Plumas Bancorp - 10-Q quarterly report FY

 

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code (530) 283-7305

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 4, 2008 4,810,210 shares

(In thousands, except share data)

See notes to unaudited condensed consolidated financial statements.

(In thousands, except per share data)

See notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)

Continued on next page.

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

See notes to unaudited condensed consolidated financial statements.

During 2002, Plumas Bancorp (the “Company”) was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the “Bank”) in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation expansion and diversification. The Company formed Plumas Statutory Trust I (“Trust I”) for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II (“Trust II”) for the sole purpose of issuing trust preferred securities on September 28, 2005.

The Bank operates thirteen branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Loyalton, Portola, Quincy, Redding, Susanville, Tahoe City, Truckee and Westwood. In addition to its branch network, the Bank operates a commercial lending office in Reno, Nevada and a lending office specializing in government-guaranteed lending in Auburn, California. 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 interest and fee income generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

The condensed consolidated financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary, Plumas Bank. Plumas Statutory Trust I and Plumas Statutory Trust II are not consolidated into the Company’s consolidated financial statements and, accordingly, are accounted for under the equity method. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2008 and December 31, 2007 and its results of operations for the three-month and six-month periods ended June 30, 2008 and 2007 and its cash flows for the six-month periods ended June 30, 2008 and 2007. Certain reclassifications have been made to prior period’s balances to conform to classifications used in 2008.

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2007 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 2008 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

Management has determined that because all of the commercial banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No single customer accounts for more than 10% of the revenues of the Company or the Bank.

Outstanding loans are summarized below, in thousands:

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

In the normal course of business, there are various outstanding commitments to extend credit, which are not reflected, in the financial statements, including loan commitments of $80,287,000 and $96,867,000 and stand-by letters of credit of $2,678,000 and $655,000 at June 30, 2008 and December 31, 2007, respectively.

Of the loan commitments outstanding at June 30, 2008, $19,195,000 are real estate construction loan commitments that are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The deferred liability related to the Company’s stand-by letters of credit was not significant at June 30, 2008 or December 31, 2007.

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted earnings per share.

Stock options not included in the computation of diluted earnings per share, due to their antidilutive effect, were 359,000 and 230,000 for the three months ended June 30, 2008 and 2007, respectively and 335,000 and 150,000 for the six months ended June 30, 2008 and 2007, respectively.

Total comprehensive income for the three months ended June 30, 2008 and 2007 totaled $429,000 and $1,073,000, respectively. Comprehensive income is comprised of unrealized losses, net of taxes, on available-for-sale investment securities, which were $(268,000) and $(61,000) for the three months ended June 30, 2008 and 2007, respectively, together with net income.

Total comprehensive income for the six months ended June 30, 2008 and 2007 totaled $1,346,000 and $2,169,000, respectively. Comprehensive income is comprised of unrealized gains, net of taxes, on available-for-sale investment securities, which were $73,000 and $87,000 for the six months ended June 30, 2008 and 2007, respectively, together with net income.

At June 30, 2008 and December 31, 2007, accumulated other comprehensive loss, net of taxes, totaled $34,000 and $107,000, respectively, and is reflected as a component of shareholders’ equity.

In 2001 and 1991, the Company established Stock Option Plans for which 883,461 shares of common stock remain reserved for issuance to employees and directors and 401,459 shares are available for future grants under incentive and nonstatutory agreements as of June 30, 2008. The Company granted 90,300 and 155,700 options during the six months ended June 30, 2008 and 2007 respectively. The weighted average grant date fair value of options granted for the six months ended June 30, 2008 and 2007 was $2.54 and $4.53, respectively.

Compensation cost related to stock options recognized in operating results under SFAS No. 123R was $75,000 and $78,000 for the quarters ended June 30, 2008 and 2007, respectively. The associated future income tax benefit recognized was $6,000 for the quarters ended June 30, 2008 and 2007. Compensation cost related to stock options recognized in operating results under SFAS No. 123R was $144,000 and $131,000 in the six months ended June 30, 2008 and 2007, respectively. Compensation expense is recognized over the vesting period of the stock options on a straight-line basis. The associated future income tax benefit recognized was $12,000 for both of the six months ended June 30, 2008 and 2007.

In accordance with SFAS 123 (R) the Company has presented excess tax benefits from the exercise of stock-based compensation awards as a financing activity in the consolidated statement of cash flows.

The following table summarizes information about stock option activity for the six months ended June 30, 2008:

The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the six months ended June 30, 2008 was $18,000. During the six months ended June 30, 2008, the amount of cash received from the exercise of stock options was $21,000.

At June 30, 2008, there was $702,000 of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 2.7 years. The total fair value of options vested during the six months ended June 30, 2008 was $172,000.

The Company files its income taxes on a consolidated basis with its subsidiaries. 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 amounts 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 condensed consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying condensed consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of tax expense in the condensed consolidated statements of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the six months ended June 30, 2008.

On January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. There was no cumulative effect adjustment to beginning retained earnings recorded upon adoption and no impact on the financial statements in the first six months of 2008.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non recurring basis as of June 30, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value based on the hierarchy:

Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

The fair value of securities available for sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities. Changes in fair market value are recorded in other comprehensive income.

Financial assets and liabilities measured at fair value on a non-recurring basis are summarized below:

Impaired loans, all of which are measured for impairment using the fair value of the collateral as they are collateral dependent loans, had a principal balance of $1,870,000 with a related valuation allowance of $211,000 at June 30, 2008. Declines in the collateral values of impaired loans during the first six months of 2008 were $134,000 which was reflected as additional specific allocations of the allowance for loan losses.

In connection with the Company’s stock repurchase plan for the year ending December 31, 2008, a total of 52,472 shares were repurchased during the six months ended June 30, 2008 at an average price of $12.77 per share. Management of the Company is authorized to repurchase an additional 191,528 shares; however, the Board of Directors may suspend, terminate or modify the repurchase plan at any time.

Certain matters discussed in this Quarterly Report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressures in the financial services industry; (2) changes in the interest rate environment resulting in reduced margins; (3) general economic conditions, either nationally or regionally, maybe less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in regulatory environment; (5) loss of key personnel; (6) fluctuations in the real estate market; (7) changes in business conditions and inflation; (8) operational risks including data processing systems failures or fraud; and (9) changes in securities markets. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp (the “Company”).

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

The following discussion and analysis sets forth certain statistical information relating to the Company as of June 30, 2008 and December 31, 2007 and for the three and six month periods ended June 30, 2008 and 2007. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2007.

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

On April 16, 2008, the Company declared a semi-annual common stock cash dividend of $0.16 per share. This represents a 7% increase in the semi-annual cash dividend per share from 15 cents paid on May 14, 2007. The dividend was paid on May 16, 2008 to its shareholders of record on April 30, 2008.

There have been no changes to the Company’s critical accounting policies from those disclosed in the Company’s 2007 Annual Report to Shareholders’ on Form 10-K.

The Company’s net income declined by $809 thousand, or 39%, to $1.27 million for the six months ended June 30, 2008 from $2.08 million for the same period in 2007. This decline in net income resulted from a decline in net interest income of $793 thousand and an increase in the provision for loan losses of $615 thousand. An increase of $165 thousand in non-interest expense was mostly offset by an increase of $149 thousand in non-interest income. Related to the reduction in pre-tax earnings the provision for income taxes declined by $615 thousand.

Total assets remained consistent at $453 million at both December 31, 2007 and June 30, 2008. Net loans increased by $3.2 million from $349.3 million at December 31, 2007 to $352.5 million at June 30, 2008. Investment securities declined by $8.4 million from $55.3 million at December 31, 2007 to $46.9 million at June 30, 2008. This decline in investment securities was offset by an increase in cash of $2.7 million, an increase in real estate and vehicles acquired through foreclosure of $1.9 million and provided funding for the $3.2 million increase in loans. Short-term borrowings increased by $17 million from $7.5 million at December 31, 2007 to $24.5 million at June 30, 2008. The increase in short-term borrowings offset a decrease in deposits of $16.9 million from $391.9 million at December 31, 2007 to $375.0 million at June 30, 2008. Total shareholders’ equity decreased slightly from $37.1 million at December 31, 2007 to $36.8 million at June 30, 2008.

The annualized return on average assets was 0.57% for the six months ended June 30, 2008 down from 0.90% for the same period in 2007. The annualized return on average equity was 6.9% for the six months ended June 30, 2008 down from 11.5% for the same period in 2007.

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, for the six months ended June 30, 2008 was $10.1 million, a decline of $793 thousand from the $10.9 million earned during the same period in 2007. Decreases in the yields and the average level of the Company’s loan portfolio along with a reduction in the average balance of investment securities were partially offset by declines in the average balances and rates paid on deposits and short-term borrowings and a decline in the rate paid on junior subordinated debentures.

Interest income declined by $2.0 million, or 13%, to $13.2 million for the six months ended June 30, 2008. Interest and fees on loans decreased by $1.8 million from $14.0 million for the six months ended June 30, 2007 to $12.2 million during the current six-month period. The Company’s average loan balances were $351.5 million for the six months ended June 30, 2008, down $5.5 million, or 2%, from the $357.0 million for the same period in 2007. The average rate earned on the Company’s loan balances decreased 93 basis points to 6.98% during the first six months of 2008 from 7.91% during the first six months of 2007. During this same period the average prime rate declined by 260 basis points. The decline in prime rate is reflective of the 325 basis point reduction made by the Federal Reserve Board since September 2007. At June 30, 2008 approximately 66% of the Company’s loan portfolio was variable rate of which approximately 37% is indexed to the prime interest rate.

Interest on investment securities decreased by $208 thousand, as an increase in yield of 31 basis points was offset by a decline in average investment securities of $15.5 million. The decrease in the overall investment portfolio resulted from maturities, calls and pay downs that were used to provide funding for loan growth and liquidity.

Interest expense decreased $1.2 million, or 29%, to $3.1 million for the six months ended June 30, 2008, down from $4.3 million for the same period in 2007, due to the decrease in both the rates paid on our interest bearing liabilities and in the average balances. Average interest bearing liabilities declined by $19.6 million from $314.7 million during the six months ended June 30, 2007 to $295.1 million during the current period. Average interest bearing deposits declined by $10.9 million and average short-term borrowings declined by $8.7 million over the same periods.

Interest expense on deposits declined by $814 thousand primarily related to the decline of $390 thousand in interest expense on NOW accounts and the $297 thousand decline in time deposit interest expense. In addition, interest on money market and savings accounts declined by $127 thousand. The average rate paid on the Company’s interest bearing deposits declined 50 basis points from 2.44% for the six months ended June 30, 2007 to 1.94% during the current six month period. The average balance of interest bearing deposits declined by $10.9 million from $287.8 million during the six months ended June 30, 2007 to $276.9 million during the six months ended June 30, 2008.

The decline in NOW account interest expense was primarily related to a reduction in the rate paid on our Money Fund Plu$ balances and is consistent with recent declines in market interest rates. Money Fund Plus$ is an interest bearing checking account designed to pay rates comparable to those available on a typical brokerage account. The average balance of NOW accounts declined by $4.0 million from $78.5 million during the six months ended June 30, 2007 to $74.5 million during the current six-month period.

Average time deposits totaled $118.9 million during the first six months of 2008, up $4.0 million from $114.9 million during the six months ended June 30, 2007. The average rate paid on time deposits decreased 65 basis points from 4.25% during the six months ended June 30, 2007 to 3.60% during the same period in 2008.

During 2007 the Company offered a promotional short-term time deposit product which we continued offering until February of 2008. At June 30, 2008 almost all of these promotional short-term time deposits have matured. The decline in the rate paid on time deposits includes the maturity of the promotional time deposit product, some of which have been renewed at lower rates, and a decline in rates paid on new and renewed time deposits.

Interest expense on short-term borrowings decreased by $341 thousand from $436 thousand during the 2007 period to $95 thousand for the six months ended June 30, 2008. This decline resulted from a decrease in the average balance outstanding of $8.7 million and a decline in the rate paid on these borrowings of 289 basis points. The average rate paid on the Company’s trust preferred securities (junior subordinated debentures) decreased 168 basis points to 6.42% for the six months ended June 30, 2008 from 8.10% during the same period in 2007. The rate on the trust preferred securities is tied to the LIBOR rate and will fluctuate with changes in LIBOR; however the rate resets quarterly so the effect of recent declines in LIBOR were not fully reflected in the rate paid during the six months ended June 30, 2008.

As a result of the changes noted above, the net interest margin for the six months ended June 30, 2008 decreased 14 basis points to 5.05%, down from 5.19% for the same period in 2007.

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

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

Provision for loan losses. In response to an increase in the level of net loan charge-offs and our evaluation of the adequacy of the allowance for loan losses in the current economic environment, particularly related to the decline in real estate values, the Company increased its loan loss provision from $375 thousand during the first six months of 2007 to $990 thousand during the current six-month period. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb probable losses in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the six months ended June 30, 2008, total non-interest income increased $149 thousand, or 6%, to $2.7 million, up from $2.6 million for the comparable period in 2007. The largest component of this increase was a $165 thousand increase in service charges on deposit accounts resulting from a change in fee structure instituted during mid 2007. Related to the expansion of our SBA lending activities; gains on the sale of loans increased by $52 thousand to $79 thousand for the six months ended June 30, 2008. Partially offsetting these increases was a decline of $39 thousand in the gain recorded on the sale of repossessed vehicles from $28 thousand during the first half of 2007 to a loss of $11 thousand during the six months ended June 30, 2008.

The following table describes the components of non-interest income for the six-month periods ending June 30, 2008 and 2007, dollars in thousands:

Non-interest expenses. During the six months ended June 30, 2008, total non-interest expenses increased $165 thousand, or 2%, to $9.9 million, up from $9.7 million for the comparable period in 2007. The increase in non-interest expense was primarily the result of increases in occupancy and equipment expense, loan collection expenses and FDIC insurance premiums.

Additions to salary expense totaling $253 thousand related to expansion of our SBA lending activities, growth in our Reno loan production office and increases in staffing at our Redding branch were offset by decreases in salaries in other departments and an $80 thousand decrease in bonus expense resulting in virtually identical levels of salaries and related benefits during the comparison periods.

The largest increase in non-interest expense was a $145 thousand increase in occupancy and equipment costs primarily related to an increase in software related costs and an increase in occupancy costs at our Redding branch. Occupancy costs related to our Redding branch were abnormally high during the 2008 period which included costs of both a temporary facility and our permanent branch which opened in July, 2008. Consistent with the increase in nonperforming assets during the period (See page 23) loan collection expense, which includes costs related to acquiring and maintaining real estate acquired through foreclosure, increased by $78 thousand from $87 thousand during the six months ended June 30, 2007 to $165 thousand during the current period. Other expense increased by $90 thousand related to an increase in FDIC insurance premiums. During 2007 the Company was able to use its remaining credit balance with the FDIC to offset insurance premium billings. By the end of the first quarter of 2008 the credit balance had been fully utilized. A $32 thousand increase in insurance expense is primarily related to recognizing certain postretirement insurance costs for split dollar life insurance policies.

Partially offsetting the above increases in non-interest expense was a decline of $82 thousand in professional fees and declines in business development and advertising costs totaling $100 thousand. During the 2007 period professional fess included consulting costs associated with an outside evaluation of our core banking software requirements, other technology planning costs and costs associated with a strategic planning initiative. Similar costs were not incurred during the 2008 period. The savings in business development and advertising costs include reductions in our marketing budget, savings in promotional materials, and a decrease in seminar and conference costs.

The following table describes the components of non-interest expense for the six-month periods ending June 30, 2008 and 2007, dollars in thousands:

Provision for income taxes. The provision for income taxes was $651 thousand, or 33.8% of pre-tax income for the six months ended June 30, 2008. This compares to $1.3 million or 37.8% of pre-tax income during the first half of 2007. The decrease of 4.0% reflects the effect of an increase, during 2008, in the percentage of tax-exempt income as a percentage of pre-tax income.

Net Income. Net income decreased by $437 thousand, or 39% from $1.1 million during the second quarter of 2007 to $697 thousand during the second three months ended June 30, 2008. This decrease in net income resulted from a $294 thousand decline in net interest income, a $345 thousand increase in the provision for loan losses, and a $237 increase in non-interest expense, partially offset by a $95 thousand increase in non-interest income and a $344 thousand decrease in the provision for income taxes.

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $5.1 million for the three months ended June 30, 2008, a decrease of $294 thousand, or 5%, from $5.4 million for the same period in 2007. The decline in net interest income was related to decreases in the yields and the level of the average loans outstanding along with a reduction in the average balance of investment securities which were mostly offset by a decline in the average balance and rate paid on deposit accounts and short-term borrowings and a decline in the rate paid on junior subordinated debentures.

Interest and fees on loans decreased by $1.1 million from $7.1 million for the three months ended June 30, 2007 to $6.0 million during the 2008 second quarter. The Company’s average loan balances were $351.7 million for the three months ended June 30, 2008, down $8.5 million, or 2%, from the $360.2 million for the same period in 2007. The average yield earned on loans decreased by 109 basis points from 7.91% during the second quarter of 2007 to 6.82% during the 2008 quarter. This decrease in yield primarily is reflective of the declines in market interest rates. During this same period the average prime interest rate declined by 317 basis points. At June 30, 2008 approximately 37% of Plumas Bank’s loans adjust with changes in the prime interest rate.

A 28 basis points increase in yield on investment securities was offset by a decrease of $13.5 million in the average balance outstanding resulting in a decrease of $93 thousand in interest earned on investment securities.

Interest expense decreased by $942 thousand, or 41%, to $1.3 million for the three months ended June 30, 2008, down from $2.3 million for the same period in 2007. Average interest bearing deposits declined by $16.3 million from $288.3 million during the second quarter of 2007 to $272.0 million during the current quarter. Primarily as a result of the maturity of promotional time deposits, average time deposits declined by $7.6 million from $120.1 million during the second quarter of 2007 to $112.5 million during the current quarter. Other categories of deposits declined as well including a $1.7 million decline in average NOW accounts, and a $7.0 million decline in average money market and savings accounts.

During 2008, the Company benefited from a reduction in market interest rates and, in the case of time deposits, the maturity of its short-term promotional time deposit product. Plumas Bank has decreased the rate paid on its interest bearing accounts resulting in a significant decline in deposit interest expense. The average rate paid on interest bearing deposits declined by 86 basis points from 2.52% during the three months ended June 30, 2007 to 1.66% during the current three month period. Related to a decline in the rate paid on our Money Fund Plu$ accounts, the average rate paid on NOW accounts has declined by 106 basis points from 1.78% during the second quarter of 2007 to 0.72% during the current quarter. The Company has also decreased the rates paid on money market, savings deposits and new and renewed time deposits. The average rate paid on time deposits declined by 119 basis points from 4.34% during the three months ended June 30, 2007 to 3.15% during the second quarter of 2008.

The average balance of short-term borrowings decreased from $18.6 million during the second quarter of 2007 to $11.2 million during the three months ended June 30, 2008. The average rate paid on these borrowings decreased by 321 basis points to 2.19% during the quarter ended June 30, 2008, down from 5.40% during the second quarter of 2007. The average rate paid on junior subordinated debentures declined by 271 basis points from 8.09% during the three months ended June 30, 2007 to 5.38% during the current quarter.

As a result of the changes noted above, the net interest margin for the three months ended June 30, 2008 increased slightly to 5.15%. This compares to a net interest margin of 5.14% for the same period in 2007.

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

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

Provision for loan losses. In response to an increase in the level of net loan charge-offs and our evaluation of the adequacy of the allowance for loan losses in the current economic environment, particularly related to the decline in real estate values, we increased our provision for loan losses. The Company recorded $470 thousand in provision for loan losses for the three months ended June 30, 2008 compared to the $125 thousand for the three months ended June 30, 2007. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the three months ended June 30, 2008, total non-interest income increased by $95 thousand from the same period in 2007. Service charge income increased by $67 thousand resulting from a change in fee structure instituted during mid 2007. Related to the expansion of our SBA lending activities; gains on the sale of loans totaled $61 thousand during the second quarter of 2008. There were no loan sales during the three months ended June 30, 2007. Partially offsetting these increases in non-interest income was a decline of $19 thousand in the gain recorded on the sale of repossessed vehicles from $8 thousand during 2007 to a loss of $11 thousand during the three months ended June 30, 2008.

The following table describes the components of non-interest income for the three-month periods ending June 30, 2008 and 2007, dollars in thousands:

Non-interest expenses. During the three months ended June 30, 2008, total non-interest expenses increased $237 thousand, or 5%, to $5.0 million, up from $4.7 million for the comparable period in 2007. The increase in non-interest expense was primarily the result of increases in salaries, occupancy and equipment expense, loan collection expenses and FDIC insurance premiums.

Additions to salary expense totaling $147 thousand were related to expansion of our SBA lending activities, growth in our Reno loan production office and increases in staffing at our Redding branch. These costs were partially offset by an increase in the deferral of loan origination costs and a reduction in staffing in other areas.

Occupancy and equipment expense increased by $96 thousand of which $82 thousand is related to our Redding branch. Occupancy costs related to the Redding branch were abnormally high during the 2008 period which included costs of both a temporary facility and our permanent branch which opened in July, 2008. Consistent with the increase in nonperforming assets during the period (See page 23) loan collection expense increased by $56 thousand from $43 thousand during the three months ended June 30, 2007 to $99 thousand during the current period. Other expense increased by $111 thousand primarily related to an increase in FDIC insurance premiums. During 2007 the Company was able to use its remaining credit balance with the FDIC to offset insurance premium billings. By the end of the first quarter of 2008 the credit balance had been fully utilized. A $30 thousand increase in telephone and data communication expense was primarily related to credits utilized to reduce expense during the 2007 period.

Partially offsetting the above increases in non-interest expense was a decline of $38 thousand in professional fees and declines in business development and advertising costs totaling $81 thousand. During the 2007 period professional fess included consulting costs associated with technology planning and with a strategic planning initiative. Similar costs were not incurred during the 2008 period. The savings in business development and advertising costs are primarily related to a decrease in seminar and conference costs and a reduction in the marketing budget.

The following table describes the components of non-interest expense for the three-month periods ending June 30, 2008 and 2007, dollars in thousands: