PLUMAS BANCORP (Form: 10-Q, Received: 05/10/2013 10:01:55)

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2013

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

FOR THE TRANSITION PERIOD FROM TO

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)		(I.R.S. Employer Identification No.)

35 S. Lindan Avenue, Quincy, California		95971
(Address of Principal Executive Offices)		(Zip Code)

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 7, 2013. 4,776,339 shares

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLUMAS BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)


	March 31, 2013		December 31, 2012
Assets
Cash and cash equivalents	$	47,762	$	44,675
Investment securities available for sale		80,446		80,964
Loans, less allowance for loan losses of $5,777 at March 31, 2013 and $5,686 at December 31, 2012		308,436		310,271
Premises and equipment, net		13,010		13,271
Bank owned life insurance		11,251		11,160
Real estate and vehicles acquired through foreclosure		5,318		5,336
Accrued interest receivable and other assets		11,758		12,125

Total assets	$	477,981	$	477,802

Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing	$	133,432	$	143,646
Interest bearing		278,800		267,916

Total deposits		412,232		411,562
Repurchase agreements		7,401		7,377
Accrued interest payable and other liabilities		5,731		6,703
Junior subordinated deferrable interest debentures		10,310		10,310

Total liabilities		435,674		435,952

Commitments and contingencies (Note 6)
Shareholders’ equity:
Serial preferred stock, no par value; 10,000,000 shares authorized; 11,949 issued and outstanding at March 31, 2013 and December 31, 2012; aggregate liquidation value of $13,816 at March 31, 2013 and $13,667 at December 31, 2012.		11,877		11,855
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 4,776,339 shares at March 31, 2013 and December 31, 2012		6,102		6,093
Retained earnings		24,167		23,573
Accumulated other comprehensive income		161		329

Total shareholders’ equity		42,307		41,850

Total liabilities and shareholders’ equity	$	477,981	$	477,802

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)


	For the Three Months
	Ended March 31,
	2013			2012
Interest Income:
Interest and fees on loans	$	4,316		$	4,228
Interest on investment securities		256			185
Other		22			33

Total interest income		4,594			4,446
Interest Expense:
Interest on deposits		155			240
Interest on junior subordinated deferrable interest debentures		83			78
Other		27			20

Total interest expense		265			338

Net interest income before provision for loan losses		4,329			4,108
Provision for Loan Losses		700			600

Net interest income after provision for loan losses		3,629			3,508
Non-Interest Income:
Service charges		876			872
Gain on sale of loans		521			234
Earnings on Bank owned life insurance		91			85
Gain on sale of investments		—			51
Other		212			185

Total non-interest income		1,700			1,427
Non-Interest Expenses:
Salaries and employee benefits		2,219			2,318
Occupancy and equipment		757			758
Other		1,399			1,509

Total non-interest expenses		4,375			4,585

Income before provision for income taxes		954			350
Provision for Income Taxes		338			126

Net income	$	616		$	224

Preferred Stock Dividends and Discount Accretion		(171	)		(171	)

Net income available to common shareholders	$	445		$	53

Basic income per common share	$	0.09		$	0.01

Diluted income per common share	$	0.09		$	0.01

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)


	For the Three Months
	Ended March 31,
	2013			2012
Net income	$	616		$	224
Other comprehensive (loss) income:
Change in net unrealized gains, net		(287	)		120
Less: Reclassification adjustments for net gains included in net income		—			(51	)

Net unrealized holding (losses) gains		(287	)		69
Income tax effect		119			(28	)

Other comprehensive (loss) income		(168	)		41

Total comprehensive income	$	448		$	265

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	For the Three Months
	Ended March 31,
	2013			2012
Cash Flows from Operating Activities:
Net income	$	616		$	224
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		700			600
Change in deferred loan origination costs/fees, net		(208	)		(182	)
Depreciation and amortization		342			317
Stock-based compensation expense		9			66
Amortization of investment security premiums		114			157
Gain on sale of investments		—			(51	)
Gain on sale of loans held for sale		(521	)		(234	)
Loans originated for sale		(4,577	)		(3,307	)
Proceeds from loan sales		7,672			4,234
Provision from change in OREO valuation		114			187
Earnings on bank-owned life insurance		(91	)		(85	)
Decrease (increase) decrease in accrued interest receivable and other assets		512			(114	)
(Decrease) increase in accrued interest payable and other liabilities		(972	)		56

Net cash provided by operating activities		3,710			1,868

Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities		6,000			6,180
Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities		2,242			2,327
Purchases of available-for-sale securities		(8,122	)		(12,873	)
Proceeds from sale of available-for-sale securities		—			4,471
Net increase in loans		(1,711	)		(1,273	)
Proceeds from sale of other real estate		243			499
Proceeds from sale of other vehicles		51			20
Purchase of premises and equipment		(20	)		(116	)

Net cash used in investing activities		(1,317	)		(765	)

Continued on next page.

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)


	For the Three Months
	Ended March 31,
	2013			2012
Cash Flows from Financing Activities:
Net increase in demand, interest bearing and savings deposits	$	3,804		$	9,333
Net decrease in time deposits		(3,134	)		(1,855	)
Net increase (decrease ) in securities sold under agreements to repurchase		24			(2,996	)

Net cash provided by financing activities		694			4,482

Increase in cash and cash equivalents		3,087			5,585
Cash and Cash Equivalents at Beginning of Year		44,675			63,076

Cash and Cash Equivalents at End of Period	$	47,762		$	68,661

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	1,146		$	266
Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure	$	364		$	45

See notes to unaudited condensed consolidated financial statements.

PLUMAS BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

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

The Bank operates eleven branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, and Truckee. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a loan administrative office in Reno, Nevada and a lending office specializing in government-guaranteed lending in Auburn, California. The Bank’s primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which, in part, permanently raised the current standard maximum deposit insurance amount to $250,000. In addition, amendments to the Dodd-Frank Act extended unlimited FDIC insurance coverage for noninterest-bearing transaction deposit accounts for an additional two years. This unlimited insurance coverage for noninterest-bearing transaction accounts expired on December 31, 2012.

2. REGULATORY MATTERS

On February 15, 2012, the Bank received notice from the Federal Deposit Insurance Corporation (FDIC) and the California Department of Financial Institutions (“DFI”) that the Consent Order with the FDIC and the DFI which was effective on March 16, 2011 had been terminated. While the Bank is no longer subject to an Order, the Bank 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, 2012 this ratio was 32% and the Bank’s Tier 1 Leverage Capital Ratio was 10.4%. The FDIC and DFI terminated the informal agreement effective January 24, 2013.

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 March 2013 the FRB allowed Plumas Bancorp to pay all past due and current interest on its trust preferred securities. As of March 31, 2013 the amount of the arrearage on the dividend payments of the Series A Preferred Stock is $1.8 million representing twelve quarterly payments.

On April 19, 2013 the Company received notice that the FRB Agreement had been terminated.

3. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary, Plumas Bank. Plumas Statutory Trust I and Plumas Statutory Trust II are not consolidated into the Company’s consolidated financial statements and, accordingly, are accounted for under the equity method. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at March 31, 2013 and the results of its operations and its cash flows for the three-month periods ended March 31, 2013 and 2012. Our condensed consolidated balance sheet at December 31, 2012 is derived from audited financial statements. Certain reclassifications have been made to prior period’s balances to conform to classifications used in 2013.

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2012 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month period ended March 31, 2013 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

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

4. INVESTMENT SECURITIES AVAILABLE FOR SALE

The amortized cost and estimated fair value of investment securities at March 31, 2013 and December 31, 2012 consisted of the following:


	March 31, 2013
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies	$	33,254,000	$	128,000	$	(1,000	)	$	33,381,000
U.S. Government-sponsored agencies collateralized by mortgage obligations - residential		46,918,000		257,000		(110,000	)		47,065,000

	$	80,172,000	$	385,000	$	(111,000	)	$	80,446,000

Unrealized gains on available-for-sale investment securities totaling $274,000 were recorded, net of $113,000 in tax expense, as accumulated other comprehensive income within shareholders’ equity at March 31, 2013. During the three months ended March 31, 2012, the Company sold three available-for-sale securities for total proceeds of $4,471,000, which resulted in the recognition of a $51,000 gross gain on sale. No securities were sold during the three months ended March 31, 2013.


	December 31, 2012
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies	$	38,291,000	$	154,000	$	(3,000	)	$	38,442,000
U.S. Government-sponsored agencies collateralized by mortgage obligations - residential		42,112,000		434,000		(24,000	)		42,522,000

	$	80,403,000	$	588,000	$	(27,000	)	$	80,964,000

Net unrealized gains on available-for-sale investment securities totaling $561,000 were recorded, net of $232,000 in tax expense, as accumulated other comprehensive income within shareholders’ equity at December 31, 2012. During the year ended December 31, 2012, the Company sold twenty-five available-for-sale investment securities for $20,773,000, recording a $403,000 gain on sale. No securities were sold at a loss.

Investment securities with unrealized losses at March 31, 2013 are summarized and classified according to the duration of the loss period as follows:


	Less than 12 Months
	Fair		Unrealized
	Value		Losses
Debt securities:
U.S. Government-sponsored agencies	$	998,000	$	1,000
U.S. Government-sponsored agencies collateralized by mortgage obligations		19,726,000		110,000

	$	20,724,000	$	111,000

Investment securities with unrealized losses at December 31, 2012 are summarized and classified according to the duration of the loss period as follows:


	Less than 12 Months
	Fair		Unrealized
	Value		Losses
Debt securities:
U.S. Government-sponsored agencies	$	2,004,000	$	3,000
U.S. Government-sponsored agencies collateralized by mortgage obligations		7,002,000		24,000

	$	9,006,000	$	27,000

There were no securities in a loss position for more than one year as of March 31, 2013 and December 31, 2012.

At March 31, 2013, the Company held 57 securities of which 16 were in a loss position. Of the securities in a loss position, all were in a loss position for less than twelve months. Of the 16 securities, 1 is a U.S. Government-sponsored agencies and 15 are U.S. Government-sponsored agencies collateralized by mortgage obligations. The unrealized losses primarily relate to changes in interest rates and other market conditions. All of the securities continue to pay as scheduled. When analyzing an issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Company’s intent and ability to hold the security to recovery. As of March 31, 2013, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis. Based on the Company’s evaluation of the above and other relevant factors, the Company does not believe the securities that are in an unrealized loss position as of March 31, 2013 are other than temporarily impaired.

The amortized cost and estimated fair value of investment securities at March 31, 2013 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.


	Estimated		Estimated
	Amortized		Fair
	Cost		Value
Within one year		1,000,000		1,005,000
After one year through five years		32,254,000		32,376,000
Investment securities not due at a single maturity date:
Government-guaranteed mortgage- backed securities		46,918,000		47,065,000

	$	80,172,000	$	80,446,000

Investment securities with amortized costs totaling $47,300,000 and $44,305,000 and estimated fair values totaling $47,542,000 and $44,535,000 at March 31, 2013 and December 31, 2012, respectively, were pledged to secure deposits and repurchase agreements.

5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands:


	March 31, 2013			December 31, 2012
Commercial	$	28,777		$	29,552
Agricultural		32,864			35,124
Real estate – residential		32,679			34,666
Real estate – commercial		138,775			139,546
Real estate – construction and land development		16,811			15,801
Equity lines of credit		37,204			36,873
Auto		22,288			19,283
Other		3,762			4,212

		313,160			315,057
Deferred loan costs, net		1,053			900
Allowance for loan losses		(5,777	)		(5,686	)

	$	308,436		$	310,271

The recorded investment in impaired loans totaled $16,864,000 and $18,850,000 at March 31, 2013 and December 31, 2012. The Company had specific allowances for loan losses of $1,371,000 on impaired loans of $7,213,000 at March 31, 2013 as compared to specific allowances for loan losses of $1,186,000 on impaired loans of $14,334,000 at December 31, 2012. The balance of impaired loans in which no specific reserves were required totaled $9,651,000 and $4,516,000 at March 31, 2013 and December 31, 2012, respectively. The average recorded investment in impaired loans for the three months ended March 31, 2013 and March 31, 2012 was $17,440,000 and $23,944,000, respectively. The Company recognized $103,000 and $127,000 in interest income on a cash basis for impaired loans during the three months ended March 31, 2013 and 2012, respectively.

Included in impaired loans are troubled debt restructurings. A troubled debt restructuring is a formal restructure of a loan where the Company for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

The carrying value of troubled debt restructurings at March 31, 2013 and December 31, 2012 was $12,149,000 and $12,296,000, respectively. The Company has allocated $985,000 and $348,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2013 and December 31, 2011, respectively. The Company was not committed to lend additional amounts on loans classified as troubled debt restructurings at March 31, 2013 and December 31, 2012.

During the three month period ended March 31, 2013 and December 31, 2012, the terms of certain loans were modified as troubled debt restructurings. Modifications involving a reduction of the stated interest rate of the loan was for periods ranging from 1 month to 10 years. For the periods described above, modifications involving an extension of the maturity date were for periods ranging from 1 month to 10 years.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ending March 31, 2013:


	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings:
Dealer		1		7,564		7,494

Total		1	$	7,564	$	7,494

The troubled debt restructuring described above resulted in no allowance for loan losses or charge-offs during the three months ending March 31, 2013.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2013.


	Number of		Recorded
	Loans		Investment
Troubled Debt Restructurings:
Real estate – commercial		1	$	1,150,000

Total		1	$	1,150,000

The following table presents loans by class modified as troubled debt restructurings that occurred during the twelve months ending December 31, 2012:


	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings:
Commercial		1	$	24,000	$	24,000
Real Estate:
Residential		2		819,000		800,000
Construction and land development		3		289,000		289,000
Commercial		3		2,497,000		2,491,000
Dealer		2		11,000		11,000

Total		11	$	3,640,000	$	3,615,000

The troubled debt restructurings described above decreased the allowance for loan losses by $118,000 during the twelve months ending December 31, 2012. The troubled debt restructurings described above did not result in charge offs during the twelve months ending December 31, 2012.


	Number of		Recorded
	Loans		Investment
Troubled Debt Restructurings:
Real estate – construction		1	$	2,978,000

Total		1	$	2,978,000

The terms of certain other loans were modified during the three months ending March 31, 2013 and year ending December 31, 2012 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of March 31, 2013 and December 31, 2012 of $874 thousand and $9 million, respectively.

These loans which were modified during the three month ended March 31, 2013 and year ended December 31, 2012 did not meet the definition of a troubled debt restructuring as the modification was a delay in a payment ranging from 30 days to 3 months that was considered to be insignificant or the borrower was not considered to be experiencing financial difficulties.

At March 31, 2013 and December 31, 2012, nonaccrual loans totaled $12,974,000 and $13,683,000, respectively. Interest foregone on nonaccrual loans totaled $180,000 and $200,000 for the three months ended March 31, 2013 and 2012, respectively. Loans past due 90 days or more and on accrual status totaled $1,258,000 and $15,000 at March 31, 2013 and December 31, 2012.

Salaries and employee benefits totaling $294,000 and $195,000 have been deferred as loan origination costs during the three months ended March 31, 2013 and 2012, respectively.

The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all such loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.

The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.

Watch – A Watch loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Watch loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – 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. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loss – Loans classified as loss are considered uncollectible and charged off immediately.

The following table shows the loan portfolio allocated by management’s internal risk ratings at the dates indicated, in thousands:

March 31, 2013


	Commercial Credit Exposure Credit Risk Profile by Internally Assigned Grade
	Commercial		Agricultural		Real Estate- Residential		Real Estate- Commercial		Real Estate- Construction		Equity LOC		Total
Grade:
Pass	$	26,421	$	31,477	$	30,012	$	129,184	$	11,905	$	34,895	$	263,894
Watch		941		511		682		4,846		175		156		7,311
Substandard		1,393		876		1,985		4,745		4,731		2,128		15,858
Doubtful		22		—		—		—		—		25		47

Total	$	28,777	$	32,864	$	32,679	$	138,775	$	16,811	$	37,204	$	287,110


December 31, 2012

	Commercial Credit Exposure Credit Risk Profile by Internally Assigned Grade
	Commercial		Agricultural		Real Estate- Residential		Real Estate- Commercial		Real Estate- Construction		Equity LOC		Total
Grade:
Pass	$	27,260	$	33,801	$	31,239	$	128,919	$	10,863	$	34,142	$	266,224
Watch		1,145		466		751		3,237		149		965		6,713
Substandard		1,138		857		2,676		7,390		4,789		1,766		18,616
Doubtful		9		—		—		—		—		—		9

Total	$	29,552	$	35,124	$	34,666	$	139,546	$	15,801	$	36,873	$	291,562


	Consumer Credit Exposure Credit Risk Profile Based on Payment Activity March 31, 2013								Consumer Credit Exposure Credit Risk Profile Based on Payment Activity December 31, 2012
	Auto		Other		Total				Auto		Other		Total
Grade:
Performing	$	22,251	$	3,721	$	25,972			$	19,239	$	4,193	$	23,432
Non-performing		37		41		78				44		19		63

Total	$	22,288	$	3,762	$	26,050			$	19,283	$	4,212	$	23,495

The following tables show the allocation of the allowance for loan losses by impairment methodology at the dates indicated, in thousands:

Allowance for Loan Losses

Three months ended


	Commercial			Agricultural			Real Estate- Residential			Real Estate- Commercial			Real Estate- Construction			Equity LOC			Auto			Other			Total
March 31, 2013:
Beginning balance	$	855		$	159		$	894		$	1,656		$	950		$	736		$	289		$	147		$	5,686
Charge-offs		(153	)		—			(221	)		(132	)		(55	)		—			(22	)		(63	)		(646	)
Recoveries		9			—			—			2			—			—			17			9			37
Provision		75			6			(19	)		(108	)		705			(28	)		6			63			700

Ending balance	$	786		$	165		$	654		$	1,418		$	1,600		$	708		$	290		$	156		$	5,777

March 31, 2012:
Beginning balance	$	1,025		$	330		$	698		$	1,925		$	2,006		$	635		$	95		$	194		$	6,908
Charge-offs		(252	)		(250	)		(39	)		(97	)		(122	)		—			(7	)		(77	)		(844	)
Recoveries		10			—			—			2			—			3			6			37			58
Provision		320			136			(125	)		9			126			95			2			37			600

Ending balance	$	1,103		$	216		$	534		$	1,839		$	2,010		$	733		$	96		$	191		$	6,722

March 31, 2013:
Allowance for Loan Losses
Ending balance	$	786		$	165		$	654		$	1,418		$	1,600		$	708		$	290		$	156		$	5,777

Ending balance: individually evaluated for impairment	$	128		$	—		$	235		$	92		$	711		$	181		$	—		$	24		$	1,371

Ending balance: collectively evaluated for impairment	$	658		$	165		$	419		$	1,326		$	889		$	527		$	290		$	132		$	4,406

Loans
Ending balance	$	28,777		$	32,864		$	32,679		$	138,775		$	16,811		$	37,204		$	22,288		$	3,762		$	313,160

Ending balance: individually evaluated for impairment	$	2,668		$	666		$	3,136		$	3,447		$	5,132		$	1,755		$	36		$	24		$	16,864

Ending balance: collectively evaluated for impairment	$	26,109		$	32,198		$	29,543		$	135,328		$	11,679		$	35,449		$	22,252		$	3,738		$	296,296

December 31, 2012:
Allowance for Loan Losses
Ending balance	$	855		$	159		$	894		$	1,656		$	950		$	736		$	289		$	147		$	5,686

Ending balance: individually evaluated for impairment	$	192		$	1		$	459		$	284		$	68		$	180		$	—		$	2		$	1,186

Ending balance: collectively evaluated for impairment	$	663		$	158		$	435		$	1,372		$	882		$	556		$	289		$	145		$	4,500

Loans
Ending balance	$	29,552		$	35,124		$	34,666		$	139,546		$	15,801		$	36,873		$	19,283		$	4,212		$	315,057

Ending balance: individually evaluated for impairment	$	3,478		$	647		$	3,598		$	4,528		$	5,191		$	1,360		$	44		$	4		$	18,850

Ending balance: collectively evaluated for impairment	$	26,074		$	34,477		$	31,068		$	135,018		$	10,610		$	35,513		$	19,239		$	4,208		$	296,207

The following table shows an aging analysis of the loan portfolio by the time past due, in thousands:


	30-89 Days Past Due		90 Days and Still Accruing		Nonaccrual		Total Past Due		Current		Total
As of March 31, 2013:
Commercial:
Commercial	$	152	$	—	$	2,534	$	2,686	$	26,091	$	28,777
Agricultural		384		—		380		764		32,100		32,864
Real estate – construction		166		1,241		3,344		4,751		12,060		16,811
Real estate – commercial		—		—		3,447		3,447		135,328		138,775
Residential:
Real estate – residential		234		—		1,453		1,687		30,992		32,679
Equity LOC		142		—		1,755		1,897		35,307		37,204
Consumer:
Auto		180		—		37		217		22,071		22,288
Other		58		17		24		99		3,663		3,762

Total	$	1,316	$	1,258	$	12,974	$	15,548	$	297,612	$	313,160

As of December 31, 2012:
Commercial:
Commercial	$	329	$	—	$	3,303	$	3,632	$	25,920	$	29,552
Agricultural		—		—		380		380		34,744		35,124
Real estate – construction		156		—		3,314		3,470		12,331		15,801
Real estate – commercial		1,271		—		3,378		4,649		134,897		139,546
Residential:
Real estate – residential		242		—		1,911		2,153		32,513		34,666
Equity LOC		527		—		1,349		1,876		34,997		36,873
Consumer:
Auto		151		11		44		206		19,077		19,283
Other		102		4		4		110		4,102		4,212

Total	$	2,778	$	15	$	13,683	$	16,476	$	298,581	$	315,057

The following table shows information related to impaired loans at the dates indicted, in thousands:


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
As of March 31, 2013:
With no related allowance recorded:
Commercial	$	2,222	$	2,812			$	2,506	$	18
Agricultural		666		1,147				655		6
Real estate – construction		1,629		1,703				1,741		26
Real estate – commercial		1,534		1,606				2,564		—
Real estate – residential		2,485		2,495				2,635		28
Equity Lines of Credit		1,079		1,155				921		1
Auto		36		36				40		1
Other		—		—				37		—
With an allowance recorded:
Commercial		446		446	$	128		440		—
Agricultural		—		—		—		—		—
Real estate – construction		3,503		4,928		711		3,503		7
Real estate – commercial		1,913		1,913		92		1,069		13
Real estate – residential		651		651		235		653		3
Equity Lines of Credit		676		812		181		670		—
Auto		—		—		—		—		—
Other		24		24		24		6		—
Total:
Commercial		2,668		3,258		128		2,946		18
Agricultural		666		1,147		—		655		6
Real estate – construction		5,132		6,631		711		5,244		33
Real estate – commercial		3,447		3,519		92		3,633		13
Real estate – residential		3,136		3,146		235		3,288		31
Equity Lines of Credit		1,755		1,967		181		1,591		1
Auto		36		36		—		40		1
Other		24		24		24		43		—

Total	$	16,864	$	19,728	$	1,371	$	17,440	$	103

As of December 31, 2012:
With no related allowance recorded:
Commercial	$	1,022	$	1,398			$	1,597	$	16
Agricultural		245		725				573		39
Real estate – construction		1,429		1,503				1,106		98
Real estate – commercial		941		1,013				1,997		96
Real estate – residential		343		354				1,336		28
Equity Lines of Credit		490		490				613		22
Auto		44		44				60		5
Other		2		2				45		6
With an allowance recorded:
Commercial		2,456		2,849	$	192		2,765		20
Agricultural		402		402		1		403		20
Real estate – construction		3,762		5,187		68		2,056		35
Real estate – commercial		3,587		3,588		284		3,473		102
Real estate – residential		3,255		3,255		459		2,818		105
Equity Lines of Credit		870		1,082		180		974		5
Auto		—		—		—		—		—
Other		2		2		2		—		—
Total:
Commercial		3,478		4,247		192		4,362		36
Agricultural		647		1,127		1		976		59
Real estate – construction		5,191		6,690		68		3,162		133
Real estate – commercial		4,528		4,601		284		5,470		198
Real estate – residential		3,598		3,609		459		4,154		133
Equity Lines of Credit		1,360		1,572		180		1,587		27
Auto		44		44		—		60		5
Other		4		4		2		45		6

Total	$	18,850	$	21,894	$	1,186	$	19,816	$	597

6. COMMITMENTS AND CONTINGENCIES

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

In the normal course of business, there are various outstanding commitments to extend credit, which are not reflected in the financial statements, including loan commitments of $83,298,000 and $76,030,000 and stand-by letters of credit of $70,000 and $110,000 at March 31, 2013 and December 31, 2012, respectively.

Of the loan commitments outstanding at March 31, 2013, $7,824,000 are real estate construction loan commitments that are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The deferred liability related to the Company’s stand-by letters of credit was not significant at March 31, 2013 or December 31, 2012.

7. EARNINGS PER SHARE

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


	For the Three Months Ended March 31,
(In thousands, except per share data)	2013			2012
Net Income:
Net income	$	616		$	224
Dividends and discount accretion on preferred shares		(171	)		(171	)

Net income available to common shareholders	$	445		$	53

Earnings Per Share:
Basic earnings per share	$	0.09		$	0.01
Diluted earnings per share	$	0.09		$	0.01
Weighted Average Number of Shares Outstanding:
Basic shares		4,776			4,776
Diluted shares		4,831			4,776

Shares of common stock issuable under stock options and warrants for which the exercise prices were greater than the average market prices were not included in the computation of diluted earnings per share due to their antidilutive effect. Stock options and warrants not included in the computation of diluted earnings per share, due to shares not being in the-money and having an antidilutive effect, were approximately 439,000 and 718,000 for the three month periods ended March 31, 2013 and 2012, respectively.

8. STOCK-BASED COMPENSATION

In 2001, the Company established a Stock Option Plan for which 410,293 shares of common stock remain reserved for issuance to employees and directors and no shares are available for future grants as of March 31, 2013. The Plan requires that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash or with Company common stock previously acquired by the optionee and held by the optionee for a period of at least six months. The Plan does not provide for the settlement of awards in cash and new shares are issued upon option exercise. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. Upon grant, options vest ratably over a three to five year period.

The Company determines the fair value of the options previously granted on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant. The Company also makes assumptions regarding estimated forfeitures that will impact the total compensation expenses recognized under the Plan.

During the three months ended March 31, 2013, the Company recognized compensation costs of $9,000 and no increase in future income tax benefit. During the three months ended March 31, 2012, the Company recognized compensation cost of $66,000 and an increase in future income tax benefit of $1,000.

The following table summarizes information about stock option activity for the three months ended March 31, 2013:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Intrinsic Value (in thousands)
Options outstanding at December 31, 2012		419,806		$	8.67
Options granted		—			—
Options exercised		—			—
Options cancelled		(9,513	)	$	9.70

Options outstanding at March 31, 2013		410,293		$	8.65		4.0	$	479

Options exercisable at March 31, 2013		305,700		$	10.60		3.4	$	240

Expected to vest after March 31, 2013		87,939		$	2.95		6.0	$	201

At March 31, 2013, there was $78,000 of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of options vested during the three months ended March 31, 2013 was $52,000.

9. 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.

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.

At March 31, 2013 total deferred tax assets were approximately $6.5 million and total deferred tax liabilities were approximately $1.4 million for a net deferred tax asset of $5.1 million. The Company’s deferred tax assets primarily relate to net operating loss carry-forwards and timing differences in the tax deductibility of the provision for loan losses, impairment charges on other real estate owned and deferred compensation. Based upon our analysis of available evidence, management of the Company determined that it is “more likely than not” that all of our deferred income tax assets as of March 31, 2013 and December 31, 2012 will be fully realized and therefore no valuation allowance was recorded. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions 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.

Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the three months ended March 31, 2013.

10. FAIR VALUE MEASUREMENT

The Company measures fair value under the fair value hierarchy described below.

Level 1: Quoted prices for identical instruments traded in active exchange markets.

Level 2: Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Model based techniques that use one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

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

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at March 31, 2013 and December 31, 2012 are as follows:


			Fair Value Measurements at March 31, 2013 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	47,762,000	$	47,762,000					$	47,762,000
Investment securities		80,446,000			$	80,446,000				80,446,000
Loans, net		308,436,000					$	312,353,000		312,353,000
FHLB stock		1,950,000								N/A
Accrued interest receivable		1,523,000				196,000		1,327,000		1,523,000
Financial liabilities:
Deposits		412,232,000		344,790,000		67,561,000				412,351,000
Repurchase Agreements		7,401,000				7,401,000				7,401,000
Junior subordinated deferrable interest debentures		10,310,000						5,702,000		5,702,000
Accrued interest payable		234,000		6,000		92,000		136,000		234,000

			Fair Value Measurements at December 31, 2012 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	44,675,000	$	44,675,000					$	44,675,000
Investment securities		80,964,000			$	80,964,000				80,964,000
Loans, net		310,271,000					$	313,929,000		313,929,000
FHLB stock		1,950,000								N/A
Accrued interest receivable		1,677,000				248,000		1,429,000		1,677,000
Financial liabilities:
Deposits		411,562,000		340,986,000		70,696,000				411,682,000
Repurchase Agreements		7,377,000				7,377,000				7,377,000
Junior subordinated deferrable interest debentures		10,310,000						3,191,000		3,191,000
Accrued interest payable		1,115,000		6,000		90,000		1,019,000		1,115,0000

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The following methods and assumptions were used by management to estimate the fair value of its financial instruments:

Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Investment securities: Fair values for securities available for sale are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FHLB stock: It was not practicable to determine the fair value of the FHLB stock due to restrictions placed on its transferability.

Deposits: The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market accounts are, by definition, equal to the carrying amount at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Repurchase agreements: The fair value of securities sold under repurchase agreements is estimated based on bid quotations received from brokers using observable inputs and are included as Level 2.

Junior subordinated deferrable interest debentures: The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Accrued interest and payable: The carrying amounts of accrued interest approximate fair value and are considered to be linked in classification to the asset or liability for which they relate.

Commitments to extend credit and letters of credit: The fair value of commitments are estimated using the fees currently charged to enter into similar agreements and are not significant and, therefore, not presented. Commitments to extend credit are primarily for variable rate loans and letters of credit.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level 3. Changes in assumptions could significantly affect the fair values presented.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Assets and liabilities measured at fair value on a recurring basis at March 31, 2013 are summarized below:


			Fair Value Measurements at March 31, 2013 Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S.Government-sponsored agencies	$	33,381,000			$	33,381,000
U.S. Government-sponsored agencies collateralized by mortgage obligations		47,065,000				47,065,000

	$	80,446,000	$	—	$	80,446,000	$	—

Assets and liabilities measured at fair value on a recurring basis at December 31, 2012 are summarized below:


			Fair Value Measurements at December 31, 2012 Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S.Government-sponsored agencies	$	38,442,000			$	38,442,000
U.S. Government-sponsored agencies collateralized by mortgage obligations		42,522,000				42,522,000

	$	80,964,000	$	—	$	80,964,000	$	—

The fair value of securities available-for-sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities or matrix pricing. There were no changes in the valuation techniques used during 2013 or 2012. Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.

Assets and liabilities measured at fair value on a non-recurring basis at March 31, 2013 are summarized below:


			Fair Value Measurements at March 31, 2013 Using
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Assets:
Impaired loans:
Commercial	$	2,193,000					$	2,193,000	$	(22,000	)
Agricultural		245,000						245,000		1,000
Real estate – residential		573,000						573,000		40,000
Real estate – commercial		2,630,000						2,630,000		8,000
Real estate – construction and land development		2,932,000						2,932,000		(653,000	)
Equity lines of credit		602,000						602,000		(13,000	)
Auto		—						—		—
Other		—						—		(24,000	)

Total impaired loans		9,175,000						9,175,000		(663,000	)

Other real estate:
Real estate – residential		1,043,000						1,043,000		—
Real estate – commercial		2,007,000						2,007,000		(9,000	)
Real estate – construction and land development		2,198,000						2,198,000		(105,000	)
Equity lines of credit		45,000						45,000		—

Total other real estate		5,293,000		—		—		5,293,000		(114,000	)

	$	14,468,000	$	—	$	—	$	14,468,000	$	(777,000	)

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2012 are summarized below:


			Fair Value Measurements at December 31, 2012 Using						Three months ended March 31, 2012
	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Assets:
Impaired loans:
Commercial	$	3,066,000					$	3,066,000	$	(200,000	)
Agricultural		646,000						646,000		—
Real estate – residential		2,954,000						2,954,000		83,000
Real estate – commercial		4,128,000						4,128,000		(163,000	)
Real estate – construction and land development		3,835,000						3,835,000		(73,000	)
Equity lines of credit		690,000						690,000		(115,000	)
Auto		—						—		—
Other		—						—		—

Total impaired loans		15,319,000						15,319,000		(468,000	)

Other real estate:
Real estate – residential		818,000						818,000		(1,000	)
Real estate – commercial		1,953,000						1,953,000		(31,000	)
Real estate – construction and land development		2,407,000						2,407,000		(155,000	)
Equity lines of credit		117,000						117,000		—

Total other real estate		5,295,000		—		—		5,295,000		(187,000	)

		$20,614,000	$	—	$	—	$	20,614,000	$	(655,000	)

The Company has no liabilities which are reported at fair value.

The following methods were used to estimate fair value.

Impaired Loans: The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses or loans that have been subject to partial charge-offs are generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Total losses of $663,000 and $468,000 represent impairment charges recognized during the three months ended March 31, 2013 and 2012, respectively, related to the above impaired loans.

Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach.

Appraisals for both collateral-dependent impaired loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.

In certain cases we use discounted cash flow or similar internal modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs. Accordingly, changes in these unobservable inputs may have a significant impact on fair value.

Certain of these unobservable inputs will (in isolation) have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. Where multiple inputs are used within the valuation technique of an asset or liability, a change in one input in a certain direction may be offset by an opposite change in another input having a potentially muted impact to the overall fair value of that particular instrument. Additionally, a change in one unobservable input may result in a change to another unobservable input (that is, changes in certain inputs are interrelated to one another), which may counteract or magnify the fair value impact.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2013 and December 31, 2012 (dollars in thousands):


Description	Fair Value 3/31/2013		Fair Value 12/31/2012		Valuation Technique	Significant Unobservable Input	Range (Weighted Average)
Impaired Loans:
Commercial	$	2,193	$	3,066	Sales Comparison	a. Appraiser adjustments on sales	0% - 20% (10%)
						comp data
					Management estimates	b. Management adjustments for
						depreciation in values
						depending on property types
Agricultural	$	245	$	646	Sales Comparison	a. Appraiser adjustments on sales	0% - 15% (8%)
						comp data
					Management estimates	b. Management adjustments for
						depreciation in values
						depending on property types
RE - Residential	$	573	$	2,954	Sales Comparison	a. Appraiser adjustments on sales	0% - 25% (10%)
						comp data
					Management estimates	b. Management adjustments for
						depreciation in values
						depending on property types
RE – Commercial	$	2,630	$	4,128	Income Approach	a. Appraisers required to apply a	0% - 10% (7%)
						capitalization rate as sales data
						is limited
					Management estimates	b. Management adjustments for
						depreciation in values
						depending on property types
Land and Construction	$	2,932	$	3,835	Sales Comparison	a. Appraiser adjustments on sales	0% - 15% (8%)
						comp data
					Management estimates	b. Management adjustments for
						depreciation in values depending
						on property types
Equity Lines of Credit	$	602	$	690	Sales Comparison	a. Appraiser adjustments on sales	0% - 25% (10%)
						comp data
					Management estimates	b. Management adjustments for
						depreciation in values depending
						on property types
Other Real Estate:
RE – Residential	$	1,043	$	818	Sales Comparison	a. Appraiser adjustments on sales comp data	0% - 25% (10%)
Land and Construction	$	2,198	$	2,407	Sales Comparison
RE – Commercial	$	2,007	$	1,953	Sales Comparison	b. Appraiser adjustments on land properties based on discounted cash flow approach
Equity Lines of Credit	$	45	$	117	Sales Comparison

11. Adoption of New Accounting Standards

In February 2013, the FASB issued an accounting standards update to finalize the reporting requirements for reclassifications of amounts out of accumulated other comprehensive income (“AOCI”). Items reclassified out of AOCI to net income in their entirety must have the effect of the reclassification disclosed according to the respective income statement line item. This information must be provided either on the face of the financial statements by income statement line item, or in a footnote. For public companies, the amendments in the update became effective for interim and annual periods beginning on or after December 15, 2012. As of March 31, 2013, the impact of this update on the Company’s disclosures was minimal as the only changes to AOCI were changes in market values related to available for sale securities.

12. Subsequent Events

On January 30, 2009 the Bancorp entered into a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Bancorp issued and sold (i) 11,949 shares of the Bancorp’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 Bancorp’s common stock, no par value (the “Common Stock”), for an aggregate purchase price of $11,949,000 in cash.

On April 11, 2013, the Treasury announced its intent to sell its investment in the Bancorp’s Series A Preferred Stock along with similar investments the Treasury had made in 7 other financial institutions, principally to qualified institutional buyers. Using a modified Dutch auction methodology that establishes a market price by allowing investors to submit bids at specified increments during the period of April 15, 2013 through April 18, 2013, the U.S. Treasury auctioned all of the Bancorp’s 11,949 Series A Preferred Stock. The Bancorp sought and obtained regulatory permission to participate in the auction. The Bancorp successfully bid to repurchase 7,000 shares of the 11,949 outstanding shares. This repurchase resulted in a discount of approximately 7% on the face value of the Series A Preferred Stock plus related outstanding dividends. The remaining 4,949 shares are held by private investors.

Funds for the repurchase of the Series A Preferred Stock were provided through a combination of a dividend from the Bancorp’s subsidiary, Plumas Bank, and $7.5 million from the proceeds of a new issuance of subordinated debentures (“subordinated debt”). The subordinated debt was issued on April 15, 2013 to an unrelated third-party pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant with Community BanCapital, L.P. (“CBC”). The subordinated debt agreement provides that in the event of default with respect to the subordinated debt, the Bancorp will be subject to certain restrictions on the payment of dividends and distributions to shareholders, repurchase or redemption of the Bancorp’s securities and payment on certain debts or guarantees. The subordinated debenture agreement also provides that in the event of default, CBC will have the right to appoint a director to the Bancorp’s board of directors and/or the Plumas Bank board in certain limited circumstances.

The subordinated debt bears an interest rate of 7.5% per annum, has a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant to purchase up to 300,000 shares of the Bancorp’s common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $5.25 per share.

PART I – FINANCIAL INFORMATION

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

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

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

INTRODUCTION

The following discussion and analysis sets forth certain statistical information relating to the Company as of March 31, 2013 and December 31, 2012 and for the three month periods ended March 31, 2013 and 2012. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2012.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no changes to the Company’s critical accounting policies from those disclosed in the Company’s 2012 Annual Report to Shareholders on Form 10-K.

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

OVERVIEW

Earnings increased by $392 thousand from $224 thousand during the first quarter of 2012 to $616 thousand during the current quarter. Earnings benefited from both growth in revenue and a decline in non-interest expense. Net interest income increased by $221 thousand and non-interest income grew by $273 thousand. Non-interest expense declined by $210 thousand. Partially offsetting these positive variances were an increase in provision for loan losses of $100 thousand and an increase in income tax expense of $212 thousand.

Net income allocable to common shareholders increased from $53 thousand during the first quarter of 2012 to $445 thousand during the current quarter. Earnings per share increased to $0.09 during the three months ended March 31, 2013 compared to $0.01 during the first quarter of 2012. Income allocable to common shareholders is calculated by subtracting preferred stock dividends and accretion of the discount on preferred stock from net income.

Total assets at March 31, 2013 were $478 million, an increase of $179 thousand from December 31, 2012. This increase included an increase in cash and cash equivalents of $3.1 million partially offset by declines in investment securities, loans and other assets. Net loan balances declined by $1.9 million from $310.3 million at December 31, 2012 to $308.4 million at March 31, 2013 and investment securities declined slightly from $81.0 million at December 31, 2012 to $80.4 million at March 31, 2013.

Deposits totaled $412.2 million at March 31, 2013, an increase of $670 thousand from December 31, 2012. Interest bearing transaction accounts (NOW) accounts increased by $3.1 million, while savings and money market accounts increased by $10.9 million. Non-interest bearing demand deposits decreased by $10.2 million and time deposits declined by $3.1 million. Shareholders’ equity increased by $0.4 million from $41.9 million at December 31, 2012 to $42.3 million at March 31, 2013.

The annualized return on average assets was 0.53% for the three months ended March 31, 2013 up from 0.20% for the three months ended March 31, 2012. The annualized return on average common equity increased from 0.8% during the first quarter of 2012 to 5.9% during the current quarter.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2013

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $4.3 million for the three months ended March 31, 2013, an increase of $221 thousand, or 5%, from $4.1 million for the same period in 2012. The increase in net interest income includes both an increase in interest income and a decline in interest expense. Interest income, benefiting from an increase in the average balance of both loans and investments, increased by $148 thousand. Interest expense decreased by $73 thousand mostly related to a decline in rate paid and average balance in time deposits. Net interest margin for the three months ended March 31, 2013 increased 6 basis points, or 1%, to 4.15%, up from 4.09% for the same period in 2012.

Interest income increased by $148 thousand, or 3%, to $4.6 million for the three months ended March 31, 2013, up from $4.4 million during the same period in 2012. Interest and fees on loans increased $88 thousand to $4.3 million for the three months ended March 31, 2013 as compared to $4.2 million during the first quarter of 2012. The Company’s average loan balances were $312 million for the three months ended March 31, 2013, up $17.6 million, or 6%, from $294 million for the same period in 2012. The Company is focused on growing loan balances through a balanced and diversified approach. The increase in loan balances during the twelve month period ended March 31, 2013 includes growth in the Company’s automobile, SBA and commercial real estate loan portfolios. The average rate earned on the Company’s loan balances decreased 17 basis points to 5.61% during the first three months of 2013 compared to 5.78% during the first three months of 2012. The decrease in loan yield reflects increased rate competition in the Company’s service area. Interest income on investment securities increased by $71 thousand as average balances increased by $23.9 million, from $56.5 million for the quarter ended March 31, 2012 to $80.4 million during the current quarter. Yield on investment securities declined by 3 basis points from 1.32% during the first quarter of 2012 to 1.29% during the current quarter. Related to a decline in interest earning cash balances, other interest income declined by $11 thousand to $22 thousand for the three months ended March 31, 2013.

Interest expense on deposits decreased by $85 thousand, or 35%, to $155 thousand for the three months ended March 31, 2013, down from $240 thousand during the 2012 quarter. This decrease primarily relates to decreases in the average balance and rate paid on time deposits.

Interest on time deposits declined by $74 thousand. Average time deposits declined by $10.5 million from $79.4 million during the three months ended March 31, 2012 to $68.9 million during the current quarter. We attribute much of the reduction in time to the unusually low interest rate environment as we have seen a movement out of time into more liquid deposit types. The average rate paid on time deposits decreased from 0.77% during the three months ended March 31, 2012 to 0.46% during the current quarter. This decrease primarily relates to a decline in market rates paid in the Company’s service area and the maturity of higher rate deposits.

Interest expense on NOW accounts declined by $9 thousand. Rates paid on NOW accounts declined by 4 basis points from 0.15% during the quarter ended March 31, 2012 to 0.11% during the three months ended March 31, 2013 related to a decline in market rates.

Interest expense on money market accounts decreased by $5 thousand related to a decrease in rate paid on these accounts of 6 basis points from 0.23% during the 2012 quarter to 0.17% during the current quarter. Interest expense on savings accounts increased by $3 thousand related to an increase in average balance from $66.1 million during the three months ended March 31, 2012 to $74.9 million during the current quarter.

Interest expense on all other interest-bearing liabilities, which mostly consist of repurchase agreements and junior subordinated debentures, increased by $12 thousand from $98 thousand during the first quarter of 2012 to $110 thousand during the three months ended March 31, 2012. This increase in mostly related to an increase in the average rate paid on these liabilities.

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


	For the Three Months Ended March 31, 2013							For the Three Months Ended March 31, 2012
	Average Balance (in thousands)		Interest (in thousands)		Yield/ Rate			Average Balance (in thousands)		Interest (in thousands)		Yield/ Rate
Interest-earning assets:
Loans (1) (2) (3)	$	311,957	$	4,316		5.61	%	$	294,322	$	4,228		5.78	%
Investment securities (1)		80,378		256		1.29	%		56,513		185		1.32	%
Interest-bearing deposits		30,264		22		0.29	%		53,412		33		0.25	%

Total interest-earning assets		422,599		4,594		4.41	%		404,247		4,446		4.42	%

Cash and due from banks		13,862							12,992
Other assets		37,237							40,777

Total assets	$	473,698						$	458,016

Interest-bearing liabilities:
NOW deposits	$	83,247		23		0.11	%	$	85,733		32		0.15	%
Money market deposits		45,334		19		0.17	%		41,132		24		0.23	%
Savings deposits		74,919		34		0.18	%		66,117		31		0.19	%
Time deposits		68,913		79		0.46	%		79,450		153		0.77	%

Total deposits		272,413		155		0.23	%		272,432		240		0.35	%
Other interest-bearing liabilities		8,264		27		1.33	%		8,838		20		0.91	%
Junior subordinated debentures		10,310		83		3.26	%		10,310		78		3.04	%

Total interest-bearing liabilities		290,987		265		0.37	%		291,580		338		0.47	%

Non-interest bearing deposits		133,952							121,461
Other liabilities		6,365							4,809
Shareholders’ equity		42,394							40,166

Total liabilities & equity	$	473,698						$	458,016

Cost of funding interest-earning assets (4)						0.26	%						0.33	%
Net interest income and margin (5)			$	4,329		4.15	%			$	4,108		4.09	%

(1)	Not computed on a tax-equivalent basis.

(2)	Average nonaccrual loan balances of $13.6 million for 2013 and $16.4 million for 2012 are included in average loan balances for computational purposes.

(3)	Net costs included in loan interest income for the three-month periods ended March 31, 2013 and 2012 were $55,000 and $11,000, respectively.

(4)	Total annualized interest expense divided by the average balance of total earning assets.

(5)	Annualized net interest income divided by the average balance of total earning assets.

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


	2013 over 2012 change in net interest income for the three months ended March 31
				(in thousands)
	Volume (1)			Rate (2)			Mix (3)			Total
Interest-earning assets:
Loans	$	251		$	(121	)	$	(42	)	$	88
Investment securities		77			(3	)		(3	)		71
Interest bearing deposits		(14	)		6			(3	)		(11	)

Total interest income		314			(118	)		(48	)		148

Interest-bearing liabilities:
NOW deposits		(1	)		(8	)		—			(9	)
Money market deposits		2			(7	)		—			(5	)
Savings deposits		4			(1	)		—			3
Time deposits		(20	)		(61	)		7			(74	)
Other		(1	)		9			(1	)		7
Junior subordinated debentures		—			5			—			5

Total interest expense		(16	)		(63	)		6			(73	)

Net interest income	$	330		$	(55	)	$	(54	)	$	221

(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.

Provision for loan losses. During the three months ended March 31, 2013 we recorded a provision for loan losses of $0.7 million, up $0.1 million from the $0.6 million provision recorded during the first quarter of 2012. The $0.7 million provision recorded for the three months ended March 31, 2013 primarily relates to a reserve for one land development loan relationship. 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 probable incurred 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 not less than quarterly 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 probable incurred losses in the loan 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.

Non-interest income. During the three months ended March 31, 2013 non-interest income increased by $273 thousand to $1.7 million up from $1.4 million during the quarter ended March 31, 2012. The largest component of this increase was $287 thousand in gains on the sale of government guaranteed loans. During the current quarter, proceeds from SBA loan sales totaled $7.7 million resulting in a gain on sale of $521 thousand. This compares to proceeds of $4.2 million and gain on sale of $234 thousand during the first quarter of 2012. Loans originated for sale were $4.6 million and $3.3 million during the three months ended March 31, 2013 and 2012, respectively. The largest decrease in non-interest income was related to a decline in gain on sale of securities. The Company elected not to sell investment securities during the three months ending March 31, 2013. During the three months ended March 31, 2012, the Company sold three available-for-sale securities for total proceeds of $4,471,000, which resulted in the recognition of a $51,000 gain on sale.

The following table describes the components of non-interest income for the three-month periods ended March 31, 2013 and 2012, in thousands:


	For the Three Months
	Ended March 31				Dollar			Percentage
	2013		2012		Change			Change
Service charges on deposit accounts	$	876	$	872	$	4			0.5	%
Gain on sale of loans		521		234		287			122.6	%
Earnings on life insurance policies		91		85		6			7.1	%
Loan servicing income		52		39		13			33.3	%
Customer service fees		43		34		9			26.5	%
Gain on sale of securities		—		51		(51	)		-100.0	%
Other		117		112		5			4.5	%

Total non-interest income	$	1,700	$	1,427	$	273			19.1	%

Non-interest expense. During the three months ended March 31, 2013, total non-interest expense declined by $210 thousand, or 5%, to $4.4 million, down from $4.6 million for the comparable period in 2012. The Company experienced declines in several categories of non-interest expense the largest of which were $99 thousand in salary and benefit expense, $73 thousand in the provision from changes in valuation of OREO and $47 thousands in postage. The largest increase in non-interest expense was $91 thousand in outside service fees.

The Company continues to realize savings in salary and benefit cost including a $10 thousand decrease in salary expense, excluding commissions. Stock compensation expense decreased by $57 thousand from $66 thousand during the first quarter of 2012 to $9 thousand during the current quarter. During the first quarter of 2012 we had an adjustment to the estimated forfeiture rate resulting in an increase in stock compensation; no adjustment was required during the current quarter. The largest reduction in salary and benefits was related to an increase in deferred loan origination costs totaling $99 thousand. We attribute this increase in deferred loan origination costs to an increase in lending activity. These items were partially offset by an increase in commission expense of $80 thousand, which relates to government-guaranteed lending personnel, related to the increase in SBA loan sales.

OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. When other real estate is acquired, any excess of the Bank’s recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property less costs to sell is charged against the allowance for loan losses. A valuation allowance for losses on other real estate is maintained to provide for subsequent temporary declines in value. The allowance is established through a provision for losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or write-downs resulting from permanent impairment are recorded in other income or expenses as incurred. The $114 thousand in OREO provision in 2013 was mostly related to a $105 thousand decline in value on one land development property based on an appraisal received during the current quarter. The $187 thousand in OREO provision in 2012 was related to a decline in the value of three properties based on appraisals received during the first quarter of 2012.

The $47 thousand decline in postage expense is related to outsourcing the mailing and processing of statements and notices beginning in June, 2012.

The increase in outside service costs was related to the outsourcing of our statement processing operations and an increase in costs related to monitoring and maintaining our ATMs. During 2012 the Bank modernized its ATM network by purchasing new ATM machines which have the ability to accept currency and checks and provide an imaged receipt. While these ATMs provide a significant increase in functionality, they are also more expensive to operate and maintain.

The following table describes the components of non-interest expense for the three-month periods ended March 31, 2013 and 2012, in thousands:


	For the Three Months
	Ended March 31				Dollar			Percentage
	2013		2012		Change			Change
Salaries and employee benefits	$	2,219	$	2,318	$	(99	)		-4.3	%
Occupancy and equipment		757		758		(1	)		-0.1	%
Outside service fees		410		319		91			28.5	%
Professional fees		197		227		(30	)		-13.2	%
FDIC insurance		133		162		(29	)		-17.9	%
Provision from changes in valuation of OREO		114		187		(73	)		-39.0	%
Telephone and data communication		68		84		(16	)		-19.0	%
Business development		63		54		9			16.7	%
Advertising and shareholder relations		61		61		—			—	%
Armored car and courier		55		56		(1	)		-1.8	%
Director compensation and retirement		55		54		1			1.9	%
Loan and collection expenses		51		62		(11	)		-17.7	%
OREO expense		48		18		30			166.7	%
Deposit premium amortization		44		43		1			2.3	%
Stationery and supplies		28		41		(13	)		-31.7	%
Insurance expense		27		28		(1	)		-3.6	%
Postage		13		60		(47	)		-78.3	%
Other		32		53		(21	)		-39.6	%

Total non-interest expense	$	4,375	$	4,585	$	(210	)		-4.6	%

Provision for income taxes. The Company recorded an income tax provision of $338 thousand, or 35.4% of pre-tax income for the three months ended March 31, 2013. This compares to an income tax provision of $126 thousand or 36.0% of pre-tax income during the first three months of 2012. The percentages for 2013 and 2012 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan income decrease taxable income.

FINANCIAL CONDITION

Loan Portfolio. The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of the area it serves. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These commercial loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment.

The Company’s largest lending categories are commercial real estate loans, equity lines of credit, agricultural loans and residential real estate loans. These categories accounted for approximately 44.3%, 11.9%, 10.5% and 10.4%, respectively of the Company’s total loan portfolio at March 31, 2013, and approximately 44.3%, 11.7%, 11.1% and 11.0%, respectively of the Company’s total loan portfolio at December 31, 2012. Construction and land development loans increased slightly representing 5.4% and 5.0% of the loan portfolio as of March 31, 2013 and December 31, 2012, 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. At the beginning of 2009 construction and land development loans totaled $73.8 million representing 20.2% of the Company’s loan portfolio as compared to $16.8 million or 5.4% of the loan portfolio at March 31, 2013.

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 78% of the total loan portfolio at March 31, 2013 and December 31, 2012. 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.

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 March 31, 2013 and December 31, 2012, approximately 73% 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 $33 million at March 31, 2013 and $35 million at December 31, 2012.

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.

The Company, through the creation of MARC in 2009 developed and implemented an action plan to significantly reduce nonperforming loans. It the start of 2009 non-performing loans totaled $26.7 million compared to $14.2 million as of March 31, 2013. MARC 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, and 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 probable incurred loan losses in the loan portfolio. The adequacy of the allowance for loan losses is based upon management’s continuing assessment of various factors affecting the collectability 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 collectability 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.

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 collectability of the portfolio as of the evaluation date. Effective for the third quarter of 2012, the Company modified its method of estimating the allowance for loan losses for non-impaired loans. This modification incorporated historical losses from the beginning of the latest business cycle. Previously we utilized historical loss experience based on a rolling eight quarters ending with the most recently completed calendar quarter. This modification had the effect of increasing the required allowance by approximately $250,000 for 2012 related to the expanded historical loss period. The Company believes that, given the recent trend in historical losses, it was prudent to increase the period examined and that a full business cycle was the appropriate period.

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

The following table provides certain information for the three-month periods indicated with respect to the Company’s allowance for loan losses as well as charge-off and recovery activity, in thousands:


	For the Three Months Ended March 31,
	2013			2012
Balance at January 1,	$	5,686		$	6,908

Charge-offs:
Commercial and agricultural		(153	)		(502	)
Real estate mortgage		(353	)		(136	)
Real estate construction		(55	)		(122	)
Auto and other		(85	)		(84	)

Total charge-offs		(646	)		(844	)

Recoveries:
Commercial and agricultural		9			10
Real estate mortgage		2			5
Real estate construction		—			—
Auto and other		26			43

Total recoveries		37			58

Net charge-offs		(609	)		(786	)

Provision for loan losses		700			600

Balance at March 31,	$	5,777		$	6,722

Annualized net charge-offs during the three-month period to average loans		0.79	%		1.07	%
Allowance for loan losses to total loans		1.84	%		2.29	%

The following table provides a breakdown of the allowance for loan losses at March 31, 2013 and 2012:


	Balance at End of Period		Percent of Loans in Each Category			Balance at End of Period		Percent of Loans in Each Category
	2013		2013			2012		2012
Commercial and agricultural	$	951		19.7	%	$	1,319		23.1	%
Real estate mortgage (includes equity lines)		2,780		66.6	%		3,106		65.8	%
Real estate construction		1,600		5.4	%		2,010		6.5	%
Auto and other		446		8.3	%		287		4.6	%

Total	$	5,777		100	%	$	6,722		100	%

The allowance for loan losses totaled $5.8 million at March 31, 2013 and $5.7 million at December 31, 2012. Specific reserves related to impaired loans increased from $1.2 million at December 31, 2012 to $1.4 million at March 31, 2013. 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 $95 thousand to $4.4 million at March 31, 2013 as compared to $4.5 million at December 31, 2012. The allowance for loan losses as a percentage of total loans increased slightly from 1.80% at December 31, 2012 to 1.84% at March 31, 2013. The percentage of general reserves to unimpaired loans decreased slightly from 1.52% at December 31, 2012 to 1.49% at March 31, 2013.

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 collectability 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 $10.9 million and $9.3 million at March 31, 2013 and December 31, 2012, respectively. For additional information related to restructured loans see Note 5 of the Company’s Condensed Consolidated Financial Statements in this Quarterly Report on Form 10Q.

Nonperforming loans at March 31, 2013 were $14.2 million, an increase of $0.5 million from the $13.7 million balance at December 31, 2012. The increase is related to a $1.2 million loan which is over 90 days past due. This loan is still accruing as it is well secured and in the process of collection. Nonaccrual loans decreased from $13.7 million at December 31, 2012 to $13.0 million at March 31, 2013. Specific reserves on nonaccrual loans totaled $1.3 million at March 31, 2013 and $976 thousand at December 31, 2012, respectively. Performing loans past due thirty to eighty-nine days decreased by $1.5 million from $2.8 million at December 31, 2012 to $1.3 million at March 31, 2013.

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 $2.7 million from $18.6 million at December 31, 2012 to $15.9 million at March 31, 2013. Loans classified as watch increased from $6.7 million at December 31, 2012 to $7.3 million at March 31, 2013. At March 31, 2013, $4.4 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 March 31, 2013 and December 31, 2012, the Company’s recorded investment in impaired loans totaled $16.9 million and $18.8 million, respectively. The specific allowance for loan losses related to impaired loans totaled $1.4 million and $1.2 million at March 31, 2013 and December 31, 2012, respectively. Additionally, $2.9 million has been charged off against the impaired loans at March 31, 2013 and $3.0 million at December 31 2012.

It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb probable incurred losses in the loan portfolio. Management believes that the allowance at March 31, 2013 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 originally carried at fair market value, less selling costs and subsequently adjusted for impairment, if any. OREO holdings represented thirty-nine properties totaling $5.3 million at March 31, 2013 and forty properties totaling $5.3 million at December 31, 2012. Nonperforming assets as a percentage of total assets were 4.09% at March 31, 2013 and 3.98% at December 31, 2012.

The following table provides a summary of the change in the OREO balance for the three months ended March 31, 2013 and 2012:


	Three Months Ended March 31,
	2013			2012
	(in thousands)
Beginning Balance	$	5,295		$	8,623
Additions		333			35
Dispositions		(221	)		(499	)
Provision from change in OREO valuation		(114	)		(187	)

Ending Balance	$	5,293		$	7,972

The provision for OREO losses relates to a decrease in value of two REO properties based on recent appraisals. During the three months ended March 31, 2013, we sold five properties and added four properties to our OREO portfolio. During the three months ended March 31, 2012, we sold a portion of one property and added on lot loan to our OREO portfolio.

Investment Portfolio and Federal Funds Sold. Total investment securities decreased by $0.5 million from $80.9 million as of December 31, 2012 to $80.4 million as of March 31, 2013.

The investment portfolio at March 31, 2013 and December 31, 2012 was invested entirely in U.S. Government-sponsored agencies. There were no Federal funds sold at March 31, 2013 and December 31, 2012; however, the Bank maintained interest earning balances at the Federal Reserve Bank (FRB) totaling $31.9 million at March 31, 2013 and $24.5 million at December 31, 2012, 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.

Deposits. Total deposits were $412.2 million as of March 31, 2013, up $670 thousand from the December 31, 2012 balance of $411.5 million. Non-interest bearing demand deposits decreased by $10.2 million, interest bearing transaction accounts (NOW) increased by $3.1 million, savings accounts increased by $9.0 million and money market accounts increased by $1.9 million. Time deposits declined by $3.1 million. We believe that the reduction in demand is mostly related to seasonal factors and the reduction in time to the unusually low interest rate environment as we have seen a movement out of time into more liquid deposits types.

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, 2012 as demand and time deposits accounts declined as a percentage of total deposits and we had an increase in other deposit types. Non-interest bearing demand deposits were 32% of total deposits at March 31, 2013 and 35% of total deposits at December 31, 2012. Interest bearing transaction accounts were 21% of total deposits at March 31, 2013 and 20% of total deposits at December 31, 2012. Money market and savings deposits totaled 31% of total deposits at March 31, 2013 and 28% at December 31, 2012. Time deposits were 16% of total deposits at March 31, 2013 and 17% of total deposits at December 31, 2012.

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. There were no brokered deposits at March 31, 2013 or December 31, 2012.

Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $99,896,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $190,239,000 at March 31, 2013. The Company is required to hold FHLB stock as a condition of membership. At March 31, 2013, the Company held $1,950,000 of FHLB stock which is recorded as a component of other assets. At this level of stock holdings, the Company can borrow up to $41,481,000. There were no borrowings outstanding as of March 31, 2013. To borrow the $99,896,000 in available credit, the Company would need to purchase $2,746,000 in additional FHLB stock. The Company also has an unsecured $6 million Federal Funds borrowing line with one of its correspondent banks.

Repurchase Agreements. In 2011 Plumas Bank introduced a new product for their larger business customers which use repurchase agreements as an alternative to interest-bearing deposits. The balance in this product at March 31, 2013 and December 31, 2012 was $7.4 million. Interest paid on this product is similar to that which is paid on the Bank’s premium money market account; however, these are not deposits and are not FDIC insured.

Capital Resources

Shareholders’ equity as of March 31, 2013 totaled $42.3 million up from $41.9 million as of December 31, 2012.

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, reviews 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 during the last four years and none are anticipated to be paid in 2013. The Company is subject to various restrictions on the payment of dividends.

Beginning during the second quarter of 2010, 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. However, in March 2013 the FRB allowed Plumas Bancorp to pay all past due and current interest on its trust preferred securities. As of March 31, 2013 the amount of the arrearage on the dividend payments of the Series A Preferred Stock is $1.8 million representing twelve quarterly payments. During April, Plumas Bancorp repurchased at auction 7,000 of 11,949 outstanding shares of Preferred Stock; see Note 12 of the Company’s Condensed Consolidated Financial Statements. As of the date of filing this report, the amount of the arrearage on the dividend payments of the remaining 4,949 shares of Series A Preferred Stock is $0.7 million representing twelve quarterly payments.

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 shareholders’ 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 table presents the Company’s and the Bank’s capital ratios as of March 31, 2013 and December 31, 2012, in thousands:


	March 31, 2013					December 31, 2012
	Amount		Ratio			Amount		Ratio
Tier 1 Leverage Ratio
Plumas Bancorp and Subsidiary	$	50,174		10.7	%	$	49,052		10.3	%
Minimum regulatory requirement		18,838		4.0	%		19,040		4.0	%
Plumas Bank		49,961		10.6	%		49,662		10.4	%
Minimum requirement for “Well-Capitalized” institution under the prompt corrective action plan		23,551		5.0	%		23,852		5.0	%
Minimum regulatory requirement		18,841		4.0	%		19,032		4.0	%
Tier 1 Risk-Based Capital Ratio
Plumas Bancorp and Subsidiary		50,174		14.1	%		49,052		13.9	%
Minimum regulatory requirement		14,190		4.0	%		14,143		4.0	%
Plumas Bank		49,961		14.1	%		49,662		14.1	%
Minimum requirement for “Well-Capitalized” institution under the prompt corrective action plan		21,264		6.0	%		21,200		6.0	%
Minimum regulatory requirement		14,176		4.0	%		14,133		4.0	%
Total Risk-Based Capital Ratio
Plumas Bancorp and Subsidiary		54,627		15.4	%		53,489		15.1	%
Minimum regulatory requirement		28,381		8.0	%		28,286		8.0	%
Plumas Bank		54,409		15.4	%		54,096		15.3	%
Minimum requirement for “Well-Capitalized” institution under the prompt corrective action plan		35,440		10.0	%		35,333		10.0	%
Minimum regulatory requirement		28,352		8.0	%		28,266		8.0	%

Management believes that the Company and the Bank currently meet all their capital adequacy requirements.

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.

New Proposed Capital Rules. During 2012 the federal bank regulatory agencies issued joint proposed rules that implement Basel III regulatory capital reforms and changes required by the Reform Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010 and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements. The proposed rules received extensive comments. In a joint press release issued in November 2012, the agencies stated that they do not expect any of the proposed rules to become effective on the original target date of January 1, 2013. Industry participants are expecting further guidance in early 2013. Management has completed a preliminary assessment of the impact of the proposed rules and believes Plumas Bank’s ratios would be in compliance with the requirements of the proposed rules if they were presently in effect.

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 March 31, 2013, the Company had $83.3 million in unfunded loan commitments and $70 thousand in letters of credit. This compares to $76.0 million in unfunded loan commitments and $110 thousand in letters of credit at December 31, 2012. Of the $83.3 million in unfunded loan commitments, $41.9 million and $44.4 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at March 31, 2013, $37.4 million were secured by real estate, of which $11.3 million was secured by commercial real estate and $26.1 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 and overdraft protection 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 totaled $48,000 and $46,000 during three months ended March 31, 2013 and 2012, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2013 and the last such lease expiring during 2015.

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 $99,896,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $190,239,000. See “Short-term Borrowing Arrangements” for additional information on our FHLB borrowing capacity. The Company also has an unsecured $6 million Federal Funds borrowing line with one of its correspondent banks.

Customer deposits are the Company’s primary source of funds. Total deposits were $412.2 million as of March 31, 2013, up $670 thousand from the December 31, 2012 balance of $411.5 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 3. 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 4. CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Company’s disclosure controls and procedures as of the end of the Company’s fiscal quarter ended March 31, 2013 (as defined in Exchange Act Rule 13a—15(e), have concluded that the Company’s disclosure controls and procedures are adequate and effective for purposes of Rule 13a—15(e) in timely alerting them to material information relating to the Company required to be included in the Company’s filings with the SEC under the Securities Exchange Act of 1934.

There were no changes in internal control over financial reporting during the fiscal quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company and/or its subsidiaries 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 1A RISK FACTORS

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

ITEM 2. UNREGISTERD SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None.

(b) None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Under the terms of the Series A Preferred Stock, Plumas Bancorp is required to pay dividends on a quarterly basis at a rate of 5% per year for the first five years, after which the dividend rate automatically increases to 9%. Dividend payments on the Series A Preferred Stock may be deferred without default, but the dividend is cumulative and, if Plumas Bancorp fails to pay dividends for six quarters, the holder will have the right to appoint representatives to Plumas Bancorp’s board of directors. As previously disclosed, Plumas Bancorp has determined to defer regularly scheduled quarterly interest payments on its Series A Preferred Stock. Therefore, Plumas Bancorp is in arrears with the dividend payments on the Series A Preferred Stock. During April, Plumas Bancorp repurchased at auction 7,000 of 11,949 outstanding shares of Preferred Stock; see Note 12 of the Company’s Condensed Consolidated Financial Statements. As of the date of filing this report, the amount of the arrearage on the dividend payments of the remaining 4,949 shares of Series A Preferred Stock is $0.7 million representing twelve quarterly payments.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following documents are included or incorporated by reference in this Quarterly Report on Form 10Q:


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.

10.3 *		Subordinated Debenture dated April 15, 2013.

10.4 *		Stock Purchase Warrant dated April 15, 2013

10.5 *		Subordinated Debenture Purchase Agreement dated April 15, 2013

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.

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.

10.41		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.

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, is included as Exhibit 10.66 to the Registrant’s 10-K filed on March 23, 2012, which is incorporated by this reference herein.



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.

10.73		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-Q under Plumas Bancorp and Subsidiary Notes to Condensed Consolidated Financial Statements as Footnote 7 – Earnings Per Share.

31.1*		Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated May 10, 2013.

31.2*		Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated May 10, 2013.

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 May 10, 2013.

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 May 10, 2013.

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Schema.

101.CAL*		XBRL Taxonomy Calculation Linkbase.

101.DEF*		XBRL Taxonomy Definition Linkbase.

101.LAB*		XBRL Taxonomy Label Linkbase.

101.PRE*		XBRL Taxonomy Presentation Linkbase.

*	Filed herewith

SIGNATURES

Pursuant to the requirements 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: May 10, 2013

/s/ Richard L. Belstock

Richard L. Belstock

Chief Financial Officer

/s/ Andrew J. Ryback

Andrew J. Ryback

President and Chief Executive Officer

Exhibit 10.3

S UBORDINATED D EBENTURE

THIS OBLIGATION IS NOT A DEPOSIT AND IT IS NOT INSURED BY THE FEDERAL DEPOSIT

INSURANCE CORPORATION OR ANY FEDERAL AGENCY.


$7,500,000		April 15, 2013

F OR V ALUE R ECEIVED , the undersigned, P LUMAS B ANCORP , a California corporation with its headquarters located at 35 South Lindan Avenue, Quincy, California 95971 (“ Borrower ”), hereby promises to pay to the order of Community BanCapital, L.P., a Delaware limited partnership with its main office located at 50 East Washington Street, Suite 400, Chicago, Illinois 60602 (“ Lender ”), the principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000), or so much thereof that has been advanced and remains outstanding, and to pay interest thereon, at the office of Lender located at 50 East Washington Street, Suite 400, Chicago, Illinois 60602, or such other place as Lender may designate, on the terms and subject to the conditions stated in this Subordinated Debenture. This Subordinated Debenture is issued in accordance with, and shall be governed by the terms of, that certain Subordinated Debenture Purchase Agreement of even date herewith entered into between Borrower and Lender (the “ Purchase Agreement ”). Unless otherwise indicated herein, terms defined in the Purchase Agreement shall have the same meaning when used herein

All accrued interest and unpaid principal due and payable under this Subordinated Debenture shall be paid in full on or before the Maturity Date.

The unpaid principal amount outstanding under this Subordinated Debenture from time to time shall bear interest before maturity in accordance with the Purchase Agreement, computed on the basis of a 365-day year and charged for actual days elapsed. Under certain circumstances as provided in the Purchase Agreement, overdue interest payments under this Subordinated Debenture shall bear interest from the due date thereof until paid at a daily rate equal to the Default Rate of interest, computed on the basis of a 365-day year and charged for actual days elapsed, except as otherwise provided in the Purchase Agreement.

Lender will note on its internal records the amount of each payment in respect of the Subordinated Debenture. Whenever any payment to be made under this Subordinated Debenture shall be due on a day that is other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest due upon this Subordinated Debenture.

There shall be no penalties or other charges payable by Borrower to Lender hereunder other than those payments expressly described in the Purchase Agreement. Except as otherwise provided in the Purchase Agreement, all payments hereunder shall be credited first to accrued interest and second to the unpaid principal balance outstanding at the time of such payment.

The Subordinated Debenture may not be prepaid in any amount or at any time on or prior to the second anniversary of the Closing Date. After the second anniversary of the Closing Date, Borrower may prepay all or part of the outstanding unpaid principal balance under this Subordinated Debenture, without penalty, as provided below and in the Purchase Agreement. Except for payments of principal prior to maturity as a result of the acceleration of maturity as a result of an Acceleration Event of Default, Lender shall have no responsibility to verify whether Borrower has obtained any requisite Federal Reserve or other regulatory approval for the payment of principal (including payment at maturity or redemption prior to maturity).

This Subordinated Debenture is not secured by any assets of Borrower. The indebtedness of Borrower evidenced by this Subordinated Debenture, including the principal, premium, if any, and interest, shall be subordinate and junior in right of payment to Borrower’s obligations to its general and secured creditors, except such other creditors holding obligations of Borrower ranking on a parity with or junior to this Subordinated Debenture, if any. Borrower may not retire any part of its obligations hereunder without the prior written consent of the Federal Reserve. In the event of any dissolution, liquidation or winding up of Borrower, whether voluntary or involuntary, all obligations to Borrower’s general creditors and secured creditors, except such creditors holding obligations of Borrower ranking on a parity with or junior to this Subordinated Debenture, if any, shall be entitled to be paid in full before any payment shall be made on account of the principal of or interest on this Subordinated Debenture. In the event of any such proceeding, after payment in full of all such sums owing with respect to such prior obligations, Lender, together with the holders of any obligations of Borrower ranking on a parity with this Subordinated Debenture, shall be entitled to be paid, from the remaining assets of Borrower, the unpaid principal and interest of this Subordinated Debenture or such obligations before any payment or other distribution, whether in cash, property or otherwise, shall be made on account of any capital stock or any obligation of Borrower ranking junior to this Subordinated Debenture.

If an Event of Default shall occur, Lender shall have the rights set forth in Section 4 of the Purchase Agreement. Borrower shall reimburse and indemnify Lender and shall hold Lender harmless against any reasonable costs (including court costs and attorneys’ fees) incurred by Lender in the collection of any amounts due as a result of an Event of Default or as otherwise provided in the Purchase Agreement.

Lender may sell, assign, pledge or otherwise transfer or encumber any or all of its interest under this Subordinated Debenture at any time and from time to time. In the event of a transfer of the Subordinated Debenture, all terms and conditions of this Subordinated Debenture shall be binding upon and inure to the benefit of both the transferee and Borrower after such transfer; provided, however , that Borrower shall have no obligation hereunder to any such transferee unless and until any transfer of this Subordinated Debenture is recorded on the books and records of Borrower.

Upon receipt of evidence reasonably satisfactory to Borrower of the loss, theft, destruction or mutilation of this Subordinated Debenture, Borrower shall, at Lender’s expense, execute and deliver in lieu thereof a new debenture in principal amount equal to the unpaid principal amount of such lost, stolen, destroyed or mutilated debenture, dated the date to which interest has been paid on such lost, stolen, destroyed or mutilated Subordinated Debenture; provided , that: (i) in the case of any such loss, theft or destruction, Lender shall have delivered to Borrower an indemnity reasonably satisfactory to Borrower indemnifying and holding Borrower harmless from any and all liability, claim or damage resulting from such loss, theft or destruction; or (ii) in the case of any such mutilation, upon surrender of this Subordinated Debenture to Borrower.

Nothing herein shall impair the obligation of Borrower, which is absolute and unconditional, to pay the principal of and any premium and interest on this Subordinated Debenture according to its terms.

No provision of this Subordinated Debenture shall be amended or waived except by a written instrument signed by a duly authorized officer of each of Borrower and Lender. Any notices or other communications permitted or required hereunder shall be sent and addressed in accordance with the requirements of the Purchase Agreement.

This Agreement shall be governed by and construed in accordance with the internal laws of the State of Illinois. Nothing herein shall be deemed to limit any rights, powers or privileges which Lender may have pursuant to any law of the United States or any rule, regulation or order of any department or agency thereof and nothing herein shall be deemed to make unlawful any transaction or conduct by Lender which is lawful pursuant to, or which is permitted by, any of the foregoing.

To induce Lender to accept this Agreement and the other Transaction Documents, Borrower irrevocably agrees that all actions or proceedings in any way, manner, or respect, arising out of or from or related to this Subordinated Debenture shall be litigated only in courts having suits within Chicago, Illinois. Borrower hereby consents and submits to the jurisdiction of any local, state, or federal court located within said city. Borrower hereby waives any right it may have to transfer or change the venue of any litigation brought against Borrower by Lender.

WAIVER OF RIGHT TO JURY TRIAL . BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH THIS SUBORDINATED DEBENTURE OR ANY OF THE OTHER TRANSACTION DOCUMENTS, OR ANY OTHER STATEMENT OR ACTION OF BORROWER OR LENDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS SUBORDINATED DEBENTURE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS DISCUSSED THIS WAIVER WITH SUCH LEGAL COUNSEL. BORROWER FURTHER ACKNOWLEDGES THAT (a) IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER, (b) THIS WAIVER HAS BEEN REVIEWED BY BORROWER AND BORROWER’S COUNSEL AND IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THE PURCHASE AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS AND (c) THIS WAIVER SHALL BE EFFECTIVE AS TO EACH OF SUCH TRANSACTION DOCUMENTS AS IF FULLY INCORPORATED THEREIN.

I N W ITNESS W HEREOF , Borrower has caused this Subordinated Debenture to be executed as of the date first written above.

A TTEST :

P LUMAS B ANCORP

By:

Name:

Title:

Exhibit 10.4

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SHARES UNDER THE ACT AND ANY REQUIRED QUALIFICATION UNDER APPLICABLE STATE AND FOREIGN LAW OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT THE TRANSACTION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS UNDER THE ACT AND THE QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE AND FOREIGN LAW.

P LUMAS B ANCORP

S TOCK P URCHASE W ARRANT


Warrant No. CBC-001		Original Issue Date: April 15, 2013

F OR V ALUE R ECEIVED , P LUMAS B ANCORP , a California corporation (the “Company” ), hereby certifies that C OMMUNITY B AN C APITAL , L.P. , a Delaware limited partnership (together with its registered assignees as hereinafter provided, the “Holder” ) is entitled to purchase from the Company Three Hundred Thousand (300,000) duly authorized, validly issued, fully paid and nonassessable shares of Common Stock at a per share price equal to the Exercise Price, all subject to the terms, conditions and adjustments set forth below in this Warrant. Certain capitalized terms used herein are defined in Section 1 .

This Warrant has been issued pursuant to the terms of that certain Subordinated Debenture Purchase Agreement dated of even date herewith (the “ Purchase Agreement ”) between the Holder and the Company.

Section 1. Definitions . As used in this Warrant, the following terms have the respective meanings set forth below:

“ Aggregate Exercise Price ” means an amount equal to the product of: (a) the number of Warrant Shares in respect of which this Warrant is then being exercised pursuant to Section 3 , multiplied by (b) the Exercise Price.

“ Board ” means the board of directors of the Company.

“ Business Day ” means any day, except a Saturday, Sunday or legal holiday, on which banking institutions in the city of Quincy, California, are authorized or obligated by law or executive order to close.

“ Common Stock ” means the common stock, no par value per share, of the Company, and any capital stock into which such Common Stock shall have been converted, exchanged or reclassified following the date hereof.

“ Common Stock Deemed Outstanding ” means, at any given time, the sum of: (a) the number of shares of Common Stock actually outstanding at such time; plus (b) the number of shares of Common Stock issuable upon exercise of Options actually outstanding at such time; plus (c) the number of shares of Common Stock issuable under existing unvested awards of restricted stock that are not treated as outstanding; plus (d) the number of shares of Common Stock issuable upon conversion or exchange of Convertible Securities actually outstanding at such time (treating as actually outstanding any Convertible Securities issuable upon exercise of Options actually outstanding at such time), in each case, regardless of whether the Options or Convertible Securities are actually exercisable at such time; provided , that Common Stock Deemed Outstanding at any given time shall not include shares owned or held by or for the account of the Company or any of its wholly owned subsidiaries.

“ Company ” has the meaning set forth in the preamble.

“ Convertible Securities ” means any securities (directly or indirectly) convertible into or exchangeable for Common Stock, but excluding Options.

“ Excluded Issuances ” means any issuance or sale by the Company after the Original Issue Date of: (a) shares of Common Stock issued upon the exercise of this Warrant; (b) shares of Common Stock issued directly or upon the exercise of Options to directors, officers, consultants or employees, in connection with their service as directors of the Company or their employment by or consulting services to the Company, in each case authorized by the Board and issued pursuant to any of the equity incentive plans identified by the Company on its Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2011 (collectively, the “ Plans ”), including all such shares of Common Stock and Options outstanding prior to the Original Issue Date; (c) shares of Common Stock issued upon the vesting of restricted stock awards made under the Plans; or (d) shares of Common Stock issued upon the conversion or exercise of Options (other than Options covered by clause (b) above) or Convertible Securities issued prior to the Original Issue Date provided that such securities are not amended after the date hereof to increase the number of shares of Common Stock issuable thereunder or to lower the exercise or conversion price thereof.

“ Exercise Date ” means, for any given exercise of this Warrant, the date on which the conditions to such exercise as set forth in Section 3 shall have been satisfied at or prior to 5:00 p.m., Chicago, Illinois, time, on a Business Day, including the receipt by the Company of the Exercise Agreement, the Warrant and the Aggregate Exercise Price.

“ Exercise Agreement ” has the meaning set forth in Section 3(a)(i) .

“ Exercise Period ” has the meaning set forth in Section 2 .

“ Exercise Price ” shall be equal to Five and Twenty Five Hundredths Dollars ($5.25), subject to adjustment as provided for in Section 4 .

“ Expiration Date ” has the meaning set forth in Section 2 .

“ Fair Market Value ” means, as of any particular date: (a) the volume weighted average of the closing sales prices of the Common Stock for such day on all domestic securities exchanges on which the Common Stock may at the time be listed, averaged over thirty (30) consecutive Business Days ending on the Business Day immediately prior to the day as of which “Fair Market Value” is being determined; provided , that if the Common Stock is listed on any domestic securities exchange, the term “Business Day” as used in this sentence means Business Days on which such exchange is open for trading. If at any time the Common Stock is not listed on any domestic securities exchange, the “Fair Market Value” of the Common Stock shall be equal to the higher of: (i) 1.25 times the consolidated tangible book value per share of the Common Stock as of the end of the most recently ended calendar quarter; or (ii) the fair market value determined by an appraisal, if any, requested by the Holder and performed by a third-party mutually acceptable to the Holder and the Company. For purposes of this definition, the NASDAQ Capital Market shall be considered a domestic securities exchange.

“ Holder ” has the meaning set forth in the preamble.

“ Holder’s Representative ” means those of the Holder’s directors, officers and employees who have agreed in writing, in form and substance satisfactory to the Company, to maintain the confidentiality of all information related to the Company except as required by law or regulation and not to use such information for any purpose other than to advise the Holder with respect to its investment in the Company.

“ Options ” means any warrants or other rights or options to subscribe for or purchase Common Stock or Convertible Securities.

“ Original Issue Date ” means April 15, 2013.

“ NASDAQ ” means The NASDAQ Stock Market, Inc.

“ OTC Bulletin Board ” means The OTC Bulletin Board, a regulated quotation service owned by the Financial Industry Regulatory Authority, Inc. and that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities.

“ Person ” means any individual, sole proprietorship, partnership, limited liability company, corporation, joint venture, trust, incorporated organization or government or department or agency thereof.

“ Warrant ” means this Warrant and all warrants issued upon division or combination of, or in substitution for, this Warrant.

“ Warrant Shares ” means the shares of Common Stock or other capital stock of the Company then purchasable upon exercise of this Warrant in accordance with the terms of this Warrant.

Section 2. Term of Warrant . Subject to the terms and conditions hereof, including Section 3(g) , at any time or from time to time after the Original Issue Date, and prior to 5:00 p.m., Chicago, Illinois, time, on the eighth (8 ^th ) anniversary of the Original Issue Date or, if such day is not a Business Day, on the next succeeding Business Day (the “ Expiration Date ”), the Holder of this Warrant may exercise this Warrant for all or any part of the Warrant Shares purchasable hereunder (subject to adjustment as provided herein). The period during which the Holder of this Warrant may exercise this Warrant as described in this Section 2 is referred to herein as (the “ Exercise Period ”).

Section 3. Exercise of Warrant .

(a) Exercise Procedure. This Warrant may be exercised from time to time on any Business Day during the Exercise Period, for all or any part of the unexercised Warrant Shares, upon:

(i) surrender of this Warrant to the Company at its then principal executive offices (or an indemnification undertaking in form and substance satisfactory to the Company with respect to this Warrant in the case of its loss, theft or destruction), together with an Exercise Agreement in the form attached hereto as Exhibit A (each, an “ Exercise Agreement ”), duly completed (including specifying the number of Warrant Shares to be purchased) and executed; and

(ii) payment to the Company of the Aggregate Exercise Price in accordance with Section 3(b) .

(b) Payment of the Aggregate Exercise Price. Payment of the Aggregate Exercise Price shall be made, at the option of the Holder as expressed in the Exercise Agreement, by the following methods:

(i) by delivery to the Company of a certified or official bank check payable to the order of the Company or by wire transfer of immediately available funds to an account designated in writing by the Company, in the amount of such Aggregate Exercise Price;

(ii) by instructing the Company to withhold a number of Warrant Shares then issuable upon exercise of this Warrant with an aggregate Fair Market Value as of the Exercise Date equal to such Aggregate Exercise Price;

(iii) by surrendering to the Company: (x) Warrant Shares (or other shares of Common Stock) previously acquired by the Holder with an aggregate Fair Market Value as of the Exercise Date equal to such Aggregate Exercise Price; and/or (y) the subordinated debenture of even date herewith issued by the Company to the Holder pursuant to the Purchase Agreement having a value as of the Exercise Date equal to the Aggregate Exercise Price (which value shall be the principal amount thereof plus accrued and unpaid interest); or

(iv) any combination of the foregoing.

In the event of any withholding of Warrant Shares or surrender of other equity securities pursuant to clause (ii), (iii) or (iv) above where the number of shares whose value is equal to the Aggregate Exercise Price is not a whole number, the number of shares withheld by or surrendered to the Company shall be rounded up to the nearest whole share and the Company shall make a cash payment to the Holder (by delivery of a certified or official bank check or by wire transfer of immediately available funds) based on the incremental fraction of a share being so withheld by or surrendered to the Company in an amount equal to the product of: (x) such incremental fraction of a share being so withheld or surrendered; multiplied by (y) in the case of Common Stock, the Fair Market Value per Warrant Share as of the Exercise Date, and, in all other cases, the value thereof as of the Exercise Date determined in accordance with clause (iii)(y) above.

(c) Delivery of Stock Certificates. Upon receipt by the Company of the Exercise Agreement, surrender of this Warrant and payment of the Aggregate Exercise Price (in accordance with Section 3(a) ), the Company shall, as promptly as practicable, and in any event within five (5) Business Days thereafter, execute (or cause to be executed) and deliver (or cause to be delivered) to the Holder a certificate or certificates representing the Warrant Shares issuable upon such exercise, together with cash in lieu of any fraction of a share, as provided in Section 3(d) . The stock certificate or certificates so delivered shall bear such legends as the Company may require under applicable securities laws and shall be, to the extent possible, in such denomination or denominations as the exercising the Holder shall reasonably request in the Exercise Agreement and shall be registered in the name of the Holder or, subject to compliance with Section 6 , such other Person’s name as shall be designated in the Exercise Agreement. This Warrant shall be deemed to have been exercised and such certificate or certificates of Warrant Shares shall be deemed to have been issued, and the Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares for all purposes, as of the Exercise Date.

(d) Fractional Shares. The Company shall not be required to issue a fractional Warrant Share upon exercise of any Warrant. As to any fraction of a Warrant Share that the Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay to such Holder an amount in cash (by delivery of a certified or official bank check or by wire transfer of immediately available funds) equal to the product of: (i) such fraction; multiplied by (ii) the Fair Market Value of one Warrant Share on the Exercise Date.

(e) Delivery of New Warrant. Unless the purchase rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, at the time of delivery of the certificate or certificates representing the Warrant Shares being issued in accordance with Section 3(c) , deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unexpired and unexercised Warrant Shares called for by this Warrant. Such new Warrant shall in all other respects be identical to this Warrant.

(f) Valid Issuance of Warrant and Warrant Shares; Payment of Taxes. With respect to the exercise of this warrant, the Company hereby represents, covenants and agrees:

(i) This Warrant is, and any Warrant issued in substitution for or replacement of this Warrant shall be, upon issuance, duly authorized and validly issued.

(ii) All Warrant Shares issuable upon the exercise of this Warrant pursuant to the terms hereof shall be, upon issuance against receipt of the Exercise Price, and the Company shall take all such actions as may be necessary or appropriate in order that such Warrant Shares are, validly issued, fully paid and non-assessable, issued without violation of any pre-emptive or similar rights of any stockholder of the Company and free and clear of all taxes, liens and charges.

(iii) The Company shall take all such actions as may be necessary to ensure that all such Warrant Shares are issued without violation by the Company of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock or other securities constituting Warrant Shares may be listed at the time of such exercise (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance).

(iv) The Company shall use its best efforts to cause the Warrant Shares, as soon as practicable upon such exercise, to be listed on any domestic securities exchange upon which shares of Common Stock or other securities constituting Warrant Shares are listed at the time of such exercise.

(v) The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issuance or delivery of Warrant Shares upon exercise of this Warrant; provided , that the Company shall not be required to pay any tax or governmental charge that may be imposed with respect to any applicable withholding or the issuance or delivery of the Warrant Shares to any Person other than the Holder, and no such issuance or delivery shall be made unless and until the Person requesting such issuance has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid.

(g) Conditional Exercise. Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a public offering or a sale of the Company (pursuant to a merger, sale of stock, or otherwise), such exercise may at the election of the Holder be made at any time prior to the Expiration Date, including prior to the first (1 ^st ) anniversary of the Original Issue Date, and further, may be conditioned upon the consummation of such transaction, in which case such exercise shall not be deemed to be effective until immediately prior to the consummation of such transaction.

(h) Reservation of Shares. During the Exercise Period, the Company shall at all times reserve and keep available out of its authorized but unissued Common Stock or other securities constituting Warrant Shares, solely for the purpose of issuance upon the exercise of this Warrant, the maximum number of Warrant Shares issuable upon the exercise of this Warrant, and the par value per Warrant Share shall at all times be less than or equal to the applicable Exercise Price. Unless required by law or governmental authority, the Company shall not increase the par value of any Warrant Shares receivable upon the exercise of this Warrant above the Exercise Price then in effect, and shall take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.

Section 4. Adjustment to Exercise Price and Number of Warrant Shares . In order to prevent dilution of the purchase rights granted under this Warrant, the Exercise Price and the number of Warrant Shares issuable upon exercise of this Warrant shall be subject to adjustment from time to time as provided in this Section 4 .

(a) Adjustment to Exercise Price and Warrant Shares Upon Dividend, Subdivision or Combination of Common Stock. If the Company shall, at any time or from time to time after the Original Issue Date: (i) pay a dividend or make any other distribution upon the Common Stock or any other capital stock of the Company payable in shares of Common Stock or in Options or Convertible Securities; or (ii) subdivide (by any stock split, recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to any such dividend, distribution or subdivision shall be proportionately reduced and the number of Warrant Shares issuable upon exercise of this Warrant shall be proportionately increased. If the Company at any time combines (by combination, reverse stock split or otherwise) its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of Warrant Shares issuable upon exercise of this Warrant shall be proportionately decreased. Any adjustment under this Section 4(a) shall become effective at the close of business on the date the dividend, subdivision or combination becomes effective.

(b) Adjustment to Exercise Price and Warrant Shares Upon Reorganization, Reclassification, Consolidation or Merger. In the event of any: (i) capital reorganization of the Company; (ii) reclassification of the stock of the Company (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares); (iii) consolidation or merger of the Company with or into another Person; (iv) sale of all or substantially all of the Company’s assets to another Person; or (v) other similar transaction (other than any such transaction covered by Section 4(a) ), in each case which entitles the holders of Common Stock to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock, each Warrant shall, immediately after such reorganization, reclassification, consolidation, merger, sale or similar transaction, remain outstanding and shall thereafter, in lieu of or in addition to (as the case may be) the number of Warrant Shares then exercisable under this Warrant, be exercisable for the kind and number of shares of stock or other securities or assets of the Company or of the successor Person resulting from such transaction to which the Holder would have been entitled upon such reorganization, reclassification, consolidation, merger, sale or similar transaction if the Holder had exercised this Warrant in full immediately prior to the time of such reorganization, reclassification, consolidation, merger, sale or similar transaction and acquired the applicable number of Warrant

Shares then issuable hereunder as a result of such exercise (without taking into account any limitations or restrictions on the exercisability of this Warrant); and, in such case, appropriate adjustment shall be made with respect to the Holder’s rights under this Warrant to insure that the provisions of this Section 4 shall thereafter be applicable, as nearly as possible, to this Warrant in relation to any shares of stock, securities or assets thereafter acquirable upon exercise of this Warrant (including, in the case of any consolidation, merger, sale or similar transaction in which the successor or purchasing Person is other than the Company, an immediate adjustment in the Exercise Price to the value per share for the Common Stock reflected by the terms of such consolidation, merger, sale or similar transaction, and a corresponding immediate adjustment to the number of Warrant Shares acquirable upon exercise of this Warrant without regard to any limitations or restrictions on exercise, if the value so reflected is less than the Exercise Price in effect immediately prior to such consolidation, merger, sale or similar transaction). The provisions of this Section 4(b) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales or similar transactions. The Company shall not effect any such reorganization, reclassification, consolidation, merger, sale or similar transaction unless, prior to the consummation thereof, the successor Person (if other than the Company) resulting from such reorganization, reclassification, consolidation, merger, sale or similar transaction, shall assume, by written instrument substantially similar in form and substance to this Warrant, the obligation to deliver to the Holder such shares of stock, securities or assets which, in accordance with the foregoing provisions, such Holder shall be entitled to receive upon exercise of this Warrant. Notwithstanding anything to the contrary contained herein, with respect to any corporate event or other transaction contemplated by the provisions of this Section 4(b) , the Holder shall have the right to elect prior to the consummation of such event or transaction, to give effect to the exercise rights contained in Section 2 instead of giving effect to the provisions contained in this Section 4(b) with respect to this Warrant.

(c) Certain Events. If any event of the type contemplated by the provisions of this Section 4 but not expressly provided for by such provisions (including the granting of stock appreciation rights, phantom stock rights or other rights with equity features (other than pursuant to the Plans) occurs, then the Board shall make an appropriate adjustment in the Exercise Price and the number of Warrant Shares issuable upon exercise of this Warrant so as to protect the rights of the Holder in a manner consistent with the provisions of this Section 4 ; provided , that no such adjustment pursuant to this Section 4(c) shall increase the Exercise Price or decrease the number of Warrant Shares issuable as otherwise determined pursuant to this Section 4 .

(d) Certificate as to Adjustment.

(i) As promptly as reasonably practicable following any adjustment of the Exercise Price, but in any event not later than forty-five (45) Business Days thereafter, the Company shall furnish to the Holder a certificate of an executive officer setting forth in reasonable detail such adjustment and the facts upon which it is based and certifying the calculation thereof.

(ii) As promptly as reasonably practicable following the receipt by the Company of a written request by the Holder, but in any event not later than forty-five (45) Business Days thereafter, the Company shall furnish to the Holder a certificate of an executive officer certifying the Exercise Price then in effect and the number of Warrant Shares or the amount, if any, of other shares of stock, securities or assets then issuable upon exercise of the Warrant.

(e) Notices. In the event:

(i) that the Company shall take a record of the holders of its Common Stock (or other capital stock or securities at the time issuable upon exercise of the Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, to vote at a meeting (or by written consent), to receive any right to subscribe for or purchase any shares of capital stock of any class or any other securities, or to receive any other security; or

(ii) of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another Person, or sale of all or substantially all of the Company’s assets to another Person; or

(iii) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company;

then, and in each such case, the Company shall send or cause to be sent to the Holder at least sixty (60) days prior to the applicable record date or the applicable expected effective date, as the case may be, for the event, a written notice specifying, as the case may be: (A) the record date for such dividend, distribution, meeting or consent or other right or action, and a description of such dividend, distribution or other right or action to be taken at such meeting or by written consent; or (B) the effective date on which such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up is proposed to take place, and the date, if any is to be fixed, as of which the books of the Company shall close or a record shall be taken with respect to which the holders of record of Common Stock (or such other capital stock or securities at the time issuable upon exercise of the Warrant) shall be entitled to exchange their shares of Common Stock (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, and the amount per share and character of such exchange applicable to the Warrant and the Warrant Shares.

(f) Exceptions to Adjustment Upon Issuance of Common Stock. Anything herein to the contrary notwithstanding, there shall be no adjustment to the Exercise Price upon exercise of this Warrant with respect to any Excluded Issuance.

Section 5. Purchase Rights . In addition to any adjustments pursuant to Section 4 , if at any time the Company grants, issues or sells any shares of Common Stock, Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of Common Stock (the “ Purchase Rights ”), then the Holder shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder would have acquired if the Holder had held the number of Warrant Shares acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Anything herein to the contrary notwithstanding, the Holder shall not be entitled to the Purchase Rights granted herein with respect to any Excluded Issuance.

Section 6. Transfer of Warrant . Subject to the transfer conditions referred to in the legend endorsed hereon, this Warrant and all rights hereunder are transferable, in whole or in part, by the Holder without charge to the Holder, upon surrender of this Warrant to the Company at its then principal executive offices (or, if the Company designates a transfer agent for this warrant, at the offices of such transfer agent) with a properly completed and duly executed Assignment in the form attached hereto as Exhibit B , together with funds sufficient to pay any transfer taxes as described in Section 3(f)(v) in connection with the making of such transfer. Upon such compliance, surrender and delivery and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant, if any, not so assigned and this Warrant shall promptly be cancelled.

Section 7. Holder Not Deemed a Stockholder; Limitations on Liability . Prior to the issuance to the Holder of the Warrant Shares to which the Holder is then entitled to receive upon the due exercise of this Warrant, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of shares of capital stock of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise. In addition, nothing contained in this Warrant shall be construed as imposing any obligations on the Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such obligations are asserted by the Company or by creditors of the Company. Notwithstanding this Section 6 , the Company shall provide the Holder with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders.

Section 8. Replacement on Loss; Division and Combination .

(a) Replacement of Warrant on Loss. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and upon delivery of an indemnity agreement reasonably satisfactory to it accompanied by a bond in customary form and, in case of mutilation, upon surrender of such Warrant for cancellation to the Company, the Company at its own expense shall execute and deliver to the Holder, in lieu hereof, a new Warrant of like tenor and exercisable for an equivalent number of Warrant Shares as the Warrant so lost, stolen, mutilated or destroyed; provided , that, in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation.

(b) Division and Combination of Warrant. Subject to compliance with the applicable provisions of this Warrant as to any transfer or other assignment which may be involved in such division or combination, this Warrant may be divided or, following any such division of this Warrant, subsequently combined with other Warrants, upon the surrender of this Warrant or Warrants to the Company at its then principal executive offices, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the respective Holders or their agents or attorneys. Subject to compliance with the applicable provisions of this Warrant as to any transfer or assignment which may be involved in such division or combination, the Company shall at its own expense execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants so surrendered in accordance with such notice. Such new Warrant or Warrants shall be of like tenor to the surrendered Warrant or Warrants and shall be exercisable in the aggregate for an equivalent number of Warrant Shares as the Warrant or Warrants so surrendered in accordance with such notice.

Section 9. No Impairment . The Company shall not, by amendment of its certificate or articles of incorporation or bylaws or other similar charter documents, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but shall at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the Holder in order to protect the exercise rights of the Holder against dilution or other impairment, consistent with the tenor and purpose of this Warrant.

Section 10. Compliance with the Securities Act .

(a) Agreement to Comply with the Securities Act; Legend. By acceptance of this Warrant, the Holder, agrees to comply in all respects with the provisions of this Section 10 and the restrictive legend requirements set forth on the face of this Warrant and further agrees that such Holder shall not offer, sell or otherwise dispose of this Warrant or any Warrant Shares to be issued upon exercise hereof except under circumstances that will not result in a violation of the Securities Act of 1933, as amended (the “ Securities Act ”). This Warrant and all Warrant Shares issued upon exercise of this Warrant (unless issued in a transaction registered under the Securities Act) shall be stamped or imprinted with a legend in substantially the following form:

“THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR QUALIFIED UNDER THE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SHARES UNDER THE ACT AND ANY REQUIRED QUALIFICATION UNDER APPLICABLE STATE AND FOREIGN LAW OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT THE TRANSACTION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS UNDER THE ACT AND THE QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE AND FOREIGN LAW.”

(b) Representations of the Holder. In connection with the issuance of this Warrant, the Holder specifically represents, as of the date hereof, to the Company by acceptance of this Warrant as follows:

(i) The Holder is an “accredited investor” as defined in Rule 501 of Regulation D promulgated under the Securities Act. The Holder is acquiring this Warrant and the Warrant Shares to be issued upon exercise hereof for investment for its own account and not with a view towards, or for resale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act.

(ii) The Holder understands and acknowledges that this Warrant and the Warrant Shares to be issued upon exercise hereof are “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that, under such laws and applicable regulations, such securities may be resold without registration under the Securities Act only in certain limited circumstances. In addition, the Holder represents that it is familiar with Rule 144 promulgated under the Securities Act, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act.

(iii) The Holder acknowledges that it can bear the economic and financial risk of its investment for an indefinite period, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Warrant and the Warrant Shares. The Holder has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Warrant and the business, properties, prospects and financial condition of the Company.

Section 11. Warrant Register . Unless it is designated a transfer agent to do so, the Company shall keep and properly maintain at its principal executive offices books for the registration of the Warrant and any transfers thereof. The Company (and any transfer agent) may deem and treat the Person in whose name the Warrant is registered on such register as the Holder thereof for all purposes, and the Company (and any transfer agent) shall not be affected by any notice to the contrary, except any assignment, division, combination or other transfer of the Warrant effected in accordance with the provisions of this Warrant.

Section 12. Notices . All notices, requests, consents, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been given: (a) when delivered by hand (with written confirmation of receipt); (b) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the next Business Day if sent after normal business hours of the recipient; or (d) on the fifth (5 ^th ) day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent to the respective parties at the addresses indicated below (or at such other address for a party as shall be specified in a notice given in accordance with this Section 12 ).


if to the Company:		Plumas Bancorp
		35 South Lindan Avenue
		Quincy, California 95971
		Attn: Andrew Ryback
		President and Chief Executive Officer
		Telephone No.: (530)283-7305 extension 8905
		Fax No.: (530) 283-9665
		E-Mail Address: andy.ryback@PlumasBank.com

with a copy to:		Gary S. Findley & Associates
		1470 N. Hundley Street
		Anaheim, California 92806-1322
		Attn: Gary Steven Findley, Esq.
		Telephone No.: (714) 630-7136
		Fax: (714) 630-7910
		E-Mail: gsf@findley-reports.com


if to the Holder:		CBC Management Partners, LLC
		1000 SW Broadway, Suite 1010
		Portland, Oregon 97205-3062
		Attn: Frank Reppenhagen
		Telephone No.: 503-227-1400
		Fax No.: 503-228-7105
		E-Mail Address: far@cbancap.com

with a copy to:		Barack Ferrazzano Kirschbaum & Nagelberg, LLP
		200 West Madison Street, Suite 3900
		Chicago, Illinois 60606
		Attn: Dennis R. Wendte
		Telephone No.: 312-984-3188
		Fax No.: 312-984-3150
		E-Mail Address: dennis.wendte@bfkn.com

Section 13. Cumulative Remedies . Except to the extent expressly provided in Section 6 to the contrary, the rights and remedies provided in this Warrant are cumulative and are not exclusive of, and are in addition to and not in substitution for, any other rights or remedies available at law, in equity or otherwise.

Section 14. Equitable Relief . Each of the Company and the Holder acknowledges that a breach or threatened breach by such party of any of its obligations under this Warrant would give rise to irreparable harm to the other party hereto for which monetary damages would not be an adequate remedy and hereby agrees that in the event of a breach or a threatened breach by such party of any such obligations, the other party hereto shall, in addition to any and all other rights and remedies that may be available to it in respect of such breach, be entitled to equitable relief, including a restraining order, an injunction, specific performance and any other relief that may be available from a court of competent jurisdiction.

Section 15. Entire Agreement . This Warrant, together with the Purchase Agreement, constitutes the sole and entire agreement of the parties to this Warrant with respect to the subject matter contained herein, and supersedes all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter. In the event of any inconsistency between the statements in the body of this Warrant and the Purchase Agreement, the statements in the body of this Warrant shall control.

Section 16. Successor and Assigns . This Warrant and the rights evidenced hereby shall be binding upon and shall inure to the benefit of the parties hereto and the successors of the Company and the successors and permitted assigns of the Holder. Such successors and/or permitted assigns of the Holder shall be deemed to be a Holder for all purposes hereunder.

Section 17. No Third-Party Beneficiaries . This Warrant is for the sole benefit of the Company and the Holder and their respective successors and, in the case of the Holder, permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person any legal or equitable right, benefit or remedy of any nature whatsoever, under or by reason of this Warrant.

Section 18. Headings . The headings in this Warrant are for reference only and shall not affect the interpretation of this Warrant.

Section 19. Amendment and Modification; Waiver . Except as otherwise provided herein, this Warrant may only be amended, modified or supplemented by an agreement in writing signed by each party hereto. No waiver by the Company or the Holder of any of the provisions hereof shall be effective unless explicitly set forth in writing and signed by the party so waiving. No waiver by any party shall operate or be construed as a waiver in respect of any failure, breach or default not expressly identified by such written waiver, whether of a similar or different character, and whether occurring before or after that waiver. No failure to exercise, or delay in exercising, any rights, remedy, power or privilege arising from this Warrant shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

Section 20. Severability . Any provision of this Warrant which is unenforceable or invalid or contrary to law, or the inclusion of which would adversely affect the validity, legality or enforcement of this Warrant, shall be of no effect and, in such case, all the remaining terms and provisions of this Warrant shall subsist and be fully effective according to the tenor of this Warrant the same as though any such invalid portion had never been included herein. Notwithstanding any of the foregoing to the contrary, if any provisions of this Warrant or the application thereof are held invalid or unenforceable only as to particular persons or situations, the remainder of this Warrant, and the application of such provision to persons or situations other than those to which it shall have been held invalid or unenforceable, shall not be affected thereby, but shall continue valid and enforceable to the fullest extent permitted by law.

Section 21. Governing Law . This Warrant shall be governed by and construed in accordance with the internal laws of the State of Illinois. Nothing herein shall be deemed to limit any rights, powers or privileges which the Holder may have pursuant to any law of the United States of America or any rule, regulation or order of any department or agency thereof and nothing herein shall be deemed to make unlawful any transaction or conduct by the Holder which is lawful pursuant to, or which is permitted by, any of the foregoing.

Section 22. Submission to Jurisdiction . Any legal suit, action or proceeding arising out of or based upon this Warrant or the transactions contemplated hereby may be instituted in the federal courts of the United States of America or the courts of the State of Illinois in each case located in the city of Chicago and County of Cook, and each party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding. Service of process, summons, notice or other document by certified or registered mail to such party’s address set forth herein shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or any proceeding in such courts and irrevocably waive and agree not to plead or claim in any such court that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.

Section 23. Waiver of Jury Trial . Each party acknowledges and agrees that any controversy which may arise under this Warrant is likely to involve complicated and difficult issues and, therefore, each such party irrevocably and unconditionally waives any right it may have to a trial by jury in respect of any legal action arising out of or relating to this Warrant or the transactions contemplated hereby.

Section 24. Construction . In this Warrant, unless otherwise stated or the context otherwise requires, the following uses apply: (a) actions permitted under this Warrant may be taken at any time and from time to time in the actor’s reasonable discretion; (b) references to a statute shall refer to the statute and any successor statute, and to all regulations promulgated under or implementing the statute or its successor, as in effect at the relevant time; (c) in computing periods from a specified date to a later specified date, the words “from” and “commencing on” (and the like) mean “from and including,” and the words “to,” “until” and “ending on” (and the like) mean “to, but excluding”; (d) “including” means “including, but not limited to”; (e) all references to sections, paragraphs, clauses and exhibits are to sections, paragraphs, clauses and exhibits in, of or to this Warrant unless otherwise specified; (f) all words used in this Warrant will be construed to be of such gender or number as the circumstances and context require; (g) the captions and headings of articles, sections, schedules and exhibits appearing in or attached to this Warrant have been inserted solely for convenience of reference and shall not be considered a part of this Warrant nor shall any of them affect the meaning or interpretation of this Warrant or any of its provisions; and (h) any reference to a document or set of documents in this Warrant, and the rights and obligations of the parties under any such documents, shall mean such document or documents as amended from time to time, and any and all modifications, extensions, renewals, substitutions or replacements thereof. The Company and the Holder further agree that this Warrant shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting an instrument or causing any instrument to be drafted.

[T HIS S PACE L EFT I NTENTIONALLY B LANK ]

[S IGNATURE P AGE F OLLOWS ]

I N W ITNESS W HEREOF , the Company has duly executed this Warrant on the Original Issue Date.


	P LUMAS B ANCORP

	By:
		Name:
		Title:

A CCEPTED AND AGREED :

	C OMMUNITY B AN C APITAL , L.P. ,

	By: CBC Partners GP, LLC, its General Partner

	By:
		Name:
		Title:

E XHIBIT A

E XERCISE A GREEMENT

[To be executed only upon exercise of Warrant]

The undersigned registered owner of the attached Warrant irrevocably exercises such Warrant for the purchase of shares of the common stock of P LUMAS B ANCORP , a California corporation (the “ Common Stock ”), and herewith makes payment therefor, all at the price and on the terms and conditions specified in such Warrant, and requests that certificates for the shares of common stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to , whose address is and, if such shares of common stock shall not include all of the shares of common stock issuable as provided in such Warrant, that a new Warrant of like tenor and date for the balance of the shares of common stock issuable hereunder be delivered to the undersigned.

The Warrant Price with respect to the shares of common stock is being paid by:

Wire Transfer in the amount of $

Bank certified, treasurer’s or cashier’s check in the amount of $

Cashless exercise


(Name of Registered Owner)


(Signature of Registered Owner)


(Street Address)


(City) (State) (Zip Code)

NOTICE: The signature on this subscription must correspond with the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever.

E XHIBIT B

A SSIGNMENT

[To be executed only upon assignment of Warrant]

The undersigned registered owner of the attached Warrant (“ Assignor ”) hereby sells, assigns, transfers and delivers to (“ Assignee ”), [all] [designated percentage or fraction] of Assignor’s right, title and interest in and to such Warrant and hereby directs P LUMAS B ANCORP , a California corporation.

I N W ITNESS W HEREOF , Assignor and Assignee have caused this Assignment to be executed as of , 20 .


A SSIGNOR		A SSIGNEE

By:		By:
	Signature of Assignor		Signature of Assignee


	Printed name as it appears on Warrant		Printed name as it should appear on Warrant

Exhibit 10.5

S UBORDINATED D EBENTURE P URCHASE A GREEMENT

T HIS S UBORDINATED D EBENTURE P URCHASE A GREEMENT (this “ Agreement ”) is dated as of April 15, 2013, and is made by and between P LUMAS B ANCORP , a California corporation (“ Borrower ”), and C OMMUNITY B AN C APITAL , L.P. , a Delaware limited partnership (“ Lender ”).

R ECITALS

A. Borrower has requested that Lender make a loan to Borrower of Seven Million Five Hundred Thousand Dollars ($7,500,000) in the form of subordinated debt (the “ Subordinated Debt ”) that is intended to qualify as Tier 2 Capital.

B. The Subordinated Debt shall be evidenced by, and Lender is willing to purchase from Borrower, a subordinated debenture in an aggregate principal amount of $7,500,000 in accordance with the terms, subject to the conditions and in reliance on, the recitals, representations, warranties, covenants and agreements set forth herein and in the Subordinated Debenture.

C. The proceeds of the Subordinated Debt shall be used by Borrower for the redemption of its preferred stock issued as part of the United States Department of the Treasury’s Capital Purchase Program and other general corporate purposes.

T HEREFORE , in consideration of the mutual covenants, conditions and agreements herein contained, the parties hereto hereby agree as follows:

A GREEMENTS

Section 1. Subordinated Debt .

Section 1.1 Certain Terms . Lender agrees to extend the Subordinated Debt to Borrower in accordance with the terms of, and subject to the conditions set forth in, this Agreement, the Subordinated Debenture and any other Transaction Documents (as defined in Section 1.3 ). The Subordinated Debenture shall bear interest at a fixed annual rate per annum of seven and one-half percent (7.50%). The unpaid principal balance plus all accrued but unpaid interest on the Subordinated Debt shall be due and payable on the eighth (8 ^th ) anniversary of the Closing Date (the “ Maturity Date ”), or such earlier date on which such amount shall become due and payable on account of acceleration by Lender in accordance with the terms of this Agreement. The Subordinated Debt shall be evidenced by the Subordinated Debenture in the form attached as Exhibit A hereto and shall be subordinated in accordance with the subordination provisions set forth therein. The obligations of Borrower to Lender under the Subordinated Debenture shall be unsecured.

Section 1.2 Maturity Date . On the Maturity Date, all sums due and owing under this Agreement and the other Transaction Documents with respect to the Subordinated Debenture shall be repaid in full. Borrower acknowledges and agrees that Lender has not made any commitments, either express or implied, to extend the terms of the Subordinated Debt past the Maturity Date, and the Subordinated Debt shall not be extended unless Borrower and Lender hereafter specifically otherwise agree in writing.

Section 1.3 The Closing . The execution and delivery of this Agreement, the Subordinated Debenture and the Warrant (collectively, the “ Transaction Documents ”), and the full funding of the Subordinated Debt (all such actions being referred to as the “ Closing ”) will occur at the offices of Lender, at 50 East Washington Street, Suite 400, Chicago, Illinois, at 9:30 a.m. Chicago, Illinois time on April 15, 2013 (the “ Closing Date ”), or at such other place or time or on such other date as the parties hereto may agree, by disbursing the proceeds of the Subordinated Debenture in accordance with any written instructions received by Lender from Borrower at least one Business Day prior to Closing.

Section 1.4 Interest Rate .

1.4.1 Interest Payments . Subject to Section 1.4.2 hereof, interest accrued or any other outstanding amount of the Subordinated Debenture shall be payable by Borrower in arrears on the last day of each March, June, September and December, commencing June 30, 2013, and on the Maturity Date.

1.4.2 Default Interest . Notwithstanding the rates of interest and the payment dates specified in this Agreement, effective immediately upon: (a) the occurrence and during the continuance of any Acceleration Event of Default (as defined in Section 4.1.1 ), or (b) the Maturity Date, the principal balance of the Subordinated Debt then outstanding, any interest payments not paid within five days after the same becomes due and any amount due on the Maturity Date which is not then paid, shall bear interest payable upon demand at a rate equal to the Prime Rate then in effect plus ten percent (10.00%) per annum (the “ Default Rate ”).

1.4.3 Computation of Interest . Interest shall be computed on the basis of the actual number of days elapsed in the period during which interest accrues and a year of 365 days. In computing interest, the date of funding shall be included and, subject to Section 1.5.2 , the date of payment shall be excluded; provided, however , that if any funding is repaid on the same day on which it is made, one day’s interest shall be paid thereon.

Section 1.5 Payments .

1.5.1 Prepayment . The Subordinated Debenture may not be prepaid in any amount prior to the second (2 ^nd ) anniversary of the Closing Date. Subject to the immediately following sentence, at any time after the second (2 ^nd ) anniversary of the Closing Date, Borrower may, upon at least one Business Day’s notice to Lender, prepay, without penalty, all or a portion of the principal amount outstanding under the Subordinated Debt in a minimum aggregate amount of $100,000 or any larger integral multiple of $100,000 by paying the principal amount to be prepaid, together with unpaid accrued interest thereon to but, subject to Section 1.5.2 , excluding the date of prepayment. Except for payments of principal prior to maturity as a result of the acceleration of maturity as the result of an Acceleration Event of Default, Lender shall have no responsibility to verify whether Borrower has obtained any requisite approval of the Federal Reserve System or other regulatory approval for the payment of principal (including payment at maturity or redemption prior to maturity).

1.5.2 Manner and Time of Payment . All payments of principal, interest and fees hereunder payable to Lender shall be made, without condition or reservation of right and free of set-off or counterclaim, in U.S. dollars and by wire transfer (pursuant to Lender’s written wire transfer instructions) of immediately available funds delivered to Lender not later than 11:00 a.m. (Chicago, Illinois time) on the date due. Funds received by Lender after that time and date shall be deemed to have been paid on the next succeeding Business Day.

1.5.3 Payments on Non-Business Days . Whenever any payment to be made by Borrower hereunder shall be stated to be due on a day which is not a Business Day, payments shall be made on the next succeeding Business Day and such extension of time (but not such next succeeding Business Day, subject to Section 1.5.2 ,) shall be included in the computation of the payment of interest hereunder.

1.5.4 Application of Payments . All payments received by Lender from or on behalf of Borrower shall first be applied to amounts due to Lender to pay Lender’s fees and reimburse Lender’s costs and expenses, including those pursuant to Section 4.4 of this Agreement, second to accrued interest under the Subordinated Debenture, and third to principal amounts outstanding under the Subordinated Debenture; provided, however , subject to the provisions of Section 4 of this Agreement, that after the date on which the final payment of principal with respect to the Subordinated Debenture is due or following and during any Event of Default, all payments received on account of Borrower’s Liabilities shall be applied in whatever order, combination and amounts as Lender, in its sole and absolute discretion, decides, to all costs, expenses and other indebtedness owing to Lender. No amount paid or prepaid on the Subordinated Debenture may be reborrowed.

Section 2. GENERAL REPRESENTATIONS AND WARRANTIES . Borrower hereby covenants, represents and warrants to Lender as follows:

Section 2.1 Organization .

2.1.1 Borrower is a corporation duly organized and existing under the laws of the State of California. Borrower has all requisite corporate power and authority, and possesses all licenses necessary to conduct business and activities as presently conducted, to own its properties and to perform its obligations under this Agreement. Borrower is the owner of all of the issued and outstanding capital stock of Plumas Bank, a commercial bank validly existing under the laws of the State of California (the “ Bank ”).

2.1.2 The Bank has all requisite corporate power and authority, and possesses all licenses necessary to conduct business and activities as presently conducted, to own its properties and to perform its obligations under this Agreement. The deposit accounts of the Bank are insured by the FDIC. No event attributable to Borrower has occurred which could reasonably be expected to adversely affect the status of Borrower as an FDIC-insured institution.

Section 2.2 Legal and Authorized . The borrowing of the principal amount of the Subordinated Debt, the execution and performance of this Agreement, the Subordinated Debenture and the other Transaction Documents and compliance by Borrower with all of the provisions of this Agreement and of the other Transaction Documents are within the corporate powers of Borrower. Each of this Agreement, the Subordinated Debenture and the other Transaction Documents has been duly authorized, executed and delivered and is the legal, valid and binding obligation of Borrower, and is enforceable in accordance with its respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization or other laws (including laws and regulations specifically applicable to bank holding companies registered with the Federal Reserve) and subject to general principles of equity.

Section 2.3 No Defaults or Restrictions . Neither the execution, delivery or performance by Borrower of any of the Transaction Documents, nor compliance by it with the terms and provisions hereof or thereof: (a) will contravene any provision of any applicable law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality; (b) will conflict with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any lien upon any of the property or assets of Borrower or any of its Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of trust, credit agreement, loan agreement or any other agreement, contract or instrument to which Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject; or (c) will violate any provision of the charter or bylaws of Borrower or the organizational documents, charter or bylaws of any of its Subsidiaries. Neither Borrower nor any of its Subsidiaries is in material default in the performance, observance or fulfillment of any of the terms, obligations, covenants, conditions or provisions contained in any indenture or other agreement creating, evidencing or securing indebtedness of any kind or pursuant to which any such indebtedness is issued, or other agreement or instrument to which Borrower or any of its Subsidiaries is a party or by which it or its properties may be bound or affected, which default would reasonably be expected to have a material adverse effect on the financial condition, results of operations or business of Borrower and its Subsidiaries, taken as a whole.

Section 2.4 Governmental Consent . No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made prior to the date of this Agreement), or exemptive action by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with: (a) the execution, delivery and performance by Borrower of this Agreement, the Subordinated Debenture or any of the other Transaction Documents; or (b) the legality, validity, binding effect or enforceability of any of the Transaction Documents.

Section 2.5 Pending Litigation . There are no actions, suits, proceedings or written agreements pending, or, to the best knowledge of Borrower based on commercially reasonable inquiry, threatened against Borrower or any of its Subsidiaries at law or in equity or before or by any federal, state, municipal, or other governmental department, commission, board, or other administrative agency, domestic or foreign that if adversely determined would reasonably be expected to have a material adverse effect on the financial condition, results of operations or business of Borrower and its Subsidiaries taken as a whole; and none of Borrower nor any of its Subsidiaries is in default with respect to any material order, writ, injunction, or decree of, or any written agreement with, any court, commission, board or agency, domestic or foreign.

Section 3. GENERAL COVENANTS, CONDITIONS AND AGREEMENTS . Borrower hereby further covenants and agrees with Lender as follows:

Section 3.1 Negative Covenants . Borrower agrees that until it satisfies all of its obligations to Lender, including its obligations to pay in full all principal, interest and other amounts due in accordance with the terms of this Agreement, the Subordinated Debenture and the other Transaction Documents, it shall not take any of the actions set forth below in this Section 3.1 , without the prior written consent of Lender.

3.1.1 Merger, Consolidation and Sale of Assets . Borrower shall not consolidate with or merge with, or sell, lease or otherwise transfer all or substantially all of its assets to, any Person unless: (a) the successor entity which results from such consolidation or merger, if not Borrower, or the Person which is the transferee of all or substantially all of Borrower’s assets, as the case may be (the “ Surviving Entity ”), (i) shall be a solvent FDIC-insured depository institution organized and existing under the laws of the United States or any State thereof or the District of Columbia or a solvent bank holding company or financial holding company that has majority ownership in a solvent FDIC-insured depository institution organized and existing under the laws of the United States or any State thereof or the District of Columbia, and (ii) shall have executed and delivered to the holder of the Subordinated Debenture its assumption of the due and punctual payment of the principal of and premium, if any, and interest on the Subordinated Debenture, and the due and punctual performance and observation of all of the covenants in the Subordinated Debenture, this Agreement and any other Transaction Document to be performed or observed by Borrower and shall furnish to such holder an opinion of counsel to the effect that the instrument of assumption has been duly authorized, executed and delivered and constitutes the legal, valid and binding contract and agreement of the Surviving Entity enforceable in accordance with its terms, except as enforcement of such terms may be limited by bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles; and (b) immediately after giving effect to such transaction and treating any indebtedness that becomes an obligation of Borrower as a result of such transaction as having been incurred by Borrower at the time of such transaction, no Event of Default or Potential Event of Default would exist. No such sale, lease or transfer of substantially all of the assets of Borrower shall have the effect of releasing Borrower or any Surviving Entity that shall theretofore have become such in the manner prescribed in this Section 3.1.1 from its liability under this Agreement and the Subordinated Debenture. Borrower agrees to provide written notice to Lender of its intention to consolidate with or merge with, or sell, lease or otherwise transfer all or substantially all of its assets to, any Person, no later than five Business Days after the earlier of: (x) Borrower’s receipt of a binding letter of intent with respect to such transaction; or (y) the execution of an agreement by and between Borrower and any Person with respect to such transaction.

3.1.1 Restricted Payments . If an Event of Default has occurred and is continuing, Borrower shall not: (a) pay any dividends or make any other distributions to its shareholders; (b) redeem or repurchase any of its outstanding capital stock or other securities; (c) make any payments of interest, principal or premium on, or repay, repurchase or redeem (i) any indebtedness of Borrower payable to any of its Affiliates except the Bank with respect to shared expenses of Borrower that is owing to the Bank pursuant to Borrower’s and Bank’s intercompany policies, or (ii) any other indebtedness of Borrower that ranks equally with or junior to the Subordinated Debenture; or (d) make any guarantee payments on any obligations ranking pari passu with or junior to the Subordinated Debenture.

3.1.2 Redemption of Capital Stock . Borrower shall not redeem any of its capital stock or otherwise change its capital structure where the same would reasonably be expected to have a material adverse effect on the financial condition, results of operations or business of Borrower.

Section 3.2 Affirmative Covenants . Borrower agrees that until it satisfies all of its obligations to Lender, including its obligations to pay in full all principal, interest and other amounts due in accordance with the terms of this Agreement, the Subordinated Debenture and the other Transaction Documents, it shall perform the covenants set forth below in this Section 3.2 .

3.2.1 Corporate Existence . Subject to Section 3.1.2 , Borrower shall at all times preserve and maintain its corporate existence, rights, franchises and privileges.

3.2.2 Financial Statements . Borrower shall at all times maintain a system of accounting, on the accrual basis of accounting and in accordance with generally accepted accounting principles in effect in the United States (“ GAAP ”), and shall promptly furnish to Lender or Lender’s Representatives upon request such financial statements and other financial information related to Borrower or the Bank as Lender may reasonably request; provided , that Borrower shall not be required to provide audited financial statements of the Bank as a stand-alone entity separate from Borrower.

3.2.3 Notice of Default . Borrower shall promptly after becoming aware of the commencement thereof, give notice to Lender in writing of the occurrence of an Event of Default or Potential Event of Default; provided , that furnishing such information to Lender is not prohibited by applicable laws and regulations and Lender agrees in writing not to disclose such information to any other Person, except that in all events Lender may disclose such information to Lender’s Representatives, as required by law or regulation or as agreed to by Borrower.

3.2.4 Inspection Rights . Except to the extent prohibited by applicable laws and regulations, agreements with third parties prohibiting the disclosure thereof and excluding any information subject to any legal privilege, Borrower shall permit Lender and Lender’s Representatives after signing a confidentiality and nondisclosure agreement to visit and inspect the corporate books and financial records of Borrower to examine and make copies of the books of accounts and other financial records of Borrower, and to discuss the affairs, finances and accounts of Borrower with, and to be advised as to the same by, any officers requested by Lender, including Borrower’s Chief Executive Officer and Chief Financial Officer, other employees and independent public accountants (and by this provision Borrower hereby authorizes such accountants to discuss with Lender the finances and affairs of Borrower) at such reasonable times and reasonable intervals as Lender may designate; provided, however , that this right shall not be exercised more than once per calendar quarter and only with five Business Days’ prior written notice so long as: (a) each of Borrower and the Bank shall be “well capitalized” in accordance with the rules and regulations of its primary federal regulator and (b) no Event of Default shall have occurred and be continuing, and provided, further , that Lender agrees to maintain the confidentiality of all information regarding Borrower obtained as a result of the exercise of this right and through any other means, except for disclosure to Lender’s Representatives or as required otherwise by law or regulation, and Borrower shall not be required to make available to Lender any customer lists or other proprietary information unless such information is required by Lender to determine the financial condition of Borrower or to determine the ability of either to meet its obligations hereunder and does not violate applicable laws and regulations and agreements with third parties prohibiting the disclosure thereof and excluding any information subject to any legal privilege. Subject to restrictions in the foregoing sentence, Borrower shall provide promptly to Lender other information concerning the business, operations, financial condition and regulatory status of Borrower and its Subsidiaries as Lender may from time to time reasonably request.

3.2.5 Board Observation Rights . If: (a) Borrower fails to make any payment when due under the terms of this Agreement, the Subordinated Debenture or any other Transaction Document, and such amount remains unpaid for a period of thirty (30) days after the due date; or (ii) the ratio of Borrower’s (A) classified assets, to (B) its Tier 1 Capital plus its allowance for loan and lease losses, calculated on a consolidated basis (the “ Classified Asset Ratio ”), is at any time on or prior to December 31, 2013, fifty percent (50%) or greater, or is at any time after December 31, 2013, forty percent (40%) or greater, Lender after signing a confidentiality and nondisclosure agreement shall have the right, subject to any necessary regulatory approval, to appoint a Lender’s Representative to attend all meetings of the board of directors or any committees thereof of each of Borrower and/or the Bank, in a nonvoting observer capacity. From and after the vesting in Lender of the rights described in the preceding sentence, Borrower shall give, or cause to be given, such Lender’s Representative copies of all notices, minutes, consents and other materials that it provides to its directors or is provided to the Bank’s directors in connection with such respective meetings. The rights of Lender set forth in this Section 3.2.5 shall remain in effect until: (x) all missed payments giving rise to Lender’s rights under this section have been paid; and (y) the Classified Asset Ratio is, if measured on or prior to December 31, 2013, less than fifty percent (50%), or if measured at any time after December 31, 2013, is less than forty percent (40%). Any appointment as an observer pursuant to this Section 3.2.5 shall remain in effect until: (x) six (6) months after all missed payments giving rise to Lender’s rights under this section have been paid; and (y) the Classified Asset Ratio is less than less than fifty percent (50%) if measured on or prior to December 31, 2013, or less than forty percent (40%) if measured at any time after December 31, 2013. For purposes of this Section 3.2.5 , the Classified Asset Ratio shall be calculated monthly. Borrower agrees to provide written notice to Lender within five (5) Business Days after the end of any month during calendar year 2013 if the Classified Asset Ratio equals or exceeds fifty percent (50%), and within five (5) Business Days after the end of any month during any calendar year after 2013 if the Classified Asset Ratio equals or exceeds forty percent (40%).

3.2.6 Board Representation Rights . If: (a) Borrower fails to make any payment when due under the terms of this Agreement, the Subordinated Debenture or any other Transaction Document, and such amount remains unpaid for a period of one hundred twenty (120) days after the due date; or (b) the Classified Asset Ratio is seventy percent (70%) or greater, Lender shall have the right, subject to any necessary regulatory approval, to appoint a Lender’s Representative as an additional member of the board of directors of Borrower and/or the Bank. If Lender exercises its right under Section 3.2.6 to appoint an additional board member, Borrower agrees to use all commercially reasonable efforts to effect such appointment, including seeking any necessary regulatory, board of directors or shareholder approval. Any appointment to the board of directors of Borrower pursuant to this Section 3.2.6 shall remain in effect until: (x) six (6) months after all missed payments giving rise to Lender’s rights under this section have been paid; and (y) the Classified Asset Ratio is less than seventy percent (70%). For purposes of this Section 3.2.6 , the Classified Assets Ratio shall be calculated monthly. Borrower agrees to provide written notice to Lender within five (5) Business Days after the Classified Asset Ratio equals or exceeds seventy percent (70%) as of the end of any month.

3.2.7 Lender Expenses . Borrower will pay all reasonable costs and expenses of Lender in connection with any modification, amendment, alteration, or the enforcement of this Agreement, the Subordinated Debenture or the other Transaction Documents, including Lender’s out-of-pocket expenses and the charges and disbursements to counsel retained by Lender, except costs associated with implementing and executing sections 3.2.4, 3.2.5 and 3.2.6 of this Agreement. The obligations of Borrower under this Section 3.2.7 shall survive the repayment in full of the Subordinated Debenture. Any of the foregoing amounts incurred by Lender and not paid by Borrower within five (5) days after demand for payment shall bear interest from the date incurred at the Default Rate and shall be deemed part of Borrower’s Liabilities hereunder.

Section 4. BORROWER’S DEFAULT .

Section 4.1 Borrower’s Defaults and Lender’s Remedies .

4.1.1 Acceleration Event of Default . The following shall constitute an “ Acceleration Event of Default ” under this Agreement:

Section 4.1.1.1 Either Borrower or the Bank applies for, consents to or acquiesces in the appointment of a receiver for itself, or in the absence of such application, consent or acquiescence, a receiver is appointed for either Borrower or the Bank.

Section 4.1.1.2 Borrower applies for, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for itself under Chapter 7 or Chapter 11 of the United States Bankruptcy Code (the “ Code Provisions ”), or in the absence of such application, consent or acquiescence, a trustee, receiver or liquidator is appointed for Borrower under the Code Provisions, and is not discharged within ninety (90) days, or any bankruptcy, reorganization, debt arrangement or other proceeding or any dissolution or liquidation proceeding is instituted by or against Borrower under the Code Provisions, and if instituted, is consented or acquiesced in by it or remains for ninety (90) days undismissed, or if Borrower is enjoined, restrained or in any way prevented from conducting all or any material part of its business under the Code Provisions.

4.1.2 Non-Acceleration Events of Default . Each of the following shall constitute a “ Non-Acceleration Event of Default ” under this Agreement:

Section 4.1.2.1 Borrower fails to pay any principal or interest due on the Subordinated Debenture when due; or

Section 4.1.2.2 Borrower fails to pay any other fees, charges, costs or expenses under this Agreement or any other Transaction Documents and in each case such failure shall continue for a period of thirty (30) days after notice thereof is given by the Lender to Borrower; or

Section 4.1.2.3 Borrower fails to perform or observe in any material respect any agreement, term, provision, condition, or covenant (other than any such failure that results in an Event of Default as expressly provided in any other clause of Section 4.1 ) required to be performed or observed by Borrower hereunder or under any other Transaction Document or other agreement with or in favor of Lender and in each case such failure shall continue for a period of 30 days after notice thereof is given by the Lender to Borrower; or

Section 4.1.2.4 Borrower, or the Bank or any Subsidiary becomes insolvent or is unable to pay its debts as they mature; or makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts as they mature; or suspends transaction of its usual business; or if a trustee of any substantial part of the assets of Borrower, or the Bank or any Subsidiary is applied for or appointed, and if appointed, Borrower, or the Bank or any Subsidiary by any action or failure to act indicates its approval of, consent to, or acquiescence in such appointment, or within ninety (90) days after such appointment, such appointment is not vacated or stayed on appeal or otherwise, or shall not otherwise have ceased to continue in effect; provided that Borrower giving notice or suspending interest payments on its subordinated debentures issued to its trust subsidiaries shall not be construed for purposes of this section as being unable to pay its debts at they mature or suspending transaction of its usual business; or

Section 4.1.2.5 Any proceedings are commenced by or against Borrower, or the Bank or any Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law or statute of the federal government or any state government, if such proceedings are instituted, Borrower, the Bank or such Subsidiary by any action or failure to act indicates its approval of, consent to or acquiescence therein, or an order shall be entered approving the petition in such proceedings and within ninety (90) days after the entry thereof such order is not vacated or stayed on appeal or otherwise, or shall not otherwise have ceased to continue in effect; or

Section 4.1.2.6 Any Subsidiary other than the Bank, applies for, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for itself under the Code Provisions, or in the absence of such application, consent or acquiescence, a trustee, receiver or liquidator is appointed for such Subsidiary under the Code Provisions, and is not discharged within ninety (90) days, or any bankruptcy, reorganization, debt arrangement or other proceeding or any dissolution or liquidation proceeding is instituted by or against such Subsidiary under the Code Provisions, and if instituted, is consented or acquiesced in by it or remains for ninety (90) days undismissed, or if such Subsidiary is enjoined, restrained or in any way prevented from conducting all or any material part of its business under the Code Provisions.

4.1.3 Effect of Event of Default; Acceleration and Termination of the Commitment .

Section 4.1.3.1 If an Acceleration Event of Default shall occur and be continuing, Lender may declare the Subordinated Debenture and any other amounts due Lender immediately due and payable, whereupon, subject to prior Federal Reserve approval, the Subordinated Debenture and such other amounts payable hereunder shall immediately become due and payable, without presentment, demand, protest or notice of any kind.

Section 4.1.3.2 If: (a) Borrower receives a written notification from the Federal Reserve that the Subordinated Debenture no longer constitutes Tier 2 Capital of Borrower; and (b) any Non-Acceleration Event of Default shall occur and be continuing, Lender may declare the Subordinated Debenture and any other amounts due Lender immediately due and payable, whereupon the Subordinated Debenture and such other amounts payable hereunder shall immediately become due and payable, without presentment, demand, protest or notice of any kind, provided that any notice to Borrower or Bank from the Federal Reserve that the Tier 2 capital treatment of the Subordinated Debenture shall decrease by (i) the exercise of the Warrant, (ii) by any amount necessary to remain within the Federal Reserve requirement that Borrower’s Tier 2 capital is no more than 50% of its Tier 1 capital or (iii) 20% per year for the last five years prior to the Maturity Date shall not be considered for purposes of this section as a written notification from the Federal Reserve that the Subordinated Debenture no longer constitutes Tier 2 Capital of Borrower.

Section 4.1.3.3 Except as provided in Section 4.1.3.2 above, in the case of the occurrence of a Non-Acceleration Event of Default, Lender shall not have the right to declare the principal amount due under the Subordinated Debenture immediately due and payable, provided, however , that Lender may take any and all actions necessary to cause Borrower to cure the Non-Acceleration Event of Default, including, in the case of a Non-Acceleration Event of Default pursuant to Section 4.1.2.1 and Section 4.1.2.2 , bring an action to collect any interest, principal and other amounts that are due and payable.

Section 4.1.3.4 Upon the occurrence of any Event of Default, it is specifically understood and agreed that notwithstanding the curing of such any Event of Default, Borrower shall not be released from any of its covenants hereunder unless and until the Subordinated Debenture is paid in full.

Section 4.2 Other Remedies . If any Event of Default shall occur and be continuing, Lender may, in addition to any other rights and remedies hereunder, exercise any and all remedies provided in any of the other Transaction Documents and other related documents.

Section 4.3 No Lender Liability . To the extent permitted by law, Lender shall have no liability for any loss, damage, injury, cost or expense resulting from any action or omission by it, or any of its representatives, which was taken, omitted or made in good faith.

Section 4.4 Lender’s Fees and Expenses . In case of any Event of Default hereunder, Borrower shall pay Lender’s reasonable fees and expenses including attorneys’ fees and expenses, in connection with the enforcement of this Agreement or any of the other Transaction Documents or other related documents.

Section 5. MISCELLANEOUS .

Section 5.1 Release; Indemnification . Borrower hereby releases Lender from any and all causes of action, claims or rights which Borrower may now or hereafter have for, or which may arise from, any loss or damage caused by or resulting from: (a) any failure of Lender to protect, enforce or collect in whole or in part any of the Subordinated Debt and (b) any other act or omission to act on the part of Lender, its officers, agents or employees, except in each instance for willful misconduct or gross negligence, and except for any breach by Lender of this Agreement or any other Transaction Document. Borrower shall indemnify, defend and hold Lender and its Affiliates harmless from and against any and all losses, liabilities, obligations, penalties, claims, fines, demands, litigation, defenses, costs, judgments, suits, proceedings, actual damages, disbursements or expenses of any kind or nature whatsoever (including attorneys’ fees and expenses) which may at any time be either directly or indirectly imposed upon, incurred by or asserted or awarded against Lender or any of Lender’s Affiliates in connection with, arising from or relating to Lender’s entering into or carrying out the terms of this Agreement or being the holder of any Subordinated Debenture, other than any loss, liability, damage, suit, claim, expense, fees or costs arising solely by reason of Lender’s or any of Lender’s Affiliates’ willful misconduct or gross negligence.

Section 5.2 Assignment and Participation . Subject to Lender’s compliance with federal and state securities laws, Lender may pledge or otherwise hypothecate all or any portion of this Agreement or grant participations herein ( provided , that Lender acts as agent for any participants, except as provided below) or in any of its rights and security hereunder, and may assign all or any part of the Subordinated Debt and Lender’s obligations in connection therewith to one or more commercial banks or other financial institutions or investors without the consent of Borrower. Borrower shall at all times be entitled to make payments of principal and interest on the Subordinated Debt as provided in Section 1.5.2 of this Agreement and shall have no duty to inquire as to any different location or manner of payment, and if Borrower makes payment in accordance with such section, it shall not be required to take any further action, notwithstanding any assignment by Lender of its rights hereunder or the Subordinated Debt.

Section 5.3 Prohibition on Assignment . Borrower shall not assign or attempt to assign its rights under this Agreement, except by operation of law.

Section 5.4 Time of the Essence . Time is of the essence of this Agreement.

Section 5.5 No Waiver . No waiver of any term, provision, condition, covenant or agreement herein contained shall be effective unless set forth in a writing signed by Lender, and any such waiver shall be effective only to the extent set forth in such writing. No failure to exercise or delay in exercising, by Lender or any holder of any Subordinated Debenture, of any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right or remedy provided by law. The rights and remedies provided in this Agreement are cumulative and not exclusive of any right or remedy provided by law or equity. No notice or demand on Borrower in any case shall, in itself, entitle Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of Lender to any other or further action in any circumstances without notice or demand. No consent or waiver, expressed or implied, by Lender to or of any breach or default by Borrower in the performance of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance of the same or any other obligations of Borrower hereunder. Failure on the part of Lender to complain of any acts or failure to act or to declare an Event of Default, irrespective of how long such failure continues, shall not constitute a waiver by Lender of its rights hereunder or impair any rights, powers or remedies on account of any breach or default by Borrower.

Section 5.6 Severability . Any provision of this Agreement which is unenforceable or invalid or contrary to law, or the inclusion of which would adversely affect the validity, legality or enforcement of this Agreement, shall be of no effect and, in such case, all the remaining terms and provisions of this Agreement shall subsist and be fully effective according to the tenor of this Agreement the same as though any such invalid portion had never been included herein. Notwithstanding any of the foregoing to the contrary, if any provisions of this Agreement or the application thereof are held invalid or unenforceable only as to particular Persons or situations, the remainder of this Agreement, and the application of such provision to Persons or situations other than those to which it shall have been held invalid or unenforceable, shall not be affected thereby, but shall continue valid and enforceable to the fullest extent permitted by law. If the primary federal regulator of Borrower determines that any provision in Section 3 , Section 4.1.1 or Section 4.1.2 of this Agreement would have the effect of causing the Subordinated Debenture to not constitute Tier 2 Capital of Borrower in accordance with the regulations and other guidance of such regulator published as of the date of this Agreement, then any such provision shall be deemed modified only to the minimum extent required for the Subordinated Debenture to constitute Tier 2 Capital of Borrower in accordance with such regulations and guidance. The immediately preceding sentence shall be construed in a manner that protects the interests of Lender to the maximum extent, while permitting the Subordinated Debenture to qualify as Tier 2 Capital in accordance with the immediately preceding sentence.

Section 5.7 Usury; Revival of Liabilities . All agreements between Borrower and Lender (including this Agreement and any other Transaction Documents) are expressly limited so that in no event whatsoever shall the amount paid or agreed to be paid to Lender exceed the highest lawful rate of interest permissible under the laws of the State of California. If, from any circumstances whatsoever, fulfillment of any provision hereof or of any other Transaction Documents, at the time performance of such provision shall be due, shall involve exceeding the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto , the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under the laws of the State of California, and if for any reason whatsoever, Lender shall ever receive as interest an amount which would be deemed unlawful, such interest shall be applied to the payment of the last maturing installment or installments of the indebtedness to Lender and not to the payment of interest. To the extent that Lender received any payment on account of Borrower’s Liabilities and any such payment(s) and/or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinated and/or required to be repaid to a trustee, receiver or any other Person under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment(s) or proceeds received, Borrower’s Liabilities or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment(s) and/or proceeds had not been received by Lender and applied on account of Borrower’s Liabilities; provided, however , if Lender successfully contests any such invalidation, declaration, set aside, subordination or other order to pay any such payment and/or proceeds to any third party, the revived Borrower’s Liabilities shall be deemed satisfied.

Section 5.8 Notices . Any notice which either party hereto may be required or may desire to give hereunder shall be deemed to have been given if in writing and if delivered personally, or if mailed, postage prepaid, by United States registered or certified mail, return receipt requested, or if delivered by a responsible overnight courier, addressed:


if to Borrower:		Plumas Bancorp
		35 South Lindan Avenue
		Quincy, California 95971
		Attn: Andrew Ryback
		President and Chief Executive Officer
		Telephone No.: (530) 283-7305, extension 8905
		Fax No.: (530) 283-9665
		E-Mail Address: andy.ryback@PlumasBank.com

with a copy to:		Gary S. Findley & Associates
		1470 N. Hundley Street
		Anaheim, California 92806-1322
		Attn: Gary Steven Findley, Esq.
		Telephone No.: (714) 630-7136
		Fax: (714) 630-7910
		E-Mail: gsf@findley-reports.com

if to Lender:		CBC Management Partners, LLC
		1000 SW Broadway, Suite 1010
		Portland, Oregon 97205-3062
		Attn: Frank Reppenhagen
		Telephone No.: 503-227-1400
		Fax No.: 503-228-7105
		E-Mail Address: far@cbancap.com

with a copy to:		Barack Ferrazzano Kirschbaum & Nagelberg, LLP
		200 West Madison Street, Suite 3900
		Chicago, Illinois 60606
		Attn: Dennis R. Wendte, Esq.
		Telephone No.: 312-984-3188
		Fax No.: 312-984-3150
		E-Mail Address: dennis.wendte@bfkn.com

or to such other address or addresses as the party to be given notice may have furnished in writing to the party seeking or desiring to give notice, as a place for the giving of notice, provided , that no change in address shall be effective until seven days after being given to the other party in the manner provided for above. Any notice given in accordance with the foregoing shall be deemed given when delivered personally or, if mailed, five Business Days after it shall have been deposited in the United States mails as aforesaid or, if sent by overnight courier, the Business Day following the date of delivery to such courier.

Section 5.9 Successors and Assigns . This Agreement shall inure to the benefit of the parties and their respective heirs, legal representatives, successors and assigns except that, unless Lender consents in writing, no assignment made by Borrower in violation of this Agreement shall confer any rights on any assignee of Borrower.

Section 5.10 No Joint Venture . Nothing contained herein or in any document executed pursuant hereto and no action or inaction whatsoever on the part of Lender, shall be deemed to make Lender a partner or joint venturer with Borrower.

Section 5.11 Publicity . Borrower shall not publicize the Facility without the prior written consent of Lender, except that Borrower may make any filings required by law.

Section 5.12 Documentation . All documents and other matters required by any of the provisions of this Agreement to be submitted or furnished to Lender shall be in form and substance satisfactory to Lender.

Section 5.13 Additional Assurances . Borrower agrees that, at any time or from time to time, upon the written request of Lender, it will execute all such further documents and do all such other acts and things as Lender may reasonably request to effectuate the transaction herein contemplated.

Section 5.14 Entire Agreement . This Agreement and the Exhibits hereto constitute the entire agreement between the parties hereto with respect to the subject matter hereof and may not be modified or amended in any manner other than by supplemental written agreement executed by the parties hereto. In entering into this Agreement neither party has relied upon any representation, warranty, covenant, obligation or other agreement that is not set forth herein or in the other Transaction Documents.

Section 5.15 Choice of Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of Illinois. Nothing herein shall be deemed to limit any rights, powers or privileges which Lender may have pursuant to any law of the United States of America or any rule, regulation or order of any department or agency thereof and nothing herein shall be deemed to make unlawful any transaction or conduct by Lender which is lawful pursuant to, or which is permitted by, any of the foregoing.

Section 5.16 Forum; Venue . To induce Lender to accept this Agreement and the other Transaction Documents, Borrower irrevocably agrees that all actions or proceedings in any way, manner, or respect, arising out of or from or related to this Agreement or the other Transaction Documents shall be litigated only in courts having suits within Chicago, Illinois. Borrower hereby consents and submits to the jurisdiction of any local, state, or federal court located within said city. Borrower hereby waives any right it may have to transfer or change the venue of any litigation brought against Borrower by Lender.

Section 5.17 No Third Party Beneficiary . This Agreement is made for the sole benefit of Borrower and Lender, and no other Person shall be deemed to have any privity of contract hereunder nor any right to rely hereon to any extent or for any purpose whatsoever, nor shall any other Person have any right of action of any kind hereon or be deemed to be a third party beneficiary hereunder.

Section 5.18 Captions; Counterparts . Captions contained in this Agreement in no way define, limit or extend the scope or intent of their respective provisions. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument.

Section 5.19 Discretion . Unless specified to the contrary herein, all references herein to an exercise of discretion or judgment by Lender, to the making of a determination or designation by Lender, to the application of Lender’s discretion or opinion, to the granting or withholding of Lender’s consent or approval, to the consideration of whether a matter or thing is satisfactory or acceptable to Lender, or otherwise involving the decision making of Lender, shall be deemed to mean that Lender shall decide unilaterally using its sole and absolute discretion or judgment.

Section 5.20 Lender’s Representations and Warranties . Lender hereby represents and warrants to Borrower that this Agreement and the other Transaction Documents have been duly authorized, executed and delivered, and are the legal, valid and binding obligations of Lender, enforceable in accordance with their terms, except as enforceability thereof may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or other similar laws relating to or affecting the rights of creditors generally, by general principles of equity and by federal or state securities laws or the public policy underlying such laws.

Section 6. Lender’s Representations and Warranties . Lender hereby represents and warrants to Borrower that this Agreement and the other Transaction Documents have been duly authorized, executed and delivered, and are the legal, valid and binding obligations of Lender, enforceable in accordance with their terms, except as enforceability thereof may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or other similar laws relating to or affecting the rights of creditors generally, by general principles of equity and by federal or state securities laws or the public policy underlying such laws.

Section 7. DEFINITIONS .

Section 7.1 Defined Terms . The following capitalized terms generally used in this Agreement and in the other Transaction Documents shall have the meanings defined or referenced below. Certain other capitalized terms used only in specific sections of this Agreement may be defined in such sections.

“ Affiliate(s) ” means, with respect to any Person, such Person’s immediate family members, partners, members or parent and subsidiary corporations, and any other Person directly or indirectly controlling, controlled by, or under common control with, said Person, and their respective Affiliates, members, shareholders, directors, officers, employees, agents and representatives.

“ Borrower’s Liabilities ” means Borrower’s obligations under this Agreement and any other Transaction Documents.

“ Business Day ” means a day of the week other than a Saturday, Sunday or a legal holiday under the laws of the State of California or any other day on which banking institutions located in California are authorized or required by law or other governmental action to close.

“ Event of Default ” means any Acceleration Event of Default and any Non-Acceleration Event of Default.

“ FDIC ” means the Federal Deposit Insurance Corporation.

“ Federal Reserve ” means the Board of Governors of the Federal Reserve System.

“ Governmental Agency(ies) ” means, individually or collectively, any federal, state, county or local governmental department, commission, board, regulatory authority or agency including the Federal Reserve, the FDIC and the California Department of Financial Institutions.

“ Lender’s Representatives ” means those of Lender’s directors, officers, employees and professional advisors engaged to advise Lender with respect to this Agreement and the transactions contemplated hereunder who have a reasonable need to know information about Borrower and who agree in writing, in form and substance satisfactory to Borrower, not to use such information for their own benefit and to maintain the confidentiality of the information in question except as required otherwise by law or regulation.

“ Person ” means an individual, a corporation (whether or not for profit), a partnership, a limited liability company, a joint venture, an association, a trust, an unincorporated organization, a government or any department or agency thereof (including a Governmental Agency) or any other entity or organization.

“ Potential Event of Default ” means an event or circumstance that with the passage of time, the giving of notice or both could become an Event of Default.

“ Prime Rate ” means the highest prime rate of interest reported in the Money Rates Section of the Wall Street Journal.

“ Subsidiary ” means (i) any corporation, at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by Borrower or by one or more of its Subsidiaries, or over which Borrower otherwise exercises control, (ii) any general partnership, joint venture or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by Borrower or by one or more of its Subsidiaries, or over which Borrower otherwise exercises control, (iii) any limited partnership of which Borrower or any of its Subsidiaries is a majority general partner, or over which Borrower otherwise exercises control, and (iv) any limited liability company, at least a majority of the outstanding voting membership interests of which are held by Borrower or one or more of its Subsidiaries, or over which Borrower otherwise exercises control.

“ Tier 1 Capital ” has the meaning ascribed to such term under applicable rules and regulations of the FDIC and the Federal Reserve.

“ Tier 2 Capital ” has the meaning ascribed to such term under applicable rules and regulations of the FDIC and the Federal Reserve.

“ United States ” means the United States of America.

“Warrant ” means a warrant in the form attached as Exhibit B hereto, as amended, restated, supplemented or modified from time to time, and each warrant delivered in substitution or exchange for such warrant.

Section 7.2 Certain Accounting Terms; Interpretations . Notwithstanding the foregoing, any accounting terms used in this Agreement which are not specifically defined herein shall have the meaning customarily given to them in accordance with GAAP. The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. The words “hereof”, “herein” and “hereunder” and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The word “including” when used in this Agreement without the phrase “without limitation,” shall mean “including, without limitation.” All references to time of day herein are references to Chicago, Illinois, time unless otherwise specifically provided. Any reference contained herein to attorneys’ fees and expenses shall be deemed to be reasonable fees and expenses of Lender’s outside counsel and of any other third-party experts or consultants engaged by Lender’s outside counsel on Lender’s behalf. All references to any Transaction Document shall be deemed to be to such document as amended, restated, supplemented or modified from time to time. With respect to any reference in this Agreement to any defined term, (a) if such defined term refers to a Person, then it shall also mean all heirs, legal representatives and permitted successors and assigns of such Person, and (b) if such defined term refers to a document, instrument or agreement, then it shall also include any replacement, extension or other modification thereof.

Section 7.3 Exhibits and Schedules Incorporated . All exhibits and schedules attached hereto or referenced herein, are hereby incorporated into this Agreement.

Section 7.4 WAIVER OF RIGHT TO JURY TRIAL . BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER TRANSACTION DOCUMENTS, OR ANY OTHER STATEMENTS OR ACTIONS OF BORROWER OR LENDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS DISCUSSED THIS WAIVER WITH SUCH LEGAL COUNSEL. BORROWER FURTHER ACKNOWLEDGES THAT (a) IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER, (b) THIS WAIVER HAS BEEN REVIEWED BY BORROWER AND BORROWER’S COUNSEL AND IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THE AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS (c) THIS WAIVER SHALL BE EFFECTIVE AS TO EACH OF SUCH OTHER TRANSACTION DOCUMENTS AS IF FULLY INCORPORATED THEREIN.

I N W ITNESS W HEREOF , the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written.

P LUMAS B ANCORP

C OMMUNITY B AN C APITAL , L.P.

By:

CBC Partners GP, LLC, its General Partner

Name:

Title:

By:

Name:

Title:

E XHIBIT A

F ORM OF S UBORDINATED D EBENTURE

B-1

Exhibit B

F ORM OF W ARRANT

B-1

Exhibit 31.1

CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Richard L. Belstock, Chief Financial Officer, certify that:

I have reviewed this report on Form 10-Q of Plumas Bancorp;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 10, 2013						/s/ Richard L. Belstock
						Richard L. Belstock, Chief Financial Officer

Exhibit 31.2

CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Andrew J. Ryback, Chief Executive Officer, certify that:

I have reviewed this report on Form 10-Q of Plumas Bancorp;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 10, 2013						/s/ Andrew J. Ryback
						Andrew J. Ryback, Chief Executive Officer

Exhibit 32.1

CERTIFICATION OF INTERIM CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Quarterly Report on Form 10-Q of the Company for the three months ended March 31, 2013, I, Richard L. Belstock, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

such Quarterly Report on Form 10-Q of the Company for the three months ended March 31, 2013, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

the information contained in such Quarterly Report on Form 10-Q of the Company for the three months ended March 31, 2013, fairly presents, in all material respects, the financial condition and results of operations of Plumas Bancorp.


Date: May 10, 2013		/s/ Richard L. Belstock
		Richard L. Belstock, Chief Financial Officer

Exhibit 32.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Quarterly Report on Form 10-Q of the Company for the three months ended March 31, 2013, I, Andrew J. Ryback, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

such Quarterly Report on Form 10-Q of the Company for the three months ended March 31, 2013, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


Date: May 10, 2013		/s/ Andrew J. Ryback
		Andrew J. Ryback, Chief Executive Officer