**UNITEDSTATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

**(Mark One)**

 

| **ý**                                                                                                                                                                                             | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                   |                                                                                               |
| **For the Quarterly Period Ended September 30, 2003**                                                                                                                                             |
|                                                                                                                                                                                                   |                                                                                               |
| **OR**                                                                                                                                                                                                 |
|                                                                                                                                                                                                   |                                                                                               |
| **o**                                                                                                                                                                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                   |                                                                                               |
| **For the transition period from                 to               ** |
|                                                                                                                                                                                                   |                                                                                               |
| **Commission file number 0-25979**                                                                                                                                                                     |
|                                                                                                                                                                                                   |                                                                                               |
| **WESTERN  SIERRA BANCORP**                                                                                                                                                                            |
| (Exact  name of Registrant as specified in its charter)                                                                                                                                                |
|                                                                                                                                                                                                   |
| **California**                                                                                                                                                                                         |                                                                                               | **68-0390121** |
| (State  or other jurisdiction of incorporation or organization)                                                                                                                                        |                                                                                               | (I.R.S.  Employer Identification No.) |
|                                                                                                                                                                                                   |                                                                                               |   |
| **4080 Plaza Goldorado Circle  Cameron Park, California**                                                                                                                                              |                                                                                               | **95682** |
| (Address  of principal executive offices)                                                                                                                                                              |                                                                                               | (Zip  code) |
|                                                                                                                                                                                                   |                                                                                               |   |
| Registrant’s  telephone number, including area code: **(530)  677-5600**                                                                                                                          |
|                                                                                                                                                                                                   |
| Securities  registered pursuant to Section 12(b) of the Act: **None**                                                                                                                             |
|                                                                                                                                                                                                   |
| Securities  registered pursuant to Section 12(g) of the Act:                                                                                                                                      |
| **Common Stock, no par value per share**                                                                                                                                                               |
|                                                                                                                                                                                                        |                                                                                                    |  |  |

 

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  ý  No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes  ý  No  o

 

As of November 7, 2003 there were approximately 4,607,273 sharesoutstanding of the Registrant’s common stock.

 

 

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**WESTERN SIERRA BANCORP & SUBSIDIARIES**

 

**Index to Form 10-Q**

 
| PART I. Financial  Information |
|--------------------------------|
|                           | Item 1. Consolidated Financial Statements (unaudited) |
|                           |   | Consolidated  Balance Sheet  September 30, 2003 and December 31, 2002 |
|                           |   | Consolidated  Statement of Income  Three and nine months ended September 30, 2003 and 2002 |
|                           |   | Consolidated  Statement of Cash Flows  Nine months ended September 30, 2003 and 2002 |
|                           |   | Notes  to Consolidated Financial Statements |
|                           | Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                           | Item 3. Quantitative and Qualitative Disclosure about Market Risk  Item 4. Controls and Procedures |
| PART II. Other Information     |
|                           | Item 1. Legal  proceedings |
|                           | Item  2. Changes in Securities and Use of Proceeds |
|                           | Item 3.  Defaults Upon Senior Securities |
|                           | Item  4. Submission of Matters to a Vote of Security Holders |
|                           | Item 5. Other Information |
|                           | Item  6. Exhibits and Report on Form 8-K |
| SIGNATURES                     |

 

2

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**PART I.FINANCIAL INFORMATION**

 

##### **Western Sierra Bancorp andSubsidiaries**

**UnauditedConsolidated Balance Sheet**

(dollars in thousands, except number ofshares)

 
|                                                                                                                    |   | **September 30,  2003** |       | **December 31,  2002** |       |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|------------|
| **ASSETS:**                                                                                                             |   |                         | ** ** |                        | ** ** |
| Cash and due from banks                                                                                                 |   | $                            | 39,285     |                        | $          | 29,064 |   |
| Federal funds sold                                                                                                      |   | 77,965                       |       | 7,900                       |       |
| Cash and cash equivalents                                                                                               |   | 117,250                      |       | 36,964                      |       |
|                                                                                                                    |   |                         |       |                        |       |
| Interest-bearing deposits                                                                                               |   | 793                          |       | 1,784                       |       |
| Loans held for sale                                                                                                     |   | 1,847                        |       | 4,926                       |       |
| Investment securities:                                                                                                  |   |                         |       |                        |       |
| Trading                                                                                                                 |   | 26                           |       | 18                          |       |
| Available for sale (amortized cost $88,822 in 2003  and $60,018 in 2002)                                                |   | 90,082                       |       | 61,038                      |       |
| Held to maturity (market value of $4,383 in 2003  and $8,203 in 2002)                                                   |   | 4,197                        |       | 8,001                       |       |
| Total investments                                                                                                       |   | 94,305                       |       | 69,057                      |       |
| Portfolio loans and leases:                                                                                             |   |                         |       |                        |       |
| Real estate mortgage                                                                                                    |   | 413,540                      |       | 311,030                     |       |
| Real estate construction                                                                                                |   | 170,094                      |       | 124,726                     |       |
| Commercial                                                                                                              |   | 94,662                       |       | 88,084                      |       |
| Agricultural                                                                                                            |   | 14,528                       |       | 8,540                       |       |
| Installment                                                                                                             |   | 4,728                        |       | 4,630                       |       |
| Lease financing                                                                                                         |   | 2,143                        |       | 3,325                       |       |
| Total gross loans and leases                                                                                            |   | 699,695                      |       | 540,335                     |       |
| Deferred loan and lease fees, net                                                                                       |   | (2,524                       | )          | (1,551                      | )          |
| Allowance for loan and lease losses                                                                                     |   | (10,032                      | )          | (7,113                      | )          |
| Net portfolio loans and leases                                                                                          |   | 687,138                      |       | 531,671                     |       |
|                                                                                                                    |   |                         |       |                        |       |
| Premises and equipment, net                                                                                             |   | 19,037                       |       | 16,034                      |       |
| Other real estate                                                                                                       |   | —                       |       | 489                         |       |
| Goodwill and other intangible assets                                                                                    |   | 18,304                       |       | 4,364                       |       |
| Other assets                                                                                                            |   | 24,474                       |       | 12,499                      |       |
| Total Assets                                                                                                            |   | $                            | 963,148    |                        | $          | 677,788 |   |
|                                                                                                                    |   |                         |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY:**                                                                         |   |                         |       |                        |       |
| Non-interest bearing deposits                                                                                           |   | $                            | 205,461    |                        | $          | 162,108 |   |
| Interest bearing deposits:                                                                                              |   |                         |       |                        |       |
| NOW, money market and savings                                                                                           |   | 289,226                      |       | 179,624                     |       |
| Time, over $100,000                                                                                                     |   | 151,349                      |       | 124,020                     |       |
| Other time                                                                                                              |   | 174,979                      |       | 123,620                     |       |
| Total deposits                                                                                                          |   | 821,015                      |       | 589,373                     |       |
|                                                                                                                    |   |                         |       |                        |       |
| Borrowed funds                                                                                                          |   | 21,650                       |       | 14,500                      |       |
| Mandatorily redeemable cumulative trust preferred  securities                                                           |   | 36,000                       |       | 16,000                      |       |
| Other liabilities                                                                                                       |   | 9,677                        |       | 3,576                       |       |
| Total liabilities                                                                                                       |   | 888,342                      |       | 623,449                     |       |
|                                                                                                                    |   |                         |       |                        |       |
| Shareholders’ equity:                                                                                              |   |                         |       |                        |       |
| Preferred stock- no par value; 10,000,000 shares  authorized; none issued                                               |   | —                       |       | —                      |       |
| Common stock- no par value; 10,000,000 shares  authorized; 4,607,576 shares issued in 2003 and 4,184,525 shares in 2002 |   | 50,451                       |       | 30,958                      |       |
| Retained earnings                                                                                                       |   | 23,855                       |       | 22,712                      |       |
| Unearned ESOP shares                                                                                                    |   | (325                         | )          | —                      |       |
| Accumulated other comprehensive income                                                                                  |   | 825                          |       | 669                         |       |
| Total shareholders’ equity                                                                                         |   | 74,806                       |       | 54,339                      |       |
| Total liabilities and shareholders’ equity                                                                         |   | $                            | 963,148    |                        | $          | 677,788 |   |

 

Seenotes to the unaudited consolidated financial statements.

 

3

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**WesternSierra Bancorp and Subsidiaries**

**Consolidated Statements of Income**

(dollars in thousands, except per share data)

 
|                                                                                               |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |       |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Unaudited)**                                                                                    |   | **2003**                                   | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Interest income:                                                                                   |   |                                       |       |                                      |       |   |   |   |   |
| Interest and fees on loans                                                                         |   | $                                          | 11,843     |                                      | $          | 9,244 |   | $ | 31,641 |   | $ | 25,367 |   |
| Interest on investment securities:                                                                 |   |                                       |       |                                      |       |   |   |   |   |
| Taxable                                                                                            |   | 276                                        |       | 581                                       |       | 1,055 |   | 1,733 |   |
| Exempt from federal taxes                                                                          |   | 361                                        |       | 367                                       |       | 1,089 |   | 1,092 |   |
| Interest on Fed funds sold                                                                         |   | 182                                        |       | 122                                       |       | 353 |   | 268 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Total interest income                                                                              |   | 12,662                                     |       | 10,313                                    |       | 34,138 |   | 28,460 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Interest expense:                                                                                  |   |                                       |       |                                      |       |   |   |   |   |
| Interest on deposits                                                                               |   | 2,178                                      |       | 2,256                                     |       | 6,224 |   | 6,442 |   |
| Interest on borrowed funds                                                                         |   | 348                                        |       | 320                                       |       | 901 |   | 912 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Total interest expense                                                                             |   | 2,525                                      |       | 2,576                                     |       | 7,125 |   | 7,354 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Net interest income                                                                                |   | 10,137                                     |       | 7,737                                     |       | 27,013 |   | 21,106 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Provision for loan and lease losses                                                                |   | 600                                        |       | 541                                       |       | 1,655 |   | 1,466 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Net interest income after provision for loan and  lease losses                                     |   | 9,537                                      |       | 7,196                                     |       | 25,358 |   | 19,640 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Non-interest income:                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Service charges and fees                                                                           |   | 1,202                                      |       | 740                                       |       | 2,915 |   | 2,066 |   |
| Net gain on sale and packaging of residential  mortgage and government-guaranteed commercial loans |   | 1,468                                      |       | 1,093                                     |       | 3,803 |   | 2,706 |   |
| Gain on sale of investment securities                                                              |   | 19                                         |       | 75                                        |       | 19 |   | 96 |   |
| Other income                                                                                       |   | 247                                        |       | 210                                       |       | 514 |   | 427 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Total non-interest income                                                                          |   | 2,936                                      |       | 2,118                                     |       | 7,251 |   | 5,294 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Other expenses:                                                                                    |   |                                       |       |                                      |       |   |   |   |   |
| Salaries and benefits                                                                              |   | 4,291                                      |       | 3,178                                     |       | 11,142 |   | 8,688 |   |
| Occupancy and equipment                                                                            |   | 1,259                                      |       | 1,121                                     |       | 3,464 |   | 2,672 |   |
| Other expenses                                                                                     |   | 2,018                                      |       | 1,995                                     |       | 5,453 |   | 5,206 |   |
| Merger expenses                                                                                    |   | 86                                         |       | —                                    |       | 86 |   | — |   |
| Amortization of core deposits and other intangibles                                                |   | 134                                        |       | 62                                        |       | 257 |   | 138 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Total other expenses                                                                               |   | 7,789                                      |       | 6,356                                     |       | 20,402 |   | 16,703 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Income before income tax provision                                                                 |   | 4,685                                      |       | 2,959                                     |       | 12,207 |   | 8,231 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Income tax provision                                                                               |   | 1,729                                      |       | 893                                       |       | 4,501 |   | 2,390 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Net income                                                                                         |   | $                                          | 2,956      |                                      | $          | 2,066 |   | $ | 7,706 |   | $ | 5,841 |   |
|                                                                                               |   |                                       |       |                                      |       |   |   |   |   |
| Basic earnings per share                                                                           |   | $                                          | 0.65       |                                      | $          | 0.50 |   | $ | 1.79 |   | $ | 1.43 |   |
| Fully diluted earnings per share                                                                   |   | $                                          | 0.62       |                                      | $          | 0.48 |   | $ | 1.71 |   | $ | 1.38 |   |

 

Seenotes to the unaudited consolidated financial statements.

 

4

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**Western Sierra Bancorp and Subsidiaries**

##### **Unaudited Consolidated Statement of Cash Flows**

(dollarsin thousands)

 
|                                                                               |   | **Nine Months Ended  September 30,** |       |
|------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                               |   | **2003**                                  |       | **2002** | ** ** |
| Cash flows from operating activities:                                              |   |                                      |       |   |   |
| Net income                                                                         |   | $                                         | 7,706      |   | $ | 5,841 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                                      |       |   |   |
| Provision for loan and lease losses                                                |   | 1,655                                     |       | 1,466 |   |
| Depreciation and amortization                                                      |   | 1,720                                     |       | 1,440 |   |
| Deferred loan and lease origination fees, net                                      |   | 469                                       |       | 358 |   |
| Amortization of investment security premiums, net  of accretion of discount        |   | 402                                       |       | 211 |   |
| Gain on sale of available-for-sale investment  securities                          |   | —                                    |       | (96 | ) |
| Gain on called held-to-maturity investment  securities                             |   | (19                                       | )          | — |   |
| Increase in trading securities                                                     |   | (8                                        | )          | (1 | ) |
| Loss on sale and disposition of premises and equipment                             |   | 6                                         |       | 48 |   |
| Gain on sale of other real estate                                                  |   | (1                                        | )          | (85 | ) |
| Increase in cash surrender value of life insurance  policies                       |   | (282                                      | )          | (32 | ) |
| Compensation cost associated with the Bank’s ESOP                             |   | —                                    |       | 200 |   |
| Decrease (increase) in loans held for sale                                         |   | 3,079                                     |       | (3,013 | ) |
| Increase in other assets                                                           |   | (3,187                                    | )          | (1,246 | ) |
| Increase in other liabilities                                                      |   | 3,201                                     |       | 913 |   |
| Net cash provided by operating activities                                          |   | 14,742                                    |       | 6,004 |   |
|                                                                               |   |                                      |       |   |   |
| Cash flows from investing activities:                                              |   |                                      |       |   |   |
| Cash acquired in acquisitions                                                      |   | 40,086                                    |       | 9,234 |   |
| Proceeds from sale and call of  available-for-sale investment securities           |   | —                                    |       | 2,746 |   |
| Proceeds from called held-to-maturity investment  securities                       |   | 2,670                                     |       | 93 |   |
| Proceeds from matured available-for-sale investment  securities                    |   | 1,625                                     |       | 1,565 |   |
| Proceeds from matured held-to-maturity investment  securities                      |   | 500                                       |       | 543 |   |
| Purchases of available-for-sale investment  securities                             |   | (28,139                                   | )          | (5,555 | ) |
| Purchases of held-to-maturity investment securities                                |   | —                                    |       | (477 | ) |
| Principal repayments received from available-for-sale  securities                  |   | 5,254                                     |       | 5,955 |   |
| Principal repayments received from held-to-maturity  securities                    |   | 618                                       |       | 1,321 |   |
| Net decrease in interest-bearing deposits in banks                                 |   | 2,689                                     |       | 495 |   |
| Proceeds from sale of OREO                                                         |   | 141                                       |       | 1,312 |   |
| Net increase in loans and leases                                                   |   | (74,591                                   | )          | (75,903 | ) |
| Proceeds from the sale of premises and equipment                                   |   | —                                    |       | 50 |   |
| Purchases of premises and equipment                                                |   | (1,057                                    | )          | (3,548 | ) |
| Purchase of life insurance policies                                                |   | (7,000                                    | )          | (1,610 | ) |
| Net cash used in investing activities                                              |   | (57,205                                   | )          | (63,779 | ) |
|                                                                               |   |                                      | ** ** |   | ** ** |
| Cash flows from financing activities:                                              |   |                                      |       |   |   |
| Net increase in demand, interest-bearing and  savings deposits                     |   | $                                         | 71,486     |   | $ | 45,493 |   |
| Net increase in time deposits                                                      |   | 30,889                                    |       | 18,954 |   |
| Net increase in short-term borrowings                                              |   | 205                                       |       | 9,500 |   |
| Borrowing (repayment) of ESOP Loan                                                 |   | 325                                       |       | (200 | ) |
| Purchase of unearned ESOP shares                                                   |   | (325                                      | )          | — |   |
| Issuance of Trust Preferred Securities                                             |   | 20,000                                    |       | — |   |
| Repurchase of common stock                                                         |   | —                                    |       | (105 | ) |
| Redemption of fractional shares                                                    |   | (33                                       | )          | (30 | ) |
| Proceeds from the exercise of stock options                                        |   | 201                                       |       | 212 |   |
| Net cash provided by financing activities                                          |   | 122,749                                   |       | 73,824 |   |
| Increase in cash and cash equivalents                                              |   | 80,286                                    |       | 16,049 |   |
| Cash and cash equivalents at beginning of year                                     |   | 36,964                                    |       | 23,038 |   |
|                                                                               |   |                                      |       |   |   |
| Cash and cash equivalents at end of period                                         |   | $                                         | 117,250    |   | $ | 39,087 |   |
|                                                                               |   |                                      |       |   |   |
| Non-cash investing activities:                                                     |   |                                      |       |   |   |
| Net change in unrealized gain on available-for-sale  investment securities         |   | 240                                       |       | 1,845 |   |
|                                                                               |   |                                      |       |   |   |
| Supplemental schedules related to acquisitions:                                    |   |                                      |       |   |   |
| Acquisition of Central Sierra Bank (Central Sierra)  (Note 5):                     |   |                                      |       |   |   |
| Deposits                                                                           |   | $                                         | 129,268    |   |   |   |
| Borrowed Funds                                                                     |   | 7,650                                     |       |   |   |
| Other Liabilities                                                                  |   | 1,869                                     |       |   |   |
| Interest-bearing deposits in banks                                                 |   | (1,698                                    | )          |   |   |
| Investment securities available-for-sale                                           |   | (2,598                                    | )          |   |   |
| Investment securities held-to-maturity                                             |   | (5,312                                    | )          |   |   |
| Loans, net                                                                         |   | (82,651                                   | )          |   |   |
| Premises and equipment                                                             |   | (3,416                                    | )          |   |   |
| Intangibles                                                                        |   | (14,167                                   | )          |   |   |
| Other assets                                                                       |   | (1,561                                    | )          |   |   |
| Stock issued                                                                       |   | 12,702                                    |       |   |   |
| Cash acquired, net of cash paid to CSB shareholders                                |   | $                                         | 40,086     |   |   |   |
|                                                                               |   |                                      |       |   |   |
| Acquisition of Central California Bank (CCB) (Note  5):                            |   |                                      |       |   |   |
| Deposits                                                                           |   |                                      |       | $ | 61,469 |   |
| Other Liabilities                                                                  |   |                                      |       | 385 |   |
| Interest-bearing deposits in banks                                                 |   |                                      |       | (2,675 | ) |
| Investment securities held-to-maturity                                             |   |                                      |       | (3,032 | ) |
| Loans, net                                                                         |   |                                      |       | (46,489 | ) |
| Premises and equipment                                                             |   |                                      |       | (280 | ) |
| Intangibles                                                                        |   |                                      |       | (4,247 | ) |
| Other assets                                                                       |   |                                      |       | (895 | ) |
| Stock issued                                                                       |   |                                      |       | 4,998 |   |
| Cash acquired, net of cash paid to CCB shareholders                                |   |                                      |       | $ | 9,234 |   |

 

Seenotes to the unaudited consolidated financial statements.

 

5

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**NOTES TO THE UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.  Basis ofPresentation**

 

The accompanying unauditedcondensed consolidated financial statements of Western Sierra Bancorp andsubsidiaries (the “Company”) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. In the opinion of Management, alladjustments (which consist solely of normal recurring accruals) considerednecessary for a fair presentation of the results for the interim periodspresented have been included. These interim condensed consolidated financialstatements should be read in conjunction with the financial statements andrelated notes contained in the Company’s 2002 Annual Report to Shareholders.

 

The condensed consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, Western Sierra National Bank (WSNB) and its subsidiary WSNBInvestment Trust (a Real Estate Investment Trust (“REIT”), Lake Community Bank(LCB), Central California Bank (CCB), and Western Sierra Statutory Trusts I,II, III, and IV. All significant inter-company balances and transactions havebeen eliminated. Operating results for the three and nine months endedSeptember 30, 2003 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2003. Certain amounts in theconsolidated financial statements for the year ended December 31, 2002 andthe three and nine month periods ended September 30, 2002 may have beenreclassified to conform to the presentation of the consolidated financialstatements in 2003.

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresManagement to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assetsand liabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

 

**2.  Stock-based Compensation**

 

At September 30, 2003, theCompany has four stock-based compensation plans.  The Company accounts for these plans under the recognition andmeasurement principles of APB Opinion No. 25, *Accounting for Stock Issued toEmployees*, and related Interpretations.  No stock-based compensation cost is reflected in net income, asall options granted under these plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.  In accordance with Financial AccountingStandards Board (“FASB”) No. 148, *Accountingfor Stock-Based Compensation — Transition and Disclosure, an Amendment of FASBNo. 12,* the following table illustrates the effect on net income andearnings per share as if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*,to stock-based compensation.

 

Pro forma adjustments to the Company’s consolidated net earnings andearnings per share are disclosed during the years in which the options becomevested (dollars in thousands, except per share data).

 
|                                                                                                                                      |   | **Three Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                                                                      |   | **2003**                                   |   | **2002** | ** ** |
| Net earnings  as reported                                                                                                                 |   | $                                          | 2,956  |   | $ | 2,066 |   |
| Deduct: Total  stock-based compensation expense  determined under the fair value based method for all awards, net of  related tax effects |   | (258                                       | )      | (164 | ) |
|                                                                                                                                      |   |                                       |   |   |   |
| Pro forma net  income                                                                                                                     |   | $                                          | 2,698  |   | $ | 1,902 |   |
|                                                                                                                                      |   |                                       |   |   |   |
| Basic earnings  per share - as reported                                                                                                   |   | $                                          | 0.65   |   | $ | 0.50 |   |
| Basic earnings  per share - pro forma                                                                                                     |   | $                                          | 0.59   |   | $ | 0.46 |   |
|                                                                                                                                      |   |                                       |   |   |   |
| Diluted  earnings per share - as reported                                                                                                 |   | $                                          | 0.62   |   | $ | 0.48 |   |
| Diluted earnings per share - pro forma                                                                                                    |   | $                                          | 0.57   |   | $ | 0.45 |   |

 

6

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|                                                                                                                                      |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                                      |   | **2003**                                  |   | **2002** | ** ** |
| Net earnings  as reported                                                                                                                 |   | $                                         | 7,706  |   | $ | 5,841 |   |
| Deduct: Total  stock-based compensation expense  determined under the fair value based method for all awards, net of  related tax effects |   | (648                                      | )      | (471 | ) |
|                                                                                                                                      |   |                                      |   |   |   |
| Pro forma net  income                                                                                                                     |   | $                                         | 7,058  |   | $ | 5,370 |   |
|                                                                                                                                      |   |                                      |   |   |   |
| Basic earnings  per share - as reported                                                                                                   |   | $                                         | 1.79   |   | $ | 1.43 |   |
| Basic earnings  per share - pro forma                                                                                                     |   | $                                         | 1.64   |   | $ | 1.32 |   |
|                                                                                                                                      |   |                                      |   |   |   |
| Diluted  earnings per share - as reported                                                                                                 |   | $                                         | 1.71   |   | $ | 1.38 |   |
| Diluted earnings per share - pro forma                                                                                                    |   | $                                         | 1.58   |   | $ | 1.31 |   |

 

**3.  Earningsper Share**

 

Basic earnings per share (EPS), which excludesdilution, is computed by dividing net income by the weighted-average number ofcommon shares outstanding for the period. Diluted EPS reflects the potentialdilution that could occur if securities or other contracts to issue commonstock, such as stock options, result in the issuance of common stock, whichshares in the earnings of the Company. Earnings per share is retroactivelyadjusted for stock dividends for all periods presented. A reconciliation of thenumerators and denominators of the basic and diluted EPS computations is asfollows (dollars in thousands, except for per share data).

 
|                                                        |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |       |
|-------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|------------|
|                                                        |   | **2003**                                    |   | **2002**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Basic EPS Computation:                                      |   |                                        |   |                                       |       |   |   |   |   |
| Numerator-net  income                                       |   | $                                           | 2,956  |                                       | $          | 2,066 |   | $ | 7,706 |   | $ | 5,841 |   |
| Denominator-  weighted average number of shares outstanding |   | 4,546,661                                   |   | 4,169,270                                  |       | 4,310,558 |   | 4,087,319 |   |
| Basic  earnings per share                                   |   | $                                           | 0.65   |                                       | $          | 0.50 |   | $ | 1.79 |   | $ | 1.43 |   |
|                                                        |   |                                        |   |                                       |       |   |   |   |   |
| Diluted EPS Computation:                                    |   |                                        |   |                                       |       |   |   |   |   |
| Numerator-net income                                        |   | $                                           | 2,956  |                                       | $          | 2,066 |   | $ | 7,706 |   | $ | 5,841 |   |
| Denominator-  weighted average number of shares outstanding |   | 4,546,661                                   |   | 4,169,270                                  |       | 4,310,558 |   | 4,087,319 |   |
| Effect of  dilutive stock options                           |   | 221,661                                     |   | 153,913                                    |       | 202,532 |   | 156,495 |   |
|                                                        |   | 4,768,322                                   |   | 4,323,183                                  |       | 4,513,091 |   | 4,243,814 |   |
| Diluted  earnings per share                                 |   | $                                           | 0.62   |                                       | $          | 0.48 |   | $ | 1.71 |   | $ | 1.38 |   |

 

**4.  StockRepurchase Plan**

 

On May 29, 2002, theCompany announced that the Board of Directors approved a plan to repurchase upto 5% (or approximately 200,000 shares) of the Company’s common stock. TheCompany has purchased 5,000 shares at an average price of approximately $21.00under the plan through September 30, 2003.

 

On October 23, 2001,the Company announced that the Board of Directors approved a plan to repurchaseup to 5% (or approximately 165,000 shares) of the Company’s common stockeffective November 20, 2001 through May 31, 2002. The Company did notrepurchase any shares under this plan.

 

7

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**5.  Acquisitions**

 

OnJuly 11, 2003, pursuant to the Agreement and Plan of Reorganization datedMarch 12, 2003, Central Sierra Bank (“Central Sierra”) was acquired by theCompany through a merger and tax-free reorganization and operates as a DBA ofCentral California Bank.  The Companyacquired Central Sierra because management believes that the combinedperformance exceeds what each entity could accomplish independently, and itallows further expansion into the counties of Calaveras, Stanislaus, Amador,and Tuolumne.  As of the date of acquisition,Central Sierra had total assets of $148.1 million, comprised of  $12.8 million in cash and due frombanks, $49.4 million in federal funds sold, interest-bearing deposits atother banks, and investment securities, $82.7 million in net loans, and$3.2 million in other assets. Total liabilities acquired amounted to $139million, including $129 million in deposits.

 

The total consideration paid toCentral Sierra shareholders amounted to approximately $23.5 million, which wascomprised of approximately $10,700,000 in cash and 404,173 shares of theCompany’s Common Stock valued at approximately $12,800,000.  Total consideration was determined throughextensive negotiation supported by internal modeling, which management believeswill result in earnings per share accretion to the Company’s shareholderswithin 12 months.

 

The excess of the purchase price over theestimated fair value of the net assets acquired was $11.3 million, which wasrecorded as goodwill.  Assets acquiredalso included a core deposit intangible of $2.9 million that is being amortizedusing the straight-line method over a period of ten years.  The accompanying unaudited consolidatedfinancial statements include the accounts of Central Sierra since July 12,2003.

 

The following supplemental pro formainformation discloses selected financial information for the periods indicatedas though the Central Sierra merger had been completed as of the beginning ofeach of the periods being reported. Dollars are in thousands except per share data.

 
|                        |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |       |
|-----------------------------|--------|--------------------------------------------|--------|-------------------------------------------|------------|
|                        |   | **2003**                                   |   | **2002**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenue                     |   | $                                          | 15,876 |                                      | $          | 14,756 |   | $ | 46,317 |   | $ | 40,729 |   |
| Net  income                 |   | $                                          | 3,014  |                                      | $          | 2,609 |   | $ | 8,734 |   | $ | 7,354 |   |
| Diluted  earnings per share |   | $                                          | 0.63   |                                      | $          | 0.55 |   | $ | 1.82 |   | $ | 1.58 |   |

 

 

On April 1, 2002, pursuant to theAgreement and Plan of Reorganization dated November 15, 2001, CentralCalifornia Bank (“CCB”) was acquired by the Company through a merger andtax-free reorganization whereby CCB became a wholly-owned subsidiary of theCompany.  As of the date of acquisition, CCB had$67.7 million in total assets, $46.7 million in net loans, and $62.9 million in deposits.

 

The excess of the purchase price over the estimated fairvalue of the net assets acquired was $2.4 million, which was recorded asgoodwill. Based upon an initial evaluation as of October 1, 2002, noimpairment exists. Assets acquired also included a core deposit intangible of$1.9 million that is being amortized using the straight-line method over aperiod of ten years.  The accompanyingunaudited consolidated financial statements include the accounts of CCB sinceApril 1, 2002.

 

**6.  RecentAccounting Pronouncements**

 

In December 2002, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 148, Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB StatementNo. 123.  This Statement amendsSFAS No. 123, Accounting for Stock-Based Compensation, to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based compensation.  In addition, this Statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based compensation and the effect of the method used on reportedresults.  The transition guidance andannual disclosure provisions of SFAS No.  148 are effective for fiscalyears ending after December 15, 2002. The interim disclosure provisions are effective for financial reportingcontaining financial statements for interim periods beginning afterDecember 15, 2002.  Because theCompany accounts for the compensation cost associated with its stock optionplan under the intrinsic value method, the alternative methods of transitionwill not apply to the Company.  Theadditional disclosure requirements of the Statement for the interim periods areincluded in these financial statements. In management’s opinion, the adoption of this Statement did not have amaterial impact on the Company’s financial position or results of operations.

 

On April 30, 2003, the Financial Accounting StandardsBoard issued Statement No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.”  ThisStatement amends and clarifies the accounting for derivative instruments byproviding guidance related to circumstances under which a contract with a netinvestment meets the characteristics of a

 

8

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derivativeas discussed in Statement 133.  TheStatement also clarifies when a derivative contains a financing component.   The Statement is intended to result in moreconsistent reporting for derivative contracts and must be applied prospectivelyfor contracts entered into or modified after June 30, 2003, except forhedging relationships designated after June 30, 2003.   In management’s opinion, adoption of thisstatement did not have a material effect on the Company’s consolidatedfinancial position or results of operations.

 

In January 2003, the FASB issuedInterpretation No. 46, *Consolidation ofVariable Interest Entities* (FIN 46), which requires theconsolidation of variable interest entities, as defined. FIN 46 is currentlyapplicable to variable interest entities created after January 31, 2003.In October 2003, the FASB agreed to defer the effective date of FIN 46 forvariable interests held by public companies in all entities that were acquiredprior to February 1, 2003. This deferral is to allow time for certainimplementation issues to be addressed through the issuance of a potentialmodification to the interpretation. The deferral revised the effective date forconsolidation of these entities to the period ended December 31, 2003 forcalendar year end companies. Based on the current rules, the Company does notbelieve that the implementation of the interpretation will have a materialimpact on the Company’s financial position or results of operations.

 

The Company adopted FIN 46 on July 1, 2003.  In its current form, FIN 46 may require theCompany to de-consolidate its investment in Western Sierra Statutory Trusts I,II, III, and IV (the “Trusts”) in future financial statements. The potentialde-consolidation of subsidiary trusts of bank holding companies formed inconnection with the issuance of trust preferred securities, like the Trusts,appears to be an unintended consequence of FIN 46.  It is currently unknown if, or when, the FASB will address thisissue.  In July 2003, the Board ofGovernors of the Federal Reserve Systems issued a supervisory letterinstructing bank holding companies to continue to include the trust preferredsecurities in their Tier I capital for regulatory capital purposes until noticeis given to the contrary.  The FederalReserve intends to review the regulatory implications of any accountingtreatment changes and, if necessary or warranted, provide further appropriateguidance. If the current regulatory capital treatment for trust preferredsecurities is not grandfathered, the Company’s regulatory capital ratios wouldbe negatively impacted and the Company may be required to obtain additionalcapital.  This paragraph containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act. See “Forward-Looking Statements” on page 12 of thisreport.

 

InMay 2003, the FASB issued SFAS No. 150, *Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*.  This Statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument thatis within its scope as a liability (or an asset in some circumstances).  This Statement is effective for financialinstruments entered into or modified by the Company after May 31, 2003,and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  TheCompany has previously accounted for its mandatorily redeemable cumulativetrust preferred securities in a manner consistent with the Statement and, inmanagement’s opinion, adoption of this Statement did not have a material effecton the Company’s consolidated financial position or results of operations.

 

**7. Comprehensive Income**

 

Comprehensiveincome includes net income and other comprehensive income (loss).  The Company’s only source of othercomprehensive income (loss) is derived from unrealized gains and losses oninvestment securities available-for-sale. Reclassification adjustments resulting from gains or losses oninvestment securities that were realized and included in net income of thecurrent period that also had been included in other comprehensive income (loss)as unrealized holding gains or losses in the period in which they arose areexcluded from comprehensive income of the current period.  The Company’s total comprehensive income wasas follows:

 
|                                                      |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |       |
|-----------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                                        |   | **2003**                                   | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                      |   |                                       |       |                                      |       |   |   |   |   |
| Net income                                                |   | $                                          | 2,956      |                                      | $          | 2,066 |   | $ | 7,706 |   | $ | 5,841 |   |
| Other comprehensive income (loss):                        |   |                                       |       |                                      |       |   |   |   |   |
| Holding (losses) gains arising during period, net  of tax |   | (342                                       | )          | 802                                       |       | 168 |   | 1,274 |   |
| Re-classification adjustment, net of tax                  |   | (12                                        | )          | (49                                       | )          | (12 | ) | (63 | ) |
| Total other comprehensive (loss) income                   |   | (354                                       | )          | 753                                       |       | 156 |   | 1,211 |   |
| Total comprehensive income                                |   | $                                          | 2,602      |                                      | $          | 2,819 |   | $ | 7,862 |   | $ | 7,052 |   |

 

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**8.  Mandatorily Redeemable Cumulative TrustPreferred Securities**

 

On September 30, 2003, Western Sierra Bancorp(Bancorp) formed two wholly-owned Delaware statutory business trusts, WesternSierra Statutory Trust III (Western Trust III) Western Sierra Statutory TrustIV (Western Trust IV). The Company issued to Western Trust IIII & IVFloating Rate Junior Subordinated Deferrable Interest Debentures Due 2033(Debentures) in the aggregate principal amount of $10 million to each trust fora total of $20 million. These debentures, together with its previously issueddebentures qualify as Tier I capital up to 25% of total tier I capital with theexcess qualifying as Tier II capital up to allowable Tier II capital. Inexchange for these debentures the Company paid $10 million to both Western TrustIII & IV and funded its purchases of the debentures by issuing a total of$10 million in floating rate capital securities (capital securities) in eachtrust, which were then pooled and sold. Western Trust III and IV secured thesecapital securities with the Debentures issued by the Company. The Debenturesare the only assets of Western Trust III & IV. The interest rate on bothinstruments is the same interest expense and interest expense is computed onactual days divided by 360 times the rate. The rate is the three-month LIBOR(London Interbank Offered Rate) plus 2.90% and the capital securities arecallable at par after five years. The proceeds from the issuance of theDebentures were used to retire $3 million in short term debt and the remainderof the proceeds (approximately $17 million) will be used to pay the cashportion of the Auburn Community Bank purchase (approximately $7.5 millionexpected to close in December 2003) and the remainder will be used forfuture acquisitions and general corporate purposes (approximately $9.5million).

 

The Debentures and capitalsecurities accrue and pay distributions quarterly based on the floating ratedescribed above on the stated liquidation value of $1,000 per security. Bancorphas entered into contractual agreements which, taken collectively, fully andunconditionally guarantee payment of: (1) accrued and unpaid distributionsrequired to be paid on the capital securities; (2) the redemption pricewith respect to any capital securities called for redemption by Western TrustIII & IV, and (3) payments due upon voluntary or involuntarydissolution, winding up, or liquidation of Western Trust III & IV.

 

The capital securities aremandatorily redeemable upon maturity of the Debentures on July 31, 2033,or upon earlier redemption as provided in the indenture.

 

**9.  Agreementand Plan of Reorganization and Merger**

 

On August 21, 2003, theCompany and Auburn Community Bancorp (ACB) announced the signing of adefinitive Agreement and Plan of Reorganization and Merger (the “Agreement”).  Under the terms of the Agreement, theCompany will pay approximately $7,500,000 in cash and issue 350,000 shares ofcommon stock.  The Agreement, which hasbeen approved by the Board of Directors of both companies, is subject toapproval by ACB shareholders and bank regulatory authorities.  It is anticipated that the merger will becompleted during December 2003, at which time Auburn Community Bank, thewholly-owned subsidiary of ACB, will become a separate wholly-owned subsidiaryof the Company and ACB will cease to exist. 

 

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**ITEM 2****. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATION.**

 

**Privatesecurities litigation reform act safe harbor statement**

 

This quarterly report onForm 10-Q includes forward-looking information, which is subject to the“safe harbor” created by the Securities Act of 1933 and Securities Act of 1934.These forward-looking statements (which involve the Company’s plans, beliefsand goals) involve certain risks and uncertainties that could cause actualresults to differ materially from those in the forward-looking statements. Suchrisks and uncertainties include, but are not limited to, the following factors:

 

1.               Competitive pressure in the banking industryand changes in the regulatory environment.

 

2.               Changes in the interest rate environment andvolatility of rate sensitive deposits.

 

3.               Decline in the health of the economynationally or regionally which could reduce the demand for loans or reduce thevalue of real estate collateral securing most of the Company’s loans.

 

4.               Credit quality deterioration that could causean increase in the provision for loan losses.

 

5.               The Company’s exposure to real estate valuesin the markets that it serves, as over 80% of the Company’s loans are securedby real estate.

 

6.               Asset/Liability matching risks and liquidityrisks.

 

7.               Volatility and devaluation in the securitiesmarkets.

 

For additional informationconcerning risks and uncertainties related to the Company and its operations,please refer to the Company’s Annual Report on Form 10-K for the yearended December 31, 2002 under the heading “Forward-LookingInformation”.  Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date hereof. The Company undertakes no obligation to revise orpublicly release the results of any revision to these forward-lookingstatements to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

 

The following sectionsdiscuss significant changes and trends in financial condition, capitalresources and liquidity of the Company from December 31, 2002 toSeptember 30, 2003. Also discussed are significant trends and changes inthe Company’s results of operations for the three and nine months endedSeptember 30, 2003 compared to the same periods in 2002. The consolidatedfinancial statements and related notes appearing elsewhere in this report arecondensed and unaudited.

 

11

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**General**

 

Western Sierra Bancorp (the“Company”) was incorporated under the laws of the State of California onJuly 11, 1996. The Company was organized pursuant to a plan ofreorganization for the purpose of becoming the parent corporation of WesternSierra National Bank, and on December 31, 1996, the reorganization waseffected and shares of the Company’s common stock were issued to theshareholders of Western Sierra National Bank for the common shares held byWestern Sierra National Bank’s shareholders.

 

In April 1999, theCompany acquired Roseville 1st National Bank and Lake Community Bank in a stockfor stock exchange. In May of 2000, the Company acquired SentinelCommunity Bank in a stock for stock exchange. All of these mergers wereaccounted for as poolings of interests and, accordingly, all prior periodfinancial information has been restated to reflect the combined operations ofthe Company, Roseville 1st National Bank, Lake Community Bank and SentinelCommunity Bank. Sentinel Community Bank was immediately merged into WesternSierra National Bank. In May of 2000, Roseville 1st National Bank was alsomerged into Western Sierra National Bank.

 

In April 2002, theCompany acquired Central California Bank for $3.7 million in cash and 252,181shares of the Company’s stock.  Thistransaction was accounted for under purchase accounting, which resulted in apurchase price allocation resulting in intangible assets totaling $2.4 millionin goodwill and $1.9 million in core deposit premium. As required underpurchase accounting, no prior period financial statements have been restated toreflect the combined operations of Central California Bank.  In July of 2002, certain assets andliabilities of the Sentinel Community Bank branches were transferred fromWestern Sierra National Bank to Central California Bank.

 

In July 2003, theCompany acquired Central Sierra Bank for $10.7 million in cash and 404,173shares of the Company’s stock.  Thistransaction was accounted for under purchase accounting, which resulted in apreliminary purchase price allocation resulting in intangible assets totaling $11.3 million in goodwill and$2.9 million in core deposit premium. As required under purchase accounting, noprior period financial statements have been restated to reflect the combinedoperations of Central California Bank.

 

The Company is aregistered bank holding company under the Bank Holding Company Act. The Companyconducts its operations at 4080 Plaza Goldorado Circle, Cameron Park,California 95682.

 

Western Sierra National Bank wasorganized under national banking laws and commenced operations as a nationalbank on January 4, 1984. Western Sierra National Bank is a member of theFederal Reserve System and the FDIC insures its deposits to the maximum amountpermitted by law. Western Sierra National Bank’s head office is located at 4080Plaza Goldorado Circle, Cameron Park, and its branch offices are located at4011 Plaza Goldorado Circle, Cameron Park, 2661 Sanders Drive, Pollock Pines,3970 J Missouri Flat Road, Placerville, 1450 Broadway, Placerville, 3880 ElDorado Hills Blvd., El Dorado Hills, 571 5th Street, Lincoln, 1545 River ParkDr. #101 & #200, Sacramento, 1801 Douglas Blvd., Roseville, 6951Douglas Blvd., Granite Bay, 9050 Fairway Drive, Roseville, and 2779 EastBidwell, Folsom, CA.   InMarch 2002, Western Sierra National Bank formed WSNB Investment Trust, aReal Estate Investment Trust (“REIT”), to potentially generate additionalcapital at Western Sierra National Bank and reduce the Company’s overalleffective tax rate. Western Sierra National Bank does not have any otheraffiliates other than Sentinel Associates, Inc., an inactive entity formedby Sentinel Bank in 1983 to develop single-family residential real estate.

 

Lake Community Bank was incorporatedas a banking corporation under the laws of the State of California onMarch 9, 1984 and commenced operations as a California state-charteredbank on November 15, 1984. Lake Community Bank is an insured bank underthe Federal Deposit Insurance Act and became a member of the Federal ReserveSystem in June 2003. Lake Community Bank engages in the general commercialbanking business in Lake County in the State of California from itsheadquarters banking office located at 805 Eleventh Street, Lakeport,California, and its branch located at 4280 Main Street, Kelseyville,California. Lake Community Bank does not have any affiliates or subsidiaries.

 

CentralCalifornia Bank was incorporated under the laws of the State of California onJanuary 13, 1997, and commenced operations on April 24, 1998. CentralCalifornia Bank is an insured bank under the Federal Deposit Insurance Act andbecame a  member of the Federal ReserveSystem in January 2003. Central California Bank engages in the generalcommercial banking business in Tuolumne and Stanislaus counties in the state ofCalifornia from its headquarters banking office located at 13753-A Mono Way,Sonora, CA, and its branches located at 400 E. Olive Ave, Turlock, CA, 3700 LoneTree Way, Antioch, CA, 229 South Washington Street, Sonora, CA, 18711 TiffeniDrive, Twain Harte, CA, 22712 Main Street, Columbia, CA and loan productionoffices located at 3400 Tully Rd., #B, Modesto, CA, 1111 Dunbar Road, Arnold,CA,  373 West St. Charles Street, SanAndreas, CA, 1239 South Main Street, Angels Camp, CA, 18281 Main Street,Jamestown, CA, 89 Lakewood Mall, Lodi, CA, 11 Ridge Road, Sutter Creek, CA, 87Highway 26, Valley Springs, CA, and 3505 Spangler Lane, Suite 300,Copperopolis, CA.  Central CaliforniaBank does not have any affiliates or subsidiaries.  In July 2003, Central Sierra Bank merged into Central

 

12

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California Bank and its branches are locatedat 373 West St. Charles Street, San Andreas, CA, 1239 South Main Street, AngelsCamp, CA, 18281 Main Street, Jamestown, CA, 89 Lakewood Mall, Lodi, CA, 11Ridge Road, Sutter Creek, CA, 87 Highway 26, Valley Springs, CA, and 3505Spangler Lane, Suite 300, Copperopolis, CA.

 

In July 2001, December 2001and September 30, 2003, respectively, four trusts, Western SierraStatutory Trust I, Western Sierra Statutory Trust II and Western SierraStatutory Trust III /IV, were established as wholly-owned subsidiaries of theCompany for the purpose of issuing and holding Trust Preferred Securities.

 

**BankingServices.** TheCompany is a locally owned and operated bank holding company, and its primaryservice area is the Northern California communities of Cameron Park, PollockPines, Placerville, El Dorado Hills, Folsom, Lincoln, Sacramento, Roseville,Granite Bay, Sonora, Twain Harte, Columbia, Turlock, Lakeport, Antioch,Rocklin, Sand Andreas, Angels Camp, Jamestown, Lodi, Sutter Creek, ValleySprings, Copperopolis, and the surrounding communities. The Company’s primarybusiness is serving the banking needs of these communities and its marketingstrategy stresses its local ownership and commitment to serve the banking needsof individuals living and working in the Company’s primary service areas andlocal businesses, including retail, professional and real estate-relatedactivities, in those service areas.

 

The Company offers a broadrange of services to individuals and businesses in its primary service areaswith an emphasis upon efficiency and personalized attention. The Companyprovides a full line of consumer services and also offers specialized services,such as courier services to small businesses, middle market companies andprofessional firms. Each of the Company’s subsidiary banks offers personal and businesschecking and savings accounts (including individual interest-bearing negotiableorders of withdrawal (“NOW”), money market accounts and/or accounts combiningchecking and savings accounts with automatic transfer), IRA accounts, timecertificates of deposit and direct deposit of social security, pension andpayroll checks, computer cash management and internet banking including billpayment. The Company’s subsidiary banks also make available commercial,construction, accounts receivable, inventory, automobile, home improvement,real estate, commercial real estate, single family mortgage, agricultural,Small Business Administration, office equipment, leasehold improvement,installment and credit card loans (as well as overdraft protection lines of credit),issue drafts and standby letters of credit, sell travelers’ checks (issued byan independent entity), offer ATMs tied in with major statewide andnational networks, extend special considerations to senior citizens and offerother customary commercial banking services.

 

Most of the Company’sdeposits are obtained from commercial businesses, professionals andindividuals. At September 30, 2003 there was a title company customer with$7.6 million or 7.2% of total deposits at Lake Community Bank.  There were no other customers with 5% ormore of any of the subsidiary banks’ deposits.

 

Other special services andproducts include both personal and business economy checking products, businesscash management products and mortgage products and services.

 

**Employees.** At September 30, 2003, the Companyand its subsidiaries employed 321 persons on a full-time equivalent basis. TheCompany believes its employee relations are satisfactory.

 

**Financial Condition**

 

The Company increased totalassets from $678 million at December 31, 2002 to $963 million atSeptember 30, 2003, an increase of $285 million or 42%. The twoprimary components of asset growth were loans, which grew $159 million, andcash and equivalents, which increased $80 million.  Asset growth was primarily funded by growth in deposits of $232million.  This strong balance sheetgrowth is due in part to the acquisition of Central Sierra, which closed onJuly 11, 2003, adding $84 million in loans, $148 million in total assets,and $129 million in deposits.

 

During the first nine monthsof 2003, non-interest bearing deposits increased from $162 million at year-end2002 to $205 million at September 30, 2003.  Included in non-interest deposits are local title company deposits,which have decreased $7 million from $45 million at December 31, 2002 to$38 million at September 30, 2003. These funds do not receive interest but do result in an assessment ofservice fees by the title company’s service bureau to the Company.  During the first nine months of 2003, theCompany incurred approximately $99,000 in service fees on title companydeposits or approximately 0.38% of the average title company depositsoutstanding.

 

**Results of Operations**

 

The Central California Bank(“CCB”) acquisition was effective April 1, 2002 and was accounted forunder purchase accounting.  Pursuant topurchase accounting rules, the operating results of the Company for thenine-month period ended September 30, 2002 do not include the operationalresults of CCB for the quarter ended March 31, 2002.  The Central Sierra Bank (Central Sierra)acquisition was effective July 11, 2003 and was also accounted for underpurchase accounting.  Therefore,

 

13

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the operating results for the Company for the three and nine-monthperiods ended September 30, 2002 do not include the operational results ofCentral Sierra for either period.  Inaddition, the operating results for the Company for the three and nine-monthperiods ended September 30, 2003 only include the operating results forCentral Sierra for the period from July 12, 2003 to September 30,2003.

 

The Company reported netincome of $2.96 million for the three months ended September 30, 2003(or $0.62 per share, diluted) compared to $2.07 million  (or $0.48 per share, diluted) for the sameperiod in 2002. The quarterly earnings represent an increase of $890,000 or a43% increase in net income and a 30% increase in diluted earnings per share.

 

The Company reported netincome of $7.71 million for the nine months ended September 30, 2003(or $1.71 per share, diluted) compared to $5.84 million  (or $1.38 per share, diluted) for the sameperiod in 2002. The nine-month earnings represent an increase of $1.87 millionor a 32% increase in net income and a 24% increase in diluted earnings pershare.

 

The primary factorscontributing to the increase in operating results during the three andnine-month periods ended September 30, 2003 as compared to the sameperiods in 2002 include:

 

1.               An increase in net interest income of $2.4million or 31% in the third quarter over the same period in 2002 and $5.9million or 28% in the first nine months of 2003 as compared to 2002.  The net increase in both periods is due toan overall increase in average earning assets (year-to-date increased partiallydue to the acquisition of $63 million in earning assets from the CCBtransaction completed in April 2002, while the Central Sierra merger added$133 million in earning assets on July 11, 2003 effecting both the quarterand year-to-date average balances).

 

2.               An increase in non-interest income, primarilyservice fees on deposit accounts and gains on the sale and packaging ofresidential mortgage loans. Non-interest income increased $818,000 or 39% and $1,956,000 or 37% overthe third quarter and year-to-date totals in the previous year.

 

The above factors were offset in part by:

 

1.               An increase in loan and lease loss provisionsof $59,000 and $189,000 for the third quarter and nine-month period endedSeptember 30, 2003 as compared to the same periods in 2002. Additionalprovisions were recorded as a result of growth in loans outstanding.  The percentage of loan and lease lossreserves to gross loans and leases increased to 1.43% at September 30, 2003as compared to 1.32% at December 31, 2002 and 1.34% at September 30,2002.

 

2.               Total other expenses increased $1.4 millionor 23% and $3.7 million or 22% over the third quarter and year-to-date totalsin the previous year.  Year-to-datetotals increased significantly as a result of the addition of CentralCalifornia Bank’s operating costs, which were approximately $1.27 million inthe first quarter of 2003, that were not included in the 2002 first quarterresults as the acquisition, accounted for under purchase accounting, did notclose until April 2002.   CentralSierra also added operating expenses of approximately $851,000 to third quarterand year-to-date 2003 totals that were not included in 2002.

 

3.               The Company’s effective tax rate increased to36.9% for both the three and nine-month periods of 2003 as compared to 30.2%and 29.0% for the three and nine-month periods of 2002.  The primary reason for the increase is thatmanagement has determined not to recognize the tax benefits associated with theReal Estate Investment Trust (“REIT”) thus far in 2003 because it ismanagement’s assessment that certain related tax-exempt income may berecharacterized as taxable in 2003 through action by the CaliforniaLegislature.  Management willcontinuously monitor developments throughout the year and a determination couldbe made to recognize a tax benefit if it appears likely that the law willremain unchanged.

 

4.               Net interest margin compression due to theaddition of approximately $60 million in cash and Fed Funds acquired throughthe Central Sierra Merger.  Net interestmargin decreased 23 basis points to 5.04% for the quarter from 5.27% in thethird quarter of 2002.  The year-to-datenet interest margin was 5.18%, down 19 basis points from the 5.37% reported forthe same period of 2002.  Fed fundsaveraged $75 million or 9.2% of average earning assets in the quarter ascompared to $43 million or 6.4% of average earning assets in the second quarterof 2003 and $29 million or 4.8% of average earning assets for the third quarterof 2002.  Management expects to deploy asignificant portion of these funds into loans over the next three quarters.

 

14

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**Return on Average Assets and Average Equity**

 

Return on average assets(“ROA”) was 1.31% and 1.33% for the third quarter and nine-month period of 2003as compared to 1.26% and 1.33% for the third quarter and nine-month period of2002.  Return on equity (“ROE”) was17.01% and 16.99% for the third quarter and nine-month period of 2003 ascompared to 16.37% and 17.19% for the third quarter and nine-month period of2002.

 

**Net Interest Income (Tax Equivalent Yield Basis)**

 

Net interest income is theprimary source of income for the Company and represents the excess of interestand fees earned on interest-earning assets (loans, investments and Federalfunds sold) over the interest paid on deposits and borrowed funds. Net interestmargin is net interest income expressed as a percentage of average earningassets.

 

For the three months endedSeptember 30, 2003, interest income on a tax equivalent basis increased by$2.34 million to $12.9 million or 22% over the same period in 2002. Interestexpense on deposit accounts and borrowings decreased $51,000 or 2% over thesame three-month period ended September 30, 2002. Average earning assetsyielded (on a fully tax equivalent basis) 6.27% versus 6.98% a year ago, theeffect of which was partially offset by a decrease in the cost of funds wherethe average cost of funds decreased to 1.58% from 2.21% a year ago. Netinterest income (on a tax equivalent basis) increased $2.39 million or 30% to$10.3 million. The net interest margin decreased 23 basis points to 5.04% from5.27% for the same three-month period a year ago.

 

For the nine months endedSeptember 30, 2003, interest income on a tax equivalent basis increased by$5.7 million to $34.8 million or 19% over the same period in 2002. Interestexpense on deposit accounts and borrowings decreased $229,000 or 3% over thesame nine-month period ended September 30, 2002. Average earning assets yielded(on a fully tax equivalent basis) 6.52% versus 7.19% a year ago, the effect ofwhich was partially offset by a decrease in the cost of funds where the averagecost of funds decreased to 1.73% from 2.33% a year ago. Net interest income (ona tax equivalent basis) increased $5.9 million or 27% to $27.6 million. The netinterest margin decreased 19 basis points to 5.18% from 5.37% for the samenine-month period a year ago.

 

Overall, yields trended downfrom the prior year as a result of market interest rates.  The most significant decrease is realized inthe taxable investment securities, which decreased to 2.44% and 3.68% for thethree and nine-month periods of 2003 as compared to 5.24% and 5.32% in the sameperiods of 2002.  The third quarter 2003yield is down 208 basis points from the 4.52% yield reported in the priorquarter (second quarter 2003). Approximately 95 basis points of this difference is due to an adjustmentduring the third quarter to premiums on securities that are paying off fasterthan originally projected, which reduced investment income.  The remainder of the difference is due tothe purchase of securities at a lower yield than the average yield in theportfolio.  In the third quarter, $5million of commercial paper was purchased at a yield of 1.04%, and another $15million in taxable securities was purchased at a weighted average yield ofapproximately 3.00%.

 

The following tables present, for theperiods indicated, the distribution of consolidated average assets, liabilitiesand shareholders’ equity, as well as the total dollar amounts of interestincome from average earning assets and the resultant yields and the dollaramounts of interest expense and average interest-bearing liabilities, expressedboth in dollars and in rates. Non-accrual loans, which are not consideredmaterial, are included in the calculation of the average balances ofloans.  Savings deposits include NOW andmoney market accounts. To compare the tax-exempt asset yields to taxableyields, amounts are adjusted to pre-tax equivalents based on the marginalcorporate federal tax rate of 34 percent (dollars in thousands).

 

15

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**Average Balances, Interest Income/Expense andYields/Rates Paid**

 
|                                                    |   | **Three Months Ended**      |    |
|---------------------------------------------------------|--------|-----------------------------|---------|
|                                                    |   | **September 30, 2003** |    | **September 30, 2002** |   |
|                                                    |   | **Average  Balance**        |    | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
| Earning assets:                                         |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Loans                                                   |   | $                           | 664,456 |   | $ | 11,857 |   | 7.08% |   | $ | 494,352 |   | $ | 9,268 |   | 7.44% |   |
| Tax exempt investment securities                        |   | 30,971                      |    | 547 |   | 7.01% |   | 30,682 |   | 555 |   | 7.18% |   |
| Taxable investment securities                           |   | 41,778                      |    | 257 |   | 2.44% |   | 42,252 |   | 558 |   | 5.24% |   |
| Federal funds sold                                      |   | 75,211                      |    | 182 |   | 0.96% |   | 28,770 |   | 122 |   | 1.68% |   |
| Interest bearing deposits in banks                      |   | 1,469                       |    | 18 |   | 4.91% |   | 2,576 |   | 23 |   | 3.54% |   |
| Average earning assets                                  |   | 813,886                     |    | 12,862 |   | 6.27% |   | 598,632 |   | 10,526 |   | 6.98% |   |
| Other assets                                            |   | 92,527                      |    |   |   |   |   | 60,058 |   |   |   |   |   |
| Less ALLL                                               |   | (9,636                      | )       |   |   |   |   | (6,551 | ) |   |   |   |   |
| Average total assets                                    |   | $                           | 896,777 |   |   |   |   |   | $ | 652,139 |   |   |   |   |   |
| Interest bearing liabilities:                           |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Savings deposits                                        |   | $                           | 265,301 |   | 491 |   | 0.73% |   | $ | 186,024 |   | 486 |   | 1.04% |   |
| Time deposits                                           |   | 327,719                     |    | 1,686 |   | 2.04% |   | 247,342 |   | 1,770 |   | 2.84% |   |
| Other borrowings (1)                                    |   | 40,720                      |    | 348 |   | 3.39% |   | 28,953 |   | 320 |   | 4.38% |   |
| Average interest bearing liabilities                    |   | 633,740                     |    | 2,525 |   | 1.58% |   | 462,318 |   | 2,576 |   | 2.21% |   |
| Non-interest bearing deposits                           |   | 187,827                     |    |   |   |   |   | 132,309 |   |   |   |   |   |
| Other liabilities                                       |   | 6,251                       |    |   |   |   |   | 7,450 |   |   |   |   |   |
| Shareholders’ equity                               |   | 68,959                      |    |   |   |   |   | 50,062 |   |   |   |   |   |
| Average total liabilities and shareholders’ equity |   | $                           | 896,777 |   |   |   |   |   | $ | 652,139 |   |   |   |   |   |
| Net interest income and net interest margin             |   |                        |    | $ | 10,337 |   | 5.04% |   |   |   | $ | 7,950 |   | 5.27% |   |

 

----

(1)          For the purpose of this schedule the average balance and intereston the trust preferred securities is included in other borrowings

 

16

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|                                                    |   | **Nine Months Ended**       |    |
|---------------------------------------------------------|--------|-----------------------------|---------|
|                                                    |   | **September 30, 2003** |    | **September 30, 2002** |   |
|                                                    |   | **Average  Balance**        |    | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
| Earning assets:                                         |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Loans                                                   |   | $                           | 599,046 |   | $ | 31,693 |   | 7.07% |   | $ | 445,470 |   | $ | 25,438 |   | 7.63% |   |
| Tax exempt investment securities                        |   | 30,933                      |    | 1,650 |   | 7.13% |   | 30,207 |   | 1,655 |   | 7.32% |   |
| Taxable investment securities                           |   | 36,859                      |    | 1,015 |   | 3.68% |   | 42,235 |   | 1,682 |   | 5.32% |   |
| Federal funds sold                                      |   | 44,584                      |    | 353 |   | 1.06% |   | 21,184 |   | 268 |   | 1.69% |   |
| Interest bearing deposits in banks                      |   | 1,468                       |    | 40 |   | 3.61% |   | 1,819 |   | 51 |   | 3.75% |   |
| Average earning assets                                  |   | 712,890                     |    | 34,750 |   | 6.52% |   | 540,915 |   | 29,094 |   | 7.19% |   |
| Other assets                                            |   | 71,033                      |    |   |   |   |   | 54,194 |   |   |   |   |   |
| Less ALLL                                               |   | (8,314                      | )       |   |   |   |   | (5,945 | ) |   |   |   |   |
| Average total assets                                    |   | $                           | 775,609 |   |   |   |   |   | $ | 589,164 |   |   |   |   |   |
| Interest bearing liabilities:                           |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Savings deposits                                        |   | $                           | 214,764 |   | $ | 1,267 |   | 0.79% |   | $ | 168,438 |   | $ | 1,306 |   | 1.04% |   |
| Time deposits                                           |   | 301,820                     |    | 4,957 |   | 2.20% |   | 227,403 |   | 5,136 |   | 3.02% |   |
| Other borrowings (1)                                    |   | 33,226                      |    | 901 |   | 3.63% |   | 25,495 |   | 912 |   | 4.78% |   |
| Average interest bearing liabilities                    |   | 549,810                     |    | 7,125 |   | 1.73% |   | 421,336 |   | 7,354 |   | 2.33% |   |
| Non-interest bearing deposits                           |   | 158,979                     |    |   |   |   |   | 115,795 |   |   |   |   |   |
| Other liabilities                                       |   | 6,176                       |    |   |   |   |   | 6,596 |   |   |   |   |   |
| Shareholders’ equity                               |   | 60,644                      |    |   |   |   |   | 45,437 |   |   |   |   |   |
| Average total liabilities and shareholders’ equity |   | $                           | 775,609 |   |   |   |   |   | $ | 589,164 |   |   |   |   |   |
| Net interest income and net interest margin             |   |                        |    | $ | 27,626 |   | 5.18% |   |   |   | $ | 21,740 |   | 5.37% |   |

 

----

(1)          For the purpose of this schedule the average balance and intereston the trust preferred securities is included in other borrowings.

 

17

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The following tables set forth changes in interestincome and expense for each major category of earning assets andinterest-bearing liabilities, and the amount of change attributable to volumeand rate changes for the periods indicated. Changes attributable to rate/volumehave been allocated to rate changes (dollars in thousands).

 

###### **Analysis of Changes in Net Interest Income**

 
|                                     |   | **Three Months Ended September 30, 2003 over 2002** |   |
|------------------------------------------|--------|----------------------------------------------------------|--------|
|                                     |   | **Volume**                                               |   | **Rate** |   | **Total** |   |
| Increase (decrease) in interest income:  |   |                                                     |   |   |   |   |   |
| Loans                                    |   | $                                                        | 3,189  |   | $ | (599 | ) | $ | 2,590 |   |
| Investment securities, tax exempt        |   | 5                                                        |   | (14 | ) | (8 | ) |
| Investment securities                    |   | (6                                                       | )      | (294 | ) | (301 | ) |
| Federal funds sold                       |   | 197                                                      |   | (137 | ) | 60 |   |
| Interest bearing deposits                |   | (10                                                      | )      | 5 |   | (5 | ) |
| Net increase (decrease)                  |   | 3,375                                                    |   | (1,039 | ) | 2,336 |   |
| Increase (decrease) in interest expense: |   |                                                     |   |   |   |   |   |
| Interest bearing accounts                |   | 207                                                      |   | (202 | ) | 5 |   |
| Time deposits                            |   | 575                                                      |   | (659 | ) | (84 | ) |
| Other borrowings (1)                     |   | 130                                                      |   | (102 | ) | 28 |   |
| Net increase (decrease)                  |   | 912                                                      |   | (963 | ) | (51 | ) |
| Total net increase (decrease)            |   | $                                                        | 2,463  |   | $ | (76 | ) | $ | 2,387 |   |

 

----

(1)          For the purpose of this schedule the change in interest expense onthe trust preferred securities is included in other borrowings.

 

 
|                                     |   | **Nine Months Ended September 30, 2003 over 2002** |   |
|------------------------------------------|--------|---------------------------------------------------------|--------|
|                                     |   | **Volume**                                              |   | **Rate** |   | **Total** |   |
| Increase (decrease) in interest income:  |   |                                                    |   |   |   |   |   |
| Loans                                    |   | $                                                       | 8,770  |   | $ | (2,515 | ) | $ | 6,255 |   |
| Investment securities, tax exempt        |   | 40                                                      |   | (44 | ) | (5 | ) |
| Investment securities                    |   | (214                                                    | )      | (453 | ) | (667 | ) |
| Federal funds sold                       |   | 296                                                     |   | (211 | ) | 85 |   |
| Interest bearing deposits                |   | (10                                                     | )      | (2 | ) | (11 | ) |
| Net increase (decrease)                  |   | 8,881                                                   |   | (3,225 | ) | 5,656 |   |
| Increase (decrease) in interest expense: |   |                                                    |   |   |   |   |   |
| Interest bearing accounts                |   | 359                                                     |   | (399 | ) | (40 | ) |
| Time deposits                            |   | 1,681                                                   |   | (1,860 | ) | (179 | ) |
| Other borrowings (1)                     |   | 277                                                     |   | (288 | ) | (11 | ) |
| Net increase (decrease)                  |   | 2,317                                                   |   | (2,547 | ) | (230 | ) |
| Total net increase (decrease)            |   | $                                                       | 6,564  |   | $ | (678 | ) | $ | 5,886 |   |

 

----

(1)          For the purpose of this schedule the change in interest expense onthe trust preferred securities is included in other borrowings.

 

18

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**Non-interest Income**

 

The Company’s non-interestincome consists primarily of service charges on deposit accounts, other servicefees, and mortgage loan origination and processing fees.

 

For the three monthsended September 30, 2003, total non-interest income increased $818,000 or39% over the same period in 2002.  Forthe nine months ended September 30, 2003, total non-interest incomeincreased $1,956,000 or 37% over the same period in 2002.

 

Service charge incomerose $463,000 or 63% and $849,000 or 41% over the same three and nine-monthperiods of 2002. Approximately $123,000 or 14% of the nine-month periodincrease relates to CCB’s service charges in the first quarter of 2003, whichwere not included in the first quarter 2002 results.  The Central Sierra acquisition increased third quarter and year-to-datenon-interest income by approximately $261,000, which represents 56% of thethird quarter increase and 31% of the year-to-date increase.

 

In addition, income frommortgage loan origination and packaging fees increased $375,000 or 34% and$1,097,000 or 41% over the same three and nine-month periods of 2002. The increase was primarily a resultof:  1) an increase in the number ofrefinance transactions (due to historic low interest rates), 2) an increase inmarket share due to expansion of loan staff and marketing, 3) expansion of themortgage product line, and 4) the Central Sierra acquisition which addedapproximately $126,000 to third quarter and year-to-date totals.

 

**Non-interest Expense**

 

Non-interest expensesconsist of salaries and related employee benefits, occupancy and equipmentexpenses, data processing fees, professional fees, directors’ fees, and otheroperating expenses. Non-interest expense increased $1.43 million or 23% and$3.70 million or 22% over the same three and nine-month periods of 2002.Approximately $1.27 million or 34% of the nine-month period increase relates toCCB’s non-interest expenses in the first quarter of 2003, which were notincluded in the first quarter 2002 results. The Central Sierra acquisition added approximately $851,000 to the threeand nine-month period totals which represents 59% and 23%, respectively, of theincrease.

 

Salaries and benefitsincreased $1.11 million or 35% and $2.45 million or 28% over the same three andnine-month periods of last year. This increase was due primarily to theintegration of the Central Sierra and CCB employees into the Company’soperation, the increase in commissions related to the increased income onmortgage loan origination and packaging fees and the implementation of new company-wideincentive programs.

 

The followingtables set forth a summary of non-interest expense for the periods indicated(dollars in thousands, percentages are annualized):

 
|                                               |   | **Three Months Ended September 30,** |   |
|----------------------------------------------------|--------|-------------------------------------------|--------|
|                                               |   | **2003**                                  |   | **2002** |   |
|                                               |   | **Expense**                               |   | **%****of Avg  Earning  Assets** | ** ** | **Expense** | ** ** | **%****of Avg  Earning  Assets** | ** ** |
| Salaries and benefits                              |   | $                                         | 4,291  |   | 2.09% |   | $ | 3,178 |   | 2.11% |   |
| Occupancy & equipment                          |   | 1,259                                     |   | 0.61% |   | 1121 |   | 0.74% |   |
| Other expenses                                     |   | 2,018                                     |   | 0.98% |   | 1,995 |   | 1.32% |   |
| Merger expenses                                    |   | 86                                        |   | 0.04% |   | 0 |   | 0.00% |   |
| Amortization of core deposit and other intangibles |   | 134                                       |   | 0.07% |   | 62 |   | 0.04% |   |
| Total non-interest expense                         |   | $                                         | 7,789  |   | 3.80% |   | $ | 6,356 |   | 4.21% |   |

 

19

 
|                                               |   | **Nine Months Ended September 30,** |   |
|----------------------------------------------------|--------|------------------------------------------|--------|
|                                               |   | **2003**                                 |   | **2002** |   |
|                                               |   | **Expense**                              |   | **%****of Avg  Earning  Assets** | ** ** | **Expense** | ** ** | **%****of Avg  Earning  Assets** | ** ** |
| Salaries and benefits                              |   | $                                        | 11,142 |   | 2.09% |   | $ | 8,688 |   | 2.15% |   |
| Occupancy & equipment                          |   | 3,464                                    |   | 0.65% |   | 2,672 |   | 0.66% |   |
| Other expenses                                     |   | 5,453                                    |   | 1.02% |   | 5,206 |   | 1.29% |   |
| Merger expenses                                    |   | 86                                       |   | 0.02% |   | 0 |   | 0.00% |   |
| Amortization of core deposit and other intangibles |   | 257                                      |   | 0.05% |   | 138 |   | 0.03% |   |
| Total non-interest expense                         |   | $                                        | 20,402 |   | 3.83% |   | $ | 16,703 |   | 4.13% |   |

 

**Efficiency Ratio**

 

The Company uses a widely used banking operating ratioas a measure of its progress in increasing operating efficiency.  The efficiency ratio is derived by dividingtotal other (i.e. operating) expenses by the sum of tax adjusted net interestincome and non-interest income.  Simplyput, this ratio describes the funds necessary to generate $1 in tax equivalenttotal revenue.  The Company’s efficiencyratio has continued to improve in 2003.

 

The following table sets forth the Company’stax adjusted efficiency ratio for the periods indicated (dollars in thousands):

 
|                                               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |       |
|----------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|------------|
|                                               |   | **2003**                                   |   | **2002**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Non-interest expense                               |   | $                                          | 7,789  |                                      | $          | 6,356 |   | $ | 20,402 |   | $ | 16,703 |   |
| Merger expenses                                    |   | (86                                        | )      | —                                    |       | (86 | ) | — |   |
| Amortization of core deposit and other intangibles |   | (134                                       | )      | (62                                       | )          | (257 | ) | (138 | ) |
| Net non-interest expense                           |   | $                                          | 7,569  |                                      | $          | 6,294 |   | $ | 20,059 |   | $ | 16,565 |   |
|                                               |   |                                       |   |                                      |       |   |   |   |   |
| Fully tax equivalent income:                       |   |                                       |   |                                      |       |   |   |   |   |
| Net interest income                                |   | $                                          | 10,137 |                                      | $          | 7,737 |   | $ | 27,013 |   | $ | 21,106 |   |
| Non-interest income                                |   | 2,936                                      |   | 2,118                                     |       | 7,251 |   | 5,294 |   |
| Tax benefit adjustment for tax-exempt income       |   | 282                                        |   | 221                                       |       | 766 |   | 664 |   |
| Total fully tax equivalent Income                  |   | $                                          | 13,355 |                                      | $          | 10,076 |   | $ | 35,030 |   | $ | 27,064 |   |
|                                               |   |                                       |   |                                      |       |   |   |   |   |
| Efficiency Ratio                                   |   | 56.68                                      | %      | 62.47                                     | %          | 57.26 | % | 61.21 | % |

 

20

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**Income Taxes**

 

The following table reflects the Company’s taxprovision and the related effective tax rate for the periods indicated (dollarsin thousands):

 
|               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|--------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|               |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Tax provision      |   | $                                          | 1,729  |                                      | $      | 893 |   | $ | 4,501 |   | $ | 2,390 |   |
| Effective tax rate |   | 36.9                                       | %      | 30.2                                      | %      | 36.9 | % | 29.0 | % |
|                    |        |                                            |        |                                           |        |  |  |  |  |  |  |  |  |

 

The Company’s effective tax rate varies with changesin the relative amounts of its non-taxable income and non-deductible expenses.The increase in the Company’s tax provision is attributable to increases in theCompany’s net income and the relative amount of tax-exempt income. The Companydecreased its effective tax rate in 2002 by deploying a series of taxstrategies including the purchase of tax-exempt municipal bonds, the funding ofenterprise zone loans and the establishment of a real estate investment trust(“REIT”) in the first quarter of 2002.  The Company’s effective tax rate increased to 36.9% for both the thirdquarter and nine-month periods of 2003 as compared to 30.2% and 29.0% in thesame periods of 2002.  The increase inthe effective tax rate is due primarily to management’s assessment that certaintax-exempt income may be recharacterized as taxable in 2003 through action bythe California Legislature.  Managementwill continuously monitor developments throughout the year and a determinationcould be made to recognize a tax benefit if it appears likely that the law willremain unchanged.

 

###### **Asset Quality**

 

The Company concentrates its lending activitiesprimarily within areas directly serviced by its branches as previouslydiscussed.

 

The Company manages its credit risk throughdiversification of its loan portfolio, the application of underwriting policiesand procedures and credit monitoring practices. Although the Company has adiversified loan portfolio, a significant portion of its borrowers’ ability torepay their loans is dependent upon the professional services and residentialreal estate development industry sectors. Generally, loans are secured by realestate or other assets and are expected to be repaid from the cash flows of theborrower or proceeds from the sale of collateral.

 

The following table sets forth the amounts of loans outstanding bycategory as of the dates indicated (dollars in thousands):

 
|                                                |   | **September 30,  2003** |    | **% of  Total** |         | **December 31,  2002** |   | **% of  Total** |   |
|-----------------------------------------------------|--------|------------------------------|---------|-----------------|--------------|-----------------------------|--------|-----------------|--------|
| Commercial                                          |   | $                            | 94,662  |            |  13.58% |                        | $      | 88,084          |   |  16.35% |   |
| Commercial and residential real estate mortgage     |   | 413,540                      |    |  59.32%    |         | 311,030                     |   |  57.73%    |   |
| Commercial and residential real estate construction |   | 170,094                      |    |  24.40%    |         | 124,726                     |   |  23.15%    |   |
| Agricultural                                        |   | 14,528                       |    |   2.08%    |         | 8,540                       |   |   1.59%    |   |
| Lease financing                                     |   | 2,143                        |    |   0.31%    |         | 3,325                       |   |   0.62%    |   |
| Installment and other                               |   | 4,728                        |    |   0.68%    |         | 4,630                       |   |   0.86%    |   |
| Deferred loan fees and costs, net                   |   | (2,524                       | )       |  -0.36%    |         | (1,551                      | )      |  -0.29%    |   |
| Total                                               |   | 697,171                      |    | 100.00%         |         | 538,784                     |   | 100.00%         |   |
| Less allowance for loan and lease losses            |   | (10,032                      | )       |  -1.44%    |         | (7,113                      | )      |  -1.32%    |   |
| Total net loans and leases                          |   | $                            | 687,138 |            |         |                        | $      | 531,671         |   |   |   |

 

21

----

 

The followingtable sets forth a summary of the Company’s non-performing assets as of thedates indicated (dollars in thousands):

 
|                                                               |   | **September 30,  2003** |   | **December 31,  2002** |   |
|--------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Non-accrual loans                                                  |   | $                            | 661    |                        | $      | 692 |   |
| 90 days past due and still accruing                                |   | —                       |   | —                      |   |
| Other real estate                                                  |   | —                       |   | 489                         |   |
| Total non-performing assets                                        |   | $                            | 661    |                        | $      | 1,181 |   |
| Non-performing assets as a% of total assets                        |   | 0.07                         | %      | 0.17                        | %      |
| Non-accrual loans as a% of gross loans                             |   | 0.09                         | %      | 0.13                        | %      |
| Ratio of allowance for loan and lease losses to non-accrual  loans |   | 15.18                        |   | 10.28                       |   |

 

The Company’s non-accrual loans decreased from$692,000 to $661,000 in the first nine months of 2003. The Company’s “coverageratio” or the ratio of allowance for loan and lease losses to non-accrual loansincreased from 10.28 to 15.18 during the first nine months of 2003.  The Company carried no other real estate asof September 30, 2003.

 

**Allowance for Loan and Lease Losses (ALLL)**

 

The Company makes provisions to the ALLL on a regularbasis through charges to operations that are reflected in the Company’sstatements of income as a provision for loan and lease losses. When a loan orlease is deemed uncollectible, it is charged against the allowance. Anyrecoveries of previously charged-off loans are credited back to the allowance.There is no precise method of predicting specific losses or amounts thatultimately may be charged-off on particular categories of the loan portfolio.

 

Accordingly, the adequacy ofthe ALLL and the level of the related provision for possible loan and leaselosses is determined based on management’s judgment after consideration of(i) economic conditions, (ii) borrowers’ financial condition,(iii) loan impairment, (iv) evaluation of industry trends,(v) industry and other concentrations, (vi) loans which arecontractually current as to payment terms but demonstrate a higher degree ofrisk as identified by Management, (vii) continuing evaluation of theperforming loan portfolio, (viii) monthly review and evaluation of problemloans identified as having loss potential, (ix) quarterly review by theBoard of Directors, and (x)  assessments by banking regulators and otherthird parties. Management and the Board of Directors evaluate the ALLL anddetermine its desired level considering objective and subjective measures, suchas knowledge of the borrowers’ business, valuation of collateral, thedetermination of impaired loans or leases and exposure to potential losses.

 

The ALLL is a generalreserve available against the total loan and lease portfolio. It is maintainedwithout any inter-allocation to the categories of the loan portfolio, and theentire allowance is available to cover loan and lease losses. While Managementuses available information to recognize possible losses on loans and leases,future additions to the allowance may be necessary, based on changes ineconomic conditions and other matters. In addition, various regulatoryagencies, as an integral part of their examination process, periodically reviewthe Company’s ALLL. Such agencies may require the Company to provide additionsto the allowance based on their judgment of information available to them atthe time of their examination.

 

The ALLL should not beinterpreted as an indication that charge-offs in future periods will occur inthe stated amounts or proportions.

 

The adequacy of the ALLL isdetermined based on three components. First is the dollar weighted risk ratingof the loan portfolio, including all outstanding loans and leases. Everyextension of credit has been assigned a risk rating based upon a comprehensivedefinition intended to measure the inherent risk of lending money. Each ratinghas an assigned risk factor expressed as a reserve percentage based on historiclosses by loan type, or peer data for the loan types that have no historiclosses. Secondly, established specific reserves are assigned to individualloans currently on the Company’s Problem Loan Reports. These are estimatedpotential losses associated with specific borrowers based upon collateral valueand event(s) affecting the risk rating. Thirdly, the Company maintains areserve for qualitative factors that may affect the portfolio as a whole, suchas those factors described above, including an unallocated reserve for modelimprecision.

 

Management believes the assigned risk grades and methods for managingchanges in assigned risk grades are satisfactory.

 

22

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The reserve percentage increased in the third quarter of 2003 becauseCentral Sierra had a greater percentage of land and development loans thatrequired a higher reserve percentage.

 

The followingtable summarizes the activity in the ALLL for the periods indicated (dollars inthousands):

 
|                                                       |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |       |
|------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|------------|
|                                                       |   | **2003**                                   |   | **2002**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Beginning balance for allowance for loan and lease  losses |   | $                                          | 8,165  |                                      | $          | 6,312 |   | $ | 7,113 |   | $ | 5,097 |   |
| Provision for loan and lease losses                        |   | 600                                        |   | 541                                       |       | 1,655 |   | 1,466 |   |
| Charge offs:                                               |   |                                       |   |                                      |       |   |   |   |   |
| Commercial                                                 |   | (251                                       | )      | —                                    |       | (274 | ) | (353 | ) |
| Real estate                                                |   | —                                     |   | —                                    |       | — |   | — |   |
| Agricultural                                               |   | —                                     |   | —                                    |       | — |   | — |   |
| Other                                                      |   | (9                                         | )      | (25                                       | )          | (35 | ) | (62 | ) |
| Total charge offs                                          |   | (260                                       | )      | (25                                       | )          | (309 | ) | (415 | ) |
| Recoveries:                                                |   |                                       |   |                                      |       |   |   |   |   |
| Commercial                                                 |   | 6                                          |   | 25                                        |       | 19 |   | 48 |   |
| Real estate                                                |   | —                                     |   | —                                    |       | 15 |   | 2 |   |
| Agricultural                                               |   | —                                     |   | —                                    |       | 14 |   | — |   |
| Other                                                      |   | —                                     |   | 8                                         |       | 4 |   | 16 |   |
| Total recoveries                                           |   | 6                                          |   | 33                                        |       | 52 |   | 66 |   |
| Net (charge offs) recoveries                               |   | (254                                       | )      | 8                                         |       | (257 | ) | (349 | ) |
| ALLL of Central Sierra/CCB acquired during the  period     |   | 1,521                                      |   | —                                    |       | 1,521 |   | 647 |   |
| Ending balance                                             |   | $                                          | 10,032 |                                      | $          | 6,861 |   | $ | 10,032 |   | $ | 6,861 |   |
| ALLL to total loans                                        |   | 1.43                                       | %      | 1.34                                      | %          | 1.43 | % | 1.34 | % |
| Annualized net (charge offs) recoveries to average  loans  |   | -0.15                                      | %      | 0.01                                      | %          | -0.06 | % | -0.10 | % |

 

# **Investment Portfolio and Other Assets**

 

Total investment securitiesincreased $21.1 million or 29% in the first nine months of 2003.  The increase was primarily due to short-termavailable-for-sale securities purchased with the excess liquidity acquired inthe Central Sierra transaction.  TheCompany also acquired $7.9 million, or 37% of the increase, in available-for-salesecurities from Central Sierra.

 

On June 30, 2003, theCompany purchased $7 million of Bank Owned Life Insurance (BOLI) on the livesof certain directors and bank officers. The policies are underwritten by Mass Mutual and there is an aggregatedeath benefit of approximately $15.8 million. Each of the 25 group participants will receive an assignment of $25,000of the death benefit, which totals $625,000 or approximately 4% of the totalexpected death benefit.  The Companybelieves the insurance represents an attractive yield and will offset a portionof the companies growing benefit costs. The $7 million cash surrender value of the BOLI policies is reflected onthe balance sheet in other assets and the income it generates is reported asnon-interest income.

 

**Liquidity**

 

A Funds Management Policyhas been developed by the Company’s Management and approved by the Company’sBoard of Directors that establishes guidelines for the investments andliquidity of the Company. The goals of this policy are to provide liquidity tomeet the financial requirements of the Company’s customers, maintain adequatereserves as required by regulatory agencies and maximize earnings of theCompany. The Company’s liquidity ratio at September 30, 2003 was 18.2% andwas 10.5% at December 31, 2002. The increased liquidity ratio at September 30, 2003 is due toapproximately $60 million in cash and Fed Funds that were acquired in theCentral Sierra transaction on July 11, 2003.  Liquidity will decrease to normal levels as these fed funds aredeployed into loans over the next three quarters.  Liquidity is computed by dividing liquid assets (consisting ofcash and due from banks, available-for-sale investments not pledged, federalfunds sold and loans available-for-sale) by total liabilities. The Company’sManagement believes it maintains adequate liquidity levels.

 

23

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**Capital Adequacy**

 

Overall capital adequacy is monitored on a day-to-daybasis by the Company’s Management and reported to the Company’s Board ofDirectors on a monthly basis. The Company’s and subsidiary banks’ regulatorsmeasure capital adequacy by using a risk-based capital framework and bymonitoring compliance with minimum risk-based and leverage ratio guidelines.Under the risk-based capital standards, assets reported on the Company’sbalance sheet and certain off-balance sheet items are assigned to riskcategories, each of which is assigned a risk weight.

 

This standard characterizes an institution’s capitalas being “Tier 1” capital (defined as principally comprising shareholders’equity and qualifying Trust Preferred Securities) and “Tier 2” capital (definedas principally comprising the qualifying portion of the ALLL and any remainingTrust Preferred Securities).

 

The minimumratio of total risk-based capital to risk-weighted assets, including certainoff-balance sheet items, is 8% (10% to be considered well-capitalized).  The minimum ratio of Tier 1 capital toaverage assets (leverage ratio) is 4.0% (5.0% to be consideredwell-capitalized).  The minimum ratio ofTier 1 capital to risk-weighted assets is 4.0% (6.0% to be consideredwell-capitalized).  At least one-half(4%) of the total risk-based capital (Tier 1) is to be comprised of commonequity; the balance may consist of debt securities and a limited portion of theALLL.  Trust Preferred Securities in theamount of  $24.8 million are included inthe Company’s Tier 1 capital, as allowed by Federal Reserve regulations, in theconsolidated totals below.   The remaining$11.2 million in Trust Preferred Securities are included in Tier 2.

 

The following table sets forth the Company’s and its bankingsubsidiaries’ capital ratios as of the dates indicated.

 
|                                              |   | **September 30,  2003** |   | **December 31,  2002** |   |
|---------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                              |   | **CCB**                      |   | **Lake**                    |   | **Western** |   | **Company** |   | **CCB** |   | **Lake** |   | **Western** |   | **Company** |   |
| Total risk-based capital to risk-weighted assets  |   | 11.0                         | %      | 10.2                        | %      | 10.4 | % | 12.9 | % | 11.4 | % | 10.4 | % | 10.7 | % | 12.7 | % |
| Tier 1 capital to risk-weighted assets            |   | 9.7                          | %      | 9.0                         | %      | 9.1 | % | 10.2 | % | 10.2 | % | 9.2 | % | 9.5 | % | 11.4 | % |
| Tier 1 capital to average assets (leverage ratio) |   | 6.9                          | %      | 8.6                         | %      | 8.0 | % | 8.5 | % | 7.0 | % | 8.5 | % | 8.3 | % | 9.6 | % |

 

The Company andits bank subsidiaries continue to meet all regulatory capital requirements atSeptember 30, 2003.

 

24

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**ITEM 3****. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

As a financial institution,the Company’s primary component of market risk is interest rate volatility.Fluctuation in interest rates will ultimately impact both the level of incomeand expense recorded on a large portion of the Company’s assets andliabilities, and the market value of all interest earning assets and interestbearing liabilities, other than those which possess a short term to maturity.Virtually all of the Company’s interest earning assets and interest bearingliabilities are located at the banking subsidiary level. Thus, virtually all ofthe Company’s interest rate risk exposure lies at the banking subsidiary level.As a result, all significant interest rate risk Management procedures areperformed at the banking subsidiary level. The subsidiary banks’ real estateloan portfolios, concentrated primarily within Northern California, are subjectto risks associated with their local economies.

 

The fundamental objective ofthe Company’s management of its assets and liabilities is to maximize theCompany’s economic value while maintaining adequate liquidity and an exposureto interest rate risk deemed by Management to be acceptable. Managementbelieves an acceptable degree of exposure to interest rate risk results fromthe management of assets and liabilities through maturities, pricing and mix toattempt to neutralize the potential impact of changes in market interest rates.The Company’s profitability is dependent to a large extent upon its netinterest income, which is the difference between its interest income oninterest-earning assets, such as loans and investments, and its interestexpense on interest-bearing liabilities, such as deposits and borrowings. TheCompany is subject to interest rate risk to the degree that itsinterest-earning assets reprice differently than its interest-bearingliabilities. The Company manages its mix of assets and liabilities with thegoals of limiting its exposure to interest rate risk, ensuring adequateliquidity, and coordinating its sources and uses of funds.

 

The Company seeks to controlinterest rate risk exposure in a manner that will allow for adequate levels ofearnings and capital over a range of possible interest rate environments. TheCompany has adopted formal policies and practices to monitor and manageinterest rate risk exposure.  Managementbelieves historically it has effectively managed the effect of changes ininterest rates on its operating results. Management believes that it can continue to manage the short-term effectof interest rate changes under various interest rate scenarios.

 

25

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The followingtable sets forth, as of September 30, 2003, the distribution of re-pricingopportunities for the Company’s earning assets and interest-bearingliabilities, the interest rate sensitivity gap, the cumulative interest ratesensitivity gap, the interest rate sensitivity gap ratio (i.e. earning assetsdivided by interest-bearing liabilities) and the cumulative interest ratesensitivity gap ratio.

 
| **Earning assets:**                                               |   | **Within  3  Months** |    | **After 3  Months But  Within One  Year** |   | **After  One  Year But  Within Five  Years** |   | **After  Five  Years** |    | **Total** |   |
|-------------------------------------------------------------------|--------|-----------------------|---------|-------------------------------------------|--------|----------------------------------------------|--------|------------------------|---------|-----------|--------|
| Federal funds sold                                                |   | $                     | 77,965  |                                      | $      | —                                       |   | $                      | —  |      | $      | — |   | $ | 77,965 |   |
| Investment securities and other                                   |   | 26,533                |    | 9,141                                     |   | 33,946                                       |   | 24,219                 |    | 93,838    |   |
| Loans                                                             |   | 205,524               |    | 115,467                                   |   | 177,184                                      |   | 200,843                |    | 699,018   |   |
| Total earning assets                                              |   | 310,022               |    | 124,608                                   |   | 211,129                                      |   | 225,062                |    | 870,821   |   |
|                                                              |   |                  |    |                                      |   |                                         |   |                   |    |      |   |
| **Interest-bearing liabilities:**                                 |   |                  |    |                                      |   |                                         |   |                   |    |      |   |
| Savings                                                           |   | 47,259                |    | 23,629                                    |   | —                                       |   | —                 |    | 70,888    |   |
| Interest-bearing transaction accounts                             |   | 184,583               |    | 33,755                                    |   | —                                       |   | —                 |    | 218,338   |   |
| Time deposits                                                     |   | 130,774               |    | 132,377                                   |   | 63,177                                       |   | —                 |    | 326,328   |   |
| Trust Preferred Securities                                        |   | 36,000                |    | —                                    |   | —                                       |   | —                 |    | 36,000    |   |
| Other borrowings                                                  |   | 5,000                 |    | 2,500                                     |   | 14,150                                       |   | —                 |    | 21,650    |   |
| Total interest-bearing liabilities                                |   | 403,616               |    | 192,262                                   |   | 77,327                                       |   | —                 |    | 673,204   |   |
| Interest rate sensitivity gap                                     |   | (93,594               | )       | (67,654                                   | )      | 133,803                                      |   | 225,062                |    | 197,617   |   |
| Cumulative interest rate sensitivity gap                          |   | $                     | (93,594 | )                                         | $      | (161,247                                     | )      | $                      | (27,444 | )         | $      | 197,617 |   | $ | — |   |
| Interest rate sensitivity gap to total earning  assets            |   | -10.75                | %       | -7.77                                     | %      | 15.37                                        | %      | 25.84                  | %       | 22.69     | %      |
| Cumulative interest rate sensitivity gap to total  earning assets |   | -10.75                | %       | -18.52                                    | %      | -3.15                                        | %      | 22.69                  | %       |      |   |
| Ratio of rate sensitive assets to rate sensitive  liabilities     |   | 0.77                  |    | 0.65                                      |   | 2.73                                         |   | N/A                    |    | 1.29      |   |
| Cumulative ratio                                                  |   | 0.77                  |    | 0.73                                      |   | 0.96                                         |   | 1.29                   |    | 1.29      |   |

 

The opportunity to reprice assets in the same dollar amountsand at the same time as liabilities would minimize interest rate risk in anyinterest rate environment. The difference between the amounts of assets andliabilities repriced at the same time, or “gap”, represents the risk, oropportunity, in repricing. In general, if more assets than liabilities arerepriced at a given time in a rising rate environment, net interest incomewould improve while in a declining rate environment, net interest income woulddecline. If more liabilities than assets were repriced under the sameconditions the opposite would result. The Company appears liability sensitivein the immediate to one-year period, and turns asset sensitive in the longerterm. This can be and is influenced by the fact that the majority ofinterest-bearing transaction accounts which consist of money market, NOW andsavings deposit accounts are classified as repricing within three months whenin fact these deposits may be immediately repriced at Management’s option, thusassisting in the further management of interest rate risk.

 

Because of the inherent limitations of the static GAP model describedabove, management deployed a new interest rate sensitivity measurement tool inApril 2003 that more accurately measures the Company’s exposure to futurechanges in interest rates.  This modelmeasures the expected cash flows and repricing of each financialasset/liability separately in measuring the Company’s and each bank’s interestsensitivity. Management and the Board’s Investment/ALCO Committee havecarefully reviewed the initial reports that indicate that the Company as awhole is “asset sensitive”.  This meansthe Company expects (all other things being equal) to expand its net interestincome if rates rise and expects it conversely to contract if rates fall.  The level of potential or expected contractionis considered manageable at this time. Management will continue to perform this analysis each quarter tofurther validate the expected results against actual data.

 

26

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**ITEM 4****.    Controls and Procedures.**

 

The Company’s Chief Executive Officer and Chief Financial Officer,based on their evaluation as of the date of this report of the Company’sdisclosure controls and procedures (as defined in Exchange ActRule 13a—14(c)), have concluded that the Company’s disclosure controls andprocedures are adequate and effective for purposes of Rule 13a—14(c) intimely alerting them to material information relating to the Company requiredto be included in the Company’s filings with the SEC under the Securities ExchangeAct of 1934.

 

There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of theirevaluation.  

 

27

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**PART II. Other Information**

 

**Item #1****. Legal proceedings**

 

The Company and itssubsidiaries are involved in various routine legal actions arising in theordinary course of business. The Company believes that the ultimate dispositionof all currently pending matters will not have a material adverse effect on theCompany’s financial condition or results of operations.

 

# **Item #2. Changesin securities and use of proceeds**

 

N/A

 

# **Item #3. Defaultsupon Senior Securities**

# ** **

N/A

 

# **Item#4.    Submission of Matters to a Vote of Security Holders**

# ** **

N/A

 

# **Item #5. OtherInformation**

# ** **

N/A

 

**Item #6A. Exhibits**

 
| **Exhibit  No.** |   | **Description of Exhibit**                                                                                                                                                                                                                                                         |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                               |
| 3.1              |   | Articles of Incorporation are contained in the Registrant’s  Registration Statement on Form S-4, file #333-66675, as Exhibit 3.1 and are  incorporated herein by this reference.                                                                                              |
|             |   |                                                                                                                                                                                                                                                                               |
| 3.2              |   | Bylaws are contained in the Registrant’s Registration Statement on  Form S-4, file #333-66675, as Exhibit 3.2 and are incorporated herein by this  reference.                                                                                                                 |
|             |   |                                                                                                                                                                                                                                                                               |
| 3.3              |   | Amendments to Bylaws  are contained in the Registrant’s Registration Statement on Form S-4, file  #333-76678, as Exhibit 3.2 and are incorporated herein by this reference.                                                                                                   |
|             |   |                                                                                                                                                                                                                                                                               |
| 10.1             |   | Severance Compensation Agreement dated December 4, 1997 between  Mr. Kirk Dowdell and Western Sierra National Bank is contained in the  Registrant’s Registration Statement on Form S-4, file #333-33256, as Exhibit  10.1 and is incorporated herein by this reference. |
|             |   |                                                                                                                                                                                                                                                                               |
| 10.2             |   | Stock Option Agreement dated September 22, 1997 between Mr. Kirk  Dowdell and Western is contained in the Registrant’s Registration Statement  on Form S-4, file # 333-33256, as Exhibit 10.2 and is incorporated herein by  this reference.                             |
|             |   |                                                                                                                                                                                                                                                                               |
| 10.3             |   | Stock Option Agreement dated May 19, 1999 between Mr. Kirk  Dowdell and Western is contained in the Registrant’s Registration Statement  on Form S-4, file # 333-33256, as Exhibit 10.3 and is incorporated herein by  this reference.                                   |
|             |   |                                                                                                                                                                                                                                                                               |
| 10.4             |   | Stock Option Agreement dated May 19, 1999 between Mr. Gary D.  Gall and Western is contained in the Registrant’s Registration Statement on  Form S-4 file, # 333-33256, as Exhibit 10.3 and is incorporated herein by  this reference.                                   |
|             |   |                                                                                                                                                                                                                                                                               |
| 10.5             |   | Executive Salary Continuation Agreement dated August 22, 2002,  between Mr. Gary D. Gall and Western Sierra National Bank. (1)                                                                                                                                                |
|             |   |                                                                                                                                                                                                                                                                               |
| 10.6             |   | Stock Option Agreement dated April 11, 1995 between Mr. Gary D.  Gall and Western Sierra National Bank is contained in the Registrant’s  Registration Statement on Form S-4, file #333-66675, as Exhibit 10.5 and is  incorporated herein by this reference.             |
|             |   |                                                                                                                                                                                                                                                                               |
| 10.7             |   | Stock Option Agreement dated November 14, 1996 between Mr. Gary  D. Gall and Western Sierra National Bank is contained in the Registrant’s  Registration Statement on Form S-4, file #333-66675, as Exhibit 10.6 and is  incorporated herein by this reference.          |
|             |   |                                                                                                                                                                                                                                                                               |
| 10.8             |   | Stock Option Agreement dated May 20, 1997 between Mr. Gary D.  Gall and Western is contained in the Registrant’s Registration Statement on  Form S-4, file #333-66675, as Exhibit 10.7 and is incorporated herein by this  reference.                                    |

 

28

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| 10.9   |   | Western Sierra Bancorp 1999 Stock Option Plan and form of stock  option agreements are contained in the Registrant’s Registration Statement on  Form S-8, file #333-86653, as Exhibit 99.3 and are incorporated herein by  this reference.                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.10  |   | Western Sierra National Bank 1989 Stock Option Plan, form of  incentive stock option and form of nonqualified stock option agreements are  contained in the Registrant’s Registration Statement on Form S-4, file  #333-66675, as Exhibit 10.10 and are incorporated herein by this reference. |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.11  |   | Western Sierra Bancorp 1997 Stock Option Plan, form of incentive  stock option and form of nonqualified stock option agreements are contained  in the Registrant’s Registration Statement on Form S-4 ,file #333-66675, as  Exhibit 10.11 and are incorporated herein by this reference.       |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.12  |   | Indemnification Agreement between Mr. Gary D. Gall and Western Sierra  National Bank is contained in the Registrant’s Registration Statement on Form  S-4, file #333-66675, as Exhibit 10.13 and is incorporated herein by this  reference.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.13  |   | Indemnification Agreement between Mr. Kirk Dowdell and Western is  contained in the Registrant’s Registration Statement on Form S-4, file  #333-86653, as Exhibit 10.14 and is incorporated herein by this reference.                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.14  |   | Form of Indemnification Agreement for the directors of Western Sierra  National Bank is contained in the Registrant’s Registration Statement on  Form  S-4 file, #333-66675, as Exhibit  10.15 and is incorporated herein by this reference.                                              |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.15  |   | Placerville Branch lease is contained in the Registrant’s  Registration Statement on Form S-4, file #333-66675, as Exhibit 10.1 and is  incorporated herein by this reference.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.16  |   | Executive Salary Continuation Agreement dated February 1, 2002,  between Mr. Kirk N. Dowdell. (1)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.17  |   | Severance Benefits Agreement dated December 4, 1997 between Mr.  Gary D. Gall and Western Sierra National Bank is contained in the  Registrant’s Registration Statement on Form S-4, file #333-66675, as Exhibit  10.2 and is incorporated herein by this reference.                      |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.18  |   | Western Sierra National Bank Incentive Compensation Plan for Senior  Management is contained in the Registrant’s Registration Statement on Form  S-4, file # 333-66675, as Exhibit 10.12 and is incorporated herein by this  reference.                                                        |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.19  |   | Stock Option Agreement dated April 11, 2000 between Mr. Kirk  Dowdell and Western is contained in the Registrant’s Registration Statement  on Form S-4, file # 333-76678, as Exhibit 10.19 and is incorporated herein by  this reference.                                                 |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.20  |   | Stock Option Agreement dated April 11, 2000 between Mr. Gary D.  Gall and Western is contained in the Registrant’s Registration Statement on  Form S-4, file # 333-76678, as Exhibit 10.20 and is incorporated herein by  this reference.                                                 |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.21  |   | Stock Option Agreement dated April 10, 2001 between Mr. Kirk  Dowdell and Western is contained in the Registrant’s Registration Statement  on Form S-4, file # 333-76678, as Exhibit 10.21 and is incorporated herein by  this reference.                                                 |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.22  |   | Stock Option Agreement dated April 10, 2001 between Mr. Gary D.  Gall and Western is contained in the Registrant’s Registration Statement on  Form S-4, file # 333-76678, as Exhibit 10.22 and is incorporated herein by  this reference.                                                 |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.23  |   | Stock Option Agreement dated December 11, 2001 between Mr. Kirk  Dowdell and Western is contained in the Registrant’s Registration Statement  on Form S-4, file # 333-76678, as Exhibit 10.23 and is incorporated herein by  this reference.                                              |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.24  |   | Folsom Western Sierra National Bank branch lease and lease amendment.  (1)                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.25  |   | Agreement and Plan of Reorganization by and between the Western and  Central Sierra Bank dated as of March 12, 2003 is attached as Appendix A  to the proxy statement-prospectus contained in the S-4 Registration Statement  file #333-104817 and is incorporated herein by this reference.   |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.26  |   | Wells Fargo Note Contract dated April 10, 2003. (1)                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.27  |   | Stock Option Agreement dated December 11, 2001 between Mr.  Phillip Wood and Western Sierra Bancorp. (1)                                                                                                                                                                                       |

 

29

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| 10.28  |   | Stock Option Agreement dated December 11, 2001 between Mr. Doug  Nordell and Western Sierra Bancorp. (1)      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                               |
| 10.29  |   | Stock Option Agreement dated April 25, 2002 between Mr. Doug  Nordell and Western Sierra Bancorp. (1)         |
|   |   |                                                                                                               |
| 10.30  |   | Stock Option Agreement dated April 25, 2002  between Mr. Fred Rowden and Western Sierra  Bancorp. (1)    |
|   |   |                                                                                                               |
| 10.31  |   | Stock Option Agreement dated April 25, 2002 between Mr. Kirk  Dowdell and Western Sierra Bancorp. (1)         |
|   |   |                                                                                                               |
| 10.32  |   | Stock Option Agreement dated June 27, 2002 between Mr. Gary Gall  and Western Sierra Bancorp. (1)             |
|   |   |                                                                                                               |
| 10.33  |   | Stock Option Agreement dated June 27, 2002 between Mr. Anthony  Gould and Western Sierra Bancorp. (1)         |
|   |   |                                                                                                               |
| 10.34  |   | Stock Option Agreement dated March 30, 2003 between Mr. Phillip  Wood and Western Sierra Bancorp. (1)         |
|   |   |                                                                                                               |
| 10.35  |   | Stock Option Agreement dated March 30, 2003 between Mr. Gary  Gall and Western Sierra Bancorp. (1)            |
|   |   |                                                                                                               |
| 10.36  |   | Stock Option Agreement dated March 30, 2003 between Mr. Kirk  Dowdell and Western Sierra Bancorp. (1)         |
|   |   |                                                                                                               |
| 10.37  |   | Stock Option Agreement dated March 30, 2003 between Mr. Anthony  Gould and Western Sierra Bancorp. (1)        |
|   |   |                                                                                                               |
| 10.38  |   | Stock Option Agreement dated March 30, 2003 between Mr. Doug  Nordell and Western Sierra Bancorp. (1)         |
|   |   |                                                                                                               |
| 10.39  |   | Stock Option Agreement dated March 30, 2003 between Mr. Fred  Rowden and Western Sierra Bancorp. (1)          |
|   |   |                                                                                                               |
| 10.40  |   | Stock Option Agreement dated January 1, 2002 between Mr. Charles  Bacchi and Western Sierra Bancorp. (1)      |
|   |   |                                                                                                               |
| 10.41  |   | Stock Option Agreement dated January 1, 2002 between Mrs.  Barbara Cook and Western Sierra Bancorp. (1)       |
|   |   |                                                                                                               |
| 10.42  |   | Stock Option Agreement dated January 1, 2002 between Mr. William  Fisher and Western Sierra Bancorp. (1)      |
|   |   |                                                                                                               |
| 10.43  |   | Stock Option Agreement dated January 1, 2002 between Mr. Howard  Jahn and Western Sierra Bancorp. (1)         |
|   |   |                                                                                                               |
| 10.44  |   | Stock Option Agreement dated January 1, 2002 between Mr. Alan  Kleinert and Western Sierra Bancorp. (1)       |
|   |   |                                                                                                               |
| 10.45  |   | Stock Option Agreement dated January 1, 2002 between Mr. Thomas  Manz and Western Sierra Bancorp. (1)         |
|   |   |                                                                                                               |
| 10.46  |   | Stock Option Agreement dated January 1, 2002 between Mr. Harold  Prescott and Western Sierra Bancorp. (1)     |
|   |   |                                                                                                               |
| 10.47  |   | Stock Option Agreement dated January 1, 2002 between Mr. Lary  Davis and Western Sierra Bancorp. (1)          |
|   |   |                                                                                                               |
| 10.48  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Charles Bacchi and Western Sierra Bancorp. (1)    |
|   |   |                                                                                                               |
| 10.49  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Barbara Cook and Western Sierra Bancorp. (1)      |
|   |   |                                                                                                               |
| 10.50  |   | Stock Option Agreement dated December 31, 2002 between Mr.  William Fisher and Western Sierra Bancorp. (1)    |
|   |   |                                                                                                               |
| 10.51  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Howard Jahn and Western Sierra Bancorp. (1)       |
|   |   |                                                                                                               |
| 10.52  |   | Stock Option Agreement dated December 31, 2002 between Mr. Alan  Kleinert and Western Sierra Bancorp. (1)     |
|   |   |                                                                                                               |
| 10.53  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Thomas Manz and Western Sierra Bancorp. (1)       |
|   |   |                                                                                                               |
| 10.54  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Harold Prescott and Western Sierra Bancorp. (1)   |
|   |   |                                                                                                               |
| 10.55  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Matthew Bruno Sr. and Western Sierra Bancorp. (1) |
|   |   |                                                                                                               |
| 10.56  |   | Stock Option Agreement dated December 31, 2002 between Mr. Lary  Davis and Western Sierra Bancorp. (1)        |
|   |   |                                                                                                               |
| 10.57  |   | Stock Option Agreement dated December 31, 2002 between Mr.  William Eames and Western Sierra Bancorp. (1)     |

 

30

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| 10.58  |   | Executive Salary Continuation Agreement dated June 22, 2002,  between Mr. Fred Rowden and Central California Bank. (1)                                                                                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.59  |   | Executive Salary Continuation Agreement dated June 1, 2002,  between Mr. Phillip Wood and Western Sierra National Bank. (1)                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.60  |   | Executive Salary Continuation Agreement dated June 25, 2002,  between Mr. Doug Nordell and Roseville 1st National Bank. (1)                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.61  |   | Stock Option Agreement dated July 1, 2003 between Mr. Charles  Bacchi and Western Sierra Bancorp.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.62  |   | Stock Option Agreement dated July 1, 2003 between Mr. Matthew  Bruno Sr. and Western Sierra Bancorp.                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.63  |   | Stock Option Agreement dated July 1, 2003 between Mr. Lary Davis  and Western Sierra Bancorp.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.64  |   | Stock Option Agreement dated July 1, 2003 between Mr. William  Fisher and Western Sierra Bancorp.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.65  |   | Stock Option Agreement dated December 31, 2002 between Mr.  William Fisher and Western Sierra Bancorp.                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.66  |   | Stock Option Agreement dated July 1, 2003 between Mr. Howard  Jahn and Western Sierra Bancorp.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.67  |   | Stock Option Agreement dated July 1, 2003 between Mr. Alan  Kleinert and Western Sierra Bancorp.                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.68  |   | Stock Option Agreement dated July 1, 2003 between Mr. Thomas  Manz and Western Sierra Bancorp.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.69  |   | Stock Option Agreement dated July 1, 2003 between Mr. Harold  Prescott and Western Sierra Bancorp.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.70  |   | Stock Option Agreement dated July 15, 2003 between Mr. Kirk  Dowdell and Western Sierra Bancorp.                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.71  |   | Agreement and Plan of Reorganization by and between the Western and  Auburn Community Bank dated as of August 20, 2003 is attached as  Appendix A to the proxy statement-prospectus contained in the S-4  Registration Statement file #333-109833 and is incorporated herein by this  reference. |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.72  |   | Contract between Woodbury Financial Services, Inc. and Western Sierra  National Bank dated July 22, 2003.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.73  |   | Summary of financial terms for Western Sierra Statutory Trusts III,  and IV.                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 11.1   |   | Statement re: Computation of earnings per share is included in Note 3  to the financial statements.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 31.1   |   | Section 302 Certification by Anthony J. Gould                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 31.2   |   | Section 302 Certification by Gary D. Gall                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 32.1   |   | Section 906 Certification by Anthony J. Gould.                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 32.2   |   | Section 906 Certification by Gary D. Gall.                                                                                                                                                                                                                                                       |

 

----

(1) included as an exhibitto the Registrant’s 10-Q for March 31, 2003, which is incorporated by thisreference herein.

 

**Item #6B. Reports on Form 8-K**

 

July 17,2003:  Acquisition of Central SierraBank is completed

July 21,2003:  Press Release results for the 2ndquarter of 2003

August 25,2003:  Announced definitive agreement toacquire Auburn Community Bancorp.

October 21,2003:  Press Release results for the 3rdquarter of 2003

 

31

----

 

**SIGNATURES**

 

Following the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| **WESTERN SIERRA BANCORP**    |                                                               |
|-------------------------------|--------------------------------------------------------------------|
| (Registrant)                  |                                                               |
|                          |                                                               |
| Date: November 10,  2003 |                                                               |
|                          |                                                               |
|                          |                                                               | /s/   GARY D. GALL |   |
|                          | Gary  D. Gall                                                      |
|                          | *President/Chief Executive Officer*                                |
|                          |                                                               |
|                          |                                                               |
|                          |                                                               | /s/   ANTHONY J. GOULD |   |
|                          |                                                               | Anthony  J. Gould |   |
|                          | *Executive Vice President Chief Financial and Accounting  Officer* |
|                               |                                                                    |  |  |  |  |

 

32

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