Plumas Bancorp - 10-Q quarterly report FY

 

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 8, 2005; 4,967,290 shares

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

See notes to condensed consolidated financial statements.

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

See notes to condensed consolidated financial statements.

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

Continued on next page.

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

See notes to condensed consolidated financial statements.

Plumas Bancorp (the “Company”) was incorporated on January 17, 2002 and subsequently obtained approval from various state and federal agencies to be a bank holding company in connection with the merger of Plumas Bank (the “Bank”). The Company became the sole shareholder of the Bank on June 21, 2002 pursuant to a Plan of Reorganization and Merger Agreement dated April 3, 2002. Pursuant to that plan, on June 21, 2002 each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company. The Company formed Plumas Statutory Trust I for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II for the sole purpose of issuing trust preferred securities on September 28, 2005.

The Bank operates twelve branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Loyalton, Portola, Quincy, Susanville, Tahoe City, Truckee and Westwood. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank’s primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

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, which were formed for the sole purpose of issuing and selling trust preferred securities, 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 September 30, 2005 and December 31, 2004, the results of operations for the three-month and nine-month periods ended September 30, 2005 and 2004 and cash flows for the nine-month period ended September 30, 2005 and December 31, 2004.

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 consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2005 and 2004 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.

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

Management has determined that since 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.

Outstanding loans are summarized below, in thousands:

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

In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the financial statements, including loan commitments of $101,565,000 and $90,084,000 and stand-by letters of credit of $1,828,000 and $1,777,000 at September 30, 2005 and December 31, 2004, respectively.

Of the loan commitments outstanding at September 30, 2005, $36,675,000 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 September 30, 2005 or December 31, 2004.

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.

There were no stock options in the three-month and nine-month periods ended September 30, 2005 considered to be antidilutive. There were 84,412 stock options in the three-month period and 85,060 stock options in the nine-month period ended September 30, 2004, considered to be antidilutive and therefore omitted from the above calculation of diluted earnings per share.

Total comprehensive income for the three months ended September 30, 2005 and 2004 totaled $1,000,000 and $1,967,000, respectively. Comprehensive income is comprised of unrealized gains and (losses), net of taxes, on available-for-sale investment securities, which were $(248,000) and $1,036,000 for the three months ended September 30, 2005 and 2004, respectively, together with net income.

Total comprehensive income for the nine months ended September 30, 2005 and 2004 totaled $2,819,000 and $2,121,000, respectively. Comprehensive income is comprised of unrealized losses, net of taxes, on available-for-sale investment securities, which were $409,000 and $386,000 for the nine months ended September 30, 2005 and 2004, respectively, together with net income.

At September 30, 2005 and December 31, 2004, accumulated other comprehensive loss totaled $902,000 and $492,000, respectively, and is reflected as a component of shareholders’ equity.

In December 2004 the FASB issued Statement Number 123 (revised 2004) (FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. In April 2005, the Securities and Exchange Commission adopted a rule that defers the compliance of FAS 123(R) from the first reporting period beginning after June 15, 2005 to the first fiscal year beginning after June 15, 2005, January 1 2006 for the Company. Management has not completed its evaluation of the effect that FAS 123 (R) will have, but believes that the effect will be consistent with its previous pro forma disclosures.

At September 30, 2005, the Company had two stock-based compensation plans, the Plumas Bank 2001 and 1991 Stock Option Plans. The Company accounts for these plans under the recognition and measurement

principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

Pro forma adjustments to the Company’s consolidated net earnings and earnings per share are disclosed during the years in which the options become vested. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statements No. 123, Accounting for Stock-Based Compensation, to stock-based compensation, dollars in thousands except per share amounts:

The fair value of each option grant is estimated on the date of grant using an option-pricing model with the following assumptions:

There were no option grants made during the three-month period ending September 30, 2004.

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

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

On May 18, 2005, Plumas Bancorp (the “Company”) began trading on The NASDAQ Capital Market under the ticker symbol “PLBC”. Prior to May 18, 2005, the Company was traded on the Over-The-Counter Bulletin Board (“OTC BB”) also under the ticker symbol “PLBC”.

The following discussion and analysis sets forth certain statistical information relating to the Company as of September 30, 2005 and December 31, 2004 and for the three and nine month periods ended September 30, 2005 and 2004. 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, 2004.

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

The Company’s net income increased $721 thousand, or 29%, to $3.2 million for the nine months ended September 30, 2005 from $2.5 million for the same period in 2004. The primary contributors to the increase in net income for the first nine months of 2005 was a $3.9 million increase in interest income and also, to a much lesser extent, a $230 thousand increase in other non-interest income. These contributors to

net income were offset by a $1.2 million increase in interest expense, decreases in gains on sales of investment securities of $237 thousand and of other real estate and vehicles of $107 thousand, an increase in the provision for loan losses of $300 thousand, an increase in salaries and benefits of $421 thousand, an increase in occupancy and equipment expenses of $241 thousand, an increase in other non-interest expenses of $377 thousand and an increase in the provision for income taxes of $402 thousand.

Total assets at September 30, 2005 were $471 million, an increase of $54 million, or 13%, from the $417 million at December 31, 2004. The growth in assets was primarily in loans, which increased $47 million, or 18%, to $311 million at September 30, 2005 from $264 million at December 31, 2004. The asset growth was primarily funded by the growth in the Company’s deposits and to a much lesser extent, the issuance in September 2005 of additional trust preferred securities. Deposits grew $46 million, or 12%, to $425 million at September 30, 2005 from $379 million at December 31, 2004. Trust preferred securities, also known as “junior subordinated deferrable interest debentures”, increased $4.1 million, or 67%, from the $6.2 million at December 31, 2004.

The annualized return on average assets was 0.97% for the nine months ended September 30, 2005 up from 0.83% for the same period in 2004. The annualized return on average equity was 14.9% for the nine months ended September 30, 2005 up from 12.5% for the same period in 2004.

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $15.2 million for the nine months ended September 30, 2005, an increase of $2.7 million, or 21%, from $12.5 million for the same period in 2004. The increase in net interest income was primarily attributed to volume increases in the Company’s average loan balances partially offset by increases in rates paid primarily on time deposits and money market accounts as well as both rate and volume increases on Federal Home Loan Bank (“FHLB”) advances.

Interest income increased $3.9 million, or 26%, to $18.5 million for the nine months ended September 30, 2005 primarily as a result of volume increases in loan balances. The Company’s average loan balances were $297 million for the nine months ended September 30, 2005, up $72 million, or 32%, from the $225 million for the same period in 2004.

Interest expense increased $1.2 million, or 57%, to $3.3 million for the nine months ended September 30, 2005, up from $2.1 million for the same period in 2004. The increase in interest expense was primarily attributed to rate increases on time deposits and money market accounts as well as both volume and rate increases on short-term borrowings. For the nine months ended September 30, 2005 compared to the same period in 2004, the Company’s average rate on time deposits increased 77 basis points to 2.60% from 1.83% and on money market accounts increased 37 basis points to 1.11% from 0.77%. Although the Company had repaid all FHLB advances at September 30, 2005, the Company’s average FHLB advances were $9.3 million with an average rate of 3.03% for the nine months ended September 30, 2005. There were no FHLB advances for the first nine months of 2004.

As a result of the changes noted above, the net interest margin for the nine months ended September 30, 2005 increased 31 basis points, or 6.5%, to 5.06%, up from 4.75% for the same period in 2004.

The following table presents for the nine-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 yields expressed in both dollars and yield percentages, as well as the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:

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

Provision for loan losses. The Company recorded $900,000 in provision for loan losses for the nine months ended September 30, 2005, up $300,000, or 50%, from the $600,000 provision for the same period in 2004. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb probable losses in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the nine months ended September 30, 2005, total non-interest income decreased $197 thousand, or 5%, to $3.4 million, down from $3.6 million for the comparable period in 2004. The decrease in non-interest income was primarily the result of declines in gains on the sale of investment securities of $237 thousand and declines in gains on the sale of other real estate holdings of $107 thousand somewhat offset by increases in other non-interest income including, tax refunds of $58 thousand, merchant processing income of $65 thousand and stock dividends on Federal Home Loan Bank stock of $26 thousand.

In managing its liquidity needs, the Company will often sell available-for-sale investment securities. During the first nine months of 2005, as a result of the higher interest rate environment, the Company did not have the same opportunity to sell investment securities at gains as it did during the same period in 2004. As a result, during the nine months ended September 30, 2005 the Company sold only $2 million of available-for-sale securities with losses of $8 thousand, as compared to selling $31.4 million of available-for-sale securities with gains of $229 thousand during the first nine months of 2004.

In addition, during the first nine months of 2004 the Company sold two unused banking offices, recording gains of $135 thousand. These two unused banking offices were part of a deposit and branch acquisition that occurred in late 2003. No such transactions occurred during the first nine months of 2005.

The following table describes the components of non-interest income for the nine-month periods ending September 30, 2005 and 2004, in thousands:

Non-interest expenses. During the nine months ended September 30, 2005, total non-interest expense increased $1.0 million, or 9%, to $12.6 million, up from $11.6 million for the comparable period in 2004. The increase in non-interest expense was primarily the result of increases in salaries and employee benefits, occupancy and equipment, professional fees, advertising and shareholder relations, slightly offset by declines in loan and collection expenses.

Salaries and employee benefits increased $421 thousand, or 6%, over the same nine-month period last year. This increase was due primarily to staffing additions related to the expansion of the Company’s dealer loan unit and other centralized lending functions, branch administration and marketing and other staffing additions to manage the overall growth of the Company. Higher salary and employee benefit costs were somewhat reduced by the deferral of salary costs related to increased loan origination activities.

Occupancy and equipment increased $241 thousand, or 12%, over the same nine-month period last year. This increase was due primarily to additional amortization expenses related to software upgrades including item processing and data transmission software developed to comply with new “Check 21” requirements. Check 21 is a federal law that is designed to enable banks to handle checks electronically, which should make check processing faster and more efficient. Additionally amortization expenses on software increased as a result of upgrades to the Company’s core data system, credit services systems, regulatory compliance systems, teller systems, communication systems and security systems.

Professional fees increased $158 thousand, or 41%, over the same nine-month period last year. This increase was primarily the result of consulting projects related to an evaluation of the Company’s risk management environment, a management training program and costs incurred by the Company to comply with the new Sarbanes Oxley reporting requirements.

Advertising and shareholder relations expense increased $102 thousand, or 43%, over the same nine-month period last year as a result of costs associated with the Company’s move to The NASDAQ Capital Market in May 2005, a general expansion of marketing efforts related to the Company’s expanded service area including the communities of Tahoe City, Kings Beach and Loyalton and increased donations to charitable organizations in the Company’s service area.

The following table describes the components of non-interest expense for the nine-month periods ending September 30, 2005 and 2004, in thousands:

Net interest income before provision for loan losses. Net interest income, on a nontax-equivalent basis, was $5.4 million for the three months ended September 30, 2005, an increase of $970 thousand, or 22%, from $4.4 million for the same period in 2004. The increase in net interest income was primarily attributed to volume increases in the Company’s average loan balances partially offset by increases in rates paid primarily on time deposits.

Interest income increased $1.5 million, or 29%, to $6.7 million for the three months ended September 30, 2005 primarily as a result of the volume increases in loan balances. The Company’s average loan balances were $318 million for the three months ended September 30, 2005, up $78 million, or 32%, from the $240 million for the same period in 2004.

Interest expense increased $547 thousand, or 76%, to $1.3 million for the three months ended September 30, 2005, up from $719 thousand for the same period in 2004. The increase in interest expense was primarily attributed to rate increases on time deposits. For the three months ended September 30, 2005 compared to the same period in 2004, the Company’s average rate on time deposits increased 107 basis points to 2.92% from 1.85%.

As a result of the changes noted above, the net interest margin for the three months ended September 30, 2005 increased 34 basis points, or 7%, to 5.14%, up from 4.80% for the same period in 2004.

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 yields expressed in both dollars and yield percentages, as well as the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:

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

Provision for loan losses. The Company recorded $300,000 in provision for loan losses for both three month periods ended September 30, 2005 and 2004. Management assesses its loan quality monthly to maintain an adequate allowance for loan losses. Based on information currently available, management believes that the allowance for loan losses is adequate to absorb probably losses in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. The Company’s loan portfolio composition and non-performing assets are further discussed under the financial condition section below.

Non-interest income. During the three months ended September 30, 2005, total non-interest income decreased $60 thousand, or 5%, to $1.2 million, down from $1.3 million for the comparable period in 2004. The decrease in non-interest income was primarily the result of declines in gains on the sale of investment securities of $82 thousand. In addition, during the three months ending September 30, 2005, service charge revenues declined $30 thousand as a result of a change in the method that service charges are assessed on deposit accounts. Somewhat offsetting these declines in non-interest income was an increase of $25 thousand in merchant processing income and an increase of $26 thousand in gains on the sale of other real estate and vehicles.

In managing its liquidity needs, the Company will often sell available-for-sale investment securities. During the three months ended September 30, 2005, as a result of the higher interest rate environment, the Company did not have the same opportunity to sell investment securities at gains as it did during the same period in 2004. As a result, during the three months ended September 30, 2005 the Company did not sell any available-for-sale securities compared to selling $14.8 million of available-for-sale securities with gains of $82 thousand during the three months ended September 30, 2004.

The following table describes the components of non-interest income for the three-month periods ending September 30, 2005 and 2004, in thousands:

Non-interest expenses. During the three months ended September 30, 2005, total non-interest expense increased $387 thousand, or 10%, to $4.3 million, up from $3.9 million for the comparable period in 2004. The increase in non-interest expense was primarily the result of increases in salaries and employee benefits, occupancy and equipment, business development, professional fees, advertising and shareholder relations, slightly offset by declines in loan and collection expenses.

Salaries and employee benefits increased $184 thousand, or 8%, over the same three-month period last year. This increase was due primarily to staffing additions related to the expansion of the Company’s centralized lending function, branch administration and marketing, the establishment of a customer call and resource center and other growth to manage the overall growth of the Company. Higher salary and employee benefit costs were somewhat reduced by the deferral of salary costs related to increased loan origination activities.

Occupancy and equipment increased $100 thousand, or 15%, over the same three-month period last year. This increase was due primarily to additional amortization expenses related to software upgrades including item processing and data transmission software developed to comply with new “Check 21” requirements. Check 21 is a federal law that is designed to enable banks to handle checks electronically, which should make check processing faster and more efficient. Additionally amortization expenses on software increased as a result of upgrades to the Company’s core data system and communication systems.

Professional fees increased $37 thousand, or 26%, over the same three-month period last year. This increase was primarily the result of costs incurred by the Company to comply with the new Sarbanes Oxley reporting requirements and increased legal expenses related to both corporate matters and loan collections.

Business development expense increased $39 thousand, or 45%, over the same three-month period last year as a result of increased training and education expense and a general expansion of business development efforts related to the Company’s expanded service area including the communities of Tahoe City, Kings Beach and Loyalton.

Advertising and shareholder relations expense increased $37 thousand, or 47% over the same three-month period last year as a result of increased donations and costs associated with the Company’s listing on The NASDAQ Capital Market in May 2005.

The following table describes the components of non-interest expense for the three-month periods ending September 30, 2005 and 2004, in thousands:

Loan portfolio composition. The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of Northeastern California. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small- to medium-sized commercial businesses. These commercial loans are diversified as to the industries and types of businesses, thus limiting material exposure from any one industry concentration. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment. As of September 30, 2005, real estate construction and land development loan balances as a percentage of total loans increased to 16.5% from 12.0% at December 31, 2004. Also during the first nine months of 2005, consumer loan balances increased to 24.9% of total loans from 22.1% at December 31, 2004. The increased percentages in real estate construction and land development and consumer loan balances were offset with declines in the relative percentage of agricultural, real estate mortgage and commercial loan balances which were 10.0%, 34.6% and 14.0%, respectively at September 30, 2005, down from 11.6%, 38.3% and 16.0%, respectively at December 31, 2004.

Nonperforming assets. Nonperforming loans at September 30, 2005 were $1,446,000, an increase of $275 thousand, or 23%, over the $1,171,000 balance at December 31, 2004. Nonperforming assets (which is comprised of nonperforming loans plus foreclosed real estate and vehicle holdings) at September 30, 2005 were $1,505,000, an increase of $298 thousand, or 25%, over the $1,207,000 balance at December 31, 2004.

The increase in both nonperforming loans and assets at September 30, 2005 from December 31, 2004 is primarily related to a downgrade in the third quarter of 2005, of one commercial loan with an outstanding balance of $305 thousand at September 30, 2005. This commercial loan has a 75% government guarantee associated with it and as a result, management does not expect to incur significant losses related to the disposition of this nonperforming loan.

As a result of the above, nonperforming loans as a percentage of total loans increased slightly to 0.46% at September 30, 2005 up from 0.44% at December 31, 2004. In addition, nonperforming assets as a percentage of total assets also increased slightly to 0.32% at September 30, 2005 up from 0.29% at December 31, 2004.

Analysis of allowance for loan losses. Net charge-offs during the nine months ended September 30, 2005 totaled $261 thousand, or 0.08% of total loans, compared to $439 thousand, or 0.17% of total loans, for the comparable period in 2004. Net charge-offs during the first nine months of 2005 were comprised of $480 thousand of charge-offs offset by $147 thousand in recoveries, compared to $560 thousand of charge-offs offset by $121 thousand in recoveries for the same period in 2004. The allowance for loan losses stood at 1.06% of total loans as of September 30, 2005 up from 1.01% as of December 31, 2004. Based on an evaluation of the credit quality of the loan portfolio and delinquency trends and charge-offs, management believes the allowance for loan losses to be adequate. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty.

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