UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2007

o		TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

California		75-2987096
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
35 S. Lindan Avenue, Quincy, California		95971
(Address of Principal Executive Offices)		(Zip Code)

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 3, 2007; 4,945,696 shares

 

 

PART I – FINANCIAL INFORMATION

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

		June 30,				December 31,
		2007				2006
Assets
Cash and due from banks		$	16,535			$	11,293
Federal funds sold			150				—
Cash and cash equivalents			16,685				11,293
Investment securities (fair value of $57,219 at June 30, 2007 and $74,841 at December 31, 2006)			57,453				74,795
Loans, less allowance for loan losses of $4,179 at June 30, 2007 and $3,917 at December 31, 2006 (Notes 3 and 4)			354,815				351,977
Premises and equipment, net			15,016				15,190
Intangible assets, net			1,187				1,337
Bank owned life insurance			9,615				9,449
Accrued interest receivable and other assets			9,180				9,198
Total assets		$	463,951			$	473,239
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing		$	115,353			$	121,464
Interest bearing			285,311				280,712
Total deposits			400,664				402,176
Short-term borrowings			12,300				20,000
Accrued interest payable and other liabilities			4,312				4,901
Junior subordinated deferrable interest debentures			10,310				10,310
Total liabilities			427,586				437,387
Commitments and contingencies (Note 4)			—				—
Shareholders’ equity (Notes 5 and 7):
Serial preferred stock, no par value; 10,000,000 shares authorized, none issued			—				—
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 4,961,796 shares at June 30, 2007 and 5,023,205 shares at December 31, 2006			4,914				4,828
Retained earnings			32,056				31,716
Accumulated other comprehensive loss (Note 6)			(605	)			(692	)
Total shareholders’ equity			36,365				35,852
Total liabilities and shareholders’ equity		$	463,951			$	473,239

See notes to unaudited condensed consolidated financial statements.

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

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2007				2006				2007				2006
Interest Income:
Interest and fees on loans		$	7,105			$	6,380			$	14,010			$	12,384
Interest on investment securities:
Taxable			447				645				966				1,332
Exempt from Federal income taxes			132				133				266				264
Interest on Federal funds sold			5				27				8				144
Total interest income			7,689				7,185				15,250				14,124
Interest Expense:
Interest on deposits			1,808				1,421				3,484				2,782
Interest on short-term borrowings			250				39				436				39
Interest on junior subordinated deferrable interest debentures			208				201				414				384
Other			5				4				11				8
Total interest expense			2,271				1,665				4,345				3,213
Net interest income before provision for loan losses			5,418				5,520				10,905				10,911
Provision for Loan Losses			125				300				375				600
Net interest income after provision for loan losses			5,293				5,220				10,530				10,311
Non-Interest Income:
Service charges			902				927				1,757				1,786
Earnings on Bank owned life insurance policies			104				97				205				191
Other			289				303				605				560
Total non-interest income			1,295				1,327				2,567				2,537
Non-Interest Expenses:
Salaries and employee benefits			2,640				2,329				5,468				4,866
Occupancy and equipment			879				810				1,789				1,560
Other			1,222				1,282				2,492				2,403
Total non-interest expenses			4,741				4,421				9,749				8,829
Income before provision for income taxes			1,847				2,126				3,348				4,019
Provision for Income Taxes			713				816				1,266				1,534
Net income		$	1,134			$	1,310			$	2,082			$	2,485
Basic earnings per share (Note 5)		$	0.23			$	0.26			$	0.42			$	0.50
Diluted earnings per share (Note 5)		$	0.23			$	0.26			$	0.41			$	0.49

See notes to unaudited condensed consolidated financial statements.

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

		For the Six Months
		Ended June 30,
		2007				2006
Cash Flows from Operating Activities:
Net income		$	2,082			$	2,485
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			375				600
Change in deferred loan origination costs/fees, net			197				(398	)
Depreciation and amortization			1,124				1,025
Stock-based compensation expense			131				87
Amortization of investment security premiums			96				223
Accretion of investment security discounts			(33	)			(46	)
Net loss on disposal/sale of premises and equipment			29				8
Net gain on sale of vehicles owned			(28	)			(2	)
Earnings on Bank owned life insurance policies			(205	)			(191	)
Expenses on Bank owned life insurance policies			39				36
Increase in accrued interest receivable and other assets			(33	)			(852	)
Decrease in accrued interest payable and other liabilities			(589	)			(614	)
Net cash provided by operating activities			3,185				2,361
Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities			15,875				12,346
Proceeds from matured and called held-to-maturity investment securities			26				18
Purchases of held-to-maturity investment securities			—				(155	)
Proceeds from principal repayments from available-for-sale government-guaranteed mortgage-backed securities			1,526				1,805
Net increase in loans			(3,750	)			(15,942	)
Proceeds from sale of other vehicles			176				101
Purchase of premises and equipment			(647	)			(2,550	)
Net cash provided by (used in) investing activities			13,206				(4,377	)

Continued on next page.

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

		For the Six Months
		Ended June 30,
		2007				2006
Cash Flows from Financing Activities:
Net decrease in demand, interest bearing and savings deposits		$	(23,441	)		$	(331	)
Net increase (decrease) in time deposits			21,929				(8,976	)
Net (decrease) increase in short-term borrowings			(7,700	)			5,000
Net proceeds from exercise of stock options			17				80
Payment of cash dividends			(750	)			(650	)
Repurchase and retirement of common stock			(1,054	)			—
Net cash used in financing activities			(10,999	)			(4,877	)
Increase (decrease) in cash and cash equivalents			5,392				(6,893	)
Cash and Cash Equivalents at Beginning of Year			11,293				24,596
Cash and Cash Equivalents at End of Period		$	16,685			$	17,703
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense		$	4,026			$	3,147
Income taxes		$	1,625			$	1,655
Non-Cash Investing Activities:
Vehicles acquired through foreclosure		$	158			$	93
Real Estate acquired through foreclosure		$	182			$	—
Loan transferred to other assets		$	—			$	211
Net change in unrealized loss on available-for-sale securities		$	87			$	(354	)
Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options		$	49			$	345

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. GENERAL

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

The Bank is a California state-chartered bank that was incorporated in July 1980 and opened for business in December 1980. The Bank operates thirteen branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Loyalton, Portola, Quincy, Redding, Susanville, Tahoe City, Truckee and Westwood. The bank also has a commercial lending office in Reno, Nevada. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank’s primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary, Plumas Bank. Plumas Statutory Trust I and Plumas Statutory Trust II are not consolidated into the Company’s consolidated financial statements and, accordingly, are accounted for under the equity method. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2007 and December 31, 2006 and its results of operations for the three-month and six-month periods ended June 30, 2007 and 2006 and its cash flows for the six-month periods ended June 30, 2007 and 2006. Certain reclassifications have been made to prior period’s balances to conform to classifications used in 2007.

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 2007 and 2006 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

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

3. LOANS

Outstanding loans are summarized below, in thousands:

		June 30,				December 31,
		2007				2006
Commercial		$	37,475			$	36,182
Agricultural			39,037				35,577
Real estate – mortgage			121,975				116,329
Real estate – construction and land development			75,389				75,930
Consumer			84,133				90,694
			358,009				354,712
Deferred loan costs, net			985				1,182
Allowance for loan losses			(4,179	)			(3,917	)
		$	354,815			$	351,977

4. COMMITMENTS AND CONTINGENCIES

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

In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the financial statements, including loan commitments of $86,706,000 and $101,759,000 and stand-by letters of credit of $318,000 and $564,000 at June 30, 2007 and December 31, 2006, respectively.

Of the loan commitments outstanding at June 30, 2007, $20,831,000 are real estate construction loan commitments that are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The deferred liability related to the Company’s stand-by letters of credit was not significant at June 30, 2007 or December 31, 2006.

5. EARNINGS PER SHARE

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

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2007				2006				2007				2006
Earnings Per Share:
Basic earnings per share		$	0.23			$	0.26			$	0.42			$	0.50
Diluted earnings per share		$	0.23			$	0.26			$	0.41			$	0.49
Weighted Average Number of Shares Outstanding:
(in thousands)
Basic shares			4,984				5,000				4,998				4,994
Diluted shares			5,029				5,089				5,050				5,090

Stock options not included in the computation of diluted earnings per share, due to their antidilutive effect, were 230,200 and 10,000 for the three months ended June 30, 2007 and 2006, respectively and 150,400 and 7,500 for the six months ended June 30, 2007 and 2006, respectively.

6. COMPREHENSIVE INCOME

Total comprehensive income for the three months ended June 30, 2007 and 2006 totaled $1,073,000 and $1,055,000, respectively. Comprehensive income is comprised of unrealized (losses), net of taxes, on available-for-sale investment securities, which were $(61,000) and $(255,000) for the three months ended June 30, 2007 and 2006, respectively, together with net income.

Total comprehensive income for the six months ended June 30, 2007 and 2006 totaled $2,169,000 and $2,131,000, respectively. Comprehensive income is comprised of unrealized gains (losses), net of taxes, on available-for-sale investment securities, which were $87,000 and $(354,000) for the six months ended June 30, 2007 and 2006, respectively, together with net income.

At June 30, 2007 and December 31, 2006, accumulated other comprehensive loss, net of taxes, totaled $605,000 and $692,000, respectively, and is reflected as a component of shareholders’ equity.

7. STOCK-BASED COMPENSATION

In 2001 and 1991, the Company established Stock Option Plans for which 897,110 shares of common stock remain reserved for issuance to employees and directors and 479,714 shares are available for future grants under incentive and nonstatutory agreements as of June 30, 2007. The Company granted 155,700 and 2,500 options during the six months ended June 30, 2007 and 2006 respectively. The weighted average grant date fair value of options granted for the six months ended June 30, 2007 and 2006 was $4.53 and $4.60 respectively. Compensation cost related to stock options recognized in operating results under SFAS No. 123R was $78,000 and $43,000 for the quarters ended June 30, 2007 and 2006, respectively. The associated future income tax benefit recognized was $6,000 and $5,000 for the quarters ended June 30, 2007 and 2006, respectively. Compensation cost related to stock options recognized in operating results under SFAS No. 123R was $131,000 and $87,000 in the six months ended June 30, 2007 and 2006, respectively. The associated future income tax benefit recognized was $12,000 and $11,000 for the six months ended June 30, 2007 and 2006, respectively.

The following table summarizes information about stock option activity for the six months ended June 30, 2007:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic Value
		Shares				Price				Term				(in thousands)
Options outstanding at December 31, 2006			290,914			$	11.62
Options granted			155,700				16.37
Options exercised			(8,841	)			7.43
Options cancelled			(20,377	)			16.13
Options outstanding at June 30, 2007			417,396			$	13.26				6.5			$	641
Options exercisable at June 30, 2007			182,903			$	10.70				5.5			$	571
Expected to vest after June 30, 2007			234,493			$	15.26				7.3			$	70

The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the six months ended June 30, 2007 was $80,000. During the six months ended June 30, 2007, the amount of cash received from the exercise of stock options was $17,000.

At June 30, 2007, there was $808,000 of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 3.2 years. The total fair value of options vested during the six months ended June 30, 2007 was $8,000.

8. INCOME TAXES

In July 2006, the Financial Accounting Standards Board (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 also prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income 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. The Company adopted FIN 48 on January 1, 2007.

The Company previously recognized 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 have been applied to all tax positions of the Company as of January 1, 2007. There was no cumulative effect of applying the provisions of FIN 48 and there was no significant effect on the Company’s provision for income taxes for the six months ended June 30, 2007. The Company recognizes interest accrued related to unrecognized tax benefits and accruals for penalties in income tax expense

9. RECENT ACCOUNTING DEVELOPMENTS

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued Statement No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. The entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. The provisions of SFAS 159 are effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management did not elect to early adopt SFAS 159 and has not yet completed its evaluation of the impact that SFAS 159 will have.

PART I – FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

INTRODUCTION

The following discussion and analysis sets forth certain statistical information relating to the Company as of June 30, 2007 and December 31, 2006 and for the three and six month periods ended June 30, 2007 and 2006. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2006.

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

CASH DIVIDEND

On April 18, 2007, the Company declared a semi-annual common stock cash dividend of $0.15 per share. This represents a 15% increase in the semi-annual cash dividend per share from $0.13 paid on May 15, 2006. The dividend was paid on May 14, 2007 to shareholders of record on April 30, 2007.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no changes to the Company’s critical accounting policies from those disclosed in the Company’s 2006 Annual Report to Shareholders’ on Form 10-K.

This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report.

OVERVIEW

The Company’s net income declined by $403 thousand, or 16%, to $2.08 million for the six months ended June 30, 2007 from $2.48 million for the same period in 2006. This decline in net income resulted from an increase in non-interest expense of $920 thousand and a slight decline in net interest income of $6 thousand which were partially offset by an increase in non-interest income of $30 thousand and decreases in the provision for loan losses of $225 thousand and income tax expense of $268 thousand. The increase in non-interest expense included an increase of $602 thousand in salaries and employee benefit expense and $229 thousand in occupancy and equipment costs.

Total assets declined $9.3 million from $473.2 million at December 31, 2006 to $463.9 million at June 30, 2007. Net loans increased by $2.8 million from $352.0 million at December 31, 2006 to $354.8 million at June 30, 2007. The decline of $17.3 million in investment securities provided funding to reduce short-term borrowings by $7.7 million, increase loans by $2.8 million and increase cash and due from banks by $5.2 million. Deposits declined $1.5 million from $402.2 million at December 31, 2006 to $400.7 million at June 30, 2007. Total shareholders’ equity increased by $0.5 million from $35.9 million at December 31, 2006 to $36.4 million at June 30, 2007.

The annualized return on average assets was 0.90% for the six months ended June 30, 2007 down from 1.08% for the same period in 2006. The annualized return on average equity was 11.5% for the six months ended June 30, 2007 down from 15.4% for the same period in 2006.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $10.9 million for each of the six month periods ended June 30, 2007 and 2006. Volume and rate increases in the Company’s loan portfolio were offset by reductions in the average balance of investment securities and federal funds sold and an increase in both the average balance and rate paid on time deposits and an increase in the average balance of short-term borrowings.

Interest income increased $1.1 million, or 8%, to $15.2 million for the six months ended June 30, 2007. Interest and fees on loans increased by $1.6 million from $12.4 million for the six months ended June 30, 2006 to $14.0 million during the current six-month period. The Company’s average loan balances were $357 million for the six months ended June 30, 2007, up $34 million, or 10%, from the $323 million for the same period in 2006. The average rate earned on the Company’s loan balances increased 19 basis points to 7.91% during the first six months of 2007 versus 7.72% during the first six months of 2006. The increase in yield is consistent with market conditions in the Company’s service area.

Interest on investment securities decreased by $364 thousand, as an increase in yield of 17 basis points was offset by a decline in average investment securities of $23.7 million. Interest earned on federal funds sold decreased by $136 thousand. This decrease resulted from a decrease in the average balance of federal funds sold of $6.2 million from $6.5 million for the six months ended June 30, 2006 to $0.3 million during the current six-month period. The decrease in the overall investment portfolio resulted from maturities, calls and pay downs that were used to provide funding to reduce borrowings, for loan growth and liquidity.

Interest expense increased $1.1 million to $4.3 million for the six months ended June 30, 2007, up from $3.2 million for the same period in 2006. This increase includes $0.9 million in interest on time deposits and a $0.4 million increase in interest expense on short-term borrowings. The Company has experienced increases in the average balance of its NOW accounts and time deposits but declines in non-interest bearing demand deposit accounts, savings and money market accounts. We continue to experience significant competition for deposits from both banking and non-banking sources. Rather than increasing the rate paid on our lower yielding interest bearing transaction and money market accounts to attract deposits and thereby increasing the rate paid on the entire balance of these accounts, the Company has chosen to increase its level of short-term time deposits and short-term borrowings to provide funding for loan growth. This has resulted in an increase in both the volume and rate components of time deposit interest expense and the volume variance of short-term borrowings.

Average NOW account balances increased by $2.8 million and the average rate paid increased by 17 basis points. This increase in rate was related to an increase in Money Fund Plu$ balances in total and as a percentage of average NOW accounts outstanding. Money Fund Plu$ is a high interest bearing checking account designed to pay rates comparable to those available on a typical brokerage account. Average Money Fund Plu$ accounts were $41.6 million for the six months ended June 30, 2007 compared to $33.7 million during the first six months of 2006. The average rate paid on Money Fund Plu$ accounts declined from 3.49% during the 2006 period to 3.30% during the six months ended June 30, 2007.

The increase in the average rate paid on time deposits and the decrease in lower rate deposit sources as a percentage of total interest-bearing deposits has resulted in an increase in the average rate paid on the Company’s interest bearing deposits of 53 basis points from 1.91% for the six months ended June 30, 2006 to 2.44% for the current six month period. The average rate paid on time deposits increased 91 basis points from 3.34% during the six months ended June 30, 2006 to 4.25% during the first half of 2007. This increase includes an increase in market rates in the Company’s service area and the effect of a promotional 5-month term certificate of deposit introduced during the fourth quarter of 2006. The average rate paid on this promotional certificate of deposit during the six months ended June 30, 2007 was 5.14% and the average balance was $31 million. This product provides a higher rate of return for our more interest rate sensitive customers, whose deposits we may have lost to competition, while providing a highly competitive rate to attract new deposits.

As a result of the changes noted above, the net interest margin for the six months ended June 30, 2007 decreased 5 basis points to 5.19%, down from 5.24% for the same period in 2006.

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

		For the Six Months Ended June 30, 2007												For the Six Months Ended June 30, 2006
		Average Balance				Interest				Yield/				Average Balance				Interest				Yield/
		(in thousands)				(in thousands)				Rate				(in thousands)				(in thousands)				Rate
(Dollars in thousands)
Interest-earning assets:
Loans (1) (2)		$	356,958			$	14,010				7.91	%		$	323,307			$	12,384				7.72	%
Investment securities (1)			66,310				1,232				3.75	%			90,002				1,596				3.58	%
Federal funds sold			254				8				6.35	%			6,492				144				4.47	%
Total interest earning assets			423,522				15,250				7.26	%			419,801				14,124				6.78	%
Cash and due from banks			12,653												13,677
Other assets			32,440												30,567
Total assets		$	468,615											$	464,045
Interest-bearing liabilities:
NOW deposits		$	78,522				713				1.83	%		$	75,748				623				1.66	%
Money market deposits			42,010				198				0.95	%			61,010				371				1.23	%
Savings deposits			52,327				149				0.57	%			61,858				224				0.73	%
Time deposits			114,890				2,424				4.25	%			94,378				1,564				3.34	%
Short-term borrowings			16,324				436				5.39	%			1,525				39				5.16	%
Other interest-bearing liabilities			301				11				7.36	%			278				8				5.80	%
Junior subordinated debentures			10,310				414				8.10	%			10,310				384				7.51	%
Total interest-bearing liabilities			314,684				4,345				2.78	%			305,107				3,213				2.12	%
Non-interest bearing deposits			112,658												121,915
Other liabilities			4,669												4,525
Shareholders’ equity			36,604												32,498
Total liabilities & equity		$	468,615											$	464,045
Cost of funding interest-earning assets (3)											2.07	%											1.54	%
Net interest income and margin (4)						$	10,905				5.19	%						$	10,911				5.24	%

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

		2007 over 2006 change in net interest income
		for the six months ended June 30
		(in thousands)
		Volume (1)				Rate (2)				Mix (3)				Total
Interest-earning assets:
Loans		$	1,289			$	305			$	32			$	1,626
Investment securities			(420	)			76				(20	)			(364	)
Federal funds sold			(138	)			60				(58	)			(136	)
Total interest income			731				441				(46	)			1,126
Interest-bearing liabilities:
NOW deposits			23				65				2				90
Money market deposits			(116	)			(83	)			26				(173	)
Savings deposits			(34	)			(48	)			7				(75	)
Time deposits			340				427				93				860
Short-term borrowings			378				2				17				397
Other interest-bearing liabilities			1				2				—				3
Junior subordinated debentures			—				30				—				30
Total interest expense			592				395				145				1,132
Net interest income		$	139			$	46			$	(191	)		$	(6	)

Provision for loan losses. The Company recorded $375 thousand in provision for loan losses for the six months ended June 30, 2007 and $600 thousand for the six months ended June 30, 2006. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the six months ended June 30, 2007, total non-interest income increased $30 thousand, or 1%, to $2.6 million, up from $2.5 million from the comparable period in 2006. The decline in service charge income of $29 thousand is primarily related to a reduction in fees earned on over draft charges and return check fees. The net increase in other non-interest income of $59 thousand relates to increases in gains on sale of loans of $31 thousand; investment services income which increased by $30 thousand and an increase in gains on the sale of repossessed vehicles of $26 thousand. Partially offsetting these increases was a decrease of $28 thousand in other fees and miscellaneous other income.

The following table describes the components of non-interest income for the six-month periods ending June 30, 2007 and 2006, dollars in thousands:

		For the Six Months
		Ended June 30,
										Dollar				Percentage
		2007				2006				Change				Change
Service charges on deposit accounts		$	1,757			$	1,786			$	(29	)			-1.6	%
Earnings on life insurance policies			206				191				15				7.9	%
Merchant processing income			127				131				(4	)			-3.1	%
Investment services income			85				55				30				54.5	%
Official check fees			80				80				—				-	%
Mortgage loan commission and servicing fees			60				65				(5	)			-7.7	%
Customer service fees			60				60				—				-	%
Federal Home Loan Bank dividends			56				48				8				16.7	%
Safe deposit box and night depository income			35				36				(1	)			-2.8	%
Gain on sale of vehicles			28				2				26				1300.0	%
Gain (loss) on sale of loans			27				(4	)			31				-775.0	%
Other deposit account fees			21				28				(7	)			-25.0	%
Printed check fee income			21				31				(10	)			-32.3	%
Other			4				28				(24	)			-85.7	%
Total non-interest income		$	2,567			$	2,537			$	30				1.2	%

Non-interest expenses. During the six months ended June 30, 2007, total non-interest expense increased $920 thousand, or 10%, to $9.7 million, up from $8.8 million for the comparable period in 2006. The increase in non-interest expense was primarily the result of increases in salaries and employee benefits, occupancy and equipment costs and professional fees.

Salaries and other employee benefits increased $602 thousand, or 12%, over the same six-month period last year. Salaries costs increased by $418 thousand which included annual merit increases as well as additional employees primarily related to the Company’s Reno, Nevada commercial real estate loan office, its recently opened Redding, California branch, its expanded Truckee, California branch and administration staffing.

During the fourth quarter of 2006 the Company completed construction and opened a new Bank owned branch in Truckee, California. This replaced a much smaller leased facility. Also in the fourth quarter of 2006 we opened a commercial real estate loan office in Reno, Nevada. During the second quarter of 2007 we opened a branch in Redding, California in a temporary location. Of the total increase of $418 in salary expense, $179 thousand relates to the Reno and Redding offices or 43% of the increase.

Another significant component of the increase in salaries and employee benefits was a $236 thousand reduction in the deferral of loan origination costs primarily related to a reduction in the origination volume of consumer loans. Over the past three years the Company had been aggressive in seeking out dealer auto loans. Beginning in late 2006 and continuing into 2007 we began to deemphasize our auto lending activities. In April 2007 the head of the Company’s auto lending department resigned and shortly thereafter the Company discontinued its dealer-lending program. In addition stock-based compensation expense, included in salary and employee benefits, increased by $42 thousand from $62 thousand during the six months ended June 30, 2006 to $104 thousand during the current six-month period.

These increases in salary and employee benefit expense were partially offset by a decrease in bonus expense of $162 thousand related primarily to a reduction in net income during the 2007 six-month period.

A large portion of the Company’s bonus plan is based on the level of net income and items directly influenced by the level of net income including return on equity, return on assets and earnings per share.

The increase in occupancy and equipment includes an increase in operating expenses of $125 thousand related to the new Truckee branch, $24 thousand in operating costs at our Reno lending office and operating costs of $15 thousand related to the Redding branch. The increase in professional fees of $44 thousand primarily relates to increases in consulting costs, which include costs associated with an outside evaluation of our core banking software requirements and other technology planning costs. The Company is evaluating the costs and benefits associated with upgrading its core processing software; however it is not anticipated that any changes will be made during the current year

The following table describes the components of non-interest expense for the six-month periods ending June 30, 2007 and 2006, dollars in thouands:

		For the Six Months
		Ended June 30,
										Dollar				Percentage
		2007				2006				Change				Change
Salaries and employee benefits		$	5,468			$	4,866			$	602				12.4	%
Occupancy and equipment			1,789				1,560				229				14.7	%
Professional fees			389				345				44				12.8	%
Outside service fees			324				296				28				9.5	%
Business development			286				282				4				1.4	%
Advertising and shareholder relations			278				242				36				14.9	%
Director compensation			174				175				(1	)			-0.6	%
Telephone and data communication			169				197				(28	)			-14.2	%
Stationery and supplies			152				140				12				8.6	%
Deposit premium amortization			150				150				—				-	%
Armored car and courier			134				132				2				1.5	%
Postage			121				123				(2	)			-1.6	%
Loan and collection expenses			87				80				7				8.8	%
Insurance			84				84				—				-	%
Other			144				157				(13	)			-8.3	%
Total non-interest expense		$	9,749			$	8,829			$	920				10.4	%

Provision for income taxes. The provision for income taxes was $1.3 million, or 37.8% of pre-tax income for the six months ended June 30, 2007. This compares to $1.5 million or 38.2% of pre-tax income during the first half of 2006. The decrease of 0.4% includes the effect of an increase, during 2007, in the percentage of tax-exempt income as a percentage of pre-tax income.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007

Net Income. Net income decreased by $176 thousand, or 13% from $1.3 million during the second quarter of 2006 to $1.1 million during the three months ended June 30, 2007. This decrease in net income included a $320 thousand increase in non-interest expense, a $102 thousand decline in net interest income and a $32 thousand decline in non-interest income, partially offset by decreases of $175 thousand in the provision for loan losses and $103 thousand in the provision for income taxes.

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $5.4 million for the three months ended June 30, 2007, a decrease of $102 thousand, or 2%, from $5.5 million for the same period in 2006. The decline in net interest income was related to an increase in interest expense of $0.6 million attributable to volume and rate increases in time deposits and an increase in average short-term borrowings. This increase in interest expense was largely offset by an increase of $0.5 million in interest income related to an increase in average loans outstanding. Interest on investment securities declined by $0.2 million related to a decrease in the average balance outstanding.

Interest and fees on loans increased by $0.7 million from $6.4 million for the three months ended June 30, 2006 to $7.1 million during the 2007 second quarter. The Company’s average loan balances were $360 million for the three months ended June 30, 2007, up $35 million, or 11%, from the $325 million for the same period in 2006. The average yield earned on loans increased by 5 basis points from 7.86% during the second quarter of 2006 to 7.91% during the 2007 quarter.

A 15 basis points increase in yield on investment securities was offset by a decrease of $25 million in the average balance outstanding resulting in a decrease of $0.2 million in interest earned on investment securities.

Interest expense increased $0.6 million, or 36%, to $2.3 million for the three months ended June 30, 2007, up from $1.7 million for the same period in 2006. This increase includes $0.5 million in interest on time deposits and a $0.2 million increase in interest expense on short-term borrowings. These increases in interest expense were partially offset by declines in both the volume and rate components of interest expense on NOW deposits, money market deposits and savings deposits as the mix of deposits shifted from these accounts to time deposits.

The Company has experienced declines in lower rate deposit sources such as its interest-bearing transaction accounts, money market accounts, and savings accounts. To offset these declines and provide funding for its continued loan growth the Company has utilized short-term time deposits and increased its average short-term borrowings.

The average rate paid on time deposits increased 91 basis points from 3.43% during the three months ended June 30, 2006 to 4.34% during the second quarter of 2007. Average time deposits outstanding increased from $92 million during the quarter ended June 30, 2006 to $120 million during the current quarter. The increase in time deposits outstanding as well as the interest in average rate paid on time deposits relates to the introduction of a promotional 5-month term certificate of deposit during the fourth quarter of 2006. The average rate paid on this promotional certificate of deposit during the three months ended June 30, 2007 was 5.15% and the average balance during the three-month period was $39 million.

The average balance of short-term borrowings increased from $3.0 million during the second quarter of 2006 to $18.6 million during the three months ended June 30, 2007. The average rate paid on these borrowings increased by 24 basis points to 5.40% during the quarter ended June 30, 2007, up from 5.16% during the second quarter of 2006.

As a result of the changes noted above, the net interest margin for the three months ended June 30, 2007 decreased 20 basis points, or 4%, to 5.14%, down from 5.34% for the same period in 2006.

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

		For the Three Months Ended June 30, 2007												For the Three Months Ended June 30, 2006
		Average Balance				Interest				Yield/				Average Balance				Interest				Yield/
		(in thousands)				(in thousands)				Rate				(in thousands)				(in thousands)				Rate
(Dollars in thousands)
Interest-earning assets:
Loans (1) (2)		$	360,240			$	7,105				7.91	%		$	325,408			$	6,380				7.86	%
Investment securities (1)			61,968				579				3.75	%			86,676				778				3.60	%
Federal funds sold			332				5				6.04	%			2,286				27				4.74	%
Total interest earning assets			422,540				7,689				7.30	%			414,370				7,185				6.95	%
Cash and due from banks			12,709												13,317
Other assets			32,267												31,446
Total assets		$	467,516											$	459,133
Interest-bearing liabilities:
NOW deposits		$	77,457				343				1.78	%		$	78,804				360				1.83	%
Money market deposits			39,483				92				0.93	%			57,329				169				1.18	%
Savings deposits			51,180				72				0.56	%			59,794				109				0.73	%
Time deposits			120,156				1,301				4.34	%			91,561				783				3.43	%
Short-term borrowings			18,570				250				5.40	%			3,033				39				5.16	%
Other interest-bearing liabilities			302				5				6.64	%			281				4				5.71	%
Junior subordinated debentures			10,310				208				8.09	%			10,310				201				7.82	%
Total interest-bearing liabilities			317,458				2,271				2.87	%			301,112				1,665				2.22	%
Non-interest bearing deposits			109,072												120,741
Other liabilities			4,360												4,410
Shareholders’ equity			36,626												32,870
Total liabilities & equity		$	467,516											$	459,133
Cost of funding interest-earning assets (3)											2.16	%											1.61	%
Net interest income and margin (4)						$	5,418				5.14	%						$	5,520				5.34	%

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

		2007 over 2006 change in net interest income
		for the three months ended June 30
		(in thousands)
		Volume (1)				Rate (2)				Mix (3)				Total
Interest-earning assets:
Loans		$	683			$	38			$	4			$	725
Investment securities			(222	)			32				(9	)			(199	)
Federal funds sold			(23	)			7				(6	)			(22	)
Total interest income			438				77				(11	)			504
Interest-bearing liabilities:
NOW deposits			(6	)			(11	)			—				(17	)
Money market deposits			(53	)			(35	)			11				(77	)
Savings deposits			(16	)			(25	)			4				(37	)
Time deposits			245				208				65				518
Short-term borrowings			200				2				9				211
Other interest-bearing liabilities			—				1				—				1
Junior subordinated debentures			—				7				—				7
Total interest expense			370				147				89				606
Net interest income		$	68			$	(70	)		$	(100	)		$	(102	)

Provision for loan losses. The Company recorded $125 thousand in provision for loan losses for the three months ended June 30, 2007 and $300 thousand for the three months ended June 30, 2006. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the three months ended June 30, 2007, total non-interest income decreased by $32 thousand. This decrease resulted primarily from a $25 thousand decrease in service charge income which relates to a reduction in fees earned on over draft charges and return check fees.

The following table describes the components of non-interest income for the three-month periods ending June 30, 2007 and 2006, dollars in thousands:

		For the Three
		Months
		Ended June 30,
										Dollar				Percentage
		2007				2006				Change				Change
Service charges on deposit accounts		$	902			$	927			$	(25	)			-2.7	%
Earnings on life insurance policies			104				97				7				7.2	%
Merchant processing income			67				70				(3	)			-4.3	%
Official check fees			39				45				(6	)			-13.3	%
Mortgage loan commission and servicing fees			35				35				—				-	%
Investment services income			33				33				—				-	%
Customer service fees			30				32				(2	)			-6.3	%
Federal Home Loan Bank dividends			25				25				—				-	%
Safe deposit box and night depository income			17				16				1				6.3	%
Other deposit account fees			10				13				(3	)			-23.1	%
Gain on sale of vehicles			8				2				6				300.0	%
Printed check fee income			6				20				(14	)			70.0	%
Other			19				12				7				58.3	%
Total non-interest income		$	1,295			$	1,327			$	(32	)			-2.4	%

Non-interest expenses. Non-interest expense increased by $320 thousand from $4.4 million during the second quarter of 2006 to $4.7 million during the current quarter. Consistent with the six month comparison the increase in non-interest expense relates primarily to increases in salaries and employee benefits and occupancy and equipment costs.

Salaries and employee benefits increased by $311 thousand to $2.6 million for the second quarter of 2007 compared to $2.3 million during the three months ended June 30, 2006. This increase included an increase in salary expense of $191 thousand, a reduction in the deferral of loan origination fees of $184 thousand and an increase in stock-based compensation expense of $33 thousand. These items were partially offset by a decrease in bonus expense of $161 thousand primarily related to the reduction in net income.

Salary expense included $102 thousand in salaries related to the Reno commercial real estate lending office and the Redding branch. The deferral of loan origination costs is primarily related to a reduction in the volume of consumer auto loans. Stock based compensation expense, included in salaries and related benefits, increased by $33 thousand from $31 thousand during the three months ended June 30, 2006 to $64 thousand during the current three-month period.

The increase in occupancy and equipment includes costs incurred at our Reno commercial lending office and the recently opened Redding branch, and an increase in costs at the Truckee branch.

The Company’s telephone and data communication costs decreased by $45 thousand, which includes one-time credits received from the Company’s data communication provider.

The following table describes the components of non-interest expense for the three-month periods ending June 30, 2007 and 2006, dollars in thousands:

		For the Three
		Months
		Ended June 30,
										Dollar				Percentage
		2007				2006				Change				Change
Salaries and employee benefits		$	2,640			$	2,329			$	311				13.4	%
Occupancy and equipment			879				810				69				8.5	%
Professional fees			182				181				1				0.6	%
Outside service fees			168				154				14				9.1	%
Business development			161				149				12				8.1	%
Advertising and shareholder relations			139				143				(4	)			-2.8	%
Director compensation			81				87				(6	)			-6.9	%
Deposit premium amortization			75				75				—				-	%
Stationery and supplies			75				66				9				13.6	%
Armored car and courier			68				67				1				1.5	%
Telephone and data communication			66				111				(45	)			-40.5	%
Postage			61				60				1				1.7	%
Insurance			47				42				5				11.9	%
Loan and collection expense			43				53				(10	)			-18.9	%
Other			56				94				(38	)			-40.4	%
Total non-interest expense		$	4,741			$	4,421			$	320				7.2	%

Provision for income taxes. The provision for income taxes was $0.7 million, or 38.6% of pre-tax income for the three months ended June 30, 2007. This compares to $0.8 million or 38.4% of pre-tax income during the second quarter of 2006. The increase of 0.2% includes the effect of an increase, during the 2007 quarter, in the percentage of stock-based compensation expense much of which is excluded from the calculation of the provision for income taxes.

FINANCIAL CONDITION

Loan portfolio composition. 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 are diversified as to the industries and types of businesses, thus limiting material exposure from any one industry concentration. 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 composition of the Company’s loan portfolio has remained relatively consistent from December 31, 2006. Real estate mortgage loans increased to 34% of total gross loans at June 30, 2007 from 33% at December 31, 2006. Agricultural loans increased to 11% of total gross loans at June 30, 2007 up from 10% at December 31, 2006. Consumer loans declined to 24% of total gross loans from 26% at December 31, 2006. Commercial and real estate construction loans were 10% and 21%, respectively of total gross loans at both June 30, 2007 and December 31, 2006.

The Company expects the level of consumer loans to continue to decline in the future. Over the past three years the Company had been aggressive in seeking out dealer auto loans. Beginning in late 2006 and continuing into 2007 we began to deemphasize our auto lending activities. In April 2007 the head of the Company’s auto lending department resigned. The Company will not replace this position and has discontinued its dealer loan program. It is our expectation that the payoffs from our auto loan portfolio can be utilized to provide funding for other higher yielding loans.

Nonperforming assets. Nonperforming loans at June 30, 2007 were $1,446 thousand, an increase of $433 thousand over the $1,013 thousand balance at December 31, 2006. Nonperforming assets (which is

comprised of nonperforming loans plus repossessed vehicles and foreclosed real estate) at June 30, 2007 were $1,685 thousand, an increase of $625 thousand over the $1,060 thousand balance at December 31, 2006. The increase in nonperforming loans primarily relates to an increase of $291 thousand in loans past due 90 days or more and still accruing from $41 thousand at December 31, 2006 to $332 thousand at June 30, 2007. The increase in nonperforming assets includes foreclosed real estate of $182 thousand at June 30, 2007. There was no foreclosed real estate at December 31, 2006.

Nonperforming loans as a percentage of total loans increased to 0.40% at June 30, 2007 up from 0.29% at December 31, 2006. In addition, nonperforming assets as a percentage of total assets also increased to 0.36% at June 30, 2007 up from 0.22% at December 31, 2006.

Analysis of allowance for loan losses. Net charge-offs during the six months ended June 30, 2007 totaled $113 thousand, or 0.03% of average loans, compared to $155 thousand, or 0.05% of average loans, for the comparable period in 2006. Net charge-offs during the first six months of 2007 were comprised of $265 thousand of charge-offs offset by $152 thousand in recoveries, compared to $319 thousand of charge-offs offset by $164 thousand in recoveries for the same period in 2006. The allowance for loan losses was 1.17% of total loans as of June 30, 2007 up from 1.10% as of December 31, 2006. Based on an evaluation of the credit quality of the loan portfolio and delinquency trends and charge-offs, management believes the allowance for loan losses to be adequate. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty.

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

		For the Six Months
		Ended June 30,
		(in thousands)
		2007				2006
Balance at January 1,		$	3,917			$	3,256
Charge-offs:
Commercial and agricultural			—				(118	)
Real estate mortgage			—				—
Real estate construction			(45	)			—
Consumer			(220	)			(201	)
Total charge-offs			(265	)			(319	)
Recoveries:
Commercial and agricultural			50				42
Real estate mortgage			—				—
Real estate construction			—				—
Consumer			102				122
Total recoveries			152				164
Net charge-offs			(113	)			(155	)
Provision for loan losses			375				600
Balance at June 30,		$	4,179			$	3,701
Net charge-offs during the six-month period to average loans			0.03	%			0.05	%
Allowance for loan losses to total loans			1.17	%			1.10	%