Plumas Bank
Annual Report 2015

Plain-text annual report

To our Shareholders: It is with great pride and pleasure that we report that 2015 marked the most profitable year and the highest level of earnings in the 35 year history of Plumas Bank. In 2015, we increased net income by 23% over last year and grew earnings per diluted share by 21%, from $0.95 during 2014 to $1.15. Additionally, we reduced the ratio of nonperforming assets to total assets to 1.06% and increased our book value per common share to $8.79. Each of these achievements was accomplished in the face of the headwinds associated with the prolonged low interest rate environment. Our commitment to our purpose and our consistent strategic focus has allowed us to achieve these important goals. 2015 was a year of expansion and growth. On July 31, 2015 the company acquired the Redding, California branch of Rabobank N.A. which included the acquisition of approximately $10 million in deposits. Then, on our 35th Anniversary, December 15, 2015, we entered the Northern Nevada market with the opening of our first out-of- state branch located in Reno, Nevada. Finally, we expanded our government guaranteed lending operations with the opening of a new loan production office located in Scottsdale, Arizona. All acquisitions are made within the context of our overall strategic, long term plan. We are thoughtful and selective about the markets that we choose to operate in, and understand those markets thoroughly before we enter into them. And most importantly, in keeping with our community-focused philosophy, in each of those markets our bankers are deeply engaged in community and philanthropic initiatives and are closely connected to business and civic leadership. We continue to invest in better tools and technologies, such as enhanced online banking and mobile deposit, to streamline various processes. This approach yields an improved client experience, increases employee productivity and lowers costs. Additionally, we are training our branch associates to meet a broader range of our client’s needs by becoming universal bankers, positioning us to be more responsive and cost-effective. Finally, we have adjusted our brand strategy to incorporate our growth into new markets by introducing a new logo and motto: HERE. For Good. This motto emphasizes our long-term commitment to the communities that we serve in terms of our stable presence and our community outreach and engagement. As is always the case, the year ahead is full of uncertainty. How will the markets fare in response to China’s slowing economy? Will the Federal Reserve continue to raise interest rates? How will lower oil prices impact our economy? How will the election year affect our industry? Whatever the coming year holds, our clients and shareholders should rest-assured knowing that Plumas Bank begins another year with a solid financial base and a dynamic strategic plan, well-prepared to meet all challenges and make the most of all opportunities. Thank you for your continued confidence in and support of Plumas Bancorp. Andrew J. Ryback Director, President & Chief Executive Officer Daniel E. West Chairman of the Board [THIS PAGE INTENTIONALLY LEFT BLANK] Dear Shareholder: You are cordially invited to attend the annual meeting of shareholders of Plumas Bancorp (the “Company”), which will be held at the Plumas Bank Credit Administration Building located at 32 Central Avenue, Quincy, California, on Wednesday, May 18, 2016 at 9:30 a.m. At this annual meeting, shareholders will be asked to (i) elect ten directors for the next year, (ii) approve a non-binding advisory proposal on the Company’s executive compensation and (iii) ratify the appointment of Vavrinek, Trine, Day & Company, LLP as our independent auditors for the fiscal year ending December 31, 2016. The Company is requesting your proxy to vote at the annual meeting. The Board of Directors of the Company recommends that you vote “FOR” the election of each of the nominees for director and “FOR” proposals Two and Three. The proxy statement contains information about each of the nominees for directors, the Company’s executive compensation, and each of the other proxy proposals for shareholder vote. To ensure that your vote is represented at this important meeting, please sign, date and return the proxy card in the enclosed envelope as promptly as possible. As an alternative to using your paper proxy card to vote, you may also vote by telephone or over the internet by following the instructions on your proxy card. Sincerely, Andrew J. Ryback President and Chief Executive Officer The date of this proxy statement is April 1, 2016. TABLE OF CONTENTS Notice of Annual Meeting General Information Revocability of Proxies and Proxy Voting Persons Making the Solicitation Voting Securities Shareholdings of Certain Beneficial Owners and Management Section 16(a) Beneficial Ownership Compliance Proposal No. 1—Election of Directors Board of Directors Director Experience and Qualifications Board Matters The Board of Directors and Committees Shareholder Communication with the Board of Directors Board Role in Risk Oversight Leadership Structure of Board Code of Ethics Director Independence Audit Committee Audit Committee Report Corporate Governance Committee Compensation Consultant Proposal No. 2— Non-binding advisory vote on executive compensation Executive Officers Executive Compensation Named Executive Officer Compensation Table Non-Equity Incentive Plan Stock Option Awards Post-Employment Benefits and Potential Payments Upon Termination Or Change of Control Perquisites Outstanding Equity Awards at December 31, 2015 Compensation of Directors Director Compensation Non-Qualified Stock Options Director Retirement Agreement Post-Retirement Consulting Agreement Director Compensation Table Proposal No. 3—Ratification of Appointment of Independent Auditors Fees Paid to Independent Auditors Shareholder Proposals Nomination of Director Candidates Copy of Bylaw Provisions Certain Transactions Other Matters Available Information ii Page iii 1 2 2 2 3 5 6 6 7 9 9 10 10 11 11 11 11 12 12 14 14 15 15 15 16 16 16 17 18 18 18 18 18 19 19 20 20 20 21 21 21 21 21 Notice of Annual Meeting of Shareholders Plumas Bancorp To: The Shareholders of Plumas Bancorp Notice is hereby given that, pursuant to its Bylaws and the call of its Board of Directors, the annual meeting of shareholders of Plumas Bancorp will be held at the Plumas Bank Credit Administration Building located at 32 Central Avenue, Quincy, California, on Wednesday, May 18, 2016 at 9:30 a.m., for the purpose of considering and voting upon the following matters: 1. Election of Directors. To elect ten (10) persons to serve as directors of the Company until their successors are duly elected and qualified. Alvin G. Blickenstaff Steven M. Coldani William E. Elliott Gerald W. Fletcher John Flournoy Arthur C. Grohs Robert J. McClintock Terrance J. Reeson Andrew J. Ryback Daniel E. West 2. 3. Non-binding Advisory Resolution on Executive Compensation. To vote on a non-binding advisory vote on the Company’s executive compensation. Ratification of the Appointment of Independent Auditors. To vote on the ratification of the appointment of Vavrinek, Trine, Day & Company, LLP as our independent auditors for the fiscal year ending December 31, 2016. 4. Transaction of Other Business. To transact such other business as may properly come before the meeting and any adjournment or adjournments thereof. The Board of Directors has fixed the close of business on March 31, 2016 as the record date for determination of shareholders entitled to notice of, and the right to vote at, the meeting. You are urged to vote in favor of the election of all of the Company’s nominees for directors, to vote “FOR” approval of a non-binding advisory vote on the Company’s executive compensation and “FOR” the ratification of the appointment of Vavrinek, Trine, Day & Company, LLP as our independent auditors for the fiscal year ending December 31, 2016, by signing and returning the enclosed proxy as promptly as possible, whether or not you plan to attend the meeting in person. As an alternative to using your paper proxy card to vote, you may also vote by telephone or over the internet by following the instructions on your proxy card. If you do attend the meeting, you may then withdraw your proxy. The proxy may be revoked at any time prior to its exercise. By Order of the Board of Directors, Dated: April 1, 2016 Terrance J. Reeson, Vice Chairman and Secretary iii [THIS PAGE INTENTIONALLY LEFT BLANK] Plumas Bancorp Proxy Statement Annual Meeting of Shareholders May 18, 2016 Plumas Bancorp (the “Company”) is providing this proxy statement to its shareholders in connection with the annual meeting (the “Meeting”) of shareholders to be held at the Plumas Bank Credit Administration Building located at 32 Central Avenue, Quincy, California, on Wednesday, May 18, 2016 at 9:30 a.m. and at any and all adjournments thereof. It is expected that the Company will mail this proxy statement and accompanying notice and form of proxy to shareholders on or about April 6, 2016. Shareholders may also view this proxy statement and the 2015 Annual Report to Shareholders on the internet at http://materials.proxyvote.com/729273. General Information Voting By Proxy. Whether or not you plan to attend the Meeting, you may submit a proxy to vote the shares registered in your name via internet, telephone or mail as more fully described below: • • • By Internet: Go to http://www.proxyvote.com and follow the instructions. You will need information from your proxy card or electronic delivery notice to submit your proxy. By Telephone: Call 1.800.690.6903 and follow the voice prompts. You will need information from your proxy card or electronic delivery notice to submit your proxy. By Mail: Mark your vote, sign your name exactly as it appears on your proxy card, date your proxy card and return it in the envelope provided. If a bank, broker or other nominee holds your shares, you will receive voting instructions directly from the holder of record. All shares represented by valid proxies that we receive through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card or as instructed via internet or telephone. If you properly submit a proxy without giving specific voting instructions, your shares will be voted in accordance with the Board’s recommendations “FOR”: • • • Proposal 1: Election to the Board of all of the 10 director nominees named in this proxy statement; Proposal 2: Approval of a non-binding advisory vote on the Company’s executive compensation; and Proposal 3: Ratification of the appointment of Vavrinek, Trine, Day & Company, LLP as our independent auditors for the fiscal year ending December 31, 2016. If other matters properly come before the Meeting, the persons appointed to vote the proxies will vote on such matters in accordance with their best judgment. Such persons also have discretionary authority to vote to adjourn the Meeting, including for the purpose of soliciting proxies to vote in accordance with the Board’s recommendations on any of the above items. 1 Revocability of Proxies and Proxy Voting You may revoke your proxy at any time before it is exercised by: • • • • written notice of revocation delivered to Terrance J. Reeson, Corporate Secretary of Plumas Bancorp, at 35 S. Lindan Avenue, Quincy, California 95971; a properly executed proxy of a later date mailed to the Company; casting a new vote by telephone or internet; or voting in person at the Meeting if you are the record holder. If you are a street name shareholder and you voted by proxy, you may revoke your proxy by informing the holder of record in accordance with that entity’s procedures. In addition, the powers of the proxy holders will be revoked if the person executing the proxy is present at the Meeting and elects to vote in person. Subject to such revocation or suspension, the proxy holders will vote all shares represented by a properly executed proxy received in time for the Meeting in accordance with the instructions on the proxy. If no instruction is specified by the shareholder with regard to the matter on the proxy to be acted upon, the proxy holders will vote the shares represented by the proxy “FOR” each of the nominees for directors, “FOR” approval of a non-binding advisory vote on the Company’s executive compensation, and “FOR” the ratification of the appointment of Vavrinek, Trine, Day & Company, LLP as our independent auditors for the fiscal year ending December 31, 2016. If any other matter is presented at the Meeting, the proxy holders will vote in accordance with the recommendations of management. Persons Making the Solicitation The Board of Directors of the Company is soliciting proxies. The Company will bear the expense of preparing, assembling, printing and mailing this proxy statement and the material used in the solicitation of proxies for the Meeting. The Company contemplates that proxies will be solicited principally through the use of the mail, but officers, directors and employees of the Company may solicit proxies personally or by telephone, without receiving special compensation for the solicitation. Although there is no formal agreement to do so, the Company will reimburse banks, brokerage houses and other custodians, nominees and fiduciaries for their reasonable expenses in forwarding these proxy materials to their principals. In addition, the Company may utilize the services of individuals or entities not regularly employed by the Company in connection with the solicitation of proxies, if management of the Company determines that this is advisable. Voting Securities Management of the Company has fixed March 31, 2016 as the record date for purposes of determining the shareholders entitled to notice of, and to vote at, the Meeting. On March 31, 2016, there were 4,835,432 shares of the Company’s common stock issued and outstanding. Each holder of the Company’s common stock will be entitled to one vote for each share of the Company’s common stock held of record on the books of the Company as of the record date. In connection with the election of directors, shares may be voted cumulatively if a shareholder present at the Meeting gives notice at the Meeting, prior to the voting for election of directors, of his or her intention to vote cumulatively. If any shareholder of the Company gives that notice, then all shareholders eligible to vote will be entitled to cumulate their shares in voting for election of directors. Cumulative voting allows a shareholder to cast a number of votes equal to the number of shares held in his or her name as of the record date, multiplied by 2 the number of directors to be elected. These votes may be cast for any one nominee, or may be distributed among as many nominees as the shareholder sees fit. If cumulative voting is declared at the Meeting, votes represented by proxies delivered pursuant to this proxy statement may be cumulated in the discretion of the proxy holders, in accordance with management’s recommendation. The 10 nominees for director receiving the most votes will be elected. Therefore, shares voted “withhold” and broker non-votes will have no impact on the outcome of the election of directors. Proposal 2 regarding the Company’s executive compensation and Proposal 3 regarding the ratification of the appointment of the Company’s auditors each requires the approval of a majority of the shares represented and voting at the Meeting, with affirmative votes constituting at least a majority of the required quorum. Therefore, shares voted “withhold” and broker non-votes will have no impact on the outcome of these proposals, assuming that the affirmative votes constitute at least a majority of the required quorum. Shareholdings of Certain Beneficial Owners and Management Management of the Company knows of no person who owns, beneficially or of record, either individually or together with associates, 5 percent or more of the outstanding shares of the Company’s common stock, except as set forth in the table below. The following table sets forth, as of March 15, 2016, the number and percentage of shares of the Company’s outstanding common stock beneficially owned, directly or indirectly, by principal shareholders, by each of the Company’s directors, our executive officers named in the Summary Compensation Table contained in this proxy statement and by the directors and executive officers of the Company as a group. The shares “beneficially owned” are determined under the Securities and Exchange Commission (“SEC”) Rules, and do not necessarily indicate ownership for any other purpose. In general, beneficial ownership includes shares over which the director, named executive officer or principal shareholder has sole or shared voting or investment power and shares which such person has the right to acquire within 60 days of March 15, 2016. Unless otherwise indicated, the persons listed below have sole voting and investment powers of the shares beneficially owned or acquirable by exercise of stock options. Management is not aware of any arrangements that may result in a change of control of the Company. Beneficial Owner Beneficial Ownership (1) Percent of Class (1) Amount and Nature of Principal Shareholders that own 5% or more: Dean A. Cortopassi Siena Capital Management, LLC Directors and Named Executive Officers: Andrew J. Ryback, President, CEO and Director Richard L. Belstock, EVP and CFO BJ North, EVP of Plumas Bank Daniel E. West, Director and Chairman of the Board Terrance J. Reeson, Director, Vice Chairman and Secretary of the Board Alvin G. Blickenstaff, Director Steven M. Coldani, Director William E. Elliott, Director Gerald W. Fletcher, Director John Flournoy, Director Arthur Grohs, Director Robert J. McClintock, Director 476,967 (2) 324,015 (3) 46,160 (4) 47,591 (5) 19,200 (6) 53,981 (7) 84,431 (8) 77,193 (9) 9,851 (10) 82,210 (11) 35,054 (12) 52,206 (13) 33,278 (14) 88,956 (15) 9.8 6.7 1.0 1.0 * 1.1 1.7 1.6 * 1.7 * 1.1 * 1.8 All 13 Directors and Executive Officers as a Group * Less than one percent 652,005 13.2 3  (1) Includes 71,700 shares subject to options held by the directors and executive officers that were exercisable within 60 days of March 15, 2016. In accordance with SEC rules, these are treated as issued and outstanding for the purpose of computing the percentage of each director, named executive officer and the directors and executive officers as a group, but not for the purpose of computing the percentage of class owned by any other person, including principal shareholders. (2) Two Cortopassi controlled entities have beneficial ownership over a total of 476,967 shares of the Company. The Cortopassi Family Trust owns 156,410 shares of the Company’s common stock, while Cortopassi Partners, L.P. owns 320,557 shares of the Company’s common stock. Dean A. Cortopassi is the Trustee of the Cortopassi Family Trust and is also President of San Tomo, Inc., the general partner of Cortopassi Partners, L.P. Mr. Cortopassi disclaims beneficial ownership of the shares held by Cortopassi Family Trust and Cortopassi Partners, L.P. except to the extent of his pecuniary or partnership interests therein. The address of the Cortopassi entities is 11292 North Alpine Road, Stockton, California 95212. (3) Siena Capital Management, LLC is the general partner of each of Siena Capital Partners I, L.P. and Siena Capital Partners Accredited, L.P. Siena Capital Partners I, L.P. may be deemed to beneficially own 315,041 shares of common stock of the Company, Siena Capital Partners Accredited, L.P. may be deemed to own 8,974 shares of common stock of the Company and Siena Capital Management, LLC may be deemed to own 324,015 shares of common stock of the Company. The address of the Siena entities is 100 North Riverside Plaza, Suite 1630 Chicago, Illinois 60606. (4) Mr. Ryback has shared voting and investment powers as to 18,300 of these shares. Mr. Ryback also has 3,600 shares acquirable by exercise of stock options. (5) Mr. Belstock has 15,300 shares acquirable by exercise of stock options. (6) Ms. North has 19,200 shares acquirable by exercise of stock options. (7) Mr. West has shared voting and investment powers as to 23,662 of these shares and sole voting powers but shared investment powers as to 16,794 of these shares. He also has 4,800 shares acquirable by exercise of stock options. (8) Mr. Reeson has shared voting and investment powers as to 74,771 of these shares. He also has 4,800 shares acquirable by exercise of stock options. (9) Mr. Blickenstaff has shared voting and investment powers as to 69,602 of these shares. He also has 2,400 shares acquirable by exercise of stock options. (10) Mr. Coldani has shared voting and investment powers as to 4,976 of these shares. He also has 1,600 shares acquirable by exercise of stock options. (11) Mr. Elliott has shared voting and investment powers as to 77,410 of these shares. He also has 4,800 shares acquirable by exercise of stock options. (12) Mr. Fletcher has shared voting and investment powers as to 32,609 of these shares. He also has 2,400 shares acquirable by exercise of stock options. (13) Mr. Flournoy has 2,400 shares acquirable by exercise of stock options. (14) Mr. Grohs has shared voting and investment powers as to 28,478 of these shares. He also has 4,800 shares acquirable by exercise of stock options. (15 ) Mr. McClintock has shared voting and investment powers as to 47,058 of these shares. He also has 800 shares acquirable by exercise of stock options. 4 Section 16(a) Beneficial Ownership Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and certain executive officers and persons who own more than ten percent (10%) of a registered class of the Company’s equity securities (collectively, the “Reporting Persons”), to file reports of ownership and changes in ownership with the SEC. The Reporting Persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to the Company during and with respect to its 2015 fiscal year, no director, executive officer or beneficial owner of 10% or more of the Company’s common stock failed to file, on a timely basis, reports required during or with respect to 2015 by Section 16(a) of the Securities Exchange Act of 1934, as amended. 5 PROPOSAL 1 ELECTION OF DIRECTORS The persons named below, all of whom are current members of the Company’s Board of Directors (the “Board”), will be nominated for election as directors at the Meeting to serve until the 2016 Annual Meeting of Shareholders and until their successors are elected and have qualified. Votes of the proxy holders will be cast in such a manner as to effect the election of all 10 nominees, as appropriate, or as many as possible under the rules of cumulative voting. The 10 nominees for directors receiving the most votes will be elected directors. In the event that any of the nominees should be unable to serve as a director, it is intended that the proxy will be voted for the election of such substitute nominee, if any, as shall be designated by the Board. The Board has no reason to believe that any of the nominees named below will be unable to serve if elected. Additional nominations for directors may only be made by complying with the nomination procedures set forth in the Company’s Bylaws. See “Shareholder Proposals - Nomination of Director Candidates”. The following table sets forth the names of, and certain information concerning, the persons to be nominated by the Board for election as directors of the Company. Name and Title Other than Director Year First Appointed Age Director Principal Occupation During the Past Five Years Daniel E. West Chairman of the Board 62 1997 President, Graeagle Land & Water Co., a management company. President, Graeagle Water Co, a private water utility, Graeagle, CA. land Terrance J. Reeson Vice Chairman and Secretary of the Board 71 1984 Retired. Formerly with the U.S. Forestry Service, Quincy, CA. Alvin G. Blickenstaff 80 1988 Farmer and Rancher, partner in Blickenstaff Ranch, Janesville, CA. Steven M. Coldani 62 2013 President, Owner/Broker, Coldani Realty Inc. and co- owner of Graeagle Associates Realtors; a managing member of Coldani Farming, LLC, a diversified farming company, Lodi, CA. William E. Elliott 75 1987 Retired. Formerly President and CEO of the Company and Plumas Bank, Quincy, CA. Gerald W. Fletcher 73 1988 Forest Products Wholesaler, Susanville, CA. John Flournoy 71 2005 Rancher and Chief Financial Officer of Likely Land and Livestock Corporation, Likely, CA. Arthur C. Grohs 79 1988 Retired. Former Retailer, Sparks, NV. Robert J. McClintock 58 2008 Certified Public Accountant, co-owner of McClintock Accountancy Corporation, Tahoe City, CA. Andrew J. Ryback 50 2016 President and CEO Plumas Bancorp and Plumas Bank 6 The following is a brief description of the experience and qualifications of each nominee that the Corporate Governance Committee considered, in light of the Company’s business and structure, in nominating them for service as Directors: Daniel E. West Chairman of the Board Director since 1997 Mr. Daniel E. West has lived in Graeagle, California since 1958. He is president of Graeagle Land and Water Company, a land management company, and Graeagle Water Company, a private water utility. Mr. West is a managing member of Graeagle Timber Company, LLC and is a member of the Feather River College Foundation. He also serves as a director on the boards of Graeagle Fire Protection District and California Water Association. Mr. West’s valuable business acumen, his extensive experience on various and diverse boards, and his deep ties to his community highly qualify him for service as a member of the Board and Chairman. Terrance J. Reeson Vice Chairman Director since 1984 Mr. Terrance J. Reeson has lived in Quincy, California for over 50 years. He is a retired U.S. Forest Service Aviation Officer for the Plumas National Forest. Mr. Reeson is active in his community and is a former executive director of the Quincy Chamber of Commerce. Mr. Reeson’s relevant experience qualifying him for service as a director includes extensive government service and widespread civic and community involvement. Alvin G. Blickenstaff Director Director since 1988 Mr. Alvin G. Blickenstaff was born and raised in the Susanville, California area. Mr. Blickenstaff, along with his wife, Beverly, own and operate Blickenstaff Ranch, a family-owned partnership, where they raise alfalfa hay, wheat, straw and alfalfa seed. He was a founding director and chairman of former Sierra Security Bank. He is a member and past president of both the Lassen County Farm Bureau and Lassen County Cattleman’s Association. Mr. Blickenstaff served as a 4-H leader and on the Jr. Livestock Sale Committee for 42 years. He served on the FHA Loan Board and the Agricultural Stabilization and Conservation Committee and received the Conservationist of the Year Award in 1972. In 2007, he was recognized by his peers with a Distinguished Service Award for community service. Mr. Blickenstaff’s expertise in the agricultural industry and business management highly qualifies him for service as a member of the Board. Steven M. Coldani Director Director since 2013 Mr. Steven M. Coldani was born and raised in Lodi, California. He is a licensed real estate broker and the president and owner of Coldani Realty Inc. in Lodi, California; he is also co-owner of Graeagle Associates Realtors in Graeagle, California since 1992. In addition, Mr. Coldani is a managing member of Coldani Farming, LLC, a diversified farming company producing various row crops such as olives and grapes, hay and livestock. Mr. Coldani graduated from the University of the Pacific, Stockton, California where he received a Bachelor of Science degree in Business and Public Administration. Mr. Coldani’s relevant experience qualifying him for service as a member of the Board is comprised of a broad range of management and community service experience including his service on the board of Community Business Bank as well as his membership in the Lodi District Chamber of Commerce, the California 7 Farm Bureau, the Lodi Association of Realtors and the Plumas Association of Realtors; he is also a past director of the California Association of Realtors. William E. Elliott Director Director since 1987 Mr. William E. Elliott joined Plumas Bank in 1987 as President and Chief Executive Officer and retired in 2005. He has been in the banking industry for over 50 years holding various management and board positions; this experience highly qualifies him for service as a board director. Mr. Elliott graduated from California State University, Sacramento where he received a Bachelor of Science degree in Accounting and a Master’s in Business Administration. He also graduated from the Pacific School of Banking at the University of Washington. Mr. Elliott is very active in his community; he is a director and former chairman of the Feather River Community College Board, and he is a former director on the Plumas District Hospital Board, both in Quincy, California. He has been a member of the Rotary Club for over 40 years. Gerald W. Fletcher Director Director since 1988 Mr. Gerald W. Fletcher has lived in Susanville, California since 1956 and is a retired rancher, realtor, and insurance agent. He was also a director of former Sierra Security Bank. Mr. Fletcher owns and operates Fletcher Christmas Trees. He was also a reforeststation contractor and has planted millions of trees throughout Northern California. He is a member and past president of Lassen County Cattleman’s Association and a member of the Lassen County Farm Bureau. Mr. Fletcher’s relevant experience qualifying him for service as a member of the Board is comprised of a broad range of management and community service including his past service as Lieutenant in the Susanville Volunteer Fire Department, a past 4-H Leader and member of the Lassen County Jr. Livestock Auction Committee. John Flournoy Director Director since 2005 Mr. John Flournoy was born and raised in Likely, California. He is a rancher and hay producer in Likely, California. Since 1971, he has served on the board of directors of the South Fork Irrigation District (SFID). He served for many years as a committee member for the Farm Service Agency where he reviewed all loan applications for small agricultural operations and evaluated collateral releases and settlements. Mr. Flournoy’s relevant experience qualifying him for service as a member of the Board includes his lifelong experience as a rancher and hay producer on his family-owned ranch, expertise in business and agricultural lending, and operational risk management. Arthur C. Grohs Director Director since 1988 Mr. Arthur C. Grohs was born in Susanville, California and raised in Westwood and Susanville, California. Mr. Grohs is an experienced business owner and entrepreneur; he retired after 35 years of retail store ownership in Susanville. Mr. Groh’s experience in qualifying him for service as a member of the Board includes marketing, long range planning, personnel management, and operational risk management. He now resides in Reno, Nevada and remains active in the Northern Nevada community. 8 Robert J. McClintock Director Director since 2008 Mr. Robert J. McClintock has lived in Tahoe City, California for over 30 years. He is a Certified Public Accountant and is a shareholder of McClintock Accountancy Corporation headquartered in Tahoe City, California with an additional office in Truckee, California. As a CPA, Mr. McClintock brings strong accounting and financial skills important to the oversight of the Company’s financial reporting, enterprise and operational risk management. Mr. McClintock is Troop Committee Chairman for Boy Scouts of America Troop 266. He is also a board member of the Kiwanis Club of North Lake Tahoe and has served previously as past President and Treasurer. He is a member of the advisory board for the Tahoe Truckee Excellence in Education Foundation and has served previously as Treasurer. Mr. McClintock attended Michigan Tech University where he received his Bachelor of Science degree in Business Administration. Andrew J. Ryback Director, President and CEO Director since 2016 Mr. Andrew J. Ryback joined Plumas Bank in 2001. In 2005 he was appointed Executive Vice President and Chief Financial Officer of the Company and the Bank. In 2010 he was appointed interim President and Chief Executive officer and in 2011 that position became permanent. Ryback received his Bachelor of Science degree in Business Administration from California State University, Northridge. He is a Certified Public Accountant and a graduate of Pacific Coast Banking School. Ryback actively serves in a variety of organizations in his community. He is currently the immediate past President of the Rotary Club of Quincy. He also serves as Treasurer on the Board of Directors of Sierra Cascade Family Opportunities and he chairs the Plumas District Hospital Bond Oversight Committee. Additionally, Ryback serves as Commissioner and Treasurer of the Quincy Fire Protection District; he previously served as a volunteer firefighter. All nominees will continue to serve if elected at the Meeting until the 2017 annual meeting of shareholders and until their successors are elected and have been qualified. None of the directors were selected pursuant to any arrangement or understanding other than with the directors and executive officers of the Company acting within their capacities as such. There are no family relationships between any of the directors of the Company. No director of the Company serves as a director of any company that has a class of securities registered under, or which is subject to the periodic reporting requirements of, the Securities Exchange Act of 1934, or of any company registered as an investment company under the Investment Company Act of 1940. Board Matters The Board of Directors and Committees During 2015, the Company’s Board of Directors met 19 times. None of the Company’s directors attended less than 75 percent of all Board of Directors’ meetings and committee meetings of which they were members. The Company does not have a policy requiring director attendance at its annual meeting; however, most directors attend the meeting as a matter of course. All current directors attended the 2015 annual meeting of shareholders. The Board has established, among others, an Audit Committee and a Corporate Governance Committee, which serves as a nominating committee and a compensation committee, and each of these committees have charters. Charters for each of these committees are available on the Company’s website www.plumasbank.com. 9 Shareholder Communication with the Board of Directors If you wish to communicate with the Board of Directors or the Chairman of the Board you may send correspondence to the Corporate Secretary, Plumas Bancorp, 35 S. Lindan Avenue, Quincy, California 95971. The Corporate Secretary will perform a review of such correspondence to ensure that communications forwarded to the Board or the Chairman preserve the integrity of the process. For example, items that are unrelated to the duties and responsibilities of the Board or the Chairman such as spam, junk mail and mass mailings, product complaints, personal employee complaints, product inquiries, new product suggestions, resumes and other forms of job inquiries, surveys, business solicitations or advertisements (the “Unrelated Items”) will not be forwarded. In addition, material that is unduly hostile, threatening, illegal or similarly unsuitable will not be forwarded. Any communication that is relevant to the conduct of the Company’s business and is not forwarded will be retained for one year (other than Unrelated Items) and made available to the Chairman and any other independent director on request. The independent directors grant the Corporate Secretary discretion to decide what correspondence shall be shared with the Company’s management and specifically instruct that any personal employee complaints be forwarded to the Company’s Human Resources Department. Board Role in Risk Oversight The Board’s duties include understanding and assessing risks to the Company and monitoring the management of those risks. To fulfill this responsibility the directors are expected to attend all meetings and review materials in advance of the meetings. Each meeting includes a review of the activities of each board committee including the committee’s activities related to risk management. Each of our board committees concentrates on specific risks for which they have an expertise and each committee is required to regularly report to the Board of Directors on its findings. The Board believes that evaluating how the executive team manages the various risks confronting the Company is one of its most important areas of oversight. In carrying out this critical responsibility, the Board has designated the Audit Committee with primary responsibility for overseeing enterprise risk management. While the Audit Committee has primary responsibility for overseeing enterprise risk management, each of the other Board committees also considers risk within its area of responsibility. For example, the Corporate Governance Committee reviews risks related to legal and regulatory compliance as they relate to corporate governance structure and processes, and reviews risks related to compensation matters. The Board is apprised by the committee chairs of significant risks and management’s response to those risks via periodic reports. While the Board and its committees oversee risk management strategy, management is responsible for implementing and supervising day-to-day risk management processes and reporting to the Board and its committees on such matters. Furthermore, because the banking industry is highly regulated, certain risks to the Company are monitored by the Board through its review of the Company’s compliance with regulations set forth by its regulatory authorities, including the FDIC and recommendations contained in regulatory examinations. With respect to risk related to compensation matters, the Corporate Governance Committee considers, in establishing and reviewing the Company’s executive compensation program, whether the program encourages unnecessary or excessive risk taking and has concluded that it does not. Executives’ base salaries are fixed in amount and thus do not encourage risk-taking. During 2015, the Company established a non-equity incentive plan (the NEI) for its officer level employees. Under the NEI, an allocation of 50% of pretax income in excess of budgeted pretax income is payable to eligible employees up to a maximum of $500,000 for all eligible employees, exclusive of the CEO. The CEO’s allocation is based on 10% of pretax income in excess of budgeted pretax income up to a maximum of $100,000. For 2015, the entire $600,000 was earned. No individual officer’s earnings under the NEI exceeded $25,300 with the exception of Mr. Ryback who earned an incentive of $100,000. The Corporate Governance Committee concluded that the NEI as descripted above did not encourage unnecessary or excessive risk 10 taking. The other significant source of compensation to executives is in the form of long-term equity awards that are important to help further align executives’ interests with those of the Company’s shareholders. The Corporate Governance Committee believes that these awards do not encourage unnecessary or excessive risk-taking since the ultimate value of the awards is tied to the Company’s stock price, and awards are subject to long-term vesting schedules to help ensure that executives have significant value tied to long-term stock price performance. The Corporate Governance Committee has also reviewed the Company’s compensation programs for employees generally and has concluded that these programs do not create risks that are reasonably likely to have a material adverse effect on the Company. The Corporate Governance Committee believes that the design of the Company’s annual cash and long-term equity incentives provides an effective and appropriate mix of incentives to help ensure the Company’s performance is focused on long-term shareholder value creation and does not encourage the taking of short-term risks at the expense of long- term results. Leadership Structure of Board The Board believes that the Company and its shareholders are best served by having an independent Board Chairman and a separate CEO. We separate these roles in recognition of the differences between the two roles. The CEO is responsible for day-to-day leadership and performance of the Company, while the Chairman of the Board provides strategic guidance to the CEO and presides over meetings of the full Board. Code of Ethics The Board of Directors has adopted a code of business conduct and ethics for directors, officers (including the Company’s principal executive officer and principal financial officer) and financial personnel, known as the Corporate Governance Code of Ethics. This Code of Ethics Policy is available on the Company’s website at www.plumasbank.com. Shareholders may request a free copy of the Code of Ethics Policy from Plumas Bancorp, Ms. Elizabeth Kuipers, Investor Relations, 35 S. Lindan Avenue, Quincy, California 95971. Additionally, a copy of the Company’s Corporate Governance Code of Ethics can be accessed at http://www.plumasbank.com. Click on the “Investor Relations tab” and then Governance Documents. Director Independence The Board has determined that each of the following non-employee directors are “independent” within the meaning of the listing standards and rules of NASDAQ. Daniel E. West Alvin G. Blickenstaff Steven M. Coldani John Flournoy Audit Committee Robert J. McClintock Terrance J. Reeson Gerald W. Fletcher Arthur C. Grohs The Company has an Audit Committee composed of Mr. McClintock, Chairman, and Messrs. Flournoy, Grohs and Reeson. The Board has determined that each member of the Audit Committee meets the independence and experience requirements of the listing standards of NASDAQ and the SEC. The Board has also determined that Mr. Robert J. McClintock is qualified as an audit committee financial expert and that he has accounting or related financial management expertise, in each case in accordance with the rules of the SEC and NASDAQ’s listing standards. 11  The Audit Committee met 10 times during 2015. The Audit Committee reviews all internal and external audits including the audit by Vavrinek, Trine, Day & Company, LLP, the Company’s independent auditor for 2015. The Audit Committee reports any significant findings of audits to the Board of Directors, and ensures that the Company’s internal audit plans are met, programs are carried out, and deficiencies and weaknesses, if any, are addressed. The Audit Committee meets regularly to discuss and review the overall audit plan. The Audit Committee’s policy is to pre-approve all recurring audit and non-audit services provided by the independent auditors through the use of engagement letters. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding all services provided by the independent auditors and fees associated with those services performed to date. The fees paid to the independent auditors in 2015 and 2014 were approved per the Audit Committee’s pre-approval policies. Audit Committee Report This report of the Audit Committee shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Acts. The Board of Directors and the Audit Committee has reviewed the Company’s audited financial statements and discussed such statements with management. The Audit Committee has discussed with Vavrinek, Trine, Day & Company, LLP, the Company’s independent auditors during the year 2015, all communications required by standards of the Public Company Accounting Oversight Board, including the matters required to be discussed by Auditing Standard No. 16, Communications with Audit Committees, and Rule 2-07, Communication with Audit Committees, of Regulation S-X, and, with and without management present, discussed and reviewed the results of the independent external audit firm’s examination of the financial statements. The Committee also discussed the results of internal audits. The Audit Committee has also received the written disclosures and the letter from Vavrinek, Trine, Day & Company, LLP as required by the PCAOB’s Ethics and Independence Rule 3526 (Communication with Audit Committees Concerning Independence) and has discussed with the independent registered public accounting firm their independence. Based on the review and discussions noted above, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for filing with the SEC. THE AUDIT COMMITTEE: Robert J. McClintock, Chairman Arthur C. Grohs Corporate Governance Committee John Flournoy Terrance J. Reeson The Company has a Corporate Governance Committee, which met 6 times during 2015. The Corporate Governance Committee consists of Mr. Flournoy, Chairman, and Messrs. Coldani, Grohs, Reeson and West. The Board has determined that Messrs. Flournoy, Coldani Grohs, Reeson and West are “independent” within the meaning of the listing standards and rules of NASDAQ. The Corporate Governance Committee, which functions as the Board’s nominating and compensation committees, provides assistance to the Board by identifying qualified individuals as prospective Board members, recommends to the Board the director nominees for election at the annual meeting of shareholders, 12 nominates the Chairperson and Vice-Chairperson of the Board, oversees the annual review and evaluation of the performance of the Board and its committees, and develops and recommends corporate governance guidelines to the Board of Directors. The Corporate Governance Committee also at least annually reviews, adjusts (as necessary), and approves the Company’s directors’ compensation, including cash, equity or other compensation for service on the Board, any committee of the Board and as Chairperson of the Board or any committee of the Board, at least annually reviews, adjusts (as necessary) and approves the Chief Executive Officer’s compensation, provides advice and consents to the Chief Executive Officer in the review and adjustment of executive officer compensation (other than the Chief Executive Officer), approves the compensation strategy for the Company’s employees, reviews and recommends for approval by the Board all equity- based compensation, including stock options and stock grants and approves other personnel matters, which are in excess of management’s authority. The Corporate Governance Committee does not have any written specific minimum qualifications or skills that the committee believes must be met by either a committee-recommended or a shareholder- recommended candidate in order to serve on the Board. The Corporate Governance Committee identifies nominees by first evaluating the current members of the Board willing to continue in service. Current members of the Board with skills and experience that are relevant to the Company’s business and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective. If any member of the Board does not wish to continue in service or if the Corporate Governance Committee or the Board decided not to re-nominate a member for re-election, the Corporate Governance Committee identifies the desired skills and experience of a new nominee in light of the following criteria. While no specific diversity policy exists, when identifying and evaluating new directors, the Corporate Governance Committee considers the diversity and mix of the existing members of the Board, including, but not limited to, such factors as: the age of the current directors, their geographic location (being a community bank, there is a strong preference for local directors), background, skills and employment experience. Among other things, when examining a specific candidate’s qualifications, the Corporate Governance Committee considers the candidate’s: ability to represent the best interest of the Company; existing relationships with the Company; interest in the affairs of the Company and its purpose; ability to fulfill director responsibilities; leadership skills; reputation within the Company’s community; community service; integrity; business judgment; ability to develop business for the Company; and ability to work as a member of a team. The Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. Nominees are not discriminated against on the basis of race, religion, national origin, sexual orientation, disability or any other basis proscribed by law. All nominees to be considered at the Meeting were recommended by the Corporate Governance Committee. The Corporate Governance Committee will consider nominees to the Board proposed by shareholders, although the Board has no formal policy with regard to shareholder nominees as it considers all nominees on their merits as aforementioned. Any shareholder nominations proposed for consideration by the Board may only be made by complying with the nomination procedures set forth in the Company’s Bylaws, which are summarized below. See “Shareholder Proposals - Nomination of Director Candidates.” Any such notices should be addressed to: President Plumas Bancorp 35 S. Lindan Avenue Quincy, CA 95971 13 Compensation Consultant The Corporate Governance Committee has the authority, to the extent it deems necessary, to retain and terminate an outside compensation consultant to assist in the evaluation of director and executive officer compensation and benefit matters. During 2015, the Corporate Governance Committee consulted with Pearl Meyer & Partners, LLC, (“Pearl Meyer”), a compensation consulting firm. Pearl Meyer served as an independent compensation consultant to advise the Corporate Governance Committee on matters related to the Executives and non-employee Directors compensation. Pearl Meyer also provided guidance on industry best practices and assisted the Corporate Governance Committee by providing comparative market data on compensation practices and programs for the Executives and Directors based on an analysis of peer competitors. Related to Executive’s compensation, Pearl Meyer advised the Corporate Governance Committee in (1) determining base salaries, (2) setting competitive levels for the Company’s Executive Incentive Plan, (3) determining the appropriateness of individual grant levels for equity awards, (4) evaluating the retirement plans and benefit amounts, (5) evaluating the perquisite program and allowances provided, and (6) determining the appropriateness of the change in control and termination benefits. Pearl Meyer’s non-employee Director Compensation plan review included a review of Board fees, Committee fees and equity awards. Other than compensation related consulting, Pearl Meyer did not provide any other services. The Board of Directors and management do not believe the services provided by Pearl Meyer created a conflict of interest. No services performed by Pearl Meyer exceeded in the aggregate, more than $120,000 in the last fiscal year. NON-BINDING ADVISORY RESOLUTION ON EXECUTIVE COMPENSATION PROPOSAL 2 The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires that stockholders cast an advisory (non-binding) vote on the executive compensation paid to the executive officers listed in the Summary Compensation Table at least every three years. This proposal, commonly known as a “Say-on-Pay” proposal, gives you as a shareholder the opportunity to provide an advisory vote on the Company's executive compensation as disclosed in this proxy statement through the following resolution: “RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K is hereby APPROVED.” Because the vote is advisory, it will not be binding upon the Board of Directors, will not overrule any decision made by the Board of Directors, and will not create or imply any additional fiduciary duty on the Board of Directors. The Corporate Governance Committee may, however, take into account the outcome of the vote when considering future executive compensation arrangements. The Board of Directors believes that the Company's executive compensation program is reasonable in comparison both to similar sized companies in the industry and to the performance of the Company during 2015. We also believe that the Company's compensation program is effective in aligning the interests of the executives with the interests of the Company's shareholders on a long-term basis and is appropriate. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF A NON- BINDING ADVISORY RESOLUTION ON EXECUTIVE COMPENSATION AS DESCRIBED IN THIS PROXY STATEMENT. 14  Executive Officers The following table sets forth information concerning the executive officers of the Company and Plumas Bank: Name Age Andrew J. Ryback 50 Position and Principal Occupation for the Past Five Years President and Chief Executive Officer of the Company and Plumas Bank since November 16, 2011. Interim President and Chief Executive Officer of the Company and Plumas Bank beginning March 29, 2010. Richard L. Belstock 59 BJ North 65 Kerry D. Wilson 59 Executive Vice President of the Company and Plumas Bank since July 18, 2012. Chief Financial Officer of the Company and Plumas Bank since November 16, 2011. Interim Chief Financial Officer of the Company and Plumas Bank beginning March 31, 2010. Executive Vice President of Retail Banking, Marketing and Commercial Lending of Plumas Bank since July 1, 2011. Executive Vice President of Retail Banking and Marketing beginning July 7, 2008. Executive Vice President and Chief Credit Officer of Plumas Bank since July 18, 2012. Chief Credit Administrator of Plumas Bank since February, 2012. Previously Senior Vice President and Assistant Loan Administrator of Plumas Bank. Executive Compensation Summary Compensation Table Year (b) Salary (c) Bonus (d) Stock Awards (1) (e) Option Awards (2) (f) Non-Equity Incentive Plan Compensation (g) Nonqualified Deferred Compensation Earnings (h) All Other Compensation (3) (i) Total (j) 2015 2014 $210,000 $210,000 2015 2014 2015 2014 $170,000 $145,000 $165,000 $145,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $ 0 $ 43,452 $ 100,000 $ 100,000 $ 0 $ 0 $ 6,326 $ 6,456 $316,326 $359,908 $ 0 $ 28,968 $ 25,300 $ 19,600 $ 0 $ 28,968 $ 24,500 $ 17,200 $ 0 $ 0 $ 0 $ 0 $ 1,629 $ 2,172 $ 4,673 $ 2,793 $196,929 $195,740 $194,173 $193,961 Name and Principal Position (a) Andrew J. Ryback President and CEO of the Company and Plumas Bank Richard L. Belstock EVP and CFO of the Company and Plumas Bank BJ North EVP, Retail Banking, Marketing and Commercial Lending (1) The Company did not grant any stock awards in 2015 or 2014. (2) The amounts in column (f) reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in footnote 3 to the Company’s audited financial statements for the fiscal year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2015. No stock options were granted in 2015. The amounts in column (i) include premiums paid and accrued on life insurance policies, personal use of a Company automobile (Mr. Ryback and Ms. North in 2015), Company-provided gasoline and cell phone allowance. (3) 15 Non-Equity Incentive Plan Under the Company’s non-equity incentive plans (the NEIs), for 2015 and 2014, an allocation of 50% of pretax income in excess of budgeted pretax income is payable to eligible employees up to a maximum of $500,000 for all eligible employees, exclusive of the CEO. The CEO’s allocation is based on 10% of pretax income in excess of budgeted pretax income up to a maximum of $100,000. For both 2015 and 2014 the entire $600,000 was earned. No individual officer’s earnings under the NEIs exceeded $25,300 in either year with the exception of Mr. Ryback who earned an incentive of $100,000 in each of 2015 and 2014. A total of thirty-six and forty employees received a bonus payment under the NEIs in 2015 and 2014, respectively. These payments were made during the first quarter of the following year. Stock Option Awards We consider equity compensation in the form of annual stock option awards an important component of our total compensation package because it helps align the interests of our executives to those of our shareholders and provides a significant retention benefit. During 2013 the Company’s shareholders approved the Plumas Bancorp 2013 Stock Option Plan (2013 Plan), which allows for the granting of stock option awards to employees. The 2013 Plan has a term of 10 years. No more than 500,000 shares of common stock may be issued pursuant to awards of stock options. The Corporate Governance Committee approves and recommends to the Board for its approval all stock option grants. On April 28, 2014 the Company granted a total of 110,400 stock options, to officers at the level of Senior Vice President and above, under the 2013 plan with an exercise price of $6.32 per share. These options have a four year vesting period and expire eight (8) years from the date of grant. There were no stock options granted during the year ended December 31, 2015. The Company makes grants of equity- based compensation only at fair market value of our stock at the time of grant. The exercise price of stock options is set at the closing stock price on the date of grant. All option grants have a maximum vesting period of five (5) years and expire no more than ten (10) years from the date of grant. The Company incorporates the officer’s position level in the determination of the total value of the equity-based compensation to be included in the officer’s total compensation. The higher the officer’s level, the more options that may be granted to the officer. Additional options may be granted to an individual based on outstanding achievement. This is consistent with the Company’s philosophy of rewarding those officers who have the most impact on our performance. Post-Employment Benefits and Potential Payments Upon Termination Or Change of Control We consider providing significant post-employment benefits in the form of providing salary continuation benefits to our executives as an important part of their total executive compensation to reward them for their service and loyalty to the Company. In 2005 the Company entered into a salary continuation agreement with Mr. Ryback. The purpose of the salary continuation agreement is to provide a special incentive to the experienced executive officer to continue employment with the Company on a long-term basis. The agreement provides Mr. Ryback with salary continuation benefits of up to $62,000 per year for 15 years after retirement at age 65. In the event of death prior to retirement, Mr. Ryback’s beneficiary is entitled to a portion of the death benefits pursuant to a split dollar agreement. In the event of disability wherein Mr. Ryback does not continue employment with the Company, he is entitled to salary continuation benefits, at a reduced amount depending on the length of service with the Company, beginning at age 65 or on the date on which he is no longer entitled to disability benefits under the Company’s group disability insurance, whichever is earlier. If Mr. Ryback terminates employment with the Company for a reason other than death or disability prior to the retirement age of 65, he will be entitled to salary continuation benefits at a reduced amount depending on the length of service with the Company. The vesting of salary continuation benefits for Mr. Ryback occurs at a rate that provides for a 90% vesting at age 60 and 2% per year for the next five years of service. 16 In the event of a change of control of the Company and Mr. Ryback terminates employment with the Company or its successor within a period of 24 months after such change in control, then he may elect full vesting of his salary continuation payments and the payment of the salary continuation benefits beginning with the month following the month of termination, subject to the reduction of benefits if the benefits result in a limitation of deductibility of such benefits for the Company under Section 280G of the Internal Revenue Code. The salary continuation benefits are informally funded by single premium life insurance policies with Mr. Ryback as the insured party and the Company as the beneficiary of the policies. The Company has entered into a split dollar agreement with Mr. Ryback. The purpose of the split dollar agreement is to provide special incentive to Mr. Ryback to continue employment with the Company on a long-term basis. To accomplish this, the Company agrees to divide the net death proceeds of life insurance policies on Mr. Ryback’s life with Mr. Ryback’s beneficiary. However, Mr. Ryback’s rights or interests in the split dollar policies no longer exist once he ceases to be employed by the Company for any reason whatsoever prior to normal retirement age provided that he has received or had the opportunity to receive any benefit under his executive salary continuation agreement. The Company has agreed to pay the taxes on the imputed income on the life insurance benefit provided to Mr. Ryback under the split dollar agreement. Perquisites We offer a qualified 401(k) plan in which the named executive officers participate on the same terms as all other employees. On April 1, 2010 we discontinued the Company’s matching contribution but reinstated it at a reduced rate beginning January 1, 2015. In addition we offer medical, dental and vision plans under the same terms to all employees. Other perquisites and benefits, which do not represent a significant portion of the named executive’s total compensation, include for Mr. Ryback a Company provided automobile, maintenance on the automobile and the payment of his portion of the split dollar insurance premium. During 2015, Ms. North was provided a Company automobile and maintenance on the automobile. Mr. Ryback, Mr. Belstock and Ms. North also receive a monthly allowance to cover the business portion of their cellular phone use and are provided with gasoline for the business use of their automobiles. These plans, and the contributions we make to them, provide an additional benefit to attract and retain executive officers of the Company. 17 Outstanding Equity Awards at Fiscal Year-End Option Awards Stock Awards Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested Number of Shares or Units of Stock That Have Not Vested Market value of Shares or Units of Stock That Have Not Vested ($) (b) (c) (d) (e) (f) (g) (h) (i) Name (a) Andrew J. Ryback 5,900 (3) 3,600 (1) 0 10,800 N/A $12.40 $6.32 02/20/2016 04/28/2022 0 $0 5,000 (4) 1,500 (3) 5,500 (2) 2,400 (1) 0 0 0 7,200 Richard L. Belstock BJ North 14,400 (2) 2,400 (1) 0 7,200 $16.89 $12.40 $2.95 $6.32 09/20/2016 02/20/2016 03/16/2019 04/28/2022 $2.95 $6.32 03/16/2019 04/28/2022 N/A N/A 0 0 $0 $0 (1) Options were granted 4/28/2014, have an eight year life and vest 25% per year beginning 4/28/2015 (2) Options were granted 3/16/2011, have an eight year life and vest 25% per year beginning 3/16/2012 (3) Options were granted 2/20/2008, have an eight year life and vest 25% per year beginning 2/20/2009 (4) Options were granted 9/20/2006, have a ten year life and vest 20% per year beginning 9/20/2007 0 0 0 Compensation of Directors (j) $0 $0 $0 Director Compensation: During 2015 Directors, except the Chairman, each received $2,100 per month for serving on the Company’s and Plumas Bank’s Board of Directors. The Chairman received $2,650 per month. Non-Qualified Stock Options: On April 28, 2014, the Company granted to each of its directors 3,200 in non-qualified stock options with an exercise price of $6.32 per share. The options vest 25% per year beginning on April 28, 2015 and have an eight year life. The Company makes grants of non- qualified stock options only at fair market value of our stock at the time of grant. All option grants have a maximum vesting period of five (5) years and expire no more than ten (10) years from the date of grant. Upon a change in control, all stock options held by directors may vest and become exercisable. Director Retirement Agreement: The Company has entered into Director Retirement (fee continuation) Agreements with its Directors excluding Mr. Elliott and Mr. Coldani. Mr. Elliott retired as President and Chief Executive Officer of the Company during 2005 and is currently receiving benefits under his executive salary continuation agreement. The purpose of the fee continuation agreements is to provide a retirement benefit to the Board members as an incentive to continue informal service with the Company. The agreements provide for fee continuation benefits of up to $10,000 per year with a term of 12 years after retirement with the exception that Board members Flournoy and McClintock’s agreements have a term of 15 years. In the event of death prior to retirement, the beneficiary will receive full fee continuation benefits, with the exception of Messrs. Flournoy and McClintock’s beneficiaries who would be entitled to receive a lump sum payment of $30,000. In the event of disability wherein the director does not continue service with the Company, the director is entitled to fee continuation benefits, at a reduced 18 amount depending on the length of service with the Company, beginning the month following termination of service. The agreements, with the exception of Messrs. Flournoy and McClintock’s agreements, allow for a Hardship Distribution under specified circumstances. Hardship Distributions are limited to the amount the Company had accrued under the terms of the agreement as of the day the director petitioned the Board to receive a Hardship Distribution. Upon a change in control, the director is eligible to receive the full fee continuation benefits upon the director’s termination of service. The fee continuation benefits, with the exception of Mr. McClintock’s benefits, are informally funded by single premium life insurance policies. The directors are the insured parties and the Company is the beneficiary of the respective policies. Post-Retirement Consulting Agreement: The Company has entered into Post-Retirement Consulting Agreements with its non-employee Directors with the exception of Messrs. Flournoy, Elliott, McClintock and Coldani. The purpose of the Agreements is to provide consideration to the Board members in exchange for consulting services after their retirement from the Board. The Agreements provide for consulting fees of $10,000 per year for 3 years after retirement. In the event of death prior to completion of the consulting services, the beneficiary will receive death benefits equal to the remaining unpaid consulting fee benefits. In the event of disability wherein the retired director is unable to continue consulting services with the Company, the Company may terminate the director’s post-retirement consulting services. If the retired director voluntarily terminates his or her consulting services for other than good reason or if the Company terminates the director’s post-retirement consulting services for cause, the Post-Retirement Consulting Agreement shall terminate. The table below summarizes the compensation paid by the Company to non-employee Directors for the fiscal year ended December 31, 2015. Director Compensation Table Fees Earned or Paid in Cash (b) $31,800 $25,200 $25,200 $25,200 $25,200 $25,200 $25,200 $25,200 $25,200 Stock Awards (1) (c) N/A N/A N/A N/A N/A N/A N/A N/A N/A Option Awards ($) (1) (d) N/A N/A N/A N/A N/A N/A N/A N/A N/A Non-Equity Incentive Plan Compensation (e) N/A N/A N/A N/A N/A N/A N/A N/A N/A Nonqualified Deferred Compensation Earnings (f) N/A N/A N/A N/A N/A N/A N/A N/A N/A All Other Compensation (g) $0 $0 $0 $0 $0 $0 $0 $0 $0 Total (h) $31,800 $25,200 $25,200 $25,200 $25,200 $25,200 $25,200 $25,200 $25,200 Name (a) Daniel E. West Terrance J. Reeson Alvin G. Blickenstaff Steven M. Coldani William E. Elliott Gerald W. Fletcher John Flournoy Arthur Grohs Robert J. McClintock (1) The Company did not grant any stock or option awards to the listed directors in 2015. As of December 31, 2015, each of Messrs. Elliott, Grohs, Reeson and West held options to purchase 7,400 shares of common stock; each of Messrs. Blickenstaff and Fletcher held options to purchase 5,000 shares of common stock; Mr. Coldani held options to purchase 3,200 shares of common stock; Mr. Flournoy held options to purchase 7,500 shares of common stock; and Mr. McClintock held options to purchase 2,400. 19 PROPOSAL 3 RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS At the Meeting, shareholders will be asked to ratify the appointment of Vavrinek, Trine, Day & Company, LLP as the Company’s independent auditors for the fiscal year ending December 31, 2016. The firm of Vavrinek, Trine, Day & Company, LLP served as independent registered public accounting firm for the audit of the Company’s consolidated financial statements as of and for the years ended December 31, 2015 and 2014. We have been advised by Vavrinek, Trine, Day & Company, LLP and by the directors themselves that neither it nor any of its members or associates has any relationship with us or our subsidiaries, other than as independent auditors. Proposal 3 is nonbinding. If the appointment is not ratified, our Audit Committee will consider whether to appoint another independent registered public accounting firm in its discretion. If the appointment is ratified, our Audit Committee in its discretion may appoint a different independent registered public accounting firm at any time if it determines that such a change would be advisable. Representatives of Vavrinek, Trine, Day & Company, LLP will be present at the Meeting, will have an opportunity to make any statement that they may desire to make, and will be available to answer appropriate questions from shareholders. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE APPOINTMENT OF VAVRINEK, TRINE, DAY & COMPANY, LLP AS INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31, 2016. Fees Paid to Independent Auditors: Aggregate fees billed by Vavrinek, Trine, Day & Company, LLP to the Company and Plumas Bank and the percentage of those fees that were pre-approved by the Company’s Audit Committee for the years ended 2015 and 2014 are as follows: Audit fees Audit-related fees Tax fees Total fees Percentage Pre- Approved 100 % $ 100% 100% 100% $ 2015 $ 103,000 15,000 15,450 $ 133,450 2014 100,000 15,000 15,000 130,000 Percentage Pre- Approved 100 % 100 % 100 % 100 % The Audit Committee of the Bancorp has considered the provision of non-audit services provided by Vavrinek, Trine, Day & Company, LLP to be compatible with maintaining the independence of Vavrinek, Trine, Day & Company, LLP. Shareholder Proposals In order for a shareholder proposal to be considered for inclusion in the Company’s proxy statement for next year’s annual meeting, the written proposal must be received by the Company no later than December 7, 2016 and should contain such information as is required under the Company’s Bylaws. Such proposals will need to comply with the SEC’s regulations regarding the inclusion of shareholder proposals in the Company’s proxy materials. 20 Nomination of Director Candidates: The Company’s Bylaws permit shareholders to nominate directors at a shareholder meeting. In order to make a director nomination at an annual shareholder meeting, it is necessary that you notify the Company not less than 120 days before the first anniversary of the date that the proxy statement for the preceding year’s annual meeting was first sent to shareholders. The Company’s 2015 proxy statement was first sent to stockholders on April 6, 2016. Thus, in order for any such nomination notice to be timely for next year’s annual meeting, it must be received by the Company not later than December 7, 2016. In addition, the notice must meet all other requirements contained in the Company’s Bylaws and include any other information required pursuant to Regulation 14A under the Exchange Act. Copy of Bylaw Provisions: You may contact the Investor Relations Officer, Ms. Elizabeth Kuipers, at the Company for a copy of the relevant Bylaw provisions regarding the requirements for making shareholder proposals and nominating director candidates. Additionally, a copy of the Company’s Bylaws can be accessed at http://www.plumasbank.com. Click on the “Investor Relations tab” and then Governance Documents. Certain Transactions Some of the directors and executive officers of the Company and their immediate families, as well as the companies with which they are associated, are customers of, or have had banking transactions with, the Company in the ordinary course of the Company’s business, and the Company expects to have banking transactions with such persons in the future. In management’s opinion, all loans and commitments to lend in such transactions were made in compliance with applicable laws and on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons of similar creditworthiness and, in the opinion of management, did not involve more than a normal risk of collectibility or present other unfavorable features. Other Matters Management does not know of any matters to be presented at the Meeting other than those set forth above. However, if other matters come before the Meeting, it is the intention of the persons named in the accompanying proxy to vote the shares represented by the proxy in accordance with the recommendations of management on such matters, and discretionary authority to do so is included in the proxy. Available Information The Company’s common stock is registered under the Securities Exchange Act of 1934 and as a result the Company is required to file annual reports, quarterly reports and other periodic filings with the SEC and are posted and are available at no cost on the Company’s website, www.plumasbank.com, as soon as reasonably practicable after the Company files such documents with the SEC. These reports and filings are also available for inspection and/or printing at no cost through the SEC website, www.sec.gov. In addition, regulatory report data for both the Company and Plumas Bank are available for inspection and/or printing at no cost through the Federal Financial Institutions Examination Council’s (the “FFIEC”) website, www.ffiec.gov and the Federal Deposit Insurance Corporation’s (the “FDIC”) website, www.fdic.gov, respectively. You may request an additional copy of the proxy statement, 10-K, 2015 annual report to shareholders, and form of proxy as to this Meeting or all future shareholder meetings by calling us at 1.888.375.8627, by writing to us at Plumas Bancorp, 35 S. Lindan Avenue, Quincy, California 95971, Attn: Ms. Elizabeth Kuipers, Vice President and Investor Relations Officer, or by email at investorrelations@plumasbank.com. 21 [THIS PAGE INTENTIONALLY LEFT BLANK]  UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2015 or  Transaction report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 000-49883 PLUMAS BANCORP (Exact name of Registrant as specified in its charter) California (State or other jurisdiction of incorporation or organization) 35 S. Lindan Avenue, Quincy, CA (Address of principal executive offices) 75-2987096 (IRS Employer Identification No.) 95971 (Zip Code) Registrant's telephone number, including area code: (530) 283-7305 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class: Name of Each Exchange on which Registered: Common Stock, no par value The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  No Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes No  Indicated by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act: Large Accelerated Filer  Accelerated Filer  Non-Accelerated Filer  Smaller Reporting Company  Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No As of June 30, 2015 the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $39.7 million, based on the closing price reported to the Registrant on June 30, 2015 of $9.32 per share. Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of the affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of Common Stock of the registrant outstanding as of March 14, 2016 was 4,852,875. Documents Incorporated by Reference: Portions of the definitive proxy statement for the 2016 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated by reference in Part III, Items 10-14.  TABLE OF CONTENTS Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. PART I Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Item 15. Exhibits and Financial Statement Schedules Signatures PART IV Page 3 13 18 19 20 20 21 22 23 43 44 45 45 46 46 46 46 46 46 47 50 PART I Forward-Looking Information This Annual Report on Form 10-K includes forward-looking statements and information is subject to the “safe harbor” provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements, which involve Plumas Bancorp’s plans, beliefs and goals, refer to estimates or use similar terms, involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors:  Local, regional, national and international economic conditions and the impact they may have on us and our customers, and our assessment of that impact on our estimates including, but not limited to, the allowance for loan losses.  The effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board.  The ability to receive regulatory approval for the Bank to declare and pay dividends to the Company.  Changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions (including the implementation of the Basel III standards), the failure to maintain capital above the level required to be well-capitalized under the regulatory capital adequacy guidelines, the availability of capital from private or government sources, or the failure to raise additional capital as needed.  The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.  The costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, increases in FDIC insurance premiums, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquires.  Changes in the interest rate environment and volatility of rate sensitive assets and liabilities.  Declines in the health of the economy, nationally or regionally, which could reduce the demand for loans, reduce the ability of borrowers to repay loans and/or reduce the value of real estate collateral securing most of the Company’s loans.  Credit quality deterioration, which could cause an increase in the provision for loan and lease losses.  Devaluation of fixed income securities.  Asset/liability matching risks and liquidity risks.  Loss of key personnel.  Operational interruptions including data processing systems failure and fraud.  Our success at managing the risks involved in the foregoing items. Plumas Bancorp undertakes no obligation to revise or publicly release the results of any revision to these forward- looking statements. 2 ITEM 1. BUSINESS General The Company. Plumas Bancorp (the “Company”, “we”, “us”) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in Quincy, California. The Company was incorporated in January 2002 and acquired all of the outstanding shares of Plumas Bank (the “Bank”) in June 2002. The Company’s principal subsidiary is the Bank, and the Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish. At the present time, the Company’s only other subsidiaries are Plumas Statutory Trust I and Plumas Statutory Trust II, which were formed in 2002 and 2005 solely to facilitate the issuance of trust preferred securities. The Company’s principal source of income is dividends from the Bank, but the Company may explore supplemental sources of income in the future. The cash outlays of the Company, including (but not limited to) the payment of dividends to shareholders, if and when declared by the Board of Directors, costs of repurchasing Company common stock, the cost of servicing debt and preferred stock dividends, will generally be paid from dividends paid to the Company by the Bank. At December 31, 2015, the Company had consolidated assets of $599.3 million, deposits of $527.3 million, other liabilities of $29.5 million and shareholders’ equity of $42.5 million. The Company’s other liabilities include $10.3 million in junior subordinated deferrable interest debentures and a $4.9 million note payable. These items are described in detail later in this section. References herein to the “Company,” “we,” “us” and “our” refer to Plumas Bancorp and its consolidated subsidiary, unless the context indicates otherwise. Our operations are conducted at 35 South Lindan Avenue, Quincy, California. Our annual, quarterly and other reports, required under the Securities Exchange Act of 1934 and filed with the Securities and Exchange Commission, (the “SEC”) are posted and are available at no cost on the Company’s website, www.plumasbank.com, as soon as reasonably practicable after the Company files such documents with the SEC. These reports are also available through the SEC’s website at www.sec.gov. The Bank. The Bank is a California state-chartered bank that was incorporated in July 1980 and opened for business in December 1980. The Bank is not a member of the Federal Reserve System. The Bank’s Administrative Office is located at 35 South Lindan Avenue, Quincy, California. At December 31, 2015 the Bank had approximately $599 million in assets, $397 million in net loans and $528 million in deposits (including deposits of $0.8 million from the Bancorp). It is currently the largest independent bank headquartered in Plumas County. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to maximum insurable amounts. The Bank’s primary service area covers the Northeastern portion of California, with Lake Tahoe to the South and the Oregon border to the North. The Bank, through its twelve branch network, serves Washoe county Nevada and the seven contiguous California counties of Plumas, Nevada, Sierra, Placer, Lassen, Modoc and Shasta. The branches are located in the California communities of Quincy, Portola, Greenville, Truckee, Fall River Mills, Alturas, Susanville, Chester, Tahoe City, Kings Beach and Redding; in addition, during December, 2015 the Bank opened a branch in Reno, Nevada. The Bank maintains sixteen automated teller machines (“ATMs”) tied in with major statewide and national networks. In addition to its branch network, the Bank operates lending offices specializing in Auburn, California and Scottsdale, Arizona and a commercial/agricultural lending office located in Chico, California. The Bank’s primary business is servicing the banking needs of these communities. Its marketing strategy stresses its local ownership and commitment to serve the banking needs of individuals living and working in the Bank’s primary service areas. in government-guaranteed lending With a predominant focus on personal service, the Bank has positioned itself as a multi-community independent bank serving the financial needs of individuals and businesses within the Bank’s geographic footprint. Our principal retail lending services include consumer, automobile and home equity loans. Our principal commercial lending services include term real estate, commercial and industrial term loans. In addition, we provide government- 3 guaranteed and agricultural loans as well as credit lines. We provide land development and construction loans on a limited basis. The Bank’s Government-guaranteed lending center, headquartered in Auburn, California with additional personnel in Truckee, California and Scottsdale, Arizona provides Small Business Administration (SBA) and USDA Rural Development loans to qualified borrowers throughout Northern California, Arizona, Oregon and Northern Nevada. During 2007 the Bank was granted nationwide Preferred Lender status with the U.S. Small Business Administration and we expect government-guaranteed lending to continue to be an important part of our overall lending operation. During 2015 proceeds from the sale of government-guaranteed loans totaled $29.4 million and we generated a gain on sale of $1.9 million. In 2014 proceeds from the sale of government guaranteed loans totaled $21.6 million and we generated a gain on sale of $1.4 million. The Agricultural Credit Centers located in Susanville, Chico and Alturas provide a complete line of credit services in support of the agricultural activities which are key to the continued economic development of the communities we serve. “Ag lending” clients include a full range of individual farming customers, small to medium-sized business farming organizations and corporate farming units. As of December 31, 2015, the principal areas to which we directed our lending activities, and the percentage of our total loan portfolio comprised by each, were as follows: (i) commercial real estate – 47.9%; (ii) commercial and industrial loans – 9.2%; (iii) consumer loans (including residential equity lines of credit and automobile loans) – 22.6%; (iv) agricultural loans (including agricultural real estate loans) – 9.9%; (v) residential real estate – 6.4%; and (vi) construction and land development – 4.0% . In addition to the lending activities noted above, we offer a wide range of deposit products for the retail and commercial banking markets including checking, interest-bearing checking, business sweep, public funds sweep, savings, time deposit and retirement accounts, as well as remote deposit, telephone and mobile banking, including mobile deposit, and internet banking with bill-pay options. Interest bearing deposits include high yield sweep accounts designed for our commercial customers and for public entities such as municipalities. In addition we offer a premium interest bearing checking account for our consumer customers. As of December 31, 2015, the Bank had 29,518 deposit accounts with balances totaling approximately $528 million, compared to 28,821 deposit accounts with balances totaling approximately $469 million at December 31, 2014. We attract deposits through our customer-oriented product mix, competitive pricing, convenient locations, mobile and internet banking, remote deposit operations and drive-up banking, all provided with a high level of customer service. Most of our deposits are attracted from individuals, business-related sources and smaller municipal entities. This mix of deposit customers resulted in a relatively modest average deposit balance of approximately $17.9 thousand at December 31, 2015. However, it makes us less vulnerable to adverse effects from the loss of depositors who may be seeking higher yields in other markets or who may otherwise draw down balances for cash needs. We also offer a variety of other products and services to complement the lending and deposit services previously reviewed. These include cashier’s checks, bank-by-mail, ATMs, night depository, safe deposit boxes, direct deposit, electronic funds transfers and other customary banking services. Through our offering of a Remote Deposit product our business customers are able to make non-cash deposits remotely from their physical location. With this product, we have extended our service area and can now meet the deposit needs of customers who may not be located within a convenient distance of one of our branch offices. Additionally, the Bank has devoted a substantial amount of time and capital to the improvement of existing Bank services, during 2009 we replaced our on-line banking service with a new state of the art product that greatly expands the features available to our customers. In addition we utilized this platform to add mobile banking services during the first quarter of 2010. During 2015 we enhanced our mobile banking services and began offering mobile deposit services. During 2010 Plumas Bank began offering a new Green Account which promotes protecting the environment, reducing clutter and making life simpler for the customer through technological advancements such as eStatements, online banking, and debit card usage. In 2011, we introduced a new product for our larger business customers which use repurchase agreements as an alternative to interest-bearing deposits. The balance in this 4 product at December 31, 2015 was $7.7 million. Interest paid on this product is similar to that which can be earned on the Bank’s premium money market account; however, these are not deposits and are not FDIC insured. During the first quarter of 2012 we replaced our ATMs with new state of the art machines that are capable of accepting check and cash deposits without a deposit envelope. The officers and employees of the Bank are continually engaged in marketing activities, including the evaluation and development of new products and services, to enable the Bank to retain and improve its competitive position in its service area. We hold no patents or licenses (other than licenses required by appropriate bank regulatory agencies or local governments), franchises, or concessions. Our business has a modest seasonal component due to the heavy agricultural and tourism orientation of some of the communities we serve. As our branches in less rural areas such as Truckee and Redding have expanded and with the opening of our Auburn SBA lending office and growth in our indirect automobile lending, the agriculture-related base has become less significant. We are not dependent on a single customer or group of related customers for a material portion of our deposits, nor are a material portion of our loans concentrated within a single industry or group of related industries. There has been no material effect upon our capital expenditures, earnings, or competitive position as a result of federal, state, or local environmental regulation. Commitment to our Communities. The Board of Directors and Management believe that the Company plays an important role in the economic well being of the communities it serves. Our Bank has a continuing responsibility to provide a wide range of lending and deposit services to both individuals and businesses. These services are tailored to meet the needs of the communities served by the Company and the Bank. We offer various loan products which encourage job growth and support community economic development. Types of loans offered range from personal and commercial loans to real estate, construction, agricultural, automobile and Government-guaranteed loans. Many banking decisions are made locally with the goal of maintaining customer satisfaction through the timely delivery of high quality products and services. Recent Developments. On July 31, 2015 the Bank completed its acquisition of the Redding, California, branch of Rabobank N.A. The transaction included the acquisition of approximately $10 million in deposits. The branch, located at 1335 Hilltop Dr. in Redding, now operates as a branch of the Bank. The Bank has consolidated its Civic Center Drive branch into this new location. The Civic Center Drive facility was sold to an unrelated third party in December, 2015. In December, 2015 the Bank opened a new full service Branch located at 5050 Meadowood Mall Circle, Reno, Nevada. This is the Bank’s first branch location outside of California. Also in December, 2015 the Bank opened a SBA lending office in Scottsdale, Arizona. Capital Purchase Program - TARP - Preferred Stock and Stock Warrant. On January 30, 2009 the Company entered into a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued and sold (i) 11,949 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 237,712 shares of the Company’s common stock, no par value (the “Common Stock”), for an aggregate purchase price of $11,949,000 in cash. 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 seven 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 Company’s 11,949 Series A Preferred Stock. The Company sought and obtained regulatory permission to participate in the auction. The Company 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 were purchased at auction by third party private investors. On June 27, 2013 the Company repurchased 1,566 shares of the Series A Preferred Stock at $1,000 per share from certain of those third party private investors and on September 16, 2013 the Company repurchased 250 shares at $985 per share from another one of the third party investors leaving 3,133 5 shares outstanding as of September 30, 2013. On October 25, 2013, the Company repurchased the remaining 3,133 shares of the Series A Preferred Stock from a third party private investor for $3,101,670 plus accrued dividends of $30,453. This represents a discount of 1% from the liquidation value of the Preferred Stock. On May 22, 2013 the Company repurchased the Warrant from the Treasury at a cost of $234,500. Trust Preferred Securities. During the third quarter of 2002, the Company formed a wholly owned Connecticut statutory business trust, Plumas Statutory Trust I (the “Trust I”). On September 26, 2002, the Company issued to the Trust I, Floating Rate Junior Subordinated Deferrable Interest Debentures due 2032 (the “Debentures”) in the aggregate principal amount of $6,186,000. In exchange for these debentures the Trust I paid the Company $6,186,000. The Trust I funded its purchase of debentures by issuing $6,000,000 in floating rate capital securities (“trust preferred securities”), which were sold to a third party. These trust preferred securities qualify as Tier I capital under current Federal Reserve Board guidelines. The Debentures are the only asset of the Trust I. The interest rate and terms on both instruments are substantially the same. The rate is based on the three-month LIBOR (London Interbank Offered Rate) plus 3.40%, not to exceed 11.9%, adjustable quarterly. The proceeds from the sale of the Debentures were primarily used by the Company to inject capital into the Bank. During the third quarter of 2005, the Company formed a wholly owned Delaware statutory business trust, Plumas Statutory Trust II (the “Trust II”). On September 28, 2005, the Company issued to the Trust II, Floating Rate Junior Subordinated Deferrable Interest Debentures due 2035 (the “Debentures”) in the aggregate principal amount of $4,124,000. In exchange for these debentures the Trust II paid the Company $4,124,000. The Trust II funded its purchase of debentures by issuing $4,000,000 in floating rate capital securities (“trust preferred securities”), which were sold to a third party. These trust preferred securities qualify as Tier I capital under current Federal Reserve Board guidelines. The Debentures are the only asset of the Trust II. The interest rate and terms on both instruments are substantially the same. The rate is based on the three-month LIBOR (London Interbank Offered Rate) plus 1.48%, adjustable quarterly. The proceeds from the sale of the Debentures were primarily used by the Company to inject capital into the Bank. The trust preferred securities are mandatorily redeemable upon maturity of the Debentures on September 26, 2032 for Trust I and September 28, 2035 for Trust II, or upon earlier redemption as provided in the indenture. Neither Trust I nor Trust II are consolidated into the Company’s consolidated financial statements and, accordingly, both entities are accounted for under the equity method and the junior subordinated debentures are reflected as debt on the consolidated balance sheet. Subordinated Debenture. On April 15, 2013 the Bancorp issued a $7.5 million subordinated debenture. The subordinated debt was issued to an unrelated third-party (“Lender”) pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Company paid off the subordinated debt. The subordinated debt had an interest rate of 7.5% per annum and 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 at an exercise price, subject to anti-dilution adjustments, of $5.25 per share. Interest expense related to the subordinated debt for the years ended December 31, 2015, 2014 and 2013 totaled $219,000, $756,000 and $541,000, respectively. Promissory Note. The Company has a $4.9 million note payable outstanding at December 31, 2015 with an unrelated commercial bank. In addition, the Company has the ability to borrow an additional $2.5 million from this same bank under a line of credit agreement. There were no outstanding borrowings on the line of credit at December 31, 2015. See “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Financial Condition – Note Payable” for detail information related to these borrowing agreements. Business Concentrations. No individual or single group of related customer accounts is considered material in relation to the Bank’s assets or deposits, or in relation to our overall business. However, at December 31, 2015 approximately 73% of the Bank's total loan portfolio consisted of real estate-secured loans, including real estate mortgage loans, real estate construction loans, consumer equity lines of credit, and agricultural loans secured by real 6 estate. Moreover, our business activities are currently focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta and Sierra and Washoe County in Nevada. Consequently, our results of operations and financial condition are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of our operations in these areas of California and Nevada exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions in California and Nevada. Competition. With respect to commercial bank competitors, the business is largely dominated by a relatively small number of major banks with many offices operating over a wide geographical area. These banks have, among other advantages, the ability to finance wide-ranging and effective advertising campaigns and to allocate their resources to regions of highest yield and demand. Many of the major banks operating in the area offer certain services that we do not offer directly but may offer indirectly through correspondent institutions. By virtue of their greater total capitalization, such banks also have substantially higher lending limits than we do. For customers whose loan demands exceed our legal lending limit, we attempt to arrange for such loans on a participation basis with correspondent or other banks. In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions such as finance companies, leasing companies, insurance companies, brokerage firms, and investment banking firms. In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal financial software. Strong competition for deposit and loan products affects the rates of those products as well as the terms on which they are offered to customers. Mergers between financial institutions have placed additional competitive pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues. Competition has also intensified due to federal and state interstate banking laws enacted in the mid-1990’s, which permit banking organizations to expand into other states. The relatively large California market has been particularly attractive to out-of-state institutions. The Financial Modernization Act, which became effective March 11, 2000, has made it possible for full affiliations to occur between banks and securities firms, insurance companies, and other financial companies, and has also intensified competitive conditions. Currently, within the California towns in which the Bank has a branch there are 51 banking branch offices of competing institutions (excluding credit unions, but including savings banks), including 28 branches of 8 major banks. As of June 30, 2015, the FDIC estimated the Bank’s market share of insured deposits within the communities it serves to be as follows: Chester 65%, Quincy 55%, Alturas 65%, Fall River Mills 38%, Kings Beach 35%, Susanville 27%,Truckee 18%, Tahoe City 10%, Redding less than 1% and 100% in Greenville and Portola. Technological innovations have also resulted in increased competition in financial services markets. Such innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously were considered traditional banking products. In addition, many customers now expect a choice of delivery systems and channels, including home computer, mobile, remote deposit, telephone, ATMs, mail, full-service branches and/or in-store branches. The sources of competition in such products include traditional banks as well as savings associations, credit unions, brokerage firms, money market and other mutual funds, asset management groups, finance and insurance companies, internet-only financial intermediaries, and mortgage banking firms. For many years we have countered rising competition by providing our own style of community-oriented, personalized service. We rely on local promotional activity, personal contacts by our officers, directors, employees, and shareholders, automated 24-hour banking, and the individualized service that we can provide through our flexible policies. This approach appears to be well-received by our customers who appreciate a more personal and customer-oriented environment in which to conduct their financial transactions. To meet the needs of customers who prefer to bank electronically, we offer telephone banking, mobile banking, remote deposit, and personal computer and internet banking with bill payment capabilities. This high tech and high touch approach allows the customers to tailor their access to our services based on their particular preference. 7 Employees. At December 31, 2015, the Company and its subsidiary employed 151 persons. On a full-time equivalent basis, we employed 134 persons. None of the Company’s employees are represented by a labor union, and management considers its relations with employees to be good. Code of Ethics. The Board of Directors has adopted a code of business conduct and ethics for directors, officers (including the Company’s principal executive officer and principal financial officer) and financial personnel, known as the Corporate Governance Code of Ethics. This Code of Ethics is available on the Company’s website at www.plumasbank.com. Shareholders may request a free copy of the Code of Ethics Policy from Plumas Bancorp, Ms. Elizabeth Kuipers, Investor Relations, 35 S. Lindan Avenue, Quincy, California 95971. Supervision and Regulation General. We are extensively regulated under federal and state law. These laws and regulations are generally intended to protect depositors and customers, not shareholders. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. Any change in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. We cannot accurately predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, or new federal or state legislation may have in the future. Holding Company Regulation. We are a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and are subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (the “FRB”). We are required to file reports with the FRB and the FRB periodically examines the Company. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support the subsidiary bank. FRB regulations require the Company to meet or exceed certain capital requirements and regulate provisions of certain bank holding company debt. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. Therefore, the Company and any of its subsidiaries are subject to supervision and examination by, and may be required to file reports with, the California Department of Business Oversight (“DBO”). Federal and State Bank Regulation. As a California-chartered commercial bank with deposits insured by the FDIC, the Bank is subject to the supervision and regulation of the DBO and the FDIC, as well as certain of the regulations of the FRB and the Consumer Financial Protection Bureau (“CFPB”). The DBO and the FDIC regularly examine the Bank and may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices. Securities Regulation. The Company is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the Securities and Exchange Commission. As a listed company on NASDAQ, we are subject to NASDAQ rules for listed companies. Capital Adequacy. The FDIC has risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk- adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for loan and lease losses and certain other instruments with some characteristics of equity. 8 The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. In addition to the risk-based guidelines, the FRB requires banking organizations to maintain a minimum amount of Tier 1 capital to average total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. It is improbable; however, that an institution with a 3% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators’ ratings. For all banking organizations not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the FRB and FDIC have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC and/or the DBO to ensure the maintenance of required capital levels. In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. The phase-in period for the final rules began on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. The Board of Governors of the Federal Reserve System has adopted final amendments to the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) ( the “Policy Statement”) that, among other things, raised from $500 million to $1 billion the asset threshold to qualify for the Policy Statement. The Company qualifies for treatment under the Policy Statement and is no longer subject to consolidated capital rules at the bank holding company level. For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Standards.” Dividends. The Company's ability to pay cash dividends is dependent on dividends paid to it by the Bank and limited by California corporation law. Under California law, the holders of common stock of the Company are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available, subject to certain restrictions. The California general corporation law permits a California corporation such as the Company to make a distribution to its shareholders if its retained earnings equal at least the amount of the proposed distribution or if after giving effect to the distribution, the value of the corporation’s assets exceed the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met. It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings support the organization’s expected future needs and financial condition. Further, it is the FRB’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. The Federal Reserve also discourages dividend payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. The Bank is a legal entity that is separate and distinct from its holding company. The Company is dependent on the performance of the Bank for funds which may be received as dividends from the Bank for use in the operation of the Company and the ability of the Company to pay dividends to shareholders. Future cash dividends by the Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors. 9 Dividends from the Bank to the Company are restricted under California law to the lesser of the Bank's retained earnings or the Bank's net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the DBO, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year. As of December 31, 2015, the maximum amount available for dividend distribution under this restriction was approximately $5,100,000. In addition the Company’s ability to pay dividends is subject to certain covenants contained in the indentures relating to the trust preferred securities issued by the Company’s business trust subsidiaries. The Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or new facility. A less than “Satisfactory” rating would likely result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. As of the most recent report of examination the Bank’s CRA rating was “Satisfactory.” Transactions with Affiliates. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders (including the Company) or any related interest of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not affiliated with the bank, and must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions. The Federal Reserve Act and the FRB’s Regulation W limit the amount of certain loan and investment transactions between the Bank and its affiliates, require certain levels of collateral for such loans, and limit the amount of advances to third parties that may be collateralized by the securities of the Company or its subsidiaries. Regulation W requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Company and its subsidiaries have adopted an Affiliate Transactions Policy and have entered into various affiliate agreements in compliance with Regulation W. Safety and Soundness Standards. The FRB and the FDIC have adopted non-capital safety and soundness standards for institutions. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that it will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. Federal Deposit Insurance. In addition to supervising and regulating state chartered non-member banks, the FDIC insures the Bank’s deposits, up to prescribed statutory limits, through the Deposit Insurance Fund (the “DIF”), currently $250,000 per depositor per institution. The DIF is funded primarily by FDIC assessments paid by each DIF member institution. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. The Bank’s FDIC insurance expense totaled $333 thousand for 2015. Additionally, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the DIF. The Bank’s FICO assessments totaled $29 thousand for 2015. These assessments will continue until the FICO bonds mature in 2017. 10 The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. Under California law, the termination of deposit insurance for the Bank would result in a termination of the Bank’s charter. Interstate Branching. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), authorized national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks may now enter new markets more freely. Consumer Protection Laws and Regulations. The banking regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations. The Company is subject to many federal and state consumer protection and privacy statutes and regulations, including but not limited to the following: • The Equal Credit Opportunity Act (“ECOA”) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act. • The Truth in Lending Act (“TILA”) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things. As a result of the Dodd-Frank Act, Regulation Z promulgated under the TILA includes new limits on loan originator compensation for all closed-end mortgages. These changes include, prohibiting certain payments to a mortgage broker or loan officer based on the transaction’s terms or conditions, prohibiting dual compensation, and prohibiting a mortgage broker or loan officer from ‘‘steering’’ consumers to transactions not in their interest, to increase mortgage broker or loan officer compensation. • The Fair Housing Act (“FH Act”) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself. • The Home Mortgage Disclosure Act (“HMDA”), in response to public concern over credit shortages in certain urban neighborhoods, requires public disclosure of information that shows whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. • The Right to Financial Privacy Act (“RFPA”) imposes a new requirement for financial institutions to provide new privacy protections to consumers. Financial institutions must provide disclosures to consumers of its privacy policy, and state the rights of consumers to direct their financial institution not to share their nonpublic personal information with third parties. • The Real Estate Settlement Procedures Act (“RESPA”) requires lenders to provide noncommercial borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. 11 Penalties for noncompliance or violations under the above laws may include fines, reimbursement and other penalties. Due to heightened regulatory expectations related to compliance with generally, the Company may incur additional compliance costs. The Dodd-Frank Act created a new, independent federal agency called the Consumer Financial Protection Bureau, which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions, including the Bank, will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. . Anti-Money Laundering Laws. A series of banking laws and regulations beginning with the bank Secrecy Act in 1970 requires banks to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism. Under the US PATRIOT Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial institutions, and foreign individuals and entities. Privacy and Data Security. The Gramm-Leach Bliley Act (“GLBA”) of 1999 imposes requirements on financial institutions with respect to consumer privacy. The GLBA generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to consumers annually. The GLBA also directs federal regulators, including the FDIC, to prescribe standards for the security of consumer information. The Bank is subject to such standards, as well as standards for notifying consumers in the event of a security breach. The Bank is required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal of information that is no longer needed. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused. Potential Enforcement Actions; Supervisory Agreements. its institution-affiliated parties may be the subject of potential enforcement actions by the FDIC for unsafe and unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties, the payment of restitution and removal and prohibition orders against institution-affiliated parties. The DBO also has authority to bring similar enforcement actions against the Bank. The FRB has the authority to bring similar enforcement actions against the Company. Under federal the Bank and law, Legislation and Proposed Changes. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. Typically, the intent of this type of legislation is to strengthen the banking industry, even if it may on occasion prove to be a burden on management’s plans. No prediction can be made as to the likelihood of any major changes or the impact that new laws or regulations might have on us. Effects of Government Monetary Policy. Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the FRB. The FRB implements national monetary policy for such purposes as curbing inflation and combating recession, through its open market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the FRB, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The Company’s profitability, like most financial institutions, is primarily dependent on interest rate spreads. In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on interest-earning assets, such as loans extended to 12 customers and securities held in the investment portfolio, will comprise the major portion of the Company’s earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB and the impact which future changes in domestic and foreign economic conditions might have on us cannot be predicted. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty. Recent Accounting Pronouncements See Note 2 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K for information related to recent accounting pronouncements. ITEM 1A. RISK FACTORS A deterioration of national or local economic conditions could reduce the Company’s profitability. The Company’s lending operations and its customers are primarily located in the eastern region of Northern California. A significant downturn in the national economy or the local economy due to agricultural commodity prices, real estate prices, public policy decisions, natural disaster, drought or other factors could result in a decline in the local economy in general, which could in turn negatively impact the Company. The majority of the Company’s assets are loans, which if not repaid would result in losses to the Bank. The Bank, like other lenders, is subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to repay loans in accordance with their terms. Underwriting and documentation controls cannot mitigate all credit risk. A downturn in the economy or the real estate market in the Company’s market areas or a rapid increase in interest rates could have a negative effect on collateral values and borrowers’ ability to repay. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual status, thereby reducing interest income. Further, under these circumstances, an additional provision for loan and lease losses or unfunded commitments may be required. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Analysis of Asset Quality and Allowance for Loan Losses”. If the Company’s allowance for loan losses is not sufficient to absorb actual loan losses, the Company’s profitability could be reduced. The risk of loan losses is inherent in the lending business. The Company maintains an allowance for loan losses based upon the Company’s actual losses over a relevant time period and management’s assessment of all relevant qualitative factors that may cause future loss experience to differ from its historical loss experience. Although the Company maintains a rigorous process for determining the allowance for loan losses, it can give no assurance that it will be sufficient to cover future loan losses. If the allowance for loan losses is not adequate to absorb future losses, or if bank regulatory agencies require the Company to increase its allowance for loan losses, earnings could be significantly and adversely impacted. A deterioration in the real estate market could have a material adverse effect on the Company’s business, financial condition and results of operations. As of December 31, 2015, approximately 73% of the Company’s total loan portfolio is secured by real estate, the majority of which is commercial real estate. Increases in commercial and consumer delinquency levels or declines in real estate market values would require increased net charge-offs and increases in the allowance for loan losses, which could have a material adverse effect on the Company’s business, financial condition and results of operations and prospects. 13 Fluctuations in interest rates could reduce profitability. The Company’s earnings depend largely upon net interest income, which is the difference between the total interest income earned on interest earning assets (primarily loans and investment securities) and the total interest expense incurred on interest bearing liabilities (primarily deposits and borrowed funds). The interest earned on assets and paid on liabilities are affected principally by direct competition, and general economic conditions at the state and national level and other factors beyond the Company’s control such as actions of the FRB, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and other state and federal economic policies. Although the Company maintains a rigorous process for managing the impact of possible interest rate fluctuations on earnings, the Company can provide no assurance that its management efforts will prevent earnings from being significantly and adversely impacted by changes in interest rates. The Company could be required to raise additional capital in the future, but that capital may not be available when it is needed or may not be available on terms that are favorable to the Company. Federal and state bank regulatory authorities require the Company and the Bank to maintain adequate levels of capital to support their operations. The Company’s ability to raise additional capital if and as needed depends on conditions in the capital markets, which are outside the Company’s control, and on the Company’s financial performance. Accordingly, the Company may not be able to raise additional capital, if needed, on terms that are acceptable to the Company. If the Company is unable to raise additional capital when needed, it could be required to curtail its growth strategy or reduce the levels of assets owned. In addition, although the Company and the Bank are currently well-capitalized under applicable regulatory frameworks, bank regulators are authorized and sometimes required to impose a wide range of requirements, conditions, and restrictions on banks and bank holding companies that fail to maintain adequate capital levels. The continuing California drought could have an adverse impact on the Company’s business. During 2015, California continued to experience a severe drought. A significant portion of the Company’s borrowers are involved in or are dependent on the agricultural industry in California, which requires water. As of December 31, 2015, approximately 10% of the Company’s loans were categorized as agricultural loans. As a result of the drought, there have been governmental proposals concerning the distribution or rationing of water. If the amount of water available to agriculture becomes scarcer due to drought or rationing, growers may not be able to continue to produce agricultural products profitably, which could force some out of business. Although many of the Company’s customers are not directly involved in agriculture, they could be impacted by difficulties in the agricultural industry because many jobs and businesses in the Company’s market areas are related to the production of agricultural products. Therefore, the drought could adversely impact the Company’s loan portfolio, business, financial condition and results of operations. The Company faces substantial competition from larger banks and other financial institutions. The Company faces substantial competition for deposits and loans. Competition for deposits primarily comes from other commercial banks, savings institutions, thrift and loan associations, money market and mutual funds and other investment alternatives. Competition for loans comes from other commercial banks, savings institutions, credit unions, mortgage banking firms, thrift and loan associations and other financial intermediaries. Larger competitors, by virtue of their larger capital resources, have substantially greater lending limits and marketing resources than the Company. In addition, they have greater resources and may be able to offer longer maturities or lower rates. The Company’s competitors may also provide certain services for their customers, including trust and international banking, that the Company is only able to offer indirectly through correspondent relationships. Ultimately, competition can reduce the Company’s profitability, as well as make it more difficult to increase the size of its loan portfolio and deposit base. 14 There are risks associated with the Company’s growth strategy. During the past year, the Company completed the purchase and assumption of a branch office in Redding, California, received regulatory approval to open a branch office in Reno, Nevada and established a loan production office in Scottsdale, Arizona. The Company may engage in additional acquisition activity and open additional offices in the future to expand the Company’s markets or further its growth strategy. There is no assurance that future acquisitions or offices will be successful. Further, growth may strain the Company’s administrative, managerial, financial and operational resources and increase demands on its systems and controls. If the Company pursues its growth strategy too aggressively, fails to attract qualified personnel, control costs or maintain asset quality, or if factors beyond management’s control divert attention away from its business operations, the Company’s pursuit of its growth strategy could have a material adverse impact on its existing business. The Company relies on key executives and personnel and the loss of any of them could have a material adverse impact on the Company’s prospects. Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out the Company’s strategies is often lengthy. The Company’s success depends to a significant degree upon its ability to attract and retain qualified management, loan origination, finance, administrative, marketing, compliance and technical personnel and upon the continued contributions of its management and personnel. In particular, the Company’s success has been and continues to be highly dependent upon the abilities of key executives and certain other employees. Security breaches and technological disruptions could damage the Company’s reputation and profitability. The Company’s business is highly reliant on third party vendors and its ability to manage the operational risks associated with outsourcing those services. The Company’s electronic banking activities expose it to possible liability and loss of reputation should an unauthorized party gain access to confidential customer information. Despite its considerable efforts and investment to provide the security and authentication necessary to effect secure transmission of data, the Company cannot fully guarantee that these precautions will protect its systems from future compromises or breaches of its security measures. Although the Company has developed systems and processes that are designed to recognize and assist in preventing security breaches (and periodically test its security), failure to protect against or mitigate breaches of security could adversely affect its ability to offer and grow its online services, constitute a breach of privacy or other laws, result in costly litigation and loss of customer relationships, negatively impact the Bank’s reputation, and could have an adverse effect on its business, results of operations and financial condition. The Company may also incur substantial increases in costs in an effort to minimize or mitigate cyber security risks and to respond to cyber incidents. The potential for operational risk exposure exists throughout the Company’s business. Integral to the Company’s performance is the continued efficacy of the Company’s technology and information systems, operational infrastructure and relationships with third parties and its colleagues in its day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes, but is not limited to, operational or systems failures, disruption of client operations and activities, ineffectiveness or exposure due to interruption in third party support as expected, as well as, the loss of key colleagues or failure on the part of key colleagues to perform properly. Additionally, the Company outsources a large portion of its data processing to third parties which may encounter technological or other difficulties that may significantly affect the Company’s ability to process and account for customer transactions. These vendors provide services that support its operations, including the storage and processing of sensitive consumer and business customer data, as well as its sales efforts. A cyber security breach of a vendor’s system may result in theft of the Company’s data or disruption of business processes. In most cases, the Company will remain primarily liable to its customers for losses arising from a breach of a vendor’s data security system. The Company relies on its outsourced service providers to implement and maintain prudent cyber security 15 controls. The loss of these vendor relationships could disrupt the services the Company provides to its customers and cause us to incur significant expense in connection with replacing these services. The Company may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations. The Company is subject to significant federal and state regulation and supervision. In the past, the Company’s business has been increasingly affected by these regulations, and this trend is likely to continue into the future. Many of these laws are subject to interpretation and changing regulatory approaches to supervision and enforcement. The Company maintains systems and procedures designed to ensure that it complies with applicable laws and regulations, but there can be no assurance that these will be effective. The Company may incur fines, penalties and other negative consequences from regulatory violations. The Company may also suffer other negative consequences resulting from findings of noncompliance with laws and regulations, that may also damage its reputation, and this in turn might materially affect its business and results of operations. Further, some legal/regulatory frameworks provide for the imposition of fines, restitution or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there were in place at the time systems and procedures designed to ensure compliance. The Company’s disclosure controls and procedures may not prevent or detect all errors or acts of fraud. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports it files under the Exchange Act is accurately accumulated and communicated to management, and recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, cannot provide absolute assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision making can be faulty, that alternative reasoned judgments can be drawn, or that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in its control system, misstatements due to error or fraud may occur and not be detected, which could result in a material weakness in its internal controls over financial reporting and the restatement of previously filed financial statements. The price of the Company’s common stock may be volatile or may decline The trading price of the Company’s common stock may fluctuate as a result of a number of factors, many of which are outside its control. Among the factors that could affect the Company’s stock price are: • • • • • • • actual or anticipated quarterly fluctuations in the Company’s operating results and financial condition; research reports and recommendations by financial analysts; failure to meet analysts’ revenue or earnings estimates; speculation in the press or investment community; actions by the Company or its competitors, such as acquisitions or restructurings; actions by institutional shareholders; fluctuations in the stock prices and operating results of its competitors; 16 • • • • general market conditions and, in particular, developments related to market conditions for the financial services industry; proposed or adopted regulatory changes or developments; anticipated or pending investigations, proceedings or litigation that involve or affect us; domestic and international economic factors unrelated to its performance. Significant decline in the Company’s stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation. The trading volume of the Company’s common stock is limited. Although the Company’s common stock is traded on the Nasdaq Stock Market, trading to date has been relatively modest. The limited trading market for the Company’s common stock may lead to exaggerated fluctuations in market prices and possible market inefficiencies compared to more actively traded securities. It may also make it more difficult for investors to sell the Company’s common stock at desired prices, especially for holders seeking to dispose of a large number shares of stock. The Company depends primarily on the operations of the Bank to repay its indebtedness. The Company’s ability to pay any dividends or repurchase any of its shares in the future will also depend on the success of the Bank’s operations. The Company is a separate and distinct legal entity from its subsidiary, the Bank, and it receives substantially all of its revenue from dividends paid by the Bank. There are legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, the Company. The Company’s inability to receive dividends from the Bank could adversely affect its business, financial condition, results of operations and prospects. Disruptions in market conditions may adversely impact the fair value of available-for-sale investment securities. Generally Accepted Accounting Principles (“GAAP”) require the Company to carry its available-for-sale investment securities at fair value on its balance sheet. Unrealized gains or losses on these securities, reflecting the difference between the fair market value and the amortized cost, net of its tax effect, are reported as a component of shareholders’ equity. In certain instances GAAP requires recognition through earnings of declines in the fair value of securities that are deemed to be other than temporarily impaired. Changes in the fair value of these securities may result from a number of circumstances that are beyond the Company’s control, such as changes in interest rates, the financial condition of government sponsored enterprises or insurers of municipal bonds, changes in demand for these securities as a result of economic conditions, or reduced market liquidity. There can be no assurance that the declines in market value will not result in other than temporary impairments of these assets, which would lead to loss recognition that could have a material adverse effect on the Company’s net income and capital levels. Damage to the Company’s reputation could significantly harm the Company’s business and prospects. The Company’s reputation is an important asset. The Company’s relationship with many of its customers is predicated upon its reputation as a high quality provider of financial services that adheres to the highest standards of ethics, service quality and regulatory compliance. The Company’s ability to attract and retain customers, investors and employees depends upon external perceptions. Damage to its reputation among existing and potential customers, investors and employees could cause significant harm to the Company’s business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, lending practices, inadequate protection of customer information, sales and marketing efforts, compliance failures, unethical behavior and the misconduct of employees. Adverse developments in the banking industry may also, by association, negatively impact the Company’s reputation or result in greater regulatory or 17 legislative scrutiny or litigation against us. The Company has policies and procedures in place that seek to protect its reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding the Company’s business, employees, or customers, with or without merit, may result in the loss of customers, investors, and employees, costly litigation, a decline in revenues and increased governmental regulation. The markets in which the Company operates are subject to the risk of earthquakes and other natural disasters. Most of the Company’s offices are located in California. Also, most of the real and personal properties securing the Company’s loans are located in California. California its prone to earthquakes, brush fires, flooding and other natural disasters. In addition to possibly sustaining damage to its own properties, if there is a major earthquake, brush fires, flood or other natural disaster, the Company faces the risk that many of the Company’s borrowers may experience uninsured property losses, or sustained job interruption and/or loss which may materially impair their ability to meet the terms of their loan obligations. Therefore, a major earthquake, brush fire, flood or other natural disaster in California could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. 18 ITEM 2. PROPERTIES Of the Company’s twelve depository branches, ten are owned and two are leased. The Company also leases three lending offices and owns four administrative facilities. 35 South Lindan Avenue Quincy, California (1) 424 N. Mill Creek Quincy, California (1) 43163 Highway 299E Fall River Mills, California 510 North Main Street Alturas, California Owned Properties 32 Central Avenue Quincy, California (1) 336 West Main Street Quincy, California 121 Crescent Street Greenville, California 3000 Riverside Drive Susanville, California 11638 Donner Pass Road 5050 Meadowood Mall Circle Truckee, California Reno, Nevada 243 North Lake Boulevard Tahoe City, California Leased Properties 1335 Hilltop Drive Redding, California 11111 North Scottsdale Road, Unit C Scottsdale, Arizona (2) 2585 Ceanothus Avenue, Suite 173 Chico, CA (3) (1) Non-branch administrative or credit administrative offices. (2) SBA lending office. (3) Commercial lending office. 80 W. Main St. Quincy, California (1) 120 North Pine Street Portola, California 255 Main Street Chester, California 8475 North Lake Boulevard Kings Beach, California 470 Nevada St., Suite 108 Auburn, California (2) Total rental expenses under all leases totaled $233,000, $192,000 and $154,000, in 2015, 2014 and 2013 respectively. The expiration dates of the leases vary, with the first such lease expiring during 2016 and the last such lease expiring during 2020. Future minimum lease payments are as follows: Year Ending December 31, 2016 2017 2018 2019 2020 $ 242,000 151,000 108,000 99,000 74,000 $ 674,000 The Company maintains insurance coverage on its premises, leaseholds and equipment, including business interruption and record reconstruction coverage. The branch properties and non-branch offices are adequate, suitable, in good condition and have adequate parking facilities for customers and employees. The Company and Bank are limited in their investments in real property under Federal and state banking laws. Generally, investments in real property are either for the Company and Bank use or are in real property and real property interests in the ordinary course of the Bank’s business. 19 ITEM 3. LEGAL PROCEEDINGS From time to time, the Company and/or its subsidiary are a party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company's management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 20 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK- HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The Company’s common stock is quoted on the NASDAQ Capital Market under the ticker symbol "PLBC". As of December 31, 2015, there were 4,835,432 shares of the Company’s common stock outstanding held by approximately 1,300 shareholders of record as of the same date. The following table shows the high and low sales prices for the common stock, for each quarter as reported by Yahoo Finance. Quarter 4th Quarter 2015 3rd Quarter 2015 2nd Quarter 2015 1st Quarter 2015 4th Quarter 2014 3rd Quarter 2014 2nd Quarter 2014 1st Quarter 2014 Common Dividends - - - - - - - - High $ 9.35 $ 10.23 $ 10.00 $ 10.00 $ 8.25 $ 8.50 $ 7.74 $ 6.75 Low $ 8.50 $ 8.04 $ 8.77 $ 7.73 $ 7.52 $ 6.77 $ 6.12 $ 5.96 It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors (the “Board). The Board will periodically, but on no regular schedule and in accordance with regulatory restrictions, if any, reviews the appropriateness of a cash dividend payment. No common cash dividends were paid in 2015 or 2014. The Company is subject to various restrictions on the payment of dividends. See Note 12 “Shareholders’ Equity – Dividend Restrictions” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K. Securities Authorized for Issuance under Equity Compensation Plans. The following table sets forth securities authorized for issuance under equity compensation plans as of December 31, 2015. Number of securities to be issued upon exercise of outstanding options (a) Weighted-average exercise price of outstanding options (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 295,293 None 295,293 $ 5.95 Not Applicable $ 5.95 294,400 None 294,400 Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total For additional information related to the above plans see Note 12 of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10K. Issuer Purchases of Equity Securities. There were no purchases of Plumas Bancorp common stock by the Company during 2015. 21 ITEM 6. SELECTED FINANCIAL DATA The following table presents a summary of selected financial data and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included under Item 8 – Financial Statements and Supplementary Data. 2015 At or for the year ended December 31, 2013 2012 2014 2011 Statement of Income Interest income Interest expense Net interest income Provision for loan losses Noninterest income Noninterest expense Provision for income taxes Net income Discount on redemption of Preferred Stock Preferred Stock dividends and discount accretion Net income available to common shareholders Balance sheet (end of period) Total assets Total loans Allowance for loan losses Total deposits Total common equity Total shareholders’ equity Balance sheet (period average) Total assets Total loans Total deposits Total shareholders’ equity Asset quality ratios Nonperforming loans/total loans Nonperforming assets/total assets Allowance for loan losses/total loans Net loan charge-offs Performance ratios Return on average assets Return on average common equity Return on average equity Net interest margin Loans to deposits Efficiency ratio Per share information Basic earnings Diluted earnings Common cash dividends Book value per common share Common shares outstanding at period end Capital ratios – Plumas Bank Leverage ratio Tier 1 risk-based capital Total risk-based capital $ 21,147 1,693 19,454 1,100 7,315 17,845 3,086 (dollars in thousands except per share information) $ 19,460 1,534 17,926 1,400 6,642 17,570 2,167 $ 22,615 1,204 21,411 1,100 7,715 18,491 3,717 $ 5,818 $ 4,738 $ 3,431 $ 1,950 $ 941 - - $ 5,818 $ 18,425 1,274 17,151 2,350 6,596 18,377 1,070 $ 18,668 1,848 16,820 3,500 7,162 19,246 295 - 684 $ 257 - - $ 4,738 - 684 $ 1,266 565 347 $ 3,649 $ 538,862 $ 370,390 $ 515,725 $ 599,286 $ 400,971 $ 338,551 $ 6,078 $ 5,451 $ 5,517 $ 5,686 $ 6,908 $ 527,276 $ 42,496 $ 42,496 $ 411,562 $ 29,995 $ 41,850 $ 449,439 $ 30,593 $ 30,593 $ 467,891 $ 36,497 $ 36,497 $ 391,140 $ 27,865 $ 39,634 $ 455,349 $ 293,865 $ 477,802 $ 315,057 $ 571,990 $ 386,070 $ 503,343 $ 39,844 $ 531,528 $ 353,389 $ 464,067 $ 33,810 $ 464,609 $ 497,711 $ 301,799 $ 321,210 $ 432,284 $ 401,110 $ 36,032 $ 41,023 $ 467,354 $ 302,841 $ 407,982 $ 39,244 1.13% 1.06% 1.52% $ 473 1.79% 1.90% 1.47% $ 1,166 1.64% 2.33% 1.63% $ 1,569 4.35% 3.98% 1.80% $ 3,572 5.73% 5.60% 2.35% $ 3,916 1.02% 14.6% 14.6% 4.10% 76.0% 63.5% 0.89% 14.0% 14.0% 4.05% 79.2% 66.7% 0.69% 12.0% 9.5% 4.03% 75.3% 71.5% 0.42% 4.3% 4.8% 4.18% 76.6% 77.4% 0.20% 0.9% 2.4% 4.08% 75.1% 80.3% $ 1.21 $ 0.99 $ 1.15 $ 0.95 $ 0.00 $ 8.79 4,835,432 $ 0.00 $ 7.61 4,799,139 $ 0.76 $ 0.26 $ 0.05 $ 0.05 $ 0.75 $ 0.26 $ 0.00 $ 0.00 $ 5.83 $ 6.39 4,776,339 4,787,739 $ 0.00 $ 6.28 4,776,339 9.8% 13.2% 14.4% 9.7% 13.2% 14.5% 10.4% 14.1% 15.3% 9.8% 13.7% 15.0% 9.4% 12.7% 14.0% 22 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General We are a bank holding company for Plumas Bank, a California state-chartered commercial bank. We derive our income primarily from interest received on real estate related, commercial, automobile and consumer loans and, to a lesser extent, interest on investment securities, fees received in connection with servicing deposit and loan customers and fees from the sale of government guaranteed loans. Our major operating expenses are the interest we pay on deposits and borrowings and general operating expenses. We rely on locally-generated deposits to provide us with funds for making loans. We are subject to competition from other financial institutions and our operating results, like those of other financial institutions operating in California, are significantly influenced by economic conditions in California, including the strength of the real estate market. In addition, both the fiscal and regulatory policies of the federal and state government and regulatory authorities that govern financial institutions and market interest rates also impact the Bank’s financial condition, results of operations and cash flows. Critical Accounting Policies Our accounting policies are integral to understanding the financial results reported. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and internal control procedures that are intended to ensure valuation methods are applied in an environment that is designed and operating effectively and applied consistently from period to period. The following is a brief description of our current accounting policies involving significant management valuation judgments. Allowance for Loan Losses. The allowance for loan losses is an estimate of credit losses inherent in the Company's loan portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are collectively evaluated for impairment. We evaluate our allowance for loan losses quarterly. We believe that the allowance for loan losses is a “critical accounting estimate” because it is based upon management’s assessment of various factors affecting the collectability of the loans, including current economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans. We cannot provide you with any assurance that economic difficulties or other circumstances which would adversely affect our borrowers and their ability to repay outstanding loans will not occur which would be reflected in increased losses in our loan portfolio, which could result in actual losses that exceed reserves previously established. Other Real Estate Owned. Other real estate owned (OREO) represents properties acquired through foreclosure or physical possession. OREO is initially recorded at fair value less costs to sell when acquired. Write-downs to fair value at the time of transfer to OREO is charged to allowance for loan losses. Subsequent to foreclosure, we periodically evaluate the value of OREO held for sale and record a valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value is based on our assessment of information available to us at the end of a reporting period and depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual properties. Our evaluation of these factors involves subjective estimates and judgments that may change. 23 The following discussion is designed to provide a better understanding of significant trends related to the Company's financial condition, results of operations, liquidity and capital. It pertains to the Company's financial condition, changes in financial condition and results of operations as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015. The discussion should be read in conjunction with the Company's audited consolidated financial statements and notes thereto and the other financial information appearing elsewhere herein. Overview The Company recorded net income of $5.8 million for the year ended December 31, 2015, a 23% increase over net income of $4.7 million during the year ended December 31, 2014. Pretax income increased by $1.7 million, or 22%, from to $9.5 million in 2015 from $7.8 million during the year ended December 31, 2014. Net interest income increased by $2.0 million to $21.4 million during 2015 from $19.4 million for the year ended December 31, 2014. This increase in net interest income resulted from an increase in interest income of $1.5 million and a decrease in interest expense of $489 thousand. Interest on loans increased by $1.3 million and interest on investment securities increased by $179 thousand. An increase of $2 thousand in interest expense on deposits was offset by a decrease in interest expense on borrowings of $491 thousand. The largest component of this decrease was a decrease of $537 thousand in interest expense related to the redemption of the Company’s $7.5 million subordinated debenture in April, 2015. The provision for loan losses was $1.1 million during 2015 and 2014. During the year ended December 31, 2015 non-interest income totaled $7.7 million an increase of $400 thousand from the year ended December 31, 2014. The largest component of this increase was an increase in gain on sale of SBA loans of $546 thousand. Gains on sale of securities were $21 thousand during 2015 and $128 thousand in 2014. In addition, the 2014 quarter included a $148 thousand gain on sale of our credit card portfolio. Non-interest expense increased by $646 thousand to $18.5 million during the twelve months ended December 31, 2015, up from $17.8 million during 2014. The largest component of this increase was an increase in salary expense of $559 thousand. This increase includes an increase in loan production personnel costs, costs associated with our new Reno, Nevada branch, an increase in commissions earned on the sale of SBA loans, related to an increase in sales volume, and merit and promotional wage increases. The provision for income taxes increased by $631 thousand from $3.1 million in 2014 to $3.7 million during the year ended December 31, 2015. Total assets at December 31, 2015 were $599 million, an increase of $60.4 million from $539 million at December 31, 2014. This increase included increases of $22.6 million in cash and due from banks, $6.4 million in investment securities, $30.0 million in net loans, $0.6 million in premises and equipment, $0.3 million in bank owned life insurance and $2.3 million in other assets exclusive of OREO. OREO decreased by $1.8 million. Loans increased by $30.6 million, or 8%, from $370.4 million at December 31, 2014 to $401.0 million at December 31, 2015. The increase in loan balances includes $28.8 million in commercial real estate loans, $5.6 million in commercial loans, $4.5 million in agricultural loans and $3.7 million in automobile loans. These increases were partially offset by declines of $8.4 million in construction and land development loans and $3.6 million in all other loan types. Construction and land development loans, which management has identified as a higher-risk loan category, represented 4.0% and 6.6% of the loan portfolio as of December 31, 2015 and December 31, 2014, respectively. Total deposits increased by $59.4 million from $468 million at December 31, 2014 to $527 million at December 31, 2015. In addition to deposit growth from our branch network, we acquired approximately $10 million in deposits with our acquisition of the Redding, California, branch of Rabobank N.A. effective July 31, 2015. No loans were acquired in this transaction. Core deposit growth remained strong in 2015 as evidenced by increases of $28.4 million in demand deposits, $19.6 million in savings accounts, $9.1 million in interest-bearing transaction accounts (NOW) and $6.4 million in money market accounts. Time deposits declined by $4.1 million, much of which we attribute to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits. The Company has no brokered deposits. 24 Total shareholders’ equity increased by $6.0 million from $36.5 million at December 31, 2014 to $42.5 million at December 31, 2015. The $6.0 million includes earnings during the twelve month period totaling $5.8 million with the balance of $0.2 million mostly representing stock option activity. The return on average assets was 1.02% for 2015, up from 0.89% for 2014. The return on average equity was 14.6% for 2015, up from 14.0% for 2014. Results of Operations Net Interest Income The following table presents, for the years indicated, the distribution of consolidated average assets, liabilities and shareholders' equity. Average balances are based on average daily balances. It also presents the amounts of interest income from interest-earning assets and the resultant yields expressed in both dollars and yield percentages, as well as the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and rate percentages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned: 2015 Interest income/ expense Rates earned / paid Average balance $ 174 1,694 20,747 22,615 0.39% 1.86 5.37 4.34% $ 44,302 91,309 386,070 521,681 17,332 32,977 $ 571,990 $ 88,220 47,149 119,071 54,418 3,858 2,150 10,310 6,529 80 66 191 181 155 219 306 6 0.09% 0.14 0.16 0.33 4.02 10.19 2.97 0.09 Assets Interest bearing deposits Investment securities(1) Total loans (2)(3) Total earning assets Cash and due from banks Other assets Total assets Liabilities and shareholders’ equity Interest bearing demand deposits Money market deposits Savings deposits Time deposits Note payable Subordinated debentures Junior subordinated debentures Other Total interest bearing $ 38,626 87,906 353,389 479,921 16,323 35,284 $ 531,528 $ 83,398 46,691 102,664 59,063 2,299 7,371 10,310 7,529 Year ended December 31, Average balance 2014 Interest income/ expense Rates earned / paid (dollars in thousands) $ 137 1,515 19,495 21,147 0.35% 1.72 5.52 4.41% 2013 Interest income/ expense Rates earned / paid Average balance $ 124 1,162 18,174 19,460 0.30% 1.40 5.66 4.37% $ 41,262 82,820 321,210 445,292 14,572 37,847 $ 497,711 76 65 163 212 111 756 303 7 0.09% 0.14 0.16 0.36 4.83 10.26 2.94 0.09 $ 83,966 48,730 84,475 66,046 567 5,185 10,310 7,298 90 82 147 281 23 541 313 57 0.11% 0.17 0.17 0.43 4.06 10.43 3.04 0.78 liabilities 331,705 1,204 0.36% 319,325 1,693 0.53% 306,577 1,534 0.50% Noninterest bearing demand deposits Other liabilities Shareholders’ equity Total liabilities and 194,485 5,956 39,844 shareholders’ equity $ 571,990 172,251 6,142 33,810 $ 531,528 149,067 6,035 36,032 $ 497,711 Net interest income Net interest spread (4) Net interest margin (5) $21,411 $19,454 $17,926 3.98% 4.10% 3.88% 4.05% 3.87% 4.03% Interest income is reflected on an actual basis and is not computed on a tax-equivalent basis. (1) (2) Average nonaccrual loan balances of $5.6 million for 2015, $6.7 million for 2014 and $9.3 million for 2013 are included in average loan balances for computational purposes. (3) Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan costs of $696,000, $380,000 and $371,000 for 2015, 2014 and 2013, respectively. (4) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. (5) Net interest margin is computed by dividing net interest income by total average earning assets. 25 The following table sets forth changes in interest income and interest expense, for the years indicated and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates: 2015 compared to 2014 Increase (decrease) due to change in: 2014 compared to 2013 Increase (decrease) due to change in: Average Average Rate(2) Volume(1) Mix(3) Average Volume(1) Total (dollars in thousands) Average Rate(2) Mix(3) Total $ 20 59 1,803 1,882 $ 15 116 (504) (373) $ 2 4 (47) (41) $ 37 179 1,252 1,468 $ (8) 72 1,821 1,885 $ 22 265 (454) (167) $ (1) 16 (46) (31) $ 13 353 1,321 1,687 4 1 26 (17) 75 (535) - (1) (447) - - 2 (15) (19) (5) 3 - (34) - - - 1 (12) 3 - - (8) 4 1 28 (31) 44 (537) 3 (1) (489) (1) (3) 32 (30) 70 228 - 2 298 (13) (14) (13) (44) 4 (9) (10) (50) (149) - - (3) 5 14 (4) - (2) 10 (14) (17) 16 (69) 88 215 (10) (50) 159 Interest-earning assets: Interest bearing deposits Investment securities Loans Total interest income Interest-bearing liabilities: Interest bearing demand deposits Money market deposits Savings deposits Time deposits Note payable Subordinated debentures Junior subordinated debentures Other borrowings Total interest expense Net interest income $ 2,329 $ (339) $ (33) $ 1,957 $ 1,587 $ (18) $ (41) $ 1,528 (1) (2) (3) The volume change in net interest income represents the change in average balance multiplied by the previous year’s rate. The rate change in net interest income represents the change in rate multiplied by the previous year’s average balance. The mix change in net interest income represents the change in average balance multiplied by the change in rate. 2015 compared to 2014. Net interest income is the difference between interest income and interest expense. Net interest income, on a nontax-equivalent basis, was $21.4 million for the year ended December 31, 2015, up $2.0 million, or 10.1%, from $19.4 million for 2014. The $2.0 million included an increase of $1.5 million, or 6.9% in interest income, from $21.1 million during 2014 to $22.6 million during the current year and a decrease of $489 thousand in interest expense. Interest and fees on loans increased by $1.3 million, interest on investment securities increased by $179 thousand and interest on deposits increased by $37 thousand. The increase in interest and fees on loans was related to an increase in average loan balances partially offset by a decline in yield. Interest on investments securities benefited from both an increase in yield and an increase in average balance. Interest and fees on loans was $20.8 million during 2015 and $19.5 million for the year ended December 31, 2014. The average loan balances were $386.1 million for 2015, up $32.7 million from the $353.4 million for 2014. The following table compares loan balances by type at December 31, 2015 and 2014. (dollars in thousands) Commercial Agricultural Real estate - residential Real estate – commercial Real estate – construction Equity Lines of Credit Auto Other Total Gross Loans Percent of Loans in Each Category to Total Loans 12/31/15 9.2% 9.9% 6.4% 47.9% 4.0% 9.6% 12.1% 0.9% 100% Percent of Loans in Each Category to Total Loans 12/31/14 8.5% 9.5% 7.9% 44.1% 6.6% 10.5% 12.1% 0.8% 100% Balance at End of Period 12/31/14 $ 31,465 35,355 29,284 163,306 24,572 38,972 44,618 2,818 $ 370,390 Balance at End of Period 12/31/15 $ 37,084 39,856 25,474 192,095 16,188 38,327 48,365 3,582 $ 400,971 26 The average yield on loans was 5.37% for 2015 down from 5.52% for 2014. We attribute much of the decrease in yield to price competition in our service area. In addition, during the fourth quarter of 2014 the Company benefited from a prepayment fee of approximately $0.2 million on a large commercial real estate loan which increased overall loan yield by approximately 5 basis points. Interest on investment securities increased by $179 thousand as a result of an increase in yield of 14 basis points from 1.72% during 2014 to 1.86% during 2015 and an increase in average balance from $87.9 million in 2014 to $91.3 million in 2015. The increase in yield on investment securities includes an increase in municipal securities as a percentage of total securities and an increase in market yields. Interest income on other interest-earning assets, which totaled $174 thousand in 2015 and $137 thousand in 2014, primarily relates to interest on cash balances held at the Federal Reserve. Interest expense on deposits increased by $2 thousand to $518 thousand for the twelve months ended December 31, 2015, up from $516 thousand in 2014. Interest expense on time deposits declined by $31 thousand from $212 thousand during 2014 to $181 thousand at during 2015. Average time deposits declined by $4.7 million from $59.1 million during 2014 to $54.4 million during the year ended December 31, 2015. We attribute much of this decline to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits. The average rate paid on time deposits decreased from 0.36% during 2014 to 0.33% during the current twelve month period. This decrease primarily relates to the maturity of higher rate time deposits. Interest expense on NOW accounts increased by $4 thousand. Rates paid on NOW accounts averaged 0.09% during 2015 and 2014. Average balances increased by $4.8 million from 2014 to $88.2 million. Interest expense on money market accounts increased by $1 thousand to $66 thousand during the year ended December 31, 2015. Interest expense on savings accounts increased by $28 thousand as we continued to experience strong growth in this category of deposits. Average savings deposits increased by $16.4 million from $102.7 million during 2014 to $119.1 million during 2015. The average rate paid on savings accounts during these same periods was 16 basis points. Interest expense on other interest-bearing liabilities decreased by $491 thousand from $1.2 million during the year ended December 31, 2014 to $686 thousand during the current twelve month period. On April 15, 2013, to help fund the repurchase of preferred stock during 2013, the Company issued a $7.5 million subordinated debenture. 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 (the “Lender Warrant”) to purchase up to 300,000 shares of the Company’s common stock, no par value at an exercise price, subject to anti- dilution adjustments, of $5.25 per share. On April 16, 2015 we paid off the subordinated debenture resulting in a reduction in interest expense related to this debt of $537 thousand from $756 thousand during 2014 to $219 thousand during 2015. The effective yield on the debenture during 2015 was 10.2% which was in excess of the 7.5% rate due to amortization of a $75 thousand commitment fee and a discount recorded on issuance of $318 thousand. Interest expense on the Company’s note payable (see “Financial Condition – Note Payable”) increased by $44 thousand to $155 thousand during the twelve months ended December 31, 2015. This increase was related to an increase in average borrowings on this note from $2.3 million during the 2014 period to $3.9 million during the year ended December 31, 2015. During April of 2015 we borrowed an additional $4 million on the note bringing the balance to $5 million. This $4 million along with a dividend from Plumas Bank to Plumas Bancorp were used to fund the payoff of the subordinated debenture. The average rate paid on the note payable was 4.02% during 2015 and 4.83% during the twelve months ended December 31, 2014. Interest expense on junior subordinated debentures, which increased by $3 thousand to $306 thousand, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate. Interest on other borrowings, which mostly relates to repurchase agreements, totaled $6 thousand in 2015 and $7 thousand in 2014. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. As a result of the changes noted above, the net interest margin for 2015 increased to 4.10%, from 4.05% for 2014. 27 2014 compared to 2013. Net interest income, on a nontax-equivalent basis, was $19.4 million for the year ended December 31, 2014, up $1.5 million, or 8.5%, from $17.9 million for 2013. An increase of $1.7 million, or 8.7% in interest income, from $19.4 million during 2013 to $21.1 million during the current year, was partially offset by an increase in interest expense of $159 thousand. Interest and fees on loans increased by $1.3 million, interest on investment securities increased by $353 thousand and interest on deposits increased by $13 thousand. The increase in interest and fees on loans was related to an increase in average loan balances partially offset by a decline in yield. Interest on investments securities benefited from both an increase in yield and an increase in average balance. Interest and fees on loans was $19.5 million during 2014 and $18.2 million for the year ended December 31, 2013. The average loan balances were $353.4 million for 2014, up $32.2 million from the $321.2 million for 2013. The average yield on loans was 5.52% for 2014 down from 5.66% for 2013. We attribute much of the decrease in yield to price competition in our service area as well as an increase in lower yielding automobile loans as a percentage of total loans. Interest on investment securities increased by $353 thousand as a result of an increase in yield of 32 basis points from 1.40% during 2013 to 1.72% during 2014 and an increase in average balance from $82.8 million in 2013 to $87.9 million in 2014. The increase in yield on investment securities incudes an increase in government sponsored agency residential mortgage backed securities and municipal securities as a percentage of total securities and an increase in market yields. Interest income on other interest-earning assets, which totaled $137 thousand in 2014 and $124 thousand in 2013, primarily relates to interest on cash balances held at the Federal Reserve. Interest expense on deposits decreased by $84 thousand, or 14%, to $516 thousand for the twelve months ended December 31, 2014, down from $600 thousand in 2013. Interest expense on time deposits declined by $69 thousand from $281 thousand during 2013 to $212 thousand at during 2014. Average time deposits declined by $6.9 million from $66.0 million during 2013 to $59.1 million for the year ended December 31, 2014. We attribute much of this decline to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits. The average rate paid on time deposits decreased from 0.43% during 2013 to 0.36% during the current twelve month period. This decrease primarily relates to a decline in market rates paid in the Company’s service area and the maturity of higher rate time deposits. Interest expense on NOW accounts declined by $14 thousand. Rates paid on NOW accounts declined by 2 basis points from 0.11% during 2013 to 0.09% during 2014. Average balances decreased by $568 thousand from 2013. Interest expense on money market accounts decreased by $17 thousand related to a decrease in rate paid on these accounts of 3 basis points from 0.17% during 2013 to 0.14% during 2014 and a decline in average balances from $48.7 million during 2013 to $46.7 million in 2014. Interest expense on savings accounts increased by $16 thousand as we continued to experience strong growth in this category of deposits. Average savings deposits increased by $18.2 million from $84.5 million during 2013 to $102.7 million during 2014. The average rate paid on savings accounts during this same period declined from 17 basis points during 2013 to 16 basis points during 2014. The decline in rates paid on deposits is consistent with a decline in competitive market rates in our service area. Interest expense on other interest-bearing liabilities increased by $243 thousand from $934 thousand during the twelve months ending December 31, 2013 to $1.2 million during 2014. This increase was mostly related to an increase of $215 thousand in interest expense on the $7.5 million subordinated debenture which was only outstanding for 8.5 months during 2013. The effective yield on the debenture during 2014 was 10.3% which was in excess of the 7.5% rate due to amortization of a $75 thousand commitment fee and a discount recorded on issuance of $318 thousand. Interest expense on the Company’s note payable for 2013 totaled $23 thousand and for 2014 it totaled $111 thousand. The increase relates mostly to an increase in average balance from $567 thousand in 2013 to $2.3 million during 2014. Interest expense on junior subordinated debentures, which decreased by $10 thousand from 2013, fluctuates with changes in the 3-month LIBOR rate. 28 Interest on other borrowings, which during 2014 relates to repurchase agreements, totaled $7 thousand in 2014 and $57 thousand in 2013. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. As a result of the changes noted above, the net interest margin for 2014 increased slightly to 4.05%, from 4.03% for 2013. Provision for Loan Losses During the years ended December 31, 2015 and 2014 we recorded a provision for loan losses of $1.1 million. See “Analysis of Asset Quality and Allowance for Loan Losses” for further discussion of loan quality trends and the provision for loan losses. The allowance for loan losses is maintained at a level that management believes will be appropriate to absorb inherent losses on existing loans based on an evaluation of the collectability of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to repay their loan. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Based on information currently available, management believes that the allowance for loan losses is appropriate to absorb potential risks in the portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period. Non-Interest Income The following table sets forth the components of non-interest income for the years ended December 31, 2015, 2014 and 2013. Years Ended December 31, 2015 2014 2013 (dollars in thousands) Change during Year 2015 2014 Service charges on deposit accounts Gain on sale of loans, net Loan servicing fees Earnings on bank owned life insurance policies Gain on sale of investments Other income Total non-interest income $ 3,954 1,942 $ 4,108 1,396 $ 3,912 1,399 $ (154) 546 $ 196 (3) 562 502 323 60 179 342 21 894 $ 7,715 341 128 840 $ 7,315 344 - 664 $ 6,642 1 (107) 54 $ 400 (3) 128 176 $ 673 2015 compared to 2014. During the twelve months ended December 31, 2015 non-interest income totaled $7.7 million an increase of $400 thousand from the year ended December 31, 2014. The largest component of this increase was an increase of $546 thousand in gains on the sale of government guaranteed SBA loans mostly related to an increase in the volume of loans originated and sold. During 2015, proceeds from SBA loan sales totaled $29.4 million resulting in a gain on sale of $1.9 million. This compares to proceeds of $21.6 million and a gain on sale of $1.4 million during 2014. Loan servicing income, which increased by $60 thousand, represents servicing income received on the guaranteed portion of small business administration (“SBA”) loans sold into the secondary market. At December 31, 2015 we were servicing over $86 million in guaranteed portions of loans an increase of $10 million from over $76 million at December 31, 2014. Other non-interest income increased by $54 thousand to $894 thousand mostly related to an increase of $126 thousand in dividends received on Federal Home Loan Bank of San Francisco (FHLB) stock. Of the $126 thousand, $88 thousand was a one-time special dividend paid by the FHLB during June 2015. The effect of the increase in FHLB dividends and increases in other items of other non-interest income were partially offset by a $148 thousand gain on the sale of our credit card portfolio during the fourth quarter of 2014. The largest decrease in non-interest income was $154 thousand in service charge income most of 29 which was related to a reduction in NSF and overcharge income which we attribute to improved economic conditions as well as working with our customers to help them reduce NSF activity. Additionally, gain on sale of investments declined by $107 thousand from $128 thousand during the twelve months ended December 31, 2014 to $21 thousand during 2015. 2014 compared to 2013. During the twelve months ended December 31, 2014 non-interest income totaled $7.3 million an increase of $673 thousand from the twelve months ended December 31, 2013. The largest component of this increase was an increase of $196 thousand in service charge income which we attribute to growth in the Company’s demand deposit accounts, an increase in debit card interchange income and a restructuring of our service charge fee structure beginning in August of 2013. During July and August 2014 we sold fourteen available-for- sale securities totaling $16.2 million recognizing a gain on sale of $128 thousand. Loan servicing fees, which totaled $502 thousand for the 12 months ended December 31, 2014, increased by $179 thousand from 2013. Other non- interest income increased by $176 thousand mostly related to a $148 thousand gain on the sale of our credit card portfolio during the fourth quarter of 2014. Prior to the sale, credit card loans represented less than one-half of a percent of our loan portfolio. Non-Interest Expense The following table sets forth the components of other non-interest expense for the years ended December 31, 2015, 2014 and 2013. $ 10,277 2,782 2,003 707 376 362 332 305 300 234 200 182 105 95 Salaries and employee benefits Occupancy and equipment Outside service fees Professional fees Telephone and data Communications Deposit insurance Business development Advertising and promotion Director compensation and retirement Armored car and courier Loan collection costs OREO expenses Stationery and supplies Insurance Provision from change in OREO valuation Postage Gain on sale of OREO Other operating expense Total non-interest expense Years Ended December 31, 2014 2015 Change during Year 2015 2014 2013 (dollars in thousands) $ 8,729 2,874 1,855 831 $ 9,474 2,902 2,042 583 $ 803 $ 745 (120) 28 (39) 187 (248) 124 351 387 279 282 298 224 182 362 122 (9) 287 435 291 281 232 228 212 310 113 112 25 64 (48) (25) 53 (12) 23 1 2 66 (4) 10 18 (30) (180) 52 (17) 9 (121) 104 79 41 (198) 309 486 51 (171) 414 $ 18,491 $ 17,845 $ 17,570 240 45 (101) 182 (161) (4) (246) (6) (97) 70 127 (232) $ 646 $ 275 2015 compared to 2014. Non-interest expense increased by $646 thousand to $18.5 million during the twelve months ended December 31, 2015, up from $17.8 million during 2014. The largest components of this increase were $803 thousand in salary and benefit expense, $124 thousand professional fees, $104 thousand in insurance expense and $127 thousand in other operating expenses. The largest declines in non-interest expense were $180 thousand in OREO expenses, $161 thousand in the provision from change in OREO valuation and $120 thousand in occupancy and equipment expense. 30 The increase in salary and benefits includes an increase in salary expense, exclusive of commissions, of $412 thousand mostly related to merit and promotion increases, new hires including three loan officers; one serving Reno, Nevada, one located in Chico, California and an SBA loan officer in Scottsdale Arizona, and a branch manager for our new Reno, Nevada location. Other significant increases in salary and benefit expense include an increase of $147 thousand in commission expense, $111 thousand in 401k plan contributions and a reduction of $104 thousand in the deferral of loan origination costs. The increase in commission expense is mostly related to an increase in SBA activity. Effective January 1, 2015, we reestablished a 401k matching benefit resulting in $111 thousand in matching contributions. During each of 2015 and 2014 the Company’s bonus expense totaled $600 thousand, the maximum payable under the terms of the respective bonus plans. The largest component of the increase in professional fees was an increase of $79 thousand in legal fees related to loan collection activities and general corporate matters including costs associated with our Redding branch acquisition and our future Reno, Nevada branch. The second largest increase in professional fees was an increase of $52 thousand in audit expense related to lending functions, including the cost of our semi-annual loan review, an annual review of our SBA loan operations by the SBA and a review of our loan compliance systems. Insurance expense, during 2014, benefited from a one-time adjustment to accrued life insurance costs. The decline in OREO costs includes a decrease in OREO legal expense of $125 thousand and a decline in repair and maintenance costs of $54 thousand. During 2014 we incurred $142 thousand in legal costs, related to OREO, pursuing additional recoveries on selected OREO properties through legal channels. In addition, OREO repair expense during 2014 totaled $93 thousand much of which was used to fix up several properties in an effort to increase their marketability. OREO repair costs were $62 thousand in 2015. OREO maintenance costs declined by $23 thousand related to a decline in OREO properties. 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 temporary declines in value. The allowance is established through a provision for subsequent losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or from impairment are recorded as incurred. The provision from change in OREO valuation declined by $161 thousand from $240 thousand during the year ended December 31, 2014 to $79 thousand during the current period. During the first three months of 2015 we recorded a net credit provision of $129 thousand. The credit resulted from a significant increase in value of one OREO property based on a recent appraisal. This property was originally transferred to OREO at a value, net of estimated costs selling costs, of $1 million. Subsequently, based on declines in value it was written down to $0.7 million with a $0.3 million valuation allowance; however, recently the surrounding area in which the property is located has enjoyed significant new business activity and the value of this property has increased resulting in a reduction in the valuation allowance of $0.2 million. The $0.2 million was offset by declines in value on other OREO properties. The decline in occupancy and equipment expense includes several reductions the largest of which was a savings of $49 thousand in equipment expense and maintenance. During 2014 equipment expense was high as we chose to replace all of our personal computers running Windows XP with machines running Windows 7. 2014 compared to 2013. During the twelve months ended December 31, 2014, total non-interest expense increased by $275 thousand, or 2%, to $17.8 million, up from $17.6 million for the comparable period in 2013. The largest components of this increase were $745 thousand in salary and benefit expense, $187 thousand in outside service fees and $70 thousand related to reduction in gain on sale of OREO. The largest declines in non-interest expense were $248 thousand in professional fees, $246 thousand in provision for OREO losses, $128 thousand in deposit premium amortization and $121 thousand in insurance expense. 31 Salaries and employee benefits increased by $745 thousand primarily related to an increase in bonus expense of $350 thousand. The Bank’s bonus plan for 2014 provided for a bonus pool of 60% of the amount that pretax income exceeds budgeted pretax income with a cap of $600 thousand. Bonus expense was $600 thousand for the twelve months ended December 31, 2014 and $250 thousand during the twelve months ended December 31, 2013. In both years the maximum allowed under the bonus plans was earned. Salary expense, exclusive of commissions, increased by $265 thousand as a decline of four employees from 159 at December 31, 2013 to 155 at December 31, 2014 was offset by an increase in average salary per employee which includes the effect of merit and promotional increases. Other increases include, but were not limited to an $89 thousand increase in commissions, which relate to government guaranteed loan production, and a $67 thousand increase in payroll tax expense. Partially offsetting these items was an increase in deferred loan origination costs totaling $104 thousand. Of the $187 thousand increase in outside service fees, $96 thousand was related to the outsourcing of our item processing beginning in June of 2013. This cost as been offset by savings in salary and benefit expense and software expense. In addition we incurred an increase in costs for the management of our investment portfolio and an increase in costs related to an increase in debit card interchange transactions. Professional fees benefited from reductions in legal expense related to loan collection activities totaling $148 thousand, a reduction in corporate legal expense of $88 thousand mostly related the repurchase of the preferred stock in 2013 and a reduction in audit expense related to a change in audit firms beginning in 2014. The provision from change in OREO valuation declined by $246 thousand from $486 thousand during the twelve months ended December 31, 2013 to $240 thousand during the 2014. During the second quarter of 2013 we recorded a $300 thousand provision related to one land development property. Insurance expense benefited from a one-time adjustment to accrued life insurance costs. The deposit premium intangible asset was fully amortized at the end of September, 2013 resulting in a savings of $128 thousand during the comparison periods. Provision for Income Taxes. The Company recorded an income tax provision of $3.7 million, or 39.0% of pre-tax income for the year ended December 31, 2015. During 2014 the Company recorded an income tax provision of $3.1 million, or 39.4% of pre-tax income for the year ended December 31, 2014. The percentages for 2015 and 2014 differ from the statutory rate as tax exempt income such as earnings on Bank owned life insurance and interest on qualified municipal securities. 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. Based upon the analysis of available evidence, management has determined that it is "more likely than not" that all deferred income tax assets as of December 31, 2015 and 2014 will be fully realized and therefore no valuation allowance was recorded. 32 Financial Condition Loan Portfolio. Net loans increased by $30 million, or 8%, from $367 million at December 31, 2014 to $397 million at December 31, 2015. The two largest areas of growth in the Company’s loan portfolio were $28.8 million in commercial real estate loans and $5.6 million in commercial loans. Additionally, agricultural loans increased by $4.5 million and automobile loans increased $3.7 million. The largest decrease in any loan category was a decline of $8.4 million in construction and land development loans. 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 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. As shown in the following table the Company's largest lending categories are commercial real estate loans, auto loans, equity lines of credit, agricultural loans and commercial loans. (dollars in thousands) Commercial Agricultural Real estate - residential Real estate – commercial Real estate – construction Equity Lines of Credit Auto Other Total Gross Loans Percent of Loans in Each Category to Total Loans 12/31/15 9.2% 9.9% 6.4% 47.9% 4.0% 9.6% 12.1% 0.9% 100% Percent of Loans in Each Category to Total Loans 12/31/14 8.5% 9.5% 7.9% 44.1% 6.6% 10.5% 12.1% 0.8% 100% Balance at End of Period 12/31/14 $ 31,465 35,355 29,284 163,306 24,572 38,972 44,618 2,818 $ 370,390 Balance at End of Period 12/31/15 $ 37,084 39,856 25,474 192,095 16,188 38,327 48,365 3,582 $ 400,971 Construction and land development loans represented 4.0% and 6.6% of the loan portfolio as of December 31, 2015 and December 31, 2014, 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 from over 21% at December 31, 2007 to less than 7% during the last two years reflects management’s efforts, which began in 2009, to reduce its exposure to construction and land development loans. The Company’s real estate related loans, including real estate mortgage loans, real estate construction and land development loans, consumer equity lines of credit, and agricultural loans secured by real estate comprised 73% of the total loan portfolio at December 31, 2015. 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. 33 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. The frequency in which variable rate loans reprice can vary from one day to several years. At December 31, 2015 and December 31, 2014, approximately 72% and 71%, respectively of the Company's loan portfolio was comprised of variable rate loans. At December 31, 2015 and December 31, 2014, 39% and 42%, respectively of the variable loans were at their respective floor rate. 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. The most significant change has been an increase in indirect auto lending with automobile loans increasing from 2.5% of gross loans at December 31, 2011 to 12.1% of gross loans at December 31, 2015. The automobile portfolio provides diversification to the loan portfolio in terms of rate, term and balance as these loans tend to have a much shorter term and balance than commercial real-estate loans and are fixed rate. 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 $40 million at December 31, 2015 and $35 million at December 31, 2014. The following table sets forth the amounts of loans outstanding by category as of the dates indicated. 2015 2014 2013 2012 2011 At December 31, $ 217,569 $ 192,590 $ 187,264 $ 174,212 $ 158,431 (dollars in thousands) 16,188 37,084 90,274 39,856 24,572 31,465 86,408 35,355 17,793 32,612 70,235 30,647 15,801 29,552 60,368 35,124 17,063 30,235 49,268 38,868 400,971 370,390 338,551 315,057 293,865 1,940 1,848 1,340 900 475 6,078 $ 396,833 5,451 $ 366,787 5,517 $ 334,374 5,686 $ 310,271 6,908 $ 287,432 Real estate – mortgage Real estate – construction and land development Commercial Consumer (1) Agriculture (2) Total loans Plus: Deferred costs Less: Allowance for loan losses Net loans (1) Includes equity lines of credit and auto (2) Includes agriculture real estate The following table sets forth the maturity of gross loan categories as of December 31, 2015. Also provided with respect to such loans are the amounts due after one year, classified according to sensitivity to changes in interest rates: Real estate – mortgage Real estate – construction and land development Commercial Consumer Agriculture Total Loans maturing after one year with: Fixed interest rates Variable interest rates Total Within One Year After One Through Five Years After Five Years Total (dollars in thousands) $ 21,274 $ 55,050 $ 141,245 $ 217,569 4,795 16,081 41,527 5,764 11,268 36,004 16,188 37,084 90,274 39,856 $ 126,550 $ 210,396 $ 400,971 16,115 9,097 $ 56,619 $ 33,418 176,978 $ 210,396 69,931 $ 126,550 $ 90,037 246,909 $ 336,946 5,629 9,735 12,743 14,644 $ 64,025 34 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 and past due 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 has implemented MARC to develop an action plan to significantly reduce nonperforming assets. It consists of the Bank’s Chief Executive Officer, Chief Financial Officer and Chief Credit Officer, 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 known and inherent risks 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. Historical loss data from the beginning of the latest business cycle are incorporated in the loss factors. 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. 35 The following table provides certain information for the years indicated with respect to the Company's allowance for loan losses as well as charge-off and recovery activity. Balance at beginning of period Charge-offs: Commercial and agricultural (2) Real estate mortgage Real estate construction Consumer (1) Total charge-offs Recoveries: Commercial and agricultural (2) Real estate mortgage Real estate construction Consumer (1) Total recoveries Net charge-offs Provision for loan losses Balance at end of period Net charge-offs during the period to average loans Allowance for loan losses to total loans (1) Includes equity lines of credit and auto (2) Includes agriculture real estate For the Year Ended December 31, 2015 2014 2013 (dollars in thousands) 2012 2011 $ 5,451 $ 5,517 $ 5,686 $ 6,908 $ 7,324 91 132 55 549 827 191 1,015 106 601 1,913 401 419 735 360 1,915 1,159 616 1,524 602 3,901 539 483 2,603 622 4,247 173 8 - 173 354 473 1,100 $ 6,078 89 19 491 148 747 1,166 1,100 $ 5,451 140 109 - 97 346 1,569 1,400 $ 5,517 66 8 81 174 329 3,572 2,350 $ 5,686 199 18 5 109 331 3,916 3,500 $ 6,908 0.12% 1.52% 0.33% 1.47% 0.49% 1.63% 1.18% 1.80% 1.29% 2.35% During each of the years ended December 31, 2015 and 2014 we recorded a provision for loan losses of $1.1 million. Net charge-offs totaled $473 thousand during the year ended December 31, 2015 down $693 thousand from $1.2 million during 2014. Net charge-offs as a percentage of average loans decreased from 0.33% during 2014 to 0.12% during the year ended December 31, 2015. The following table provides a breakdown of the allowance for loan losses: (dollars in thousands) Commercial and agricultural Real estate mortgage Real estate construction Consumer (includes equity LOC & Auto) Total Balance at End of Period 2015 $ 933 2,866 874 1,405 $ 6,078 Percent of Loans in Each Category to Total Loans 2015 19.1% 54.3% 4.0% 22.6% 100.0% Balance at End of Period 2014 $ 799 2,080 1,227 1,345 $ 5,451 Percent of Loans in Each Category to Total Loans 2014 18.0% 52.0% 6.6% 23.4% 100.0% The allowance for loan losses totaled $6.1 million at December 31, 2015 and $5.5 million at December 31, 2014. Specific reserves related to impaired loans increased by $187 thousand from $564 thousand at December 31, 2014 to $751 thousand at December 31, 2015. At least quarterly the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion. General reserves were $5.3 million at December 31, 2015 and $4.9 million at December 31, 2014. The allowance for loan losses as a percentage of total loans increased from 1.47% at December 31, 2014 to 1.52% at December 31, 2015. The percentage of general reserves to unimpaired loans totaled 1.35% at December 31, 2015 and December 31, 2014. 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 36 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 (TDRs) and not included in nonperforming loans in the following table totaled $2.0 million, $2.0 million, $4.5 million, $5.4 million and $8.6 million at December 31, 2015, 2014, 2013, 2012 and 2011, respectively. For additional information related to restructured loans see Note 5 of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K. The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated. Nonaccrual loans Loans past due 90 days or more and still accruing Total nonperforming loans Other real estate owned Other vehicles owned Total nonperforming assets Interest income forgone on nonaccrual loans Interest income recorded on a cash basis on nonaccrual loans Nonperforming loans to total loans Nonperforming assets to total assets 2015 2014 At December 31, 2013 (dollars in thousands) 2012 2011 $ 4,546 $ 6,625 $ 5,519 $ 13,683 $ 16,757 - 4,546 1,756 30 - 6,625 3,590 13 17 5,536 6,399 60 15 13,698 5,295 41 72 16,829 8,623 57 $ 6,332 $ 10,228 $ 11,995 $ 19,034 $ 25,509 $ 303 $ 345 $ 280 $ 646 $ 510 $ - $ 31 $ 22 $ 192 $ 285 1.13% 1.06% 1.79% 1.90% 1.64% 2.33% 4.35% 3.98% 5.73% 5.60% Nonperforming loans at December 31, 2015 were $4.5 million, a decrease of $2.1 million from the $6.6 million balance at December 31, 2014. Specific reserves on nonaccrual loans totaled $683 thousand at December 31, 2015 and $522 thousand at December 31, 2014, respectively. Performing loans past due thirty to eighty-nine days were $1.5 million at December 31, 2015 and $1.6 million at December 31, 2014. 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 $2.1 million from $8.1 million at December 31, 2014 to $6.0 million at December 31, 2015. Loans classified as watch decreased by $0.3 million from $4.4 million at December 31, 2014 to $4.1 million at December 31, 2015. At December 31, 2015, $1.5 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. 37 At December 31, 2015 and December 31, 2014, the Company's recorded investment in impaired loans totaled $6.5 million and $8.6 million, respectively. The specific allowance for loan losses related to impaired loans totaled $751 thousand and $564 thousand at December 31, 2015 and December 31, 2014, respectively. Additionally, $0.7 million has been charged off against the impaired loans at December 31, 2015 and December 31 2014. It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at December 31, 2015 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 acquired 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. OREO holdings represented seven properties totaling $1.8 million at December 31, 2015 and fifteen properties totaling $3.6 million at December 31, 2014. Nonperforming assets as a percentage of total assets were 1.06% at December 31, 2015 and 1.90% at December 31, 2014. The following table provides a summary of the change in the number and balance of OREO properties for the years ended December 31, 2015 and 2014, dollars in thousands: Year Ended December 31, Beginning Balance Additions Dispositions Provision from change in OREO valuation Ending Balance # 15 4 (12) - 7 2015 $ 3,590 328 # 26 6 (2,083) (17) - 15 (79) $ 1,756 2014 $ 6,399 729 (3,298) (240 ) $ 3,590 Investment Portfolio and Federal Funds Sold. Total investment securities were $96.7 million as of December 31, 2015 and $90.3 million as of December 31, 2014. During the year ended December 31, 2015 the Company sold fifteen available-for-sale investment securities for total proceeds of $12,260,000 recording a $21,000 net gain on sale. The investment portfolio at December 31, 2015 consisted of $74.3 million in securities of U.S. Government- sponsored agencies and 83 municipal securities totaling $22.4 million. During the year ended December 31, 2014 the Company sold fourteen available-for-sale investment securities for total proceeds of $16,325,000 recording a $128,000 gain on sale. The investment portfolio at December 31, 2014 consisted of $77.3 million in securities of U.S. Government-sponsored agencies, 52 municipal securities totaling $12.5 million and one corporate security totaling $0.5 million. There were no Federal funds sold at December 31, 2015 and December 31, 2014; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $47.6 million at December 31, 2015 and $22.9 million at December 31, 2014. The balances, at December 31, 2015, earn interest at the rate of 0.5%. 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. The following tables summarize the values of the Company's investment securities held on the dates indicated: Available-for-sale (fair value) U.S. Government-sponsored agencies U.S. Government-sponsored agency residential mortgage-backed securities Municipal obligations Corporate debt Total December 31, 2015 2014 2013 (dollars in thousands) $ 1,977 $ 7,002 $ 27,097 72,370 70,280 61,875 22,357 - $ 96,704 12,532 506 1,371 - $ 90,320 $ 90,343 38 The following table summarizes the maturities of the Company's securities at their carrying value, which represents fair value, and their weighted average tax equivalent yields at December 31, 2015. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations. (dollars in thousands) Within One Year After One Through Five Years Available-for-sale (Fair Value) Amount Yield Amount U.S. Government- sponsored agencies $ - -% $ - Yield After Five Through Ten Years After Ten Years Amount Yield Amount Yield Total Amount Yield -% $ 1,977 1.96% $ - -% $ 1,977 1.96% U.S. Government-sponsored agency residential mortgage- backed securities Municipal obligations Total - - $ - - -% -% 160 -% $ 160 -% 2.71% 2.71% 7,661 14,902 $ 24,540 72,370 1.91% 1.64% 64,709 1.94% 3.54% 22,357 3.59% 7,295 3.71% 2.82% $ 72,004 2.12% $ 96,704 2.30% Deposits. Total deposits increased by $59.4 million from $468 million at December 31, 2014 to $527 million at December 31, 2015. In addition to deposit growth from our branch network, we acquired approximately $10 million in deposits with our acquisition of the Redding, California, branch of Rabobank N.A. effective July 31, 2015. Core deposit growth remained strong in 2015 as evidenced by increases in all major deposit categories with the exception of time. The two largest increases were $28.4 million in non-interest bearing demand deposits and $19.6 million in savings accounts. Time deposits declined by $4.1 million, much of which we attribute to migration into other types of deposits given the low rates and lack of liquidity associated with time deposits. 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 following table shows the distribution of deposits by type at December 31, 2015 and 2014. (dollars in thousands) Non-interest bearing NOW Money Market Savings Time Total Deposits Balance at End of Period 12/31/15 $ 209,044 91,225 48,848 125,896 52,263 $ 527,276 Percent of Deposits in Each Category to Total Deposits 12/31/15 Balance at End of Period 12/31/14 Percent of Deposits in Each Category to Total Deposits 12/31/14 39.6% $ 180,649 82,144 17.3% 42,499 9.3% 106,257 23.9% 9.9% 56,342 $ 467,891 100% 38.6% 17.6% 9.1% 22.7% 12.0% 100% 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 FHLB. There were no brokered deposits at December 31, 2015 or 2014. The Company's time deposits of $100,000 or more had the following schedule of maturities at December 31, 2015: (dollars in thousands) Remaining Maturity: Three months or less Over three months to six months Over six months to 12 months Over 12 months Total 39 Amount $ 7,463 2,685 4,056 7,341 $ 21,545 Time deposits of $100,000 or more are generally from the Company's local business and individual customer base. The potential impact on the Company's liquidity from the withdrawal of these deposits is discussed at the Company's asset and liability management committee meetings, and is considered to be minimal. Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $154,000,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $231,000,000. The Company is required to hold FHLB stock as a condition of membership. At December 31, 2015 and 2014, the Company held $2,380,000 of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings at December 31, 2015, the Company can borrow up to $88,159,000. To borrow the $154,000,000 in available credit the Company would need to purchase $1,787,000 in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings to the FHLB or the correspondent banks under these agreements at December 31, 2015 and 2014. Note Payable and Term Loan. On October 24, 2013 the Company issued a $3.0 million promissory note (the “Note”) payable to an unrelated commercial bank. As originally issued, the Note provided for an interest rate of U.S. “Prime Rate” plus three-quarters percent per annum, 4.00% at December 31, 2014 and 2013, had a term of 18 months and subjected the Bank to several negative and affirmative covenants including, but not limited to providing timely financial information, maintaining specified levels of capital, restrictions on additional borrowings, and meeting or exceeding certain capital and asset quality ratios. The Note is secured by 100 shares of the Bank’s stock representing the 100% of the Company's ownership interest in the Bank. On July 28, 2014, the Company and the borrower modified the Note to (1) extend the maturity date to October 24, 2015, (2) increase the maximum principal amount to $7.5 million and (3) permit the Company to borrow, repay and reborrow up to the maximum principal amount of the Note, among other things. On October 1, 2015, the Company and the borrower further modified the Note to (1) extend the maturity date to October 1, 2016, (2) reduce the maximum principal amount to $2.5 million and (3) change the interest rate to U.S. "Prime Rate" plus one-half percent per annum. Concurrently, with entering into the second modification of the note on October 1, 2015, the Company entered into a $5.0 million term loan (the “Term Loan”), which matures on October 1, 2018. The Term Loan requires quarterly principal payments of $125,000 plus accrued interest. Both the Term Loan and the Note bear interest at a rate of the U.S. "Prime Rate" plus one-half percent per annum and are secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Term Loan and the Note, the Bank is subject to several negative and affirmative covenants similar to the covenants under the original Note but in several cases less restrictive. The Bank was in compliance with all such covenants related to the Note and the Term Loan at December 31, 2015 and December 31, 2014. Interest expense related to the Note and the Term Loan for the years ended December 31, 2015, December 31, 2014 and 2013 totaled $155,000, $111,000 and $23,000, respectively. The ending balance of the Note at December 31, 2014 was $1,000,000. There was no balance outstanding on the Note at December 31, 2015. The balance of the Term Loan was $4,875,000 at December 31, 2015. Repurchase Agreements. In 2011 the Bank introduced a new product for its larger business customers which use repurchase agreements as an alternative to interest-bearing deposits. The balance in this product at December 31, 2015 was $7.7 million, a decrease of $1.9 million from the December 31, 2014 balance of $9.6 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. Subordinated Debentures. On April 15, 2013 the Company issued a $7.5 million subordinated debenture (“subordinated debt”). The subordinated debt was issued to an unrelated third-party (“Lender”) pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Company paid off the subordinated debt. Interest expense related to the subordinated debt for the years ended December 31, 2015, 2014 and 2013 totaled $219,000, $756,000 and $541,000, respectively. 40 The subordinated debt had an interest rate of 7.5% per annum and 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. Junior Subordinated Deferrable Interest Debentures. Plumas Statutory Trust I and II are business trust subsidiaries formed by the Company with capital of $311,000 and $163,000, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. During 2002, Trust I issued 6,000 Floating Rate Capital Trust Pass-Through Securities ("Trust Preferred Securities"), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. During 2005, Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II. Trust I’s Subordinated Debentures mature on September 26, 2032, bear a current interest rate of 4.00% (based on 3- month LIBOR plus 3.40%), with repricing and payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear a current interest rate of 1.99% (based on 3-month LIBOR plus 1.48%), with repricing and payments due quarterly. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures. Interest expense recognized by the Company for the years ended December 31, 2015, 2014 and 2013 related to the subordinated debentures was $306,000, $303,000 and $313,000, respectively. Capital Resources Total shareholders’ equity increased by $6.0 million from $36.5 million at December 31, 2014 to $42.5 million at December 31, 2015. The $6.0 million includes earnings during the twelve month period totaling $5.8 million with the balance of $0.2 million mostly representing stock option activity. 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 will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. No common cash dividends were paid during the last seven years. The Company is subject to various restrictions on the payment of dividends. Capital Standards. The Company uses a variety of measures to evaluate its capital adequacy. 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. In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. The phase-in period for the final rules began on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company and 41 the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. The Board of Governors of the Federal Reserve System has adopted final amendments to the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) ( the “Policy Statement”) that, among other things, raised from $500 million to $1 billion the asset threshold to qualify for the Policy Statement. Plumas Bancorp qualifies for treatment under the Policy Statement and is no longer subject to consolidated capital rules at the bank holding company level. The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands): Amount of Capital Required Actual For Capital Adequacy Purposes To be Well-Capitalized Under Prompt Corrective Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2015 Common Equity Tier 1 Ratio Tier 1 Leverage Ratio Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio $56,300 56,300 56,300 61,839 December 31, 2014 Common Equity Tier 1 Ratio Tier 1 Leverage Ratio Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio N/A $53,925 53,925 59,039 12.7% 9.4% 12.7% 14.0% N/A 9.8% 13.2% 14.4% $19,908 23,999 26,544 35,392 N/A $22,144 16,344 32,689 4.5% 4.0% 6.0% 8.0% N/A 4.0% 4.0% 8.0% $28,756 29,999 35,392 44,240 N/A $27,643 24,517 40,860 6.5% 5.0% 8.0% 10.0% N/A 5.0% 6.0% 10.0% Management believes that Plumas Bank currently meets all its capital adequacy requirements. The current and projected capital positions of 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 ratios at all times. Off-Balance Sheet Arrangements Loan Commitments. In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of December 31, 2015, the Company had $83.0 million in unfunded loan commitments and $265 thousand in letters of credit. This compares to $89.7 million in unfunded loan commitments and no letters of credit at December 31, 2014. Of the $83.0 million in unfunded loan commitments, $46.1 million and $36.9 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at December 31, 2015, $42.6 million were secured by real estate, of which $16.0 million was secured by commercial real estate and $26.6 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 42 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 two depository branches and three lending offices and two non-branch automated teller machine locations. Total rental expenses under all operating leases were $233,000 and $192,000 during the years ended December, 31, 2015 and 2014, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2016 and the last such lease expiring during 2020. 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 $154,000,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $231,000,000. See “Short-term Borrowing Arrangements” for additional information on our FHLB borrowing capacity. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings under the FHLB or the correspondent bank borrowing lines at December 31, 2015 or 2014. Customer deposits are the Company’s primary source of funds. Total deposits increased by $59.4 million from $468 million at December 31, 2014 to $527 million at December 31, 2015. Deposits are held in various forms with varying maturities. The Company’s securities portfolio, Federal funds sold, FHLB advances, and cash and due from banks serve as the primary sources of liquidity, providing adequate funding for loans during periods of high loan demand. During periods of decreased lending, funds obtained from the maturing or sale of investments, loan payments, and new deposits are invested in short-term earning assets, such as cash held at the FRB, Federal funds sold and investment securities, to serve as a source of funding for future loan growth. Management believes that the Company’s available sources of funds, including borrowings, will provide adequate liquidity for its operations in the foreseeable future. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company we are not required to provide the information required by this item. 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of Plumas Bancorp and subsidiary, and report of the independent registered public accounting firm are included in the Annual Report of Plumas Bancorp to its shareholders for the years ended December 31, 2015, 2014 and 2013. Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2015 and 2014 Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 Notes to Consolidated Financial Statements Page F-1 F-2 F-3 F-4 F-6 F-7 F-8 F-11 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Plumas Bancorp and Subsidiary Quincy, California We have audited the accompanying consolidated balance sheets of Plumas Bancorp and Subsidiary (the “Company”) as of December 31, 2015 and 2014 and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Plumas Bancorp and Subsidiary as of December 31, 2015 and 2014 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Vavrinek, Trine, Day & Co., LLP Laguna Hills, California March 17, 2016 F - 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Shareholders and Board of Directors Plumas Bancorp Quincy, California We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows of Plumas Bancorp and Subsidiary (the "Company") for the year ended December 31, 2013. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company’s operations and their cash flows for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. /s/ Crowe Horwath LLP Sacramento, California March 20, 2014 F - 2 PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 2015 and 2014 ASSETS Cash and cash equivalents Investment securities available for sale Loans, less allowance for loan losses of $6,078,000 in 2015 and $5,451,000 in 2014 Real estate acquired through foreclosure Premises and equipment, net Bank owned life insurance Accrued interest receivable and other assets 2015 2014 $ 68,195,000 $ 96,704,000 45,574,000 90,320,000 396,833,000 1,756,000 12,234,000 12,187,000 11,377,000 366,787,000 3,590,000 11,642,000 11,845,000 9,104,000 Total assets $ 599,286,000 $ 538,862,000 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing Interest bearing Total deposits Repurchase agreements Note payable Subordinated debenture Accrued interest payable and other liabilities Junior subordinated deferrable interest debentures $ 209,044,000 $ 318,232,000 180,649,000 287,242,000 527,276,000 467,891,000 7,671,000 4,875,000 - 6,658,000 10,310,000 9,626,000 1,000,000 7,454,000 6,084,000 10,310,000 Total liabilities 556,790,000 502,365,000 Commitments and contingencies (Note 11) Shareholders' equity: Serial preferred stock - no par value; 10,000,000 shares authorized; none outstanding Common stock - no par value; 22,500,000 shares authorized; issued and outstanding – 4,835,432 at December 31, 2015 and 4,799,139 at December 31, 2014 Retained earnings Accumulated other comprehensive loss, net of taxes - - 6,475,000 36,063,000 (42,000) 6,312,000 30,245,000 (60,000) Total shareholders' equity 42,496,000 36,497,000 Total liabilities and shareholders' equity $ 599,286,000 $ 538,862,000 The accompanying notes are an integral part of these consolidated financial statements. F - 3 PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2015, 2014 and 2013 2015 2014 2013 Interest income: Interest and fees on loans Interest on investment securities: Taxable Exempt from Federal income taxes Other $ 20,747,000 $ 19,495,000 $ 18,174,000 1,351,000 343,000 174,000 1,368,000 147,000 137,000 1,155,000 7,000 124,000 Total interest income 22,615,000 21,147,000 19,460,000 Interest expense: Interest on deposits Interest on note payable Interest on subordinated debenture Interest on junior subordinated deferrable interest debentures Other 518,000 155,000 219,000 306,000 6,000 516,000 111,000 756,000 303,000 7,000 600,000 23,000 541,000 313,000 57,000 Total interest expense 1,204,000 1,693,000 1,534,000 Net interest income before provision for loan losses 21,411,000 19,454,000 17,926,000 Provision for loan losses 1,100,000 1,100,000 1,400,000 Net interest income after provision for loan losses Non-interest income: Service charges Gain on sale of loans Gain on sale of investments Earnings on bank owned life insurance policies, net Other 20,311,000 18,354,000 16,526,000 3,954,000 1,942,000 21,000 4,108,000 1,396,000 128,000 3,912,000 1,399,000 - 342,000 1,456,000 341,000 1,342,000 344,000 987,000 Total non-interest income 7,715,000 7,315,000 6,642,000 (Continued) F - 4 PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Continued) For the Years Ended December 31, 2015, 2014 and 2013 2015 2014 2013 Non-interest expenses: Salaries and employee benefits Occupancy and equipment Other $ 10,277,000 $ 2,782,000 5,432,000 9,474,000 $ 2,902,000 5,469,000 8,729,000 2,874,000 5,967,000 Total non-interest expenses 18,491,000 17,845,000 17,570,000 Income before income taxes 9,535,000 7,824,000 5,598,000 Provision for income taxes 3,717,000 3,086,000 2,167,000 Net income Discount on redemption of preferred stock Preferred stock dividends and discount accretion Net income available to common shareholders 5,818,000 4,738,000 3,431,000 - - - - 565,000 (347,000) $ 5,818,000 $ 4,738,000 $ 3,649,000 Basic earnings per common share Diluted earnings per common share Common dividends per share $ $ $ 1.21 1.15 - $ $ $ 0.99 0.95 - $ $ $ 0.76 0.75 - The accompanying notes are an integral part of these consolidated financial statements. F - 5 PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2015, 2014 and 2013 Net Income Other comprehensive income (loss): Change in net unrealized gain (loss) Less: reclassification adjustments for net gains included in net income $ 2015 2014 2013 5,818,000 $ 4,738,000 $ 3,431,000 51,000 2,006,000 (2,540,000) (21,000) (128,000) - Net unrealized holding gain (loss) 30,000 1,878,000 (2,540,000) Related income tax effect: Change in unrealized (gain) loss Reclassification of gains included in net income (21,000) (828,000) 1,048,000 9,000 53,000 - Income tax effect (12,000) (775,000) 1,048,000 Total other comprehensive income (loss) 18,000 1,103,000 (1,492,000) Comprehensive income $ 5,836,000 $ 5,841,000 $ 1,939,000 The accompanying notes are an integral part of these consolidated financial statements. F - 6 l a t o T ’ l s r e d o h e r a h S y t i u q E l d e t a u m u c c A r e h t O i e v s n e h e r p m o C e m o c n I ) s s o L ( ) s e x a T f o t e N ( i d e n a t e R i s g n n r a E k c o t S n o m m o C k c o t S d e r r e f e r P t n u o m A s e r a h S t n u o m A s e r a h S I Y T U Q E ' S R E D L O H E R A H S N I S E G N A H C F O S T N E M E T A T S D E T A D L O S N O C I 3 1 0 2 d n a 4 1 0 2 , 5 1 0 2 , 1 3 r e b m e c e D d e d n E s r a e Y e h t r o F I I Y R A D S B U S D N A P R O C N A B S A M U L P , 0 0 0 0 5 8 1 4 , $ 0 0 0 9 2 3 , $ , 0 0 0 3 7 5 3 2 , $ 0 0 0 , 3 9 0 , 6 $ 9 3 3 , 6 7 7 , 4 0 0 0 , 5 5 8 , 1 1 $ 9 4 9 , 1 1 3 1 0 2 , 1 y r a u n a J , e c n a a B l - ) 0 0 0 4 9 ( , , 0 0 0 1 3 4 3 , , ) 0 0 0 2 9 4 1 ( , , ) 0 0 0 2 9 4 1 ( , , 0 0 0 1 3 4 3 , , ) 0 0 0 8 6 9 1 ( , , ) 0 0 0 4 8 3 1 1 ( , - 0 0 0 4 3 , ) 0 0 0 4 3 2 ( , 0 0 0 8 3 , 0 0 0 8 1 3 , , 0 0 0 3 9 5 0 3 , , 0 0 0 8 3 7 4 , ) 0 0 0 8 1 ( , 0 0 0 1 8 , , 0 0 0 3 0 1 1 , , 0 0 0 7 9 4 6 3 , 0 0 0 8 1 , 0 0 0 5 2 1 , ) 0 0 0 2 3 ( , 0 0 0 0 7 , , 0 0 0 8 1 8 5 , _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 0 0 0 , 8 3 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ) 0 0 0 , 3 6 1 1 ( , _ _ _ _ _ ) 0 0 0 0 6 ( , 0 0 0 8 1 , , 0 0 0 3 0 1 1 , , 0 0 0 7 0 5 5 2 , 0 0 0 , 9 4 2 , 6 9 3 7 , 7 8 7 , 4 - - 3 1 0 2 , 1 3 r e b m e c e D , e c n a a B l , 0 0 0 8 3 7 4 , _ _ _ _ _ _ _ _ _ _ _ _ 0 0 0 , 1 8 ) 0 0 0 , 8 1 ( 0 0 4 , 1 1 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ t c e f f e x a t d n a s n o i t p o k c o t s f o i e s c r e x E e s n e p x e n o i t a s n e p m o c d e s a b - k c o S t e m o c n i i e v s n e h e r p m o c r e h O t e m o c n l t e N , 0 0 0 5 4 2 0 3 , 0 0 0 , 2 1 3 , 6 9 3 1 , 9 9 7 , 4 - - 4 1 0 2 , 1 3 r e b m e c e D , e c n a a B l , 0 0 0 8 1 8 5 , 0 0 0 , 5 2 1 0 0 7 , 9 3 ) 0 0 0 , 2 3 ( ) 7 0 4 , 3 ( n o i t c e n n o c n i k c o t s n o m m o c f o t n e m e r i t e R s n o i t p o k c o t s f o i e s c r e x e e h t h t i w t c e f f e x a t d n a s n o i t p o k c o t s f o i e s c r e x E e m o c n i i e v s n e h e r p m o c r e h O t e m o c n l t e N _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 0 0 0 , 0 7 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ e s n e p x e n o i t a s n e p m o c d e s a b - k c o S t , ) 0 0 0 8 6 9 1 ( , 0 0 0 5 6 5 , 0 0 0 , 4 3 0 0 0 , 8 1 3 ) 0 0 0 , 4 3 2 ( 0 0 4 , 1 1 0 0 0 , 4 9 ) 0 0 0 , 5 6 5 ( ) 0 0 0 , 4 8 3 , 1 1 ( ) 9 4 9 , 1 1 ( k c o t s d e r r e f e r p f o n o i t p m e d e R s s o l i e v s n e h e r p m o c r e h O t n o i t e r c c a k c o t s d e r r e e r P f e m o c n l t e N s d n e d v d i i k c o t s d e r r e e r P f k c o t s d e r r e f e r p f o n o i t p m e d e r n o t n u o c s D i t n a r r a w k c o t s n o m m o c f o e s a h c r u p e R e s n e p x e n o i t a s n e p m o c d e s a b - k c o S t t n a r r a w k c o t s n o m m o c f o e c n a u s s I s n o i t p o k c o t s f o i e s c r e x E , 0 0 0 6 9 4 2 4 , $ ) 0 0 0 2 4 ( , $ , 0 0 0 3 6 0 6 3 , $ 0 0 0 , 5 7 4 , 6 $ 2 3 4 , 5 3 8 , 4 - $ - 5 1 0 2 , 1 3 r e b m e c e D . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T 7 - F , e c n a a B l PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2015, 2014 and 2013 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Change in deferred loan origination 2015 2014 2013 $ 5,818,000 $ 4,738,000 $ 3,431,000 1,100,000 1,100,000 1,400,000 costs/fees, net (350,000) Stock-based compensation expense 70,000 Depreciation and amortization Amortization of investment security 1,151,000 (752,000) 81,000 1,306,000 (667,000) 38,000 1,408,000 premiums Accretion of investment security discounts Gain on sale of investments Gain on sale of loans held for sale Loans originated for sale Proceeds from loan sales Provision from change in OREO valuation Net (gain) loss on sale of OREO Net (gain) loss on sale of other vehicles owned Earnings on bank owned life insurance policies (Benefit) provision for deferred income taxes (Increase) decrease in accrued interest receivable and other assets Increase (decrease) in accrued interest payable and other liabilities Net cash provided by operating activities 506,000 487,000 (4,000) (21,000) (1,942,000) (26,699,000) 29,430,000 (8,000) (128,000) (1,396,000) (22,063,000) 21,592,000 79,000 240,000 (198,000) (101,000) 445,000 (6,000) - (1,399,000) (17,609,000) 21,733,000 486,000 (171,000) (78,000) (59,000) (12,000) (342,000) (539,000) (341,000) 1,165,000 (344,000) 2,085,000 (1,294,000) (620,000) 613,000 540,000 104,000 (724,000) 7,227,000 5,345,000 10,707,000 (Continued) F - 8 PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2015, 2014 and 2013 2015 2014 2013 Cash flows from investing activities: Proceeds from matured and called available- for-sale investment securities $ 3,499,000 $ Proceeds from sale of available-for-sale securities Purchases of available-for-sale investment 12,260,000 16,044,000 $ 16,325,000 14,000,000 - securities (34,609,000) (40,511,000) (34,734,000) Proceeds from principal repayments from available-for-sale government-guaranteed mortgage-backed securities Net increase in loans Proceeds from sale of vehicles Proceeds from sale of other real estate Proceeds from sale of premises and equipment Purchases of premises and equipment Net cash used in investing 12,015,000 (32,777,000) 445,000 2,281,000 1,032,000 (2,645,000) 9,692,000 (31,733,000) 318,000 3,399,000 - (225,000) 8,376,000 (31,864,000) 148,000 2,404,000 - (352,000) activities (38,499,000) (26,691,000) (42,022,000) Issuance of subordinated debenture, net of discount - Cash flows from financing activities: Net increase in demand, interest-bearing and savings deposits Net decrease in time deposits Net (decrease) increase in securities sold under agreements to repurchase Redemption of subordinated debenture Issuance of common stock warrant Issuance of note payable Increase in note payable Principal payment on note payable Repurchase of common stock warrant Redemption of preferred stock Payment of cash dividend on preferred stock Proceeds from exercise of stock options Net cash provided by financing 63,464,000 (4,079,000) 24,793,000 (6,341,000) 45,770,000 (7,893,000) (1,955,000) (7,500,000) - - 4,000,000 517,000 - - - - - (125,000) (2,000,000) - - - 88,000 - - - 34,000 1,732,000 7,182,000 - 318,000 3,000,000 - - (234,000) (11,384,000) (1,968,000) 34,000 activities 53,893,000 17,003,000 36,557,000 Increase (decrease) in cash and cash equivalents 22,621,000 (4,343,000) 5,242,000 Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 45,574,000 68,195,000 $ 49,917,000 45,574,000 $ 44,675,000 49,917,000 $ F - 9 PLUMAS BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2015, 2014 and 2013 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest expense Income taxes Non-cash investing activities: 2015 2014 2013 $ 1,172,000 $ $ 4,405,000 $ 1,560,000 $ 1,916,000 $ 2,438,000 30,000 Real estate acquired through foreclosure Vehicles acquired through repossession Loans provided for sales of real estate owned $ $ $ 328,000 $ 382,000 $ 211,000 $ 593,000 $ 95,000 $ 729,000 $ 3,824,000 155,000 40,000 The accompanying notes are an integral part of these consolidated financial statements. F - 10 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE BUSINESS OF PLUMAS BANCORP 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. In December, 2015 the Bank opened a Branch in Reno, Nevada; it’s first Branch outside of California. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates lending offices specializing in government-guaranteed in Auburn, California, Scottsdale, Arizona and Beaverton, Oregon and a commercial/agricultural lending office in Chico, 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. lending 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated. Plumas Statutory Trust I and Trust II are not consolidated into the Company's consolidated financial statements and, accordingly, are accounted for under the equity method. The Company's investment in Trust I of $311,000 and Trust II of $163,000 are included in accrued interest receivable and other assets on the consolidated balance sheet. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by Trust I and Trust II are reflected as debt on the consolidated balance sheet. The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Reclassifications Certain reclassifications have been made to prior years’ balances to conform to the classifications used in 2015. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents. F - 11 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Segment Information Management has determined that since all of the 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 customer accounts for more than 10 percent of revenues for the Company or the Bank. Use of Estimates To prepare financial statements in conformity with accounting principles generally accepted in the United States of America management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, loan servicing rights, deferred tax assets, and fair values of financial instruments are particularly subject to change. Cash and Cash Equivalents For the purpose of the statement of cash flows, cash and due from banks and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold for one day periods. Cash held with other federally insured institutions in excess of FDIC limits as of December 31, 2015 was $9.8 million. Net cash flows are reported for customer loans and deposit transactions and repurchase agreements. Investment Securities Investments are classified into one of the following categories: • Available-for-sale securities reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders' equity. • Held-to-maturity securities, which management has the positive intent and ability to hold, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums. As of December 31, 2015 and 2014 the Company did not have any investment securities classified as held-to-maturity. Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. As of December 31, 2015 and 2014 the Company did not have any investment securities classified as trading and gains or losses on the sale of securities are computed on the specific identification method. Interest earned on investment securities is reported in interest for accretion of discounts and amortization of premiums accounted for by the level yield method with no pre-payment anticipated. income, net of applicable adjustments F - 12 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investment Securities (continued) An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term "other than temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings. Investment in Federal Home Loan Bank Stock As a member of the Federal Home Loan Bank (FHLB) System, the Bank is required to maintain an investment in the capital stock of the FHLB. The investment is carried at cost classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. At December 31, 2015 and 2014, FHLB stock totaled $2,380,000. On the consolidated balance sheet, FHLB stock is included in accrued interest receivable and other assets. Loans Held for Sale, Loan Sales and Servicing Included in the loan portfolio are loans which are 75% to 85% guaranteed by the Small Business Administration (SBA), US Department of Agriculture Rural Business Cooperative Service (RBS) and Farm Services Agency (FSA). The guaranteed portion of these loans may be sold to a third party, with the Bank retaining the unguaranteed portion. The Company can receive a premium in excess of the adjusted carrying value of the loan at the time of sale. As of December 31, 2015 and 2014 the Company had $2.1 million and $3.0 million, respectively in government guaranteed loans held for sale. Loans held for sale are recorded at the lower of cost or fair value and therefore may be reported at fair value on a non-recurring basis. The fair values for loans held for sale are based on either observable transactions of similar instruments or formally committed loan sale prices. F - 13 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Held for Sale, Loan Sales and Servicing (continued) Government guaranteed loans with unpaid balances of $86,589,000 and $76,797,000 were being serviced for others at December 31, 2015 and 2014, respectively. The Company accounts for the transfer and servicing of financial assets based on the fair value of financial and servicing assets it controls and liabilities it has assumed, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold or securitized with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are recorded at fair value and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with non-interest income on the statement of income. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. The Company's investment in the loan is allocated between the retained portion of the loan and the sold portion of the loan based on their fair values on the date the loan is sold. The gain on the sold portion of the loan is recognized as income at the time of sale. The carrying value of the retained portion of the loan is discounted based on the estimated value of a comparable non-guaranteed loan. F - 14 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Loans that management has the intent and ability to hold for foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase premiums or discounts, deferred loan fees and costs, and an allowance for loan losses. Loans, if any, that are transferred from loans held for sale are carried at the lower of principal balance or market value at the date of transfer, adjusted for accretion of discounts. Interest is accrued daily based upon outstanding loan balances. However, when, in the opinion of management, loans are considered to be impaired and the future collectability of interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended. Any interest accrued but unpaid is charged against income. Payments received are applied to reduce principal to the extent necessary to ensure collection. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment unless well secured and in the process of collection. Past due status is based on the contractual terms of the loan. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to earned but unpaid interest and then to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loan origination fees, commitment fees, direct loan origination costs and purchased premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans. The Company may acquire loans through a business combination or a purchase for which differences may exist between the contractual cash flows and the cash flows expected to be collected due, at least in part, to credit quality. When the Company acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Company's estimate of undiscounted cash flows expected to be collected over the Company's initial investment in the loan. The excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation allowance. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan's yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as an impairment. The Company may not "carry over" or create a valuation allowance in the initial accounting for loans acquired under these circumstances. At December 31, 2015 and 2014, there were no such loans being accounted for under this policy. F - 15 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses The allowance for loan losses is an estimate of probable incurred credit losses inherent in the Company's loan portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not impaired but collectively evaluated for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. 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. The determination of the general reserve for loans that are not impaired is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment from January 1, 2008 (the beginning of the latest business cycle as determined by management) to the most current balance sheet date, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable incurred losses inherent in the portfolio taken as a whole. The Company maintains a separate allowance for each portfolio segment (loan type). These portfolio segments include commercial, agricultural, real estate construction (including land and development loans), commercial real estate mortgage, residential mortgage, home equity loans, automobile loans and other loans primarily consisting of consumer installment loans and credit card receivables. The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Company’s overall allowance, and is included as a component of loans on the consolidated balance sheet. F - 16 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses (continued) The Company assigns a risk rating to all loans, with the exception of automobile and other 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 general reserve component of the allowance for loan losses associated with loans collectively evaluated for impairment also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) historical losses and (2) other qualitative factors, including inherent credit risk. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described on the next page. F - 17 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses (continued) Commercial – Commercial loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Agricultural – Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions. Real estate – Residential and Home Equity Lines of Credit – The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating. Real estate – Commercial – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations. Real estate – Construction and Land Development – Construction and land development loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects. Automobile – An automobile loan portfolio is usually comprised of a large number of smaller loans scheduled to be amortized over a specific period. Most automobile loans are made directly for consumer purchases, but business vehicles may also be included. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating. Other – Other loans primarily consist of consumer and credit card loans and are similar in nature to automobile loans. Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors and management review the adequacy of the allowance, including consideration of the relative risks in the portfolio, F - 18 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses (continued) current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's primary regulators, the FDIC and DBO, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations. The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for these commitments totaled $200,000 and $141,000 at December 31, 2015 and 2014, respectively and is included in accrued interest payable and other liabilities in the consolidated balance sheet. Other Real Estate Other real estate owned relates to real estate acquired in full or partial settlement of loan obligations, which was $1,756,000 ($3,106,000 less a valuation allowance of $1,350,000) at December 31, 2015 and $3,590,000 ($5,884,000 less a valuation allowance of $2,294,000) at December 31, 2014. Of these amounts $84,000 at December 31, 2015 and $146,000 at December 31, 2014 represent foreclosed residential real estate property. There was one consumer mortgage loans with a balance of $23 thousand secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2015. There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process at December 31, 2014. Proceeds from sales of other real estate owned totaled $2,281,000, $3,399,000 and $2,404,000 for the years ended December 31, 2015, 2014 and 2013, respectively. For the years ended December 31, 2015, 2014 and 2013 the Company recorded gains on sale of other real estate owned of $198,000, $101,000 and $171,000, respectively. Other real estate owned is initially recorded at fair value less cost to sell when acquired, any excess of the Bank's recorded investment in the loan balance and accrued interest income over the estimated fair 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 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 also recorded in other expenses as incurred. The following table provides a summary of the change in the OREO balance for the years ended December 31, 2015 and 2014: Beginning balance Additions Dispositions Write-downs Ending balance Year Ended December 31, 2014 2015 $ 6,399,000 $ 3,590,000 729,000 328,000 (3,298,000) (2,083,000) ( 240,000) (79,000) $ 1,756,000 $ 3,590,000 F - 19 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Intangible Assets Intangible assets consist of core deposit intangibles related to branch acquisitions and are amortized using the straight-line method over a period not to exceed fifteen years. The Company evaluates the recoverability and remaining useful life annually to determine whether events or circumstances warrant a revision to the intangible asset or the remaining period of amortization. There were no such events or circumstances during the periods presented. At December 31, 2015 and 2014, intangible assets totaled $94,000 and $0, respectively. Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of premises are estimated to be twenty to thirty years. The useful lives of furniture, fixtures and equipment are estimated to be two to ten years. Leasehold improvements are amortized over the life of the asset or the life of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. The Company evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Bank Owned Life Insurance The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Income Taxes The Company files its income taxes on a consolidated basis with its subsidiary. Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities. 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 adjusted for the effects of changes in tax laws and rates on the date of enactment. A valuation allowance is recognized if, based on the weight of available evidence management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets. F - 20 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Accounting for Uncertainty in Income Taxes 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 income statement. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the years ended December 31, 2015 and 2014. Earnings Per Share Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common stockholders (net income plus discount on redemption of preferred stock less preferred dividends and accretion) by the weighted-average number of common shares outstanding for the period. Diluted EPS 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 EPS. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity. The amount reclassified out of other accumulated comprehensive income relating to realized gains on securities available for sale was $21,000 and $128,000 for 2015 and 2014, with the related tax effect of $9,000 and $53,000, respectively. There were no sales of available for sale investment securities during the year ended December 31, 2013. F - 21 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Dividend Restrictions Banking regulations require maintaining certain capital levels and may limit the dividend paid by the bank to the holding company or by the holding company to shareholders. Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. Stock-Based Compensation Compensation expense related to the Company’s Stock Option Plans, net of related tax benefit, recorded in 2015, 2014 and 2013 totaled $70,000, $75,000 and $37,000 or $0.01, $0.02 and $0.01 per diluted share, respectively. Compensation expense is recognized over the vesting period on a straight line accounting basis. The Company determines the fair value of options 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 Plans. During 2014 the Company granted options to purchase 110,400 shares of common stock. The fair value of each option was estimated on the date of grant using the following assumptions. Expected life of stock options (in years) Risk free interest rate Volatility Dividend yields Weighted-average fair value of options granted during the year 2014 5.2 1.64 % 63.8 % 2.00 % $3.02 No options were granted during the years ended December 31, 2015 and 2013. F - 22 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recently Adopted Accounting Pronouncements In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 did not have a material impact on the Company's Financial Statements. In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The Update improves the financial reporting of repurchase agreements and other similar transactions through a change in accounting for repurchase-to-maturity transactions and repurchase financings, and the introduction of two new disclosure requirements. New disclosures are required for (1) transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction and (2) repurchase agreements, securities lending transactions, and repurchase-to- maturity transactions accounted for as secured borrowings about the nature of collateral pledged and the time to maturity of those transactions The adoption of ASU No. 2014-11 did not have a material impact on the Company's Financial Statements. Pending Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers. This update to the ASC is the culmination of efforts by the FASB and the International Accounting Standards Board (IASB) to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 supersedes Topic 605 – Revenue Recognition and most industry-specific guidance. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 describes a 5-step process entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information. F - 23 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Pending Accounting Pronouncements (continued) This update was originally effective for annual reporting periods beginning on or after December 15, 2016 and interim periods therein and requires expanded disclosures. In July 2015 the FASB issued a deferral of ASU 2014-09 of one year making it effective for annual reporting periods beginning on or after December 15, 2017 while also providing for early adoption but not before the original effective date. The Company is currently evaluating the effects of ASU 2014-09 on its financial statements and disclosures, if any. On January 5, 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes made to the current measurement model primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The Update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. This Update is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effects of ASU 2016-01 on its financial statements and disclosures. On February 25, 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under current lease accounting guidance. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the effects of ASU 2016-02 on its financial statements and disclosures. 3. FAIR VALUE MEASUREMENTS 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. F - 24 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) 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 December 31, 2015 are as follows: Fair Value Measurements at December 31, 2015 Using: Carrying Value $68,195,000 96,704,000 396,833,000 2,380,000 2,048,000 527,276,000 7,671,000 4,875,000 Financial assets: Cash and cash equivalents Investment securities Loans, net FHLB stock Accrued interest receivable Financial liabilities: Deposits Repurchase agreements Note payable Junior subordinated deferrable interest debentures Accrued interest payable 10,310,000 58,000 Level 1 $68,195,000 26,000 Level 2 Level 3 Total Fair Value $96,704,000 $68,195,000 96,704,000 $395,338,000 395,338,000 N/A 2,048,000 328,000 1,694,000 475,013,000 52,287,000 7,671,000 527,300,000 7,671,000 4,875,000 4,875,000 8,000 38,000 6,662,000 6,662,000 58,000 12,000 F - 25 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) The carrying amounts and estimated fair values of financial instruments, at December 31, 2014 are as follows: Fair Value Measurements at December 31, 2014 Using: Carrying Value $45,574,000 90,320,000 366,787,000 2,380,000 1,727,000 467,891,000 9,626,000 1,000,000 7,454,000 Financial assets: Cash and cash equivalents Investment securities Loans, net FHLB stock Accrued interest receivable Financial liabilities: Deposits Repurchase agreements Note payable Subordinated debenture Junior subordinated deferrable interest debentures Accrued interest payable 10,310,000 72,000 Level 1 $45,574,000 $90,320,000 Level 2 Level 3 Total Fair Value $45,574,000 90,320,000 $368,442,000 368,442,000 N/A 1,727,000 281,000 1,446,000 411,549,000 56,364,000 9,626,000 467,913,000 9,626,000 1,000,000 1,000,000 7,313,000 7,313,000 7,000 47,000 6,636,000 6,636,000 72,000 18,000 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. F - 26 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) 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. Note payable: The fair value of the Company’s Note Payable is estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification. Subordinated debentures and 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 December 31, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value: F - 27 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) Assets and liabilities measured at fair value on a recurring basis at December 31, 2015 are summarized below: Fair Value Measurements at December 31, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Total Fair Value Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: U.S. Government- sponsored agencies $ 1,977,000 $ 1,977,000 $ - U.S. Government- sponsored agencies collateralized by mortgage obligations- residential Obligations of states and political subdivisions 72,370,000 22,357,000 72,370,000 22,357,000 $ 96,704,000 $ - $ 96,704,000 $ - Assets and liabilities measured at fair value on a recurring basis at December 31, 2014 are summarized below: Fair Value Measurements at December 31, 2014 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Total Fair Value Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: U.S. Government- sponsored agencies $ 7,002,000 $ 7,002,000 $ - U.S. Government- sponsored agencies collateralized by mortgage obligations- residential Obligations of states and political subdivisions Corporate debt 70,280,000 12,532,000 506,000 70,280,000 12,532,000 506,000 $ 90,320,000 $ - $ 90,320,000 $ - 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 2015 or 2014. 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. F - 28 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2015 are summarized below: Fair Value Measurements at December 31, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Total Fair Value $ - $ - $ - $ - $ - - - 1,214,000 30,000 83,000 - - 1,327,000 - - - - - (53,000) 6,000 - - (47,000) Assets: Impaired loans: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction and land development Equity lines of credit Auto Other Total impaired loans Other real estate: Real estate – residential Real estate – commercial Real estate – construction and land development Equity lines of credit Total other real estate - - 1,214,000 30,000 83,000 - - 1,327,000 - 156,000 - - 156,000 (127,000) 1,516,000 84,000 1,756,000 $ 3,083,000 75,000 (27,000) (79,000) $ (126,000) 1,516,000 84,000 1,756,000 $ 3,083,000 - $ - - $ - F - 29 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2014 are summarized below: Fair Value Measurements at December 31, 2014 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Total Fair Value Assets: Impaired loans: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction and land development Equity lines of credit Auto Other Total impaired loans Other real estate: Real estate – residential Real estate – commercial Real estate – construction and land development Equity lines of credit Total other real estate $ - $ - $ - - 838,000 1,479,000 27,000 80,000 - - 2,424,000 146,000 1,052,000 - - 1,984,000 408,000 3,590,000 $ 6,014,000 - $ - - $ - $ - - $ - - 838,000 (16,000) 1,479,000 (43,000) 27,000 80,000 - - 2,424,000 (62,000) (4,000) - - (125,000) 146,000 (17,000) 1,052,000 (33,000) 1,984,000 408,000 3,590,000 $ 6,014,000 (138,000) (52,000) (240,000) $ (365,000) 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 $47,000 and $125,000 represent impairment charges recognized during the years ended December 31, 2015 and 2014, respectively, related to the above impaired loans. F - 30 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FAIR VALUE MEASUREMENTS (Continued) 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. 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 December 31, 2015 and 2014 (dollars in thousands): Description Impaired Loans: Fair Value 12/31/2015 Fair Value 12/31/2014 Valuation Technique Significant Unobservable Input Range (Weighted Average) 12/31/2015 Range (Weighted Average) 12/31/2014 Commercial $ - $ - Sales Comparison Agricultural $ - $ - Sales Comparison RE – Residential $ - $ 838 Sales Comparison RE – Commercial $ 1,214 $ 1,479 Sales Comparison Land and Construction $ 30 $ 27 Sales Comparison Equity Lines of Credit $ 83 $ 80 Sales Comparison Other Real Estate: RE – Residential $ - $ 146 Sales Comparison Land and Construction $ 1,516 $ 1,984 Sales Comparison RE – Commercial $ 156 $ 1,052 Sales Comparison Adjustment for differences between comparable sales N/A Adjustment for differences between comparable sales N/A Adjustment for differences between comparable sales N/A N/A N/A 8% (8%) Adjustment for differences between comparable sales Adjustment for differences between comparable sales Adjustment for differences between comparable sales 9%-12% (10%) 9%-12% (10%) 8% (8%) 8% (8%) 8% (8%) 8% (8%) Adjustment for differences between comparable sales N/A Adjustment for differences between comparable sales Adjustment for differences between comparable sales 10% (10%) 10% (10%) 10% (10%) 10% (10%) 10% (10%) Equity Lines of Credit $ 84 $ 408 Sales Comparison Adjustment for differences between comparable sales 10% (10%) 10% (10%) F - 31 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities at December 31, 2015 and 2014 consisted of the following: Available-for-Sale 2015 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Debt securities: U.S. Government-sponsored agencies U.S. Government-sponsored agencies collateralized by mortgage obligations- residential Obligations of states and political subdivisions $ 1,994,000 $ - $ (17,000) $ 1,977,000 72,965,000 56,000 (651,000) 72,370,000 21,817,000 $ 96,776,000 $ 548,000 604,000 $ (8,000) 22,357,000 (676,000) $ 96,704,000 Net unrealized loss on available-for-sale investment securities totaling $72,000 were recorded, net of $30,000 in tax benefits, as accumulated other comprehensive income within shareholders' equity at December 31, 2015. During the year ended December 31, 2015 the Company sold fifteen available-for-sale investment securities for total proceeds of $12,260,000 recording a $21,000 net gain on sale. The Company realized a gain on sale from eight of these securities totaling $62,000 and a loss on sale on seven of these securities of $41,000. Available-for-Sale 2014 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Debt securities: U.S. Government-sponsored agencies U.S. Government-sponsored agencies collateralized by mortgage obligations- residential Obligations of states and political subdivisions $ 7,003,000 $ 19,000 $ (20,000) $ 7,002,000 70,610,000 192,000 (522,000) 70,280,000 12,307,000 234,000 (9,000) 12,532,000 Corporate debt 502,000 4,000 - 506,000 $ 90,422,000 $ 449,000 $ (551,000) $ 90,320,000 F - 32 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. INVESTMENT SECURITIES (Continued) Net unrealized loss on available-for-sale investment securities totaling $102,000 were recorded, net of $42,000 in tax benefits, as accumulated other comprehensive income within shareholders' equity at December 31, 2014. During the year ended December 31, 2014 the Company sold fourteen available-for-sale investment securities for total proceeds of $16,325,000 recording a $128,000 gain on sale. The Company realized a gain on sale from thirteen of these securities totaling $134,000 and a loss on sale on one security of $6,000. Net unrealized loss on available-for-sale investment securities totaling $1,980,000 were recorded, net of $817,000 in tax benefits, as accumulated other comprehensive income within shareholders' equity at December 31, 2013. No securities were sold during the year ended December 31, 2013. There were no transfers of available-for-sale investment securities during the years ended December 31, 2015, 2014 or 2013. There were no securities classified as held- to-maturity at December 31, 2015 or December 31, 2014. Investment securities with unrealized losses at December 31, 2015 and 2014 are summarized and classified according to the duration of the loss period as follows: December 31, 2015 Debt securities: U.S. Government- sponsored agencies U.S. Government agencies collateral- ized by mortgage obligations-residential Obligations of states and political subdi- visions December 31, 2014 Debt securities: U.S. Government- sponsored agencies U.S. Government agencies collateral- ized by mortgage obligations-residential Obligations of states and political subdi- visions Less than 12 Months Fair Value Unrealized Losses 12 Months or More Fair Value Unrealized Losses Total Fair Value Unrealized Losses $ 1,977,000 $ 17,000 $ - $ - $ 1,977,000 $ 17,000 45,398,000 327,000 11,880,000 324,000 57,278,000 651,000 1,037,000 $ 48,412,000 $ 7,000 351,000 160,000 $12,040,000 $ 1,000 1,197,000 8,000 325,000 $ 60,452,000 $ 676,000 Less than 12 Months Fair Value Unrealized Losses 12 Months or More Fair Value Unrealized Losses Total Fair Value Unrealized Losses $ 994,000 $ 6,000 $ 2,985,000 $ 14,000 $ 3,979,000 $ 20,000 4,504,000 17,000 28,643,000 505,000 33,147,000 522,000 2,014,000 $ 7,512,000 $ 9,000 32,000 - - 2,014,000 9,000 $31,628,000 $ 519,000 $ 39,140,000 $ 551,000 F - 33 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. INVESTMENT SECURITIES (Continued) At December 31, 2015, the Company held 150 securities of which 57 were in a loss position. Of the securities in a loss position, 43 were in a loss position for less than twelve months. Of the 57 securities 2 are U.S. Government-sponsored agencies 51 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 4 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate 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 December 31, 2015, 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 December 31, 2015 are other than temporarily impaired. The amortized cost and estimated fair value of investment securities at December 31, 2015 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. Amortized Cost Estimated Fair Value After one year through five years After five years through ten years After ten years Investment securities not due at a single maturity date: Government-sponsored mortgage-backed securities $ 16,498,000 161,000 $ 160,000 16,879,000 7,152,000 7,295,000 72,965,000 96,776,000 $ 72,370,000 96,704,000 $ Investment securities with amortized costs totaling $62,914,000 and $57,793,000 and estimated fair values totaling $62,483,000 and $57,636,000 at December 31, 2015 and 2014, respectively, were pledged to secure deposits and repurchase agreements. F - 34 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES Outstanding loans are summarized below: December 31, 2015 2014 Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land development Equity lines of credit Auto Other 39,856,000 25,474,000 $ 37,084,000 $ 31,465,000 35,355,000 29,284,000 192,095,000 163,306,000 24,572,000 38,972,000 44,618,000 2,818,000 400,971,000 370,390,000 16,188,000 38,327,000 48,365,000 3,582,000 Deferred loan costs, net Allowance for loan losses 1,940,000 1,848,000 (6,078,000) (5,451,000) $ 396,833,000 $ 366,787,000 Changes in the allowance for loan losses were as follows: Year Ended December 31, 2014 2013 2015 Balance, beginning of year Provision charged to operations Losses charged to allowance Recoveries Balance, end of year $ $ 5,451,000 $ 1,100,000 (827,000) 354,000 6,078,000 $ 5,517,000 $ 1,100,000 (1,913,000) 747,000 5,451,000 $ 5,686,000 1,400,000 (1,915,000) 346,000 5,517,000 The recorded investment in impaired loans totaled $6,461,000 and $8,582,000 at December 31, 2015 and 2014, respectively. The Company had specific allowances for loan losses of $751,000 on impaired loans of $2,346,000 at December 31, 2015 as compared to specific allowances for loan losses of $564,000 on impaired loans of $2,401,000 at December 31, 2014. The balance of impaired loans in which no specific reserves were required totaled $4,115,000 and $6,181,000 at December 31, 2015 and 2014, respectively. The average recorded investment in impaired loans for the years ended December 31, 2015, 2014 and 2013 was $6,528,000, $8,070,000 and $10,182,000, respectively. The Company recognized $119,000, $152,000 and $298,000 in interest income on impaired loans during the years ended December 31, 2015, 2014 and 2013, respectively. Of these amounts $0, $31,000 and $22,000 were recognized on the cash basis, 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 to include 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. F - 35 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. The carrying value of troubled debt restructurings at December 31, 2015 and December 31, 2014 was $4,661,000 and $5,738,000, respectively. The Company has allocated $311,000 and $319,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2015 and December 31, 2014, respectively. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at December 31, 2015 and December 31, 2014. There were no troubled debt restructurings during the twelve months ending December 31, 2015. During the twelve month period ended December 31, 2014, the terms of two loans were modified as troubled debt restructurings. Modifications involved an extension of the maturity date for up to two years. The following table presents loans by class modified as troubled debt restructurings that occurred during the twelve months ended December 31, 2014: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Recorded Investment Troubled Debt Restructurings: Auto 2 $ 29,000 $ 29,000 The troubled debt restructurings described above resulted in no allowance for loan losses or charge-offs during the year ended December 31, 2014. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the twelve months ended December 31, 2015 and 2014. At December 31, 2015 and 2014, nonaccrual loans totaled $4,546,000 and $6,625,000, respectively. Interest foregone on nonaccrual loans totaled $303,000, $345,000 and $280,000 for the twelve months ended December 31, 2015, 2014 and 2013, respectively. The Company recognized $0, $31,000 and $22,000 in interest income on nonaccrual loans during the years ended December 31, 2015, 2014 and 2013, respectively. There were no loans past due 90 days or more and on accrual status at December 31, 2015 and 2014. Salaries and employee benefits totaling $1,337,000, $1,441,000 and $1,337,000 have been deferred as loan origination costs during the years ended December 31, 2015, 2014 and 2013, respectively. F - 36 e r u s o p x E t i d e r C l i a c r e m m o C e d a r G d e n g s s A y i l l a n r e t n I y b e l i f o r P k s R i t i d e r C 8 0 1 , 4 2 9 9 5 , - - 4 4 3 - 4 2 9 8 3 3 , $ 3 8 9 7 3 , 4 2 0 9 4 3 , $ 7 2 3 8 3 , 7 5 3 , 4 8 3 1 8 , - 6 4 1 3 5 4 - 9 5 4 0 1 3 , $ 3 7 3 8 3 , 4 5 9 2 2 3 , $ 2 7 9 8 3 , l t a o T C O L y t i u q E $ $ $ $ e d a r G d e n g s s A y i l l a n r e t n I y b e l i f o r P k s R i t i d e r C e r u s o p x E t i d e r C l i a c r e m m o C 7 4 2 3 9 8 - - 2 4 4 , 2 4 1 9 , 3 - 9 4 1 5 0 1 8 4 0 5 1 , $ 9 3 7 , 5 8 1 $ 0 2 2 , 5 2 8 8 1 6 1 , $ 5 9 0 , 2 9 1 $ 4 7 4 , 5 2 $ $ - 3 4 7 8 3 3 8 8 3 9 6 - 6 2 4 , 9 3 $ 8 0 5 , 5 3 $ 6 5 8 , 9 3 $ 4 8 0 , 7 3 $ t - e a t s E l a e R n o i t c u r t s n o C l a e R - e t a t s E l i a c r e m m o C - e t a t s E l a e R l a i t n e d s e R i l a r u t l u c i r g A l i a c r e m m o C - 7 3 5 1 1 1 1 , 4 2 9 2 2 , $ 9 2 3 , 6 5 1 $ 8 4 0 , 8 2 - 7 9 2 , 2 0 8 6 , 4 - 3 3 2 3 0 0 , 1 2 7 5 4 2 , $ 6 0 3 , 3 6 1 $ 4 8 2 , 9 2 $ $ - 5 5 3 1 9 3 9 8 7 0 0 5 - 9 0 6 , 4 3 $ 6 7 1 , 0 3 $ 5 5 3 , 5 3 $ 5 6 4 , 1 3 $ l t a o T C O L y t i u q E t - e a t s E l a e R n o i t c u r t s n o C l a e R - e t a t s E l i a c r e m m o C - e t a t s E l a e R l a i t n e d s e R i l a r u t l u c i r g A l i a c r e m m o C e r u s o p x E t i d e r C r e m u s n o C e r u s o p x E t i d e r C r e m u s n o C l t a o T r e h O t 4 1 0 2 , 1 3 r e b m e c e D y t i v i t c A t n e m y a P n o d e s a B e l i f o r P k s R i t i d e r C o t u A l a t o T r e h t O 5 1 0 2 , 1 3 r e b m e c e D y t i v i t c A t n e m y a P n o d e s a B e l i f o r P k s R i t i d e r C o t u A 8 0 1 8 2 3 , 7 4 6 3 4 , 7 4 $ $ 3 1 5 0 8 2 , 8 1 8 2 , $ $ 5 9 3 2 5 4 4 , 8 1 6 4 4 , $ $ 5 6 2 8 8 , 1 5 7 4 9 , 1 5 $ $ - 2 8 5 , 3 2 8 5 , 3 $ $ 5 6 0 0 3 , 8 4 5 6 3 , 8 4 $ $ 7 3 - F 5 1 0 2 , 1 3 r e b m e c e D d r a d n a t s b u S l u f t b u o D h c t a W s s a P : e d a r G l t a o T 4 1 0 2 , 1 3 r e b m e c e D d r a d n a t s b u S l u f t b u o D h c t a W s s a P : e d a r G l t a o T i g n m r o f r e p - n o N i g n m r o f r e P : e d a r G l t a o T I I Y R A D S B U S D N A P R O C N A B S A M U L P I I S T N E M E T A T S L A C N A N F D E T A D L O S N O C O T S E T O N I ) d e u n i t n o C ( : s d n a s u o h t n i , d e t a c d n i i s e t a d e h t t a s g n i t a r k s i r l a n r e t n i s ' t n e m e g a n a m y b d e t a c o l l a o i l o f t r o p n a o l e h t w o h s l s e b a t i g n w o l l o f e h T ) d e u n i t n o C ( S E S S O L N A O L R O F E C N A W O L L A E H T D N A S N A O L . 5 l t a o T r e h O t o t u A C O L y t i u q E - e t a t s E l a e R n o i t c u r t s n o C - e t a t s E l a e R l i a c r e m m o C - e t a t s E l a e R l a i t n e d s e R i l a r u t l u c i r g A l i a c r e m m o C : 5 1 / 1 3 / 2 1 d e d n e r a e Y I I Y R A D S B U S D N A P R O C N A B S A M U L P I I S T N E M E T A T S L A C N A N F D E T A D L O S N O C O T S E T O N I ) d e u n i t n o C ( : s d n a s u o h t n i , d e t a c d n i i s e t a d e h t t a s e s s o l n a o l r o f e c n a w o l l a e h t f o n o i t a c o l l a e h t w o h s l s e b a t i g n w o l l o f e h T ) d e u n i t n o C ( S E S S O L N A O L R O F E C N A W O L L A E H T D N A S N A O L . 5 ) 7 2 8 ( 4 5 3 1 5 4 5 , 0 0 1 1 , 8 7 0 6 , 7 1 5 5 , ) 3 1 9 1 ( , 7 4 7 0 0 1 1 , 1 5 4 5 , 6 8 6 5 , ) 5 1 9 1 ( , 6 4 3 0 0 4 1 , 7 1 5 5 , $ 3 7 ) 7 3 ( $ 3 4 4 1 3 9 $ 0 5 1 ) 4 1 1 ( $ 0 7 ) 3 3 ( 3 7 $ 7 4 1 ) 4 3 1 ( $ 0 5 1 1 4 6 9 1 5 7 7 2 3 5 , 1 7 9 0 0 4 , 1 6 4 6 , 0 1 5 4 9 3 , $ $ $ $ $ - 3 9 2 8 5 3 , - 2 8 5 3 , $ 1 8 5 ) 4 1 4 ( $ 4 2 1 3 9 4 4 8 7 $ 9 4 4 ) 2 8 2 ( $ 3 7 1 4 3 1 8 5 $ 9 8 2 ) 4 3 1 ( $ $ $ $ $ $ 5 5 9 3 2 9 4 4 - 4 8 7 5 6 3 8 4 , 6 6 9 9 2 8 4 , $ $ ) 8 9 ( 1 9 6 6 ) 1 7 ( 8 2 5 $ 3 1 6 ) 5 0 2 ( $ $ $ $ $ $ $ $ 5 8 7 2 1 9 6 1 ) 2 9 ( 6 3 7 ) 2 3 ( 3 1 6 1 3 7 9 4 7 2 3 8 3 , 1 1 3 6 1 0 8 3 , $ 7 2 2 , 1 $ 1 0 7 , 1 $ - ) 5 5 ( ) 8 9 2 ( 4 7 8 $ 5 2 5 , 2 $ 1 4 3 $ 4 9 2 - - 4 2 8 $ 9 7 3 ) 2 3 1 ( 8 6 8 $ 5 2 2 ) 3 ( 6 6 6 $ $ 4 7 5 ) 8 8 ( 7 6 1 ) 4 1 ( 9 3 6 $ 4 4 9 $ 4 7 7 , 1 $ 8 3 6 $ 4 6 1 $ 5 8 7 ) 6 0 1 ( 1 9 4 ) 2 0 1 ( ) 8 8 8 ( 6 9 0 8 $ 7 2 2 , 1 $ 1 0 7 , 1 $ 3 1 ) 7 2 1 ( ) 5 4 1 ( 9 7 3 - - $ 1 6 5 2 2 $ 0 5 9 ) 5 3 7 ( $ $ $ $ $ $ - 9 2 7 4 4 9 9 6 2 5 0 6 8 8 1 , 6 1 9 2 0 , 1 9 5 1 , 5 1 $ 6 5 6 , 1 $ 4 9 8 $ 9 5 1 ) 2 6 1 ( 5 1 5 6 2 $ 4 7 7 , 1 $ ) 7 5 2 ( 4 9 ) 3 9 ( 8 3 6 - - 5 $ 4 6 1 8 3 - F $ $ $ $ $ 1 7 3 4 5 1 , 2 5 9 0 , 2 9 1 9 2 1 , 3 6 6 9 , 8 8 1 $ $ $ $ $ 4 5 7 8 2 4 7 4 , 5 2 3 9 5 , 1 1 8 8 , 3 2 $ $ $ $ $ - 4 9 2 6 5 8 , 9 3 0 6 2 6 9 5 , 9 3 $ 4 7 5 9 8 ) 1 9 1 ( ) 9 0 1 ( $ 5 5 8 ) 1 0 4 ( $ $ $ $ $ $ 0 4 1 1 9 1 5 8 7 6 2 3 1 6 4 8 0 , 7 3 3 7 1 1 0 , 7 3 $ $ $ $ $ $ $ $ $ $ $ s e s s o L n a o L r o f e c n a w o l l A l e c n a a b g n n n g e B i i s f f o - e g r a h C s e i r e v o c e R i i n o s v o r P l e c n a a b g n d n E i : 4 1 / 1 3 / 2 1 d e d n e r a e Y : 3 1 / 1 3 / 2 1 d e d n e r a e Y l e c n a a b g n d n E i s f f o - e g r a h C s e i r e v o c e R i i n o s v o r P l e c n a a b g n n n g e B i i s e s s o L n a o L r o f e c n a w o l l A l e c n a a b g n n n g e B i i s f f o - e g r a h C s e i r e v o c e R i i n o s v o r P l e c n a a b g n d n E i : 5 1 0 2 , 1 3 r e b m e c e D y l l i a u d v d n i i : e c n a a b l i g n d n E s e s s o L n a o L r o f e c n a w o l l A s e s s o L n a o L r o f e c n a w o l l A t n e m r i a p m i r o f t d e a u a v e l l y e v i t c e l l o c : e c n a a b l i g n d n E t n e m r i a p m i r o f t d e a u a v e l s n a o L l e c n a a b g n d n E i y l l i a u d v d n i i : e c n a a b l i g n d n E t n e m r i a p m i r o f t d e a u a v e l l y e v i t c e l l o c : e c n a a b l i g n d n E t n e m r i a p m i r o f t d e a u a v e l l t a o T r e h O t o t u A C O L y t i u q E - e t a t s E l a e R n o i t c u r t s n o C - e t a t s E l a e R l i a c r e m m o C - e t a t s E l a e R l a i t n e d s e R i l a r u t l u c i r g A l i a c r e m m o C : 4 1 0 2 , 1 3 r e b m e c e D I I Y R A D S B U S D N A P R O C N A B S A M U L P I I S T N E M E T A T S L A C N A N F D E T A D L O S N O C O T S E T O N I : s d n a s u o h t n i , d e t a c d n i i e t a d e h t t a s e s s o l n a o l r o f e c n a w o l l a e h t f o n o i t a c o l l a e h t s w o h s l e b a t i g n w o l l o f e h T ) d e u n i t n o C ( ) d e u n i t n o C ( S E S S O L N A O L R O F E C N A W O L L A E H T D N A S N A O L . 5 y l l i a u d v d n i i : e c n a a b l i g n d n E s e s s o L n a o L r o f e c n a w o l l A 4 6 5 7 8 8 4 , 2 8 5 8 , 0 9 3 0 7 3 , 8 0 8 1 6 3 , $ $ $ $ $ - 3 7 1 8 1 8 2 , 7 1 8 2 , $ $ $ $ $ - 1 8 5 3 9 8 1 6 4 4 , 5 2 5 4 4 , $ $ $ $ $ 4 7 1 7 1 5 5 1 4 2 7 9 8 3 , 7 5 5 8 3 , $ $ $ $ $ 4 7 2 3 5 9 2 7 5 , 4 2 2 5 2 , 1 0 2 3 , 3 2 $ $ $ $ $ 5 6 6 3 6 , 1 3 4 6 , 3 6 0 3 , 3 6 1 3 6 6 , 9 5 1 $ $ $ $ $ 1 5 8 2 3 4 8 2 , 9 2 8 1 5 , 2 6 6 7 , 6 2 $ $ $ $ $ - 5 2 2 5 0 6 5 5 3 , 5 3 0 5 7 , 4 3 $ $ $ $ $ - 4 7 5 5 6 4 , 1 3 5 5 0 1 4 , 1 3 $ $ $ $ $ 9 3 - F t n e m r i a p m i r o f t d e a u a v e l l y e v i t c e l l o c : e c n a a b l i g n d n E t n e m r i a p m i r o f t d e a u a v e l s n a o L l e c n a a b g n d n E i y l l i a u d v d n i i : e c n a a b l i g n d n E t n e m r i a p m i r o f t d e a u a v e l l y e v i t c e l l o c : e c n a a b l i g n d n E t n e m r i a p m i r o f t d e a u a v e l PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) The following tables show an aging analysis of the loan portfolio by the time past due, in thousands: December 31, 2015 90 Days and 30-89 Days Past Due Still Accruing Total Past Due Nonaccrual and Nonaccrual Current Total $ Commercial Agricultural Real estate - residential Real estate - commercial Real estate – construction & land Equity Lines of Credit Auto Other Total $ 457 $ - 472 - 9 8 586 15 1,547 $ - $ - - - - - - - - $ 56 $ - 90 3,130 893 312 65 - 4,546 $ 513 $ - 562 3,130 902 320 651 15 6,093 $ 36,571 $ 39,856 24,912 188,965 15,286 38,007 47,714 3,567 394,878 $ 37,084 39,856 25,474 192,095 16,188 38,327 48,365 3,582 400,971 December 31, 2014 30-89 Days 90 Days and Past Due Still Accruing Total Past Due Nonaccrual and Nonaccrual Current Total $ Commercial Agricultural Real estate - residential Real estate - commercial Real estate – construction & land Equity Lines of Credit Auto Other Total $ 131 $ - 292 - 345 194 601 43 1,606 $ - $ - - - - - - - - $ 38 $ 339 985 3,643 1,111 415 93 1 6,625 $ 169 $ 339 1,277 3,643 1,456 609 694 44 8,231 $ 31,296 $ 35,016 28,007 159,663 23,116 38,363 43,924 2,774 362,159 $ 31,465 35,355 29,284 163,306 24,572 38,972 44,618 2,818 370,390 F - 40 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) The following tables show information related to impaired loans at the dates indicated, in thousands: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized $ 39 $ 1 As of December 31, 2015: With no related allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other With an allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total As of December 31, 2014: With no related allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other With an allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total 262 1,346 2,057 232 156 21 - 605 1,443 2,460 512 130 81 - - 1,112 589 778 299 - - 26 $ - 245 1,154 808 113 - - $ 26 $ 29 - 246 1,203 822 115 - - - 54 371 269 31 - - 73 $ 26 $ - 54 371 269 31 - - 751 $ 260 1,604 3,776 1,029 312 65 - 7,119 $ 68 $ 262 1,592 3,260 1,054 271 21 - 6,528 $ Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized $ 61 $ 1 $ 47 $ 260 1,347 1,976 221 199 65 - 26 $ - 245 1,154 808 113 - - 73 $ 260 1,592 3,130 1,029 312 65 - 6,461 $ $ $ $ $ 55 $ $ 605 1,422 3,389 495 121 93 1 - $ - 1,096 254 757 294 - - 47 260 1,359 2,622 221 199 65 - 55 605 1,433 4,036 495 121 93 1 1,102 254 757 294 - - - $ - $ - $ - - 51 65 274 174 - - $ 55 $ 605 2,518 3,643 1,252 415 93 1 55 $ - $ - 51 65 274 174 - - 605 2,535 4,290 1,252 415 93 1 61 $ 605 2,555 3,049 1,290 429 81 - $ 8,582 $ 9,246 $ 564 $ 8,070 $ F - 41 20 79 - - - - - - - 11 - 8 - - - 1 20 90 - 8 - - - 119 51 80 - 9 - - - - - 11 - - - - - 1 51 91 - 9 - - - 152 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES (Continued) The following table shows information related to impaired loans at the date indicated, in thousands: As of December 31, 2013: With no related allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other With an allowance recorded: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total: Commercial Agricultural Real estate – residential Real estate – commercial Real estate – construction & land Equity Lines of Credit Auto Other Total $ $ $ $ Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized 1,224 $ 267 2,024 2,237 1,325 339 77 - 100 $ - 451 837 412 522 - - 1,324 $ 267 2,475 3,074 1,737 861 77 - 9,815 $ 1,493 267 2,035 2,675 1,325 339 77 - $ 1,239 $ 267 2,057 2,489 1,384 294 20 - - 100 $ 79 $ 58 $ - 200 232 13 105 - - - 452 994 417 511 - - 451 837 412 522 - - 1,593 $ 79 $ 267 2,486 3,512 1,737 861 77 - - 200 232 13 105 - - 629 $ 10,533 $ 1,297 $ 267 2,509 3,483 1,801 805 20 - 10,182 $ 3 20 89 53 79 9 3 - - - 10 - 25 7 - - 3 20 99 53 104 16 3 - 298 F - 42 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. PREMISES AND EQUIPMENT Premises and equipment consisted of the following: Land Premises Furniture, equipment and leasehold improvements Less accumulated depreciation and amortization December 31, 2015 2014 $ 2,863,000 $ 15,833,000 7,491,000 26,187,000 2,628,000 15,768,000 6,599,000 24,995,000 (13,953,000) (13,353,000) $ 12,234,000 $ 11,642,000 Depreciation and amortization included in occupancy and equipment expense totaled $1,055,000, $1,147,000 and $1,166,000 for the years ended December 31, 2015, 2014 and 2013, respectively. 7. DEPOSITS Interest-bearing deposits consisted of the following: December 31, 2015 2014 Interest-bearing demand deposits Money market Savings Time, $250,000 or more Other time 48,848,000 $ 91,225,000 $ 82,144,000 42,499,000 125,896,000 106,257,000 3,291,000 53,051,000 $ 318,232,000 $ 287,242,000 3,079,000 49,184,000 At December 31, 2015, the scheduled maturities of time deposits were as follows: Year Ending December 31, 2016 2017 2018 2019 2020 thereafter $ 38,388,000 9,246,000 2,208,000 2,114,000 307,000 - $ 52,263,000 Deposit overdrafts reclassified as loan balances were $364,000 and $269,000 at December 31, 2015 and 2014, respectively. F - 43 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase totaling $7,671,000 and $9,626,000 at December 31, 2015, and 2014, respectively are secured by U.S. Government agency securities with a carrying amount of $13,171,000 and $14,879,000 at December 31, 2015 and 2014, respectively. Securities sold under agreements to repurchase are financing arrangements that mature within two years. At maturity, the securities underlying the agreements are returned to the Company. Information concerning securities sold under agreements to repurchase during 2015 and 2014 is summarized as follows: Average daily balance during the year Average interest rate during the year Maximum month-end balance during the year Weighted average interest rate at year-end 0.08% 0.11% $7,519,000 0.09% $11,466,000 2015 2014 $6,529,000 0.08% $8,708,000 9. BORROWING ARRANGEMENTS The Company is a member of the FHLB and can borrow up to $154,000,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $231,000,000. The Company is required to hold FHLB stock as a condition of membership. At December 31, 2015 and 2014, the Company held $2,380,000 of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings at December 31, 2015, the Company can borrow up to $88,159,000. To borrow the $154,000,000 in available credit the Company would need to purchase $1,787,000 in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings to the FHLB or the correspondent banks under these agreements at December 31, 2015 and 2014. On October 24, 2013 the Company issued a $3.0 million promissory note (the “Note”) payable to an unrelated commercial bank. As originally issued, the Note provided for an interest rate of U.S. “Prime Rate” plus three-quarters percent per annum, 4.00% at December 31, 2014 and 2013, had a term of 18 months and subjected the Bank to several negative and affirmative covenants including, but not limited to providing timely financial information, maintaining specified levels of capital, restrictions on additional borrowings, and meeting or exceeding certain capital and asset quality ratios. The Note is secured by 100 shares of the Bank’s stock representing the 100% of the Company's ownership interest in the Bank. On July 28, 2014, the Company and the borrower modified the Note to (1) extend the maturity date to October 24, 2015, (2) increase the maximum principal amount to $7.5 million and (3) permit the Company to borrow, repay and reborrow up to the maximum principal amount of the Note, among other things. F - 44 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. BORROWING ARRANGEMENTS (Continued) On October 1, 2015, the Company and the borrower further modified the Note to (1) extend the maturity date to October 1, 2016, (2) reduce the maximum principal amount to $2.5 million and (3) change the interest rate to U.S. "Prime Rate" plus one-half percent per annum. Concurrently, with entering into the second modification of the note on October 1, 2015, the Company entered into a $5.0 million term loan (the “Term Loan”), which matures on October 1, 2018. The Term Loan requires quarterly principal payments of $125,000 plus accrued interest. Both the Term Loan and the Note bear interest at a rate of the U.S. "Prime Rate" plus one-half percent per annum and are secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Term Loan and the Note, the Bank is subject to several negative and affirmative covenants similar to the covenants under the original Note but in several cases less restrictive. The Bank was in compliance with all such covenants related to the Note and the Term Loan at December 31, 2015 and December 31, 2014. Interest expense related to the Note and the Term Loan for the years ended December 31, 2015, December 31, 2014 and 2013 totaled $155,000, $111,000 and $23,000, respectively. The ending balance of the Note at December 31, 2014 was $1,000,000. There was no balance outstanding on the Note at December 31, 2015. The balance of the Term Loan was $4,875,000 at December 31, 2015. On April 15, 2013 the Company issued a $7.5 million subordinated debenture (“subordinated debt”). The subordinated debt was issued to an unrelated third-party (“Lender”) pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Bancorp paid off the subordinated debt. Interest expense related to the subordinated debt for the years ended December 31, 2015, 2014 and 2013 totaled $219,000, $756,000 and $541,000, respectively. The subordinated debt had an interest rate of 7.5% per annum and a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant (the “Warrant”) to purchase up to 300,000 shares of the Company’s common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $5.25 per share. Under capital guidelines in effect through December 31, 2014 the subordinated debt qualified as Tier 2 capital. However, under the provisions of Basel III, which became effective for the Company on January 1, 2015, the subordinated debt no longer qualified as capital. The Company allocated the proceeds received on April 15, 2013 between the subordinated debt and the Warrant based on the estimated relative fair value of each. The fair value of the Warrant was estimated based on a Black-Scholes-Merton model and totaled $318,000. The discount recorded on the subordinated noted was amortized by the level-yield method over 2 years. F - 45 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. BORROWING ARRANGEMENTS (Continued) Proceeds from the Note and the subordinated debt were used to partially fund the repurchase of preferred stock. (see Note 12 - Shareholders’ Equity for additional information related to the repurchase, during 2013, of the Bancorp’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”). 10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES Plumas Statutory Trust I and II are business trusts formed by the Company with capital of $311,000 and $163,000, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. During 2002, Plumas Statutory Trust I issued 6,000 Floating Rate Capital Trust Pass- Through Securities ("Trust Preferred Securities"), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. During 2005, Plumas Statutory Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II. Trust I’s Subordinated Debentures mature on September 26, 2032, bear a current interest rate of 4.00% (based on 3-month LIBOR plus 3.40%), with repricing and payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear a current interest rate of 1.99% (based on 3-month LIBOR plus 1.48%), with repricing and payments due quarterly. The Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Board of Governors, on any quarterly anniversary date on or after the 5-year anniversary date of the issuance. The redemption price is par plus accrued and unpaid interest, except in the case of redemption under a special event which is defined in the debenture. The Trust Preferred Securities are subject to mandatory redemption to the extent of any early redemption of the Subordinated Debentures and upon maturity of the Subordinated Debentures on September 26, 2032 for Trust I and September 28, 2035 for Trust II. Holders of the Trust Preferred Securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures. The Trust Preferred Securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Trust Preferred Securities. F - 46 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES (Continued) Interest expense recognized by the Company for the years ended December 31, 2015, 2014 and 2013 related to the subordinated debentures was $306,000, $303,000 and $313,000, respectively. 11. COMMITMENTS AND CONTINGENCIES Leases The Company has commitments for leasing premises under the terms of noncancelable operating leases expiring from 2016 to 2020. Future minimum lease payments are as follows: Year Ending December 31, 2016 2017 2018 2019 2020 $ $ 242,000 151,000 108,000 99,000 74,000 674,000 Rental expense included in occupancy and equipment expense totaled $233,000, $192,000 and $154,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Financial Instruments With Off-Balance-Sheet Risk The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for loans included on the consolidated balance sheet. The following financial instruments represent off-balance-sheet credit risk: Commitments to extend credit Letters of credit December 31, 2015 2014 $ 82,995,000 $ 89,735,000 $ - $ 265,000 F - 47 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. COMMITMENTS AND CONTINGENCIES (Continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, crops, inventory, equipment, income-producing commercial properties, farm land and residential properties. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The fair value of the liability related to these letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2015 and 2014. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used. At December 31, 2015, consumer loan commitments represent approximately 12% of total commitments and are generally unsecured. loan commitments represent approximately 41% of total commitments and are generally secured by various assets of the borrower. Real estate loan commitments, including consumer home equity lines of credit, represent the remaining 47% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. In addition, the majority of the Company’s commitments have variable interest rates. Commercial and agricultural Concentrations of Credit Risk The Company grants real estate mortgage, real estate construction, commercial, agricultural and consumer loans to customers throughout Plumas, Nevada, Placer, Lassen, Sierra, Shasta and Modoc counties in California and Washoe county in Northern Nevada. Although the Company has a diversified loan portfolio, a substantial portion of its portfolio is secured by commercial and residential real estate. A continued substantial decline in the economy in general, or a continued decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectability of these loans. However, personal and business income represents the primary source of repayment for a majority of these loans. Contingencies The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the financial position or results of operations of the Company. F - 48 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY Dividend Restrictions The Company's ability to pay cash dividends is dependent on dividends paid to it by the Bank and limited by California corporation law. Under California law, the holders of common stock of the Company are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available, subject to certain restrictions. The California general corporation law permits a California corporation such as the Company to make a distribution to its shareholders if its retained earnings equal at least the amount of the proposed distribution or if after giving effect to the distribution, the value of the corporation’s assets exceed the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met. Dividends from the Bank to the Company are restricted under California law to the lesser of the Bank's retained earnings or the Bank's net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the DBO, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year. As of December 31, 2015, the maximum amount available for dividend distribution under this restriction was approximately $5,100,000. In addition the Company’s ability to pay dividends is subject to certain covenants contained in the indentures relating to the Trust Preferred Securities issued by the business trusts (see Note 10 for additional information related to the Trust Preferred Securities). Preferred Stock On January 30, 2009 the Company entered into a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Bancorp issued and sold (i) 11,949 shares 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 seven 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 Company sought and obtained regulatory permission to participate in the auction. The Company 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 were purchased at auction by third party private investors. F - 49 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY (Continued) Preferred Stock (continued) On June 27, 2013 the Bancorp repurchased 1,566 shares of the Series A Preferred Stock at $1,000 per share from certain of those third party private investors and on September 16, 2013 the Bancorp repurchased 250 shares at $985 per share from another one of the third party investors leaving 3,133 shares outstanding as of September 30, 2013. On October 25, 2013, Plumas Bancorp repurchased the remaining 3,133 shares of the Series A Preferred Stock from a third party private investor. The Company paid $3,101,670 plus accrued dividends of $30,453. This represents a discount of 1% from the liquidation value of the Preferred Stock. On May 22, 2013 the Bancorp repurchased the Warrant from the Treasury at a cost of $234,500. 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. (In thousands, except per share data) For the Year Ended December 31, 2014 2015 2013 Net Income: Net income Discount on redemption of preferred shares Dividends and accretion on preferred shares Net income available to common shareholders $ Earnings Per Share: $ 5,818 $ - - 5,818 $ 4,738 $ 3,431 565 (347) 3,649 - - 4,738 $ Basic earnings per share Diluted earnings per share Weighted Average Number of Shares Outstanding: Basic shares Diluted shares $ $ 1.21 $ 1.15 $ 0.99 $ 0.95 $ 0.76 0.75 4,817 5,058 4,793 4,977 4,780 4,883 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 53,000, 238,000 and 172,000 for the years ended December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, 2014 and 2013 one stock warrant was outstanding to purchase up to 300,000 shares of the Bancorp’s common stock at an exercise price, subject to anti-dilution adjustments, of $5.25 per share. F - 50 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY (Continued) Stock Options In 2001, the Company established a Stock Option Plan for which 192,893 shares of common stock remain reserved for issuance to employees and directors and no shares are available for future grants as of December 31, 2015. As of December 31, 2015, all remaining shares in this plan have vested and no compensation cost remains unrecognized. The total fair value of options vested was $49,000 for the years ended December 31, 2015 and 2014. The total intrinsic value of options at time of exercise was $240,000 and $51,000 for the years ended December 31, 2015 and 2014, respectively. Weighted Average Exercise Price Weighted Average Remaining Contractual Term Shares Intrinsic Value Options outstanding at January 1, 2013 Options forfeited Options exercised Options outstanding at December 31, 2013 Options forfeited Options exercised Options outstanding at December 31, 2014 Options forfeited Options exercised Options outstanding at December 31, 2015 Options exercisable at December 31, 2015 Expected to vest after December 31, 2015 419,806 (43,347) (11,400) 365,059 (47,266) (11,400) 306,393 (74,600) (38,900) 192,893 192,893 - $ 8.67 11.34 2.95 8.53 13.64 2.95 7.95 16.26 2.95 $ 5.75 $ 5.75 2.4 $ 2.4 $ 802,000 802,000 In May 2013, the Company established the 2013 Stock Option Plan for which 500,000 shares of common stock are reserved and 396,800 shares are available for future grants as of December 31, 2015. The 2013 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, with Company common stock previously acquired by the optionee and held by the optionee for a period of at least six months, in options of the Optionee that are fully vested and exercisable or in any combination of the foregoing. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. No options were granted during the years ended December 31, 2015 and 2013. During the year ended December 31, 2014,110,400 options were granted. As of December 31, 2015, there was $124,000 of total unrecognized compensation cost related to non-vested, share-based compensation arrangements granted under the 2013 Plan. That cost is expected to be recognized over a weighted average period of 2.3 years. F - 51 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY (Continued) Stock Options (continued) A summary of the activity within the 2013 Plan follows: Weighted Average Exercise Price $ - 6.32 6.32 6.32 6.32 $ 6.32 $ 6.32 $ 6.32 Shares - 110,400 110,400 (7,200) (800) 102,400 26,800 65,507 Weighted Average Remaining Contractual Term in Years Intrinsic Value 6.3 $ 6.3 $ 6.3 $ 242,000 63,000 155,000 Options outstanding at January 1, 2014 Options granted Options outstanding at December 31, 2014 Options cancelled Options exercised Options outstanding at December 31, 2015 Options exercisable at December 31, 2015 Expected to vest after December 31, 2015 Compensation cost related to stock options recognized in operating results under the two stock option plans was $70,000 and $81,000 for the years ended December 31, 2015 and 2014, respectively. The associated future income tax benefit recognized was $7,000 for the year ended December 31, 2015 and $6,000 for the year ended December 31, 2014. Cash received from option exercises for the years ended December 31, 2015 and 2014 was $88,000 and $34,000, respectively. The tax benefit realized for the tax deductions from option exercise totaled $13,000 for each of the years ended December 31, 2015 and 2014. Regulatory Capital The Bank is subject to certain regulatory capital requirements administered by the FDIC. Failure to meet these minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involved quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. These quantitative measures are established by regulation and require that minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets be maintained. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Bank is also subject to additional capital guidelines under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table on the following page and cannot be subject to a written agreement, order or capital directive issued by the FDIC. F - 52 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. SHAREHOLDERS' EQUITY (Continued) Regulatory Capital (continued) In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. The phase-in period for the final rules began on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk- weighted assets ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. The Board of Governors of the Federal Reserve System has adopted final amendments to the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) ( the “Policy Statement”) that, among other things, raised from $500 million to $1 billion the asset threshold to qualify for the Policy Statement. Plumas Bancorp qualifies for treatment under the Policy Statement and is no longer subject to consolidated capital rules at the bank holding company level. The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands): Amount of Capital Required To be Well-Capitalized For Capital Under Prompt Actual Adequacy Purposes Corrective Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2015 Common Equity Tier 1 Ratio $56,300 12.7% $19,908 Tier 1 Leverage Ratio 56,300 Tier 1 Risk-Based Capital Ratio 56,300 Total Risk-Based Capital Ratio 61,839 9.4% 12.7% 14.0% 23,999 26,544 35,392 December 31, 2014 Common Equity Tier 1 Ratio N/A N/A N/A Tier 1 Leverage Ratio $53,925 9.8% $22,144 Tier 1 Risk-Based Capital Ratio 53,925 Total Risk-Based Capital Ratio 59,039 13.2% 14.4% 16,344 32,689 4.5% 4.0% 6.0% 8.0% N/A 4.0% 4.0% 8.0% $28,756 29,999 35,392 44,240 N/A $27,643 24,517 40,860 6.5% 5.0% 8.0% 10.0% N/A 5.0% 6.0% 10.0% 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 ratios at all times. Management believes that the Bank currently meets all its capital adequacy requirements. F - 53 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. OTHER EXPENSES Other expenses consisted of the following: Year Ended December 31, 2014 2013 2015 2,003,000 $ $ Outside service fees 707,000 Professional fees Telephone and data communications 376,000 Deposit insurance 362,000 332,000 Business development 305,000 Advertising and promotion 300,000 Director compensation and retirement 234,000 Armored car and courier 200,000 Loan collection expenses 182,000 OREO expenses Stationery and supplies 105,000 Provision from change in OREO valuation Postage Gain on sale of other real estate Other operating expenses 79,000 41,000 (198,000) 404,000 5,432,000 $ 14. INCOME TAXES $ 2,042,000 $ 583,000 351,000 1,855,000 831,000 287,000 387,000 435,000 291,000 281,000 232,000 228,000 212,000 310,000 113,000 279,000 282,000 298,000 224,000 182,000 362,000 122,000 240,000 45,000 (101,000) 173,000 5,469,000 $ 486,000 51,000 (171,000) 526,000 5,967,000 The provision for income taxes for the years ended December 31, 2015, 2014 and 2013 consisted of the following: 2015 Current Deferred Provision for income taxes 2014 Current Deferred Provision for income taxes $ $ $ $ Federal State Total 3,625,000 $ (848,000) 2,777,000 $ 631,000 $ 309,000 940,000 $ 4,256,000 (539,000) 3,717,000 Federal State Total 1,863,000 $ 401,000 2,264,000 $ 58,000 $ 764,000 822,000 $ 1,921,000 1,165,000 3,086,000 2013 Current Deferred Provision for income taxes State Total 22,000 $ 507,000 529,000 $ 82,000 2,085,000 2,167,000 Federal $ 60,000 $ 1,578,000 1,638,000 $ $ F - 54 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. INCOME TAXES (Continued) Deferred tax assets (liabilities) consisted of the following: Deferred tax assets: Allowance for loan losses Deferred compensation OREO valuation allowance Premises and equipment Net operating loss carryovers Unrealized loss on available-for-sale investment securities Other Total deferred tax assets Deferred tax liabilities: Deferred loan costs Other Total deferred tax liabilities Net deferred tax assets December 31, 2015 2014 $ 903,000 $ 1,774,000 556,000 619,000 4,000 181,000 1,773,000 944,000 475,000 236,000 30,000 717,000 4,603,000 42,000 372,000 4,023,000 (1,436,000) (244,000) (1,680,000) 2,923,000 $ (1,397,000) (229,000) (1,626,000) 2,397,000 $ 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 December 31, 2015 total deferred tax assets were approximately $4,603,000 and total deferred tax liabilities were approximately $1,680,000 for a net deferred tax asset of $2,923,000. The Company’s deferred tax assets primarily relate timing differences in the tax deductibility of impairment charges on other real estate owned, deprecation on premises and equipment, the provision for loan losses 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 December 31, 2015 and 2014 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. F - 55 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. INCOME TAXES (Continued) The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate to operating income before income taxes. The significant items comprising these differences consisted of the following: Federal income tax, at statutory rate State franchise tax, net of Federal tax effect Interest on obligations of states and political subdivisions Net increase in cash surrender value of bank owned life insurance Other Effective tax rate 2015 2014 2013 34.0 % 6.9 % 34.0 % 6.9 % 34.0 % 6.0 % (1.3)% (0.7)% (0.1)% (1.2)% 0.6 % (1.5)% 0.7 % 39.0 % 39.4 % (2.1)% 0.9 % 38.7 % At year-end 2015, the Company had state operating loss carry-forwards of approximately $62,000 which expire at various dates from 2029 to 2031. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized. The Company and its subsidiary file income tax returns in the U.S. federal and California jurisdictions. The Company conducts all of its business activities in the states of California and Nevada. There are currently no pending U.S. federal, state, and local income tax or non-U.S. income tax examinations by tax authorities. With few exceptions, the Company is no longer subject to tax examinations by U.S. Federal taxing authorities for years ended before December 31, 2012, and by state and local taxing authorities for years ended before December 31, 2011. The unrecognized tax benefits and changes therein and the interest and penalties accrued by the Company as of or during the years ended December 31, 2015 and 2014 were not significant. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. 15. RELATED PARTY TRANSACTIONS During the normal course of business, the Company enters into transactions with related parties, including executive officers and directors. The following is a summary of the aggregate activity involving related party borrowers during 2015: Balance, January 1, 2015 Disbursements Amounts repaid Balance, December 31, 2015 Undisbursed commitments to related parties, December 31, 2015 $ $ $ 1,749,000 2,673,000 (1,173,000) 3,249,000 1,518,000 F - 56 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. EMPLOYEE BENEFIT PLANS Profit Sharing Plan The Plumas Bank Profit Sharing Plan commenced April 1, 1988 and is available to employees meeting certain service requirements. Under the Plan, employees are able to defer a selected percentage of their annual compensation. Included under the Plan's investment options is the option to invest in Company stock. During 2015, the Company’s contribution consisted of a matching amount of 25% of the employee’s contribution up to a total of 2% of the employee’s compensation totaling $111,000. No contribution was made for the years ended December 31, 2014 and 2013. Salary Continuation and Retirement Agreements Salary continuation and retirement agreements are in place for the Company’s president and seven members of the Board of Directors as well as five former executives and four former directors. Under these agreements, the directors and executives will receive monthly payments for twelve to fifteen years, respectively, after retirement. The estimated present value of these future benefits is accrued over the period from the effective dates of the agreements until the participants' expected retirement dates. The expense recognized under these plans for the years ended December 31, 2015, 2014 and 2013 totaled $258,000, $289,000 and $286,000, respectively. Accrued compensation payable under these plans totaled $3,973,000 and $4,007,000 at December 31, 2015 and 2014, respectively. In connection with these agreements, the Bank purchased single premium life insurance policies with cash surrender values totaling $12,187,000 and $11,845,000 at December 31, 2015 and 2014, respectively. Income earned on these policies, net of expenses, totaled $342,000, $341,000 and $344,000 for the years ended December 31, 2015, 2014 and 2013, respectively. F - 57 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS December 31, 2015 and 2014 ASSETS Cash and cash equivalents Investment in bank subsidiary Other assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities Note payable Subordinated debenture Junior subordinated deferrable interest debentures Total liabilities Shareholders' equity: Common stock Retained earnings Accumulated other comprehensive loss Total shareholders' equity 2015 2014 $ 849,000 $ 56,295,000 552,000 628,000 53,865,000 790,000 $ 57,696,000 $ 55,283,000 $ 15,000 $ 4,875,000 - 10,310,000 22,000 1,000,000 7,454,000 10,310,000 15,200,000 18,786,000 6,475,000 36,063,000 (42,000) 6,312,000 30,245,000 (60,000) 42,496,000 36,497,000 Total liabilities and shareholders' equity $ 57,696,000 $ 55,283,000 CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 2015, 2014 and 2013 Income: Dividends declared by bank subsidiary Earnings from investment in Plumas Statutory Trusts I and II Total income Expenses: Interest on note payable Interest on subordinated debenture Interest on junior subordinated deferrable interest debentures Other expenses Total expenses Income before equity in undistributed income of subsidiary Equity in undistributed income (loss) of subsidiary Income before income taxes Income tax benefit Net income Total comprehensive income 2015 2014 2013 $ 4,000,000 $ 2,500,000 $ 4,500,000 9,000 9,000 9,000 4,009,000 2,509,000 4,509,000 155,000 219,000 306,000 206,000 111,000 756,000 303,000 211,000 23,000 541,000 313,000 309,000 886,000 1,381,000 1,186,000 3,123,000 1,128,000 3,323,000 2,353,000 3,111,000 (330,000) 5,476,000 342,000 4,239,000 499,000 5,818,000 $ 4,738,000 $ 2,993,000 438,000 3,431,000 5,836,000 $ 5,841,000 $ 1,939,000 $ $ F - 58 PLUMAS BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2015, 2014 and 2013 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Undistributed (income) loss of subsidiary Amortization of discount on debentures Stock-based compensation expense Decrease in other assets Decrease in other liabilities Net cash provided by operating activities Cash flows from financing activities: 2015 2014 2013 $ 5,818,000 $ 4,738,000 $ 3,431,000 (2,353,000) 45,000 17,000 238,000 (7,000) (3,111,000) 159,000 330,000 113,000 14,000 4,000 207,000 (11,000) 285,000 (990,000) 3,758,000 1,996,000 3,173,000 Issuance of subordinated debt, net of discount Redemption of subordinated debt Issuance of common stock warrant Issuance of note payable Increase in note payable Payment on note payable Repurchase of common stock warrant Redemption of preferred stock Proceeds from exercise of stock options Payment of cash dividends on preferred stock Net cash used in financing activities - - - 4,000,000 7,182,000 - (7,500,000) - - 318,000 - 3,000,000 - - - - (2,000,000) (234,000) - - (11,384,000) - - 34,000 34,000 - - (1,968,000) (3,537,000) (1,966,000) (3,052,000) (125,000) 88,000 Increase in cash and cash equivalents 221,000 30,000 121,000 Cash and cash equivalents at beginning of year 628,000 598,000 477,000 Cash and cash equivalents at end of year $ 849,000 $ 628,000 $ 598,000 F - 59 [THIS PAGE INTENTIONALLY LEFT BLANK] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Plumas Bancorp and subsidiary (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Management, including the undersigned Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting presented in conformity with accounting principles generally accepted in the United States of America as of December 31, 2015. In conducting its assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control — Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2015, our internal control over financial reporting was effective based on those criteria. This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. /s/ Andrew J. Ryback Andrew J. Ryback President and Chief Executive Officer /s/ Richard L. Belstock Richard L. Belstock Executive Vice President and Chief Financial Officer Dated: March 17, 2016 45 ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Item 10 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by Item 14 can be found in Plumas Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein. 46 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits PART IV The following documents are included or incorporated by reference in this Annual Report on Form 10K. 3.1 3.2 3.3 3.4 4 10.1 10.2 10.3 10.4 10.5 10.6 10.8 10.18 10.19 10.21 10.22 10.24 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. 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. 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. 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. 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. 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. 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. Subordinated Debenture dated April 15, 2013, is included as Exhibit 10.3 to the Registrant’s 10-Q filed on May 10, 2013, which is incorporated by this reference herein. Stock Purchase Warrant dated April 15, 2013, is included as Exhibit 10.4 to the Registrant’s 10-Q filed on May 10, 2013, which is incorporated by this reference herein. Subordinated Debenture Purchase Agreement dated April 15, 2013, is included as Exhibit 10.5 to the Registrant’s 10-Q filed on November 7, 2013, which is incorporated by this reference herein. Promissory Note Dated October 24, 2013, is included as Exhibit 10.6 to the Registrant’s 10-Q filed on May 10, 2013, which is incorporated by this reference herein. 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. 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. 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. 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. 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. 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. 47 10.25 10.27 10.28 10.33 10.34 10.37 10.41 10.42 10.43 10.47 10.48 10.49 10.50 10.51 10.64 10.65 10.66 10.67 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. 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. 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. 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. 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. 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. 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. 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. 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. 2013 Stock Option Plan is included as exhibit 99.1 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein. Specimen Form of Incentive Stock Option Agreement under the 2013 Stock Option Plan is included as exhibit 99.2 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein. Specimen Form of Nonqualified Stock Option Agreement under the 2013 Stock Option Plan is included as exhibit 99.3 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein. 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. 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. 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. 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. 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. 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. 48 10.69 10.70 11 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. 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. Computation of per share earnings appears in the attached 10-K under Item 8 Financial Statements Plumas Bancorp and Subsidiary Notes to Consolidated Financial Statements as Footnote 12 – Shareholders’ Equity. 21.01 Plumas Bank – California. 21.02 Plumas Statutory Trust I – Connecticut. 21.03 Plumas Statutory Trust II – Delaware. 23.01* 23.02* Independent Registered Public Accountant’s Consent for audit of year ended December 31, 2013 dated March 17, 2016. Independent Registered Public Accountant’s Consent for audit of years ended December 31, 2015 and December 31, 2014 dated March 17, 2016. 31.1* Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated March 17, 2016. 31.2* Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated March 17, 2016. 32.1* 32.2* Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 17, 2016. Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 17, 2016. 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 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PLUMAS BANCORP (Registrant) Date: March 17, 2016 /s/ ANDREW J. RYBACK Andrew J. Ryback, President, Chief Executive Officer and Director 50 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ ANDREW J. RYBACK Dated: March 17, 2016 Andrew J. Ryback, President, Chief Executive Officer and Director /s/ RICHARD L. BELSTOCK Dated: March 17, 2016 Richard L. Belstock, Executive Vice President and Chief Financial Officer /s/ DANIEL E. WEST Dated: March 17, 2016 Daniel E. West, Director and Chairman of the Board /s/ TERRANCE J. REESON Dated: March 17, 2016 Terrance J. Reeson, Director and Vice Chairman of the Board /s/ ALVIN G. BLICKENSTAFF Dated: March 17, 2016 Alvin G. Blickenstaff, Director /s/ W. E. ELLIOTT Dated: March 17, 2016 William E. Elliott, Director /s/ Steven M. Coldani Dated: March 17, 2016 Steven M. Coldani, Director /s/ GERALD W. FLETCHER Dated: March 17, 2016 Gerald W. Fletcher, Director /s/ JOHN FLOURNOY Dated: March 17, 2016 John Flournoy, Director /s/ ARTHUR C. GROHS Dated: March 17, 2016 Arthur C. Grohs, Director /s/ ROBERT J. MCCLINTOCK Dated: March 17, 2016 Robert J. McClintock, Director 51  [THIS PAGE INTENTIONALLY LEFT BLANK]   

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