826,000  
After five years through ten years
                    3,652,000       3,663,000  
After ten years through fifteen years
                    8,763,000       8,802,000  
 
                       
 
                               
 
    77,269,000       76,639,000       15,966,000       16,104,000  
 
                               
Investment securities not due at a single maturity date:
                               
Government-guaranteed mortgage- backed securities
    20,848,000       20,640,000                  
SBA loan pools
                    7,000       7,000  
 
                       
 
                               
 
  $ 98,117,000     $ 97,279,000     $ 15,973,000     $ 16,111,000  
 
                       

    Investment securities with amortized costs totaling $35,050,000 and $22,715,000 and estimated fair values totaling $35,072,000 and $23,398,000 at December 31, 2004 and 2003, respectively, were pledged to secure public deposits and treasury, tax and loan accounts.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

4.   LOANS
 
    Outstanding loans are summarized below:

                 
    December 31,  
    2004     2003  
Commercial
  $ 42,689,000     $ 51,073,000  
Agricultural
    31,067,000       26,537,000  
Real estate — mortgage
    102,125,000       67,532,000  
Real estate — construction and land development
    31,964,000       26,194,000  
Installment
    59,068,000       46,621,000  
 
           
 
               
 
    266,913,000       217,957,000  
 
               
Deferred loan fees, net
    (260,000 )     (530,000 )
Allowance for loan losses
    (2,762,000 )     (2,564,000 )
 
           
 
               
 
  $ 263,891,000     $ 214,863,000  
 
           

    Changes in the allowance for loan losses were as follows:

                         
    Year Ended December 31,  
    2004     2003     2002  
Balance, beginning of year
  $ 2,564,000     $ 2,471,000     $ 2,153,000  
Provision charged to operations
    750,000       750,000       825,000  
Losses charged to allowance
    (703,000 )     (847,000 )     (601,000 )
Recoveries
    151,000       190,000       94,000  
 
                 
 
                       
Balance, end of year
  $ 2,762,000     $ 2,564,000     $ 2,471,000  
 
                 

    The recorded investment in loans that were considered to be impaired totaled $1,171,000 and $847,000 at December 31, 2004 and 2003, respectively. The related allowance for loan losses for impaired loans was $121,000 and $59,000 at December 31, 2004 and 2003, respectively. The average recorded investment in impaired loans for the years ended December 31, 2004, 2003 and 2002 was $1,582,000, $2,034,000 and $1,447,000, respectively. During the year ended December 31, 2003, the Company received a court judgment on loans previously considered impaired in the amount of $1,399,000. At December 31, 2003, this judgment was included in other assets on the consolidated balance sheet. The Company recognized $63,000, $143,000 and $29,000 in interest income on a cash basis for impaired loans during the years ended December 31, 2004, 2003 and 2002, respectively.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

4.   LOANS (Continued)
 
    At December 31, 2004 and 2003, nonaccrual loans totaled $1,171,000 and $847,000, respectively. Interest foregone on nonaccrual loans totaled $25,000, $51,000 and $148,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
 
    Salaries and employee benefits totaling $746,000, $728,000 and $753,000 have been deferred as loan origination costs during the years ended December 31, 2004, 2003 and 2002, respectively.
 
    Sales and Servicing of Government-Guaranteed Loans
 
    A summary of the activity in government-guaranteed loans follows:

                         
    Year Ended December 31,  
    2004     2003     2002  
Loans originated
  $ 3,044,000     $ 3,010,000     $ 3,401,000  
Loans sold (guaranteed portion)
    2,333,000               899,000  
Loans outstanding at year end
    4,538,000       6,773,000       4,329,000  
Premium received at sale
    103,000               38,000  
Balance of servicing assets at year end
    106,000       82,000       91,000  
Fair value of interest-only strips at year end
    356,000       237,000       263,000  

    There were no significant gains or losses recognized on the interest-only strips for the years ended December 31, 2004, 2003 and 2002.
 
5.   PREMISES AND EQUIPMENT
 
    Premises and equipment consisted of the following:

                 
    December 31,  
    2004     2003  
Land
  $ 1,349,000     $ 1,349,000  
Premises
    6,931,000       6,904,000  
Furniture, equipment and leasehold improvements
    7,512,000       7,075,000  
Construction in progress
    320,000       260,000  
 
           
 
               
 
    16,112,000       15,588,000  
Less accumulated depreciation and amortization
    (6,319,000 )     (5,282,000 )
 
           
 
               
 
  $ 9,793,000     $ 10,306,000  
 
           

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

5.   PREMISES AND EQUIPMENT (Continued)
 
    Depreciation and amortization included in occupancy and equipment expense totaled $1,326,000, $1,153,000 and $925,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
 
6.   INTEREST-BEARING DEPOSITS
 
    Interest-bearing deposits consisted of the following:

                 
    December 31,  
    2004     2003  
NOW
  $ 45,439,000     $ 41,690,000  
Money market
    63,189,000       64,349,000  
Savings
    66,821,000       59,601,000  
Time, $100,000 or more
    31,277,000       27,461,000  
Other time
    63,285,000       65,911,000  
 
           
 
               
 
  $ 270,011,000     $ 259,012,000  
 
           

    Aggregate annual maturities of time deposits are as follows:

         
Year Ending        
December 31,        
2005
  $ 75,113,000  
2006
    12,256,000  
2007
    4,802,000  
2008
    1,553,000  
2009
    609,000  
Thereafter
    229,000  
 
     
 
       
 
  $ 94,562,000  
 
     

    Interest expense recognized on interest-bearing deposits consisted of the following:

                         
    Year Ended December 31,  
    2004     2003     2002  
NOW
  $ 58,000     $ 79,000     $ 114,000  
Money market
    490,000       498,000       775,000  
Savings
    292,000       310,000       432,000  
Time, $100,000 or more
    540,000       507,000       695,000  
Other time
    1,220,000       1,309,000       1,929,000  
 
                 
 
                       
 
  $ 2,600,000     $ 2,703,000     $ 3,945,000  
 
                 

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

7.   SHORT-TERM BORROWING ARRANGEMENTS
 
    The Company has unsecured short-term borrowing arrangements with two of its correspondent banks in the amounts of $10,000,000 and $5,000,000. The Company can also borrow up to $60,893,000 from the Federal Home Loan Bank secured by commercial and residential mortgage loans with carrying values totaling $106,175,000. In addition, the Bank has a reverse repurchase agreement with a securities firm whereby all borrowings are fully secured by investment securities. Short-term borrowings at December 31, 2004 consisted of $1,035,000 in Federal funds purchased which are normally purchased for one day periods. There were no short-term borrowings outstanding at December 31, 2003.
 
8.   JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
 
    Plumas Statutory Trust I is a Connecticut business trust formed by the Company with capital of $186,000 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to twenty-five percent of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2004, all of the trust preferred securities that have been issued qualify as Tier 1 capital. During the third quarter of 2002, Plumas Statutory Trust I (the “Trust”) issued 6,000 Floating Rate Capital Trust Pass-Through Securities (“Trust Preferred Securities”), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. The entire proceeds of the issuance were invested by the Trust in $6,186,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of the Trust. The Subordinated Debentures mature on September 26, 2032, bear a current interest rate of 5.80% (based on 3-month LIBOR plus 3.40%), with repricing and payments due quarterly. The Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Board of Governors, on any September 26, December 26, March 26 or June 26 on or after September 26, 2007. The redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture. The Trust Preferred Securities are subject to mandatory redemption to the extent of any early redemption of the Subordinated Debentures and upon maturity of the Subordinated Debentures on September 26, 2032.
 
    Holders of the Trust Preferred Securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each successive period beginning on December 26, March 26, June 26 and September 26 of each year, the rate will be adjusted to equal the 3-month LIBOR plus 3.40% provided, however, that prior to September 26, 2007, such annual rate does not exceed 11.90%. The Trust has the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures. The Trust Preferred Securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Trust Preferred Securities.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

8.   JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES (Continued)
 
    Interest expense recognized by the Company for the years ended December 31, 2004, 2003 and 2002 related to the subordinated debentures was $305,000, $288,000 and $87,000, respectively. The amount of deferred costs at December 31, 2004 and 2003 was $169,000 and $175,000, respectively. The amortization of the deferred costs was $9,000, $8,750 and $2,250 for the years ended December 31, 2004, 2003 and 2002, respectively.
 
9.   COMMITMENTS AND CONTINGENCIES
 
    Leases
 
    The Company leases its Truckee, Tahoe City and Loyalton branch offices and administrative office space in Truckee under noncancelable operating leases that expire in January 2007, March 2008, June 2005 and April 2006, respectively. The Tahoe City and Truckee office leases contain options to renew the leases for fifteen years and three years, respectively. Future minimum lease payments are as follows:

         
Year Ending        
December 31,        
2005
  $ 245,000  
2006
    176,000  
2007
    118,000  
2008
    30,000  
 
     
 
       
 
  $ 569,000  
 
     

    Rental expense included in occupancy and equipment expense totaled $264,000, $179,000 and $85,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
 
    Financial Instruments With Off-Balance-Sheet Risk
 
    The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet.
 
    The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for loans included on the consolidated balance sheet.

F - 28


Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

9.   COMMITMENTS AND CONTINGENCIES (Continued)
 
    Financial Instruments With Off-Balance-Sheet Risk (Continued)
 
    The following financial instruments represent off-balance-sheet credit risk:

                 
    December 31,  
    2004     2003  
Commitments to extend credit
  $ 90,084,000     $ 60,203,000  
Letters of credit
  $ 1,777,000     $ 1,802,000  

    Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, crops, inventory, equipment, income-producing commercial properties, farm land and residential properties.
 
    Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The fair value of the liability related to these letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2004 and 2003. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.
 
    At December 31, 2004, consumer loan commitments represent approximately 11% of total commitments and are generally unsecured. Commercial and agricultural loan commitments represent approximately 26% of total commitments and are generally secured by various assets of the borrower. Real estate loan commitments represent the remaining 63% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. In addition, the majority of the Company’s commitments have variable interest rates.
 
    Concentrations of Credit Risk
 
    The Company grants real estate mortgage, real estate construction, commercial, agricultural and consumer loans to customers throughout Plumas, Nevada, Placer, Lassen, Sierra, Shasta and Modoc counties.
 
    Although the Company has a diversified loan portfolio, a substantial portion of its portfolio is secured by commercial and residential real estate. However, personal and business income represent the primary source of repayment for a majority of these loans.

F - 29


Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

9.   COMMITMENTS AND CONTINGENCIES (Continued)
 
    Contingencies
 
    The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the financial position or results of operations of the Company.
 
10.   SHAREHOLDERS’ EQUITY
 
    Dividend Restrictions
 
    The Company’s ability to pay cash dividends is dependent on dividends paid to it by the Bank and limited by California corporation law. Under California law, the holders of common stock of the Company are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available, subject to certain restrictions. The California general corporation law prohibits the Company from paying dividends on its common stock unless: (i) its retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend or (ii) immediately after giving effect to the dividend, the sum of the Company’s assets (exclusive of goodwill and deferred charges) would be at least equal to 125% of its liabilities (not including deferred taxes, deferred income and other deferred liabilities) and the current assets of the Company would be at least equal to its current liabilities, or, if the average of its earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of its interest expense for the two preceding fiscal years, at least equal to 125% of its current liabilities.
 
    Dividends from the Bank to the Company are restricted under California law to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the Department of Financial Institutions, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year. As of December 31, 2004, the maximum amount available for dividend distribution under this restriction was approximately $7,952,000.
 
    Stock Split
 
    On October 25, 2002 the Company’s Board of Directors approved a three-for-two stock split to shareholders of record at the close of business on November 12, 2002, effective November 26, 2002. All per share, shares outstanding and stock option data in the consolidated financial statements have been retroactively restated to reflect the stock split.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

10.   SHAREHOLDERS’ EQUITY (Continued)
 
    Earnings Per Share
 
    A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows:

                         
            Weighted        
            Average        
            Number of        
    Net     Shares     Per Share  
For the Year Ended   Income     Outstanding     Amount  
December 31, 2004
                       
 
                       
Basic earnings per share
  $ 3,646,000       3,260,420     $ 1.12  
 
                     
 
                       
Effect of dilutive stock options
            72,547          
 
                   
 
                       
Diluted earnings per share
  $ 3,646,000       3,332,967     $ 1.09  
 
                 
 
                       
December 31, 2003
                       
 
                       
Basic earnings per share
  $ 3,281,000       3,230,956     $ 1.02  
 
                     
 
                       
Effect of dilutive stock options
            88,007          
 
                   
 
                       
Diluted earnings per share
  $ 3,281,000       3,318,963     $ 0.99  
 
                 
 
                       
December 31, 2002
                       
 
                       
Basic earnings per share
  $ 3,154,000       3,199,962     $ 0.99  
 
                     
 
                       
Effect of dilutive stock options
            70,635          
 
                   
 
                       
Diluted earnings per share
  $ 3,154,000       3,270,597     $ 0.96  
 
                 

    Shares of common stock issuable under stock options for which the exercise prices were greater than the average market prices were not included in the computation of diluted earnings per share due to their antidilutive effect. Stock options not included in the computation of diluted earnings per share were 52,375, 56,925 and 100,575 for the years ended December 31, 2004, 2003 and 2002, respectively.

F - 31


Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

10.   SHAREHOLDERS’ EQUITY (Continued)
 
    Stock Options
 
    In 2001 and 1991, the Company established Stock Option Plans for which 704,243 shares of common stock remain reserved for issuance to employees and directors and 397,530 shares are available for future grants under incentive and nonstatutory agreements as of December 31, 2004. The plans require that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash or with Company common stock previously acquired by the optionee and held by the optionee for a period of at least six months. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. Upon grant, options vest ratably over a three to five year period. A summary of the activity within the plans follows:

                                                 
    2004     2003     2002  
            Weighted             Weighted             Weighted  
            Average             Average             Average  
            Exercise             Exercise             Exercise  
    Shares     Price     Shares     Price     Shares     Price  
Incentive
                                               
 
                                               
Options outstanding, beginning of year
    214,575       12.64       196,003     $ 10.06       143,790     $ 6.91  
 
                                               
Options granted
    38,075       21.11       50,800     $ 19.25       66,825     $ 16.13  
Options exercised
    (32,892 )     6.90       (29,903 )   $ 6.63       (14,612 )   $ 6.87  
Options canceled
    (4,905 )     17.64       (2,325 )   $ 16.13                  
 
                                         
 
                                               
Options outstanding, end of year
    214,853       14.91       214,575     $ 12.64       196,003     $ 10.06  
 
                                         
 
                                               
Options exercisable, end of year
    104,903       10.67       114,205     $ 8.19       129,178     $ 6.92  
 
                                         
 
                                               
Nonstatutory
                                               
 
                                               
Options outstanding, beginning of year
    76,505       14.05       66,690     $ 11.28       36,930     $ 7.52  
 
                                               
Options granted
    16,875       21.28       16,875     $ 19.79       33,750     $ 16.13  
Options exercised
    (1,520 )     7.44       (7,060 )   $ 7.37       (2,694 )   $ 4.88  
Options canceled
                                    (1,296 )   $ 4.96  
 
                                         
 
                                               
Options outstanding, end of year
    91,860       15.49       76,505     $ 14.05       66,690     $ 11.28  
 
                                         
 
                                               
Options exercisable, end of year
    45,235       11.81       34,630     $ 9.75       32,940     $ 7.54  
 
                                         

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

10.   SHAREHOLDERS’ EQUITY (Continued)
 
    Stock Options (Continued)
 
    A summary of options outstanding at December 31, 2004 follows:

                         
    Number of     Weighted        
    Options     Average     Options  
    Outstanding     Remaining     Exercisable  
Range of   December 31,     Contractual     December 31,  
Exercise Prices   2004     Life     2004  
Incentive
                       
 
                       
$    4.09
    9,720     0.1 years     9,720  
$    7.44
    30,918     3.9 years     30,918  
$    8.15
    7,000     6.7 years     7,000  
$    8.28
    8,250     3.7 years     8,250  
$    8.29
    12,275     6.8 years     12,275  
$  16.13
    60,065     7.9 years     27,210  
$  16.14
    5,525     8.2 years     925  
$  18.51
    5,000     8.5 years     1,000  
$  18.51
    2,000     9.3 years        
$  19.79
    38,025     9.0 years     7,605  
$  19.86
    575     9.8 years        
$  21.28
    35,500     10.0 years        
 
                   
 
                       
 
    214,853               104,903  
 
                   
Nonstatutory
                       
 
                       
$    7.00
    2,000     5.6 years     2,000  
$    7.44
    12,985     3.9 years     12,985  
$    7.72
    5,625     2.9 years     5,625  
$    8.29
    3,750     6.8 years     3,750  
$  16.13
    33,750     7.9 years     17,500  
$  19.79
    16,875     9.0 years     3,375  
$  21.28
    16,875     10.0 years        
 
                   
 
                       
 
    91,860               45,235  
 
                   

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

10.   SHAREHOLDERS’ EQUITY (Continued)
 
    Regulatory Capital
 
    The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and 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 Company’s consolidated 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 Company’s and 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 Company and 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 Company and the Bank met all their capital adequacy requirements as of December 31, 2004 and 2003.
 
    In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

                                 
    December 31,  
    2004     2003  
    Amount     Ratio     Amount     Ratio  
Leverage Ratio
                               
 
                               
Plumas Bancorp and Subsidiary
  $ 32,444,000       7.6 %   $ 29,345,000       8.4 %
Minimum regulatory requirement
  $ 17,120,000       4.0 %   $ 14,053,000       4.0 %
 
                               
Plumas Bank
  $ 31,982,000       7.5 %   $ 28,852,000       8.2 %
Minimum requirement for “Well- Capitalized” institution
  $ 21,400,000       5.0 %   $ 17,567,000       5.0 %
Minimum regulatory requirement
  $ 17,120,000       4.0 %   $ 14,053,000       4.0 %

F - 34


Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

10.   SHAREHOLDERS’ EQUITY (Continued)
 
    Regulatory Capital (Continued)

                                 
    December 31,  
    2004     2003  
    Amount     Ratio     Amount     Ratio  
Tier 1 Risk-Based Capital Ratio
                               
 
                               
Plumas Bancorp and Subsidiary
  $ 32,444,000       10.1 %   $ 29,345,000       10.4 %
Minimum regulatory requirement
  $ 12,858,000       4.0 %   $ 11,261,000       4.0 %
 
                               
Plumas Bank
  $ 31,982,000       10.0 %   $ 28,852,000       10.3 %
Minimum requirement for “Well- Capitalized” institution
  $ 19,262,000       6.0 %   $ 16,867,000       6.0 %
Minimum regulatory requirement
  $ 12,841,000       4.0 %   $ 11,245,000       4.0 %
 
                               
Total Risk-Based Capital Ratio
                               
 
                               
Plumas Bancorp and Subsidiary
  $ 35,206,000       10.9 %   $ 31,909,000       11.3 %
Minimum regulatory requirement
  $ 25,715,000       8.0 %   $ 22,522,000       8.0 %
 
                               
Plumas Bank
  $ 34,744,000       10.8 %   $ 31,416,000       11.1 %
Minimum requirement for “Well- Capitalized” institution
  $ 32,103,000       10.0 %   $ 28,112,000       10.0 %
Minimum regulatory requirement
  $ 25,682,000       8.0 %   $ 22,490,000       8.0 %

11.   OTHER EXPENSES
 
    Other expenses consisted of the following:

                         
    Year Ended December 31,  
    2004     2003     2002  
Professional fees
  $ 596,000     $ 392,000     $ 673,000  
Business development
    389,000       357,000       371,000  
Armored car and courier
    371,000       342,000       318,000  
Advertising and promotion
    350,000       288,000       260,000  
Telephone and data communications
    346,000       357,000       347,000  
Core deposit intangible amortization
    299,000       161,000       135,000  
Stationery and supplies
    292,000       349,000       324,000  
Director compensation and retirement
    284,000       196,000       228,000  
Postage
    261,000       253,000       184,000  
Outside service fees
    236,000       201,000       185,000  
Insurance
    236,000       164,000       171,000  
Loan expenses
    191,000       170,000       244,000  
Other operating expenses
    188,000       111,000       101,000  
 
                 
 
                       
 
  $ 4,039,000     $ 3,341,000     $ 3,541,000  
 
                 

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

12.   INCOME TAXES
 
    The provision for income taxes for the years ended December 31, 2004, 2003 and 2002 consisted of the following:

                         
    Federal     State     Total  
2004
                       
 
                       
Current
  $ 1,378,000     $ 541,000     $ 1,919,000  
Deferred
    51,000       31,000       82,000  
 
                 
 
                       
Provision for income taxes
  $ 1,429,000     $ 572,000     $ 2,001,000  
 
                 
 
                       
2003
                       
 
                       
Current
  $ 1,437,000     $ 553,000     $ 1,990,000  
Deferred
    19,000       9,000       28,000  
 
                 
 
                       
Provision for income taxes
  $ 1,456,000     $ 562,000     $ 2,018,000  
 
                 
 
                       
2002
                       
 
                       
Current
  $ 1,460,000     $ 555,000     $ 2,015,000  
Deferred
    21,000       10,000       31,000  
 
                 
 
                       
Provision for income taxes
  $ 1,481,000     $ 565,000     $ 2,046,000  
 
                 

    Deferred tax assets (liabilities) consisted of the following:

                 
    December 31,  
    2004     2003  
Deferred tax assets:
               
 
               
Allowance for loan losses
  $ 986,000     $ 925,000  
Future benefit of state income tax deduction
    87,000       81,000  
Deferred compensation
    1,006,000       806,000  
Core deposit premium
    166,000       124,000  
Unrealized loss on available-for-sale investment securities
    346,000          
Other
    40,000       11,000  
 
           
 
               
Total deferred tax assets
    2,631,000       1,947,000  
 
           

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

12.   INCOME TAXES (Continued)

                 
    December 31,  
    2004     2003  
Deferred tax liabilities:
               
 
               
Prepaid costs
  $ 986,000          
Deferred loan costs
    (786,000 )        
 
               
Unrealized gain on available-for-sale investment securities
          $ (117,000 )
 
               
Premises and equipment
    (82,000 )     (608,000 )
 
           
 
               
Total deferred tax liabilities
    (1,028,000 )     (725,000 )
 
           
 
               
Net deferred tax assets
  $ 1,603,000     $ 1,222,000  
 
           

    The Company believes that it is more likely than not that it will realize the above deferred tax assets in future periods; therefore, no valuation allowance has been provided against its deferred tax assets.
 
    The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate to operating income before income taxes. The significant items comprising these differences consisted of the following:

                         
    2004     2003     2002  
Federal income tax, at statutory rate
    34.0 %     34.0 %     34.0 %
State franchise tax, net of Federal tax effect
    6.7 %     6.8 %     6.5 %
Interest on obligations of states and political subdivisions
    (3.2 )%     (1.2 )%     (0.9 )%
Net increase in cash surrender value of officers’ life insurance
    (2.5 )%     (2.0 )%     (1.4 )%
Other
    0.5 %     0.5 %     1.1 %
 
                 
 
                       
Effective tax rate
    35.5 %     38.1 %     39.3 %
 
                 

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

13.   RELATED PARTY TRANSACTIONS

    During the normal course of business, the Company enters into transactions with related parties, including executive officers and directors. These transactions include borrowings with substantially the same terms, including rates and collateral, as loans to unrelated parties. The following is a summary of the aggregate activity involving related party borrowers during 2004:

         
Balance, January 1, 2004
  $ 1,168,000  
 
       
Disbursements
    2,246,000  
Amounts repaid
    (1,551,000 )
 
     
 
       
Balance, December 31, 2004
  $ 1,863,000  
 
     
 
       
Undisbursed commitments to related parties, December 31, 2004
  $ 381,000  
 
     

14.   EMPLOYEE BENEFIT PLANS

    Profit Sharing Plan
 
    The Plumas Bank Profit Sharing Plan commenced April 1, 1988 and is available to employees meeting certain service requirements. Under the Plan, employees are able to defer a selected percentage of their annual compensation. Included under the Plan’s investment options is the option to invest in Company stock. The Company’s contribution consists of the following:

  •   A contribution which matches the participant’s contribution, up to a maximum of 3% of the employee’s compensation.
 
  •   An additional discretionary contribution.

    During the years ended December 31, 2004, 2003 and 2002, the Company’s contribution totaled $160,000, $139,000 and $135,000, respectively.
 
    Salary Continuation and Retirement Plans
 
    Salary continuation and retirement plans are in place for four key executives and members of the Board of Directors. Under these plans, the directors and executives will receive monthly payments for twelve to fifteen years, respectively, after retirement. These benefits are substantially equivalent to those available under split-dollar life insurance policies purchased by the Company on the lives of the directors and executives. In addition, the estimated present value of these future benefits is accrued over the period from the effective dates of the plans until the participants’ expected retirement dates. The expense recognized under these plans for the years ended December 31, 2004, 2003 and 2002 totaled $435,000, $402,000 and $199,000, respectively.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

14.   EMPLOYEE BENEFIT PLANS (Continued)
 
    Salary Continuation and Retirement Plans (Continued)
 
    In connection with these plans, the Company purchased single premium life insurance policies with cash surrender values totaling $8,362,000 and $8,013,000 at December 31, 2004 and 2003, respectively. Income earned on these policies, net of expenses, totaled $349,000, $278,000 and $183,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Income earned on these policies is not subject to Federal and State income tax.
 
15.   COMPREHENSIVE INCOME
 
    Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income (loss) that historically has not been recognized in the calculation of net income. The unrealized gains and losses on the Company’s available-for-sale investment securities are included in other comprehensive income (loss). Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the consolidated statement of changes in shareholders’ equity.
 
    At December 31, 2004, 2003 and 2002, the Company held securities classified as available-for-sale which had unrealized (losses) gains as follows:

                         
            Tax        
    Before     Benefit     After  
    Tax     (Expense)     Tax  
For the Year Ended December 31, 2004
                       
 
                       
Other comprehensive loss:
                       
 
                       
Unrealized holding losses
  $ (885,000 )   $ 362,000     $ (523,000 )
Reclassification adjustment for gains included in net income
    235,000       (100,000 )     135,000  
 
                 
 
                       
Total other comprehensive loss
  $ (1,120,000 )   $ 462,000     $ (658,000 )
 
                 
 
                       
For the Year Ended December 31, 2003
                       
 
                       
Other comprehensive loss:
                       
 
                       
Unrealized holding losses
  $ (87,000 )   $ 37,000     $ (50,000 )
Reclassification adjustment for gains included in net income
    328,000       (134,000 )     194,000  
 
                 
 
                       
Total other comprehensive loss
  $ (415,000 )   $ 171,000     $ (244,000 )
 
                 

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

15.   COMPREHENSIVE INCOME (Continued)

                         
    Before     Benefit     After  
    Tax     (Expense)     Tax  
For the Year Ended December 31, 2002
                       
 
                       
Other comprehensive income:
                       
 
                       
Unrealized holding gains
  $ 563,000     $ (232,000 )   $ 331,000  
Reclassification adjustment for gains included in net income
    117,000       (48,000 )     69,000  
 
                 
 
                       
Total other comprehensive income
  $ 446,000     $ (184,000 )   $ 262,000  
 
                 

16.   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 
    Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
 
    Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.
 
    The following methods and assumptions were used by management to estimate the fair value of its financial instruments at December 31, 2004 and 2003:
 
    Cash and cash equivalents: For cash and cash equivalents, the carrying amount is estimated to be fair value.
 
    Investment securities: For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

16.   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
 
    Loans: For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values of loans held for sale are estimated using quoted market prices for similar loans. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness. The fair value of loans is adjusted for the allowance for loan losses. The carrying amount of accrued interest receivable approximates its fair value.
 
    Cash surrender value of life insurance policies: The fair values of life insurance policies are based on current cash surrender values at each reporting date provided by the insurers.
 
    Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis using interest rates offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.
 
    Junior subordinated deferrable interest debentures: The fair value of junior subordinated deferrable interest debentures was determined based on the current market value for like kind instruments of a similar maturity and structure.
 
    Commitments to extend credit and letters of credit: Commitments to extend credit are primarily for variable rate loans and letters of credit. For these commitments, there is no difference between the committed amounts and their fair values. Commitments to fund fixed rate loans and letters of credit are at rates which approximate fair value at each reporting date.
 
    The estimated fair values of the Company’s financial instruments are as follows:

                                 
    December 31, 2004     December 31, 2003  
    Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
Financial assets:
                               
Cash and cash equivalents
  $ 11,444,000     $ 11,444,000     $ 30,012,000     $ 30,012,000  
Loans held for sale
                    276,000       276,000  
Investment securities
    113,252,000       113,390,000       115,883,000       116,102,000  
Loans
    263,891,000       265,452,000       214,863,000       215,488,000  
Cash surrender value of life insurance policies
    8,362,000       8,362,000       8,013,000       8,013,000  
Accrued interest receivable
    2,451,000       2,451,000       2,501,000       2,501,000  
 
                               
Financial liabilities:
                               
Deposits
  $ 378,567,000     $ 378,612,000     $ 355,842,000     $ 356,517,000  
Junior subordinated deferrable interest debentures
    6,186,000       6,186,000       6,186,000       6,186,000  
Accrued interest payable
    271,000       271,000       238,000       238,000  

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

16.   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

                                 
    December 31, 2004     December 31, 2003  
    Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
Off-balance-sheet financial instruments:
                               
Commitments to extend credit
  $ 90,084,000     $ 90,084,000     $ 60,203,000     $ 60,203,000  
Letters of credit
    1,777,000       1,777,000       1,802,000       1,802,000  

17.   INTANGIBLE ASSETS
 
    During 2003, the Company acquired certain assets and liabilities of the Kings Beach, Loyalton, Portola, Quincy and Truckee branches of Placer Sierra Bank. Upon acquisition, premises and equipment were valued at fair value and a core deposit premium was recorded as an intangible asset. This core deposit premium, along with core deposit premiums from previous acquisitions, is amortized using the straight-line method over ten years. Annually, the intangible asset is analyzed for impairment. At December 31, 2004, 2003 and 2002, no impairment of the intangible asset has been recognized in the consolidated financial statements. Amortization expense totaled $299,000, $161,000 and $135,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Unamortized core deposit premiums related to acquisitions totaled $1,939,000 and $2,238,000 at December 31, 2004 and 2003, respectively. The estimated intangible amortization is $301,000 for each year through December 31, 2009.

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Table of Contents

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

18.   PARENT ONLY CONDENSED FINANCIAL STATEMENTS

CONDENSED BALANCE SHEET

December 31, 2004 and 2003

                 
    2004     2003  
ASSETS
               
 
               
Cash and cash equivalents
  $ 8,000     $ 116,000  
Investment in bank subsidiary
    33,429,000       31,316,000  
Other assets
    645,000       539,000  
 
           
 
               
Total assets
  $ 34,082,000     $ 31,971,000  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Other liabilities
  $ 5,000     $ 36,000  
Junior subordinated deferrable interest debentures
    6,186,000       6,186,000  
 
           
 
               
Total liabilities
    6,191,000       6,222,000  
 
           
 
               
Shareholders’ equity:
               
Common stock
    4,013,000       3,945,000  
Retained earnings
    24,370,000       21,638,000  
Accumulated other comprehensive (loss) income
    (492,000 )     166,000  
 
           
 
               
Total shareholders’ equity
    27,891,000       25,749,000  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 34,082,000     $ 31,971,000  
 
           

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Table of Contents

18.   PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)

CONDENSED STATEMENT OF INCOME

For the Years Ended December 31, 2004 and 2003

                         
    2004     2003     2002  
Income:
                       
Dividends declared by bank subsidiary
  $ 1,250,000     $ 812,000     $ 944,000  
Earnings from investment in Plumas Statutory Trust I
    9,000       11,000          
 
                 
 
                       
Total income
    1,259,000       823,000       944,000  
 
                 
 
                       
Expenses:
                       
Interest on junior subordinated deferrable interest debentures
    305,000       288,000       87,000  
Other expenses
    335,000       347,000       129,000  
 
                 
 
                       
Total expenses
    640,000       635,000       216,000  
 
                 
 
                       
Income before equity in undistributed income of subsidiary
    619,000       188,000       728,000  
 
                       
Equity in undistributed income of subsidiary
    2,771,000       2,839,000       2,342,000  
 
                 
 
                       
Income before income taxes
    3,390,000       3,027,000       3,070,000  
 
                       
Income tax benefit
    256,000       254,000       84,000  
 
                 
 
                       
Net income
  $ 3,646,000     $ 3,281,000     $ 3,154,000  
 
                 

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Table of Contents

18.   PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)

CONDENSED STATEMENT OF CASH FLOWS

For the Years Ended December 31, 2004 and 2003

                         
    2004     2003     2002  
Cash flows from operating activities:
                       
Net income
  $ 3,646,000     $ 3,281,000     $ 3,154,000  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Undistributed net income of subsidiary
    (2,771,000 )     (2,839,000 )     (2,342,000 )
Increase in other assets
    (106,000 )     (88,000 )     (265,000 )
(Decrease) increase in other liabilities
    (31,000 )     31,000       5,000  
 
                 
 
                       
Net cash provided by operating activities
    738,000       385,000       552,000  
 
                 
 
                       
Cash flows from investing activities:
                       
Investment in bank subsidiary
            (3,000,000 )     (2,500,000 )
Investment in Plumas Statutory Trust I
                    (186,000 )
 
                 
 
                       
Net cash used in investing activities
            (3,000,000 )     (2,686,000 )
 
                 
 
                       
Cash flows from financing activities:
                       
 
                       
Proceeds from short-term borrowings
                    35,000  
Proceeds from issuance of junior subordinated deferral interest debentures
                    6,186,000  
Repayment of short-term borrowings
                    (35,000 )
Dividends paid
    (914,000 )     (776,000 )     (867,000 )
Cash paid to repurchase fractional shares
                    (4,000 )
Proceeds from the exercise of stock options
    68,000       202,000       124,000  
 
                 
 
                       
Net cash (used in) provided by financing activities
    (846,000 )     (574,000 )     5,439,000  
 
                 
 
                       
(Decrease) increase in cash and cash equivalents
    (108,000 )     (3,189,000 )     3,305,000  
 
                       
Cash and cash equivalents at beginning of year
    116,000       3,305,000          
 
                 
 
                       
Cash and cash equivalents at end of year
  $ 8,000     $ 116,000     $ 3,305,000  
 
                 
 
                       
Non-cash investing activities:
                       
 
                       
Issuance of common stock in exchange for the common stock of the Bank
                  $ 3,623,000  
 
                       
Net change in unrealized gain on investment securities available-for- sale
  $ (1,120,000 )   $ (415,000 )   $ 446,000  

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Table of Contents

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Items 10 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Items 11 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Items 12 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED MATTERS

The information required by Items 13 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Items 14 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)   Exhibits

     The following documents are included or incorporated by reference in this Annual Report on Form 10K.

     
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.
 
   
10.3
  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.
 
   
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.
 
   
10.6
  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.
 
   
10.9
  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
  First Amendment to Executive Salary Continuation Agreement of Robert T. Herr dated September 15, 2004, is included as Exhibit 10.11 to the Registrant’s 8-K filed on September 17, 2004, 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.
 
   
10.18
  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
  Split Dollar Agreements of Robert T. Herr dated September 15, 2004, is included as Exhibit 10.20 to the Registrant’s 8-K filed on September 17, 2004, which is incorporated by this reference herein.

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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.
 
   
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.
 
   
10.27
  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.
 
   
10.30
  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.
 
   
10.33
  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.
 
   
10.36
  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.
 
   
10.39
  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
 
   
10.42
  1991 Stock Option Plan on 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
  1991 Stock Option Plan as amended.
 
   
10.47
  Specimen form of Incentive Stock Option Agreement under the 1991 Stock Option Plan.
 
   
10.48
  Specimen form of Non-Qualified Stock Option Agreement under the 1991 Stock Option Plan.
 
   
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.
 
   
10.61
  Third Amendment to Executive Salary Continuation Agreement of William E. Elliott dated November 12, 2003, is included as Exhibit 10.61 to the Registrant’s 10-K for December 31, 2003, which is incorporated by this reference herein.

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11
  Computation of per share earnings appears in the attached 10-K under Item 8 Financial Statements — Plumas Bancorp and Subsidiary Notes to Consolidated Financial Statements as Footnote 10 – Shareholders’ Equity.
 
   
13.01
  Form 10-Q for the quarterly period ended March 31, 2004.
 
   
13.02
  Form 10-Q for the quarterly period ended June 30, 2004.
 
   
13.03
  Form 10-Q for the quarterly period ended September 30, 2004.
 
   
21.01
  Plumas Bank — California.
 
   
21.02
  Plumas Statutory Trust I – Connecticut.
 
   
23.01
  Independent Auditor’s Consent letter dated March 28, 2005.
 
   
31.1
  Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated March 28, 2005.
 
   
31.2
  Rule 13a-14(a) [Section 302] Certification of Principal Operating Officer dated March 28, 2005.
 
   
31.3
  Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated March 28, 2005.
 
   
32.1
  Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 28, 2005.
 
   
32.2
  Certification of Principal Operating Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 28, 2005.
 
   
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 March 28, 2005.

(b)   Reports on Form 8-K

On January 20, 2005, the Company filed a Current Report on Form 8-K. The Current Report included as an exhibit, the press release dated January 20, 2005, filed by the Company containing unaudited financial information and accompanying discussion for the year and quarter ended December 31, 2004.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 21, 2005

     
  /s/ W. E. ELLIOTT
   
   
  William E. Elliott
  President/Chief Executive Officer
 
   
  /s/ D. N. BIDDLE
   
   
  Douglas N. Biddle
  Executive Vice President Chief Operating Officer
 
   
  /s/ ANDREW RYBACK
   
   
  Andrew J. Ryback
  Executive Vice President Chief Financial Officer

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

     
/s/ JERRY V. KEHR
  Dated: March 22, 2005
 
   

   
Jerry V. Kehr, Director and
   
Chairman of the Board
   
 
   
/s/ DANIEL E. WEST
  Dated: March 22, 2005
 
   

   
Daniel E. West, Director and
   
Vice Chairman of the Board
   
 
   
/s/ ALVIN G.
  Dated: March 22, 2005
BLICKENSTAFF
   
 
   

   
Alvin G. Blickenstaff, Director
   
 
   
/s/ W. E. ELLIOTT
  Dated: March 22, 2005
 
   

   
William E. Elliott, Director
   
 
   
/s/ GERALD W.
  Dated: March 22, 2005
FLETCHER
   
 
   

   
Gerald W. Fletcher, Director
   
 
   
/s/ JOHN FLOURNOY
  Dated: March 22, 2005
 
   

   
John Flournoy, Director
   
 
   
/s/ ARTHUR C. GROHS
  Dated: March 22, 2005
 
   

   
Arthur C. Grohs, Director
   
 
   
/s/ CHRISTINE
  Dated: March 22, 2005
MCARTHUR
   
 
   

   
Christine McArthur, Director
   
 
   
/s/ TERRANCE J.
  Dated: March 22, 2005
REESON
   
 
   

   
Terrance J. Reeson, Director
   
 
   
/s/ THOMAS WATSON
  Dated: March 22, 2005
 
   

   
Thomas Watson, Director
   

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