UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2011

or

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

Commission file number: 000-49883

PLUMAS BANCORP

(Exact name of Registrant as specified in its charter)

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

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

Securities 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.    ¨  Yes  x     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.    ¨  Yes    x  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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    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.    ¨

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

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-Accelerated Filer	¨	Smaller Reporting Company	x

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

As of June 30, 2011, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $10.5 million, based on the closing price reported to the Registrant on that date of $2.42 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 22, 2012 was 4,776,339.

Documents Incorporated by Reference: Portions of the definitive proxy statement for the 2012 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		17
Item 1B Unresolved Staff Comments		18
Item 2. Properties		18
Item 3. Legal Proceedings		19
Item 4. Mine Safety Disclosures		19
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
Item 6. Selected Financial Data		22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		45
Item 8. Financial Statements and Supplementary Data		45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		46
Item 9A. Controls and Procedures		46
Item 9B Other Information		47
PART III
Item 10. Directors, Executive Officers and Corporate Governance		47
Item 11. Executive Compensation		47
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		47
Item 13. Certain Relationships and Related Transactions, and Director Independence		48
Item 14. Principal Accountant Fees and Services		48
PART IV
Item 15. Exhibits and Financial Statement Schedules		48
Signatures		52

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PART I

Forward-Looking Information

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

• Competitive pressure in the banking industry, competition in the markets the Company operates in and changes in the 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.

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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 may explore supplemental sources of income in the future. The Bank cannot currently pay dividends without the prior approval of its primary regulators. 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, the cost of servicing debt and preferred stock dividends, will generally be paid from dividends paid to the Company by the Bank. The Company cannot currently pay dividends without the prior approval of its primary regulators.

At December 31, 2011, the Company had consolidated assets of $455 million, deposits of $391 million, other liabilities of $24 million and shareholders’ equity of $40 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”) in September 2005. Both Trust I and Trust II are further discussed in the section titled “Trust Preferred Securities.” Shareholders’ equity includes $11.8 million in preferred stock issued pursuant to the U.S. government’s Capital Purchase Program which is discussed in the section titled “Capital Purchase Program—TARP—Preferred Stock and Stock Warrant.”

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, (the “SEC”) 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 is not a member of the Federal Reserve System. The Bank’s Administrative Office is located at 35 South Lindan Avenue, Quincy, California. At December 31, 2011 the Bank had approximately $454 million in assets, $287 million in net loans and $392 million in deposits (including deposits of $0.7 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’s primary service area covers the Northeastern portion of California, with Lake Tahoe to the South and the Oregon border to the North. The Bank, through its eleven branch network, serves the seven contiguous California counties of Plumas, Nevada, Sierra, Placer, Lassen, Modoc and Shasta. The branches are located in the communities of Quincy, Portola, Greenville, Truckee, Fall River Mills, Alturas, Susanville, Chester, Tahoe City, Kings Beach and Redding. The Bank maintains fifteen automated teller machines (“ATMs”) tied in with major statewide and national networks. In addition to its branch network, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California. 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.

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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, automobile and home equity loans. Our principal commercial lending services include term real estate, commercial and industrial term loans. In addition, we provide government-guaranteed and agricultural loans as well as credit lines. We provide land development and construction loans on a limited basis.

The Bank’s Government-guaranteed lending center, headquartered in Auburn, California with additional personnel in Truckee, provides Small Business Administration and USDA Rural Development loans to qualified borrowers throughout Northern California and Northern Nevada. During 2007 the Bank was granted nationwide Preferred Lender status with the U.S. Small Business Administration and we expect government-guaranteed lending to continue to be an important part of our overall lending operation. During 2010 proceeds from the sale of government-guaranteed loans totaled $14.9 million and we generated a gain on sale of $1.1 million. In 2011 proceeds from the sale of government guaranteed loans totaled $23.4 million and we generated a gain on sale of $1.9 million.

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, 2011, the principal areas to which we directed our lending activities, and the percentage of our total loan portfolio comprised by each, were as follows: (i) commercial real estate – 40.6%; (ii) commercial and industrial loans – 10.3%; (iii) consumer loans (including residential equity lines of credit) – 16.8%; (iv) agricultural loans (including agricultural real estate loans) – 13.2%; (v) residential real estate – 13.3%; and (vi) construction and land development – 5.8% .

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, public funds sweep, savings, time deposit and retirement accounts, as well as remote deposit, telephone and mobile banking and internet banking with bill-pay options. Interest bearing deposits include high yield sweep accounts designed for our commercial customers and for public entities such as municipalities. In addition we offer a premium interest bearing checking account for our consumer customers. As of December 31, 2011, the Bank had 29,359 deposit accounts with balances totaling approximately $392 million, compared to 30,372 deposit accounts with balances totaling approximately $425 million at December 31, 2010. We attract deposits through our customer-oriented product mix, competitive pricing, convenient locations, extended hours, remote deposit operations and drive-up banking, all provided with a high level of customer service.

Most of our deposits are attracted from individuals, business-related sources and smaller municipal entities. This mix of deposit customers resulted in a relatively modest average deposit balance of approximately $13,000 at December 31, 2011. However, it 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 also offer a variety of other products and services to complement the lending and deposit services previously reviewed. These include cashier’s checks, bank-by-mail, ATMs, night depository, safe deposit boxes, direct deposit, electronic funds transfers, on-line banking, remote deposit, mobile 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 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.

Through our offering of a Remote Deposit product our customers are able to make non-cash deposits remotely from their physical location. With this product, we have extended our service area and can now meet the deposit needs of customers who may not be located within a convenient distance of one of our branch offices.

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Additionally, the Bank has devoted a substantial amount of time and capital to the improvement of existing Bank services, during 2009 we replaced our on-line banking service with a new state of the art product that greatly expands the features available to our customers. In addition we utilized this platform to add mobile banking services during the first quarter of 2010. During 2010 Plumas Bank began offering a new Green Account which promotes protecting the environment, reducing clutter and making life simpler for the customer through technological advancements such as eStatements, online banking, and debit card usage while providing the customer with the opportunity to grow their savings through monthly monetary rewards for green behavior. In 2011, we introduced a new product for our larger business customers which use repurchase agreements as an alternative to interest-bearing deposits. The balance in this product at December 31, 2011 was $8.3 million. Interest paid on this product is similar to that which can be earned on the Bank’s premium money market account; however, these are not deposits and are not FDIC insured. During the first quarter of 2012 we replaced our ATMs with new state of the art machines that are capable of accepting check and cash deposits without a deposit envelope.

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.

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 and with the opening of our Auburn commercial lending office, 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 are 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, encourage job growth and support community economic development. Types of loans offered range from personal and commercial loans to real estate, construction, agricultural, and government-guaranteed community infrastructure loans. Many banking decisions are made locally with the goal of maintaining customer satisfaction through the timely delivery of high quality products and services.

Capital Purchase Program—TARP—Preferred Stock and Stock Warrant. On January 30, 2009 the Company entered into a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued and sold (i) 11,949 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 237,712 shares of the Company’s common stock, no par value (the “Common Stock”), for an aggregate purchase price of $11,949,000 in cash.

The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Company may redeem the Series A Preferred Stock at its liquidation preference ($1,000 per share) plus accrued and unpaid dividends under the American Recovery and Reinvestment Act of 2009, subject to the Treasury’s consultation with the Company’s appropriate federal regulator.

The Warrant has a 10-year term and was immediately exercisable with an exercise price, subject to antidilution adjustments, equal to $7.54 per share of the Common Stock. Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant.

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Prior to January 30, 2012, unless the Company has redeemed the Series A Preferred Stock, or the Treasury has transferred the Series A Preferred Stock to a third party, the consent of the Treasury will be required for the Company to: (1) declare or pay any dividend or make any distribution on shares of the Common Stock (other than regular quarterly cash dividends of not more than $0.04 per share or regular semi-annual cash dividends of not more than $0.08 per share); or (2) redeem, purchase or acquire any shares of Common Stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Purchase Agreement. At the request of the Federal Reserve Bank of San Francisco (FRB), Plumas Bancorp suspended quarterly cash dividend payments on its Series A Preferred Stock. As of December 31, 2011 the amount of the arrearage on the dividend payments of the Series A Preferred Stock is $1,046,000 representing seven quarterly payments.

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. At the request of the FRB, Plumas Bancorp deferred its regularly scheduled quarterly interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities. As of December 31, 2011 the amount of the arrearage on the payments on the subordinated debt associated with the trust preferred securities is $569,000 representing seven quarterly payments.

Recent Developments. Effective in March, 2011, in connection with the Bank’s regularly scheduled 2010 Joint FDIC and California Department of Financial Institutions (“DFI”) examination, the Bank entered into a Consent Order (“Order”) with the FDIC and the DFI. The FDIC and DFI in the Order, required certain actions to be taken by the Bank including among others: continue to reduce certain classified asset balances, maintain strong capital ratios, improve lending policies and practices, and retain qualified management as stated in the terms of the Order. On February 15, 2012 the FDIC and DFI terminated this Order. While the Bank is no longer subject to an Order, the Bank has entered into an informal agreement with the FDIC and DFI which, among other things, requests that the Bank continue to maintain a Tier 1 Leverage Capital Ratio of 9% which is in excess of that required for well capitalized institutions and continue to reduce its level of classified asset balances that were outstanding as of September 30, 2011 to not more than 50% of Tier 1 Capital plus the allowance for loan losses. At December 31, 2011 this ratio was 68% and the Bank’s Tier 1 Leverage Capital Ratio was 9.8%.

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The lifting of the Order reflects the progress made by the Bank’s management and board of directors in reducing classified asset balances, increasing capital ratios, improving lending policies and practices, and retaining qualified management as stated in the terms of the Order.

On July 28, 2011 the Company entered into an agreement with the Federal Reserve Bank of San Francisco (the “FRB Agreement”). Under the terms of the FRB Agreement, Plumas Bancorp has agreed to take certain actions that are designed to maintain its financial soundness so that it may continue to serve as a source of strength to the Bank. Among other things, the FRB Agreement requires prior written approval related to the payment or taking of dividends and distributions, making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities, incurrence of debt, and the purchase or redemption of stock. In addition, the FRB Agreement requires Plumas Bancorp to submit, within 60 days of the FRB Agreement, a written statement of Plumas Bancorp’s planned sources and uses of cash for debt service, operating expense and other purposes (“Cash Flow Statement”) for the remainder of 2011 and annually thereafter. The Company submitted the Cash Flow Statements within the required time frames.

See Note 2 – “Regulatory Matters” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K for additional information related to the Order and FRB Agreement.

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, 2011 approximately 81% 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 or other 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 competitive pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues. 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. 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.

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Currently, within the Bank’s branch service area there are 55 banking branch offices of competing institutions, including 30 branches of 8 major banks. As of June 30, 2011, the Federal Deposit Insurance Corporation (FDIC) estimated the Bank’s market share of insured deposits within the communities it serves to be as follows: Chester 68%, Quincy 59%, Portola 55%, Alturas 47%, Fall River Mills 36%, Susanville 33%, Kings Beach 32%, Truckee 15%, Tahoe City 5%, Redding less than 1% and 100% in Greenville. Redding is the location of our most recently opened branch, which became operational in June 2007.

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, mobile, 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 approach appears to be well-received by our customers who appreciate a more personal and customer-oriented environment in which to conduct their financial transactions. To meet the needs of customers who prefer to bank electronically, we offer telephone banking, mobile banking, remote deposit, and personal computer and internet banking with bill payment capabilities. This high tech and high touch approach allows the customers to tailor their access to our services based on their particular preference.

Employees. At December 31, 2011, the Company and its subsidiary employed 156 persons. On a full-time equivalent basis, we employed 142 persons. None of the Company’s employees are represented by a labor union, and management considers its relations with employees to be good.

Code of Ethics. The Board of Directors has adopted a code of business conduct and ethics for directors, officers (including Plumas Bancorp’s principal executive officer and principal financial officer) and financial personnel, known as the Corporate Governance Code of Ethics. This Code of Ethics Policy is available on Plumas Bancorp’s website at www.plumasbank.com. Shareholders may request a free copy of the Code of Ethics Policy from Plumas Bancorp, Ms. Elizabeth Kuipers, Investor Relations, 35 S. Lindan Avenue, Quincy, California 95971.

Supervision and Regulation

General. We are extensively regulated under federal and state law. These laws and regulations are generally intended to protect depositors and customers, not shareholders. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. Any change in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. We cannot accurately predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, or new federal or state legislation may have in the future. The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the Securities and Exchange Commission. As a listed company on NASDAQ, the Company is subject to NASDAQ rules for listed companies.

Holding Company Regulation. We are a registered bank holding company under the Bank Holding Company Act, and are subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company, we are examined by and file reports with the Federal Reserve. The Federal Reserve expects a bank holding company to serve as a source of financial and managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support the subsidiary bank.

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Federal and State Bank Regulation. The Bank, as a state chartered bank with deposits insured by the FDIC, is primarily subject to the supervision and regulation of the California Department of Financial Institutions, the FDIC, and the Consumer Financial Protection Bureau (CFPB). These agencies may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices. The California Department of Financial Institutions regularly examines the Bank or participates in joint examinations with the FDIC.

The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or new facility. A less than “Satisfactory” rating would result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. As of the most recent CRA examination the Bank’s CRA rating was “Satisfactory.”

Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit 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 persons not affiliated with the bank, and must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions.

The Federal Reserve Act and related Regulation W limit the amount of certain loan and investment transactions between the Bank and its affiliates, require certain levels of collateral for such loans, and limit the amount of advances to third parties that may be collateralized by the securities of the Company or its subsidiaries. Regulation W requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Company and its subsidiaries have adopted an Affiliate Transactions Policy and have entered into various affiliate agreements in compliance with Regulation W.

The Federal Reserve and the FDIC have adopted non-capital safety and soundness standards for institutions. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that it will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. We believe that the Bank is in compliance with these standards.

Federal Deposit Insurance. Substantially all deposits with the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a bank’s capital level and supervisory ratings. The base assessment rates under the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”), enacted in February 2006, ranged from $0.02 to $0.40 per $100 of deposits annually. The FDIC could increase or decrease the assessment rate schedule five basis points (annualized) higher or lower than the base rates in order to manage the DIF to prescribed statutory target levels.

In December 2008, the FDIC adopted a rule that amended the system for risk-based assessments and changed assessment rates in attempt to restore targeted reserve ratios in the DIF. Effective January 1, 2009, the risk-based assessment rates were uniformly raised by seven basis points (annualized). On February 27, 2009, the FDIC further modified the risk-based assessment system, effective April 1, 2009, to effectively require larger risk institutions to pay a larger share of the assessment. Characteristics of larger risk institutions include a significant reliance on secured liabilities or brokered deposits, particularly when combined with rapid asset growth. The rule also provided incentives for institutions to hold long-term unsecured debt and, for smaller institutions, high levels of Tier 1 capital. The initial base assessment rates range from $0.12 to $0.45 per $100 of deposits annually. The Bank’s assessment rate for 2010 fell at the middle of this range.

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After potential adjustments related to unsecured debt, secured liabilities and brokered deposit balances, the final total assessment rates range from $0.07 to $0.775 per $100 of deposits annually. Initial base assessment rates for well managed, well capitalized institutions ranged from $0.12 to $0.16 per $100 of deposits annually.

In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the new restoration plan, the FDIC will forego the uniform three-basis point increase in initial assessment rates schedules for January 1, 2011 and maintain the current schedule of assessment rates. At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, increase or decrease assessment rates. On February 7, 2011, the FDIC adopted a final rule modifying the risk-based assessment system from a domestic deposit base to a scorecard based assessment system, effective April 1, 2011. Effective as of April 1, 2011, the Bank was categorized as a small institution as the Bank has less than $10 billion in assets. The initial base assessment rates range from five to 35 basis points. After potential adjustments related to unsecured debt and brokered deposit balances, the final total assessment rates range from 2.5 to 45 basis points. Initial base assessment rates for large institutions ranged from five to 35 basis points. The Bank’s assessment rate for 2011 fell at the middle of this range. Further increases in the assessment rate could have a material adverse effect on our earnings, depending upon the amount of the increase.

In 2006, the Reform Act increased the deposit insurance limit for certain retirement plan deposit accounts from $100,000 to $250,000. The basic insurance limit for other deposits, including individuals, joint account holders, businesses, government entities, and trusts, remained at $100,000. The Reform Act also provided for the merger of the two deposit insurance funds administered by the FDIC, the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”), into the DIF. On October 3, 2008, the EESA temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. While the basic deposit insurance limit was to have returned to $100,000 after December 31, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the standard maximum deposit insurance amount to $250,000 per depositor through December 31, 2013, and the enactment of the Dodd-Frank Act permanently raised the current standard maximum federal deposit insurance amount from $100,000 to $250,000 per qualified account.

In November 2008, the FDIC approved the final ruling establishing the Transaction Account Guarantee Program (“TAGP”) as part of the Temporary Liquidity Guarantee Program (“TLGP”). Under this program, all non-interest bearing transaction accounts became fully guaranteed by the FDIC for the entire amount in the account. This unlimited coverage also extended to NOW (interest bearing deposit accounts) earning an interest rate no greater than 0.50% and all IOLTAs (lawyers’ trust accounts). TAGP was extended with the enactment of the Dodd-Frank Act provides for unlimited deposit insurance for noninterest bearing transactions accounts (excluding NOW, but including IOLTAs) expiring on December 31, 2012.

The FDIC may terminate the deposit insurance of any insured depository institution if it determines that the institution has engaged in or is engaging in unsafe and unsound banking practices, is in an unsafe or unsound condition or has violated any applicable law, regulation or order or any condition imposed in writing by, or pursuant to, any written agreement with the FDIC. The termination of deposit insurance for the Bank could have a material adverse effect on our financial condition and results of operations due to the fact that the Bank’s liquidity position would likely be affected by deposit withdrawal activity.

Capital Adequacy. The FDIC has 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%.

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In addition to the risk-based guidelines, the FRB requires 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 FRB and/or DFI to ensure the maintenance of required capital levels. As discussed above, the Company and the Bank are required to maintain certain levels of capital, as is the Bank. The regulatory capital guidelines as well as the actual capitalization for the Bank and Bancorp as of December 31, 2011 follow:

		September 30,			September 30,			September 30,			September 30,
	Requirement for the Bank to be:
	Adequately Capitalized			Well Capitalized			Plumas Bank			Plumas Bancorp
Tier 1 leverage capital ratio		4.0	%		5.0	%		9.8	%		9.8	%
Tier 1 risk-based capital ratio		4.0	%		6.0	%		13.7	%		13.7	%
Total risk-based capital ratio		8.0	%		10.0	%		15.0	%		15.0	%

Management believes that the Company and the Bank met all of the above capital adequacy requirements as of December 31, 2011 and 2010.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires federal banking regulators to take “prompt corrective action” with respect to a capital-deficient institution, including requiring a capital restoration plan and restricting certain growth activities of the institution. The Company could be required to guarantee any such capital restoration plan required of the Bank if the Bank became undercapitalized. Pursuant to FDICIA, regulations were adopted defining five capital levels: well capitalized, adequately capitalized, undercapitalized, severely undercapitalized and critically undercapitalized. Under the regulations, the Bank is considered “Well Capitalized” as of December 31, 2011.

If capital falls below the minimum levels established by these regulatory capital guidelines, a holding company or a bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities.

Banks with capital ratios below the required minimums are subject to certain administrative actions, including prompt corrective action, the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing.

Effects of Government Monetary Policy. Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, through its open market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.

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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 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 communities.

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.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), signed into law in July, 2010, will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act creates of a new interagency council, the Financial System Oversight Council that is charged with identifying and monitoring the systemic risk to the U.S. economy posed by systemically significant, large financial companies, including bank holding companies and non-bank financial companies. The Office of Thrift Supervision will be eliminated and its powers distributed among the Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

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The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.

The legislation also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also repeals the prohibition on payment of interest on demand deposits.

Section 613 of the Dodd-Frank Act eliminates interstate branching restrictions that were implemented as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, and removes many restrictions on de novo interstate branching by national and state-chartered banks. The FDIC and the OCC now have authority to approve applications by insured state nonmember banks and national banks, respectively, to establish de novo branches in states other than the bank’s home state if “the law of the State in which the branch is located, or is to be located, would permit establishment of the branch, if the bank were a State bank chartered by such State.” The enactment of this section may significantly increase interstate banking by community banks in western states, where barriers to entry were previously high.

Many of the provisions of the Dodd-Frank Act will not take effect for at least a year, and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those provisions relating to the new Consumer Financial Protection Bureau, will increase the Bank’s operating and compliance costs as it is likely that the Bank’s existing regulatory agencies will adopt the same or similar consumer protections as the new Consumer Financial Protection Bureau will adopt.

On June 21, 2010, the federal banking agencies issued final guidance on incentive compensation. The final guidance is largely unchanged from the FRB’s preliminary guidance published in 2009, with the exception of a few adjustments/clarifications in response to feedback the FRB received during the open comment period. The guidance became effective on June 25, 2010 (the date published in the Federal Register, and applies to all banks. Except for the largest banking organizations, enforcement of this guidance will be handled through the supervisors’ regular risk-focused examination process. The guidance is principles-based, rather than prescriptive, and also identifies expectations of large banking organizations that go beyond what will be expected of community banks, and emphasizes that the application of the guidance should be scaled appropriately for the complexity of the organization and the extent to which incentive arrangements are utilized. The employees covered by the final guidance are senior executives and others who are responsible for oversight of the organization’s firm-wide activities or material business lines; individual employees, including non-executive employees, whose activities may expose the organization to material amounts of risk; and groups of employees who are subject to the same or similar incentive compensation arrangements and who, in the aggregate, may expose the organization to material amounts of risk, even if no individual employee is likely to expose the organization to material risk. The guidance provides for three principles for safe and sound incentive compensation arrangements:

• Balanced Risk-Taking: Incentive compensation arrangements should balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risks;

• Compatibility with Effective Controls and Risk-Management: A banking organization’s risk-management processes and internal controls should reinforce and support the development and maintenance of balanced incentive compensation arrangements;

• Strong Corporate Governance: Banking organizations should have strong and effective corporate governance to help ensure sound compensation practices, including active and effective oversight by the board of directors.

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The Electronic Funds Transfer Act (the “EFTA”) provides a basic framework for establishing the rights, liabilities, and responsibilities of consumers who use electronic funds transfer (“EFT”) systems. The EFTA is implemented by the Federal Reserve’s Regulation E, which governs transfers initiated through ATMs, point-of-sale terminals, payroll cards, automated clearinghouse (“ACH”) transactions, telephone bill-payment plans, or remote banking services. Regulation E was amended in January 2010 to require consumers to opt in (affirmatively consent) to participation in the Bank’s overdraft service program for ATM and one-time debit card transactions before overdraft fees may be assessed on the consumer’s account. Notice of the opt-in right must be provided to all existing and new customers who are consumers, and the customer’s affirmative consent must be obtained, before charges may be assessed on the consumer’s account for paying such overdrafts.

The new rule provides bank customers with an ongoing right to revoke consent to participation in an overdraft service program for ATM and one-time debit card transactions, as opposed to being automatically enrolled in such a program. The new rule also prohibits banks from conditioning the payment of overdrafts for checks, ACH transactions, or other types of transactions that overdraw the consumer’s account on the consumer’s opting into an overdraft service for ATM and one-time debit card transactions. For customers who do not affirmatively consent to overdraft service for ATM and one-time debit card transactions, a bank must provide those customers with the same account terms, conditions, and features that it provides to consumers who do affirmatively consent, except for the overdraft service for ATM and one-time debit card transactions.

The mandatory compliance date for the Regulation E amendments is July 1, 2010 provided that the Bank may continue to assess overdraft service fees or charges on existing customer accounts prior to August 15, 2010, without obtaining the consumer’s affirmative consent. The Bank’s compliance with the new Regulation E amendments may have an impact on the Bank’s revenue from overdraft service fees and non-sufficient funds (“NSF”) charges.

In May 2009 the Helping Families Save Their Homes Act of 2009 was enacted to help consumers avoid mortgage foreclosures on their homes through certain loss mitigation actions including special forbearance, loan modification, pre-foreclosure sale, deed in lieu of foreclosure, support for borrower housing counseling, subordinate lien resolution, and borrower relocation. The new law permits the Secretary of Housing and Urban Development (HUD), for mortgages either in default or facing imminent default, to: (1) authorize the modification of such mortgages; and (2) establish a program for payment of a partial claim to a mortgagee who agrees to apply the claim amount to payment of a mortgage on a 1- to 4-family residence. In implementing the law, the Secretary of HUD is authorized to (1) provide compensation to the mortgagee for lost income on monthly mortgage payments due to interest rate reduction; (2) reimburse the mortgagee from a guaranty fund in connection with activities that the mortgagee is required to undertake concerning repayment by the mortgagor of the amount owed to HUD; (3) make payments to the mortgagee on behalf of the borrower, under terms defined by HUD; and (4) make mortgage modification with terms extended up to 40 years from the modification date. The new law also authorizes the Secretary of HUD to: (1) reassign the mortgage to the mortgagee; (2) act as a Government National Mortgage Association (GNMA, or Ginnie Mae) issuer, or contract with an entity for such purpose, in order to pool the mortgage into a Ginnie Mae security; or (3) resell the mortgage in accordance with any program established for purchase by the federal government of insured mortgages. The new law also amends the Foreclosure Prevention Act of 2008, with respect to emergency assistance for the redevelopment of abandoned and foreclosed homes (neighborhood stabilization), to authorize each state that has received certain minimum allocations and has fulfilled certain requirements, to distribute any remaining amounts to areas with homeowners at risk of foreclosure or in foreclosure without regard to the percentage of home foreclosures in such areas.

Also in May 2009, the Credit Card Act of 2009 was enacted to help consumers and ban certain practices of credit card issuers. The new law allows interest rate hikes on existing balances only under limited conditions, such as when a promotional rate ends, there is a variable rate or if the cardholder makes a late payment. Interest rates on new transactions can increase only after the first year. Significant changes in terms on accounts cannot occur without 45 days’ advance notice of the change. The new law bans raising interest rates on customers based on their payment records with other unrelated credit issuers (such as utility companies and other creditors) for existing credit card balances, though card issuers would still be allowed to use universal default on future credit card balances if they give at least 45 days’ advance notice of the change. The new law allows consumers to opt out of certain significant changes in terms on their accounts. Opting out means cardholders agree to close their accounts and pay off the balance under the old terms. They have at least five years to pay the balance. Credit card issuers will be banned from issuing credit cards to anyone under 21, unless they have adult co-signers on the accounts or can show proof they have enough income to repay the card debt.

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The new law requires card issuers to give card account holders “a reasonable amount of time” to make payments on monthly bills. That means payments would be due at least 21 days after they are mailed or delivered. Credit card issuers would no longer be able to set early morning or other arbitrary deadlines for payments. When consumers have accounts that carry different interest rates for different types of purchases payments in excess of the minimum amount due must go to balances with higher interest rates first. Consumers must “opt in” to over-limit fees. Those who opt out would have their transactions rejected if they exceed their credit limits, thus avoiding over-limit fees. Fees charged for going over the limit must be reasonable. Finance charges on outstanding credit card balances would be computed based on purchases made in the current cycle rather than going back to the previous billing cycle to calculate interest charges. Fees on credit cards cannot exceed 25 percent of the available credit limit in the first year of the card.

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted to provide stimulus to the struggling US economy. ARRA authorizes spending of $787 billion, including about $288 billion for tax relief, $144 billion for state and local relief aid, and $111 billion for infrastructure and science. In addition, ARRA includes additional executive compensation restrictions for recipients of funds from the US Treasury under the Troubled Assets Relief Program of the Emergency Economic Stimulus Act of 2008 (“EESA”).

EESA was amended by ARRA to provide additional incentive compensation restrictions for financial institutions receiving TARP funds and also require additional corporate governance provisions with respect to limiting golden parachutes, lavish expenditures and requiring officer certifications of compliance and clawbacks for improperly earned incentive compensation at such institutions.

In addition, EESA as amended by ARRA provides that for any TARP recipient, its annual meeting materials shall include a nonbinding shareholder approval proposal of executive compensation for shareholders to vote.

ARRA also provides $730 million to the SBA and makes changes to the agency’s lending and investment programs so that they can reach more small businesses that need help. The funding includes:

• $375 million for temporarily eliminating fees on SBA-backed loans and raising SBA’s guarantee percentage on some loans to 90 percent.

• $255 million for a new loan program to help small businesses meet existing debt payments

• $30 million for expanding SBA’s Microloan program, enough to finance up to $50 million in new lending and $24 million in technical assistance grants to microlenders.

In October 2008, the President signed the Emergency Economic Stabilization Act of 2008 (“EESA”), in response to the global financial crisis of 2008 authorizing the United States Secretary of the Treasury with authority to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, under the Troubled Assets Relief Program (“TARP”) and make capital injections into banks under the Capital Purchase Program. EESA gives the government the unprecedented authority to buy troubled assets on balance sheets of financial institutions under the Troubled Assets Relief Program. Some of the other provisions of EESA are as follows:

• accelerated from 2011 to 2008 the date that the Federal Reserve Bank could pay interest on deposits of banks held with the Federal Reserve to meet reserve requirements;

• to the extent that the U. S. Treasury purchases mortgage securities as part of TARP, the Treasury shall implement a plan to minimize foreclosures including using guarantees and credit enhancements to support reasonable loan modifications, and to the extent loans are owned by the government to consent to the reasonable modification of such loans;

• limits executive compensation for executives for TARP participating financial institutions;

• extends the mortgage debt forgiveness provision of the Mortgage Forgiveness Debt Relief Act of 2007 by three years (2012) to ease the income tax burden on those involved with certain foreclosures; and

On January 1, 2012, SB 664 (Committee on Banking and Financial Institutions, Chapter 243, Statutes of 2011) became operative. While some substantive changes were included in this legislation due to the passage of the Dodd-Frank federal legislation and some technical corrections that resulted from earlier amendments to the Code, the majority of the work involved in SB 664 was to reorder the section numbering in the Code. Among other things, the law requires a bank that establishes a branch office in this state in accordance with the National Bank Act, as amended by the Dodd-Frank Act to provide a specified notice to the Commissioner of DFI within 10 days of the establishment, relocation, or redesignation of offices.

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In California, the enactment of AB329 in 2009, the Reverse Mortgage Elder Protection Act of 2009 prohibits a lender or any other person who participates in the origination of the mortgage from participation in, being associated with, or employing any party that participates in or is associated with any other financial or insurance activity or referring a prospective borrower to anyone for the purchase of other financial or insurance products; and imposes certain disclosure requirements on the lender.

The enactment of AB1160 in 2009, requires a supervised financial institution in California that negotiates primarily in any of a number of specified languages in the course of entering into a contract or agreement for a loan or extension of credit secured by residential real property, to deliver, prior to the execution of the contract or agreement, and no later than 3 business days after receiving the written application, a specified form in that language summarizing the terms of the contract or agreement; provides for administrative penalties for violations; and requires the California Department of Corporations and the Department of Financial Institutions to create a form for providing translations and make it available in Spanish, Chinese, Tagalog, Vietnamese and Korean. The statute becomes operative on July 1, 2010, or 90 days after issuance of the form, whichever occurs later.

The enactment of AB 1291 in 2009 makes changes to the California Unclaimed Property Law including (among other things): allowing electronic notification to customers who have consented to electronic notice; requiring that notices contain certain information and allow the holder to provide electronic means to enable the owner to contact the holder in lieu of returning the prescribed form to declare the owner’s intent; authorizing the holder to give additional notices; and requiring, beginning January 1, 2011, a banking or financial organization to provide a written notice regarding escheat at the time a new account or safe deposit box is opened.

The enactment of SB306 makes specified changes to clarify existing law related to filing a notice of default on residential real property in California, including (among other things): clarifying that the provisions apply to mortgages and deeds of trust recorded from January 1, 2003 through December 31, 2007, secured by owner-occupied 3 4 residential real property containing no more than 4 dwelling units; revising the declaration to be filed with the notice of default; specifying how the loan servicers have to maximize net present value under their pooling and servicing agreements applies to certain investors; specifying how and when the notice to residents of property subject to foreclosure is to be mailed; and extending the time during which the notice of sale must be recorded from 14 to 20 days. The bill also makes certain changes related to short-pay agreements and short-pay demand statements.

On February 20, 2009, Governor Schwarzenegger signed ABX2 7 and SBX2 7, which established the California Foreclosure Prevention Act. The California Foreclosure Prevention Act modifies the foreclosure process to provide additional time for borrowers to work out loan modifications while providing an exemption for mortgage loan servicers that have implemented a comprehensive loan modification program. Civil Code Section 2923.52 requires an additional 90 day period beyond the period already provided before a Notice of Sale can be given in order to allow all parties to pursue a loan modification to prevent foreclosure of loans meeting certain criteria identified in that section.

A mortgage loan servicer who has implemented a comprehensive loan modification program may file an application for exemption from the provisions of Civil Code Section 2923.52. Approval of this application provides the mortgage loan servicer an exemption from the additional 90-day period before filing the Notice of Sale when foreclosing on real property covered by the new law.

Recent Accounting Pronouncements

See Note 3 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K for information related to recent accounting pronouncements.

ITEM 1A. RISK FACTORS

As a smaller reporting company we are not required to provide the information required by this item.

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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 eleven depository branches, ten are owned and one is leased. The Company also leases one lending office and one administrative office, and owns four administrative facilities.

Owned Properties
35 South Lindan Avenue	32 Central Avenue	80 W. Main St.
Quincy, California (1)	Quincy, California (1)	Quincy, California (3)
424 N. Mill Creek	336 West Main Street	120 North Pine Street
Quincy, California (1)	Quincy, California	Portola, California
43163 Highway 299E	121 Crescent Street	255 Main Street
Fall River Mills, California	Greenville, California	Chester, California
510 North Main Street	3000 Riverside Drive	8475 North Lake Boulevard
Alturas, California	Susanville, California	Kings Beach, California
11638 Donner Pass Road	2175 Civic Center Drive
Truckee, California	Redding, California
Leased Properties
243 North Lake Boulevard	1005 Terminal Way, Ste. 246	470 Nevada St., Suite 108
Tahoe City, California	Reno, Nevada (1)	Auburn, California (2)

(1) Non-branch administrative or credit administrative offices.

(2) Commercial lending office.

(3) Leased to a third party.

Total rental expenses under all leases, including premises, totaled $150,000, $20,000 and $317,000, in 2011, 2010 and 2009 respectively. The decline in rental expense during 2010 resulted from the purchase of our Redding branch building on March 31, 2010. Previously we had leased this building. Under the terms of the lease agreement we were provided free rent for a period of time; however, in accordance with accounting principals we recognized monthly rent expense equal to the total payments required under the lease dividend by the term of the lease in months. At the time of the purchase we reversed this accrual recognizing a $184 thousand reduction in rental expense. The expiration dates of the leases vary, with the first such lease expiring during 2012 and the last such lease expiring during 2015.

Future minimum lease payments in thousands of dollars are as follows:

		September 30,
Year Ending December 31,
2012	$	147,000
2013		75,000
2014		51,000
2015		51,000
	$	324,000

18

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. MINE SAFETY DISCLOSURES

Not applicable.

19

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, 2011, there were 4,776,339 shares of the Company’s stock outstanding held by approximately 1,640 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.

		September 30,		September 30,		September 30,
	Common
Quarter	Dividends		High		Low
4th Quarter 2011		—	$	2.92	$	1.63
3rd Quarter 2011		—	$	2.72	$	1.46
2nd Quarter 2011		—	$	2.85	$	1.94
1st Quarter 2011		—	$	4.00	$	1.85
4th Quarter 2010		—	$	3.09	$	1.92
3rd Quarter 2010		—	$	3.22	$	2.53
2nd Quarter 2010		—	$	3.39	$	2.46
1st Quarter 2010		—	$	3.78	$	2.21

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.

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 and in accordance with regulatory restrictions, if any, review the appropriateness of a cash dividend payment. No common cash dividends were paid in 2010 or 2011 and none are anticipated to be paid in 2012.

The Company is subject to various restrictions on the payment of dividends. See Note 2 “Regulatory Matters” and Note 13 “Shareholders’ Equity – Dividend Restrictions” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K.

On January 30, 2009, under the Capital Purchase Program, the Company entered into a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued and sold (i) 11,949 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Shares”) and (ii) a ten-year warrant to purchase up to 237,712 shares of the Company’s common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $7.54 per share, for an aggregate purchase price of $11,949,000 in cash. The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. As described in the following paragraph the Purchase Agreement contains provisions that restrict the payment of dividends on Plumas Bancorp common stock and restrict the Company’s ability to repurchase Plumas Bancorp common stock.

Under the Purchase Agreement, prior to January 30, 2012, unless the Company has redeemed the Preferred Shares, or the Treasury has transferred the Preferred Shares to a third party, the consent of the Treasury will be required for the Company to: (1) declare or pay any dividend or make any distribution on shares of the Common Stock (other than regular quarterly cash dividends of not more than $0.04 per share or regular semi-annual cash dividends of not more than $0.08 per share); or (2) redeem, purchase or acquire any shares of Common Stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Purchase Agreement.

20

Securities Authorized for Issuance under Equity Compensation Plans. The following table sets forth securities authorized for issuance under equity compensation plans as of December 31, 2011.

		September 30,		September 30,		September 30,
	Number of securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category	(a)		(b)		(c)
Equity compensation plans approved by security holders		482,780	$	8.74		0
Equity compensation plans not approved by security holders		None		Not Applicable		None
Total		482,780	$	8.74		0

For additional information related to the above plans see Note 13 of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K.

Issuer Purchases of Equity Securities. There were no purchases of Plumas Bancorp common stock by the Company during 2011.

21

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.

		September 30,			September 30,			September 30,			September 30,			September 30,
	At or for the year ended December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands except per share information)
Statement of Operations
Interest income	$	18,668		$	20,680		$	22,836		$	25,440		$	30,284
Interest expense		1,848			3,147			3,655			5,364			8,536
Net interest income		16,820			17,533			19,181			20,076			21,748
Provision for loan losses		3,500			5,500			14,500			4,600			800
Noninterest income		7,162			8,468			5,664			5,091			5,448
Noninterest expense		19,246			19,141			26,266			20,475			19,671
Provision for (benefit from) income taxes		295			389			(6,775	)		(212	)		2,502
Net income (loss)	$	941		$	971		$	(9,146	)	$	304		$	4,223
Preferred Stock dividends and discount accretion		684			684			628			—			—
Net income (loss) available to common shareholders	$	257		$	287		$	(9,774	)	$	304		$	4,223
Balance sheet (end of period)
Total assets	$	455,349		$	484,480		$	528,117		$	457,175		$	453,115
Total loans	$	293,865		$	314,200		$	332,678		$	366,017		$	352,949
Allowance for loan losses	$	6,908		$	7,324		$	9,568		$	7,224		$	4,211
Total deposits	$	391,140		$	424,887		$	433,255		$	371,493		$	391,940
Total shareholders’ equity	$	39,634		$	37,988		$	38,231		$	35,437		$	37,139
Balance sheet (period average)
Total assets	$	467,354		$	500,082		$	490,000		$	447,720		$	464,974
Total loans	$	302,841		$	323,906		$	354,482		$	355,416		$	353,384
Total deposits	$	407,982		$	430,777		$	403,896		$	382,279		$	403,772
Total shareholders’ equity	$	39,244		$	38,941		$	43,839		$	37,343		$	37,041
Capital ratios
Leverage ratio		9.8	%		8.9	%		7.9	%		9.8	%		10.0	%
Tier 1 risk-based capital		13.7	%		12.7	%		10.4	%		11.0	%		11.6	%
Total risk-based capital		15.0	%		13.9	%		11.6	%		12.2	%		12.7	%
Asset quality ratios
Nonperforming loans/total loans		5.73	%		8.07	%		4.30	%		7.31	%		0.75	%
Nonperforming assets/total assets		5.60	%		7.07	%		4.84	%		6.78	%		0.70	%
Allowance for loan losses/total loans		2.35	%		2.33	%		2.88	%		1.97	%		1.19	%
Net loan charge-offs	$	3,916		$	7,744		$	12,156		$	1,587		$	506
Performance ratios
Return (loss) on average assets		0.20	%		0.19	%		(1.87	)%		0.07	%		0.91	%
Return (loss) on average common equity		0.9	%		1.1	%		(29.5	)%		0.8	%		11.4	%
Return (loss) on average equity		2.4	%		2.5	%		(20.9	)%		0.8	%		11.4	%
Net interest margin		4.08	%		4.24	%		4.52	%		4.99	%		5.18	%
Loans to deposits		75.1	%		73.9	%		76.8	%		98.5	%		90.1	%
Efficiency ratio		80.3	%		73.6	%		105.7	%		81.4	%		72.3	%
Per share information
Basic earnings (loss)	$	0.05		$	0.06		$	(2.05	)	$	0.06		$	0.85
Diluted earnings (loss)	$	0.05		$	0.06		$	(2.05	)	$	0.06		$	0.84
Common cash dividends	$	0.00		$	0.00		$	0.00		$	0.24		$	0.30
Dividend payout ratio		—	%		—	%		—	%		400	%		35.3	%
Book value per common share	$	5.83		$	5.51		$	5.58		$	7.42		$	7.63
Common shares outstanding at period end		4,776,339			4,776,339			4,776,339			4,775,339			4,869,130

22

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 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.

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 internal control procedures that are intended to ensure valuation methods are applied in an environment that is designed and operating effectively 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 is an estimate of credit losses inherent in the Company’s loan portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are collectively evaluated for impairment.

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 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.

Other Real Estate Owned. Other real estate owned (OREO) represents properties acquired through foreclosure or physical possession. OREO is initially recorded at fair value less costs to sell when acquired. Write-downs to fair value at the time of transfer to OREO is charged to allowance for loan losses. Subsequent to foreclosure, we periodically evaluate the value of OREO held for sale and record a valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value is based on our assessment of information available to us at the end of a reporting period and depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual properties. Our evaluation of these factors involves subjective estimates and judgments that may change.

Income Taxes. The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.

23

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. A valuation allowance is recognized if, based on the weight of available evidence, management believes it is more likely than not that some portion or all of the deferred tax assets will not 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.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

The following discussion is designed to provide a better understanding of significant trends related to the Company’s financial condition, results of operations, liquidity and capital. It pertains to the Company’s financial condition, changes in financial condition and results of operations as of December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011. 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 recorded net income of $941 thousand for the year ended December 31, 2011, a slight decrease from net income of $971 thousand during the year ended December 31, 2010 but up $10.1 million over 2009’s net loss of $9.1 million. Excluding a $1.4 million gain ($0.8 million net of tax) in 2010 on sale of the Bank’s merchant card portfolio, net income would have increased by $0.8 million over 2010.

Net interest income declined by $713 thousand from $17.5 million during 2010 to $16.8 million for the year ended December 31, 2011. This decrease in net interest income was mostly related to a $21 million decline in average loan balances. During the year ended December 31, 2011 non-interest income decreased by $1.3 million to $7.2 million, from $8.5 million during the year ended December 31, 2010. This decrease was related to a $1.4 million gain on the sale of our merchant processing portfolio in 2010. Additionally, gain on sale of investment securities declined by $494 thousand from $1.2 million in 2010 to $0.7 million for the year ended December 31, 2011. Partially offsetting these declines in non-interest income was an $884 thousand increase in gain on sale of government guaranteed loans from $1.1 million in 2010 to $1.9 million in 2011. Non-interest expense increased by $105 thousand from $19.1 million during the year ended December 31, 2010 to $19.2 million during the current twelve month period. While we have achieved savings in many categories of non-interest expense these were offset in the current year by an increase of $649 thousand in loss on sale of OREO.

The most significant expense reduction was a $2.0 million decrease in our provision for loan losses from $5.5 million for the year ended December 31, 2010 to $3.5 million during 2011. The $3.5 million provision recorded for the year ended December 31, 2011 primarily relates to net charge-offs during the twelve month period. We have experienced a $3.8 million decrease in net charge-offs during the comparison years. Net charge-offs declined from $7.7 million during 2010 to $3.9 million during the year ended December 31, 2011. Net charge-offs as percentage of average loans decreased significantly from 2.39% during the twelve months ended December 31, 2010 to 1.29% during the current year.

The provision for income taxes declined from $389 thousand in 2010 to $295 thousand during the year ended December 31, 2011.

Net income allocable to common shareholders decreased slightly from $287 thousand during the year ended December 31, 2010 to $257 thousand during 2011. Income allocable to common shareholders is calculated by subtracting dividends and discount amortized on preferred stock from net income.

24

Total assets at December 31, 2011 decreased $29.1 million, or 6% to $455 million. Decreases include $5.1 million in investment securities, $19.7 million in net loans, $1.6 million in cash and due from banks and $2.7 million in all other assets. Net loans decreased by 6% from $307 million at December 31, 2010 to $287 million at December 31, 2011. This decline in net loans was mostly related to normal pay downs and prepayments, loan charge-offs, real estate acquired through foreclosure and our continued efforts to reduce the level of construction and land development loan balances. At December 31, 2011 investment securities totaled $57.9 million compared to $63.0 million at December 31, 2010. Investment securities are composed of debt securities issued by agencies sponsored by the U.S. Government.

Total deposits were $391 million as of December 31, 2011, a decrease of $33.7 million, or 8%, from the December 31, 2010 balance of $425 million. The decline in deposits was primarily related to maturities from a higher rate promotional time deposit product we began offering in June, 2009 and continued to offer until April 30, 2010. Core deposit growth was strong with increases in non-interest bearing deposits of $14.1 million and savings deposits of $10.8 million. Non-interest bearing deposits as a percentage of total deposits increased from 26.3% at December 31, 2010 to 32.2% at December 31, 2011.

Shareholders’ equity as of December 31, 2011 increased by $1.6 million to $39.6 million up from $38.0 million as of December 31, 2010. This increase was mostly related to earnings during the period, the reversal of $524 thousand in accrued preferred stock dividends and an increase of $210 thousand in accumulated other comprehensive income/loss from a loss of $52 thousand at December 31, 2010 to accumulated other comprehensive income of $158 thousand at December 31, 2011.

The return on average assets was 0.20% for 2011, up from 0.19% for 2010. The return on average common equity was 0.9% for 2011, down from 1.1% for 2010.

25

Results of Operations

Net Interest Income

The following table presents, for the years indicated, the distribution of consolidated average assets, liabilities and shareholders’ equity. Average balances are based on average daily balances. 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:

		XXXX		XXXX		XXXX			XXXX		XXXX		XXXX			XXXX		XXXX		XXXX
	Year ended December 31,
	2011							2010							2009
	Average balance		Interest income/ expense		Rates earned/ paid			Average balance		Interest income/ expense		Rates earned/ paid			Average balance		Interest income/ expense		Rates earned/ paid
	(dollars in thousands)
Assets
Interest bearing deposits	$	49,628	$	124		0.25	%	$	19,808	$	48		0.24	%	$	6,298	$	15		0.24	%
Federal funds sold		—		—		—			—		—		—			12		—		—
Investment securities(1)		59,439		1,144		1.92			69,357		1,772		2.55			64,047		2,163		3.38
Total loans (2)(3)		302,841		17,400		5.75			323,906		18,860		5.82			354,482		20,658		5.83
Total earning assets		411,908		18,668		4.53	%		413,071		20,680		5.01	%		424,839		22,836		5.38	%
Cash and due from banks		13,204							38,945							27,372
Other assets		42,242							48,066							37,789
Total assets	$	467,354						$	500,082						$	490,000
Liabilities and shareholders’ equity
Interest bearing demand deposits	$	93,925		187		0.20	%	$	101,519		382		0.38	%	$	98,394		671		0.68	%
Money market deposits		40,050		115		0.29			42,514		221		0.52			41,844		346		0.83
Savings deposits		58,996		106		0.18			51,011		86		0.17			50,286		90		0.18
Time deposits		96,961		1,061		1.09			124,810		2,007		1.61			105,313		2,062		1.96
Short-term borrowings		—		—		—			986		5		0.51			24,292		80		0.33
Long-term borrowings		—		—		—			9,973		130		1.30			1,589		27		1.70
Junior subordinated debentures		10,310		326		3.16			10,310		312		3.03			10,310		371		3.60
Other		3,188		53		1.66			123		4		3.25			212		8		3.77
Total interest bearing liabilities		303,430		1,848		0.61	%		341,246		3,147		0.92	%		332,240		3,655		1.10	%
Noninterest bearing demand deposits		118,050							110,923							108,059
Other liabilities		6,630							8,972							5,862
Shareholders’ equity		39,244							38,941							43,839
Total liabilities and shareholders’ equity	$	467,354						$	500,082						$	490,000
Net interest income			$	16,820						$	17,533						$	19,181
Net interest spread (4)						3.92	%						4.09	%						4.28	%
Net interest margin (5)						4.08	%						4.24	%						4.52	%

(1) Interest income is reflected on an actual basis and is not computed on a tax-equivalent basis.

(2) Average nonaccrual loan balances of $20.2 million for 2011, $18.8 million for 2010 and $25.1 million for 2009 are included in average loan balances for computational purposes.

(3) Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan fees (costs) of $49,000, $(20,000) and $(214,000) for 2011, 2010 and 2009, respectively.

(4) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(5) Net interest margin is computed by dividing net interest income by total average earning assets.

26

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:

		Septem			Septem			Septem			Septem			Septem			Septem			Septem			Septem
	2011 compared to 2010 Increase (decrease) due to change in:												2010 compared to 2009 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:
Interest bearing deposits	$	72		$	2		$	2		$	76		$	32		$	—		$	1		$	33
Investment securities		(253	)		(437	)		62			(628	)		179			(527	)		(43	)		(391	)
Loans		(1,226	)		(250	)		16			(1,460	)		(1,782	)		(18	)		2			(1,798	)
Total interest income		(1,407	)		(685	)		80			(2,012	)		(1,571	)		(545	)		(40	)		(2,156	)
Interest-bearing liabilities:
Interest bearing demand deposits		(28	)		(180	)		13			(195	)		21			(301	)		(9	)		(289	)
Money market deposits		(13	)		(99	)		6			(106	)		5			(128	)		(2	)		(125	)
Savings deposits		13			6			1			20			1			(5	)		—			(4	)
Time deposits		(448	)		(641	)		143			(946	)		382			(369	)		(68	)		(55	)
Short-term borrowings		(5	)		(5	)		5			(5	)		(77	)		43			(41	)		(75	)
Long-term borrowings		(130	)		(130	)		130			(130	)		142			(6	)		(33	)		103
Junior subordinated debentures		—			14			—			14			—			(59	)		—			(59	)
Other borrowings		100			(2	)		(49	)		49			(3	)		(1	)		—			(4	)
Total interest expense		(511	)		(1,037	)		249			(1,299	)		471			(826	)		(153	)		(508	)
Net interest income	$	(896	)	$	352		$	(169	)	$	(713	)	$	(2,042	)	$	281		$	113		$	(1,648	)

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

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

(3) The mix change in net interest income represents the change in average balance multiplied by the change in rate.

2011 compared to 2010. Net interest income is the difference between interest income and interest expense. Net interest income, on a nontax-equivalent basis, was $16.8 million for the year ended December 31, 2011, a decline of $0.7 million, or 4.1%, from $17.5 million for 2010.

The overall change in net interest income was primarily a result of a decrease of $1.5 million in loan interest income and a decline of $628 thousand in interest income on investment securities. The decline in interest on loans was mostly related to a decline in average loans outstanding. Interest on investments securities declined related to a decrease in both yield and average balance. Partially offsetting these decreases in interest income was a decline in rates paid on the Company’s deposits and a decline in the average balance of time deposits, interest bearing demand deposits and long-term borrowings.

Interest income decreased $2.0 million, or 9.7%, to $18.7 million for the year ended December 31, 2011. Interest and fees on loans decreased by $1.5 million from $18.9 million for the year ended December 31, 2010 to $17.4 million for 2011. The average loan balances were $302.8 million for 2011, down $21.1 million from the $323.9 million for 2010. This decline in loans was mostly related to normal pay downs and prepayments, loan charge-offs, real estate acquired through foreclosure and our on-going efforts to reduce the level of construction and land development loan balances. The average yields on loans were 5.75% for 2011 down from the 5.82% for 2010.

Interest on investment securities decreased by $628 thousand resulting from a decrease in yield of 63 basis points and a decline in average investment securities of $9.9 million. The decline in yield is primarily related to the replacement of matured and sold investment securities with new investments with market yields below those which they replaced.

Interest income on other interest-earning assets, which totaled $124 thousand in 2011 and $48 thousand in 2010, relates to interest on cash balances held at the Federal Reserve.

Interest expense on deposits decreased by $1.2 million, or 46%, to $1.5 million for the twelve months ended December 31, 2011, down from $2.7 million in 2011. This decrease primarily relates to decreases in the average balance and rate paid on time deposits and a decline in the rate paid on demand deposit (NOW) and money market accounts.

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Interest on time deposits declined by $946 thousand. Average time deposits declined by $27.8 million from $124.8 million during 2010 to $97.0 million for the year ended December 31, 2011. The decrease in time deposits is mostly related to a promotional time deposit product we began offering in June, 2009 and continued to offer until April 30, 2010. These promotional time deposits have now fully matured. The average rate paid on these promotional deposits during 2011 was 2%. The average rate paid on time deposits decreased from 1.61% during 2010 to 1.09% during the current twelve month period. This decrease primarily relates to a decline in market rates paid in the Company’s service area and the maturity of the higher rate promotional deposits.

Interest expense on NOW accounts declined by $195 thousand. Rates paid on NOW accounts declined by 18 basis points from 0.38% during 2010 to 0.20% during 2011, as we significantly lowered the rate paid on local public agencies NOW accounts. Although we lost deposits by lowering this rate; we continue to focus on the profitability of the public sweep accounts rather than growing public sweep balances.

Interest expense on money market accounts decreased by $106 thousand related primarily to a decrease in rate paid on these accounts of 23 basis points from 0.52% during 2010 to 0.29% during 2011. This was primarily related to a significant drop in the rates paid on our money market sweep product. We no longer offer the money market sweep account having replaced it with a product that utilizes repurchase agreements during the third quarter of 2011.

Interest on FHLB long term borrowings decreased by $130 thousand as there were no outstanding long term borrowings during 2011. Interest expense on junior subordinated debentures, which increased by $14 thousand from 2010, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate.

Interest on other borrowings in 2011 primarily relates to interest paid on repurchase agreements.

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 2011 decreased 16 basis points to 4.08%, from 4.24% for 2010.

2010 compared to 2009. Net interest income, on a nontax-equivalent basis, was $17.5 million for the year ended December 31, 2010, a decline of $1.6 million, or 8.6%, from $19.2 million for 2009.

The overall change in net interest income was primarily a result of a decrease of $1.8 million in loan interest income, due to a decline in average loans outstanding. Additionally, interest on investments securities declined by $391 thousand, related to a decrease in yield. Partially offsetting these decreases in interest income was a decline in rates paid on the Company’s deposits and borrowings.

Interest income decreased $2.2 million, or 9.4%, to $20.7 million for the year ended December 31, 2010. Interest and fees on loans decreased by $1.8 million from $20.7 million for the year ended December 31, 2009 to $18.9 million for 2010. The average loan balances were $323.9 million for 2010, down $30.6 million from the $354.5 million for 2009. The decline in loan balances is consistent with the decrease in economic activity in the Company’s service area and the Company’s successful effort to reduce its exposure to real estate construction and land development loans. The average yields on loans were 5.82% for 2010 as compared to the 5.83% for 2009.

Interest on investment securities decreased by $391 thousand, as a decrease in yield of 83 basis points was partially offset by an increase in average investment securities of $5.3 million. The decline in yield is primarily related to the replacement of matured and sold investment securities with new investments with market yields below those which they replaced.

Deposit rates in the Bank’s service area continued to decline in 2010 resulting in a decline in interest expense on deposits of $473 thousand for the year ended December 31, 2010, from $3.2 million for 2009 to $2.7 million for the year ended December 31, 2010. All deposit products experienced rate declines in 2010.

Interest expense on NOW accounts decreased by $289 thousand related to a decrease in the average rate paid on these accounts. Rates paid on NOW accounts declined by 30 basis points from 0.68% during 2009 to 0.38% during 2010 as we significantly lowered the rate paid on local public agencies NOW accounts. Although we lost some deposits by lowering this rate; we currently are more focused on the profitability of the public sweep accounts rather than the amount of deposits we can generate from this source.

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Interest expense on money market accounts decreased by $125 thousand related to a decrease in rate paid on these accounts of 31 basis points from 0.83% during the year ended December 31, 2009 to 0.52% during 2010. This was primarily related to a significantly drop in the rates paid on our money market sweep product.

Interest on time deposits declined by $55 thousand as an increase in average balance was offset by a decline in rate paid. For the year ended December 31, 2010 compared to 2009, the Company’s average time deposits increased by $19.5 million from $105.3 million for 2009 to $124.8 million for the year ended December 31, 2010. The increase in time deposits is related to a promotional time deposit product we began offering in June, 2009 and continued to offer until April 30, 2010. The average rate paid on time deposits decreased from 1.96% during 2009 to 1.61% during 2010. This decrease primarily relates to a decline in market rates in the Company’s service area.

Interest on borrowings increased by $28 thousand related to an increase in the rate paid on borrowings as we chose to extend the term of our borrowings; however, this was partially offset by a $59 thousand decline in interest paid on junior subordinated debentures.

Interest expense on FHLB long-term borrowings increased by $103 thousand to $130 thousand for the year ended December 31, 2010. We chose to prepay these borrowings during July 2010 as we had significant excess liquidity and no longer projected a need for these long-term borrowings. We incurred a $226 thousand prepayment penalty on these advances which we anticipate will be more than offset by future savings in interest expense. Interest on short-term borrowings decreased by $75 thousand to $5 thousand related to a decline in average balance of $23.3 million from $24.3 million during 2009 to $986 thousand during 2010.

Interest expense on junior subordinated debentures, which fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate, decreased by $59 thousand during 2010 as a result of a decrease in the LIBOR rate.

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 2010 decreased 28 basis points to 4.24%, from 4.52% for 2009.

Provision for Loan Losses

During the year ended December 31, 2011 we recorded a provision for loan losses of $3.5 million down $2.0 million from the $5.5 million provision recorded during 2010. See “Analysis of Asset Quality and Allowance for Loan Losses” for further discussion of loan quality trends and the provision for loan losses.

The allowance for loan losses is maintained at a level that management believes will be appropriate 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 repay their loan. 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.

Based on information currently available, management believes that the allowance for loan losses is appropriate 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.

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Non-Interest Income

The following table sets forth the components of non-interest income for the years ended December 31, 2011, 2010 and 2009.

		September 30,		September 30,		September 30,		September 30,			September 30,
	Years Ended December 31,						Change during Year
	2011		2010		2009		2011			2010
	(dollars in thousands)
Service charges on deposit accounts	$	3,477	$	3,642	$	3,796	$	(165	)	$	(154	)
Gain on sale of loans, net		1,939		1,055		593		884			462
Gain on sale of investments		666		1,160		10		(494	)		1,150
Earnings on bank owned life insurance policies		352		351		346		1			5
Loan servicing fees		219		195		139		24			56
Customer service fees		141		135		121		6			14
Safe deposit box and night depository income		66		66		68		—			(2	)
Merchant processing		15		141		282		(126	)		(141	)
Sale of merchant processing portfolio		—		1,435		—		(1,435	)		1,435
Other income		287		288		309		(1	)		(21	)
Total non-interest income	$	7,162	$	8,468	$	5,664	$	(1,306	)	$	2,804

2011 compared to 2010. During the year ended December 31, 2011 non-interest income decreased by $1.3 million to $7.2 million, from $8.5 million during the year ended December 31, 2010. This decrease was related to the sale of our merchant processing portfolio in 2010. During June 2010 we entered into an alliance with a world-wide merchant processing leader. In conjunction with this alliance we sold our merchant processing business, recording a one-time gain of $1.4 million. Related to this sale we experienced a decrease in merchant processing income of $126 thousand during the comparison periods. Service charges on deposit accounts declined by $165 thousand primarily related to a decline in overdraft fees as new regulations placed additional restrictions on the Bank in charging overdraft fees on ATM and Point of Sale transactions. Gain on sale of investments declined by $494 thousand. During the year ended December 31, 2011 we sold twenty-seven investment securities classified as available-for-sale for $29.4 million recognizing a $0.7 million gain on sale. During the 2010 period we sold sixty-five investment securities classified as available-for sale for $40.9 million and recorded a $1.2 million gain on sale. We chose to sell some of the securities in our investment portfolio in order to lock in gains; this had the additional benefit of partially offsetting some nonrecurring expense items such as losses on sale of OREO.

Partially offsetting these declines in income was a $884 thousand increase in gain on sale of government guaranteed loans. Gains on sale in 2011 were particularly strong related to two factors. First, during the first quarter of 2011 the SBA eliminated the recourse provision related to loan sales allowing us to record both gains on sales from loans sold during the fourth quarter of 2010 and the first quarter of 2011. In addition, many loans sold in 2011 were 90% guaranteed related to a temporary increase in guarantee percentage enacted on February 17, 2009 as part of the Recovery Act. Currently loans made through the SBA 7(a) program carry a 75% to 85% guarantee. The production and sale of government guaranteed loans has become an important component of the Company’s core business. We expect government guaranteed lending activity to remain strong in 2012; however, we anticipate a reduction in gains on sale during 2012.

Loan servicing fees increased by $24 thousand to $219 thousand for the year ended December 31, 2011. Loan servicing fees are primarily related to fees earned for servicing the sold portion of SBA loans and the increase in this category is consistent with the increase in sold SBA loans.

2010 compared to 2009. During the year ended December 31, 2010 non-interest income increased by $2.8 million to $8.6 million, from $5.8 million during 2009. This increase was primarily related to three items, the largest of which was a $1.4 million gain on the sale of our merchant processing portfolio. Additionally we sold securities having a book value of $39.7 million, recording a gain on sale of $1.2 million. We chose to sell substantially our entire municipal securities portfolio as part of our overall asset/liability management strategy and related to the favorable market price for these securities. In addition, we sold $28.9 million in U.S. government agency securities to lock in significant gains that were available on these securities. Finally, we recorded a gain on sale of government guaranteed loans of $1.1 million representing the sale of $13.6 million in loans. Additional SBA government guaranteed loans totaling $4.3 million were sold during the fourth quarter; however, the gain on sale generated was not recorded until the 90-day premium recourse period on SBA loan sales had expired. During the first quarter of 2011, the Company recognized a gain on sale of approximately $338 thousand related to loans sold during the fourth quarter of 2010; however, this gain was partially offset by commission expense of approximately $106 thousand.

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Loan servicing fees increased by $56 thousand to $195 thousand for the year ended December 31, 2010. Loan servicing fees are primarily related to fees earned for servicing the sold portion of SBA loans and the increase in this category is consistent with the increase in sold SBA loans.

Service charges on deposit accounts declined by $154 thousand primarily related to a decline in overdraft fees as new regulations placed additional restrictions on the Bank in charging overdraft fees on ATM and Point of Sale transactions. Merchant processing fees declined by $141 thousand related to the sale of our merchant processing portfolio in June, 2010.

Non-Interest Expense

The following table sets forth the components of other non-interest expense for the years ended December 31, 2011, 2010 and 2009.

		September 30,		September 30,			September 30,		September 30,			September 30,
	Years Ended December 31,							Change during Year
	2011		2010			2009		2011			2010
	(dollars in thousands)
Salaries and employee benefits	$	9,195	$	9,732		$	11,054	$	(537	)	$	(1,322	)
Occupancy and equipment		3,088		3,096			3,759		(8	)		(663	)
Outside service fees		1,270		1,212			990		58			222
FDIC insurance		1,099		1,009			1,125		90			(116	)
Professional fees		730		587			789		143			(202	)
Loss (gain) on sale of OREO		606		(43	)		158		649			(201	)
Provision for OREO losses		579		356			4,800		223			(4,444	)
OREO costs		422		573			370		(151	)		203
Telephone and data communications		331		338			392		(7	)		(54	)
Business development		262		250			333		12			(83	)
Loan collection costs		261		261			399		—			(138	)
Advertising and promotion		236		252			327		(16	)		(75	)
Director compensation and retirement		229		233			293		(4	)		(60	)
Armored car and courier		225		239			281		(14	)		(42	)
Postage		190		207			207		(17	)		—
Core deposit intangible		173		173			173		—			—
Stationery and supplies		140		145			183		(5	)		(38	)
Insurance		42		125			54		(83	)		71
Other operating expense		168		396			579		(228	)		(183	)
Total non-interest expense	$	19,246	$	19,141		$	26,266	$	105		$	(7,125	)

2011 compared to 2010. While we have achieved savings in many categories of non-interest expense these were offset in the current year by an increase of $649 thousand in loss on sale of OREO. Non-interest expense increased by $105 thousand from $19.1 million during the year ended December 31, 2010 to $19.2 million during the current twelve month period.

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OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. Loss on sale of OREO totaled $606 thousand primarily related to the sale of one property. During June, 2011 the Bank sold its largest OREO holding which represented $4.3 million, or 48% of the total balance in OREO at January 1, 2011. The Bank incurred a $617 thousand loss on sale; however, management believes the loss was prudent given the significant affect this transaction had in decreasing nonperforming assets.

Outside service fees increased by $58 thousand which mostly relates to our on-line banking and bill payment platform. FDIC insurance costs increased related to an increase in the rate the FDIC charges Plumas Bank. Professional fees increased by $143 thousand the largest portion of which was related to an increase in consulting cost of $97 thousand. During the second half of 2011 we contracted with an outside party to provide assistance in the management of our nonperforming assets. Total costs incurred related to this consultant were $42 thousand. In addition we incurred $21 thousand in costs related to an outside management study required by the Consent Order.

The largest reduction in expense was a decrease of $537 thousand in salaries and employee benefits. Salary expense, excluding commissions, declined by $667 thousand mostly related to a reduction in staffing, during the second quarter of 2010, which affected most functional areas with the exception of government guaranteed lending and problem assets. On a full-time equivalent basis, we employed 142 persons at December 31, 2011 down from 146 at December 31, 2010 and 163 at December 31, 2009. Commission expense, which relates to government guaranteed lending personnel and is included in salary expense, increased by $318 thousand resulting from the increase in government guaranteed loan gains.

The provision for OREO losses increased by $223 thousand related to one land development property that, based on a recent appraisal, declined in value by $417 thousand. This property is currently valued at approximately $1 million. OREO carrying costs declined by $151 thousand from $573 thousand during 2010 to $422 thousand during 2011. These savings were primarily related to property taxes on OREO properties and refunds on prior year tax payments related to some of our OREO properties being reassessed.

Insurance expense declined by $83 thousand primarily related to the forfeiture of retirement split dollar life insurance benefits by one of our executive officers who chose to terminate his employment during 2011 prior to age sixty-five.

Other non-interest expense declined by $228 thousand related to a $226 thousand prepayment penalty incurred upon the prepayment of our long-term Federal Home Loan Bank borrowings during July, 2010.

2010 compared to 2009. During the second quarter of 2010 we performed an extensive analysis of our personnel requirements throughout the organization and based on this analysis we were able to reduce our head count by approximately 10% which resulted in significant savings in salary and benefits during the second half of 2010. During the year ended December 31, 2010, total non-interest expense decreased by $7.1 million, or 27%, to $19.2 million, down from $26.3 million for the comparable period in 2009. This decrease in non-interest expense was primarily the result of savings in salaries and employee benefits, occupancy and equipment costs, professional fees, provision for OREO losses and a reduction in losses on the sale of OREO. These items and other reductions were partially offset by increases in outside service fees, OREO carrying expenses and insurance expense.

Salaries and employee benefits decreased by $1.3 million primarily related to four items. Salary expense, excluding commissions, declined by $796 thousand related to a reduction in staffing in all areas with the exception of government guaranteed lending and problem assets. While the Company reduced personnel in most functional areas, we increased staffing in our problem asset department to effectively manage our increased level of nonperforming assets. Additionally, staffing in our government guaranteed lending department was increased to support opportunities for loan growth in this area. Commission expense, which relates to government guaranteed lending personnel and is included in salary expense, increased by $152 thousand resulting from the increase in government guaranteed loan sales. Stock compensation expense decreased by $199 thousand. During the first quarter of 2010 we recorded an adjustment to the estimated forfeiture rate associated with option expense. Finally, we eliminated discretionary bonuses in 2010 resulting in a decrease in bonus expense of $269 thousand and during the second quarter of 2010 we discontinued the Company matching contributions to our 401k plan saving $172 thousand during 2010.

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The decline in occupancy and equipment expense primarily relates to the savings realized from the purchase of our Redding branch. On March 31, 2010 we purchased the building housing our Redding branch at a cost of $1.0 million. Previously we had leased this building. Under the terms of the lease agreement we were provided free rent for a period of time; however, in accordance with accounting principals we recognized monthly rent expense equal to the total payments required under the lease dividend by the term of the lease in months. At the time of the purchase we reversed this accrual recognizing a $184 thousand reduction in occupancy costs. In addition to the one-time savings from the reversal of accrued rent we benefit from reduced operating costs on this building as the owner rather than a renter. Occupancy costs also benefited from a milder winter resulting in reduced utility and snow removal costs. Equipment costs benefited from a $153 thousand reduction in depreciation expense.

Professional fees were abnormally high during 2009 related to consulting costs associated with our computer network and telephone system. The decrease in profession fees includes a $157 thousand reduction in consulting costs.

Losses on the sale of OREO totaled $158 thousand during 2009; however, during 2010 we recorded $43 thousand net gains on sale of OREO. During 2009 we experienced a significant decline in the value of many of our OREO properties requiring a $4.8 million loss provision; however, this decline in value slowed significantly in 2010. During 2010 our provision for OREO losses declined by $4.4 million to $356 thousand.

Other reductions in expense include savings in FDIC insurance, telephone, loan collection costs, business development, advertising, director expense, courier expense, director expenses, supplies costs and other. In total these costs were down $789 thousand for 2010.

Outside service fees increased by $222 thousand related to the outsourcing of daily management of our computer network operations and the installation of a new internet banking platform. Consistent with the increase in average OREO (See “Analysis of Asset Quality and Allowance for Loan Losses”) OREO carrying expenses increased by $203 thousand.

Insurance expense was abnormally low in 2009. During the first quarter of 2009 our Chief Information and Technology officer retired from the Company. Because his retirement took place prior to the age of sixty-five he forfeited his benefits under his company provided split dollar life insurance plan. To reflect this forfeiture we recorded a one-time reduction in insurance expense totaling $83 thousand.

Provision for Income Taxes. The Company recorded an income tax provision of $295 thousand, or 23.9% of pre-tax income for the year ended December 31, 2011. During 2010 the Company recorded an income tax provision of $389 thousand, or 28.6% of pre-tax income for the year ended December 31, 2010. The percentages for 2011 and 2010 differ from the statutory rate as tax exempt income such as earnings on Bank owned life insurance, municipal loan interest, and in the state of California enterprise zone interest decrease taxable income.

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.

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As part of its analysis, the Company considered the following positive evidence:

• The Company’s 2009 net loss was largely attributable to losses on its Construction and Land Development portfolio that represented approximately 80% of net charge-offs during the year ended December 31, 2009. This portfolio has decreased from $74 million at December 31, 2008 to $17 million at December 31 2011.

• The Company’s 2009 net loss was also attributable to significant write-downs on foreclosed construction and land development real estate properties which represented the majority of its provision for losses on other real estate during 2009. During 2010 other real estate write-downs decreased by $4.4 million from $4.8 million during the year ended December 31, 2009 to $356 thousand during 2010. Write-downs on construction and land development real estate owned during 2011 totaled $440 thousand.

• The Company has a long history of earnings and profitability.

• The Company was profitable in 2011 and 2010 and is projecting future taxable and book income will be generated by operations.

• The size of loans in the Company’s pipeline of potential problem loans has significantly decreased.

• The Company does not have a history of net operating losses carry forwards or tax credits expiring unused.

As part of its analysis, the Company also considered the following negative evidence:

• The Company recorded a large net loss in 2009 and is in a cumulative loss position for the current and preceding two years.

Based upon the analysis of available evidence, management has determined that it is “more likely than not” that all deferred income tax assets as of December 31, 2011 and 2010 will be fully realized and therefore no valuation allowance was recorded.

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 commercial real estate loans, residential real estate loans, and agricultural loans. These categories accounted for approximately 40.6%, 13.3% and 13.2%, respectively of the Company’s total loan portfolio at December 31, 2011, and approximately 37.9%, 13.8% and 12.2%, respectively of the Company’s total loan portfolio at December 31, 2010. Construction and land development loans continue to decline and represented 5.8% and 9.9% of the loan portfolio as of December 31, 2011 and December 31, 2010, respectively. The construction and land development portfolio component has been identified by Management as a higher-risk loan category. The quality of the construction and land development category is highly dependent on property values both in terms of the likelihood of repayment once the property is transacted by the current owner as well as the level of collateral the Company has securing the loan in the event of default. Loans in this category are characterized by the speculative nature of commercial and residential development properties and can include property in various stages of development from raw land to finished lots. The decline in these loans as a percentage of the Company’s loan portfolio reflects management’s continued efforts, which began in 2009, to reduce its exposure to construction and land development loans due to the severe valuation decrease in the real estate market.

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 81% and 80% of the total loan portfolio at December 31, 2011 and December 31, 2010, respectively. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, Sierra and 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 Northwestern 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.

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The rates of interest charged on variable rate loans are set at specific increments in relation to the Company’s lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. At December 31, 2011 and December 31, 2010, approximately 73% and 66%, respectively, of the Company’s loan portfolio was comprised 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 totaled $39 million at December 31, 2011 and $38 million at December 31, 2010.

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

		September 30,			September 30,			September 30,			September 30,			September 30,
	At December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands)
Real estate – mortgage	$	158,431		$	162,513		$	161,397		$	151,943		$	128,357
Real estate – construction and land development		17,063			31,199			38,061			73,820			76,478
Commercial		30,235			33,433			37,056			42,528			39,584
Consumer (1)		49,268			48,586			54,442			61,706			72,768
Agriculture (2)		38,868			38,469			41,722			36,020			35,762
Total loans		293,865			314,200			332,678			366,017			352,949
Less:
Deferred costs		(475	)		(275	)		(298	)		(279	)		(564	)
Allowance for loan losses		6,908			7,324			9,568			7,224			4,211
Net loans	$	287,432		$	307,151		$	323,408		$	359,072		$	349,302

(1) Includes equity lines of credit

(2) Includes agriculture real estate

The following table sets forth the maturity of gross loan categories as of December 31, 2011. Also provided with respect to such loans are the amounts due after one year, classified according to sensitivity to changes in interest rates:

		September 30,		September 30,		September 30,		September 30,
	Within One Year		After One Through Five  Years		After Five Years		Total
	(dollars in thousands)
Real estate – mortgage	$	10,357	$	39,933	$	108,141	$	158,431
Real estate – construction and land development		6,811		7,237		3,015		17,063
Commercial		9,744		16,005		4,486		30,235
Consumer		5,644		12,044		31,580		49,268
Agriculture		13,758		10,018		15,092		38,868
Total	$	46,314	$	85,237	$	162,314	$	293,865
Loans maturing after one year with:
Fixed interest rates			$	26,275	$	42,419	$	68,694
Variable interest rates				58,962		119,899		178,861
Total			$	85,237	$	162,318	$	247,555

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 Management Asset Resolution Committee (MARC) reviews the asset quality of criticized loans on a monthly basis and reports the findings to the full Board of Directors. The Board’s Loan Committee reviews the asset quality of new loans on a monthly basis and reports the findings to the full Board of Directors. In management’s opinion, this loan review system helps facilitate the early identification of potential criticized loans.

35

The Company has implemented MARC to develop an action plan to significantly reduce nonperforming loans. It consists of members of executive management and credit administration management, and the activities are governed by a formal written charter. The MARC meets at least monthly and reports to the Board of Directors.

More specifically, a formal plan to effect repayment and/or disposition of every significant nonperforming loan relationship is developed and documented for review and on-going oversight by the MARC. Some of the strategies used include but are not limited to: 1) obtaining additional collateral, 2) obtaining additional investor cash infusion, 3) sale of the promissory note to an outside party, 4) proceeding with foreclosure on the underlying collateral, 5) legal action against borrower/guarantors to encourage settlement of debt and/or collect any deficiency balance owed. Each step includes a benchmark timeline to track progress.

MARC also provides guidance for the maintenance and timely disposition of OREO properties; including developing financing and marketing programs to incent individuals to purchase OREO.

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 was also 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.

36

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 determined in accordance with ASC Topic 310 – Receivables, based on probable losses on specific loans.

• general reserves determined in accordance with guidance in ASC Topic 450 – Contingencies, based on historical loan loss experience adjusted for other qualitative risk factors both internal and external to the Company.

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 contractual terms of the loan agreement are in question. For purposes of this analysis, loans are grouped by internal risk classifications which are “watch”, “substandard”, “doubtful”, and “loss”. Watch 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.

Loans are consistently monitored against risk rating criteria. As loans are identified that may warrant a classification change, they are discussed with the Company’s credit administration officers and appropriate risk grades are assigned. There are several times in the life of a loan that this occurs:

• loan origination

• loan renewal

• loan servicing actions (change in terms, collateral release, etc.)

• annual financial review

• delinquency monitoring and follow-up

• loan review process

• audit process

If weaknesses (or improvements) are noted, a change in risk rating, if warranted by credit administration, will be made. Loans classified Watch or below in an amount of $100,000 or more will be individually evaluated for impairment in accordance with the Bank’s policy for determining and measuring impairment.

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 may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. Effective for the third quarter of 2010, the Company modified its method of estimating the allowance for loan losses for loans collectively evaluated for impairment. This modification incorporated historical loss experience based on a rolling eight quarters ending with the most recently completed calendar quarter to identified pools of loans. This modification did not have a material affect on the Company’s allowance for loans losses or provision for loan losses. No modifications to the allowance for loan losses methodology were made in 2011.

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.

37

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.

		September 30,			September 30,			September 30,			September 30,			September 30,
	For the Year Ended December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands)
Balance at beginning of period	$	7,324		$	9,568		$	7,224		$	4,211		$	3,917
Charge-offs:
Commercial and agricultural		539			1,219			663			477			83
Real estate mortgage		483			3,105			1,145			95			—
Real estate construction		2,603			3,617			10,133			522			46
Consumer		622			408			559			689			657
Total charge-offs		4,247			8,349			12,500			1,783			786
Recoveries:
Commercial and agricultural		199			26			18			11			53
Real estate mortgage		18			396			8			14			—
Real estate construction		5			65			90			—			—
Consumer		109			118			228			171			227
Total recoveries		331			605			344			196			280
Net charge-offs		3,916			7,744			12,156			1,587			506
Provision for loan losses		3,500			5,500			14,500			4,600			800
Balance at end of period	$	6,908		$	7,324		$	9,568		$	7,224		$	4,211
Net charge-offs during the period to average loans		1.29	%		2.39	%		3.43	%		0.45	%		0.14	%
Allowance for loan losses to total loans		2.35	%		2.33	%		2.88	%		1.97	%		1.19	%

During the year ended December 31, 2011 we recorded a provision for loan losses of $3.5 million down $2.0 million from the $5.5 million provision recorded during the year ended December 31, 2010. Net charge-offs totaled $3.9 million during the year ended December 31, 2011 and $7.7 million during 2010. Net charge-offs as a percentage of average loans decreased from 2.39% during 2010 to 1.29% during the year ended December 31, 2011.

The following table provides a breakdown of the allowance for loan losses:

		September 30,		September 30,			September 30,		September 30,
	Balance at End of  Period		Percent of Loans in  Each Category to Total Loans			Balance at End of  Period		Percent of Loans in  Each Category to Total Loans
	2011		2011			2010		2010
Commercial and agricultural		1,355		23.5	%		944		22.9	%
Real estate mortgage		2,623		53.9	%		2,451		51.7	%
Real estate construction		2,006		5.8	%		3,011		9.9	%
Consumer (includes equity LOC)		924		16.8	%		918		15.5	%
Total		6,908		100.0	%		7,324		100.0	%

The allowance for loan losses totaled $6.9 million at December 31, 2011 and $7.3 million at December 31, 2010. Specific reserves related to impaired loans increased from $1.9 million at December 31, 2010 to $2.1 million at December 31, 2011. At least quarterly the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it reverses the specific reserve and takes a partial charge-off in its place. General reserves decreased by $579 thousand to $4.8 million at December 31, 2011. The allowance for loan losses as a percentage of total loans increased slightly from 2.33% at December 31, 2010 to 2.35% at December 31, 2011. The percentage of general reserves to unimpaired loans decreased from 1.90% at December 31, 2010 to 1.80% at December 31, 2011 primarily related to a decrease in charge-offs during the eight quarters ending December 31, 2011 as compared to the eight quarters ended December 31, 2010 which resulted in a lower loss rate applied to unimpaired loans.

38

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.

A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.

Loans restructured and in compliance with modified terms totaled $8.4 million, $2.0 million and $3.4 million at December 31, 2011, 2010 and 2009, respectively. There were no troubled debt restructurings at December 31, 2008, or 2007. For additional information related to restructured loans see Note 6 of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K.

The following table sets forth the amount of the Company’s nonperforming assets as of the dates indicated.

		September 30,			September 30,			September 30,			September 30,			September 30,
	At December 31,
	2011			2010			2009			2008			2007
	(dollars in thousands)
Nonaccrual loans	$	16,757		$	25,313		$	14,263		$	26,444		$	2,618
Loans past due 90 days or more and still accruing		72			45			28			297			14
Total nonperforming loans		16,829			25,358			14,291			26,741			2,632
Other real estate owned		8,623			8,867			11,204			4,148			402
Other vehicles owned		57			17			65			129			135
Total nonperforming assets	$	25,509		$	34,242		$	25,560		$	31,018		$	3,169
Interest income forgone on nonaccrual loans	$	510		$	1,021		$	568		$	576		$	161
Interest income recorded on a cash basis on nonaccrual loans	$	285		$	608		$	369		$	74		$	118
Nonperforming loans to total loans		5.73	%		8.07	%		4.30	%		7.31	%		0.75	%
Nonperforming assets to total assets		5.60	%		7.07	%		4.84	%		6.78	%		0.70	%

Nonperforming loans at December 31, 2011 were $16.8 million, a decrease of $8.5 million from the $25.3 million balance at December 31, 2010. The decline of $8.5 million includes $5.7 million in loans transferred to OREO, a $4.4 million loan that was returned to performing status and charge-offs and principal repayments on nonperforming loans partially offset by $9.1 million in additional loans placed on nonperforming status during the period. Specific reserves on nonaccrual loans totaled $1.3 million at December 31, 2011 and $1.8 million at December 31, 2010, respectively. Performing loans past due thirty to eighty-nine days increased from $2.9 million at December 31, 2010 to $5.1 million at December 31, 2011.

39

A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Total substandard loans decreased by $9.4 million from $38.6 million at December 31, 2010 to $29.2 million at December 31, 2011. Loans classified as watch decreased as well from $14.2 million at December 31, 2010 to $10.7 million at December 31, 2011. At December 31, 2011, $13.9 million of performing loans were classified as substandard. Further deterioration in the credit quality of individual performing substandard loans or other adverse circumstances could result in the need to place these loans on nonperforming status.

At December 31, 2011 and December 31, 2010, the Company’s recorded investment in impaired loans totaled $24.4 million and $28.8 million, respectively. The specific allowance for loan losses related to impaired loans totaled $2.1 million and $1.9 million at December 31, 2011 and December 31, 2010, respectively. Additionally, $940 thousand has been charged off against the impaired loans at December 31, 2011 and $2.8 million at December 31 2010.

It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at December 31, 2011 is appropriate. 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.

OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. Repossessed assets and OREO are carried at fair market value, less selling costs. OREO holdings represented forty-four properties totaling $8.6 million at December 31, 2011 and thirty-one properties totaling $8.9 million at December 31, 2010. During June, 2011 the Bank sold its largest OREO holding which represented $4.3 million, or 48% of the total balance in OREO at January 1, 2011. The Bank incurred a $617 thousand loss on sale; however, management believes the loss was prudent given the significant affect this transaction had in decreasing nonperforming assets. Nonperforming assets as a percentage of total assets were 5.60% at December 31, 2011 and 7.07% at December 31, 2010.

The following table provides a summary of the change in the OREO balance for the years ended December 31, 2011 and 2010:

		September 30,			September 30,
	Year Ended December 31,
	2011			2010
	(in thousands)
Beginning Balance	$	8,867		$	11,204
Additions		5,825			1,438
Dispositions		(5,490	)		(3,419	)
Write-downs		(579	)		(356	)
Ending Balance	$	8,623		$	8,867

Investment Portfolio and Federal Funds Sold. Total investment securities decreased by $5.1 million from $63.0 million at December 31, 2010 to $57.9 million as of December 31, 2011. While investment securities decreased from December 31, 2010 levels, we anticipate adding to investment securities during the next three months. The investment portfolio at December 31, 2011 was invested entirely in U.S. Government-sponsored agencies, at December 31, 2010 the investment portfolio consisted of 2% U.S. Treasuries and 98% U.S. Government-sponsored agencies. There were no Federal funds sold at December 31, 2011 or 2010; however, the Bank maintained interest earning balances at the Federal Reserve Bank (FRB) totaling $47.8 million at December 31, 2011 and $52.3 million at December 31, 2010, respectively. These balances currently earn 25 basis points.

The Company classifies its investment securities as available-for-sale or held-to-maturity. Currently all securities are classified as available-for-sale. 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.

40

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

		September 30,		September 30,		September 30,
	December 31,
Available-for-sale (fair value)	2011		2010		2009
	(dollars in thousands)
U.S. Treasuries	$	—	$	1,032	$	1,052
U.S. Government-sponsored agencies		32,777		40,430		55,889
U.S. Government-sponsored agency residential mortgage-backed securities		25,140		21,273		19,287
Municipal obligations		—		282		11,722
Total	$	57,917	$	63,017	$	87,950

At December 31, 2009 the Company transferred all of its municipal securities from held-to-maturity to available-for-sale as it was determined that management no longer had the intent to hold these investments to maturity.

The following table summarizes the maturities of the Company’s securities at their carrying value and their weighted average tax equivalent yields at December 31, 2011.

		0000		0000			0000		0000			0000		0000			0000		0000
(dollars in thousands)	After One Through Five Years					After Five Through Ten Years					After Ten Years					Total
Available-for-sale (Fair Value)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. Government-sponsored agencies	$	32,777		1.08	%		—		—	%		—		—	%	$	32,777		1.08	%
U.S. Government-sponsored agency residential mortgage-backed securities		554		3.84	%	$	6,395		1.74	%	$	18,191		2.59	%		25,140		2.40	%
Total	$	33,331		1.12	%	$	6,395		1.74	%	$	18,191		2.59	%	$	57,917		1.65	%

Deposits. Total deposits were $391.1 million as of December 31, 2011, a decrease of $33.8 million, or 8%, from the December 31, 2010 balance of $424.9 million. The decline in deposits was mostly related to maturities from a higher rate promotional time deposit product we began offering in June, 2009 and continued to offer until April 30, 2010. Core deposit growth was strong with increases in non-interest bearing deposits of $14.1 million and an increase in savings accounts of $10.8 million.

The Company continues to manage the mix of its deposits consistent with its identity as a community bank serving the financial needs of its customers. The deposit mix changed slightly from December 31, 2010 as time deposits deceased and we had an increase in non-interest bearing demand deposits and savings accounts. Non-interest bearing demand deposits were 32% of total deposits at December 31, 2011 and 26% of total deposits at December 31, 2010. Interest bearing transaction accounts were 21% of total deposits at December 31, 2011 and 24% of total deposits at December 31, 2010. Money market and savings deposits totaled 26% of total deposits at December 31, 2011 and 22% at December 31, 2010. Time deposits were 21% of total deposits at December 31, 2011 and 28% of total deposits at December 31, 2010.

Deposits represent the Bank’s primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. The Company experiences, to a small degree, some seasonality with the slower growth period between November through April, and the higher growth period from May through October. In order to assist in meeting any funding demands, the Company maintains a secured borrowing arrangement with the Federal Home Loan Bank of San Francisco. Included in time deposits at December 31, 2010 were $2.0 million in CDARS reciprocal time deposits which, under regulatory guidelines, are classified as brokered deposits. There were no brokered deposits at December 31, 2011.

41

The Company’s time deposits of $100,000 or more had the following schedule of maturities at December 31, 2011:

		September 30,
(dollars in thousands)	Amount
Remaining Maturity:
Three months or less	$	7,566
Over three months to six months		5,519
Over six months to 12 months		11,093
Over 12 months		7,446
Total	$	31,624

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

Short-term Borrowing Arrangements.

The Company is a member of the FHLB and can borrow up to $86,388,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $178,987,000. The Company is required to hold FHLB stock as a condition of membership. At December 31, 2011, the Company held $2,043,000 of FHLB stock which is recorded as a component of other assets. At this level of stock holdings the Company can borrow up to $43,466,000. There were no borrowings outstanding as of December 31, 2011. To borrow the $86,388,000 in available credit the Company would need to purchase $2,017,000 in additional FHLB stock.

Repurchase Agreements.

Recently Plumas Bank introduced a new product for its larger business customers which use repurchase agreements as an alternative to interest-bearing deposits. The balance in this product at December 31, 2011 was $8.3 million. Interest paid on this product is similar to that which can be earned on the Bank’s premium money market account; however, these are not deposits and are not FDIC insured.

Capital Resources

Shareholders’ equity as of December 31, 2011 totaled $39.6 million up from $38.0 million as of December 31, 2010.

On January 30, 2009, under the Capital Purchase Program, the Company sold (i) 11,949 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Shares”) and (ii) a ten-year warrant to purchase up to 237,712 shares of the Company’s common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $7.54 per share, for an aggregate purchase price of $11,949,000 in cash. Ten million of the twelve million in proceeds from the sale of the Series A Preferred Stock was injected into Plumas Bank providing addition capital for the bank to support growth in loans and investment securities and strengthen its capital ratios. The remainder provided funds for holding company activities and general corporate purposes.

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. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. No common cash dividends were paid in 2009, 2010 or 2011 and none are anticipated to be paid in 2012.

The Company is subject to various restrictions on the payment of dividends.

At the request of the FRB, Plumas Bancorp deferred its regularly scheduled quarterly interest payments on its outstanding junior subordinated debentures relating to its two trust preferred securities and suspended quarterly cash dividend payments on its Series A Preferred Stock. Therefore, Plumas Bancorp is currently in arrears with the dividend payments on the Series A Preferred Stock and interest payments on the junior subordinated debentures as permitted by the related documentation. As of December 31, 2011 the amount of the arrearage on the dividend payments of the Series A Preferred Stock is $1,046 thousand representing seven quarterly payments and the amount of the arrearage on the payments on the subordinated debt associated with the trust preferred securities is $569 thousand also representing seven quarterly payments.

42

Capital Standards.

The Company uses a variety of measures to evaluate its capital adequacy, with risk-based capital ratios calculated separately for the Company and the Bank. Management reviews these capital measurements on a monthly basis and takes appropriate action to ensure that they are within established internal and external guidelines. The FDIC has promulgated risk-based capital guidelines for all state non-member banks such as the Bank. These guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. There are two categories of capital under the guidelines: Tier 1 capital includes common stockholders’ equity, and qualifying trust-preferred securities (including notes payable to unconsolidated special purpose entities that issue trust-preferred securities), less goodwill and certain other deductions, notably the unrealized net gains or losses (after tax adjustments) on available-for-sale investment securities carried at fair market value; Tier 2 capital can include qualifying subordinated debt and the allowance for loan losses, subject to certain limitations. The Series A Preferred Stock qualifies as Tier 1 capital for the Company.

As noted previously, the Company’s junior subordinated debentures represent borrowings from its unconsolidated subsidiaries that have issued an aggregate $10 million in trust-preferred securities. These trust-preferred securities currently qualify for inclusion as Tier 1 capital for regulatory purposes as they do not exceed 25% of total Tier 1 capital, but are classified as long-term debt in accordance with GAAP. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued inclusion of trust-preferred securities (and/or related subordinated debentures) in the Tier I capital of bank holding companies.

The following tables present the capital ratios for the Company and the Bank compared to the standards for bank holding companies and the regulatory minimum requirements for depository institutions as of December 31, 2011 and 2010 (amounts in thousands except percentage amounts).

		September 30,		September 30,			September 30,		September 30,
	December 31, 2011					December 31, 2010
	Amount		Ratio			Amount		Ratio
Tier 1 Leverage Ratio
Plumas Bancorp and Subsidiary	$	45,024		9.8	%	$	42,994		8.9	%
Minimum regulatory requirement		18,313		4.0	%		19,361		4.0	%
Plumas Bank		45,073		9.8	%		43,262		8.9	%
Minimum requirement for “Well-Capitalized” institution under the prompt corrective action regulation		22,882		5.0	%		24,190		5.0	%
Minimum regulatory requirement		18,305		4.0	%		19,352		4.0	%
Tier 1 Risk-Based Capital Ratio
Plumas Bancorp and Subsidiary		45,024		13.7	%		42,994		12.7	%
Minimum regulatory requirement		13,149		4.0	%		13,570		4.0	%
Plumas Bank		45,073		13.7	%		43,262		12.8	%
Minimum requirement for “Well-Capitalized” institution under the prompt corrective action regulation		19,710		6.0	%		20,342		6.0	%
Minimum regulatory requirement		13,140		4.0	%		13,561		4.0	%
Total Risk-Based Capital Ratio
Plumas Bancorp and Subsidiary		49,169		15.0	%		47,274		13.9	%
Minimum regulatory requirement		26,298		8.0	%		27,140		8.0	%
Plumas Bank		49,215		15.0	%		47,539		14.0	%
Minimum requirement for “Well-Capitalized” institution under the prompt corrective action regulation		32,850		10.0	%		33,903		10.0	%
Minimum regulatory requirement		26,280		8.0	%		27,123		8.0	%

43

Management believes that the Company and the Bank currently meet their entire capital adequacy requirements including a minimum 9% Tier 1 Leverage Ratio required under the Bank’s informal agreement with the FDIC and DFI.

The current and projected capital positions of the Company and the Bank and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company policy is to maintain the Bank’s ratios above the prescribed well-capitalized leverage, Tier 1 risk-based and total risk-based capital ratios of 5%, 6% and 10%, respectively, at all times.

Off-Balance Sheet Arrangements

Loan Commitments. In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of December 31, 2011, the Company had $79.2 million in unfunded loan commitments and $50 thousand in letters of credit. This compares to $71.6 million in unfunded loan commitments and $164 thousand in letters of credit at December 31, 2010. Of the $79.2 million in unfunded loan commitments, $35.1 million and $44.1 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at December 31, 2011, $36.1 million were secured by real estate, of which $8.8 million was secured by commercial real estate and $27.3 million was secured by residential real estate in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.

Operating Leases. The Company leases one depository branch, one lending office and one loan administration office and two non branch automated teller machine locations. Total rental expenses under all operating leases, including premises, totaled $150,000 and $20,000, during the years ended December 31, 2011 and 2010, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2012 and the last such lease expiring during 2015.

The reduced level of rental expense during 2010 resulted from the purchase of our Redding branch building on March 31, 2010. Previously we had leased this building. Under the terms of the lease agreement we were provided free rent for a period of time; however, in accordance with applicable accounting standards we recognized monthly rent expense equal to the total payments required under the lease dividend by the term of the lease in months. At the time of the purchase we reversed this accrual recognizing a $184 thousand reduction in rental expense.

Liquidity

The Company manages its liquidity to provide the ability to generate funds to support asset growth, meet deposit withdrawals (both anticipated and unanticipated), fund customers’ borrowing needs, satisfy maturity of short-term borrowings and maintain reserve requirements. The Company’s liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to cash and due from banks, the Company maintains an investment portfolio which includes unpledged U.S. Government-sponsored agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by charging competitive offering rates on deposit products and the use of established lines of credit.

The Company is a member of the FHLB and can borrow up to $86,388,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $178,987,000. The Company is required to hold FHLB stock as a condition of membership. At December 31, 2011, the Company held $2,043,000 of FHLB stock which is recorded as a component of other assets. At this level of stock holdings the Company can borrow up to $43,466,000. There were no borrowings outstanding as of December 31, 2011. To borrow the $86,388,000 in available credit the Company would need to purchase $2,017,000 in additional FHLB stock.

44

Customer deposits are the Company’s primary source of funds. Total deposits were $391.1 million as of December 31, 2011, a decrease of $33.8 million, or 8%, from the December 31, 2010 balance of $424.9 million. Deposits are held in various forms with varying maturities. The Company’s securities portfolio, Federal funds sold, Federal Home Loan Bank advances, and cash and due from banks serve as the primary sources of liquidity, providing adequate funding for loans during periods of high loan demand. During periods of decreased lending, funds obtained from the maturing or sale of investments, loan payments, and new deposits are invested in short-term earning assets, such as cash held at the FRB, Federal funds sold and investment securities, to serve as a source of funding for future loan growth. Management believes that the Company’s available sources of funds, including borrowings, will provide adequate liquidity for its operations in the foreseeable future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company we are not required to provide the information required by this item.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of Plumas Bancorp and subsidiary, and report of the independent registered public accounting firm are included in the Annual Report of Plumas Bancorp to its shareholders for the years ended December 31, 2011, 2010 and 2009.

	Page
Reports of Independent Registered Public Accounting Firms		F-1
Consolidated Balance Sheet as of December 31, 2011 and 2010		F-3
Consolidated Statement of Operations for the years ended December 31, 2011, 2010 and 2009		F-4
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December  31, 2011, 2010 and 2009		F-6
Consolidated Statement of Cash Flows for the years ended December 31, 2011, 2010 and 2009		F-8
Notes to Consolidated Financial Statements		F-11

45

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Plumas Bancorp and subsidiary (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.

Management, including the undersigned Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting presented in conformity with accounting principles generally accepted in the United States of America as of December 31, 2011. In conducting its assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2011, our internal control over financial reporting was effective based on those criteria.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

/s/ Andrew J. Ryback

Andrew J. Ryback

President and Chief Executive Officer

/s/ Richard L. Belstock

Richard L. Belstock

Senior Vice President and Chief Financial Officer

Dated March 23, 2012

46

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

ITEM 11. EXECUTIVE COMPENSATION

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

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

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

47

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

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

3.1	Articles of Incorporation as amended of Registrant included as exhibit 3.1 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein.
3.2	Bylaws of Registrant as amended on March 16, 2011 included as exhibit 3.2 to the Registrant’s Form 10-K for December 31, 2010, which is incorporated by this reference herein.
3.3	Amendment of the Articles of Incorporation of Registrant dated November 1, 2002, is included as exhibit 3.3 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.
3.4	Amendment of the Articles of Incorporation of Registrant dated August 17, 2005, is included as exhibit 3.4 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.
4	Specimen form of certificate for Plumas Bancorp included as exhibit 4 to the Registrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein.
4.1	Certificate of Determination of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, is included as exhibit 4.1 to Registrant’s 8-K filed on January 30, 2009, which is incorporated by this reference herein.
10.1	Executive Salary Continuation Agreement of Andrew J. Ryback dated December 17, 2008, is included as exhibit 10.1 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.
10.2	Split Dollar Agreement of Andrew J. Ryback dated August 23, 2005, is included as Exhibit 10.2 to the Registrant’s 8-K filed on October 17, 2005, which is incorporated by this reference herein.
10.8	Director Retirement Agreement of John Flournoy dated March 21, 2007, is included as Exhibit 10.8 to Registrant’s 10-Q for March 31, 2007, which is incorporated by this reference herein.
10.18	Amended and Restated Director Retirement Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.18 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

48

10.19	Consulting Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.19 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
10.21	Amended and Restated Director Retirement Agreement of Alvin G. Blickenstaff dated April 19, 2000, is included as Exhibit 10.21 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
10.22	Consulting Agreement of Alvin G. Blickenstaff dated May 8, 2000, is included as Exhibit 10.22 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
10.24	Amended and Restated Director Retirement Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.24 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
10.25	Consulting Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.25 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
10.27	Amended and Restated Director Retirement Agreement of Arthur C. Grohs dated May 9, 2000, is included as Exhibit 10.27 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
10.28	Consulting Agreement of Arthur C. Grohs dated May 9, 2000, is included as Exhibit 10.28 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
10.33	Amended and Restated Director Retirement Agreement of Terrance J. Reeson dated April 19, 2000, is included as Exhibit 10.33 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
10.34	Consulting Agreement of Terrance J. Reeson dated May 10, 2000, is included as Exhibit 10.34 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.
10.35	Letter Agreement, dated January 30, 2009 by and between Plumas Bancorp, Inc. and the United States Department of the Treasury and Securities Purchase Agreement — Standard Terms attached thereto, is included as exhibit 10.1 to Registrant’s 8-K filed on January 30, 2009, which is incorporated by this reference herein.
10.36	Form of Senior Executive Officer letter agreement, is included as exhibit 10.2 to Registrant’s 8-K filed on January 30, 2009, which is incorporated by this reference herein.
10.37	Deferred Fee Agreement of Alvin Blickenstaff is included as Exhibit 10.37 to the Registrant’s 10-Q for March 31, 2009, which is incorporated by this reference herein.
10.40	2001 Stock Option Plan as amended is included as exhibit 99.1 of the Form S-8 filed July 23, 2002, File No. 333-96957, which is incorporated by this reference herein.
10.41	Form of Indemnification Agreement (Plumas Bancorp) is included as Exhibit 10.41 to the Registrant’s 10-Q for March 31, 2009, which is incorporated by this reference herein.
10.42	Form of Indemnification Agreement (Plumas Bank) is included as Exhibit 10.42 to the Registrant’s 10-Q for March 31, 2009, which is incorporated by this reference herein.
10.43	Plumas Bank 401(k) Profit Sharing Plan as amended is included as exhibit 99.1 of the Form S-8 filed February 14, 2003, File No. 333-103229, which is incorporated by this reference herein.
10.46	1991 Stock Option Plan as amended is included as Exhibit 10.46 to the Registrant’s 10-Q for September 30, 2004, which is incorporated by this reference herein.

49

10.47	Specimen form of Incentive Stock Option Agreement under the 1991 Stock Option Plan is included as Exhibit 10.47 to the Registrant’s 10-Q for September 30, 2004, which is incorporated by this reference herein.
10.48	Specimen form of Non-Qualified Stock Option Agreement under the 1991 Stock Option Plan is included as Exhibit 10.48 to the Registrant’s 10-Q for September 30, 2004, which is incorporated by this reference herein.
10.49	Amended and Restated Plumas Bancorp Stock Option Plan is included as Exhibit 10.49 to the Registrant’s 10-Q for September 30, 2006, which is incorporated by this reference herein.
10.50	Executive Salary Continuation Agreement of Rose Dembosz, is included as exhibit 10.50 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.
10.51	First Amendment to Split Dollar Agreement of Andrew J. Ryback, is included as exhibit 10.51 to the Registrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.
10.64	First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Alvin Blickenstaff adopted on September 19, 2007, is included as Exhibit 10.64 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.
10.65	First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Arthur C. Grohs adopted on September 19, 2007, is included as Exhibit 10.65 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.
10.66	Director Retirement Agreement of Robert McClintock
10.67	First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Terrance J. Reeson adopted on September 19, 2007, is included as Exhibit 10.67 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.
10.69	First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Daniel E. West adopted on September 19, 2007, is included as Exhibit 10.69 to the Registrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.
10.70	First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Gerald W. Fletcher adopted on October 9, 2007, is included as Exhibit 10.70 to the Registrant’s 10-Q for September 30, 2007, which is incorporated by this reference herein.
10.71	Consent Order issued by the FDIC and CDFI to Plumas Bank on March 18, 2011, is included as Exhibit 10.1 of the Registrant’s 8-K filed on March 21, 2011, which is incorporated by this reference herein.
10.72	Stipulation and Consent to the Issuance of Consent Order among Plumas Bank and the FDIC entered into on March 16, 2011, is included as Exhibit 10.2 of the Registrant’s 8-K filed on March 21, 2011, which is incorporated by this reference herein.
10.73	Written Agreement with Federal Reserve Bank of San Francisco effective July 28, 2011, is included as Exhibit 10.1 of the Registrant’s 8-K filed on July 29, 2011, which is incorporated by this reference herein.
11	Computation of per share earnings appears in the attached 10-K under Item 8 Financial Statements Plumas Bancorp and Subsidiary Notes to Consolidated Financial Statements as Footnote 13 – Shareholders’ Equity.
21.01	Plumas Bank – California.
21.02	Plumas Statutory Trust I – Connecticut.

50

21.03	Plumas Statutory Trust II – Connecticut.
23.01	Independent Registered Public Accountant’s Consent for audit of year ended December 31, 2011 dated March 23, 2012
23.02	Independent Registered Public Accountant’s Consent for audit of years ended December 31, 2010 and December 31, 2009 dated March 23, 2012
31.1	Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated March 23, 2012
31.2	Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated March 23, 2012
32.1	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 23, 2012.
32.2	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 23, 2012.
99.1	Certification of Chief Executive Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008 dated March 23, 2012.
99.2	Certification of Chief Financial Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008 dated March 23, 2012.

51

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PLUMAS BANCORP

(Registrant)

Date: March 23, 2012

/s/ ANDREW J. RYBACK

Andrew J. Ryback

President and Chief Executive Officer

/s/ RICHARD L. BELSTOCK

Richard L. Belstock

Senior Vice President and Chief Financial Officer

52

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

/s/ DANIEL E. WEST	Dated: March 23, 2012
Daniel E. West, Director and Chairman of the Board
/s/ TERRANCE J. REESON	Dated: March 23, 2012
Terrance J. Reeson, Director and Vice Chairman of the Board
/s/ ALVIN G. BLICKENSTAFF	Dated: March 23, 2012
Alvin G. Blickenstaff, Director
/s/ W. E. ELLIOTT	Dated: March 23, 2012
William E. Elliott, Director
/s/ GERALD W. FLETCHER	Dated: March 23, 2012
Gerald W. Fletcher, Director
/s/ JOHN FLOURNOY	Dated: March 23, 2012
John Flournoy, Director
/s/ ARTHUR C. GROHS	Dated: March 23, 2012
Arthur C. Grohs, Director
/s/ ROBERT J. MCCLINTOCK	Dated: March 23, 2012
Robert J. McClintock, Director

53

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Plumas Bancorp and Subsidiary

Quincy, California

We have audited the accompanying consolidated balance sheet of Plumas Bancorp and subsidiary (the “Company”) as of December 31, 2011, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Horwath LLP

Sacramento, California

March 23, 2012

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Plumas Bancorp and Subsidiary

Quincy, California

We have audited the accompanying consolidated balance sheet of Plumas Bancorp and subsidiary (the “Company”) as of December 31, 2010 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years in the two year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Plumas Bancorp and subsidiary as of December 31, 2010, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ Perry-Smith LLP

Sacramento, California

March 23, 2011

F - 2

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

December 31, 2011 and 2010

		September 30,		September 30,
	2011		2010
ASSETS
Cash and cash equivalents	$	63,076,000	$	64,628,000
Investment securities		57,917,000		63,017,000
Loans, less allowance for loan losses of $6,908,000 in 2011 and $7,324,000 in 2010		287,432,000		307,151,000
Premises and equipment, net		13,457,000		14,431,000
Bank owned life insurance		10,815,000		10,463,000
Other real estate and vehicles acquired through foreclosure		8,680,000		8,884,000
Accrued interest receivable and other assets		13,972,000		15,906,000
Total assets	$	455,349,000	$	484,480,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	125,931,000	$	111,802,000
Interest bearing		265,209,000		313,085,000
Total deposits		391,140,000		424,887,000
Repurchase agreements		8,279,000
Accrued interest payable and other liabilities		5,986,000		11,295,000
Junior subordinated deferrable interest debentures		10,310,000		10,310,000
Total liabilities		415,715,000		446,492,000
Commitments and contingencies (Note 12)
Shareholders’ equity:
Serial preferred stock—no par value; 10,000,000 shares authorized; 11,949 issued and outstanding at December 31, 2011 and 2010; aggregate liquidation value of $13,069,000 at December 31, 2011		11,769,000		11,682,000
Common stock—no par value; 22,500,000 shares authorized; issued and outstanding—4,776,339 shares at December 31, 2011 and 2010		5,998,000		6,027,000
Retained earnings		21,709,000		20,331,000
Accumulated other comprehensive income (loss)		158,000		(52,000	)
Total shareholders’ equity		39,634,000		37,988,000
Total liabilities and shareholders’ equity	$	455,349,000	$	484,480,000

The accompanying notes are an integral

part of these consolidated financial statements.

F - 3

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

For the Years Ended December 31, 2011, 2010 and 2009

		September 30,		September 30,		September 30,
	2011		2010		2009
Interest income:
Interest and fees on loans	$	17,400,000	$	18,860,000	$	20,658,000
Interest on investment securities:
Taxable		1,138,000		1,649,000		1,708,000
Exempt from Federal income taxes		6,000		123,000		455,000
Other		124,000		48,000		15,000
Total interest income		18,668,000		20,680,000		22,836,000
Interest expense:
Interest on deposits		1,469,000		2,696,000		3,169,000
Interest on borrowings		—		135,000		80,000
Interest on junior subordinated deferrable interest debentures		326,000		312,000		371,000
Other		53,000		4,000		35,000
Total interest expense		1,848,000		3,147,000		3,655,000
Net interest income before provision for loan losses		16,820,000		17,533,000		19,181,000
Provision for loan losses		3,500,000		5,500,000		14,500,000
Net interest income after provision for loan losses		13,320,000		12,033,000		4,681,000
Non-interest income:
Service charges		3,477,000		3,642,000		3,796,000
Gain on sale of investments		666,000		1,160,000		10,000
Gain on sale of loans		1,939,000		1,055,000		593,000
Earnings on bank owned life insurance policies		352,000		351,000		346,000
Sale of merchant processing portfolio		—		1,435,000		—
Other		728,000		825,000		919,000
Total non-interest income		7,162,000		8,468,000		5,664,000

(Continued)

F - 4

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

(Continued)

For the Years Ended December 31, 2011, 2010 and 2009

		September 30,			September 30,			September 30,
	2011			2010			2009
Non-interest expenses:
Salaries and employee benefits	$	9,195,000		$	9,732,000		$	11,054,000
Occupancy and equipment		3,088,000			3,096,000			3,759,000
Provision for losses on other real estate		579,000			356,000			4,800,000
Other		6,384,000			5,957,000			6,653,000
Total non-interest expenses		19,246,000			19,141,000			26,266,000
Income (loss) before income taxes		1,236,000			1,360,000			(15,921,000	)
Provision (benefit) for income taxes		295,000			389,000			(6,775,000	)
Net income (loss)		941,000			971,000			(9,146,000	)
Preferred stock dividends accrued and discount accretion		(684,000	)		(684,000	)		(628,000	)
Net income (loss) available to common shareholders	$	257,000		$	287,000		$	(9,774,000	)
Basic earnings (loss) per common share	$	0.05		$	0.06		$	(2.05	)
Diluted earnings (loss) per common share	$	0.05		$	0.06		$	(2.05	)
Common dividends per share	$	—		$	—		$	—

The accompanying notes are an integral

part of these consolidated financial statements.

F - 5

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2011, 2010 and 2009

		00000		00000		00000		00000		00000			00000			00000			00000
												Accumulated
												Other
	Preferred Stock				Common Stock							Comprehensive			Total			Total
									Retained			(Loss) Income			Shareholders’			Comprehensive
	Shares		Amount		Shares		Amount		Earnings			(Net of Taxes)			Equity			Income (loss)
Balance, January 1, 2009						4,775,339	$	5,302,000	$	29,818,000		$	317,000		$	35,437,000
Comprehensive loss:
Net loss										(9,146,000	)					(9,146,000	)	$	(9,146,000	)
Other comprehensive income, net of tax:
Unrealized gains on securities transferred from held-to-maturity to available-for-sale													197,000			197,000			197,000
Net change in unrealized gains on available-for-sale investment securities													108,000			108,000			108,000
Total comprehensive loss																		$	(8,841,000	)
Preferred stock issued		11,949	$	11,516,000												11,516,000
Stock warrants issued								407,000								407,000
Preferred stock dividends & accretion				79,000						(628,000	)					(549,000	)
Stock options exercised and related tax benefit						1,000		5,000								5,000
Stock-based compensation expense								256,000								256,000
Balance, December 31, 2009		11,949		11,595,000		4,776,339		5,970,000		20,044,000			622,000			38,231,000
Comprehensive Income:
Net lncome										971,000						971,000		$	971,000
Other comprehensive loss, net of tax:
Net change in unrealized gains on available-for-sale investment securities													(674,000	)		(674,000	)		(674,000	)
Total comprehensive income																		$	297,000
Preferred stock dividends & accretion				87,000						(684,000	)					(597,000	)
Stock-based compensation expense								57,000								57,000
Balance, December 31, 2010		11,949	$	11,682,000		4,776,339	$	6,027,000	$	20,331,000		$	(52,000	)	$	37,988,000

(Continued)

F - 6

PLUMAS BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Continued)

For the Years Ended December 31, 2011, 2010 and 2009

		0000		0000		0000		0000		0000		0000			0000		0000
											Accumulated
											Other
	Preferred Stock				Common Stock						Comprehensive			Total		Total
									Retained		(Loss) Income			Shareholders’		Comprehensive
	Shares		Amount		Shares		Amount		Earnings		(Net of Taxes)			Equity		Income (Loss)
Balance, December 31, 2010		11,949	$	11,682,000		4,776,339	$	6,027,000	$	20,331,000	$	(52,000	)	$	37,988,000
Comprehensive Income:
Net lncome										941,000					941,000	$	941,000
Other comprehensive income, net of tax:
Net change in unrealized gains on available-for-sale investment securities												210,000			210,000		210,000
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