Recently appointed President/CEO Gary D. Gall stated, “After assessing the effects of the stock market, real estate market and the overall economy that hit all of us last fall, especially during the September/October timeframe, it was necessary that we evaluate the underlying collateral value of our loans.” He added, “After a comprehensive review of the Bank’s loan portfolio that occurred during the first half of 2009, it was made clear that the new valuations of property in Nevada and Placer Counties serving as collateral for our loans were relevant to the 2008 period. Much of the restatement, therefore, acknowledges this devaluation in the 4th quarter of 2008, versus the first quarter of 2009. While we are disappointed to experience any loss, we must move forward from a baseline that acknowledges the reality of today’s economy.”

YEAR TO DATE AND SECOND QUARTER 2009 FINANCIAL RESULTS
Total assets for the Company as of June 30, 2009 were $381.2 million, an increase of $17.9 million, or 4.9%, from $363.3 million as of December 31, 2008, and an increase of $30.4 million, or 8.7%, from $350.7 million as of June 30, 2008. Total loans for the Company as of June 30, 2009 were $314.7 million, an increase of $2.3 million, or 0.7%, from $312.4 million as of December 31, 2008, and a decrease of $2.0 million, or 0.6%, from $316.7 million as of June 30, 2008. Over the same periods, deposits grew $9.0 million, or 3.0% to $308.7 million at June 30, 2009, compared to $299.8 million at December 31, 2008 and $18.7 million, or 6.4%, compared to $290.0 million at June 30, 2008.

The net loss for the quarter ended June 30, 2009 was $448 thousand, compared to net income of $319 thousand for the same period in 2008. Earnings (loss) per diluted share for the three months ended June 30, 2009 and 2008, were ($0.23) and $0.17, respectively. The net loss for the six month period ended June 30, 2009 was $2.1 million or ($1.08) per share, compared to net income of $712 thousand or $0.37 per share for the same period in 2008. The decrease in net income in 2009 compared to 2008 was attributed primarily to an increase in the provision for loan losses along with maintenance and valuation expenses related to REO. Gall said, “The Bank is having some success in selling its REO properties, which should have a positive effect on the level of future REO expenses.” At June 30, 2009, December 31, 2008, and June 30, 2008, the allowance for loan losses as a percent of non-accrual loans totaled 56.4%, 44.5%, and 153.6%, respectively.

Net interest income was $3.7 million for the three month period ended June 30, 2009, a decrease of $151 thousand, or 3.9%, as compared to $3.9 million for the same period in 2008. The Company’s net interest margin declined from 4.84% in the three month period ended June 30, 2008 to 4.58% in the three month period ended June 30, 2009. For the six month period ended June 30, 2009, net interest income was $7.3 million compared to $7.6 million in the same period in 2008. The Company’s net interest margin narrowed from 4.75% in the six month period ended June 30, 2008 to 4.40% in the six month period ended June 30, 2009. The compressed net interest margin was primarily due to lower interest rates and forgone interest on non-accrual and restructured loans, and was partially mitigated by growth in earning assets and improved cost of funds during the period. Forgone interest on non-accrual and restructured loans negatively affected the net interest margin by 0.80% and 0.63% for the three and six month periods ended June 30, 2009. Forgone interest on non-accrual loans negatively affected the net interest margin by 0.11% and 0.18% for the three and six month period ended June 30, 2008. The cost of funds decreased 0.80% from 2.09% for the three month period ended June 30, 2008 to 1.29% for the same period in 2009 and 0.86% from 2.28% for the six month period ended June 30, 2008 to 1.42% for the same period in 2009. Average earning assets for the three months ended June 30, 2009 grew by $4.3 million to $327.8 million compared to $323.5 million for the same period in 2008. For the six month period, average earning assets grew by $9.9 million from $320.0 million in 2008 to $330.0 million in 2009.

During the six month period ended June 30, 2009, the increase in non-interest expense of $2.0 million over the same period in 2008, was primarily the result of a $1.9 million write-down in the carrying value of REO, $75.0 thousand in other costs associated with the holding and disposition of REO, an increase in FDIC insurance premiums of $335.0 thousand, offset by a net decrease in other expenses of $284.0 thousand. The growth of those non-interest expense items was partially offset by lower personnel and occupancy costs of $567.0 thousand and $42.0 thousand, respectively.

RESTATED FIRST QUARTER 2009 FINANCIAL RESULTS
Total assets for the Company as of March 31, 2009 were $370.4 million, an increase of $7.2 million, or 2.0%, from $363.3 million as of December 31, 2008 and $26.9 million from $343.6 million as of March 31, 2008. Total loans for the Company as of March 31, 2009 were $315.3 million, an increase of $2.9 million, or 0.9%, from $312.4 million as of December 31, 2008, a decrease of $4.2 million compared to $319.4 million at March 31, 2008. Over the same periods deposits grew $3.7 million, or 1.2%, to $303.5 million at March 31, 2009 compared to $299.8 million at December 31, 2008 and $38.7 million compared to $264.9 million as of March 31, 2008.

As a result of the adjustments to loan loss reserve associated with the restated 2008 financial statements, a lower provision for loan loss was required for the first quarter of 2009 thereby necessitating a restatement of the first quarter 2009 financial results. For the three month period ended March 31, 2009, the Company’s net loss was $1.6 million, or ($0.84) per diluted share compared to net income of $393 thousand, or $0.20 per diluted share for the same period in 2008. First quarter 2009 financial results were originally reported with a loss of $5.4 million, or ($2.81) per diluted share and improved as a result of updated appraisals obtained during the loan portfolio examination validating that deterioration in loan collateral values was attributable to 2008 rather than 2009. (Earnings per share for 2008 have been adjusted to reflect the 5% stock dividend in June 2008.)

The decrease in net income in the three month period ended March 31, 2009 compared to the same three month period in 2008 is primarily attributable to an increase in the provision for loan losses of $1.4 million, and maintenance and valuation expenses related to REO of $1.7 million. The percentage of loan loss reserve to total loans outstanding as of March 31, 2009 was 4.38%.

RESTATED 2008 FINANCIAL RESULTS
The Company’s 2008 restated results of operations show a loss of $10.7 million for the 12 months ended December 31, 2008, or ($5.56) per diluted share, compared to earnings of $2.6 million, or $1.32 per diluted share for the same period in 2007. (Earnings per share for 2007 have been adjusted to reflect the 5% stock dividend in June 2008.) Gall said, “Most of the change in the net loss for 2008, originally reported as $1.1 million, was the result of an additional $16.0 million that was added to the Company’s Loan Loss Reserve.” Gall continued, “The recently concluded audit of the loan portfolio confirmed that a significant portion of the deterioration of borrowers’ collateral values and financial condition as a result of economic pressures could be traced to events occurring in 2008. It was also confirmed that additional sums should be provided to augment the Loan Loss Reserve from potential losses that may arise from certain loans that have been identified to have been made that did not comply with Bank loan policies and procedures during 2008. As a result, the Company’s reported 2008 financial results needed to be adjusted to reflect an appropriate reserve for or write-down for the value or increased risk of some of our loans.”

Total assets for the Company as of December 31, 2008 were $363.3 million, an increase of $34.8 million, or 10.6%, from $328.4 million as of December 31, 2007. Total loans for the Company as of December 31, 2008 were $312.4 million, an increase of $7.2 million, or 2.4% from $305.1 million as of December 31, 2007. Over the same period, deposits grew $25.5 million, or 9%, to $299.8 million at December 31, 2008 compared to $274.3 million at December 31, 2007.

The net loss in 2008 compared to net income in 2007 is primarily attributable to an increase in the provision for loan losses. A total of $20.9 million has been added to augment the loan loss reserve in the quarter ended December 31, 2008, bringing the provision to the loan loss reserve for the 12 months ended December 31, 2008 to $23.9 million compared to $945 thousand for the comparable 2008 period. The percentage of loan loss reserve to total loans outstanding as of December 31, 2008 was 3.97%.

Gall stated, “The Company’s earnings from core operations, before the effect of real estate owned (REO) expenses and provision for loan losses, is improving. A review of the last two quarters shows that net interest income, non-interest income and non-interest expense are all heading in the right direction.”

HIGHLIGHTS