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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K  x
    Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 2003 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  California
    
    75-2987096(State or other jurisdiction ofincorporation 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
    
    Nox
    
    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. o




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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes
    
    Noo
    
    x
 As of June 30, 2003, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant was
approximately $54.3 million, based on the closing price reported to the
Registrant on that date of $19.13 per share. Shares of Common Stock held by each officer and director and each person
owning more than five percent of the outstanding Common Stock 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
June 30, 2003 was 3,230,610. Documents Incorporated by Reference: Portions of the definitive proxy
statement for the 2004 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. 2




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TABLE OF CONTENTS PagePART IItem 1.    Business
    
    4Item 2.    Properties
    
    18Item 3.    Legal Proceedings
    
    19Item 4.    Submission of Matters to a Vote of Security Holders
    
    19PART IIItem 5.    Market for Registrants Common Equity and Related Stockholder Matters
    
    20Item 6.    Selected Financial Data
    
    22Item 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    23Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    41Item 8.    Financial Statements and Supplementary Data
    
    43Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    44Item 9A. Controls and Procedures
    
    44PART IIIItem 10.  Directors and Executive Officers of the Registrant
    
    44Item 11.  Executive Compensation
    
    44Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    44Item 13.  Certain Relationships and Related Transactions
    
    44Item 14.  Principal Accountant Fees and Services
    
    44PART IVItem 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    45EXHIBIT 10.61EXHIBIT 23.01EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 31.3EXHIBIT 32.1EXHIBIT 32.2EXHIBIT 32.2
  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
    
    An increase in mortgage interest rates, which would have a negative
effect on mortgage refinancing volume
    
    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 Actof
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. 4




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At December 31, 2003, the Company had consolidated assets of $390.3 million,
deposits of $355.8 million and shareholders equity of $25.7 million. The
Companys liabilities include $6.2 million in junior 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, 2003 the Bank had approximately $389.9 million in
assets, $217.9 million in loans and $355.9 million in deposits (including a
deposit of $116 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 lending and USDA Rural Development lending. The
Bank has applied for Preferred Lender status with the Small Business
Administration (the SBA) and once obtained, will allow for further expansion
of this center. In 2003, the Bank approved 11 SBA and Rural Development loans
totaling $14.9 million. This is a significant dollar increase from the 9 SBA
and Rural Development loans totaling $3.8 million approved in 2002. Also in
Truckee we have a senior commercial lender charged with the production and
maintenance of a significant participation loan portfolio. 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 and small- to medium-sized business farming organizations and
corporate farming units. Until recently, the Bank also had a group dedicated to originating residential
mortgage loans. However, in an effort to improve customer service, increase
non-interest income and reduce overhead expense, the residential mortgage
lending area was restructured and this groups focus was shifted to other
products. In 5




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early 2003 the Bank entered into an agreement with Community Bank Lending
Exchange (CBLX), whereby the Bank refers qualifying single family mortgage
loans to CBLX in exchange for a referral fee. As of December 31, 2003, 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
- 56.8%; (ii) commercial and industrial (including SBA) loans  23.4%; (iii)
consumer loans  13.1%; and (iv) agricultural loans  6.7%. In addition to the lending activities noted above, we offer a wide range of
deposit products for the retail banking market including checking,
interest-bearing checking, savings, time deposit and retirement accounts, as
well as telephone banking and internet banking with bill-pay options. As of
December 31, 2003, the Bank had 42,746 deposit accounts with balances totaling
approximately $355.9 million, compared to 36,708 deposit accounts with balances
totaling approximately $297.2 million at December 31, 2002. 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 $8,000 at December
31, 2003, 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, 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, mortgage lending was outsourced as previously discussed, real
estate equity line products were improved to be more competitive, real estate
construction loan products were expanded, the use of credit scored consumer
and business products was expanded to provide more timely customer service.
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 more metropolitan
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 its 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. 6




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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. 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. 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, 2003
approximately 56.8% 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. 7




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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 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 20 branch offices of
competing institutions, including 15 branches of 4 major banks. As of June 30,
2003, the Federal Deposit Insurance Corporation estimated the Banks market
share of insured deposits within the communities it serves to be as follows:
Quincy 73%, Portola 53%, Truckee 17%, Fall River Mills 41%, Alturas 35%,
Susanville 25%, Chester 71%, Kings Beach 39% and 100% in the communities of
Greenville, Westwood and Loyalton. As of June 30, 2003, the Bank had no market
share in the community of Tahoe City, the location of our de novo branch, which
opened its doors in November 2003. Additionally the market share data above
includes the market share of the five branches that were acquired 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, 2003, the Company and its subsidiary employed 191
persons. On a full-time equivalent basis, we employed 155 persons. We believe
our employee relations are excellent. 8




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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 9




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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, 2003 follow: RequirementAdequately
    
    Well
    
    Plumas
    
    PlumasCapitalized
    
    Capitalized
    
    Bank
    
    BancorpTotal risk-based capital ratio
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    11.1
    %
    
    
    11.3
    %Tier 1 risk-based capital ratio
    
    
    4.0
    %
    
    
    6.0
    %
    
    
    10.3
    %
    
    
    10.4
    %Tier 1 leverage capital ratio
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    8.2
    %
    
    
    8.4
    %
 10




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If Tier I capital treatment for our trust preferred securities were disallowed,
there would be a reduction in our consolidated capital ratios. The following
table shows as of December 31, 2003:  
    
    our current capital position,
    
    our pro forma capital position if the FRB granted only
Tier II status to our trust preferred securities,
    
    our pro forma capital position if the FRB excluded
entirely our trust preferred securities from capital, and
    
    the minimum regulatory capital requirements. Tier 1 Risk-
    
    Total Risk-Based Capital
    
    Based CapitalLeverage Ratio
    
    Ratio
    
    RatioPlumas Bancorps current capital
Position
    
    
    8.4
    %
    
    
    10.4
    %
    
    
    11.3
    %Assuming trust preferred securities
only qualified as Tier 2 capital
    
    
    6.7
    %
    
    
    8.5
    %
    
    
    9.7
    %Assuming trust preferred securities
were excluded entirely from capital
    
    
    6.7
    %
    
    
    8.3
    %
    
    
    9.2
    %Minimum regulatory requirement
    
    
    4.0
    %
    
    
    4.0
    %
    
    
    8.0
    %
 As the table shows, we would continue to meet minimum regulatory capital
requirements under FRB guidelines in the event that the FRB elected to change
its position with regards to the capital treatment of trust preferred
securities. If Tier I capital treatment were disallowed, then we could redeem
the trust preferred securities pursuant to the terms of the trust preferred
securities, and have the ability to identify and obtain other sources of
capital. The rules regarding special purpose entities are further discussed in
the section titled Recent Accounting Pronouncements. 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 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 11




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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. As an FHLB
member, the bank is required to own capital stock in an FHLB in an amount equal
to the greater of:  
    
    1% of its aggregate outstanding principal amount of its residential
mortgage loans, home purchase contracts and similar obligations at the
beginning of each calendar year, or
    
    5% of its FHLB advances or borrowings. A new capital plan of the FHLB-SF was approved by the Federal Housing Finance
Board and will be implemented 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. Each
member will be required to own stock in amount equal to the greater of:  
    
    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. 12




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We do not believe that the initial implementation of the FHLB-SF new capital
plan as approved will have 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, 2003, we
were in compliance with these requirements. Impact of Monetary Policies.The earnings and growth of the bank are subject
to the influence of domestic and foreign economic conditions, including
inflation, recession and unemployment. The earnings of the bank 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 Actand FRB Regulation Oplace 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 bank 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 bank is subject to
many federal consumer protection statutes and regulations, some of which are
discussed below. 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 13




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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 believes 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 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 14




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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. 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 15




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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. 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. 16




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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.In December 2003, the FASB revised FASB
Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46).
This interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities that possess certain characteristics. FIN 46
requires that if a business enterprise has a controlling financial interest in
a variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity must be included in the consolidated
financial statements with those of the business enterprise. We adopted FIN 46
on December 31, 2003. Adoption of this standard required us to deconsolidate
our investment in Plumas Statutory Trust I made in September 2002. The
deconsolidation of Plumas Statutory Trust I, formed in connection with the
issuance of trust preferred securities, appears to be an unintended consequence
of FIN 46. In managements opinion, the effect of deconsolidation on our
consolidated financial position, results of operations and cash flows was not
material. In July 2003, the FRB issued a supervisory letter instructing bank holding
companies to continue to include trust preferred securities in their Tier 1
capital for regulatory capital purposes until notice is given to the contrary.
The FRB intends to review the regulatory implications of the accounting changes
resulting from FIN 46 and, if necessary or warranted, provide further
appropriate guidance. We cannot assure you that the Federal Reserve will
continue to allow institutions to include trust preferred securities in Tier 1
capital for regulatory capital purposes. On April 30, 2003, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends and clarifies the accounting for derivative
instruments by providing guidance related to circumstances under which a
contract with a net investment meets the characteristics of a derivative as
discussed in SFAS No. 133. The statement also clarifies when a derivative
contains a financing component. The statement is intended to result in more
consistent reporting for derivative contracts and must be applied prospectively
for contracts entered into or modified after June 30, 2003, except for hedging
relationships designated after June 30, 2003. In managements opinion,
adoption of this statement is not expected to have a material impact on our
consolidated financial position, results of operations or cash flows. 17




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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
three other administrative lending offices. The Company also owns three real
estate investment properties that are expected to either be used in its
operations or sold. Owned Properties35 South Lindan Avenue
Quincy, California (1)
    
    32 Central Avenue
Quincy, California (1)
    
    336 West Main Street
Quincy, California120 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, California255 Main Street
Chester, California
    
    8475 North Lake Boulevard
Kings Beach, California
    
    76 Crescent Street
Quincy, California (3)24 West Sierra Avenue
Portola, California (3)
    
    100 Grand Avenue
Susanville, California (3)
 Leased Properties11429 Donner Pass Road
Truckee, California
    
    243 North Lake Boulevard
Tahoe City, California
    
    604 Main Street
Loyalton, California11317 Deerfield Drive
Truckee, California (1)
    
    10059 Palisades Drive
Truckee, California (1)
    
    10116 Jibboom
Truckee, California (1)
  (1)
    
    Non-branch administrative or credit administrative offices.(2)
    
    The Westwood branch is a mortgaged property with an outstanding balance of
$87,000 at December 31, 2003.(3)
    
    Real estate investment property not currently in use. Total rental expenses under all leases, including premises, totaled $179,000,
$85,000 and $97,000, in 2003, 2002 and 2001 respectively. The expiration dates
of the leases vary, with the first such lease expiring during 2004 and the last
such lease expiring during 2008. Future minimum lease payments in dollars are
as follows: Year EndingDecember 31,2004
    
    $
    232,5002005
    
    
    225,0002006
    
    
    153,4002007
    
    
    101,6002008
    
    
    32,500Total
    
    $
    745,000
 18




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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. 19




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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, 2003, there were
3,242,027 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. The stock prices and per share cash dividends presented below have
been adjusted to reflect the three-for-two stock split issued in November 2002. Closing PricesQuarter
    
    Dividends
    
    High
    
    Low4th Quarter 2003
    
    $
    0.12
    
    
    $
    20.25
    
    
    $
    18.753rd Quarter 2003
    
    
    
    
    
    $
    20.00
    
    
    $
    18.752nd Quarter 2003
    
    $
    0.12
    
    
    $
    19.25
    
    
    $
    16.631st Quarter 2003
    
    
    
    
    
    $
    17.50
    
    
    $
    15.304th Quarter 2002
    
    $
    0.05
    
    
    $
    17.00
    
    
    $
    14.833rd Quarter 2002
    
    
    
    
    
    $
    16.67
    
    
    $
    13.832nd Quarter 2002
    
    $
    0.22
    
    
    $
    15.00
    
    
    $
    9.801st Quarter 2002
    
    
    
    
    
    $
    10.67
    
    
    $
    9.33
 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%. 20




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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, 2003. Number of securities remainingNumber of securities to
    
    Weighted-average
    
    available for future issuancebe issued upon exercise
    
    exercise price of
    
    under equity compensationof outstanding options,
    
    outstanding options,
    
    plans (excluding securitieswarrants and rights
    
    warrants and rights
    
    reflected in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    291,080
    
    
    $
    13.01
    
    
    
    447,575Equity compensation
plans not approved
by security holders
    
    None
    
    Not Applicable
    
    NoneTotal
    
    
    291,080
    
    
    $
    13.01
    
    
    
    447,575
 A complete description of the above plans is included in Note 10 of the
Companys Consolidated Financial Statements in Item 8 of this Annual Report on
Form 10K, and is hereby incorporated by reference. 21




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA Summary of Consolidated Financial Data and Performance Ratios At or for the year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(dollars in thousands except per share information)Statement of IncomeInterest income
    
    $
    18,413
    
    
    $
    18,389
    
    
    $
    19,149
    
    
    $
    18,455
    
    
    $
    15,500Interest expense
    
    
    3,013
    
    
    
    4,038
    
    
    
    6,373
    
    
    
    6,724
    
    
    
    5,096Net interest income
    
    
    15,400
    
    
    
    14,351
    
    
    
    12,776
    
    
    
    11,731
    
    
    
    10,404Provision for loan losses
    
    
    750
    
    
    
    825
    
    
    
    725
    
    
    
    500
    
    
    
    480Noninterest income
    
    
    3,775
    
    
    
    3,278
    
    
    
    2,854
    
    
    
    2,167
    
    
    
    1,974Noninterest expense
    
    
    13,126
    
    
    
    11,604
    
    
    
    10,480
    
    
    
    9,431
    
    
    
    8,188Provision for income taxes
    
    
    2,018
    
    
    
    2,046
    
    
    
    1,667
    
    
    
    1,404
    
    
    
    1,442Net income
    
    $
    3,281
    
    
    $
    3,154
    
    
    $
    2,758
    
    
    $
    2,563
    
    
    $
    2,268Balance sheet (end of period)Total assets
    
    $
    390,262
    
    
    $
    325,650
    
    
    $
    275,090
    
    
    $
    243,601
    
    
    $
    212,315Total loans
    
    $
    217,957
    
    
    $
    207,721
    
    
    $
    183,676
    
    
    $
    164,004
    
    
    $
    128,883Allowance for loan losses
    
    $
    2,564
    
    
    $
    2,471
    
    
    $
    2,153
    
    
    $
    1,888
    
    
    $
    1,608Total deposits
    
    $
    355,842
    
    
    $
    293,941
    
    
    $
    252,206
    
    
    $
    223,256
    
    
    $
    194,163Total shareholders equity
    
    $
    25,749
    
    
    $
    23,286
    
    
    $
    20,617
    
    
    $
    18,165
    
    
    $
    16,813Balance sheet (period average)Total assets
    
    $
    339,353
    
    
    $
    294,708
    
    
    $
    257,581
    
    
    $
    229,508
    
    
    $
    206,800Total loans
    
    $
    214,178
    
    
    $
    197,900
    
    
    $
    176,746
    
    
    $
    141,562
    
    
    $
    114,785Total deposits
    
    $
    304,835
    
    
    $
    268,773
    
    
    $
    235,840
    
    
    $
    209,794
    
    
    $
    189,092Total shareholders equity
    
    $
    25,809
    
    
    $
    22,184
    
    
    $
    19,423
    
    
    $
    17,194
    
    
    $
    16,094Capital ratiosLeverage ratio
    
    
    8.4
    %
    
    
    8.8
    %
    
    
    7.4
    %
    
    
    7.1
    %
    
    
    7.6
    %Tier 1 risk-based capital
    
    
    10.4
    %
    
    
    11.8
    %
    
    
    9.3
    %
    
    
    9.2
    %
    
    
    10.1
    %Total risk-based capital
    
    
    11.3
    %
    
    
    12.8
    %
    
    
    10.3
    %
    
    
    10.2
    %
    
    
    11.1
    %Asset quality ratiosNonperforming loans/total loans
    
    
    0.40
    %
    
    
    0.86
    %
    
    
    0.71
    %
    
    
    0.32
    %
    
    
    0.50
    %Nonperforming assets/total assets
    
    
    0.22
    %
    
    
    0.59
    %
    
    
    0.52
    %
    
    
    0.34
    %
    
    
    0.58
    %Allowance for loan losses/total loans
    
    
    1.18
    %
    
    
    1.19
    %
    
    
    1.17
    %
    
    
    1.15
    %
    
    
    1.25
    %Performance ratiosReturn on average assets
    
    
    0.97
    %
    
    
    1.07
    %
    
    
    1.07
    %
    
    
    1.12
    %
    
    
    1.10
    %Return on average equity
    
    
    12.7
    %
    
    
    14.2
    %
    
    
    14.2
    %
    
    
    14.9
    %
    
    
    14.1
    %Net interest margin
    
    
    5.16
    %
    
    
    5.48
    %
    
    
    5.57
    %
    
    
    5.84
    %
    
    
    5.53
    %Loans to Deposits
    
    
    61.3
    %
    
    
    70.7
    %
    
    
    72.8
    %
    
    
    73.5
    %
    
    
    66.4
    %Efficiency ratio
    
    
    68.5
    %
    
    
    65.8
    %
    
    
    67.1
    %
    
    
    67.9
    %
    
    
    66.2
    %Per share informationBasic earnings
    
    $
    1.02
    
    
    $
    0.99
    
    
    $
    0.87
    
    
    $
    0.82
    
    
    $
    0.72Diluted earnings
    
    $
    0.99
    
    
    $
    0.96
    
    
    $
    0.86
    
    
    $
    0.79
    
    
    $
    0.67Cash dividends
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.18Dividend payout ratio
    
    
    23.7
    %
    
    
    27.3
    %
    
    
    23.0
    %
    
    
    24.4
    %
    
    
    25.0
    %Book value
    
    $
    7.93
    
    
    $
    7.26
    
    
    $
    6.46
    
    
    $
    5.89
    
    
    $
    5.32Common shares outstanding at period end
    
    
    3,242,027
    
    
    
    3,209,317
    
    
    
    3,192,335
    
    
    
    3,082,457
    
    
    
    3,160,946
 22




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##### Table of Contents



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, fees
from the sale or referral of loans, interest on investment securities and fees
received in connection with servicing loan and deposit customers. 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 2003 we opened a de novo branch in Tahoe City. Also in 2003 we
bought five branches located within our existing service area from Placer
Sierra Bank. The transaction closed on November 14, 2003. As a result, our
assets and liabilities increased by approximately $45 million and we recorded a
premium associated with the branch purchase of $1.7 million. This premium was
recorded as an intangible asset with an estimated life of approximately 10
years. 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 periodically. 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 would normally have 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 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 23




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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 Goodwill.Goodwill represents the excess of the purchase price
over the fair value of net assets acquired. In accordance with Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
goodwill will not be amortized but will be evaluated for impairment at least
annually. Goodwill will be tested for impairment using quoted market values and
a discounted cash flow model to determine if the fair value of our assets, net
of liabilities, exceeds the carrying amount. If the fair value of our net
assets is determined to be less than the carrying amount, goodwill will be
written down through a charge to operations. 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, 2003 and 2002 and for each of the
three years in the period ended December 31, 2003. 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 $127,000, or 4.0%, to $3,281,000 for the
year ended December 31, 2003 from $3,154,000 for the same period in 2002. The
primary contributors to the modest increase in net income for 2003 were a $1
million decrease in interest expense and a $0.5 million increase in
non-interest income largely offset by a $1.5 million increase in non-interest
expenses. Total assets at December 31, 2003 increased $65 million, or 20%, to $390
million from $325 million at December 31, 2002. Growth in total assets was
primarily concentrated in the investment portfolio with moderate growth in the
loan portfolio. The investment portfolio grew $54 million, or 89%, to $116
million during 2003, while the loan portfolio grew $10 million, or 5%, to $215
million during the same period. Growth in both investments and loans was
funded by significant growth in deposits. Deposits grew $62 million, or 21%,
to $356 million at December 31, 2003 from $294 million at December 31, 2002.
Growth in the Companys deposits were largely the result of the acquisition, in
November 2003 of five branches from Placer Sierra Bank. The deposits purchased
amounted to $45.5 million and the funds received from assuming these deposits
were directed into the Companys investment portfolio. The return on average assets was 0.97% for 2003, down from 1.07% for 2002. The
return on average equity was 12.7% for 2003, down from 14.2% for 2002.
Although the Company reported its fifteenth consecutive year of earnings growth
in 2003, the years earnings growth was outpaced by growth in both assets and
shareholders equity balances. Average assets increased $45 million, or 15%,
while average shareholders equity increased $3.6 million, or 16% during 2003. 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 24




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##### Table of Contents



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 31,2003
    
    2002
    
    2001Interest
    
    Rates
    
    
    
    
    
    Interest
    
    Rates
    
    
    
    
    
    Interest
    
    RatesAverage
    
    income/
    
    earned
    
    Average
    
    income/
    
    earned
    
    Average
    
    income/
    
    earnedbalance
    
    expense
    
    /paid
    
    balance
    
    expense
    
    / paid
    
    balance
    
    expense
    
    / paid(dollars in thousands)AssetsFederal funds sold
    
    $
    11,276
    
    
    $
    116
    
    
    
    1.03
    %
    
    $
    17,465
    
    
    $
    275
    
    
    
    1.57
    %
    
    $
    9,729
    
    
    $
    321
    
    
    
    3.30
    %Investment securities(1)
    
    
    72,745
    
    
    
    2,221
    
    
    
    3.05
    
    
    
    46,628
    
    
    
    2,065
    
    
    
    4.43
    
    
    
    42,725
    
    
    
    2,374
    
    
    
    5.56Total loans (2)(3)
    
    
    214,178
    
    
    
    16,076
    
    
    
    7.51
    
    
    
    197,900
    
    
    
    16,049
    
    
    
    8.11
    
    
    
    176,746
    
    
    
    16,454
    
    
    
    9.31Total earning assets
    
    
    298,199
    
    
    
    18,413
    
    
    
    6.17
    %
    
    
    261,993
    
    
    
    18,389
    
    
    
    7.02
    %
    
    
    229,200
    
    
    
    19,149
    
    
    
    8.35
    %Cash and due from banks
    
    
    21,517
    
    
    
    
    
    
    
    
    
    
    
    16,201
    
    
    
    
    
    
    
    
    
    
    
    13,983Other assets
    
    
    19,637
    
    
    
    
    
    
    
    
    
    
    
    16,514
    
    
    
    
    
    
    
    
    
    
    
    14,398Total assets
    
    $
    339,353
    
    
    
    
    
    
    
    
    
    
    $
    294,708
    
    
    
    
    
    
    
    
    
    
    $
    257,581Liabilities and
shareholders equityInterest bearing demand
deposits
    
    $
    35,668
    
    
    
    79
    
    
    
    0.22
    %
    
    $
    33,070
    
    
    
    114
    
    
    
    0.34
    %
    
    $
    28,131
    
    
    
    195
    
    
    
    0.69
    %Money market deposits
    
    
    58,814
    
    
    
    498
    
    
    
    0.85
    
    
    
    51,776
    
    
    
    775
    
    
    
    1.50
    
    
    
    42,045
    
    
    
    1,285
    
    
    
    3.06Savings deposits
    
    
    48,866
    
    
    
    310
    
    
    
    0.63
    
    
    
    39,094
    
    
    
    432
    
    
    
    1.11
    
    
    
    32,753
    
    
    
    581
    
    
    
    1.77Time deposits
    
    
    83,186
    
    
    
    1,816
    
    
    
    2.18
    
    
    
    84,195
    
    
    
    2,624
    
    
    
    3.12
    
    
    
    85,307
    
    
    
    4,307
    
    
    
    5.05Other borrowings(4)
    
    
    6,375
    
    
    
    310
    
    
    
    4.86
    
    
    
    1,617
    
    
    
    93
    
    
    
    5.75
    
    
    
    51
    
    
    
    5
    
    
    
    9.80Total interest bearing
liabilities
    
    
    232,909
    
    
    
    3,013
    
    
    
    1.29
    %
    
    
    209,752
    
    
    
    4,038
    
    
    
    1.93
    %
    
    
    188,287
    
    
    
    6,373
    
    
    
    3.38
    %Noninterest bearing
demand deposits
    
    
    78,301
    
    
    
    
    
    
    
    
    
    
    
    60,638
    
    
    
    
    
    
    
    
    
    
    
    47,604Other liabilities
    
    
    2,334
    
    
    
    
    
    
    
    
    
    
    
    2,134
    
    
    
    
    
    
    
    
    
    
    
    2,267Shareholders equity
    
    
    25,809
    
    
    
    
    
    
    
    
    
    
    
    22,184
    
    
    
    
    
    
    
    
    
    
    
    19,423Total liabilities
and shareholders
equity
    
    $
    339,353
    
    
    
    
    
    
    
    
    
    
    $
    294,708
    
    
    
    
    
    
    
    
    
    
    $
    257,581Net interest income
    
    
    
    
    
    $
    15,400
    
    
    
    
    
    
    
    
    
    
    $
    14,351
    
    
    
    
    
    
    
    
    
    
    $
    12,776Net interest spread (5)
    
    
    
    
    
    
    
    
    
    
    4.88
    %
    
    
    
    
    
    
    
    
    
    
    5.09
    %
    
    
    
    
    
    
    
    
    
    
    4.97
    %Net interest margin (6)
    
    
    
    
    
    
    
    
    
    
    5.16
    %
    
    
    
    
    
    
    
    
    
    
    5.48
    %
    
    
    
    
    
    
    
    
    
    
    5.57
    %
   (1)
    
    Not computed on a tax-equivalent basis.(2)
    
    Average nonaccrual loan balances of $2.0 million for 2003, $1.5 million
for 2002 and $0.7 million for 2001 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 $579,000
for both 2003 and 2002 and $693,000 for 2001.(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. 25




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##### Table of Contents



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: 2003 compared to 2002
    
    2002 compared to 2001Increase (decrease) due to change in:
    
    Increase (decrease) due to change in:Average
    
    Average
    
    
    
    
    
    
    
    
    
    Average
    
    AverageVolume(1)
    
    Rate(2)
    
    Mix(3)
    
    Total
    
    Volume(1)
    
    Rate(2)
    
    Mix(3)
    
    Total(dollars in thousands)Interest-earning assets:Federal funds sold
    
    $
    (98
    )
    
    $
    (95
    )
    
    $
    34
    
    
    $
    (159
    )
    
    $
    255
    
    
    $
    (168
    )
    
    $
    (133
    )
    
    $
    (46
    )Investment securities
    
    
    1,156
    
    
    
    (641
    )
    
    
    (359
    )
    
    
    156
    
    
    
    217
    
    
    
    (482
    )
    
    
    (44
    )
    
    
    (309
    )Loans
    
    
    1,320
    
    
    
    (1,195
    )
    
    
    (98
    )
    
    
    27
    
    
    
    1,969
    
    
    
    (2,120
    )
    
    
    (254
    )
    
    
    (405
    )Total interest income
    
    
    2,378
    
    
    
    (1,931
    )
    
    
    (423
    )
    
    
    24
    
    
    
    2,441
    
    
    
    (2,770
    )
    
    
    (431
    )
    
    
    (760
    )Interest-bearing
liabilities:Interest bearing demand
deposits
    
    
    9
    
    
    
    (41
    )
    
    
    (3
    )
    
    
    (35
    )
    
    
    34
    
    
    
    (98
    )
    
    
    (17
    )
    
    
    (81
    )Money market deposits
    
    
    106
    
    
    
    (337
    )
    
    
    (46
    )
    
    
    (277
    )
    
    
    297
    
    
    
    (656
    )
    
    
    (152
    )
    
    
    (511
    )Savings deposits
    
    
    108
    
    
    
    (184
    )
    
    
    (46
    )
    
    
    (122
    )
    
    
    112
    
    
    
    (219
    )
    
    
    (42
    )
    
    
    (149
    )Time deposits
    
    
    (31
    )
    
    
    (786
    )
    
    
    9
    
    
    
    (808
    )
    
    
    (56
    )
    
    
    (1,648
    )
    
    
    21
    
    
    
    (1,683
    )Other borrowings
    
    
    273
    
    
    
    (14
    )
    
    
    (42
    )
    
    
    217
    
    
    
    154
    
    
    
    (2
    )
    
    
    (63
    )
    
    
    89Total interest expense
    
    
    465
    
    
    
    (1,362
    )
    
    
    (128
    )
    
    
    (1,025
    )
    
    
    541
    
    
    
    (2,623
    )
    
    
    (253
    )
    
    
    (2,335
    )Net interest income
    
    $
    1,913
    
    
    $
    (569
    )
    
    $
    (295
    )
    
    $
    1,049
    
    
    $
    1,900
    
    
    $
    (147
    )
    
    $
    (178
    )
    
    $
    1,575
  (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. 2003 compared to 2002.Net interest income before provision for loan losses is
the difference between interest income and interest expense. Net interest
income, on a nontax-equivalent basis, 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
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. Net interest margin is net interest income expressed as a percentage of average
interest-earning assets. 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. 2002 compared to 2001.Net interest income, on a nontax-equivalent basis, was
$14.4 million for 2002, an increase of $1.6 million, or 12%, from $12.8 million
for 2001. The increase in net interest income was attributed to declines in
rates paid on deposits combined with volume increases in average loan balances,
partially offset by declines in the yields on interest-earning assets. The
average loan balances were $197.9 million for 2002, up $21.2 million, or 12%,
from the $176.7 million for 2001. Offsetting the benefits of the 26




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##### Table of Contents



increased loan volume was the continuing impact of the 2001 falling interest
rate environment. The average loan yield was 8.11% for 2002, down 120 basis
points, or 13%, from the 9.31% for 2001. Interest expense decreased $2.3 million, or 36.7%, to $4.0 million for 2002,
down from $6.4 million for 2001. The decrease in interest expense was
primarily attributed to rate decreases for both time and money market deposits,
slightly offset by volume increases in deposits. The average rate paid on time
deposits was 3.12% for 2002, down 193 basis points, or 38.2%, from the 5.05%
paid for 2001. The average rate paid on money market deposits was 1.50% for
2002, down 156 basis points, or 51.0%, from the 3.06% paid for 2001. The
average money market deposit balances were $51.8 million for 2002, up $9.7
million, or 23%, from the $42.0 million for 2001. The net interest margin for 2002 decreased 9 basis points to 5.48%, down from
5.57% for 2001. The adverse effects of the 2001 falling interest rate
environment on the Companys interest-earning assets offset the positive
effects of the declining cost of funds and increasing loan volumes and resulted
in the slight decrease in the net interest margin when comparing the periods of
2002 and 2001. 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, $825,000 and $725,000 in provision for loan
losses for 2003, 2002 and 2001, respectively. The decrease in the provision
for loan losses during 2003 was the result of significant improvements in the
loan portfolios overall credit quality slightly offset by modest growth in
loan balances. 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%. The increase in the provision for loan losses during 2002 was
primarily the result of increasing loan balances. Loan growth for the
year-ended 2002 amounted to $23.9 million, or 13%. The Company assesses its
loan quality monthly to maintain an adequate allowance for loan losses. Based
on information currently available, management believes that the allowance for
loan losses is adequate to absorb potential risks in the portfolio. However,
no assurance can be given that the Company may not sustain charge-offs which
are in excess of the allowance in any given period. 27




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##### Table of Contents



Non-Interest Income The following table describes the components of non-interest income for the
years ended December 31, 2003, 2002 and 2001. Years Ended December 31,
    
    Change during Year2003
    
    2002
    
    2001
    
    2003
    
    2002(dollars in thousands)Service charges
    
    $
    1,988
    
    
    $
    1,905
    
    
    $
    1,596
    
    
    $
    83
    
    
    $
    309Loan origination and servicing
    
    
    272
    
    
    
    181
    
    
    
    134
    
    
    
    91
    
    
    
    47Cash surrender value life
insurance earnings
    
    
    313
    
    
    
    217
    
    
    
    243
    
    
    
    96
    
    
    
    (26
    )Gain on sale of loans, net
    
    
    203
    
    
    
    191
    
    
    
    267
    
    
    
    12
    
    
    
    (76
    )Gain on sale of
investment securities, net
    
    
    328
    
    
    
    117
    
    
    
    72
    
    
    
    211
    
    
    
    45Merchant processing
    
    
    235
    
    
    
    205
    
    
    
    149
    
    
    
    30
    
    
    
    56Investment services
    
    
    134
    
    
    
    144
    
    
    
    113
    
    
    
    (10
    )
    
    
    31Other income
    
    
    302
    
    
    
    318
    
    
    
    280
    
    
    
    (16
    )
    
    
    38Total non-interest income
    
    $
    3,775
    
    
    $
    3,278
    
    
    $
    2,854
    
    
    $
    497
    
    
    $
    424
 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 bank-owned life insurance
policies (BOLI), 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 BOLI by $3.2 million to provide additional coverage for an executive officer
of the Company. The increase in BOLI 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 processor CBLX. 2002 compared to 2001.During 2002, total non-interest income increased
$424,000, or 15%, to $3.3 million, up from $2.9 million for 2001. The increase
in non-interest income is primarily due to increases in the number of fee
generating accounts, merchant processing income, alternative investment fee
income, gains on the sale of available-for-sale investment securities and
restructuring of the Banks service charge fee schedule in February 2002,
partially offset by reduced gains on the sale of loans. 28




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##### Table of Contents



Non-Interest Expense The following table describes the components of other non-interest expense for
the years ended December 31, 2003, 2002 and 2001. Years Ended December 31,
    
    Change during Year2003
    
    2002
    
    2001
    
    2003
    
    2002(dollars in thousands)Salaries and employee benefits
    
    $
    7,442
    
    
    $
    6,269
    
    
    $
    5,867
    
    
    $
    1,173
    
    
    $
    402Occupancy and equipment
    
    
    2,343
    
    
    
    1,794
    
    
    
    1,525
    
    
    
    549
    
    
    
    269Professional fees
    
    
    392
    
    
    
    673
    
    
    
    369
    
    
    
    (281
    )
    
    
    304Telephone
    
    
    357
    
    
    
    347
    
    
    
    293
    
    
    
    10
    
    
    
    54Business development
    
    
    357
    
    
    
    371
    
    
    
    330
    
    
    
    (14
    )
    
    
    41Stationery and supplies
    
    
    349
    
    
    
    324
    
    
    
    300
    
    
    
    25
    
    
    
    24Armored car and courier
    
    
    342
    
    
    
    318
    
    
    
    354
    
    
    
    24
    
    
    
    (36
    )Advertising and promotion
    
    
    288
    
    
    
    260
    
    
    
    237
    
    
    
    28
    
    
    
    23Postage
    
    
    253
    
    
    
    184
    
    
    
    201
    
    
    
    69
    
    
    
    (17
    )Director compensation
    
    
    196
    
    
    
    228
    
    
    
    216
    
    
    
    (32
    )
    
    
    12Loan expenses
    
    
    170
    
    
    
    244
    
    
    
    216
    
    
    
    (74
    )
    
    
    28Insurance
    
    
    164
    
    
    
    171
    
    
    
    131
    
    
    
    (7
    )
    
    
    40Other expense
    
    
    473
    
    
    
    421
    
    
    
    441
    
    
    
    52
    
    
    
    (20
    )Total non-interest expense
    
    $
    13,126
    
    
    $
    11,604
    
    
    $
    10,480
    
    
    $
    1,522
    
    
    $
    1,124
 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. 2002 compared to 2001.During 2002, non-interest expense increased $1.1
million, or 10.7%, to $11.6 million, up from $10.5 million for 2001. The
increase in non-interest expense is primarily due to increased salary and
benefit costs, equipment depreciation expense and professional fees. The
increase to salary and 29




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##### Table of Contents



benefits was the result of staffing additions to manage the overall growth of
the Company as well as higher health-care costs. The increases to equipment
expense were the result of, additional depreciation expense resulting from the
installation of an automated teller platform system and enhancement to the
Companys data processing systems. The increases to professional fees related
to the use of consultants for the enhancement of the systems securing customer
and Company information 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 30.9%, 23.4% and 21.4%, respectively of the Companys total loan
portfolio at December 31, 2003, and approximately 31.8%, 25.2% and 23.3%,
respectively of the Companys total loan portfolio at December 31, 2002. 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 56.8% of the
total loan portfolio at December 31, 2003. 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 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, 2003, approximately 63% of the
Companys loan portfolio was compromised of variable rate loans, and at
December 31, 2002, approximately 62% of the Companys loan portfolio was
compromised of variable interest 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 outstanding at December 31, 2003 increased
slightly to $26.5 million, or 12.2% of the Companys total loan portfolio, from
$25.6 million, or 12.3%, at December 31, 2002 30




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##### Table of Contents



The following table sets forth the amounts of loans outstanding by
category as of the dates indicated. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(dollars in thousands)Real estate  mortgage
    
    $
    67,532
    
    
    $
    66,039
    
    
    $
    50,865
    
    
    $
    48,878
    
    
    $
    41,879Real estate  construction
    
    
    26,194
    
    
    
    15,175
    
    
    
    13,705
    
    
    
    10,118
    
    
    
    7,818Commercial
    
    
    51,073
    
    
    
    52,432
    
    
    
    49,910
    
    
    
    43,464
    
    
    
    29,494Consumer
    
    
    46,621
    
    
    
    48,465
    
    
    
    47,280
    
    
    
    43,793
    
    
    
    34,715Agriculture
    
    
    26,537
    
    
    
    25,610
    
    
    
    21,916
    
    
    
    17,751
    
    
    
    14,977Total loans
    
    
    217,957
    
    
    
    207,721
    
    
    
    183,676
    
    
    
    164,004
    
    
    
    128,883Less:Deferred fees
    
    
    530
    
    
    
    601
    
    
    
    748
    
    
    
    664
    
    
    
    490Allowance for loan losses
    
    
    2,564
    
    
    
    2,471
    
    
    
    2,153
    
    
    
    1,888
    
    
    
    1,608Net loans
    
    $
    214,863
    
    
    $
    204,649
    
    
    $
    180,775
    
    
    $
    161,452
    
    
    $
    126,785
 The following table sets forth the maturity/repricing of gross loan categories
as of December 31, 2003. Also provided with respect to such loans are the
amounts due after one year, classified according to sensitivity to changes in
interest rates: After OneWithin
    
    Through
    
    AfterOne Year
    
    Five Years
    
    Five Years
    
    Total(dollars in thousands)Real estate  mortgage
    
    $
    17,556
    
    
    $
    34,796
    
    
    $
    15,180
    
    
    $
    67,532Real estate  construction
    
    
    20,641
    
    
    
    5,167
    
    
    
    386
    
    
    
    26,194Commercial
    
    
    37,163
    
    
    
    13,001
    
    
    
    909
    
    
    
    51,073Consumer
    
    
    24,212
    
    
    
    17,481
    
    
    
    4,928
    
    
    
    46,621Agriculture
    
    
    16,937
    
    
    
    8,986
    
    
    
    614
    
    
    
    26,537Total
    
    $
    116,509
    
    
    $
    79,431
    
    
    $
    22,017
    
    
    $
    217,957Loans maturing after one year with:Fixed interest rates
    
    
    
    
    
    $
    31,342
    
    
    $
    21,656
    
    
    $
    52,998Variable interest rates
    
    
    
    
    
    
    48,089
    
    
    
    361
    
    
    
    48,450Total
    
    
    
    
    
    $
    79,431
    
    
    $
    22,017
    
    
    $
    101,448
 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 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, 2003 totaled $657,000, or
0.30% of total loans, compared to $507,000, or 0.24% of total loans, for the
comparable period in 2002. The allowance for loan losses stood at 1.18% of
total loans as of December 31, 2003, versus 1.19% of total loans as of December
31, 2002. 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 31




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##### Table of Contents



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
weaknesses that make full collection of the obligation improbable. Classified
loans, as defined by the Company, include loans categorized as substandard,
doubtful, and loss. 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 32




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##### Table of Contents



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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(dollars in thousands)Balance at beginning of period
    
    $
    2,471
    
    
    $
    2,153
    
    
    $
    1,888
    
    
    $
    1,608
    
    
    $
    1,361Charge-offs:Commercial and agricultural
    
    
    295
    
    
    
    195
    
    
    
    215
    
    
    
    80
    
    
    
    108Real estate mortgage
    
    
    26
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Real estate construction
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    520
    
    
    
    393
    
    
    
    345
    
    
    
    250
    
    
    
    227Total charge-offs
    
    
    847
    
    
    
    601
    
    
    
    560
    
    
    
    330
    
    
    
    335Recoveries:Commercial and agricultural
    
    
    45
    
    
    
    21
    
    
    
    15
    
    
    
    17
    
    
    
    42Real estate mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    145
    
    
    
    73
    
    
    
    85
    
    
    
    93
    
    
    
    60Total recoveries
    
    
    190
    
    
    
    94
    
    
    
    100
    
    
    
    110
    
    
    
    102Net charge-offs
    
    
    657
    
    
    
    507
    
    
    
    460
    
    
    
    220
    
    
    
    233Provision for loan losses
    
    
    750
    
    
    
    825
    
    
    
    725
    
    
    
    500
    
    
    
    480Balance at end of period
    
    $
    2,564
    
    
    $
    2,471
    
    
    $
    2,153
    
    
    $
    1,888
    
    
    $
    1,608Net charge-offs during the period
to average loans
    
    
    0.31
    %
    
    
    0.26
    %
    
    
    0.26
    %
    
    
    0.16
    %
    
    
    0.20
    %Allowance for loan losses to total
loans
    
    
    1.18
    %
    
    
    1.19
    %
    
    
    1.17
    %
    
    
    1.15
    %
    
    
    1.25
    %
 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 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 are: i) all loan categories are considered in determining
nonperforming loans while impaired loan recognition is limited to commercial
and industrial loans, commercial and residential real estate loans,
construction loans, and agricultural loans, and ii) 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. 33




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##### Table of Contents



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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(dollars in thousands)Nonaccrual loans
    
    $
    847
    
    
    $
    1,711
    
    
    $
    1,203
    
    
    $
    522
    
    
    $
    638Loans past due 90 days or
more and still accruing
    
    
    29
    
    
    
    75
    
    
    
    98
    
    
    
    3
    
    
    
    5Total nonperforming loans
    
    
    876
    
    
    
    1,786
    
    
    
    1,301
    
    
    
    525
    
    
    
    643Other real estate owned
    
    
    
    
    
    
    125
    
    
    
    122
    
    
    
    300
    
    
    
    594Total nonperforming assets
    
    $
    876
    
    
    $
    1,911
    
    
    $
    1,423
    
    
    $
    825
    
    
    $
    1,237Interest income forgone on
nonaccrual loans
    
    $
    51
    
    
    $
    148
    
    
    $
    72
    
    
    $
    31
    
    
    $
    49Interest income recorded on a
cash basis on nonaccrual loans
    
    $
    143
    
    
    $
    29
    
    
    $
    1
    
    
    $
    
    
    
    $
    5Nonperforming loans to total
loans
    
    
    0.40
    %
    
    
    0.86
    %
    
    
    0.71
    %
    
    
    0.32
    %
    
    
    0.50
    %Nonperforming assets to total
assets
    
    
    0.22
    %
    
    
    0.59
    %
    
    
    0.52
    %
    
    
    0.34
    %
    
    
    0.58
    %Allowance for loan losses to nonperforming
loans
    
    
    293
    %
    
    
    138
    %
    
    
    165
    %
    
    
    360
    %
    
    
    250
    %
 At December 31, 2003 and 2002, the Companys recorded investment in loans for
which impairment has been recognized totaled $550,000 and $1.5 million,
respectively. The specific allowance for loan losses related to impaired loans
was 59,000 and 228,000 at December 31, 2003 and 2002, respectively. The
average recorded investment in impaired loans was $1.7 million and $1.0 million
during the years ended December 31, 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, 2003, 2002 and 2001, the
Company recognized $143,000, $29,000 and $1,000, 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, 2003 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 increased $44.5 million, or 58%, to $121.2 million as of
December 31, 2003, up from $76.7 million at December 31, 2002. The significant
increase in investment securities balances in 2003 was directly related to the
acquisition of five branches in mid-November 2003. The funds received for
assuming the deposit liabilities of the acquired branches were directed into
the investment portfolio. Even with the significant growth in investment balances towards year-end, the
composition of the portfolio as of the end of 2003 was fairly consistent with
the composition of the portfolio as of the end of 2002. The investment
portfolio balances in U.S. Treasuries, U.S. Government agencies, corporate debt
securities and municipal obligations comprised 10%, 72%, 11% and 7%
respectively at December 31, 2003 versus 14%, 69%, 7% and 5%, respectively at
December 31, 2002. However, 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, 2003, total balances in these mortgage-backed securities amounted
to $12.8 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. 34




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##### Table of Contents



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 31,2003
    
    2002
    
    2001Available-for-sale (market value)
    
    (dollars in thousands)U.S. Treasuries
    
    $
    11,907
    
    
    $
    8,654
    
    
    $
    14,968U.S. Government agencies
    
    
    70,442
    
    
    
    42,201
    
    
    
    10,008Corporate debt securities
    
    
    10,983
    
    
    
    
    
    
    
    526U.S. Government agency
mortgage-backed
securities
    
    
    12,832
    
    
    
    
    
    
    
    Total
    
    $
    106,164
    
    
    $
    50,855
    
    
    $
    25,502
 December 31,2003
    
    2002
    
    2001Held-to-maturity (book value)
    
    (dollars in thousands)U.S. Treasuries
    
    $
    
    
    
    $
    
    
    
    $
    1,000U.S. Government agencies
    
    
    512
    
    
    
    2,753
    
    
    
    7,069Corporate debt securities
    
    
    1,502
    
    
    
    3,313
    
    
    
    3,089Municipal obligations
    
    
    7,705
    
    
    
    4,515
    
    
    
    9,183Total
    
    $
    9,719
    
    
    $
    10,581
    
    
    $
    20,341
 35




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##### Table of Contents



The following tables summarize the maturities of the Companys securities at
their carrying value and their weighted average yields at December 31, 2003.
Yields on tax-exempt municipal obligations have been computed on a
tax-equivalent basis using an effective tax rate of 38.1%. (dollars in thousands)
    
    Within One Year
    
    One to Five Years
    
    Five to Ten YearsAvailable-for-sale(market Value)
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    YieldU.S. Treasuries
    
    $
    
    
    
    
    
    %
    
    $
    11,907
    
    
    
    2.70
    %
    
    $
    
    
    
    
    
    %U.S. Government agencies
    
    
    
    
    
    
    
    %
    
    
    70,442
    
    
    
    2.62
    %
    
    
    
    
    
    
    
    %Corporate debt securities
    
    
    
    
    
    
    
    %
    
    
    10,983
    
    
    
    3.38
    %
    
    
    
    
    
    
    
    %U.S. Government agency
mortgage-backed securities
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    7,962
    
    
    
    3.97
    %Total
    
    $
    
    
    
    
    
    %
    
    $
    93,332
    
    
    
    2.71
    %
    
    $
    7,962
    
    
    
    3.97
    %Held-to-maturity
(book value)
U.S. Government agencies
    
    $
    
    
    
    
    
    %
    
    $
    500
    
    
    
    6.03
    %
    
    $
    12
    
    
    
    4.59
    %Corporate debt securities
    
    
    1,002
    
    
    
    6.20
    %
    
    
    500
    
    
    
    6.02
    %
    
    
    
    
    
    
    
    %Municipal obligations
    
    
    1,428
    
    
    
    8.51
    %
    
    
    2,360
    
    
    
    7.47
    %
    
    
    2,002
    
    
    
    5.08
    %Total
    
    $
    2,430
    
    
    
    7.56
    %
    
    $
    3,360
    
    
    
    7.04
    %
    
    $
    2,014
    
    
    
    5.08
    %
   [Continued from above table, first column(s) repeated] (dollars in thousands)
    
    Over Ten Years
    
    TotalAvailable-for-sale(market Value)
    
    Amount
    
    Yield
    
    Amount
    
    YieldU.S. Treasuries
    
    $
    
    
    
    
    
    %
    
    $
    11,907
    
    
    
    2.70
    %U.S. Government agencies
    
    
    
    
    
    
    
    %
    
    
    70,442
    
    
    
    2.62
    %Corporate debt securities
    
    
    
    
    
    
    
    %
    
    
    10,983
    
    
    
    3.38
    %U.S. Government agency
mortgage-backed securities
    
    
    4,870
    
    
    

    4.42
    %
    
    
    12,832
    
    
    
    4.14
    %Total
    
    $
    4,870
    
    
    
    4.42
    %
    
    $
    106,164
    
    
    
    2.89
    %Held-to-maturity
(book value)
U.S. Government agencies
    
    $
    
    
    
    
    
    %
    
    $
    512
    
    
    
    6.00
    %Corporate debt securities
    
    
    
    
    
    
    
    %
    
    
    1,502
    
    
    
    6.14
    %Municipal obligations
    
    
    1,915
    
    
    
    5.68
    %
    
    
    7,705
    
    
    
    6.60
    %Total
    
    $
    1,915
    
    
    
    5.68
    %
    
    $
    9,719
    
    
    
    6.49
    %
 36




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##### Table of Contents



Deposits.Total deposits were $355.8 million as of December 31, 2003, an
increase of $61.9 million, or 21%, from the December 31, 2002 balance of $293.9
million. Approximately three-quarters of the deposit growth in 2003 is
attributable to the acquisition of five branches in mid-November 2003.
Deposits acquired in that transaction amounted to $45.5 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, 2003, non-interest bearing demand deposits and interest
checking deposits increased to 38.9% of total deposits versus 36.7% at December
31, 2002. Money market and savings deposits decreased slightly to 34.9% of
total deposits as of December 31, 2003 compared to 35.1% as of December 31,
2002. Time deposits decreased to 26.2% of total deposits as of December 31,
2003 compared to 28.2% at December 31, 2002. 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. 2003
    
    2002
    
    2001Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageBalance
    
    Rate %
    
    Balance
    
    Rate %
    
    Balance
    
    Rate %(dollars in thousands)Non-interest-bearing deposits
    
    $
    78,301
    
    
    
    
    
    
    $
    60,638
    
    
    
    
    
    
    $
    41,281Interest-bearing deposits:Checking accounts
    
    
    35,668
    
    
    
    0.22
    %
    
    
    33,070
    
    
    
    0.34
    %
    
    
    25,980
    
    
    
    0.69
    %Money market accounts
    
    
    58,814
    
    
    
    0.85
    %
    
    
    51,776
    
    
    
    1.50
    %
    
    
    36,540
    
    
    
    3.06
    %Savings
    
    
    48,866
    
    
    
    0.63
    %
    
    
    39,094
    
    
    
    1.11
    %
    
    
    33,075
    
    
    
    1.77
    %Time deposits
    
    
    83,186
    
    
    
    2.18
    %
    
    
    84,195
    
    
    
    3.12
    %
    
    
    72,918
    
    
    
    5.05
    %Total interest bearing deposits
    
    
    226,534
    
    
    
    1.19
    %
    
    
    208,135
    
    
    
    1.90
    %
    
    
    168,513
    
    
    
    3.38
    %Total deposits
    
    $
    304,835
    
    
    
    0.89
    %
    
    $
    268,773
    
    
    
    1.47
    %
    
    $
    209,794
    
    
    
    2.70
    %
 The Companys time deposits of $100,000 or more had the following schedule of
maturities at December 31, 2003: Amount(dollars in thousands)Remaining Maturity:Three months or less
    
    $
    10,146Over three months to six months
    
    
    6,870Over six months to 12 months
    
    
    4,870Over 12 months
    
    
    5,575Total
    
    $
    27,461
 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. 37




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##### Table of Contents



Capital Resources Shareholders Equity.Shareholders equity as of December 31, 2003 increased
$2.5 million, or 11%, to $25.8 million from $23.3 million as of December 31,
2002. This increase was due to the retention of current period earnings of
$3.3 million and to a lesser extent the net funds received from key employees
and directors exercising their stock options totaling $202,000. Partially
offsetting these increases were two cash dividends totaling $776,000 paid
during 2003 and a decrease in the unrealized gains on available-for-sale
investment securities of $244,000. 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,
2003, that both the Company and Bank exceed all capital adequacy requirements
to which they are subject. At December 31, 2003, the Companys capital ratios deteriorated slightly. This
deterioration was primarily the result of a growth in assets in mid-November
2003 as a result of acquisition of five branches. Just prior to the branch
acquisition, the Company injected an additional $3 million of capital into the
Bank to support the Banks growth. The Company was able to make this capital
injection from the remaining funds of the 2002 subordinated debentures
issuance, thus improving some of the Banks capital ratios at December 31,
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. 38




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##### Table of Contents



As of December 31, 2003, 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, 2003 (amounts in thousands except percentage amounts). Plumas BancorpActual
    
    RegulatoryMinimumCapital
    
    Ratio
    
    RequirementLeverage ratio
    
    $
    29,345
    
    
    
    8.4
    %
    
    
    4.0
    %Tier 1 capital to risk-weighted assets
    
    $
    29,345
    
    
    
    10.4
    %
    
    
    4.0
    %Total risk-based capital ratio
    
    $
    31,909
    
    
    
    11.3
    %
    
    
    8.0
    %
 Plumas BankActual
    
    RegulatoryMinimumCapital
    
    Ratio
    
    RequirementLeverage ratio
    
    $
    28,852
    
    
    
    8.2
    %
    
    
    4.0
    %Tier 1 capital to risk-weighted assets
    
    $
    28,852
    
    
    
    10.3
    %
    
    
    4.0
    %Total risk-based capital ratio
    
    $
    31,416
    
    
    
    11.1
    %
    
    
    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 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, 2003,
the Company had $60.2 million in unfunded loan commitments and $1.8 million in
letters of credit. Of the $60.2 million in unfunded loan commitments, $35.5
million and $24.7 million represented commitments to commercial and consumer
customers, respectively. Of the total unfunded commitments at December 31,
2003, $32.0 million were secured by real estate, of which $17.3 million was
secured by commercial real estate and $14.7 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
three administrative lending offices 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
$179,000, $85,000 and $97,000, in 2003, 2002 and 2001 respectively. The
expiration dates of the leases vary, with the first such lease expiring during
2004 and the last such lease expiring during 2008. 39




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##### Table of Contents



Contractual Obligations and Commitments The Companys contractual obligations and commitments are comprised of the
junior subordinated deferrable interest debentures or trust preferred
securities and operating lease obligations and a mortgage for various banking
facilities. As of December 31, 2003, 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 yearsLong-term debt obligations:Junior subordinated deferrable
interest debentures
    
    $
    6,186
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6,186Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    745
    
    
    
    233
    
    
    
    378
    
    
    
    134
    
    
    
    Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities:Branch mortgage
    
    
    87
    
    
    
    7
    
    
    
    17
    
    
    
    20
    
    
    
    43Total contractual liabilities
    
    $
    7,018
    
    
    $
    240
    
    
    $
    395
    
    
    $
    154
    
    
    $
    6,229
 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 $10.1 million from the Federal Home Loan Bank
secured by residential mortgage loans. There were no short-term borrowings
outstanding at December 31, 2003, 2002 and 2001. Customer deposits are the Companys primary source of funds. Deposits totaled
$355.8 million at December 31, 2003, an increase of $61.9 million, or 21%, from
the December 31, 2002 balance of $293.9 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. 40




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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 the net interest income
from potential changes in interest rates and considers the impact of
alternative strategies or changes in balance sheet structure. The ALCO manages
the 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, 2003, 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. 41




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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, 2003
    
    December 31, 2002Adjusted Net
    
    Percent
    
    Adjusted Net
    
    PercentInterest Income
    
    Change
    
    Interest Income
    
    ChangeChange in Rates
    
    (in thousands)
    
    From Base
    
    (in thousands)
    
    From BaseUp 300 basis points
    
    $
    20,353
    
    
    
    18.45
    %
    
    $
    20,198
    
    
    
    12.19
    %Up 200 basis points
    
    
    18,972
    
    
    
    10.41
    %
    
    
    19,466
    
    
    
    8.13
    %Up 100 basis points
    
    
    17,884
    
    
    
    4.08
    %
    
    
    18,735
    
    
    
    4.06
    %Base scenario
    
    
    17,182
    
    
    
    
    %
    
    
    18,003
    
    
    
    
    %Down 100 basis
points
    
    
    16,391
    
    
    
    -4.61
    %
    
    
    17,272
    
    
    
    -4.06
    %Down 200 basis
points
    
    
    15,374
    
    
    
    -10.53
    %
    
    
    16,540
    
    
    
    -8.13
    %Down 300 basis
points
    
    
    14,804
    
    
    
    -13.84
    %
    
    
    15,803
    
    
    
    -12.22
    %
 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, 2003, 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. Unaudited Quarterly Statement of Operations Data Q4
    
    Q3
    
    Q2
    
    Q1
    
    Q4
    
    Q3
    
    Q2
    
    Q12003
    
    2003
    
    2003
    
    2003
    
    2002
    
    2002
    
    2002
    
    2002(dollars in thousands)Net interest income
    
    $
    3,962
    
    
    $
    3,864
    
    
    $
    3,909
    
    
    $
    3,665
    
    
    $
    3,626
    
    
    $
    3,752
    
    
    $
    3,593
    
    
    $
    3,380Provision for loan losses
    
    
    125
    
    
    
    175
    
    
    
    225
    
    
    
    225
    
    
    
    100
    
    
    
    200
    
    
    
    300
    
    
    
    225Non-interest income
    
    
    1,181
    
    
    
    893
    
    
    
    876
    
    
    
    825
    
    
    
    1,040
    
    
    
    774
    
    
    
    734
    
    
    
    730Non-interest expense
    
    
    3,503
    
    
    
    3,299
    
    
    
    3,237
    
    
    
    3,087
    
    
    
    3,036
    
    
    
    2,991
    
    
    
    2,832
    
    
    
    2,745Income before income taxes
    
    
    1,515
    
    
    
    1,283
    
    
    
    1,323
    
    
    
    1,178
    
    
    
    1,530
    
    
    
    1,335
    
    
    
    1,195
    
    
    
    1,140Income taxes
    
    
    532
    
    
    
    501
    
    
    
    523
    
    
    
    462
    
    
    
    616
    
    
    
    514
    
    
    
    475
    
    
    
    441Net income
    
    $
    983
    
    
    $
    782
    
    
    $
    800
    
    
    $
    716
    
    
    $
    914
    
    
    $
    821
    
    
    $
    720
    
    
    $
    699Per share:Basic earnings per share
    
    $
    0.31
    
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.26
    
    
    $
    0.23
    
    
    $
    0.22Diluted earnings per share
    
    $
    0.29
    
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.25
    
    
    $
    0.22
    
    
    $
    0.21
 42




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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, 2003, 2002
and 2001. PageIndependent Auditors Reports
    
    
    F-1Consolidated Balance Sheet as of December 31, 2003 and 2002
    
    
    F-2Consolidated Statement of Income for the years ended December 31,
2003, 2002 and 2001
    
    
    F-3Consolidated Statement of Changes in Shareholders Equity for the
years ended December 31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statement of Cash Flows for the years ended December 31,
2003, 2002 and 2001
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-11
 43




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##### Table of Contents



INDEPENDENT AUDITORS REPORT The Shareholders and
   Board of Directors
Plumas Bancorp and Subsidiary We have audited the accompanying consolidated balance sheet of Plumas
Bancorp and subsidiary (the Company) as of December 31, 2003 and 2002, 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, 2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. /s/ PERRY-SMITH LLP Sacramento, California
January 16, 2004 F-1




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEET December 31, 2003 and 2002 2003
    
    2002ASSETSCash and due from banks
    
    $
    24,717,000
    
    
    $
    22,665,000Federal funds sold
    
    
    5,295,000
    
    
    
    15,265,000Loans held for sale
    
    
    276,000
    
    
    
    1,472,000Investment securities (market value of $116,102,000
in 2003 and $61,807,000 in 2002) (Notes 3 and 7)
    
    
    115,883,000
    
    
    
    61,436,000Loans, less allowance for loan losses of $2,564,000
in 2003 and $2,471,000 in 2002 (Notes 4, 7, 9 and 13)
    
    
    214,863,000
    
    
    
    204,649,000Bank premises and equipment, net (Note 5)
    
    
    10,306,000
    
    
    
    9,323,000Intangible assets, net (Note 17)
    
    
    2,238,000
    
    
    
    690,000Accrued interest receivable and other assets
(Notes 12 and 14)
    
    
    16,684,000
    
    
    
    10,150,000$
    390,262,000
    
    
    $
    325,650,000LIABILITIES AND
SHAREHOLDERS EQUITYDeposits:Non-interest bearing
    
    $
    96,830,000
    
    
    $
    73,554,000Interest bearing (Note 6)
    
    
    259,012,000
    
    
    
    220,387,000Total deposits
    
    
    355,842,000
    
    
    
    293,941,000Accrued interest payable and other liabilities
    
    
    2,485,000
    
    
    
    2,237,000Junior subordinated deferrable interest debentures
(Note 8)
    
    
    6,186,000
    
    
    
    6,186,000Total liabilities
    
    
    364,513,000
    
    
    
    302,364,000Commitments 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  3,242,027
shares in 2003 and 3,209,317 shares in 2002
    
    
    3,945,000
    
    
    
    3,743,000Retained earnings
    
    
    21,638,000
    
    
    
    19,133,000Accumulated other comprehensive income
(Notes 3 and 15)
    
    
    166,000
    
    
    
    410,000Total shareholders equity
    
    
    25,749,000
    
    
    
    23,286,000$
    390,262,000
    
    
    $
    325,650,000
 The accompanying notes are an integral
part of these consolidated financial statements. F-2




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY 
 CONSOLIDATED STATEMENT OF INCOME For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Interest income:Interest and fees on loans
    
    $
    16,046,000
    
    
    $
    16,013,000
    
    
    $
    16,385,000Interest on investment securities:Taxable
    
    
    2,074,000
    
    
    
    1,922,000
    
    
    
    2,246,000Exempt from Federal income taxes
    
    
    147,000
    
    
    
    143,000
    
    
    
    128,000Interest on Federal funds sold
    
    
    116,000
    
    
    
    275,000
    
    
    
    321,000Interest on loans held for sale
    
    
    30,000
    
    
    
    36,000
    
    
    
    69,000Total interest income
    
    
    18,413,000
    
    
    
    18,389,000
    
    
    
    19,149,000Interest expense:Interest on deposits (Note 6)
    
    
    2,703,000
    
    
    
    3,945,000
    
    
    
    6,368,000Interest on short-term borrowings
(Note 7)
    
    
    22,000
    
    
    
    6,000
    
    
    
    5,000Interest on junior subordinated
deferrable interest debentures
(Note 8)
    
    
    288,000
    
    
    
    87,000Total interest expense
    
    
    3,013,000
    
    
    
    4,038,000
    
    
    
    6,373,000Net interest income
    
    
    15,400,000
    
    
    
    14,351,000
    
    
    
    12,776,000Provision for loan losses (Note 4)
    
    
    750,000
    
    
    
    825,000
    
    
    
    725,000Net interest income after
provision for loan losses
    
    
    14,650,000
    
    
    
    13,526,000
    
    
    
    12,051,000Non-interest income:Service charges
    
    
    1,988,000
    
    
    
    1,905,000
    
    
    
    1,596,000Gain on sale of loans
    
    
    203,000
    
    
    
    191,000
    
    
    
    267,000Gain on sale of available-for-sale
investment securities, net (Notes 3
and 15)
    
    
    328,000
    
    
    
    117,000
    
    
    
    72,000Earnings on cash surrender value of
life insurance policies (Note 14)
    
    
    313,000
    
    
    
    217,000
    
    
    
    243,000Other
    
    
    943,000
    
    
    
    848,000
    
    
    
    676,000Total non-interest income
    
    
    3,775,000
    
    
    
    3,278,000
    
    
    
    2,854,000
 (Continued) F-3




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME For the Years Ended December 31, 2003, 2002 and 2001
 2003
    
    2002
    
    2001Other expenses:Salaries and employee benefits
(Notes 4 and 14)
    
    $
    7,442,000
    
    
    $
    6,269,000
    
    
    $
    5,867,000Occupancy and equipment
(Notes 5 and 9)
    
    
    2,343,000
    
    
    
    1,794,000
    
    
    
    1,525,000Other (Note 11)
    
    
    3,341,000
    
    
    
    3,541,000
    
    
    
    3,088,000Total other expenses
    
    
    13,126,000
    
    
    
    11,604,000
    
    
    
    10,480,000Income before income
taxes
    
    
    5,299,000
    
    
    
    5,200,000
    
    
    
    4,425,000Income taxes (Note 12)
    
    
    2,018,000
    
    
    
    2,046,000
    
    
    
    1,667,000Net income
    
    $
    3,281,000
    
    
    $
    3,154,000
    
    
    $
    2,758,000Basic earnings per share (Note 10)
    
    $
    1.02
    
    
    $
    0.99
    
    
    $
    0.87Diluted earnings per share (Note 10)
    
    $
    0.99
    
    
    $
    0.96
    
    
    $
    0.86
 The accompanying notes are an integral
part of these consolidated financial statements. F-4




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY 
 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY For the Years Ended December 31, 2003, 2002 and 2001 Common Stock
    
    Additional
    
    
    
    
    
    AccumulatedOtherPaid-In
    
    Retained
    
    Comprehensive
    
    Shareholders
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Earnings
    
    (Loss) Income
    
    Equity
    
    IncomeBalance, January 1, 2001
    
    
    3,082,457
    
    
    $
    2,291,000
    
    
    $
    1,165,000
    
    
    $
    14,723,000
    
    
    $
    (14,000
    )
    
    $
    18,165,000Comprehensive income (Note 15):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,758,000
    
    
    
    
    
    
    
    2,758,000
    
    
    $
    2,758,000Other comprehensive income, net
of tax:Unrealized gains on available-for-sale investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,000
    
    
    
    162,000
    
    
    
    162,000Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,920,000Cash dividend  $.20 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (635,000
    )
    
    
    
    
    
    
    (635,000
    )Retirement of common stock in connection with the exercise of stock options
(Note 10)
    
    
    (22,425
    )
    
    
    (97,000
    )
    
    
    (65,000
    )
    
    
    
    
    
    
    
    
    
    
    (162,000
    )Stock options exercised and related
tax benefit (Note 10)
    
    
    132,303
    
    
    
    153,000
    
    
    
    176,000
    
    
    
    
    
    
    
    
    
    
    
    329,000Balance, December 31, 2001
    
    
    3,192,335
    
    
    
    2,347,000
    
    
    
    1,276,000
    
    
    
    16,846,000
    
    
    
    148,000
    
    
    
    20,617,000Comprehensive income (Note 15):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,154,000
    
    
    
    
    
    
    
    3,154,000
    
    
    $
    3,154,000Other comprehensive income, net
of tax:Unrealized gains on available-for-sale investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262,000
    
    
    
    262,000
    
    
    
    262,000Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,416,000Cash
dividends - $.27 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (867,000
    )
    
    
    
    
    
    
    (867,000
    )Stock options exercised and related
tax benefit (Note 10)
    
    
    17,306
    
    
    
    108,000
    
    
    
    16,000
    
    
    
    
    
    
    
    
    
    
    
    124,000Reorganization 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
 (Continued) F-5




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PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY For the Years Ended December 31, 2003, 2002 and 2001
 Common Stock
    
    Additional
    
    
    
    
    
    AccumulatedOtherPaid-In
    
    Retained
    
    Comprehensive
    
    Shareholders
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Earnings
    
    (Loss) Income
    
    Equity
    
    IncomeBalance, December 31, 2002
    
    
    3,209,317
    
    
    $
    3,743,000
    
    
    
    
    
    
    $
    19,133,000
    
    
    $
    410,000
    
    
    $
    23,286,000Comprehensive income (Note 15):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,281,000
    
    
    
    
    
    
    
    3,281,000
    
    
    $
    3,281,000Other comprehensive loss, net
of tax:Unrealized losses on available-for-
sale investment securities (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (244,000
    )
    
    
    (244,000
    )
    
    
    (244,000
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,037,000Cash
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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    276,000Balance, December 31, 2003
    
    
    3,242,027
    
    
    $
    3,945,000
    
    
    $
    
    
    
    $
    21,638,000
    
    
    $
    166,000
    
    
    $
    25,749,000
 2003
    
    2002
    
    2001Disclosure of reclassification amount, net of taxes (Note 15):Unrealized holding (losses) gains arising during the year
    
    $
    (50,000
    )
    
    $
    331,000
    
    
    $
    204,000Reclassification adjustment for gains included in net income
    
    
    194,000
    
    
    
    69,000
    
    
    
    42,000Net unrealized (losses) gains on available-for-sale investment securities
    
    $
    (244,000
    )
    
    $
    262,000
    
    
    $
    162,000
 The
accompanying notes are an integral
part of these consolidated financial statements. F-6




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY 
 CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    3,281,000
    
    
    $
    3,154,000
    
    
    $
    2,758,000Adjustments to reconcile net
income to net cash provided
by operating activities:Provision for loan losses
    
    
    750,000
    
    
    
    825,000
    
    
    
    725,000(Decrease) increase in deferred loan
origination fees, net
    
    
    (71,000
    )
    
    
    (147,000
    )
    
    
    84,000Depreciation and amortization
    
    
    1,314,000
    
    
    
    1,060,000
    
    
    
    884,000Net gain on sale of available-for-sale investment securities
    
    
    (328,000
    )
    
    
    (117,000
    )
    
    
    (72,000
    )Amortization of investment security
premiums
    
    
    1,200,000
    
    
    
    279,000
    
    
    
    71,000Accretion of investment security
discounts
    
    
    (24,000
    )
    
    
    (71,000
    )
    
    
    (132,000
    )Net loss on sale of premises and
equipment
    
    
    3,000
    
    
    
    24,000
    
    
    
    11,000Net gain on sale of other real estate
    
    
    (71,000
    )
    
    
    
    
    
    
    (73,000
    )(Recovery) writedown of held-to-maturity investment security
    
    
    
    
    
    
    (60,000
    )
    
    
    60,000Writedown of other real estate to
market value
    
    
    
    
    
    
    13,000
    
    
    
    9,000Net decrease (increase) in loans
held for sale
    
    
    1,196,000
    
    
    
    (823,000
    )
    
    
    (407,000
    )Increase in cash surrender value
of life insurance policies
    
    
    (278,000
    )
    
    
    (183,000
    )
    
    
    (212,000
    )(Increase) decrease in accrued
interest receivable and other assets
    
    
    (1,060,000
    )
    
    
    (769,000
    )
    
    
    274,000Increase (decrease) in accrued
interest payable and other liabilities
    
    
    221,000
    
    
    
    (30,000
    )
    
    
    87,000Deferred taxes
    
    
    28,000
    
    
    
    31,000
    
    
    
    (101,000
    )Net cash provided by operating
activities
    
    
    6,161,000
    
    
    
    3,186,000
    
    
    
    3,966,000
 (Continued) F-7




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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 2003
    
    2002
    
    2001Cash flows from investing activities:Cash acquired in the purchase of
selected assets and liabilities of
another bank
    
    $
    42,520,000Proceeds from matured and called
available-for-sale investment
securities
    
    
    15,000,000
    
    
    $
    16,996,000
    
    
    $
    10,950,000Proceeds from matured and called
held-to-maturity investment
securities
    
    
    6,237,000
    
    
    
    8,056,000
    
    
    
    10,195,000Proceeds from sale of available-
for-sale investment securities
    
    
    32,426,000
    
    
    
    4,639,000
    
    
    
    5,003,000Purchases of available-for-sale
investment securities
    
    
    (104,217,000
    )
    
    
    (47,400,000
    )
    
    
    (21,554,000
    )Purchases of held-to-maturity
investment securities
    
    
    (6,174,000
    )
    
    
    (687,000
    )
    
    
    (103,000
    )Proceeds from principal repayments
from available-for-sale government-
guaranteed mortgage-backed
securities
    
    
    695,000
    
    
    
    796,000
    
    
    
    917,000Proceeds from principal repayments
from held-to-maturity government-
guaranteed mortgage-backed
securities
    
    
    322,000
    
    
    
    2,422,000
    
    
    
    303,000Net increase in loans
    
    
    (12,338,000
    )
    
    
    (24,690,000
    )
    
    
    (20,172,000
    )Proceeds from sale of other real
estate
    
    
    370,000
    
    
    
    
    
    
    
    282,000Proceeds from sale of premises
and equipment
    
    
    
    
    
    
    3,000
    
    
    
    8,000Purchases of premises and equipment
    
    
    (1,587,000
    )
    
    
    (2,142,000
    )
    
    
    (1,685,000
    )Life insurance policy deposits
    
    
    (3,170,000
    )
    
    
    (510,000
    )Net cash used in investing
activities
    
    
    (29,916,000
    )
    
    
    (42,517,000
    )
    
    
    (15,856,000
    )
 (Continued) F-8




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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 2003
    
    2002
    
    2001Cash flows from financing activities:Net increase in demand, interest-
bearing and savings deposits
    
    $
    19,114,000
    
    
    $
    45,275,000
    
    
    $
    24,649,000Net (decrease) increase in time
deposits
    
    
    (2,677,000
    )
    
    
    (3,541,000
    )
    
    
    4,301,000Proceeds from exercise of stock
options
    
    
    176,000
    
    
    
    124,000
    
    
    
    100,000Proceeds from the issuance of junior
subordinated deferrable interest
debentures
    
    
    
    
    
    
    6,186,000Cash paid to repurchase fractional
shares
    
    
    
    
    
    
    (4,000
    )Payment of cash dividends
    
    
    (776,000
    )
    
    
    (867,000
    )
    
    
    (635,000
    )Net cash provided by
financing activities
    
    
    15,837,000
    
    
    
    47,173,000
    
    
    
    28,415,000(Decrease) increase in cash
and cash equivalents
    
    
    (7,918,000
    )
    
    
    7,842,000
    
    
    
    16,525,000Cash and cash equivalents at
beginning of year
    
    
    37,930,000
    
    
    
    30,088,000
    
    
    
    13,563,000Cash and cash equivalents at
end of year
    
    $
    30,012,000
    
    
    $
    37,930,000
    
    
    $
    30,088,000Supplemental disclosure of cash
flow information:Cash paid during the year for:Interest expense
    
    $
    3,123,000
    
    
    $
    4,272,000
    
    
    $
    6,508,000Income taxes
    
    $
    2,052,000
    
    
    $
    2,079,000
    
    
    $
    1,134,000Non-cash investing activities:Real estate acquired through
foreclosure
    
    $
    175,000
    
    
    $
    138,000
    
    
    $
    40,000Reclassification of loans to other
assets (Note 4)
    
    $
    1,399,000Net change in unrealized gain on
available-for-sale investment
securities
    
    $
    (415,000
    )
    
    $
    446,000
    
    
    $
    276,000Non-cash financing activities:Common stock retired in connection
with the exercise of stock options
    
    $
    74,000
    
    
    
    
    
    
    $
    162,000
 (Continued) F-9




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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 2003
    
    2002
    
    2001On 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
    
    $
    45,464,000Loans
    
    
    (129,000
    )Premises and equipment
    
    
    (552,000
    )Premium paid for deposits
    
    
    (1,709,000
    )Other assets
    
    
    (581,000
    )Other liabilities
    
    
    27,000Cash received
    
    $
    42,520,000
 The accompanying notes are an integral
part of these consolidated financial statements. F-10




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  1.
    
    THE BUSINESS OF PLUMAS BANCORPOn 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. The new 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 POLICIESConsolidation and Basis of PresentationThe 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 junior subordinated debentures issued and
guaranteed by the Company and held by the Trust are reflected on the
Companys consolidated balance sheet in accordance with the provisions of
FASB Interpretation No. 46, Consolidation of Variable Interest Entities.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.Investment SecuritiesInvestments 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. F-11




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)Investment Securities (Continued)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. In addition, unrealized
losses that are other than temporary are recognized in earnings for all
investments.Investment in Federal Home Loan Bank StockAs 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, 2003 and 2002,
Federal Home Loan Bank stock totaled $755,000 and $466,000, respectively.
On the consolidated balance sheet, Federal Home Loan Bank stock is
included in accrued interest receivable and other assets.Loan Sales and ServicingServicing 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 LoansIncluded 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 Bank generally receives
a premium in excess of the adjusted carrying
value of the loan at the time of sale. The Bank 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, 2003, no
premium amounts were subject to these recourse provisions. F-12




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)Loan Sales and Servicing (Continued)Government Guaranteed Loans(Continued)The Bank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 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 Bank serviced SBA and RBS government guaranteed loans for others
totaling $2,889,000 and $3,379,000 as of December 31, 2003 and 2002,
respectively.Mortgage LoansThe Bank originates mortgage loans that are either held in the Bank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 Bank 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, 2003, the premiums and sold loans subject to these recourse
provisions totaled $47,000 and $15,000, respectively.The Bank serviced loans for the Federal National Mortgage Association
(FNMA) totaling $12,518,000 and $11,404,000 as of December 31, 2003 and
2002, respectively. F-13




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)Loan Sales and Servicing (Continued)Participation LoansThe Bank also serviced loans which it has participated with other
financial institutions totaling $5,109,000 and $4,060,000 as of December
31, 2003 and 2002, respectively.LoansLoans 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 LossesThe 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 Banks service area. F-14




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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)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 Bank has not experienced losses,
the loss experience of peer banks. Management also computes specific and
expected loss reserves for loan commitments. 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.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, 2003 and 2002,
respectively, reflects managements estimate of possible losses in the
portfolio.Other Real EstateOther real estate includes real estate acquired in full or partial
settlement of loan obligations with a balance of $125,000 at December 31,
2002 and former Bank premises with balances of $690,000 and $122,000 at
December 31, 2003 and 2002, respectively. At December 31, 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 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. On the consolidated
balance sheet, other real estate is included in accrued interest
receivable and other assets.Bank Premises and EquipmentBank 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. F-15




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)Intangible AssetsIntangible assets consist of core deposit intangibles related to branch
acquisitions and are amortized using the straight-line method over ten
years. Amortization expense totaled $161,000, $135,000 and $135,000 for
years ended December 31, 2003, 2002 and 2001, respectively. The
estimated intangible amortization for the years ending December 31, 2004,
2005, 2006, 2007 and 2008 is $303,000, $298,000, $298,000, $298,000 and
$213,000, respectively.Income TaxesThe Company files its income taxes on a consolidated basis with its
subsidiary. The allocation of income tax expense (benefit) represents
each entitys proportionate share of the consolidated provision for
income taxes.Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the reported amount of
assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment. On the balance sheet, net deferred tax assets
are included in accrued interest receivable and other assets.Cash EquivalentsFor 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, 2003 was $10,404,000.Earnings Per ShareBasic 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 CompensationAt December 31, 2003, the Company had two stock-based employee
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. F-16




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)Stock-Based Compensation (Continued)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. 2003
    
    2002
    
    2001Net income, as reported
    
    $
    3,281,000
    
    
    $
    3,154,000
    
    
    $
    2,758,000Deduct: Total stock-based compensation expense determined under
the fair value based method for all
awards, net of related tax effects
    
    
    91,000
    
    
    
    165,000
    
    
    
    52,000Pro forma net income
    
    $
    3,190,000
    
    
    $
    2,989,000
    
    
    $
    2,706,000Basic earnings per share  as reported
    
    $
    1.02
    
    
    $
    .99
    
    
    $
    .87Basic earnings per share  pro forma
    
    $
    .99
    
    
    $
    .93
    
    
    $
    .86Diluted earnings per share  as reported
    
    $
    .99
    
    
    $
    .96
    
    
    $
    .86Diluted earnings per share  pro forma
    
    $
    .97
    
    
    $
    .92
    
    
    $
    .85Weighted average fair value of options
granted during the year
    
    $
    5.30
    
    
    $
    4.72
    
    
    $
    4.07
  The fair value of each option was estimated on the date of grant using an
option-pricing model with the following assumptions: 2003
    
    2002
    
    2001Dividend yield
    
    
    1.29
    %
    
    
    1.67
    %
    
    
    2.43
    %Expected volatility
    
    
    38.74
    %
    
    
    27.38
    %
    
    
    24.82
    %Risk-free interest rate
    
    
    3.07
    %
    
    
    3.01
    %
    
    
    3.87
    %Expected option life
    
    5 years
    
    
    3 to 5 years
    
    
    5 years
  Use of EstimatesThe 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. F-17




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)ReclassificationsCertain reclassifications have been made to prior years balances to
conform to classifications used in 2003.Impact of New Financial Accounting StandardsIn December, 2003, the Financial Accounting Standards Board (FASB)
revised FASB Interpretation No. 46, Consolidation of Variable Interest
Entities(FIN 46). This interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities that possess certain
characteristics. FIN 46 requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with
those of the business enterprise. The Company adopted FIN 46 on December
31, 2003. Adoption of this standard required the Company to
deconsolidate its investment in Plumas Statutory Trust I, a Connecticut
statutory business trust, made in September 2002. The deconsolidation of
Plumas Statutory Trust I, formed in connection with the issuance of trust
preferred securities, appears to be an unintended consequence of FIN 46.
In managements opinion, the effect of deconsolidation on the Companys
financial position and results of operations was not material.In July 2003, the Board of Governors of the Federal Reserve Systems
issued a supervisory letter instructing bank holding companies to
continue to include the trust preferred securities in their Tier I
capital for regulatory capital purposes until notice is given to the
contrary. The Federal Reserve intends to review the regulatory
implications of this accounting change and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance that the
Federal Reserve will continue to allow institutions to include trust
preferred securities in Tier I capital for regulatory capital purposes.On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies the accounting for derivative instruments by
providing guidance related to circumstances under which a contract with a
net investment meets the characteristics of a derivative as discussed in
SFAS No. 133. The Statement also clarifies when a derivative contains a
financing component. The Statement is intended to result in more
consistent reporting for derivative contracts and must be applied
prospectively for contracts entered into or modified after June 30, 2003,
except for hedging relationships designated after June 30, 2003. In
managements opinion, the adoption of this Statement did not have a
material impact on the Companys consolidated financial position or
results of operations. F-18




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    3.
    
    INVESTMENT SECURITIESThe amortized cost and estimated market value of investment securities at
December 31, 2003 and 2002 consisted of the following:Available-for-Sale: 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueU.S. Treasury
securities
    
    $
    11,861,000
    
    
    $
    52,000
    
    
    $
    (6,000
    )
    
    $
    11,907,000U.S. Government
agencies
    
    
    83,092,000
    
    
    
    294,000
    
    
    
    (112,000
    )
    
    
    83,274,000Corporate debt
securities
    
    
    10,928,000
    
    
    
    70,000
    
    
    
    (15,000
    )
    
    
    10,983,000$
    105,881,000
    
    
    $
    416,000
    
    
    $
    (133,000
    )
    
    $
    106,164,000
  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. 2002Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueU.S. Treasury
securities
    
    $
    8,355,000
    
    
    $
    299,000
    
    
    
    
    
    
    $
    8,654,000U.S. Government
agencies
    
    
    41,802,000
    
    
    
    399,000
    
    
    
    
    
    
    
    42,201,000$
    50,157,000
    
    
    $
    698,000
    
    
    $
    
    
    
    $
    50,855,000
  Net unrealized gains on available-for-sale investment securities totaling
$698,000 were recorded, net of $288,000 in tax liabilities, as
accumulated other comprehensive income within shareholders equity at
December 31, 2002. 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. Proceeds and gross
realized gains from the sale of available-for-sale investment securities
for the year ended December 31, 2001 totaled $5,003,000 and $72,000,
respectively. F-19




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    3.
    
    INVESTMENT SECURITIES(Continued)Held-to-Maturity: 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueU.S. Government
agencies
    
    $
    512,000
    
    
    $
    27,000
    
    
    
    
    
    
    $
    539,000Obligations of states
and political sub-
divisions
    
    
    7,705,000
    
    
    
    155,000
    
    
    $
    (10,000
    )
    
    
    7,850,000Corporate debt
securities
    
    
    1,502,000
    
    
    
    47,000
    
    
    
    
    
    
    
    1,549,000$
    9,719,000
    
    
    $
    229,000
    
    
    $
    (10,000
    )
    
    $
    9,938,000
 2002Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueU.S. Government
agencies
    
    $
    2,753,000
    
    
    $
    73,000
    
    
    
    
    
    
    $
    2,826,000Obligations of states
and political sub-
divisions
    
    
    3,313,000
    
    
    
    172,000
    
    
    
    
    
    
    
    3,485,000Corporate debt
securities
    
    
    4,515,000
    
    
    
    126,000
    
    
    
    
    
    
    
    4,641,000$
    10,581,000
    
    
    $
    371,000
    
    
    $
    
    
    
    $
    10,952,000
  There were no sales or transfers of held-to-maturity investment
securities during the years ended December 31, 2003, 2002 and 2001.
However, a loss from the writedown of a held-to-maturity investment
security was recognized during the year ended December 31, 2001 totaling
$60,000. During the year ended December 31, 2002, this amount was
recovered. F-20




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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, 2003 are
summarized and classified according to the duration of the loss period as
follows: Less than 12 MonthsFair
    
    UnrealizedValue
    
    LossesU.S. Treasury securities
    
    $
    7,104,000
    
    
    $
    (6,000
    )U.S. Government agencies
    
    
    34,353,000
    
    
    
    (112,000
    )Corporate debt securities
    
    
    4,747,000
    
    
    
    (15,000
    )Obligations of states and political subdivisions
    
    
    2,113,000
    
    
    
    (10,000
    )$
    48,317,000
    
    
    $
    (143,000
    )
  Management periodically evaluates each investment security relying
primarily on industry analyst reports, 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 due only to interest rate fluctuations.The amortized cost and estimated market value of investment securities at
December 31, 2003 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-MaturityEstimated
    
    
    
    
    
    EstimatedAmortized
    
    Market
    
    Amortized
    
    MarketCost
    
    Value
    
    Cost
    
    ValueWithin one year
    
    
    
    
    
    
    
    
    
    $
    2,429,000
    
    
    $
    2,473,000After one year through
five years
    
    $
    93,052,000
    
    
    $
    93,332,000
    
    
    
    2,861,000
    
    
    
    3,015,000After five years through
ten years
    
    
    
    
    
    
    
    
    
    
    2,002,000
    
    
    
    2,000,000After ten years through
fifteen years
    
    
    
    
    
    
    
    
    
    
    1,915,000
    
    
    
    1,911,00093,052,000
    
    
    
    93,332,000
    
    
    
    9,207,000
    
    
    
    9,399,000Investment securities
not due at a single
maturity date:Government-guaranteed
mortgage-backed securities
    
    
    12,829,000
    
    
    
    12,832,000
    
    
    
    500,000
    
    
    
    526,000SBA loan pools
    
    
    
    
    
    
    
    
    
    
    12,000
    
    
    
    13,000$
    105,881,000
    
    
    $
    106,164,000
    
    
    $
    9,719,000
    
    
    $
    9,938,000
 F-21




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  3.
    
    INVESTMENT SECURITIES(Continued)Investment securities with amortized costs totaling $22,715,000 and
$19,923,000 and estimated market values totaling $23,398,000 and
$20,218,000 were pledged to secure public deposits and treasury, tax and
loan accounts.4.
    
    LOANSOutstanding loans are summarized below: December 31,2003
    
    2002Commercial
    
    $
    51,073,000
    
    
    $
    52,432,000Agricultural
    
    
    26,537,000
    
    
    
    25,610,000Real estate  mortgage
    
    
    67,532,000
    
    
    
    66,039,000Real estate  construction and land
development
    
    
    26,194,000
    
    
    
    15,175,000Installment
    
    
    46,621,000
    
    
    
    48,465,000217,957,000
    
    
    
    207,721,000Deferred loan fees, net
    
    
    (530,000
    )
    
    
    (601,000
    )Allowance for loan losses
    
    
    (2,564,000
    )
    
    
    (2,471,000
    )$
    214,863,000
    
    
    $
    204,649,000
  Changes in the allowance for loan losses were as follows: Year Ended December 31,2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    2,471,000
    
    
    $
    2,153,000
    
    
    $
    1,888,000Provision charged to operations
    
    
    750,000
    
    
    
    825,000
    
    
    
    725,000Losses charged to allowance
    
    
    (847,000
    )
    
    
    (601,000
    )
    
    
    (560,000
    )Recoveries
    
    
    190,000
    
    
    
    94,000
    
    
    
    100,000Balance, end of year
    
    $
    2,564,000
    
    
    $
    2,471,000
    
    
    $
    2,153,000
 F-22




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  4.
    
    LOANS(Continued)The recorded investment in loans that were considered to be impaired
totaled $550,000 and $1,459,000 at December 31, 2003 and 2002,
respectively. The related allowance for loan losses for impaired loans
was $59,000 and $228,000 at December 31, 2003 and 2002, respectively.
The average recorded investment in impaired loans for the years ended
December 31, 2003, 2002 and 2001 was $1,733,000, $1,003,000 and $197,000,
respectively. During the year ended December 31, 2003, the Bank 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 Bank recognized $143,000,
$29,000 and $1,000 in interest income on a cash basis for impaired loans
during the years ended December 31, 2003, 2002 and 2001, respectively.At December 31, 2003 and 2002, nonaccrual loans totaled $847,000 and
$1,711,000, respectively. Interest foregone on nonaccrual loans totaled
$51,000, $148,000 and $72,000 for the years ended December 31, 2003, 2002
and 2001, respectively.Salaries and employee benefits totaling $728,000, $753,000 and $397,000
have been deferred as loan origination costs during the years ended
December 31, 2003, 2002 and 2001, respectively.Sales and Servicing of Government-Guaranteed LoansA summary of the activity in government-guaranteed loans follows: Year Ended December 31,2003
    
    2002
    
    2001Loans originated
    
    $
    3,010,000
    
    
    $
    3,401,000
    
    
    $
    2,465,000Loans sold (guaranteed portion)
    
    
    
    
    
    
    899,000
    
    
    
    4,157,000Loans outstanding at year end
    
    
    6,773,000
    
    
    
    4,329,000
    
    
    
    2,729,000Premium received at sale
    
    
    
    
    
    
    38,000
    
    
    
    155,000Balance of servicing assets at
year end
    
    
    82,000
    
    
    
    91,000
    
    
    
    85,000Fair value of interest-only strips
year end
    
    
    237,000
    
    
    
    263,000
    
    
    
    225,000
  There were no significant gains or losses recognized on the interest-only
strips for the years ended December 31, 2003, 2002 and 2001. F-23




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    5.
    
    PREMISES AND EQUIPMENTPremises and equipment consisted of the following: December 31,2003
    
    2002Land
    
    $
    1,349,000
    
    
    $
    981,000Premises
    
    
    6,904,000
    
    
    
    6,579,000Furniture, equipment and leasehold improvements
    
    
    7,075,000
    
    
    
    5,860,000Construction in progress
    
    
    260,000
    
    
    
    317,00015,588,000
    
    
    
    13,737,000Less accumulated depreciation
and amortization
    
    
    (5,282,000
    )
    
    
    (4,414,000
    )$
    10,306,000
    
    
    $
    9,323,000
  Depreciation and amortization included in occupancy and equipment expense
totaled $1,153,000, $925,000 and $749,000 for the years ended December
31, 2003, 2002 and 2001, respectively.6.
    
    INTEREST-BEARING DEPOSITSInterest-bearing deposits consisted of the following: December 31,2003
    
    2002NOW
    
    $
    41,690,000
    
    
    $
    34,222,000Money market
    
    
    64,349,000
    
    
    
    59,802,000Savings
    
    
    59,601,000
    
    
    
    43,367,000Time, $100,000 or more
    
    
    27,461,000
    
    
    
    24,072,000Other time
    
    
    65,911,000
    
    
    
    58,924,000$
    259,012,000
    
    
    $
    220,387,000
 F-24




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  6.
    
    INTEREST-BEARING DEPOSITS(Continued)Aggregate annual maturities of time deposits are as follows: Year EndingDecember 31,2004
    
    $
    74,937,0002005
    
    
    10,254,0002006
    
    
    5,576,0002007
    
    
    2,053,0002008
    
    
    442,000Thereafter
    
    
    110,000$
    93,372,000
  Interest expense recognized on interest-bearing deposits consisted of the
following: Year Ended December 31,2003
    
    2002
    
    2001NOW
    
    $
    79,000
    
    
    $
    114,000
    
    
    $
    195,000Money market
    
    
    498,000
    
    
    
    775,000
    
    
    
    1,285,000Savings
    
    
    310,000
    
    
    
    432,000
    
    
    
    581,000Time, $100,000 or more
    
    
    507,000
    
    
    
    695,000
    
    
    
    1,076,000Other time
    
    
    1,309,000
    
    
    
    1,929,000
    
    
    
    3,231,000$
    2,703,000
    
    
    $
    3,945,000
    
    
    $
    6,368,000
  7.
    
    SHORT-TERM BORROWING ARRANGEMENTSThe Bank has unsecured short-term borrowing arrangements with two of its
correspondent banks in the amounts of $10,000,000 and $5,000,000. The
Bank can also borrow up to $10,192,000 from the Federal Home Loan Bank
secured by residential mortgage loans with carrying values totaling
$18,122,000. In addition, the Bank has a reverse repurchase agreement
with a securities firm whereby all borrowings are fully secured by
investment securities. There were no short-term borrowings outstanding
at December 31, 2003 and 2002. F-25




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    8.
    
    JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURESPlumas 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.
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
4.77% (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. F-26




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  9.
    
    COMMITMENTS AND CONTINGENCIESLeasesThe Bank leases its Tahoe City and Loyalton branch offices and an
administrative office in Truckee under noncancelable operating leases
that expire in March 2008, June 2005 and January 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 EndingDecember 31,2004
    
    $
    232,5002005
    
    
    225,0002006
    
    
    153,4002007
    
    
    101,6002008
    
    
    32,500$
    745,000
  Rental expense included in occupancy and equipment expense totaled
$179,000, $85,000 and $97,000 for the years ended December 31, 2003, 2002
and 2001, respectively.Financial Instruments With Off-Balance-Sheet RiskThe Bank 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 Bank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 Bank
uses the same credit policies in making commitments and letters of credit
as it does for loans included on the consolidated balance sheet.The following financial instruments represent off-balance-sheet credit
risk: December 31,2003
    
    2002Commitments to extend credit
    
    $
    60,203,000
    
    
    $
    49,267,000Letters of credit
    
    $
    1,802,000
    
    
    $
    509,000
 F-27




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##### 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)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 Bank
evaluates each customers creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank 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 Bank 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.At December 31, 2003, consumer loan commitments represent approximately
17% of total commitments and are generally unsecured. Commercial and
agricultural loan commitments represent approximately 31% of total
commitments and are generally secured by various assets of the borrower.
Real estate loan commitments represent the remaining 52% 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 Banks
commitments have variable interest rates.Significant Concentrations of Credit RiskThe Bank 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 Bank 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.ContingenciesThe 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. F-28




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    10.
    
    SHAREHOLDERS EQUITYDividend RestrictionsThe 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, 2003,
the maximum amount available for dividend distribution under this
restriction was approximately $7,300,000.Stock SplitOn 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. F-29




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    10.
    
    SHAREHOLDERS EQUITY(Continued)Earnings Per ShareA reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows: WeightedAverageNumber ofNet
    
    Shares
    
    Per ShareFor the Year Ended
    
    Income
    
    Outstanding
    
    AmountDecember 31, 2003Basic earnings per share
    
    $
    3,281,000
    
    
    
    3,230,956
    
    
    $
    1.02Effect of dilutive stock options
    
    
    
    
    
    
    88,007Diluted earnings per share
    
    $
    3,281,000
    
    
    
    3,318,963
    
    
    $
    0.99December 31, 2002Basic earnings per share
    
    $
    3,154,000
    
    
    
    3,199,962
    
    
    $
    0.99Effect of dilutive stock options
    
    
    
    
    
    
    70,635Diluted earnings per share
    
    $
    3,154,000
    
    
    
    3,270,597
    
    
    $
    0.96December 31, 2001Basic earnings per share
    
    $
    2,758,000
    
    
    
    3,163,977
    
    
    $
    0.87Effect of dilutive stock options
    
    
    
    
    
    
    41,930Diluted earnings per share
    
    $
    2,758,000
    
    
    
    3,205,907
    
    
    $
    0.86
  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 56,925, 100,575 and 116,820 for the years
ended December 31, 2003, 2002 and 2001, respectively. F-30




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    10.
    
    SHAREHOLDERS EQUITY(Continued)Stock OptionsIn 2001 and 1991, the Company established Stock Option Plans for which
738,655 shares of common stock are reserved for issuance to employees and
directors under incentive and nonstatutory agreements as of December 31,
2003. 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: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceIncentiveOptions outstanding,
beginning of year
    
    
    196,003
    
    
    $
    10.06
    
    
    
    143,790
    
    
    $
    6.91
    
    
    
    218,397
    
    
    $
    4.60Options granted
    
    
    50,800
    
    
    $
    19.25
    
    
    
    66,825
    
    
    $
    16.13
    
    
    
    20,250
    
    
    $
    8.24Options exercised
    
    
    (29,903
    )
    
    $
    6.63
    
    
    
    (14,612
    )
    
    $
    6.87
    
    
    
    (94,857
    )
    
    $
    1.88Options canceled
    
    
    (2,325
    )
    
    $
    16.13Options outstanding,
end of year
    
    
    214,575
    
    
    $
    12.64
    
    
    
    196,003
    
    
    $
    10.06
    
    
    
    143,790
    
    
    $
    6.91Options exercisable,
end of year
    
    
    114,205
    
    
    $
    8.19
    
    
    
    129,178
    
    
    $
    6.92
    
    
    
    81,086
    
    
    $
    6.32NonstatutoryOptions outstanding,
beginning of year
    
    
    66,690
    
    
    $
    11.28
    
    
    
    36,930
    
    
    $
    7.52
    
    
    
    72,570
    
    
    $
    4.67Options granted
    
    
    16,875
    
    
    $
    19.79
    
    
    
    33,750
    
    
    $
    16.13
    
    
    
    3,750
    
    
    $
    8.29Options exercised
    
    
    (7,060
    )
    
    $
    7.37
    
    
    
    (2,694
    )
    
    $
    4.88
    
    
    
    (37,446
    )
    
    $
    2.07Options canceled
    
    
    
    
    
    
    
    
    
    
    (1,296
    )
    
    $
    4.96
    
    
    
    (1,944
    )
    
    $
    7.44Options outstanding,
end of year
    
    
    76,505
    
    
    $
    14.05
    
    
    
    66,690
    
    
    $
    11.28
    
    
    
    36,930
    
    
    $
    7.52Options exercisable,
end of year
    
    
    34,630
    
    
    $
    9.75
    
    
    
    32,940
    
    
    $
    7.54
    
    
    
    19,533
    
    
    $
    7.48
 F-31




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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, 2003 follows: Number of
    
    WeightedOptions
    
    Average
    
    OptionsOutstanding
    
    Remaining
    
    ExercisableRange of
    
    December 31,
    
    Contractual
    
    December 31,Exercise Prices
    
    2003
    
    Life
    
    2003Incentive$
    
    
    4.09
    
    
    
    
    
    
    
    16,200
    
    
    1.0 years
    
    
    16,200$
    
    
    5.37
    
    
    
    
    
    
    
    6,000
    
    
    2.3 years
    
    
    6,000$
    
    
    7.17
    
    
    
    
    
    
    
    3,000
    
    
    6.5 years
    
    
    3,000$
    
    
    7.44
    
    
    
    
    
    
    
    44,350
    
    
    4.9 years
    
    
    44,350$
    
    
    8.15
    
    
    
    
    
    
    
    7,500
    
    
    7.8 years
    
    
    7,500$
    
    
    8.28
    
    
    
    
    
    
    
    9,750
    
    
    4.7 years
    
    
    9,750$
    
    
    8.29
    
    
    
    
    
    
    
    12,475
    
    
    7.8 years
    
    
    12,475$
    
    
    16.13
    
    
    
    
    
    
    
    64,500
    
    
    8.9 years
    
    
    14,830$
    
    
    16.14
    
    
    
    
    
    
    
    5,750
    
    
    9.2 years
    
    
    0$
    
    
    18.51
    
    
    
    
    
    
    
    5,000
    
    
    9.5 years
    
    
    0$
    
    
    19.79
    
    
    
    
    
    
    
    40,050
    
    
    9.9 years
    
    
    0214,575
    
    
    
    
    
    114,105Nonstatutory$
    
    
    7.00
    
    
    
    
    
    
    
    2,000
    
    
    6.6 years
    
    
    2,000$
    
    
    7.44
    
    
    
    
    
    
    
    14,505
    
    
    4.9 years
    
    
    14,505$
    
    
    7.72
    
    
    
    
    
    
    
    5,625
    
    
    3.9 years
    
    
    5,625$
    
    
    8.29
    
    
    
    
    
    
    
    3,750
    
    
    7.8 years
    
    
    3,750$
    
    
    16.13
    
    
    
    
    
    
    
    33,750
    
    
    8.9 years
    
    
    8,750$
    
    
    19.79
    
    
    
    
    
    
    
    16,875
    
    
    9.9 years
    
    
    076,505
    
    
    
    
    
    34,630
  Regulatory CapitalThe 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. F-32




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  10.
    
    SHAREHOLDERS EQUITY(Continued)Regulatory Capital (Continued)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, 2003 and 2002.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 31,2003
    
    2002Amount
    
    Ratio
    
    Amount
    
    RatioLeverage RatioPlumas Bancorp and Subsidiary
    
    $
    29,345,000
    
    
    
    8.4
    %
    
    $
    28,188,000
    
    
    
    8.8
    %Minimum regulatory requirement
    
    $
    14,053,000
    
    
    
    4.0
    %
    
    $
    11,967,000
    
    
    
    4.0
    %Plumas Bank
    
    $
    28,852,000
    
    
    
    8.2
    %
    
    $
    24,621,000
    
    
    
    7.7
    %Minimum requirement for Well-Capitalized institution
    
    $
    17,567,000
    
    
    
    5.0
    %
    
    $
    16,089,000
    
    
    
    5.0
    %Minimum regulatory requirement
    
    $
    14,053,000
    
    
    
    4.0
    %
    
    $
    12,871,000
    
    
    
    4.0
    %Tier 1 Risk-Based Capital RatioPlumas Bancorp and Subsidiary
    
    $
    29,345,000
    
    
    
    10.4
    %
    
    $
    28,188,000
    
    
    
    11.8
    %Minimum regulatory requirement
    
    $
    11,261,000
    
    
    
    4.0
    %
    
    $
    9,546,000
    
    
    
    4.0
    %Plumas Bank
    
    $
    28,852,000
    
    
    
    10.3
    %
    
    $
    24,621,000
    
    
    
    7.7
    %Minimum requirement for Well-Capitalized institution
    
    $
    16,867,000
    
    
    
    6.0
    %
    
    $
    14,309,000
    
    
    
    6.0
    %Minimum regulatory requirement
    
    $
    11,245,000
    
    
    
    4.0
    %
    
    $
    9,539,000
    
    
    
    4.0
    %Total Risk-Based Capital RatioPlumas Bancorp and Subsidiary
    
    $
    31,909,000
    
    
    
    11.3
    %
    
    $
    30,656,000
    
    
    
    12.8
    %Minimum regulatory requirement
    
    $
    22,522,000
    
    
    
    8.0
    %
    
    $
    19,093,000
    
    
    
    8.0
    %Plumas Bank
    
    $
    31,416,000
    
    
    
    11.1
    %
    
    $
    27,092,000
    
    
    
    11.4
    %Minimum requirement for Well-Capitalized institution
    
    $
    28,112,000
    
    
    
    10.0
    %
    
    $
    23,848,000
    
    
    
    10.0
    %Minimum regulatory requirement
    
    $
    22,490,000
    
    
    
    8.0
    %
    
    $
    19,078,000
    
    
    
    8.0
    %
 F-33




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  11.
    
    OTHER EXPENSESOther expenses consisted of the following: Year Ended December 31,2003
    
    2002
    
    2001Professional fees
    
    $
    392,000
    
    
    $
    673,000
    
    
    $
    369,000Telephone
    
    
    357,000
    
    
    
    347,000
    
    
    
    293,000Business development
    
    
    357,000
    
    
    
    371,000
    
    
    
    330,000Stationery and supplies
    
    
    349,000
    
    
    
    324,000
    
    
    
    300,000Armored car and courier
    
    
    342,000
    
    
    
    318,000
    
    
    
    354,000Advertising and promotion
    
    
    288,000
    
    
    
    260,000
    
    
    
    237,000Postage
    
    
    253,000
    
    
    
    184,000
    
    
    
    201,000Director compensation and retirement
    
    
    196,000
    
    
    
    228,000
    
    
    
    216,000Loan expenses
    
    
    170,000
    
    
    
    244,000
    
    
    
    216,000Insurance
    
    
    164,000
    
    
    
    171,000
    
    
    
    131,000Other operating expenses
    
    
    473,000
    
    
    
    421,000
    
    
    
    441,000$
    3,341,000
    
    
    $
    3,541,000
    
    
    $
    3,088,000
  12.
    
    INCOME TAXESThe provision for income taxes for the years ended December 31, 2003,
2002 and 2001 consisted of the following: Federal
    
    State
    
    Total2003Current
    
    $
    1,437,000
    
    
    $
    553,000
    
    
    $
    1,990,000Deferred
    
    
    19,000
    
    
    
    9,000
    
    
    
    28,000Income tax expense
    
    $
    1,456,000
    
    
    $
    562,000
    
    
    $
    2,018,0002002Current
    
    $
    1,460,000
    
    
    $
    555,000
    
    
    $
    2,015,000Deferred
    
    
    21,000
    
    
    
    10,000
    
    
    
    31,000Income tax expense
    
    $
    1,481,000
    
    
    $
    565,000
    
    
    $
    2,046,0002001Current
    
    $
    1,259,000
    
    
    $
    509,000
    
    
    $
    1,768,000Deferred
    
    
    (72,000
    )
    
    
    (29,000
    )
    
    
    (101,000
    )Income tax expense
    
    $
    1,187,000
    
    
    $
    480,000
    
    
    $
    1,667,000
 F-34




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  12.
    
    INCOME TAXES(Continued)Deferred tax assets (liabilities) consisted of the following: December 31,2003
    
    2002Deferred tax assets:Allowance for loan losses
    
    $
    925,000
    
    
    $
    901,000Future benefit of state income tax deduction
    
    
    203,000
    
    
    
    179,000Deferred compensation
    
    
    806,000
    
    
    
    597,000Deposit purchase premium
    
    
    124,000
    
    
    
    98,000Other
    
    
    11,000
    
    
    
    94,000Total deferred tax assets
    
    
    2,069,000
    
    
    
    1,869,000Deferred tax liabilities:Future liability of state deferred tax asset
    
    
    (122,000
    )
    
    
    (102,000
    )Unrealized gain on available-for-sale
investment securities
    
    
    (117,000
    )
    
    
    (288,000
    )Bank premises and equipment
    
    
    (608,000
    )
    
    
    (456,000
    )Total deferred tax liabilities
    
    
    (847,000
    )
    
    
    (846,000
    )Net deferred tax assets
    
    $
    1,222,000
    
    
    $
    1,023,000
  The provision for income taxes differs from amounts computed by applying
the statutory Federal income tax rate to operating income before income
taxes. The items comprising these differences consisted of the
following: Year Ended December 31,2003
    
    2002
    
    2001Amount
    
    Rate %
    
    Amount
    
    Rate %
    
    Amount
    
    Rate %Federal income tax
expense, at statutory
rate
    
    $
    1,802,000
    
    
    
    34.0
    
    
    $
    1,768,000
    
    
    
    34.0
    
    
    $
    1,505,000
    
    
    
    34.0State franchise tax, net
of Federal tax effect
    
    
    360,000
    
    
    
    6.8
    
    
    
    339,000
    
    
    
    6.5
    
    
    
    289,000
    
    
    
    6.5Interest on obligations
of states and political
subdivisions
    
    
    (62,000
    )
    
    
    (1.2
    )
    
    
    (48,000
    )
    
    
    (.9
    )
    
    
    (36,000
    )
    
    
    (.8
    )Net increase in cash
surrender value of
officers life insurance
    
    
    (106,000
    )
    
    
    (2.0
    )
    
    
    (74,000
    )
    
    
    (1.4
    )
    
    
    (83,000
    )
    
    
    (1.9
    )Other
    
    
    24,000
    
    
    
    .5
    
    
    
    61,000
    
    
    
    1.1
    
    
    
    (8,000
    )
    
    
    (.1
    )Total income
tax expense
    
    $
    2,018,000
    
    
    
    38.1
    
    
    $
    2,046,000
    
    
    
    39.3
    
    
    $
    1,667,000
    
    
    
    37.7
 F-35




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  13.
    
    RELATED PARTY TRANSACTIONSDuring the normal course of business, the Bank enters into transactions
with related parties, including executive officers and directors. These
transactions include borrowings from the Bank 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 2003: Balance, January 1, 2003
    
    $
    847,000Disbursements
    
    
    1,080,000Amounts repaid
    
    
    (759,000
    )Balance, December 31, 2003
    
    $
    1,168,000Undisbursed commitments to related
parties, December 31, 2003
    
    $
    873,000
  14.
    
    EMPLOYEE BENEFIT PLANSProfit Sharing PlanThe 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. 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, 2003, 2002 and 2001, the Companys
contribution totaled $139,000, $135,000 and $111,000, respectively.Salary Continuation and Retirement PlansSalary 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 Bank 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, 2003, 2002
and 2001 totaled $402,000, $199,000 and $199,000, respectively. F-36




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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 Bank purchased single premium life
insurance policies with cash surrender values totaling $8,013,000 and
$4,565,000 at December 31, 2003 and 2002, respectively. On the
consolidated balance sheet, the cash surrender values are included in
accrued interest receivable and other assets. Income earned on these
policies, net of expenses, totaled $278,000, $183,000 and $212,000 for
the years ended December 31, 2003, 2002 and 2001, respectively. Income
earned on these policies is not subject to Federal income tax.15.
    
    COMPREHENSIVE INCOMEComprehensive 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 Statement of Changes in Shareholders Equity.At December 31, 2003, 2002 and 2001, the Bank held securities classified
as available-for-sale which had unrealized gains (losses) as follows: TaxBefore
    
    Benefit
    
    AfterTax
    
    (Expense)
    
    TaxFor the Year Ended December 31, 2003Other comprehensive loss:Unrealized holding losses
    
    $
    (87,000
    )
    
    $
    37,000
    
    
    $
    (50,000
    )Reclassification adjustment for gains
included in net income
    
    
    328,000
    
    
    
    (134,000
    )
    
    
    194,000Total other comprehensive loss
    
    $
    (415,000
    )
    
    $
    171,000
    
    
    $
    (244,000
    )For the Year Ended December 31, 2002Other comprehensive income:Unrealized holding gains
    
    $
    563,000
    
    
    $
    (232,000
    )
    
    $
    331,000Reclassification adjustment for gains
included in net income
    
    
    117,000
    
    
    
    (48,000
    )
    
    
    69,000Total other comprehensive
income
    
    $
    446,000
    
    
    $
    (184,000
    )
    
    $
    262,000
 F-37




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  15.
    
    COMPREHENSIVE INCOME(Continued) TaxBefore
    
    Benefit
    
    AfterTax
    
    (Expense)
    
    TaxFor the Year Ended December 31, 2001Other comprehensive income:Unrealized holding gains
    
    $
    348,000
    
    
    $
    (144,000
    )
    
    $
    204,000Reclassification adjustment for gains
included in net income
    
    
    72,000
    
    
    
    (30,000
    )
    
    
    42,000Total other comprehensive
income
    
    $
    276,000
    
    
    $
    (114,000
    )
    
    $
    162,000
  16.
    
    DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTSEstimated 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, 2003 and
2002: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. F-38




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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 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: 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. December 31, 2003
    
    December 31, 2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    30,012,000
    
    
    $
    30,012,000
    
    
    $
    37,930,000
    
    
    $
    37,930,000Loans held for sale
    
    
    276,000
    
    
    
    276,000
    
    
    
    1,472,000
    
    
    
    1,472,000Investment securities
    
    
    115,883,000
    
    
    
    116,102,000
    
    
    
    61,436,000
    
    
    
    61,807,000Loans
    
    
    214,863,000
    
    
    
    215,488,000
    
    
    
    204,649,000
    
    
    
    204,826,000Cash surrender value of life
insurance policies
    
    
    8,013,000
    
    
    
    8,013,000
    
    
    
    4,565,000
    
    
    
    4,565,000Accrued interest receivable
    
    
    2,501,000
    
    
    
    2,501,000
    
    
    
    2,132,000
    
    
    
    2,132,000Financial liabilities:Deposits
    
    $
    355,842,000
    
    
    $
    356,517,000
    
    
    $
    293,941,000
    
    
    $
    294,586,000Junior subordinated deferrable
interest debentures
    
    
    6,186,000
    
    
    
    6,186,000
    
    
    
    6,186,000
    
    
    
    6,186,000Accrued interest payable
    
    
    238,000
    
    
    
    238,000
    
    
    
    348,000
    
    
    
    348,000
 F-39




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PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  16.
    
    DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS(Continued) December 31, 2003
    
    December 31, 2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueOff-balance-sheet financial
instruments:Commitments to extend
credit
    
    $
    60,203,000
    
    
    $
    60,203,000
    
    
    $
    49,267,000
    
    
    $
    49,267,000Standby letters of credit
    
    
    1,802,000
    
    
    
    1,802,000
    
    
    
    509,000
    
    
    
    509,000
  17.
    
    INTANGIBLE ASSETSThe Bank acquired certain assets and liabilities of the Kings Beach,
Loyalton, Portola, Quincy and Truckee branches of Placer Sierra Bank on
November 17, 2004. Upon acquisition, premises and equipment were valued
at fair value and a core deposit premium of $1,709,000 was recorded as an
intangible.The core deposit premiums are amortized using the straight-line method
over ten years. Annually, the intangible is analyzed for impairment.
Amortization expense totaled $161,000, $135,000 and $135,000 for the
years ended December 31, 2003, 2002 and 2001, respectively. Unamortized
core deposit premiums related to previous acquisitions totaled $556,000
and $690,000 at December 31, 2003 and 2002, respectively. F-40




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)    18.
    
    PARENT ONLY CONDENSED FINANCIAL STATEMENTS BALANCE SHEET December 31, 2003 and 2002 2003
    
    2002ASSETSCash and due from banks
    
    $
    116,000
    
    
    $
    3,305,000Investment in bank subsidiary
    
    
    31,316,000
    
    
    
    25,721,000Other assets
    
    
    539,000
    
    
    
    451,000$
    31,971,000
    
    
    $
    29,477,000LIABILITIES AND
SHAREHOLDERS EQUITYOther liabilities
    
    $
    36,000
    
    
    $
    5,000Junior subordinated debentures due to subsidiary
grantor trust
    
    
    6,186,000
    
    
    
    6,186,000Total liabilities
    
    
    6,222,000
    
    
    
    6,191,000Shareholders equity:Common stock
    
    
    3,945,000
    
    
    
    3,743,000Retained earnings
    
    
    21,638,000
    
    
    
    19,133,000Accumulated other comprehensive income
    
    
    166,000
    
    
    
    410,000Total shareholders equity
    
    
    25,749,000
    
    
    
    23,286,000$
    31,971,000
    
    
    $
    29,477,000
 F-41




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  18.
    
    PARENT ONLY CONDENSED FINANCIAL STATEMENTS(Continued) STATEMENT OF INCOME For the Years Ended December 31, 2003 and 2002 2003
    
    2002Income:Dividends declared by bank subsidiary
    
    $
    812,000
    
    
    $
    944,000Earnings from investment in Plumas Statutory
Trust I
    
    
    11,000Total income
    
    
    823,000
    
    
    
    944,000Expenses:Interest on junior subordinated deferrable
interest debentures
    
    
    288,000
    
    
    
    87,000Other expenses
    
    
    347,000
    
    
    
    129,000Total expenses
    
    
    635,000
    
    
    
    216,000Income before equity in undistributed
income of subsidiary
    
    
    188,000
    
    
    
    728,000Equity in undistributed income of subsidiary
    
    
    2,839,000
    
    
    
    2,342,000Income before income taxes
    
    
    3,027,000
    
    
    
    3,070,000Income tax benefit
    
    
    254,000
    
    
    
    84,000Net income
    
    $
    3,281,000
    
    
    $
    3,154,000
 F-42




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##### Table of Contents



PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)  18.
    
    PARENT ONLY CONDENSED FINANCIAL STATEMENTS(Continued) STATEMENT OF CASH FLOWS For the Years Ended December 31, 2003 and 2002 2003
    
    2002Cash flows from operating activities:Net income
    
    $
    3,281,000
    
    
    $
    3,154,000Adjustments to reconcile net income to net cash
provided by operating activities:Undistributed net income of subsidiary
    
    
    (2,839,000
    )
    
    
    (2,342,000
    )Increase in other assets
    
    
    (88,000
    )
    
    
    (265,000
    )Increase in other liabilities
    
    
    31,000
    
    
    
    5,000Net cash provided by operating activities
    
    
    385,000
    
    
    
    552,000Cash 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
    
    
    
    
    
    
    35,000Proceeds from the issuance of junior subordinated
deferrable interest debentures
    
    
    
    
    
    
    6,186,000Repayment of short-term borrowings
    
    
    
    
    
    
    (35,000
    )Dividends paid
    
    
    (776,000
    )
    
    
    (867,000
    )Cash paid to repurchase fractional shares
    
    
    
    
    
    
    (4,000
    )Proceeds from the exercise of stock options
    
    
    202,000
    
    
    
    124,000Net cash (used in) provided by
financing activities
    
    
    (574,000
    )
    
    
    5,439,000(Decrease) increase in cash and cash equivalents
    
    
    (3,189,000
    )
    
    
    3,305,000Cash and cash equivalents at beginning of year
    
    
    3,305,000Cash and cash equivalents at end of year
    
    $
    116,000
    
    
    $
    3,305,000Non-cash investing activities:Issuance of common stock in exchange for the
common stock of the Bank
    
    
    
    
    
    $
    3,623,000Net change in unrealized gain on investment
securities available-for-sale
    
    $
    (415,000
    )
    
    $
    446,000
 F-43




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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. 44




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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.10.2
    
    Incentive Stock Option Agreement as amended of William E. Elliott
dated November 18, 1998, is included as Exhibit 10.2 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.3
    
    Executive Salary Continuation Agreement as amended of William E.
Elliott dated October 13, 1993, is included as Exhibit 10.3 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.4
    
    Split Dollar Agreements of William E. Elliott dated January 23,
2002, is included as Exhibit 10.4 to the Registrants 10-QSB for
June 30 2002, which is incorporated by this reference herein.10.5
    
    Incentive Stock Option Agreement as amended of Douglas N. Biddle
dated November 18, 1998, is included as Exhibit 10.5 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.6
    
    Executive Salary Continuation Agreement as amended of Douglas N.
Biddle dated June 2, 1994, is included as Exhibit 10.6 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.7
    
    Split Dollar Agreements of Douglas N. Biddle dated January 24, 2002,
is included as Exhibit 10.7 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.10.8
    
    Incentive Stock Option Agreement as amended of Dennis C. Irvine
dated November 18, 1998, is included as Exhibit 10.8 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.9
    
    Executive Salary Continuation Agreement as amended of Dennis C.
Irvine dated June 2, 1994, is included as Exhibit 10.9 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.10
    
    Split Dollar Agreements of Dennis C. Irvine dated January 24, 2002,
is included as Exhibit 10.10 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.10.11
    
    Incentive Stock Option Agreement as amended of Robert T. Herr dated
July 19, 2000, is included as Exhibit 10.11 to the Registrants
10-QSB for June 30 2002, which is incorporated by this reference
herein.10.12
    
    Non-Qualified Stock Option Agreement as amended of Jerry V. Kehr
dated November 18, 1998, is included as Exhibit 10.12 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.13
    
    Deferred Fee Agreement as amended of Jerry V. Kehr dated August 19,
1998, is included as Exhibit 10.13 to the Registrants 10-QSB for
June 30 2002, which is incorporated by this reference herein.
 45




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##### Table of Contents



10.14
    
    Amended and Restated Director Retirement Agreement of Jerry V. Kehr
dated April 28, 2000, is included as Exhibit 10.14 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.15
    
    Consulting Agreement of Jerry V. Kehr dated May 10, 2000, is
included as Exhibit 10.15 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.10.16
    
    Non-Qualified Stock Option Agreement as amended of Daniel E. West
dated November 19, 1997, is included as Exhibit 10.16 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.17
    
    Non-Qualified Stock Option Agreement as amended of Daniel E. West
dated November 18, 1998, is included as Exhibit 10.17 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.18
    
    Amended and Restated Director Retirement Agreement of Daniel E. West
dated May 10, 2000, is included as Exhibit 10.18 to the Registrants
10-QSB for June 30 2002, which is incorporated by this reference
herein.10.19
    
    Consulting Agreement of Daniel E. West dated May 10, 2000, is
included as Exhibit 10.19 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.10.20
    
    Non-Qualified Stock Option Agreement as amended of Alvin G.
Blickenstaff dated November 18, 1998, is included as Exhibit 10.20
to the Registrants 10-QSB for June 30 2002, which is incorporated
by this reference herein.10.21
    
    Amended and Restated Director Retirement Agreement of Alvin G.
Blickenstaff dated April 19, 2000, is included as Exhibit 10.21 to
the Registrants 10-QSB for June 30 2002, which is incorporated by
this reference herein.10.22
    
    Consulting Agreement of Alvin G. Blickenstaff dated May 8, 2000, is
included as Exhibit 10.22 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.10.23
    
    Non-Qualified Stock Option Agreement as amended of Gerald W.
Fletcher dated November 18, 1998, is included as Exhibit 10.23 to
the Registrants 10-QSB for June 30 2002, which is incorporated by
this reference herein.10.24
    
    Amended and Restated Director Retirement Agreement of Gerald W.
Fletcher dated May 10, 2000, is included as Exhibit 10.24 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.25
    
    Consulting Agreement of Gerald W. Fletcher dated May 10, 2000, is
included as Exhibit 10.25 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.10.26
    
    Non-Qualified Stock Option Agreement as amended of Arthur C. Grohs
dated November 18, 1998, is included as Exhibit 10.26 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.27
    
    Amended and Restated Director Retirement Agreement of Arthur C.
Grohs dated May 9, 2000, is included as Exhibit 10.27 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.28
    
    Consulting Agreement of Arthur C. Grohs dated May 9, 2000, is
included as Exhibit 10.28 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.10.29
    
    Non-Qualified Stock Option Agreement as amended of Christine
McArthur dated August 16, 2000, is included as Exhibit 10.29 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.30
    
    Amended and Restated Director Retirement Agreement of Christine
McArthur dated May 12, 2000, is included as Exhibit 10.30 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.31
    
    Consulting Agreement of Christine McArthur dated May 12, 2000, is
included as Exhibit 10.31 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.
 46




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10.32
    
    Non-Qualified Stock Option Agreement as amended of Terrance J.
Reeson dated November 18, 1998, is included as Exhibit 10.32 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.33
    
    Amended and Restated Director Retirement Agreement of Terrance J.
Reeson dated April 19, 2000, is included as Exhibit 10.33 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.34
    
    Consulting Agreement of Terrance J. Reeson dated May 10, 2000, is
included as Exhibit 10.34 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.10.35
    
    Non-Qualified Stock Option Agreement as amended of Walter Sphar
dated November 18, 1998, is included as Exhibit 10.35 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.36
    
    Amended and Restated Director Retirement Agreement of Walter Sphar
dated April 20, 2000, is included as Exhibit 10.36 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.37
    
    Consulting Agreement of Walter Sphar dated May 9, 2000, is included
as Exhibit 10.37 to the Registrants 10-QSB for June 30 2002, which
is incorporated by this reference herein.10.38
    
    Non-Qualified Stock Option Agreement as amended of Thomas Watson
dated November 21, 2001, is included as Exhibit 10.38 to the
Registrants 10-QSB for June 30 2002, which is incorporated by this
reference herein.10.39
    
    Deferred Fee Agreement of Thomas Watson dated March 3, 2001, is
included as Exhibit 10.39 to the Registrants 10-QSB for June 30
2002, which is incorporated by this reference herein.10.40
    
    Form of Indemnification Agreement, is included as Exhibit 10.41 to
the Registrants 10-QSB for June 30, 2002, which is incorporated by
this reference herein.10.41
    
    2001 Stock Option Plan as amended is included as exhibit 99.1 of the
Form S-8 filed July 23, 2002, File No. 333-9695710.42
    
    1991 Stock Option Plan as amended is included as exhibit 99.1 of the
Form S-8 filed August 19, 2002, File No. 333-9831910.43
    
    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.
333-10322910.44
    
    Executive Salary Continuation Agreement of Robert T. Herr dated June
4, 2002, is included as Exhibit 10.44 to the Registrants 10-Q for
March 31, 2003, which is incorporated by this reference herein.10.45
    
    Branch Purchase and Assumption Agreement dated April 25, 2003, is
included as Exhibit 10.45 to the Registrants 10-Q for March 31,
2003, which is incorporated by this reference herein.10.46
    
    Incentive Stock Option Agreement of William E. Elliott dated
December 18, 2002, is included as Exhibit 10.46 to the Registrants
10-Q for June 30, 2003, which is incorporated by this reference
herein.10.47
    
    Incentive Stock Option Agreement of Douglas N. Biddle dated December
18, 2002, is included as Exhibit 10.47 to the Registrants 10-Q for
June 30, 2003, which is incorporated by this reference herein.10.48
    
    Incentive Stock Option Agreement of Dennis C. Irvine dated December
18, 2002, is included as Exhibit 10.48 to the Registrants 10-Q for
June 30, 2003, which is incorporated by this reference herein.10.49
    
    Incentive Stock Option Agreement of Robert T. Herr dated December
18, 2002, is included as Exhibit 10.49 to the Registrants 10-Q for
June 30, 2003, which is incorporated by this reference herein.10.50
    
    Non-Qualified Stock Option Agreement of Jerry V. Kehr dated December
18, 2002, is included as Exhibit 10.50 to the Registrants 10-Q for
June 30, 2003, which is incorporated by this reference herein.
 47




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##### Table of Contents



10.51
    
    Non-Qualified Stock Option Agreement of Daniel E. West dated
December 18, 2002, is included as Exhibit 10.51 to the Registrants
10-Q for June 30, 2003, which is incorporated by this reference
herein.10.52
    
    Non-Qualified Stock Option Agreement of Alvin G. Blickenstaff dated
December 18, 2002, is included as Exhibit 10.52 to the Registrants
10-Q for June 30, 2003, which is incorporated by this reference
herein.10.53
    
    Non-Qualified Stock Option Agreement of Gerald W. Fletcher dated
December 18, 2002, is included as Exhibit 10.53 to the Registrants
10-Q for June 30, 2003, which is incorporated by this reference
herein.10.54
    
    Non-Qualified Stock Option Agreement of Arthur C. Grohs dated
December 18, 2002, is included as Exhibit 10.54 to the Registrants
10-Q for June 30, 2003, which is incorporated by this reference
herein.10.55
    
    Non-Qualified Stock Option Agreement of Christine McArthur dated
December 18, 2002, is included as Exhibit 10.55 to the Registrants
10-Q for June 30, 2003, which is incorporated by this reference
herein.10.56
    
    Non-Qualified Stock Option Agreement of Terrance J. Reeson dated
December 18, 2002, is included as Exhibit 10.56 to the Registrants
10-Q for June 30, 2003, which is incorporated by this reference
herein.10.57
    
    Non-Qualified Stock Option Agreement of Walter Sphar dated December
18, 2002, is included as Exhibit 10.57 to the Registrants 10-Q for
June 30, 2003, which is incorporated by this reference herein.10.58
    
    Non-Qualified Stock Option Agreement of Thomas Watson dated December
18, 2002, is included as Exhibit 10.58 to the Registrants 10-Q for
June 30, 2003, which is incorporated by this reference herein.10.59
    
    Director Retirement Agreement of Thomas Watson dated May 1, 2003, is
included as Exhibit 10.59 to the Registrants 10-Q for June 30,
2003, which is incorporated by this reference herein.10.60
    
    Consulting Agreement of Thomas Watson dated May 1, 2003, is included
as Exhibit 10.60 to the Registrants 10-Q for June 30, 2003, which
is incorporated by this reference herein.10.61
    
    Third Amendment to Executive Salary Continuation Agreement of
William E. Elliott dated November 12, 2003.11
    
    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, 2003.13.02
    
    Form 10-Q for the quarterly period ended June 30, 2003.13.03
    
    Form 10-Q for the quarterly period ended September 30, 2003.21.01
    
    Plumas Bank  California.21.02
    
    Plumas Statutory Trust I  Connecticut.23.01
    
    Independent Auditors Consent letter dated March 22, 2004.31.1
    
    Rule 13a-14(a) [Section 302] Certification of Principal Accounting
Officer dated March 23, 2004.31.2
    
    Rule 13a-14(a) [Section 302] Certification of Principal Financial
Officer dated March 23, 2004.31.3
    
    Rule 13a-14(a) [Section 302] Certification of Principal Executive
Officer dated March 23, 2004.32.1
    
    Certification of Principal Accounting Officer pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 dated March 23, 2004.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 dated March 23, 2004.32.3
    
    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 23, 2004.
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(b)
    
    Reports on Form 8-K  On January 21, 2004, the Company filed a Current Report on Form 8-K. The
Current Report included as an exhibit, the press release dated January 21,
2004, filed by the Company containing unaudited financial information and
accompanying discussion for the year and quarter ended December 31, 2003. 49




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SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. PLUMAS BANCORP
(Registrant) Date: March 23, 2004 /s/ W. E. ELLIOTTWilliam E. ElliottPresident/Chief Executive Officer/s/ D. N. BIDDLEDouglas N. BiddleExecutive Vice President Chief Financial Officer/s/ ANDREW RYBACKAndrew J. RybackSenior Vice President Controller and Principal Accountant
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##### Table of Contents



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
Jerry V. Kehr, Director and Chairman of the Board
    
    Dated: March 25, 2004/s/ DANIEL E. WEST
Daniel E. West, Director and Vice Chairman of the
Board
    
    Dated: March 25, 2004/s/ ALVIN G. BLICKENSTAFF
Alvin G. Blickenstaff, Director
    
    Dated: March 25, 2004/s/ W. E. ELLIOTT
William E. Elliott, Director
    
    Dated: March 23, 2004/s/ GERALD W. FLETCHER
Gerald W. Fletcher, Director
    
    Dated: March 25, 2004/s/ ARTHUR C. GROHS
Arthur C. Grohs, Director
    
    Dated: March 25, 2004/s/ CHRISTINE MCARTHUR
Christine McArthur, Director
    
    Dated: March 25, 2004/s/ TERRANCE J. REESON
Terrance J. Reeson, Director
    
    Dated: March 25, 2004/s/ WALTER SPHAR
Walter Sphar, Director
    
    Dated: March 25, 2004/s/ THOMAS WATSON
Thomas Watson, Director
    
    Dated: March 25, 2004
 51