UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006

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

PLUMAS BANCORP

(Exact name of Registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)		75-2987096 (IRS Employer Identification No.)
35 S. Lindan Avenue, Quincy, CA (Address of principal executive offices)		95971 (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:		Name of Each Exchange on which Registered:
Common Stock, no par value		The NASDAQ Stock Market LLC

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

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes     þ No

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o Yes     þ No

     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.

þ Yes     o No

     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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act (check one):

Large Accelerated Filer o     Accelerated Filer þ     Non-Accelerated Filer o

     Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes     þ No

     As of June 30, 2006, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $80.5 million, based on the closing price reported to the Registrant on that date of $18.50 per share.

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

     The number of shares of Common Stock of the registrant outstanding as of March 9, 2007 was 4,997,321.

     Documents Incorporated by Reference: Portions of the definitive proxy statement for the 2007 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.

 

 

TABLE OF CONTENTS

				Page
		PART I
Item 1.		Business			4
Item 1A		Risk Factors			18
Item 1B		Unresolved Staff Comments			21
Item 2.		Properties			21
Item 3.		Legal Proceedings			22
Item 4.		Submission of Matters to a Vote of Security Holders			22
		PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			22
Item 6.		Selected Financial Data			25
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			46
Item 8.		Financial Statements and Supplementary Data			48
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			49
Item 9A.		Controls and Procedures			49
Item 9B		Other Information			51
		PART III
Item 10.		Directors, Executive Officers and Corporate Governance			51
Item 11.		Executive Compensation			51
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			51
Item 13.		Certain Relationships and Related Transactions, and Director Independence			52
Item 14.		Principal Accountant Fees and Services			52
		PART IV
Item 15.		Exhibits and Financial Statement Schedules			52
Signatures					55
EXHIBIT 23
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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 legal, accounting and regulatory environment
	§		Changes in the interest rate environment and volatility of rate sensitive assets and liabilities
	§		Declines in the health of the economy, nationally or regionally, which could reduce the demand for loans, reduce the ability of borrowers to repay loans and/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 Item 1A of this Form 10-K entitled “Risk Factors” and other information in this Report.

ITEM 1. BUSINESS

General

The Company. Plumas Bancorp (the “Company”) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in Quincy, California. The Company was incorporated in January 2002 and acquired all of the outstanding shares of Plumas Bank (the “Bank”) in June 2002. The Company’s principal subsidiary is the Bank, and the Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish. At the present time, the Company’s only other subsidiaries are Plumas Statutory Trust I and Plumas Statutory Trust II, which were formed in 2002 and 2005 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, costs of repurchasing Company common stock, and the cost of servicing debt, will generally be paid from dividends paid to the Company by the Bank.

At December 31, 2006, the Company had consolidated assets of $473.2 million, deposits of $402.2 million and shareholders’ equity of $35.8 million. The Company’s liabilities include $10.3 million in junior subordinated deferrable interest debentures issued in conjunction with the trust preferred securities issued by Plumas Statutory Trust I (the “Trust I”) in September 2002 and Plumas Statutory Trust II (the “Trust II”). Both Trust I and Trust II are 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, required under the Securities Exchange Act of 1934 and filed 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, 2006 the Bank had approximately $472.7 million in assets, $354.7 million in loans and $403.0 million in deposits (including a deposit of $0.9 million from the Bancorp). 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. During the fourth quarter of 2006 the Bank opened a commercial lending office in Reno, Nevada. The Bank’s primary business is servicing the banking needs of these communities. 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 Bank’s Government-guaranteed lending center, headquartered in Truckee, provides Small Business Administration (SBA) lending and USDA Rural Development lending. The Bank produces 6-10 of both of these types of loans annually and it is anticipated that this will continue at the same level for the foreseeable future. Also in Truckee, we have a senior commercial lender charged with the production and maintenance of a significant participation loan portfolio. Participations with commitments totaling $22.3 million and outstanding balances of $20.5 million were purchased during 2006. Total participations of $41.7 and $30.7 million were included in the Company’s loan portfolio as of December 31, 2006 and 2005.

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

As of December 31, 2006, 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 – 54.2%; (ii) commercial and industrial (including SBA) loans – 10.2%; (iii) consumer loans (including residential equity lines of credit) – 25.6%; and (iv) agricultural loans (including agricultural real estate loans) – 10.0%.

In addition to the lending activities noted above, we offer a wide range of deposit products for the retail and commercial banking markets including checking, interest-bearing checking, business sweep, savings, time deposit and retirement accounts, as well as telephone banking and internet banking with bill-pay options. As of December 31, 2006, the Bank had 34,304 deposit accounts with balances totaling approximately $403 million, compared to 34,596 deposit accounts with balances totaling approximately $429.0 million at December 31, 2005. We attract deposits through our customer-oriented product mix, competitive pricing, convenient locations, extended hours and drive-up banking, all provided with high level of customer service. During September 2005 the Bank introduced its Money Fund Plu$ checking account. This account is intended to pay rates comparable to those available on a money fund offered by a typical brokerage firm. Since its introduction this product has been very successful in generating interest bearing checking deposits. Money Fund Plu$ balances increased by $21.6 million in 2006 and balances totaled $42.9 million at December 31, 2006.

Most of our deposits are attracted from individuals, business-related sources and smaller municipal entities. This mix of deposit customers resulted in a relatively modest average deposit balance of approximately $11,750 at December 31, 2006, but makes us less vulnerable to adverse effects from the loss of depositors who may be seeking higher yields in other markets or who may otherwise draw down balances for cash needs. We do not accept brokered deposits.

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

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

The Bank has 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 this period. In January of 2005, the Bank introduced a single close construction/permanent residential loan product. This provided the customer with the ability to obtain a construction and permanent loan on their residence with only one application, one set of loan documents and a fixed rate for the entire term. This product has become very popular with loan originations of over $17 million during 2006 and outstanding loans totaling $9.7 million at December 31, 2006. During 2006 the Bank introduced an equity line of credit product secured by investment or commercial property, including improved or unimproved lots. Although this product has generated some interest among the Bank’s customers, it has not generated significant loan balances to date. Loans balances at December 31, 2006 related to this product totaled $193,000.

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

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

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. During October of 2006 we open a commercial lending office in Reno, Nevada.

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 I”). On September 26, 2002, the Company issued to the Trust I, 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 I paid the Company $6,186,000. The Trust I 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 I. 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.

During the third quarter of 2005, the Company formed a wholly owned Connecticut statutory business trust, Plumas Statutory Trust II (the “Trust II”). On September 28, 2005, the Company issued to the Trust II, Floating Rate Junior Subordinated Deferrable Interest Debentures due 2035 (the “Debentures”) in the aggregate principal amount of $4,124,000. In exchange for these debentures the Trust II paid the Company $4,124,000. The Trust II funded its purchase of debentures by issuing $4,000,000 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 II. 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 1.48%, 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 either Trust I or Trust II, and (3) payments due upon voluntary or involuntary dissolution, winding up, or liquidation of either Trust I or Trust II.

The trust preferred securities are mandatorily redeemable upon maturity of the Debentures on September 26, 2032 for Trust I and September 28, 2035 for Trust II, or upon earlier redemption as provided in the indenture.

Neither Trust I nor Trust II are consolidated into the Company’s consolidated financial statements and, accordingly, both entities are accounted for under the equity method and the junior subordinated debentures are reflected as debt on the consolidated balance sheet.

Business Concentrations. No individual or single group of related customer accounts is considered material in relation to the Banks’ assets or deposits, or in relation to our overall business. However, at December 31, 2006 approximately 64% 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 and Washoe County in Nevada. Consequently, our results of operations and financial condition are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of our operations in these areas of California and Nevada 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 and Nevada.

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 branch service area there are 23 traditional banking branch offices of competing institutions, including 19 branches of 4 major banks. As of June 30, 2006, the Federal Deposit Insurance Corporation estimated the Bank’s market share of insured deposits within the communities it serves to be as follows: Chester 71%, Quincy 66%, Portola 49%, Susanville 40%, Alturas 38%, Kings Beach 31%, Truckee 20%, Fall River Mills/Burney 20%, Tahoe City 3% and 100% in the communities of Greenville, Westwood and Loyalton. Tahoe City is the location of our most recently opened branch, which opened its doors in November 2003.

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

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

Employees. At December 31, 2006, the Company and its subsidiary employed 205 persons. On a full-time equivalent basis, we employed 181 persons. We believe our employee relations are excellent.

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 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% for assets with low credit risk, such as certain U.S. government securities, to 100% 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%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance-sheet items of 4%.

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%. It is improbable, however, that an institution with a 3% 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% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, is at least 4% or 5%. 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, 2006 follow:

		Requirement for the
		Bank to be:
		Adequately				Well				Plumas				Plumas
		Capitalized				Capitalized				Bank				Bancorp
Tier 1 leverage capital ratio			4.0	%			5.0	%			9.3	%			9.5	%
Tier 1 risk-based capital ratio			4.0	%			6.0	%			10.6	%			10.9	%
Total risk-based capital ratio			8.0	%			10.0	%			11.6	%			11.8	%

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. The deposit insurance fund or DIF of the FDIC insures our customer deposits up to prescribed limits for each depositor. The Federal Deposit Insurance Reform Act of 2005 and the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 amended the insurance of deposits by the FDIC and collection of assessments from insured depository institutions for deposit insurance. Passed on such amendments enacted, the FDIC approved a final rule to determine risk-based assessment rates on November 2, 2006. An insured depository institution’s assessment rate under the final rule is based on the new assessment rate schedule, its long-term debt issuer ratings or recent financial ratios and supervisory ratings. 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.

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

	§		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.

In April 2005 the Bank was required to purchase an additional 12,810 shares, or $1,281,000, of capital stock under the FHLB-SF’s new capital plan. At December 31, 2006 the Bank owned 21,034 shares of the FHLB-SF capital stock. We do not believe that the FHLB-SF’s new capital plan had a material impact upon our business, financial condition, results of operations or cash flows.

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, 2006, we were in compliance with these requirements.

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

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

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

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

Consumer Protection Laws and Regulations. The banking regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations. The Company is subject to many federal and state consumer protection and privacy 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 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 August 2005, 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 noncommercial 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 Legislation and Other Changes. Federal and state laws affecting banking are enacted from time to time, and similarly federal and state regulations affecting banking are also adopted from time to time. The following include some of the recent laws and regulations affecting banking.

On February 8, 2006, the President signed The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) into law. The Federal Deposit Insurance Reform Conforming Amendments Act of 2005, which the President signed into law on February 15, 2006, contains necessary technical and conforming changes to implement deposit insurance reform, as well as a number of study and survey requirements. The Reform Act provides for the following changes:

	•		Merging the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into a new fund, the Deposit Insurance Fund (DIF). This change was made effective March 31, 2006.
	•		Increasing the coverage limit for retirement accounts to $250,000 and indexing the coverage limit for retirement accounts to inflation as with the general deposit insurance coverage limit. This change was made effective April 1, 2006.
	•		Establishing a range of 1.15 percent to 1.50 percent within which the FDIC Board of Directors may set the Designated Reserve Ratio (DRR).
	•		Allowing the FDIC to manage the pace at which the reserve ratio varies within this range.

	1.		If the reserve ratio falls below 1.15 percent—or is expected to within 6 months—the FDIC must adopt a restoration plan that provides that the DIF will return to 1.15 percent generally within 5 years.
	2.		If the reserve ratio exceeds 1.35 percent, the FDIC must generally dividend to DIF members half of the amount above the amount necessary to maintain the DIF at 1.35 percent, unless the FDIC Board, considering statutory factors, suspends the dividends.

3.

If the reserve ratio exceeds 1.5 percent, the FDIC must generally dividend to DIF members all amounts above the amount necessary to maintain the DIF at 1.5 percent.

	•		Eliminating the restrictions on premium rates based on the DRR and granting the FDIC Board the discretion to price deposit insurance according to risk for all insured institutions regardless of the level of the reserve ratio.
	•		Granting a one-time initial assessment credit (of approximately $4.7 billion) to recognize institutions’ past contributions to the fund.

The Federal Reserve Board in February 2006 approved a final rule that expands the definition of a small bank holding company under its Small Bank Holding Company Policy Statement and the Board’s risk-based and leverage capital guidelines for bank holding companies. The policy statement facilitates the transfer of ownership of small community banks by permitting debt levels at small bank holding companies that are higher than what would typically be permitted for larger small bank holding companies. In its revisions to the Policy Statement, the Federal Reserve Board has raised the small bank holding company asset size threshold from $150 million to $500 million and amended the related qualitative criteria for determining eligibility as a small bank holding company for the purposes of the policy statement and the capital guidelines.

The FDIC finalized its interim final rule, with changes, that amended its deposit insurance regulations to implement applicable revisions to the Federal Deposit Insurance Act made by the Federal Deposit Insurance Reform Act of 2005 and the Federal Deposit Insurance Reform Conforming Amendments Act of 2005. The final rule provides for consideration of inflation adjustments to increase the current standard maximum deposit insurance amount of $100,000 on a five-year cycle beginning in 2010; increases the deposit insurance limit for certain retirement accounts from $100,000 to $250,000, also subject to inflation adjustments; and provides per-participant insurance coverage to employee benefit plan accounts, even if the depository institution at which the deposits are placed is not authorized to accept employee benefit plan deposits. The final rule is effective on October 12, 2006.

The Board of Governors of the Federal Reserve System amended Regulation E, which implements the Electronic Fund Transfer Act, and the official staff commentary to the regulation, which interprets the requirements of Regulation E to become effective on July 1, 2006. The final rule provides that Regulation E covers payroll card accounts that are established directly or indirectly through an employer, and to which transfers of the consumer’s salary, wages, or other employee compensation are made on a recurring basis. The final rule also provides financial institutions with an alternative to providing periodic statements for payroll card accounts if they make account information available to consumers by specified means.

The federal financial regulatory agencies in September 2006 issued final guidance to address the risks posed by nontraditional residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest, including “interest-only” mortgages and “payment option” adjustable-rate mortgages. These products allow borrowers to exchange lower payments during an initial period for higher payments later. The lack of principal amortization and the potential for negative amortization and features that compound risks (such as no document loans and simultaneous second mortgages) elevate the concern of the federal banking agencies for nontraditional mortgage products. The guidelines require depository institutions to ensure that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower’s repayment capacity, to recognize that many nontraditional mortgage loans, particularly when they have risk-layering features, are untested in a stressed environment. The guidelines also express the need for depository institutions to have strong risk management standards, capital levels commensurate with the risk, an allowance for loan and lease losses that reflects the collectibility of the portfolio, and the need to make sure that consumers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice.

The federal financial regulatory agencies in December 2006 issued a new interagency policy statement on the allowance for loan and lease losses (ALLL) along with supplemental frequently asked questions. The policy statement revises and replaces a 1993 policy statement on the ALLL. The agencies issued the revised policy statement in view of today’s uncertain economic environment and the presence of concentrations in untested loan products in the loan portfolios of insured depository institutions. The policy statement has also been revised to conform with generally accepted accounting principles (GAAP) and post-1993 supervisory guidance. The 1993 policy statement described the responsibilities of the boards of directors, management, and banking examiners regarding the ALLL; factors to be considered in the estimation of the ALLL; and the objectives and elements of an effective loan review system, including a sound credit grading system. The policy statement reiterates that each institution has a responsibility for developing, maintaining and documenting a comprehensive, systematic, and consistently applied process appropriate to its size and the nature, scope, and risk of its lending activities for determining the amounts of the ALLL and the provision for loan and lease losses and states that each institution should ensure controls are in place to consistently determine the ALLL in accordance with GAAP, the institution’s stated policies and procedures, management’s best judgment and relevant supervisory guidance.

The policy statement also restates that insured depository institutions must maintain an ALLL at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio, and that estimates of credit losses should reflect consideration of all significant factors that affect the collectibility of the portfolio as of the evaluation date. The policy statement states that prudent, conservative, but not excessive, loan loss allowances that represent management’s best estimate from within an acceptable range of estimated losses are appropriate.

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation in December 2006 issued final guidance on sound risk management practices for concentrations in commercial real estate lending. The agencies observed that the commercial real estate is an area in which some banks are becoming increasingly concentrated, especially with small- to medium- sized banks that face strong competition in their other business lines. The agencies support banks serving a vital role in their communities by supplying credit for business and real estate development. However, the agencies are concerned that rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in commercial real estate markets. The guidance provides supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny, but such criteria are not limits on commercial real estate lending.

In California, effective January 1, 2007, a new law Financial Code Section 854.1 recognizes the ability of mortgage brokers to obtain the benefit of non interest-bearing accounts on trust funds deposited in a “commercial bank.” The provision applies to real estate brokers who collect payments or provide services in connection with a loan secured by a lien on real property and permits a mortgage broker to earn interest on an interest-bearing account at a financial institution. Interest on funds received by a real estate broker who collects payments or provides services for an “institutional investor” in connection with a loan secured by commercial real property may inure to the broker, if agreed to in writing by the broker and the institutional investor. For purposes of this law, commercial real property means real estate improved with other than a one-to-four family residence.

A new California law makes it easier for California banks to accept deposits from local government agencies. Under the old law, local agency deposits over $100,000 had to be secured by collateral. Pursuant to the enactment of Assembly Bill 2011, banks would be able to acquire surplus public deposits exceeding $100,000 without pledging collateral if they participate in a deposit placement service where excess amounts are placed in certificates of deposit at other institutions within a network. Such a network (of which currently there is only one available in the market) permits the entire amount of a customer’s deposit to be FDIC-insured, and the bank taking the original deposit retains the benefit of the full amount of the

deposit for lending or other purposes. AB 2011 clarifies that a local agency may deposit up to 30% of its surplus funds in certificates of deposit at a bank, savings association, savings bank, or credit union that participates in such a deposit-sharing network. Since the entire amount of the deposits would be FDIC-insured, a bank would not be required to pledge collateral. The bill permits agencies to make these deposits until January 1, 2012.

It is impossible to predict what effect the enactment of certain of the above-mentioned legislation will have on the Company. Moreover, it is likely that other bills affecting the business of banks may be introduced in the future by the United States Congress or California legislature.

Recent Accounting Pronouncements

Accounting for Servicing of Financial Assets

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 156 (SFAS 156), Accounting for Servicing of Financial Assets – An Amendment of FASB Statement No. 140. SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Under SFAS 156, an entity can elect subsequent fair value measurement of its servicing assets and servicing liabilities by class. An entity should apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions after the effective date. SFAS 156 permits an entity to reclassify certain available-for-sale securities to trading securities provided that they are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities subsequently measured at fair value. The provisions of SFAS 156 are effective for an entity as of the beginning of its first fiscal year that begins after September 15, 2006. Management does not expect the adoption of SFAS 156 to have a material impact on the Company’s financial position or results of operations.

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes –An Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company presently recognizes income tax positions based on management’s estimate of whether it is reasonably possible that a liability has been incurred for unrecognized income tax benefits by applying FASB Statement No. 5, Accounting for Contingencies.

The provisions of FIN 48 will be effective for the Company on January 1, 2007 and are to be applied to all tax positions upon initial application of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption.

The cumulative effect of applying the provisions of FIN 48, if any, will be reported as an adjustment to the opening balance of retained earnings for the fiscal year of adoption. Management does not expect the adoption of FIN 48 to have a material impact on the Company’s financial position or results of operations.

Accounting for Purchases of Life Insurance

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. FASB Technical Bulletin No. 85-4 requires that the amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset. Since the issuance of FASB Technical Bulletin No. 85-4, questions arose regarding whether “the amount that could be realized” should consider 1) any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value and 2) the contractual ability to surrender all of the individual-life policies (or certificates in a group policy) at the same time. EITF 06-5 determined that “the amount that could be realized” should 1) consider any additional amounts included in the contractual terms of the policy and 2) assume the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). Any amount that is ultimately realized by the policy holder upon the assumed surrender of the final policy (or final certificate in a group policy) shall be included in the “amount that could be realized.” An entity should apply the provisions of EITF 06-5 through either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or a change in accounting principle through retrospective application to all prior periods. The provisions of EITF 06-5 are effective for fiscal years beginning after December 15, 2006. Management has not yet completed its evaluation of the impact that EITF 06-5 will have.

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements

In September 2006, the FASB ratified the consensuses reached by the Task Force on Issue No. 06-4 (EITF 06-4), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. A question arose when an employer enters into an endorsement split-dollar life insurance arrangement related to whether the employer should recognize a liability for the future benefits or premiums to be provided to the employee. EITF 06-4 indicates that an employer should recognize a liability for future benefits and that a liability for the benefit obligation has not been settled through the purchase of an endorsement type policy. An entity should apply the provisions of EITF 06-4 either through a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or a change in accounting principle through retrospective application to all prior periods. The provisions of EITF 06-4 are effective for fiscal years beginning after December 15, 2007. Management has not yet completed its evaluation of the impact that EITF 06-4 will have.

Fair Value Measurements

In September 2006, the FASB issued Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions should be applied prospectively, except for certain specifically identified financial instruments. Management does not expect the adoption of SFAS 157 to have a material impact to the Company’s financial position or result of operations.

Consideration of the Effects of Prior Year Misstatements

In September 2006, the Securities and Exchange Commission published Staff Accounting Bulleting No. 108 (SAB 108) Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The interpretations in this Staff Accounting Bulleting were issued to address diversity in practice in quantifying financial statement misstatements and the potential under current practice to build up improper amounts on the balance sheet. This guidance will apply to the first fiscal year ending after November 15, 2006 or December 31, 2006 for the Company. The adoption of SAB 108 did not have a material impact on the Company’s financial position, results of operations or cash flows and no cumulative adjustment was required.

ITEM 1A. RISK FACTORS

Our high concentration of real estate loans expose us to increased lending risks, especially in the event of a recession or natural disaster. Our loan portfolio is strongly concentrated in real estate loans. As of December 31, 2006, 64% of our loan portfolio was concentrated in real estate related loans. There has been a relatively rapid increase in real estate values in our market area in recent years, and the occurrence of a real estate recession affecting our market areas would likely reduce the security for many of our loans and adversely affect the ability of many of our borrowers to repay their loan from us. Therefore, our financial condition may be adversely affected by a decline in the value of the real estate securing our loans. In addition, acts of nature, including earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

Deterioration of local economic conditions could hurt our profitability. Our operations are primarily located in Northeastern California and are concentrated in Plumas, Nevada, Placer, Lassen, Modoc, Shasta and Sierra Counties and Washoe County, Nevada and surrounding areas. As a result of this geographic concentration, our financial results depend largely upon economic conditions in these areas. The local economy relies heavily on real estate, agriculture and ranching, timber and tourism. A significant downturn in any or all of these industries could result in a decline in the local economy in general, which could in turn negatively impact us. Poor economic conditions could cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. Also, if there were significant recessionary conditions in our market area, our financial condition would be negatively impacted.

Our growth and expansion strategy may not prove to be successful and our market value and profitability may suffer. We plan to grow our operations, however our ability to manage any such growth will depend primarily on our ability to attract and retain qualified personnel, monitor operations, maintain earnings and control costs. We expect to continue to grow our assets and deposits, the products and services which we offer and the scale of our operations, generally. Our ability to manage our growth successfully will depend on our ability to maintain cost controls and asset quality while attracting additional loans and deposits on favorable terms. If we grow too quickly and are not able to control costs and maintain asset quality, this rapid growth could materially adversely affect our financial performance. Our future successful growth will depend on the ability of our officers and other key employees to continue to implement and improve our operational, credit, financial, management and other internal risk controls and processes and our reporting systems and procedures, and to manage a growing number of client relationships. We may not successfully implement improvements to our management information and control systems and control procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In particular, our controls and procedures must be able to accommodate an increase in expected loan volume and the infrastructure that comes with growth. Thus, our growth strategy may divert management from our existing businesses and may require us to incur additional expenditures to expand our administrative and operational infrastructure. If we are unable to manage future expansion in our operations, we may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such growth, any one of which could adversely affect our business.

Loss of any of our executive officers or key personnel could be damaging to us. We depend upon the skills and reputations of our executive officers and key employees for our future success. The loss of any of these key persons or the inability to attract and retain other key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract other qualified persons. All of our current executive officers have been with us since at least 2001. While we have an employment agreement with Douglas N. Biddle, our President and CEO, which contains an agreement not to compete following termination, we do not have employment agreements with our other executive officers and, therefore, upon leaving the employ of Plumas Bank, such executives other than Mr. Biddle may become employed by our competitors.

Our performance is subject to interest rate risk. Our operations are significantly influenced by general economic conditions and by the related monetary and fiscal policies of the federal government. Deposit flows and the cost of funds are influenced by interest rates of competing investments and general market rates of interest. Lending activities are affected by the demand for loans, which in turn is affected by the interest rates at which such financing may be offered and by other factors affecting the availability of funds.

Our operations are substantially dependent on our net interest income, which is the difference between the interest income received from our interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities. To reduce exposure to interest rate fluctuations, we seek to manage the balances of our interest sensitive assets and liabilities, and maintain the maturity and repricing of these assets and liabilities at appropriate levels. A mismatch between the amount of rate sensitive assets and rate sensitive liabilities in any time period is referred to as a “gap”. Generally, if rate sensitive assets exceed rate sensitive liabilities, the net interest margin will be positively impacted during a rising rate environment and negatively impacted during a declining rate environment. When rate sensitive liabilities exceed rate sensitive assets, the net interest margin will generally be positively impacted during a declining rate environment and negatively impacted during a rising rate environment.

Increases in the level of interest rates may reduce the amount of loans originated by us, and, thus, the amount of loan and commitment fees, as well as the value of our investment securities and other interest-earning assets. Moreover, fluctuations in interest rates also can result in disintermediation, which is the flow of funds away from depository institutions into direct investments, such as corporate securities and other investment vehicles which, because of the absence of federal deposit insurance, generally pay higher rates of return than depository institutions.

We could experience loan losses which exceed our allowance for loan losses. The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower, and, in the case of a collateralized loan, the value and marketability of the collateral. We maintain an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, we make various assumptions and determinations about the ultimate collectibility of our loan portfolio and provide an allowance for losses based upon a percentage of the outstanding balances and for specific loans where their collectibility is considered to be questionable.

As of December 31, 2006, our allowance for loan losses was approximately $3.9 million representing 1.1% of gross outstanding loans. Although we believe that this allowance is adequate, we can give no assurance that it will be sufficient to cover future loan losses. Although we use the best information available to make our determinations with respect to this allowance, future adjustments may be necessary if economic conditions change substantially from the assumptions used or if negative developments occur with respect to non-performing or performing loans. If our assumptions or conclusions prove to be incorrect and the allowance for loan losses is not adequate to absorb future losses, or if bank regulatory agencies require us to increase our allowance, our earnings and potentially even our capital could be significantly and adversely impacted.

We face strong competition which may adversely affect our operating results. In recent years, competition for bank customers, the source of deposits and loans, has greatly intensified. This competition includes:

	•		larger national and regional banks in many of the communities we serve;
	•		finance companies, investment banking and brokerage firms, and insurance companies that offer bank-like products;
	•		credit unions, which can offer highly competitive rates on loans and deposits because they receive tax advantages not available to commercial banks; and
	•		technology-based financial institutions including large national and super-regional banks offering on-line deposit, bill payment, and mortgage loan application services.

Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured financial institutions. As a result, these nonbank competitors have certain advantages over us in accessing funding and in providing various services.

By virtue of their larger capital, major banks have substantially larger lending limits then we have and can perform certain functions for their customers which we are not equipped to offer directly, such as trust and international services. Many of these also operate with “economies of scale” which result in lower operating costs than ours on a per loan or per asset basis.

Other existing single or multi-branch community banks, or new community bank start-ups, have marketing strategies similar to ours. These other community banks can open new branches in the communities we serve and compete directly for customers who want the high level of service community banks offer. Other community banks also compete for the same management personnel and the same potential acquisition and merger candidates. Ultimately, competition can drive down our interest margins and reduce our profitability, as well as make it more difficult to increase the size of our loan portfolio and deposit base. See ITEM 1. BUSINESS – General - Competition.

Our future growth may be hindered if we do not raise additional capital. Banks and bank holding companies are required to meet capital adequacy guidelines and maintain their capital to specified percentages of their assets. See ITEM 1. BUSINESS – Supervision and Regulation – Capital Standards. A failure to meet these guidelines will limit our ability to grow and could result in banking regulators requiring us to increase our capital or reduce our assets. Therefore, in order for us to continue to increase our assets and net income, we may be required from time to time to raise additional capital. We cannot assure that such capital will be available or, if it is, that it will be available on reasonable terms. Any such future capital raising may include the sale of additional securities, which could have a dilutive effect on the earnings per share and book value of per share for our stockholders prior to that offering. We have recently incurred long-term debt in order to maintain our capital adequacy and we may need to continue to do so in the future. Adequate funding sources for such borrowing may not be available in the future which would cause us to fall below the required capital ratios. In such an event, the FDIC could proceed with regulatory actions and Plumas Bank may be required to reduce its asset base in order to comply with the capital guidelines until such time as borrowings become available or an additional offering is successfully completed.

ITEM 1B. UNRESOLVED STAFF COMMENTS

No comments have been submitted to the registrant by the staff of the Securities Exchange Commission.

ITEM 2. PROPERTIES

Of the Company’s twelve depository branches, ten are owned and two are leased. In addition the Company owns three administrative facilities and leases two lending offices. The Company purchased a building located at 424 N. Mill Creek, Quincy, California during the first quarter of 2006 which, after modifications to be undertaken in 2007, is expected to house the Company’s data processing facilities.

Owned Properties
35 South Lindan Avenue		32 Central Avenue		80 W. Main St.
Quincy, California (1)		Quincy, California (1)		Quincy, California (1)
424 N. Mill Creek		336 West Main Street		120 North Pine Street
Quincy, California (4)		Quincy, California		Portola, California
43163 Highway 299E		121 Crescent Street		315 Birch Street
Fall River Mills, California		Greenville, California		Westwood, California (2)
255 Main Street		510 North Main Street		3000 Riverside Drive
Chester, California		Alturas, California		Susanville, California
8475 North Lake Boulevard		11638 Donner Pass Road
Kings Beach, California		Truckee, California
Leased Properties
243 North Lake Boulevard		604 Main Street		2625 Fair Oaks Blvd., Ste. 7
Tahoe City, California		Loyalton, California		Sacramento, California (3)
1895 Plumas Ste 2
Reno, Nevada (3)

Total rental expenses under all leases, including premises, totaled $221,000, $242,000 and $264,000, in 2006, 2005 and 2004 respectively. The expiration dates of the leases vary, with the first such lease expiring during 2007 and the last such lease expiring during 2009. Future minimum lease payments in thousands of dollars are as follows:

Year Ending
December 31,
2007		$	164
2008			49
2009			22
Total		$	235

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.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK- HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s common stock is quoted on the NASDAQ Capital Market under the ticker symbol “PLBC”. As of December 31, 2006, there were 5,023,205 shares of the Company’s stock outstanding held by approximately 2,038 shareholders of record as of the same date. The following table shows the high and low sales prices for the common stock, for each quarter as reported by Yahoo Finance.

Quarter		Dividends				High				Low
4th Quarter 2006		$	0.13			$	17.45			$	14.50
3rd Quarter 2006			—			$	19.00			$	15.77
2nd Quarter 2006		$	0.13			$	19.89			$	15.50
1st Quarter 2006			—			$	23.00			$	17.00
4th Quarter 2005		$	0.11			$	27.00			$	20.77
3rd Quarter 2005			—			$	26.07			$	17.34
2nd Quarter 2005		$	0.11			$	21.33			$	14.20
1st Quarter 2005			—			$	15.67			$	13.33

On August 17, 2005 the Company’s Board of Director approved a three-for-two stock split for shareholders of record at the close of business on September 2, 2005 and effective on September 16, 2005. All share and per share data in the consolidated financial statements have been retroactively adjusted to give effect to the stock split.

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 cash dividend payout ratio over the last five years has averaged approximately 25% of net income.

On January 22, 2007 the Company announced that the Board authorized a common stock repurchase plan. The plan calls for the repurchase of up to 250,000 shares, or approximately 5%, of the Company’s shares outstanding as of January 22, 2007. The repurchases will be made from time to time by the Company in the open market or privately negotiated transactions as conditions allow. All such transactions will be structured to comply with Securities and Exchange Commission Rule 10b-18 and all shares repurchased under this plan will be retired. The number, price and timing of the repurchases shall be at the Company’s sole discretion and the plan may be re-evaluated depending on market conditions, liquidity needs or other factors. The Board, based on such re-evaluations, may suspend, terminate, modify or cancel the plan at any time without notice.

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, 2006.

Number of securities remaining

available for future issuance

Number of securities to

Weighted-average

under equity compensation

be issued upon exercise

exercise price of

plans (excluding securities

of outstanding options

outstanding options

reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

290,914

$

11.62

615,037

Equity compensation plans not approved by security holders

None

Not Applicable

None

Total

290,914

$

11.62

615,037

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

Plumas Bancorp Stock Performance Graph

The graph below compares the cumulative total shareholder return on Plumas Bancorp’s (Plumas Bank’s prior to June 2002) common stock to the cumulative total return of the NASDAQ Composite Index, a broad market index of all stocks traded on the NASDAQ Exchange, the SNL NASDAQ Bank Index, a cumulative total of almost 400 banks traded on the NASDAQ Exchange, and the SNL OTC-BB & Pink Banks Index, a cumulative total of over 600 banks traded on either the Over-The-Counter Bulletin Board or Pink Sheets. These Indexes were prepared by SNL Financial LC. The graph assumes that a $100 investment was made in the Company’s Common Stock as well as the other indexes on December 31, 2001 and that all dividends were reinvested. The chart represents the average closing price for the month of December in each of the years presented.

				Period Ending
	Index			12/31/01					12/31/02					12/31/03					12/31/04					12/31/05					12/31/06
	Plumas Bancorp				100.00					158.08					208.63					227.57					337.24					243.04
	NASDAQ Composite				100.00					68.76					103.67					113.16					115.57					127.58
	SNL NASDAQ Bank Index				100.00					102.85					132.76					152.16					147.52					165.62
	SNL All OTC-BB & Pink Banks Index				100.00					124.40					170.92					204.07					221.37					242.38

ITEM 6. SELECTED FINANCIAL DATA

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

		At or for the year ended December 31,
		2006				2005				2004				2003				2002
		(dollars in thousands except per share information)
Statement of Income
Interest income		$	29,483			$	25,497			$	20,110			$	18,549			$	18,389
Interest expense			6,954				4,793				2,914				3,013				4,038
Net interest income			22,529				20,704				17,196				15,536				14,351
Provision for loan losses			1,000				1,100				750				750				825
Noninterest income			5,159				5,073				5,099				3,639				3,278
Noninterest expense			18,290				17,549				15,898				13,126				11,604
Provision for income taxes			3,196				2,600				2,001				2,018				2,046
Net income		$	5,202			$	4,528			$	3,646			$	3,281			$	3,154
Balance sheet (end of period)
Total assets		$	473,239			$	472,803			$	417,346			$	390,262			$	325,650
Total loans		$	354,712			$	321,646			$	266,913			$	217,957			$	207,721
Allowance for loan losses		$	3,917			$	3,256			$	2,722			$	2,524			$	2,431
Total deposits		$	402,176			$	426,560			$	378,567			$	355,842			$	293,941
Total shareholders’ equity		$	35,852			$	31,137			$	27,891			$	25,749			$	23,286
Balance sheet (period average)
Total assets		$	468,988			$	452,225			$	409,335			$	339,160			$	294,708
Total loans		$	335,226			$	302,596			$	233,759			$	214,736			$	197,900
Total deposits		$	415,700			$	403,818			$	373,267			$	304,840			$	268,773
Total shareholders’ equity		$	33,682			$	29,548			$	26,829			$	24,558			$	22,184
Capital ratios
Leverage ratio			9.5	%			8.5	%			7.6	%			8.4	%			8.8	%
Tier 1 risk-based capital			10.9	%			10.3	%			10.1	%			10.4	%			11.8	%
Total risk-based capital			11.8	%			11.1	%			10.9	%			11.3	%			12.8	%
Asset quality ratios
Nonperforming loans/total loans			0.29	%			0.52	%			0.45	%			0.40	%			0.86	%
Nonperforming assets/total assets			0.22	%			0.36	%			0.30	%			0.22	%			0.59	%
Allowance for loan losses/total loans			1.10	%			1.01	%			1.03	%			1.18	%			1.19	%
Net loan charge-offs		$	339			$	566			$	552			$	657			$	507
Performance ratios
Return on average assets			1.11	%			1.00	%			0.89	%			0.97	%			1.07	%
Return on average equity			15.4	%			15.2	%			13.5	%			13.3	%			14.2	%
Net interest margin			5.32	%			5.06	%			4.77	%			5.20	%			5.48	%
Loans to Deposits			88.2	%			75.4	%			70.5	%			61.3	%			70.7	%
Efficiency ratio			66.1	%			68.1	%			71.3	%			68.5	%			65.8	%
Per share information
Basic earnings		$	1.04			$	0.92			$	0.75			$	0.68			$	0.66
Diluted earnings		$	1.02			$	0.89			$	0.73			$	0.66			$	0.64
Cash dividends		$	0.26			$	0.22			$	0.19			$	0.16			$	0.18
Dividend payout ratio			25.0	%			23.9	%			25.1	%			23.7	%			27.3	%
Book value		$	7.14			$	6.26			$	5.69			$	5.29			$	4.84
Common shares outstanding at period end			5,023,205				4,976,654				4,901,197				4,863,040				4,813,975

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

General

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

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

One of our strategic objectives is to expand our banking service activities in the Truckee/Tahoe region and the adjacent communities. Consistent with this objective, in late 2003 we opened a de novo branch in Tahoe City. Also in late 2003, we bought five branches located within our existing service area from another community bank. Of the five branches purchased, two were located in the Truckee/Tahoe region, specifically in the communities of Truckee and Kings Beach. This helped further strengthen our presence in this region. In October, 2006 we completed construction and opened a new Bank owned branch in Truckee, California. This replaced a much smaller leased facility. During the fourth quarter of 2006 we opened a commercial real estate loan office in Reno, Nevada.

Critical Accounting Policies

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

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

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

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

We cannot provide you with any assurance that 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. Available-for-sale securities are required to 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 quoted prices of similar instruments. Adjustments to the available-for-sale securities fair value impact the consolidated financial statements by increasing or decreasing assets and shareholders’ equity.

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

Impairment of Core Deposit Intangible. The core deposit intangible represents the excess of the premiums paid over the fair value of the assets and liabilities acquired in the branch acquisitions. The core deposit intangible is required to be amortized over its expected useful life and required to be evaluated for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the fair value of the asset is determined to be less than the carrying amount, the core deposit intangible will be written down through a charge to operations.

Stock-Based Compensation. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment (“SFAS 123 (R)”). Under SFAS 123(R), compensation cost is recognized for all awards that vest subsequent to the date of adoption based on the grant-date fair value estimated in accordance with SFAS No. 123, Accounting for Stock-Based Compensation and SFAS 123(R). We believe this is a “critical accounting estimate” since the grant-date fair value is estimated using the Black-Scholes option-pricing formula, which involves making estimates of the assumptions used, including the expected term of the option, expected volatility over the option term, expected dividend yield over the option term and risk-free interest rate. In addition, when determining the compensation expense to amortize over the vesting period, management makes estimates about the expected forfeiture rate of options.

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, 2006 and 2005 and for each of the three years in the period ended December 31, 2006. 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 reported its eighteenth consecutive year of earnings growth in 2006. The Company’s net income increased $674,000, or 14.9%, to $5,202,000 for the year ended December 31, 2006 from $4,528,000 for the same period in 2005. Net income was $3,646,000 for the year ended December 31, 2004. During 2006 the Company increased its average interest earning assets and its net interest margin resulting in an increase in net interest income of $1,825,000. This increase in net interest income was the primary contributor to the increase in net income for 2006. In addition, during 2006 the Company’s non-interest income increased slightly by $86,000 and its provision for loan losses decreased by $100,000. Partially offsetting these increases in income in 2006 was an increase of $741,000 in non-interest expense and an increase of $596,000 in the provision for income taxes.

Total assets at December 31, 2006 increased $436,000 to $473 million. Growth in the Company’s loan portfolio was offset by decreases in Federal funds sold and investment securities. Net loans grew $32.8 million, or 10% to $352 million at December 31, 2006, compared to $319 million at December 31, 2005. Growth in loans was funded by a decrease of $23.1 million in investment securities and a decrease of $7.3 million in Federal funds sold and an increase in short-term borrowings. At December 31, 2006 investments securities totaled $75 million, there were no Federal funds sold and short-term borrowings were $20 million.

Deposits declined by $24 million, or 6%, to $402 million at December 31, 2006 from $426 million at December 31, 2005. Competition for deposit dollars throughout the Company’s service area, both from bank and non-bank sources, and a lack of significant deposit growth in the Company’s service area have contributed to this decline in deposits. The Company believes that additional deposits could be generated through aggressive pricing, but has chosen to rely on alternative sources of liquidity, such as short-term FHLB borrowings, to fund additions to its loan portfolio during 2006.

The return on average assets was 1.11% for 2006, up from 1.00% for 2005. The return on average equity was 15.4% for 2006, up from 15.2% for 2005.

Results of Operations

Net Interest Income

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

		Year ended December 31,
		2006												2005												2004
						Interest				Rates								Interest				Rates								Interest				Rates
		Average				income/				earned				Average				income/				earned				Average				income/				earned
		balance				expense				/ paid				balance				expense				/ paid				balance				expense				/ paid
		(dollars in thousands)
Assets
Federal funds sold		$	3,616			$	164				4.54	%		$	5,930			$	218				3.68	%		$	12,729			$	163				1.28	%
Investment securities(1)			84,794				3,047				3.59				100,633				3,324				3.30				113,684				3,483				3.06
Total loans (2)(3)			335,226				26,272				7.84				302,596				21,955				7.26				233,759				16,464				7.04
Total earning assets			423,636				29,483				6.96	%			409,159				25,497				6.23	%			360,172				20,110				5.58	%
Cash and due from banks			13,547												15,953												23,813
Other assets			31,805												27,357												25,551
Total assets		$	468,988											$	452,469											$	409,536
Liabilities and shareholders’ equity
Interest bearing demand deposits		$	80,685				1,489				1.85	%		$	48,577				196				0.40	%		$	44,244				58				0.13	%
Money market deposits			56,496				661				1.17				64,025				747				1.17				65,026				490				0.75
Savings deposits			59,802				423				0.71				67,702				445				0.66				64,472				292				0.45
Time deposits			93,515				3,314				3.54				98,946				2,704				2.73				93,684				1,760				1.88
Short-term borrowings			4,446				237				5.33				6,921				210				3.03				—				—				—
Trust preferred securities			10,310				810				7.86				7,259				479				6.60				6,186				305				4.93
Other			285				20				7.02				245				12				4.90				215				9				4.19
Total interest bearing liabilities			305,539				6,954				2.28	%			293,675				4,793				1.63	%			273,827				2,914				1.06	%
Noninterest bearing demand deposits			125,202												124,568												105,841
Other liabilities			4,565												4,434												2,838
Shareholders’ equity			33,682												29,792												27,030
Total liabilities and shareholders’ equity		$	468,988											$	452,469											$	409,536
Net interest income						$	22,529											$	20,704											$	17,196
Net interest spread (4)											4.68	%											4.60	%											4.52	%
Net interest margin (5)											5.32	%											5.06	%											4.77	%

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:

		2006 compared to 2005																2005 compared to 2004
		Increase (decrease) due to change in:																Increase (decrease) due to change in:
		Average				Average												Average				Average
		Volume(1)				Rate(2)				Mix(3)				Total				Volume(1)				Rate(2)				Mix(3)				Total
		(dollars in thousands)
Interest-earning assets:
Federal funds sold		$	(85	)		$	51			$	(20	)		$	(54	)		$	(87	)		$	305			$	(163	)		$	55
Investment securities			(523	)			292				(46	)			(277	)			(400	)			272				(31	)			(159	)
Loans			2,367				1,760				190				4,317				4,848				497				146				5,491
Total interest income			1,759				2,103				124				3,986				4,361				1,074				(48	)			5,387
Interest-bearing liabilities:
Interest bearing demand deposits			130				700				463				1,293				6				120				12				138
Money market deposits			(88	)			2				—				(86	)			(8	)			269				(4	)			257
Savings deposits			(52	)			34				(4	)			(22	)			15				132				6				153
Time deposits			(148	)			802				(44	)			610				99				800				45				944
Short-term borrowings			(75	)			159				(57	)			27				—				—				210				210
Trust preferred securities			201				91				39				331				53				103				18				174
Other borrowings			2				5				1				8				1				2				—				3
Total interest expense			(30	)			1,793				398				2,161				166				1,426				287				1,879
Net interest income		$	1,789			$	310			$	(274	)		$	1,825			$	4,195			$	(352	)		$	(335	)		$	3,508

2006 compared to 2005. Net interest income is the difference between interest income and interest expense. Net interest income, on a nontax-equivalent basis, was $22.5 million for the year ended December 31, 2006, an increase of $1.8 million, or 9%, from $20.7 million for 2005. The increase in net interest income was primarily attributed to volume and rate increases in the Company’s average loan balances partially offset by increases in the rates paid on interest bearing deposit account balances and the level of and rates paid on the junior subordinated debentures (trust preferred securities).

Interest income increased $4.0 million, or 16%, to $29.5 million for the year ended December 31, 2006. Interest and fees on loans increased by $4.3 million from $22.0 million for the year ended December 31, 2005 to $26.3 million during the 2006. The average loan balances were $335.2 million for 2006, up $32.6 million, or 11%, from the $302.6 million for 2005. The average yields on loans were 7.84% for 2006 up 58 basis points from 7.26% for 2005. The increase in yield is consistent with market conditions in the Company’s service area.

Interest on investment securities decreased by $277 thousand, as an increase in yield of 29 basis points was offset by a decline in average investment securities of $15.8 million. Interest earned on federal funds sold decreased by $54 thousand. This item benefited from an increase in yield of 86 basis points but was offset by a decline in average balances outstanding of $2.3 million.

Interest expense increased $2.2 million to $7.0 million for the year ended December 31, 2006, up from $4.8 million for 2005. The increase in interest expense was primarily attributed to rate increases on time deposits and interest-bearing demand deposits and the increase in the level of and rates paid on the junior subordinated debentures.

For the year ended December 31, 2006 compared to 2005, the Company’s average rate paid on time deposits increased 81 basis points to 3.54% from 2.73%. This increase is consistent with market conditions

in the Company’s service area and reflects the rising interest rate environment which began in 2004 and continued into 2006. The average rate paid on interest-bearing demand deposits increased 145 basis points to 1.85% for the year ended December 31, 2006 from 0.40% for 2005 primarily as a result of the introduction of the Money Fund Plu$ account in September 2005.

Money Fund Plu$ is a high interest bearing checking account designed to pay rates comparable to those available on a typical brokerage account. Since its introduction, there has been significant growth in the total Money Fund Plu$ balances with an average balance of $40.2 million for the year ended December 31, 2006 and total balances as of December 31, 2006 of $42.9 million. The average rate paid on Money Fund Plu$ accounts during 2006 was 3.51%.

Adding to interest expense was an increase in the average balance of the junior subordinated debentures of $3.1 million to $10.3 million and in the average rate paid of 126 basis points from 6.60% to 7.86%.

Net interest margin is net interest income expressed as a percentage of average interest-earning assets. As a result of the changes noted above, the net interest margin for 2006 increased 26 basis points to 5.32%, up from 5.06% for 2005.

2005 compared to 2004. Net interest income was $20.7 million for 2005, an increase of $3.5 million, or 20%, from $17.2 million for 2004. The increase in net interest income was attributed to volume increases in average loan balances and average yields on interest earning assets partially offset by increases in rates paid on deposits. The average loan balances were $302.6 million for 2005, up $68.8 million, or 29%, from the $233.8 million for 2004. The average yields on interest earning assets, which are a combination of loans, investments and federal funds sold, were 6.23% for 2005 up from 5.58% for 2004. Offsetting the benefits of the increased loan volume and higher yields was the impact of the rising interest rate environment which began in 2004 on interest bearing liabilities, especially on time deposits.

Interest expense increased $1.9 million, or 64%, to $4.1 million for 2005, up from $2.9 million for 2004. The increase in interest expense was primarily attributed to rate increases for all interest bearing deposits, with the largest increases in time deposits. The average rate paid on time deposits was 2.73% for 2005, up 85 basis points, or 45%, from the 1.88% paid for 2004.

As a result of the changes noted above, the net interest margin for 2005 increased 29 basis points to 5.06%, up from 4.77% for 2004.

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 $1,000,000 in provision for loan losses for 2006, $1,100,000 for 2005 and $750,000 for 2004. The Company has experienced a general strengthening in overall credit quality of the loan portfolio as evidenced by a decline in net charge-offs as a percentage of average loans in 2006 and 2005 and a decline in nonperforming loans in 2006 compared to 2005. Net charge-offs as a percentage of average loans decreased to 0.10%, or 47%, from the 2005 level of 0.19%. Net charge-offs as a percentage of average loans decreased to 0.19%, or 21%, from the 2004 level of 0.24%. Nonperforming loans decreased from $1.7 million at December 31, 2005 to $1.0 million at December 31, 2006. Based on

information currently available, management believes that the allowance for loan losses is adequate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section that begins on page 35.

Non-Interest Income

The following table sets forth the components of non-interest income for the years ended December 31, 2006, 2005 and 2004.

		Years Ended December 31,												Change during Year
		2006				2005				2004				2006				2005
		(dollars in thousands)
Service charges on deposit accounts		$	3,676			$	3,458			$	3,297			$	218			$	161
Earnings on bank owned life insurance policies			393				355				415				38				(60	)
Merchant processing			318				338				263				(20	)			75
Official check fees			170				118				62				52				56
Customer service fees			113				111				119				2				(8	)
Investment services			104				189				175				(85	)			14
Federal Home Loan Bank Dividends			104				82				50				22				32
Safe deposit box and night depository income			69				69				61				—				8
Printed check fee income			44				43				24				1				19
Gain on sale of loans, net			42				45				94				(3	)			(49	)
Loan commission and servicing fees			14				171				184				(157	)			(13	)
(Loss) gain on sale of investment securities, net			—				(8	)			235				8				(243	)
Other income			112				102				120				10				(18	)
Total non-interest income		$	5,159			$	5,073			$	5,099			$	86			$	(26	)

2006 compared to 2005. During 2006, total non-interest income increased slightly by $86,000, or 2%, to $5.2 million, up from $5.1 million from the comparable period in 2005. This increase was primarily related to an increase in service charges on deposit accounts of $218,000 thousand from the previous year. This increase primarily relates to fees from increased customer usage of deposit account overdrafts privileges, the collection of fees resulting from those overdrafts and from an increase in the rate charged.

Loan commissions and servicing fees declined by $157 thousand from 2005. This decline primarily relates to an increase in the amortization of servicing assets and I/O strips receivable. Declines of $85,000 in investment services income and $20,000 in merchant processing income were mostly offset by increases of $38,000 in earnings on life insurance policies and $52,000 in official check fees.

2005 compared to 2004. During 2005, total non-interest income decreased slightly by $26,000, or 1%, to $5.1 million. The decrease in non-interest income was primarily the result of decreases in gains on sale of investments securities and loans and declines in earnings on bank owned life insurance policies partially offset by increases in merchant processing fees and service charges on deposit accounts.

The decrease in gains on sales of investment securities is primarily a result of the increase in short-term interest rates in 2005 reducing opportunities to record gains on the sale of investment securities.

Earnings on bank-owned life insurance policies (“BOLI”) decreased $60,000, or 14%, as a result of declining yields on these particular investments The book yields on BOLI averaged 4.1% during 2005 down from 5.1% during 2004.

Fee income on merchant processing services increased $75,000, or 29%, primarily as a result of an increased number of merchants serviced.

Service charges on deposit accounts, primarily in the areas of ATM and debit card activity and in overdraft fees, increased $161,000, or 5% to $3,458,000 for 2005 up from $3,297,000 for 2004 as a result of increased volume.

Non-Interest Expense

The following table sets forth the components of other non-interest expense for the years ended December 31, 2006, 2005 and 2004.

		Years Ended December 31,												Change during Year
		2006				2005				2004				2006				2005
		(dollars in thousands)
Salaries and employee benefits		$	10,043			$	9,514			$	8,831			$	529			$	683
Occupancy and equipment			3,323				3,070				2,713				253				357
Professional fees			780				865				596				(85	)			269
Outside service fees			591				700				551				(109	)			149
Business development			555				494				389				61				105
Advertising and promotion			552				467				350				85				117
Telephone and data communications			374				366				346				8				20
Director compensation and retirement			370				288				284				82				4
Core deposit intangible amortization			301				301				299				—				2
Stationery and supplies			282				336				292				(54	)			44
Armored car and courier			270				337				371				(67	)			(34	)
Postage			249				258				261				(9	)			(3	)
Insurance			173				206				236				(33	)			(30	)
Loan expenses			139				114				191				25				(77	)
Other operating expense			288				233				188				55				45
Total non-interest expense		$	18,290			$	17,549			$	15,898			$	741			$	1,651

2006 compared to 2005. During 2006, total non-interest expense increased $741 thousand, or 4%, to $18.3 million, up from $17.5 million for the comparable period in 2005. The increase in non-interest expense was primarily the result of increases in salaries and employee benefits, occupancy and equipment costs.

Salaries and other employee benefits increased $529 thousand, or 6%, over 2005. Salaries increased $504,000 as a result of staffing additions including increases in loan production, accounting and customer service staff as well as general salary merit increases. Employee bonuses increased $287,000 and stock based compensation expenses increased $126,000. These increases were offset by reductions in workers’ compensation costs of $67,000, salary continuation costs of $268,000 and an increase in capitalized salary costs of $131,000 related to increased loan origination activities. The increase in bonus expense includes the effect of the increase in salary expense and revisions to the Company’s bonus plans for 2006. The decrease in salary continuation expense relates to non-recurring accruals for the Company’s former President and Chief Executive Officer who retired in December 2005.

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share Based Payment (“SFAS 123 (R)”), using the modified prospective application transition method to record stock based compensation. As a result of adopting SFAS 123 (R), the Company recorded $126,000 of employee stock based compensation expense and $47,000 of director stock based compensation expense during 2006. Basic and diluted earnings per share for the year ended December 31, 2006 would have been $1.07 and $1.05, respectively, without the adoption of SFAS 123 (R) compared to $1.04 and $1.02, respectively, as reported. As of December 31, 2006, there was $263,000 of unrecognized employee compensation costs and $98,000 of unrecognized director compensation cost related to non-vested share-based compensation arrangements. These costs are expected to be recognized over a weighted average period of 2.4 years.

Prior to January 1, 2006, the Company accounted for the stock options under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost was recorded prior to January 1, 2006, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant.

The Company determines the fair value of the options previously granted on the date of grant using a Black-Scholes option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate.

Occupancy and equipment expense increased by $253,000, or 8%, over 2005. Occupancy expense increased by $206,000 which included depreciation, taxes and insurance associated with the Company’s new Truckee, California branch facility. This facility, completed during October 2006, replaced a much smaller leased facility. In addition the Company experienced higher levels of janitorial, utilities, and other operating costs during 2006. A decrease in equipment deprecation was offset by increases in software costs, as the Company continues to expand and upgrade its computer software applications, resulting in an increase in equipment costs of $47,000.

Professional fees declined by $85,000 in 2006 to $780,000 from $865,000 during 2005. This decline primarily relates to a lower level of consulting fees. As described below, 2005 included several large consulting projects. The Company also benefited from lower outside service fees during 2006. A decline of $109,000 in outside service fees to $591,000 during 2006 from $700,000 during 2005 was primarily related to lower ATM processing fees. An increase of $61,000 in business development costs relates to increased education and training costs. The Company expanded its education and training budget during 2006 and expects to continue to incur an increase in training costs during 2007. The increase in advertising and promotion costs of $85,000, or 18%, includes costs associated with the Company’s newly built Truckee, California branch, an increase in customer incentive programs, and an increase in the overall marketing budget. Armored car and courier costs decreased $67,000, or 20%, as compared to 2005. Courier savings were realized as a result of the Bank’s implementation of “Check 21”. Check 21 is a federal law promoting the transmission of checks electronically between institutions rather than physically transporting the items.

2005 compared to 2004. During 2005, non-interest expense increased $1.6 million, or 10%, to $17.5 million, up from $15.9 million for 2004. The increase in non-interest expense was primarily the result of increases in salaries and employee benefits, occupancy and equipment and professional fees.

During 2005 salaries and employee benefits increased $683,000, or 8%, due primarily to the staffing additions related to the full year’s operations of the Bank’s three new branch offices, expansion of the Company’s dealer loan unit and other centralized lending functions, branch administration and marketing and other staffing additions to manage the overall growth of the Company. Higher salary and employee costs were somewhat offset by the deferral of salary costs related to increased loan origination activities.

Occupancy and equipment expense increased $357,000, or 13%, over the prior year primarily as a result of additional amortization expenses related to software upgrades including item processing and data transmission software developed to comply with new “Check 21” requirements. Additionally, amortization expenses on software increased as a result of upgrades to the Company’s core data system, credit services systems, regulatory compliance systems, teller systems, communication systems and security systems.

Professional fees increased $269,000, or 45%, over the prior year primarily as a result of consulting projects related to an evaluation of the Company’s risk management environment, a management training program and costs incurred by the Company to comply with the new Sarbanes-Oxley reporting requirements.

Provision for income taxes. The provision for income taxes was $3.2 million, or 38.1% of pre-tax income for 2006. This compares to $2.6 million or 36.5% of pre-tax income during 2005 and $2.0 million or 35.5% of pre-tax income during 2004. The increase in provision as a percentage of pre-tax income for 2006 reflects the effect of employee stock based compensation expense which is included in expense during 2006, but excluded from the calculation of the provision for income taxes and a reduction in the percentage of tax exempt income as a percentage of pre-tax income. The increase in provision as a percentage of pre-tax income taxes for 2005 over 2004 relates to a reduction in earnings on Bank owned life insurance policies and a reduction in the percentage of tax exempt income as a percentage of pre-tax income.

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 lending categories are real estate mortgage loans, consumer and real estate construction loans. These categories accounted for approximately 32.8%, 25.6% and 21.4%, respectively of the Company’s total loan portfolio at December 31, 2006, and approximately 34.4%, 25.3% and 17.5%, respectively of the Company’s total loan portfolio at December 31, 2005. 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 64% and 66% of the total loan portfolio at December 31, 2006 and 2005. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, and Sierra and beginning in the fourth quarter of 2006 in Washoe County in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of the Company’s operations in these areas of Northeastern California and Northern Nevada 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.

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, 2006 and 2005, approximately 61% and 74%, respectively, of the Company’s loan portfolio was compromised of variable rate loans. While real estate mortgage, commercial and consumer lending remain the foundation of the Company’s historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types. In addition, the Company remains committed to the agricultural industry in Northeastern California and will continue to pursue high quality agricultural loans. Agricultural loans include both commercial and commercial real estate loans. The Company’s agricultural loan balances increased to $36 million at December 31, 2006 up from $31 million at December 31, 2005.

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

		At December 31,
		2006				2005				2004				2003				2002
		(dollars in thousands)
Real estate – mortgage		$	116,329			$	110,686			$	102,125			$	67,532			$	66,039
Real estate – construction			75,930				56,370				31,964				26,194				15,175
Commercial			36,182				42,252				42,689				51,073				52,432
Consumer			90,694				81,320				59,068				46,621				48,465
Agriculture			35,577				31,018				31,067				26,537				25,610
Total loans			354,712				321,646				266,913				217,957				207,721
Less:
Deferred (costs) fees			(1,182	)			(766	)			260				530				601
Allowance for loan losses			3,917				3,256				2,722				2,524				2,431
Net loans		$	351,977			$	319,156			$	263,931			$	214,903			$	204,689

The following table sets forth the maturity of gross loan categories as of December 31, 2006. Also provided with respect to such loans are the amounts due after one year, classified according to sensitivity to changes in interest rates:

		Within				After One				After
		One Year				Through Five Years				Five Years				Total
		(dollars in thousands)
Real estate – mortgage		$	6,077			$	30,826			$	79,426			$	116,329
Real estate – construction			37,998				27,263				10,669				75,930
Commercial			11,131				15,132				9,919				36,182
Consumer			14,272				47,695				28,727				90,694
Agriculture			18,069				13,003				4,505				35,577
Total		$	87,547			$	133,919			$	133,246			$	354,712
Loans maturing after one year with:
Fixed interest rates						$	66,521			$	35,752			$	102,273
Variable interest rates							67,398				97,494				164,892
Total						$	133,919			$	133,246			$	267,165

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 quarterly 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, 2006 totaled $339,000, or 0.10% of total loans, compared to $566,000, or 0.18% of total loans, for the comparable period in 2005 and $552,000, or 0.21% of total loans for the comparable period of 2004. The allowance for loan losses stood at 1.10% of total loans as of December 31, 2006, versus 1.01% of total loans as of December 31, 2005.

The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses. Loan losses are charged to and recoveries are credited to the allowance for loan losses. The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in loans. The adequacy of the allowance for loan losses is based upon management’s continuing assessment of various factors affecting the collectibility of loans; including current economic

conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for loan losses, independent credit reviews, current charges and recoveries to the allowance for loan losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectibility of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy. The federal financial regulatory agencies in December 2006 issued a new interagency policy statement on the allowance for loan and lease losses along with supplemental frequently asked questions. When determining the adequacy of the allowance for loan losses, the Company follows these guidelines. The policy statement revises and replaces a 1993 policy statement on the allowance for loan and lease losses. The agencies issued the revised policy statement in view of today’s uncertain economic environment and the presence of concentrations in untested loan products in the loan portfolios of insured depository institutions. The policy statement has also been revised to conform with accounting principles generally accepted in the United States of America (“GAAP”) and post-1993 supervisory guidance. The policy statement reiterates that each institution has a responsibility for developing, maintaining and documenting a comprehensive, systematic, and consistently applied process appropriate to its size and the nature, scope, and risk of its lending activities for determining the amounts of the allowance for loan and lease losses and the provision for loan and lease losses and states that each institution should ensure controls are in place to consistently determine the allowance for loan and lease losses in accordance with GAAP, the institution’s stated policies and procedures, management’s best judgment and relevant supervisory guidance.

The policy statement also restates that insured depository institutions must maintain an allowance for loan and lease losses at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio, and that estimates of credit losses should reflect consideration of all significant factors that affect the collectibility of the portfolio as of the evaluation date. The policy statement states that prudent, conservative, but not excessive, loan loss allowances that represent management’s best estimate from within an acceptable range of estimated losses are appropriate. 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.

The Company’s methodology incorporates the following accounting pronouncements in determining the adequacy of the allowance for loan losses:

	§		Statement of Financial Accounting Standards (“SFAS”) No. 5 “Accounting for Contingencies”,
	§		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 and doubtful. Loans classified as loss are immediately charged off.

Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on the Company’s historical loss experience as adjusted for changes in the business cycle 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 seven years. Loss factors are adjusted to recognize and quantify the estimated loss exposure resulting from changes in market conditions and trends in the Company’s loan portfolio.

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

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

		At December 31,
		2006				2005				2004				2003				2002
		(dollars in thousands)
Balance at beginning of period		$	3,256			$	2,722			$	2,524			$	2,431			$	2,113
Charge-offs:
Commercial and agricultural			126				297				103				295				195
Real estate mortgage			—				—				—				26				13
Real estate construction			—				—				—				6				—
Consumer			519				442				600				520				393
Total charge-offs			645				739				703				847				601
Recoveries:
Commercial and agricultural			46				21				15				45				21
Real estate mortgage			—				—				—				—				—
Real estate construction			—				—				—				—				—
Consumer			260				152				136				145				73
Total recoveries			306				173				151				190				94
Net charge-offs			339				566				552				657				507
Provision for loan losses			1,000				1,100				750				750				825
Balance at end of period		$	3,917			$	3,256			$	2,722			$	2,524			$	2,431
Net charge-offs during the period to average loans			0.10	%			0.19	%			0.24	%			0.31	%			0.26	%
Allowance for loan losses to total loans			1.10	%			1.01	%			1.02	%			1.16	%			1.17	%

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 difference between impaired loans and nonperforming loans is that impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but also may include identified problem loans other than delinquent loans where it is considered probable that we will not collect all amounts due to us (including both principal and interest) in accordance with the contractual terms of the loan agreement.

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,
		2006				2005				2004				2003				2002
		(dollars in thousands)
Nonaccrual loans		$	972			$	1,661			$	1,171			$	847			$	1,711
Loans past due 90 days or more and still accruing			41				—				36				29				75
Total nonperforming loans			1,013				1,661				1,207				876				1,786
Other real estate owned			—				—				—				—				125
Other vehicles owned			47				40				33				—				—
Total nonperforming assets		$	1,060			$	1,701			$	1,240			$	876			$	1,911
Interest income forgone on nonaccrual loans		$	53			$	39			$	25			$	51			$	148
Interest income recorded on a cash basis on nonaccrual loans		$	116			$	16			$	63			$	143			$	29
Nonperforming loans to total Loans			0.29	%			0.52	%			0.45	%			0.40	%			0.86	%
Nonperforming assets to total Assets			0.22	%			0.36	%			0.30	%			0.22	%			0.59	%
Allowance for loan losses to nonperforming Loans			387	%			196	%			226	%			288	%			136	%

At December 31, 2006 and 2005, the Company’s recorded investment in loans for which impairment has been recognized totaled $1.0 million and $1.7 million, respectively. The specific allowance for loan losses related to impaired loans was $66,000 and $137,000 at December 31, 2006 and 2005, respectively. The average recorded investment in impaired loans was $1.2 million, $1.3 million and $1.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. In most cases, the Company uses the cash basis method of income recognition for impaired loans. For the years ended December 31, 2006, 2005 and 2004, the Company recognized $116,000, $16,000 and $63,000, 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, 2006 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 occur in future periods.

Investment Portfolio and Federal Funds Sold. Total investment securities and Federal funds sold decreased $30.4 million, or 29%, to $74.8 million as of December 31, 2006, down from $105.2 million at December 31, 2005. During 2006 the Company utilized the proceeds from the maturities and calls of

investment securities along with advances from the Federal Home Loan Bank to fund its loan growth. This resulted in the Company increasing its net interest margin as it replaced lower yielding investments with loans. The Company intends to continue to fund a portion of its anticipated loan growth in 2007 with funds generated from matured or called investment securities. Since the addition of $45 million in deposits from branch acquisitions in late 2003, the Bank has continued to migrate the original placement of these amounts from short-term investment securities into higher-yielding loan balances.

The composition of the portfolio as of the end of 2006 was fairly consistent with the composition of the portfolio as of the end of 2005. The investment portfolio balances in U.S. Treasuries, U.S. Government agencies, corporate debt securities and municipal obligations comprised 7%, 64%, 10% and 19%, respectively, at December 31, 2006 versus 10%, 66%, 10% and 14%, respectively, at December 31, 2005. The increase in municipal obligations as a percentage of the investment relates to the decrease in shorter maturity investment securities such as U.S. Treasuries and U.S. agency securities. As these securities mature the proceeds where used to primarily to fund growth in the loan portfolio. During 2006 the Company purchased $155,000 of securities while maturities and principal repayments totaled $23.6 million

The Company’s investments in mortgage-backed securities of U.S. Government agencies achieve both an increase in interest income and provide cash flows for liquidity and reinvestment opportunities. At December 31, 2006, total balances in these mortgage-backed securities amounted to $17 million down from $21 million at December 31, 2005. 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.

Municipal securities provide attractive tax equivalent yields for the Company. Since the majority of the interest earnings on these securities are not taxable for Federal purposes the addition of municipal securities results in a reduction in the effective tax rate of the Company.

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

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

		December 31,
Available-for-sale (fair value)		2006				2005				2004
		(dollars in thousands)
U.S. Treasuries		$	5,344			$	9,823			$	10,055
U.S. Government agencies			30,063				43,756				57,083
Corporate debt securities			7,868				9,231				9,501
U.S. Government agency mortgage-backed Securities			17,440				20,951				20,640
Total		$	60,715			$	83,761			$	97,279

		December 31,
Held-to-maturity (amortized cost)		2006				2005				2004
		(dollars in thousands)
U.S. Government agencies						$	6			$	507
Corporate debt securities							—				500
Municipal obligations		$	14,080				14,077				14,966
Total		$	14,080			$	14,083			$	15,973