**UNITEDSTATES**

### **SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-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 March 31, 2006**        |
|                                                          |                                                                                                    |
| **OR**                                                        |
|                                                          |                                                                                                    |
| **o**                                                         | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                          |                                                                                                    |
| **For the  transition period from ___________to ___________** |

 

##### **Commissionfile number 0-25979**

##### ** **

**WESTERNSIERRA 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**

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YesýNoo

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2) YesýNoo

 

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

| Large accelerated filer o |   | Accelerated filer ý |   | Non-accelerated  filer o |
|---------------------------|--------|--------------------------|--------|--------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).
| Yes o |   | No ý |
|-------|--------|-----------|

 

As of May 4, 2006 therewere approximately 7,889,000 shares outstanding of the Registrant’s commonstock. 

 

 

----

 

**WESTERNSIERRA BANCORP & SUBSIDIARIES**

 

**Index to Form 10-Q**

 
| PART I. Financial Information |
|------------------------------------|
|                               | Item 1. | Consolidated Financial  Statements (unaudited) |
|                               |   | Consolidated Balance Sheet  March 31, 2006 and December 31, 2005 |
|                               |   | Consolidated Statement of Income  Three months ended March 31, 2006 and 2005 |
|                               |   | Consolidated Statement of Cash Flows  Three months ended March 31, 2006 and 2005 |
|                               |   | 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 1A. | Risk Factors |
|                               | Item 2. | Unregistered  Sales of Equity 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 |
| SIGNATURES                         |
|                                    |  |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**WesternSierra Bancorp and Subsidiaries**

**CondensedConsolidated Balance Sheet (Unaudited)**

(dollars in thousands)

 
| ** **                                                                                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                 | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **ASSETS:**                                                                                                                | ** ** | ** **         | ** ** | ** **            | ** ** |
| Cash and due  from banks                                                                                                   |       | $                  | 37,818     |                  | $          | 41,972 |   |
| Federal  funds sold                                                                                                        |       | 45,920             |       | 39,535                |       |
| Cash and  cash equivalents                                                                                                 |       | 83,738             |       | 81,507                |       |
|                                                                                                                       |       |               |       |                  |       |
| Loans held  for sale                                                                                                       |       | 417                |       | 3,190                 |       |
| Investment  securities:                                                                                                    |       |               |       |                  |       |
| Trading                                                                                                                    |       | 45                 |       | 41                    |       |
| Available  for sale (amortized cost $80,048 in 2006 and $78,940 in 2005)                                                   |       | 80,127             |       | 79,519                |       |
| Held to  maturity (market value of $2,915 in 2006 and $2,960 in 2005)                                                      |       | 2,864              |       | 2,888                 |       |
| Total  investments                                                                                                         |       | 83,036             |       | 82,448                |       |
| Portfolio  loans:                                                                                                          |       |               |       |                  |       |
| Real estate  mortgage                                                                                                      |       | 540,524            |       | 547,750               |       |
| Real estate  construction                                                                                                  |       | 242,645            |       | 244,872               |       |
| Lot and land  loans                                                                                                        |       | 134,151            |       | 134,147               |       |
| Commercial                                                                                                                 |       | 95,090             |       | 98,152                |       |
| Agricultural                                                                                                               |       | 15,005             |       | 15,828                |       |
| Other loans                                                                                                                |       | 6,152              |       | 7,066                 |       |
| Total gross  loans                                                                                                         |       | 1,033,567          |       | 1,047,635             |       |
| Deferred  loan fees, net                                                                                                   |       | (3,234             | )          | (3,663                | )          |
| Allowance  for loan losses                                                                                                 |       | (15,440            | )          | (15,505               | )          |
| Net  portfolio loans                                                                                                       |       | 1,014,893          |       | 1,028,467             |       |
|                                                                                                                       |       |               |       |                  |       |
| Premises and  equipment, net                                                                                               |       | 18,988             |       | 19,466                |       |
| Goodwill and  other intangible assets                                                                                      |       | 32,997             |       | 33,177                |       |
| Other assets                                                                                                               |       | 43,524             |       | 44,318                |       |
| Total Assets                                                                                                               |       | $                  | 1,277,593  |                  | $          | 1,292,573 |   |
|                                                                                                                       |       |               |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY:**                                                                            | ** ** | ** **         | ** ** | ** **            | ** ** |
| Non-interest  bearing deposits                                                                                             |       | $                  | 253,139    |                  | $          | 276,667 |   |
| Interest  bearing deposits:                                                                                                |       |               |       |                  |       |
| NOW, money  market and savings                                                                                             |       | 372,857            |       | 395,257               |       |
| Time, over  $100,000                                                                                                       |       | 222,718            |       | 222,496               |       |
| Other time                                                                                                                 |       | 180,264            |       | 154,275               |       |
| Total  deposits                                                                                                            |       | 1,028,978          |       | 1,048,695             |       |
|                                                                                                                       |       |               |       |                  |       |
| Borrowed  funds                                                                                                            |       | 64,000             |       | 66,000                |       |
| Subordinated  debt                                                                                                         |       | 37,116             |       | 37,116                |       |
| Other  liabilities                                                                                                         |       | 12,568             |       | 10,530                |       |
| Total  liabilities                                                                                                         |       | 1,142,662          |       | 1,162,341             |       |
|                                                                                                                       |       |               |       |                  |       |
| Shareholders’  equity:                                                                                                |       |               |       |                  |       |
| Preferred  stock- no par value; 15,000,000 shares authorized; none issued                                                  |       | —             |       | —                |       |
| Common  stock- no par value; 15,000,000 shares authorized; issued - 7,864,272 shares  in 2006 and 7,782,223 shares in 2005 |       | 72,519             |       | 71,042                |       |
| Retained  earnings                                                                                                         |       | 62,366             |       | 58,855                |       |
| Accumulated  other comprehensive income                                                                                    |       | 46                 |       | 335                   |       |
| Total  shareholders’ equity                                                                                           |       | 134,931            |       | 130,232               |       |
| Total  Liabilities and Shareholders’ Equity                                                                           |       | $                  | 1,277,593  |                  | $          | 1,292,573 |   |

 

See notes to the unaudited consolidated financial statements.

 

3

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**WesternSierra Bancorp and Subsidiaries**

**CondensedConsolidated Statement of Income (Unaudited)**

(dollars in thousands, except per share data)

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **March 31,**     | ** ** |
| ** **                                                    | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Interest  income:                                             |       |                   |       |   |   |
| Interest and  fees on loans                                   |       | $                      | 20,053     |   | $ | 16,113 |   |
| Interest on  investment securities:                           |       |                   |       |   |   |
| Taxable                                                       |       | 481                    |       | 398 |   |
| Exempt from  federal taxes                                    |       | 453                    |       | 409 |   |
| Interest on  Federal funds sold                               |       | 220                    |       | 312 |   |
| Total  interest income                                        |       | 21,207                 |       | 17,232 |   |
|                                                          |       |                   |       |   |   |
| Interest  expense:                                            |       |                   |       |   |   |
| Interest on  deposits                                         |       | 4,330                  |       | 2,671 |   |
| Interest on  borrowed funds                                   |       | 1,433                  |       | 716 |   |
| Total  interest expense                                       |       | 5,763                  |       | 3,387 |   |
|                                                          |       |                   |       |   |   |
| Net interest  income                                          |       | 15,444                 |       | 13,845 |   |
|                                                          |       |                   |       |   |   |
| Provision  for loan losses (LLP)                              |       | —                 |       | 450 |   |
|                                                          |       |                   |       |   |   |
| Net interest  income after LLP                                |       | 15,444                 |       | 13,395 |   |
|                                                          |       |                   |       |   |   |
| Non-interest  income:                                         |       |                   |       |   |   |
| Service  charges and fees                                     |       | 1,491                  |       | 1,186 |   |
| Investment  service fee income                                |       | 316                    |       | 130 |   |
| Net gain on  sale and packaging of residential mortgage loans |       | 788                    |       | 933 |   |
| Gain on sale  of government-guaranteed loans                  |       | 146                    |       | 112 |   |
| Gain (loss)  on sale of investment securities                 |       | 4                      |       | (3 | ) |
| Other income                                                  |       | 406                    |       | 251 |   |
| Total  non-interest income                                    |       | 3,151                  |       | 2,609 |   |
|                                                          |       |                   |       |   |   |
| Non-interest  expense:                                        |       |                   |       |   |   |
| Salaries and  benefits                                        |       | 5,903                  |       | 5,403 |   |
| Occupancy  and equipment                                      |       | 1,848                  |       | 1,611 |   |
| Other  expenses                                               |       | 2,618                  |       | 2,621 |   |
| Merger  expenses                                              |       | 667                    |       | — |   |
| Amortization  of core deposit intangibles                     |       | 180                    |       | 180 |   |
| Total  non-interest expense                                   |       | 11,216                 |       | 9,815 |   |
|                                                          |       |                   |       |   |   |
| Provision  for income before income tax                       |       | 7,379                  |       | 6,189 |   |
|                                                          |       |                   |       |   |   |
| Income taxes                                                  |       | 2,923                  |       | 2,166 |   |
| Net income                                                    |       | $                      | 4,456      |   | $ | 4,023 |   |
|                                                          |       |                   |       |   |   |
| Basic  earnings per share                                     |       | $                      | 0.57       |   | $ | 0.53 |   |
| Diluted  earnings per share                                   |       | $                      | 0.56       |   | $ | 0.51 |   |

 

See notes to the unaudited consolidated financial statements.

 

4

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**Western Sierra Bancorp and Subsidiaries**

##### **CondensedConsolidated Statement of Cash Flows (Unaudited)**

(dollars in thousands)

 
| ** **                                                                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                       | ** ** | **March 31,**     | ** ** | **March 31,** | ** ** |
| ** **                                                                                       | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Cash flows  from operating activities:                                                           |       |                   |       |   |   |
| Net income                                                                                       |       | $                      | 4,456      |   | $ | 4,023 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:               |       |                   |       |   |   |
| Provision  for loan losses                                                                       |       | —                 |       | 450 |   |
| Depreciation  and amortization                                                                   |       | 943                    |       | 851 |   |
| Decrease in  deferred loan origination fees, net                                                 |       | (429                   | )          | (55 | ) |
| Amortization  of investment security premiums, net of accretion of discount                      |       | 39                     |       | 127 |   |
| (Increase)  decrease in trading securities                                                       |       | (4                     | )          | 6 |   |
| Loss on sale  of premises and equipment                                                          |       | —                 |       | (3 | ) |
| Increase in  cash surrender value of life insurance policies                                     |       | (299                   | )          | (198 | ) |
| Stock-based  compensation expense                                                                |       | 36                     |       | — |   |
| Decrease in  loans held for sale                                                                 |       | 2,773                  |       | 1,201 |   |
| Decrease  (increase) in accrued interest receivable and other assets                             |       | 1,716                  |       | (1,018 | ) |
| Increase in  accrued interest payable and other liabilities                                      |       | 1,094                  |       | 108 |   |
| Net cash  provided by operating activities                                                       |       | 10,325                 |       | 5,492 |   |
|                                                                                             |       |                   |       |   |   |
| Cash flows  from investing activities:                                                           |       |                   |       |   |   |
| Proceeds  from sale and call of available-for-sale investment securities                         |       | —                 |       | 3,000 |   |
| Purchases of  available-for-sale investment securities                                           |       | (2,413                 | )          | (5,412 | ) |
| Principal  repayments received from available-for-sale SBA Pools and mortgage-backed  securities |       | 1,270                  |       | 3,851 |   |
| Principal  repayments received from held-to-maturity mortgaged-backed securities                 |       | 20                     |       | 50 |   |
| Net decrease  in interest-bearing deposits in banks                                              |       | —                 |       | 1,200 |   |
| Net decrease  (increase) in loans                                                                |       | 14,003                 |       | (32,823 | ) |
| Proceeds  from the sale of premises and equipment                                                |       | —                 |       | 15 |   |
| Purchases of  premises and equipment                                                             |       | (285                   | )          | (1,028 | ) |
| Purchase of  life insurance policies                                                             |       | —                 |       | (7,300 | ) |
| Net cash  provided by (used in) investing activities                                             |       | 12,595                 |       | (38,447 | ) |
|                                                                                             |       |                   |       |   |   |
| Cash flows  from financing activities:                                                           |       |                   |       |   |   |
| Net decrease  in demand, interest-bearing and savings deposits                                   |       | $                      | (45,928    | ) | $ | (8,766 | ) |
| Net increase  in time deposits                                                                   |       | 26,211                 |       | 15,618 |   |
| Net  (decrease) increase in borrowings                                                           |       | (2,000                 | )          | 9,000 |   |
| Proceeds  from the exercise of stock options                                                     |       | 1,028                  |       | 461 |   |
| Net cash  (used in) provided by financing activities                                             |       | (20,689                | )          | 16,313 |   |
|                                                                                             |       |                   |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                                |       | 2,231                  |       | (16,642 | ) |
|                                                                                             |       |                   |       |   |   |
| Cash and  cash equivalents at beginning of year                                                  |       | 81,507                 |       | 104,605 |   |
|                                                                                             |       |                   |       |   |   |
| Cash and  cash equivalents at end of the period                                                  |       | $                      | 83,738     |   | $ | 87,963 |   |
|                                                                                             |       |                   |       |   |   |
| Cash paid  during the period for income taxes:                                                   |       | $                      | 220        |   | $ | 1,439 |   |
| Cash paid  during the period for interest:                                                       |       | $                      | 5,768      |   | $ | 3,315 |   |
| Non-cash  investing activities:                                                                  |       |                   |       |   |   |
| Net change  in unrealized gain on available-for-sale investment securities                       |       | $                      | (500       | ) | $ | (890 | ) |

 

See notes to the unaudited consolidated financial statements.

 

5

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**NOTES TO THE CONDENSED 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 and Article 10of Regulation S-X. In the opinion of Management, all adjustments (whichconsist solely of normal recurring accruals) considered necessary for a fairpresentation of the results for the interim periods presented have been included.These interim condensed consolidated financial statements should be read inconjunction with the financial statements and related notes contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2005.

 

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 Auburn Community Bank (ACB). Allsignificant inter-company balances and transactions have been eliminated. WesternSierra Statutory Trusts I, II, III, and IV are unconsolidatedsubsidiaries formed solely for the purpose of issuing trust preferredsecurities. Operating results for the three months ended March 31, 2006are not necessarily indicative of the results that may be expected for theyear ending December 31, 2006. Certain amounts in the consolidatedfinancial statements for the year ended December 31, 2005 and thethree-month period ended March 31, 2005 may have been reclassified toconform to the presentation of the consolidated financial statements in 2006.

 

The preparation of consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires Management to make estimatesand assumptions. These estimates and assumptions affect the reported amounts ofassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period. Actualresults could differ from these estimates.

 

**2. Stock-based Compensation**

 

At March 31, 2006, the Company has four stock-based compensationplans. The Company accounts for these plans under the recognition andmeasurement principles of FAS 123(R), which was adopted by the Company as of January 1,2006 under the modified prospective application method. In accordance with FAS123(R), the compensation cost that has been charged against income for thestock-based compensation plans was $36,000 for the three months ended March 31,2006. There was no tax benefit associated with this charge as all of theexpense was related to incentive stock options. The financial statements inprior periods have not been restated.

 

In accordance with Financial Accounting Standards Board (“FASB”) No. 148,*Accounting for Stock-Based Compensation –Transition and Disclosure, an Amendment of FASB No. 123,* thefollowing table illustrates the effect on net income and earnings per share asif the Company had applied the fair value recognition provisions of FASBStatement No. 123, *Accounting for Stock-BasedCompensation*, to stock-based compensation to prior periods.

 

6

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

 
| ** **                                                                                                                                    | ** ** | **Three  Months  Ended  March 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| Net income as reported                                                                                                                        |       | $                                              | 4,023      |   |
| Deduct: Total stock-based compensation expense  determined under the fair value based method  for all awards, net of related tax effects |       | (168                                           | )          |
|                                                                                                                                          |       |                                           |       |
| Pro forma net income                                                                                                                          |       | $                                              | 3,855      |   |
|                                                                                                                                          |       |                                           |       |
| Basic earnings per share - as reported                                                                                                        |       | $                                              | 0.53       |   |
| Basic earnings per share - pro forma                                                                                                          |       | $                                              | 0.50       |   |
| * *                                                                                                                                      | * *   | * *                                       | * *   |
| Diluted earnings per share - as reported                                                                                                      |       | $                                              | 0.51       |   |
| Diluted earnings per share - pro forma                                                                                                        |       | $                                              | 0.49       |   |

 

In 2004, 1999, 1997 and 1989, the Board of Directors adopted stockoption plans for which 932,796 shares of common stock were reserved forissuance to employees and directors of the Company and the Banks underincentive and nonstatutory agreements as of March 31, 2006. In addition,certain Sentinel Community Bank and ACB options outstanding at the date of theacquisition were converted into options to purchase shares of the Company’scommon stock. At March 31, 2006, a total of 18,981 shares remain reservedfor issuance in connection with these plans. There were 447,700 shares availablefor grant under the 2004 plan at March 31, 2006. The plans require thatthe option price may not be less than the fair market value of the stockat the date the option is granted, and that the exercise price of each optionmust be paid in full at the time the option is exercised. The options expire ona date determined by the Board of Directors, but not later than ten years fromthe date of grant. The vesting period is determined by the Board of Directorsand is generally four years. Outstanding options under the 1999, 1997 and 1989plans are exercisable until their expiration; however, no new options will begranted under these plans. The Company issues new shares upon exercise ofgrants by all plan participants.

 

There were no anti-dilutive options at March 31, 2006. At March 31,2005, there were anti-dilutive options for 34,000 shares of common stock thathad a weighted average exercise price of $38.15.

 

Thefair value of each option award is estimated on the date of grant using a Black-Scholes based optionvaluation model that uses the assumptions noted in the following table. BecauseBlack-Scholes based option valuation models incorporate ranges of assumptionsfor inputs, those ranges are disclosed. Expected volatilities are based on thehistorical volatility of the Company’s stock. The Company uses historical datato estimate option exercise and employee termination within the valuation model.The expected term of options granted is derived from SAB 107 and represents theperiod of time that options granted are expected to be outstanding. Therisk-free rate for periods within the contractual life of the option is basedon the U.S. Treasury yield curve in effect at the time of grant. Theassumptions for the quarter ending March 31, 2006 are marked “N/A” asthere were no stock options grants in this period.

 
| ** **                                                        | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                        | ** ** | **March 31,**     | ** ** |
| ** **                                                        | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Dividend  yield (not applicable)                                  |       |                   |       |   |   |
| Expected  volatility                                              |       | N/A                    |       | 20.60% |   |
| Risk-free  interest rate                                          |       | N/A                    |       | 4.22% |   |
| Weighted  average expected option life                            |       | N/A                    |       | 5.0 years |   |
| Weighted  average fair value of options granted during the period |       | N/A                    |       | $ | 10.57 |   |
|                                                              |       |                   |       |   |   |
| Stock-based  compensation recorded                                |       | $                      | 36,000     |   | $ | 0 |   |
|                                                                   |            |                        |            |  |  |  |  |

 

7

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Asummary of option activity under the stock option plans as of March 31,2006 and 2005, and changes during the period then ended is presented below:

 
| **Options**                          | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value ($000)** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| Outstanding  at January 1, 2006 |       | 586,787    |       | $                                      | 21.04      |                                                |       |                                   |       |   |
| Granted                              |       | —     |       | $                                      | —     |                                                |       |                                   |       |   |
| Exercised                            |       | (82,049    | )          | $                                      | 12.60      |                                                |       |                                   |       |   |
| Canceled                             |       | (661       | )          | $                                      | 13.55      |                                                |       |                                   |       |   |
| Outstanding  at March 31, 2006  |       | 504,077    |       | $                                      | 22.42      |                                                | 6.8 years  |                                   | $          | 11,553 |   |
| Exercisable  at March 31, 2006  |       | 467,185    |       | $                                      | 21.74      |                                                | 6.7 years  |                                   | $          | 11,026 |   |

 
| **Options**                         | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value ($000)** | ** ** |
|-------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| Outstanding at January 1, 2005 |       | 583,378    |       | $                                      | 14.44      |                                                |       |                                   |       |   |
| Granted                             |       | 35,000     |       | $                                      | 37.50      |                                                |       |                                   |       |   |
| Exercised                           |       | (50,172    | )          | $                                      | 9.19       |                                                |       |                                   |       |   |
| Canceled                            |       | (1,669     | )          | $                                      | 13.55      |                                                |       |                                   |       |   |
| Outstanding at March 31, 2005  |       | 566,537    |       | $                                      | 16.33      |                                                | 6.8 years  |                                   | $          | 10,033 |   |
| Exercisable at March 31, 2005  |       | 392,218    |       | $                                      | 13.60      |                                                | 6.2 years  |                                   | $          | 8,017 |   |

 

Thetotal intrinsic value of options exercised during the three months ended March 31,2006 and 2005 was $2,463,000 and $1,410,000, respectively.

 

8

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AtMarch 31, 2006, the total compensation cost related to non-vestedstock-based awards granted to employees under the Company’s stock option plansbut not yet recognized was $233,000. Management does not anticipate anyforfeitures for the remaining non-vested options. This cost will be amortizedon a straight-line basis over a weighted average period of approximately 2.4years and will be adjusted for subsequent changes in estimated forfeitures.

 

**3. Earningsper Share**

 

Basic earnings per share (EPS), which excludes dilution, is computed bydividing net income by the weighted-average number of common shares outstandingfor the period. Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock, such as stock options,result in the issuance of common stock, which shares in the earnings of theCompany. Earnings per share is retroactively adjusted for stock dividends andsplits for all periods presented. A reconciliation of the numerators anddenominators of the basic and diluted EPS computations is as follows (dollarsin thousands, except share data).

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                       | ** ** | **March 31,**     | ** ** | **March 31,** | ** ** |
| ** **                                                       | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Basic EPS Computation:                                           |       |                   |       |   |   |
| Numerator—net  income                                       |       | $                      | 4,456      |   | $ | 4,023 |   |
| Denominator—  weighted average number of shares outstanding |       | 7,808,303              |       | 7,645,511 |   |
| Basic  earnings per share                                        |       | $                      | 0.57       |   | $ | 0.53 |   |
|                                                             |       |                   |       |   |   |
| Diluted EPS Computation:                                         |       |                   |       |   |   |
| Numerator—net  income                                       |       | $                      | 4,456      |   | $ | 4,023 |   |
| Denominator—  weighted average number of shares outstanding |       | 7,808,303              |       | 7,645,511 |   |
| Effect of  dilutive stock options                                |       | 214,300                |       | 310,563 |   |
|                                                             |       | 8,022,603              |       | 7,956,074 |   |
| Diluted  earnings per share                                      |       | $                      | 0.56       |   | $ | 0.51 |   |

 

**4. Commitments and Contingencies**

** **

#### **Financial Instruments With Off-Balance-Sheet Risk**

#### ** **

The Company is a party to financial instruments with off-balance-sheetrisk in the normal course of business in order to meet the financing needs ofits customers and to reduce its exposure to fluctuations in interest rates. Thesefinancial instruments include commitments to extend credit, letters of creditand commitments to sell loans. These instruments involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized onthe consolidated balance sheet.

 

The Company’s exposure to credit loss in the event of nonperformance bythe other party for commitments to extend credit and letters of credit isrepresented by the contractual amount of those instruments. The Company usesthe same credit policies in making commitments and letters of credit as they dofor loans and leases included on the consolidated balance sheet.

 

9

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The following financial instruments represent off-balance-sheet creditrisk (dollars in thousands):

 
| ** **                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                             | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Commitments  to extend credit:                                         |       |               |       |                  |       |
| Revolving  lines of credit secured by 1-4 family residences            |       | $                  | 39,124     |                  | $          | 37,576 |   |
| Commercial  real estate, construction and land development commitments |       | 198,035            |       | 213,334               |       |
| Other  commercial commitments not secured by real estate               |       | 48,852             |       | 60,112                |       |
| Agricultural  commitments                                              |       | 786                |       | 2,690                 |       |
| Other  commitments                                                     |       | —             |       | —                |       |
|                                                                   |       | $                  | 286,797    |                  | $          | 313,712 |   |
| Stand by  letters of credit                                            |       | $                  | 20,012     |                  | $          | 20,303 |   |

 

Real estate commitments are generally secured by property withloan-to-value ratios not to exceed 80%. In addition, the majority of theCompany’s commitments have variable interest rates.

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in the contract. Commitmentsgenerally have fixed expiration dates or other termination clauses and may requirepayment of a fee. Since some of the commitments are expected to expire withoutbeing drawn upon, the total commitment amounts do not necessarily representfuture cash requirements. Each customer’s creditworthiness is evaluated on acase-by-case basis. The amount of collateral obtained, if deemed necessary uponextension of credit, is based on Management’s credit evaluation of the borrower.Collateral held varies, but may include deposits, accounts receivable,inventory, equipment, income-producing commercial properties and residentialreal estate.

 

Letters of credit are conditional commitments to guarantee theperformance or financial obligation of a customer to a third party. The creditrisk involved in issuing letters of credit is essentially the same as thatinvolved in extending loans to customers.

 

Commitments to sell loans are agreements to sell to another party loansoriginated by the Company. The Company only sells loans to third partieswithout recourse. The Company is not exposed to credit loss if the borrowerfails to perform according to the promissory note as long as the Companyhas fulfilled its obligations stated in the sales commitment.

 

**5. Comprehensive Income**

** **

Comprehensive income includes net income and other comprehensive income.The Company’s only source of other comprehensive income is derived fromunrealized gains and losses on investment securities available-for-sale. Reclassificationadjustments resulting from gains or losses on investment securities that wererealized and included in net income of the current period that also had beenincluded in other comprehensive income as unrealized holding gains or losses inthe period in which they arose are excluded from comprehensive income of thecurrent period. The Company’s total comprehensive income was as follows:

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **March 31,**               | ** ** |
| **(In thousands)**                           | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                              |       |                             |       |   |   |
| Net income                                        |       | $                                | 4,456      |   | $ | 4,023 |   |
| Other  comprehensive loss:                        |       |                             |       |   |   |
| Holding  losses arising during period, net of tax |       | (286                             | )          | (581 | ) |
| Re-classification  adjustment, net of tax         |       | (3                               | )          | 2 |   |
| Total other  comprehensive loss                   |       | (289                             | )          | (579 | ) |
| Total  comprehensive income                       |       | $                                | 4,167      |   | $ | 3,444 |   |

 

10

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**6. Definitive Agreement**

 

On February 7, 2006, Western Sierra Bancorp (“Western Sierra”)entered into a Definitive Agreement and Plan of Reorganization (“Agreement”)with Umpqua Holdings Corporation (“Umpqua”). Under the terms of the Agreement,Western Sierra will merge with and into Umpqua, with Umpqua the survivingCompany. The Agreement also provides for all of Western Sierra’s subsidiarybanks to be merged with and into Umpqua Bank, with Umpqua Bank the survivingentity.

 

The Agreement provides for each outstanding Western Sierra common shareto be exchanged for 1.61 shares of Umpqua common stock and for Western Sierra’soutstanding stock options to be converted at the same conversion rate. Approximately12.5 million Umpqua common shares are expected to be issued in connection withthe merger, which is expected to qualify as a tax-free reorganization.

 

On May 3, 2006 Umpqua announced that it has received approval of itsInteragency Merger Application from the Federal Deposit Insurance Corporationand the Director of the Oregon Division of Finance and Corporate Securitieswith respect to the planned merger of Western Sierra Bank, Auburn CommunityBank, Central California Bank and Lake Community Bank with and into Umpqua Bank.These regulatory approvals are conditioned upon expiration of a 15-day waitingperiod, which commenced on April 20, 2006; shareholder approval and nomaterial changes affecting the parties prior to closing.

 

Inaddition, the Federal Reserve Bank of San Francisco has notified Umpqua thatthe proposed transaction under which Western Sierra Bancorp would merge withand into Umpqua Holdings Corporation may proceed without a formal bankholding company merger application and the Commissioner of the CaliforniaDepartment of Financial Institutions has issued an order of exemption for thetransaction.

 

Thetransaction remains subject to customary closing conditions including approvalby the shareholders of Umpqua Holdings Corporation and Western Sierra Bancorpat meetings that are scheduled for May 30, 2006.

 

11

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATION.**

 

**Privatesecurities litigation reform act safe harbor statement**

 

Thisquarterly report on Form 10-Q includes forward-looking information, whichis subject to the “safe harbor” created by the Securities Act of 1933 andSecurities Act of 1934. These forward-looking statements (which involve theCompany’s plans, beliefs and goals) involve certain risks and uncertaintiesthat could cause actual results to differ materially from those in theforward-looking statements. Such risks and uncertainties include, but are notlimited to, the following factors:

 

1.     Competitive pressure in the banking industry and changes in theregulatory environment.

 

2.     Changes in the interest rate environment and volatility of ratesensitive deposits.

 

3.     Decline in the health of the economy nationally or regionally whichcould reduce the demand for loans or reduce the value of real estate collateralsecuring most of the Company’s loans.

 

4.     Credit quality deterioration that could cause an increase in theprovision for loan losses.

 

5.     The Company’s exposure to real estate values in the markets that itserves, as over 85% of the Company’s loans are secured by real estate.

 

6.     Asset/Liability matching risks and liquidity risks.

 

7.     Volatility and devaluation in the securities markets.

 

8.     A rise in short term rates that flattens or inverts the yield curvewhich may have a negative effect on the Company’s net interest margin,cost of funds, ability to sustain deposit growth.

 

Foradditional information concerning risks and uncertainties related to theCompany and its operations, please refer to the heading “Forward-Looking Information”in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005and Item 1A. “Risk Factors” of this report. Readers are cautioned not to placeundue reliance on these forward-looking statements, which speak only as of thedate hereof. The Company undertakes no obligation to revise or publicly releasethe results of any revision to these forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

Thefollowing sections discuss significant changes and trends in financialcondition, capital resources and liquidity of the Company from December 31,2005 to March 31, 2006. Also discussed are significant trends and changesin the Company’s results of operations for the three months ended March 31,2006 compared to the same period in 2005. The consolidated financial statementsand related notes appearing elsewhere in this report are condensed andunaudited.

 

12

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**General**

** **

Throughout this document all references to “The Company” shall meanWestern Sierra Bancorp on a consolidated basis. All references to “The Banks”shall refer to the Company’s four bank subsidiaries: Western Sierra NationalBank (“WSNB”), Central California Bank (“CCB”), Auburn Community Bank (“ACB”),and Lake Community Bank (“LCB”).

 

TheCompany was incorporated under the laws of the State of California on July 11,1996. The Company was organized pursuant to a plan of reorganization for thepurpose of becoming the parent corporation of Western Sierra National Bank, andon December 31, 1996, the reorganization was effected and shares of theCompany’s common stock were exchanged for the common shares held by WesternSierra National Bank’s shareholders.

 

InApril 1999, the Company acquired Roseville 1st National Bank and LakeCommunity Bank in a stock for stock exchange. In May of 2000, the Companyacquired Sentinel Community Bank in a stock for stock exchange. Each of thesemergers was accounted for as a pooling of interests and, accordingly, all priorperiod financial statements have been restated to reflect the combinedoperations of the Company, Roseville 1st National Bank, Lake Community Bank andSentinel Community Bank. Sentinel Community Bank at the time of its acquisitionwas immediately merged into Western Sierra National Bank. In May of 2000,Roseville 1st National Bank was also merged into Western Sierra National Bank.

 

InApril 2002, the Company acquired Central California Bank for $3.7 millionin cash and 378,282 shares of the Company’s stock. This transaction wasaccounted for using purchase accounting, which resulted in a purchase priceallocation of $2.3 million to goodwill and $1.9 million to core depositintangible assets. In July 2002, the Sentinel Community Bank branches weretransferred from Western Sierra National Bank to Central California Bank.

 

InJuly 2003, the Company acquired Central Sierra Bank for $10.7 million incash and 606,260 shares of the Company’s stock. This transaction was accountedfor using purchase accounting, which resulted in a purchase price allocation of$11.6 million to goodwill and $2.9 million to core deposit intangible assets. CentralSierra Bank operates as a division of Central California Bank.

 

InDecember 2003, the Company acquired Auburn Community Bank for $6.5 millionin cash and 524,964 shares of the Company’s stock. This transaction wasaccounted for using purchase accounting, which resulted in a purchase priceallocation of $14.5 million to goodwill and $1.8 million to core depositintangible assets.

 

TheCompany is a registered bank holding company under the Bank Holding CompanyAct. The Company conducts its operations at 4080 Plaza Goldorado Circle,Cameron Park, California 95682.

 

WesternSierra National Bank was organized under national banking laws and commencedoperations as a national bank on January 4, 1984. Western Sierra NationalBank is a member of the Federal Reserve System, and the FDIC insures itsdeposits to the maximum amount permitted by law. Western Sierra National Bank’shead office is located at One Capitol Mall, Sacramento California, and operatestwelve branch offices and one loan production office. Western Sierra NationalBank does not have any other subsidiaries other than Sentinel Associates, Inc.,an inactive entity formed by Sentinel Bank in 1983 to develop single-familyresidential real estate.

 

LakeCommunity Bank was incorporated as a banking corporation under the laws of theState of California on March 9, 1984 and commenced operations as aCalifornia state-chartered bank on November 15, 1984. Lake Community Bankis an insured bank under the Federal Deposit Insurance Act and is a member ofthe Federal Reserve System. Lake Community Bank engages in the generalcommercial banking business in Lake County from its headquarters banking officelocated at 805 Eleventh Street, Lakeport, CA, a branch in Kelseyville, CA and aloan production office in Middletown. Lake Community Bank does not have anyaffiliates or subsidiaries.

 

CentralCalifornia Bank was incorporated under the laws of the State of California on January 13,1997 and commenced operations on April 24, 1998. Central California Bankis an insured bank under the Federal Deposit Insurance Act and became a memberof the Federal Reserve System in January 2003. In July 2003, CentralSierra Bank merged into Central California Bank. Central California Bankengages in the general commercial banking business in Tuolumne and Stanislauscounties from its headquarters banking office located at 13753-A Mono Way,Sonora, CA, and its fourteen branches and a loan production office. CentralCalifornia Bank does not have any affiliates or subsidiaries.

 

AuburnCommunity Bank, a state non-member bank, was originally operating under thename of Auburn National Bank which was incorporated under the laws of the Stateof California on July 28, 1997, and commenced operations on February 2,1998. On July 29, 1999, Auburn National Bank converted from national bankto a state non-member bank and was renamed Auburn Community Bank. AuburnCommunity Bank is an insured bank under the Federal Deposit Insurance Act andoperates its

 

13

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headquarters banking officelocated at 500 Auburn-Folsom Road Suite 200, Auburn, CA and its branchlocated at 11795 Atwood Road, Auburn, CA. Auburn Community Bank does not haveany affiliates or subsidiaries.

 

**RecentEvents**. On February 7,2006, the Company entered into a definitive agreement to merge into UmpquaHolding Company. See Footnote 6 to the accompanying condensed consolidatedfinancial statements.

 

**Employees.**At March 31, 2006, the Company and its subsidiaries employed 383persons on a full-time equivalent basis. The Company believes its employeerelations are satisfactory.

 

**FinancialCondition**

 

TheCompany’s total assets decreased from $1.29 billion at December 31, 2005to $1.28 billion at March 31, 2006, a decrease of $14.9 millionor 1.2%. The largest component of asset reduction was portfolio loans, which decreased$14.9 million.

 

Nocomponent of the portfolio grew during the first quarter of 2006, the largestreduction was in real estate mortgage which fell $7 million during the period. AtMarch 31, 2006 the Banks’ largest single loan outstanding was $17.4million and the ten largest loans totaled approximately $112 million inaggregate balances outstanding.

 

Depositswere reduced by $19.7 million during the first quarter of 2006. Time depositsunder $100,000 grew $26 million during the first quarter while demand depositfell $23.5 million.

 

Includedin non-interest deposits are local title company deposits, which have decreasedapproximately $19.8 million from $44.6 million at December 31, 2005 to $24.8million at March 31, 2006. These funds do not receive interest but doresult in an assessment of service fees by the title company’s service bureau tothe Company. During the first three months of 2006, the service fees on titlecompany deposits incurred by the Company were less than 1.5% of the averagetitle company deposits outstanding.

 

**Results ofOperations**

 

TheCompany reported net income of $4.46 million for the three months ended March 31,2006 (or $0.56 per diluted share) compared to $4.02 million (or $0.51 per dilutedshare) during the first quarter of 2005. The quarterly earnings represent anincrease of $433,000 or a 10.8% increase in net income and 9.8% increase to dilutedearnings per share.

 

Theprimary factors contributing to the increase in operating results during thethree-month period ended March 31, 2006 as compared to the same period in 2005include:

 

1.        An increase in net interest income of $1.6 millionor 11.5% in the first quarter over the same period in 2005. The netincrease is due to an overall increase in average earning assets and thebenefit of recent rate increases applied to the Company’s asset sensitivebalance sheet.

 

2.        A decrease in loan loss provisions of $450,000for the first quarter ended March 31, 2006 as compared to the firstquarter of 2005. There were no provisions recorded in the first quarter of 2005as total loans decreased and management’s measures of the portfolio’s risk andperformance remained stable. The percentage of loan loss reserves to grossloans and leases was 1.49% at March 31, 2006 as compared to 1.48% at December 31,2005 and 1.47% at March 31, 2005.

 

3.        An increase in non-interest income of $542,000,which is primarily due to an increase in deposit service charges and fees of$305,000, an increase in investment service fee income of $186,000, an increasein other income of $107,000, offset by a reduction in gains on the salemortgage fees of $145,000.

 

14

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The above factors wereoffset in part by:

 

1.        Total non-interest expense increased $1.4million or 14.3% over the first quarter in the previous year. Included in otherexpenses for the first quarter of 2006 were merger expenses of $667,000($597,000 net of tax).

 

2.        An increase in the effective tax rate to39.6% from 35.0% in the first quarter of the previous year, primarily due tomerger expenses of $667,000 of which only 75% was deductible.

 

**Return onAverage Assets and Average Equity**

 

Returnon average assets (“ROA”) was 1.43% for the first quarter of 2006 as comparedto 1.36% for the first quarter of 2005. Return on equity (“ROE”) was 13.60% forthe first quarter of 2006 as compared to 14.52% for the first quarter of 2005.

 

**NetInterest Income (Tax Equivalent Yield Basis)**

 

Netinterest income is the primary source of income for the Company and representsthe excess of interest and fees earned on interest-earning assets (loans,investments and Federal funds sold) over the interest paid on deposits andborrowed funds. Net interest margin is net interest income expressed as apercentage of average earning assets.

 

Forthe three months ended March 31, 2006, interest income on a tax equivalentbasis increased by $3.97 million to $21.4 million or 22.8% over the same periodin 2005. Interest expense on deposit accounts and borrowings increased $2.38million or 70.2% over the same three-month period ended March 31, 2005.Average earning assets yielded (on a fully tax equivalent basis) 7.58% versus6.54% a year ago, the effect of which was partially offset by an increase inthe cost of funds where the average cost of funds increased to 2.73% from 1.69%a year ago. Net interest income (on a tax equivalent basis) increased $1.59million or 11.4% to $15.64 million. The net interest margin increased 27 basispoints to 5.54% from 5.27% for the same three-month period a year ago.

 

15

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The following table presents, for the periods indicated, thedistribution of consolidated average assets, liabilities and shareholders’equity, as well as the total dollar amounts of interest income from averageearning assets and the resultant yields and the dollar amounts of interestexpense and average interest-bearing liabilities, expressed both in dollars andin rates. Non-accrual loans, which are not considered material, are included inthe calculation of the average balances of loans. Savings deposits include NOWand money 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 35 percent (dollars in thousands).

 

**AverageBalances, Interest Income/Expense and Yields/Rates Paid**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
| ** **                                               | ** ** | **Average**                      | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                               | ** ** | **Balance**                      | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning  assets:                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Portfolio  loans (3)                                     |       | $                                | 1,041,699  |   | $ | 20,061 |   | 7.81% |   | $ | 945,555 |   | $ | 16,123 |   | 6.92% |   |
| Tax exempt  investment securities                        |       | 41,909                           |       | 638 |   | 6.17% |   | 36,937 |   | 597 |   | 6.55% |   |
| Taxable  investment securities                           |       | 40,987                           |       | 481 |   | 4.76% |   | 46,190 |   | 387 |   | 3.40% |   |
| Federal  funds sold                                      |       | 20,291                           |       | 220 |   | 4.40% |   | 51,731 |   | 312 |   | 2.44% |   |
| Interest  bearing deposits in banks                      |       | —                           |       | — |   | 0.00% |   | 1,187 |   | 12 |   | 3.96% |   |
| Average  earning assets                                  |       | 1,144,886                        |       | 21,400 |   | 7.58% |   | 1,081,599 |   | 17,430 |   | 6.54% |   |
| Other assets                                             |       | 133,497                          |       |   |   |   |   | 131,233 |   |   |   |   |   |
| Less ALLL                                                |       | (15,545                          | )          |   |   |   |   | (14,033 | ) |   |   |   |   |
| Average  total assets                                    |       | $                                | 1,262,838  |   |   |   |   |   | $ | 1,198,799 |   |   |   |   |   |
| Interest  bearing liabilities:                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Savings  Deposits                                        |       | $                                | 374,437    |   | $ | 1,119 |   | 1.21% |   | $ | 399,710 |   | $ | 862 |   | 0.87% |   |
| Time  deposits                                           |       | 381,129                          |       | 3,211 |   | 3.42% |   | 349,903 |   | 1,809 |   | 2.10% |   |
| Other  borrowings (1)                                    |       | 100,501                          |       | 1,433 |   | 5.78% |   | 62,182 |   | 717 |   | 4.67% |   |
| Average  interest bearing liabilities                    |       | 856,067                          |       | 5,763 |   | 2.73% |   | 811,794 |   | 3,387 |   | 1.69% |   |
| Non-interest  bearing liabilities                        |       | 263,595                          |       |   |   |   |   | 267,844 |   |   |   |   |   |
| Other  liabilities                                       |       | 10,329                           |       |   |   |   |   | 7,846 |   |   |   |   |   |
| Shareholders’  equity                               |       | 132,847                          |       |   |   |   |   | 111,315 |   |   |   |   |   |
| Average  total liabilities and shareholders’ equity |       | $                                | 1,262,838  |   |   |   |   |   | $ | 1,198,799 |   |   |   |   |   |
| Net interest spread                                      |       |                             |       |   |   | 4.85% |   |   |   |   |   | 4.84% |   |
| Net interest  income and net interest margin (2)         |       |                             |       | $ | 15,637 |   | 5.54% |   |   |   | $ | 14,043 |   | 5.27% |   |

 

----

(1) For the purpose ofthis schedule the Company’s subordinated debentures are included in otherborrowings.

(2) Net interest marginis calculated by dividing net interest income by average earning assets.

(3) Includes loans onnon-accrual status.

 

16

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The following tables set forth changes in interest income and expensefor each major category of earning assets and interest-bearing liabilities, andthe amount of change attributable to volume and rate changes for the periodsindicated. Changes not specifically attributable to rate or volume have beenallocated to rate changes (dollars in thousands).

 

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

 
| ** **                                | ** ** | **Three Months Ended March 31,  2006 over 2005** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                | ** ** | **Volume**                                            | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:  |       |                                                  |       |   |   |   |   |
| Portfolio  loans                          |       | $                                                     | 1,640      |   | $ | 2,298 |   | $ | 3,938 |   |
| Investment  securities, tax exempt        |       | 80                                                    |       | (39 | ) | 41 |   |
| Investment  securities                    |       | (44                                                   | )          | 138 |   | 94 |   |
| Federal funds  sold                       |       | (189                                                  | )          | 98 |   | (91 | ) |
| Interest  bearing deposits                |       | (12                                                   | )          | — |   | (12 | ) |
| Net increase                              |       | 1,475                                                 |       | 2,495 |   | 3,970 |   |
| Increase  (decrease) in interest expense: |       |                                                  |       |   |   |   |   |
| Interest  bearing accounts                |       | (54                                                   | )          | 312 |   | 258 |   |
| Time  deposits                            |       | 161                                                   |       | 1,241 |   | 1,402 |   |
| Other  borrowings (1)                     |       | 442                                                   |       | 274 |   | 716 |   |
| Net increase                              |       | 549                                                   |       | 1,827 |   | 2,376 |   |
| Total net  increase                       |       | $                                                     | 927        |   | $ | 667 |   | $ | 1,594 |   |

 

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(1) For the purpose ofthis schedule the interest on the Company’s subordinated debentures isincluded in other borrowings.

 

17

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**Non-interestIncome**

** **

TheCompany’s non-interest income consists primarily of service charges on depositaccounts, investment service fee income, other service fees, and gains on thesale of government-guaranteed loans and mortgage loan origination and processingfees.

 

For the three months ended March 31, 2006, total non-interestincome increased $542,000 or 20.8% over the same period in 2005. This increaseis primarily due to an increase in deposit service charges and fees of $305,000,as a result of adding new accounts as well as changes in service charge ratesand related policies. In addition, investment fee income increased $186,000 andsundry recoveries totaled $107,000. This growth was offset by a decrease inmortgage loan origination and processing fees of $145,000.

 

**Non-interestExpense**

 

Non-interest expenses consist of salaries and related employeebenefits, occupancy and equipment expenses, data processing fees, professionalfees, directors’ fees, and other operating expenses. Non-interest expenseincreased $1.4 million or 14.3% over the same three-month period of 2005. Salariesand benefits increased $500,000 or 9.3% over the same three-month period oflast year. Included in total non-interest expense were merger related expensesof $667,000 ($597,000, net of tax).

 

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

 
| ** **                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **Expense**                                          | ** ** | **% of Avg  Assets** | ** ** | **Expense** | ** ** | **% of Avg  Assets** | ** ** |
| Salaries and  benefits                              |       | $                                                    | 5,903      |   | 1.87% |   | $ | 5,403 |   | 1.83% |   |
| Occupancy  and equipment                            |       | 1,848                                                |       | 0.59% |   | 1,611 |   | 0.54% |   |
| Other  expenses                                     |       | 2,618                                                |       | 0.83% |   | 2,621 |   | 0.89% |   |
| Merger  expense                                     |       | 667                                                  |       | 0.21% |   | — |   | — |   |
| Amortization  of core deposit and other intangibles |       | 180                                                  |       | 0.06% |   | 180 |   | 0.06% |   |
| Total  non-interest expense                         |       | $                                                    | 11,216     |   | 3.55% |   | $ | 9,815 |   | 3.32% |   |

 

18

 

**EfficiencyRatio**

 

The Company uses a widely accepted banking operating ratio as a measureof its progress in improving operating efficiency. The efficiency ratio isderived by dividing total non-interest expenses by the sum of tax adjusted netinterest income and non-interest income. Simply put, this ratio describes theoperating expense necessary to generate $1 in tax equivalent total revenue. TheCompany’s efficiency ratio improved in the first quarter of 2006 driven by the revenueincreases outlined above in the “Non-interest Income” and “Net Interest Income”discussion.

 

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

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **March 31,**               | ** ** |
| ** **                                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Non-interest  expense                               |       | $                                | 11,216     |   | $ | 9,815 |   |
| Amortization  of core deposit and other intangibles |       | (180                             | )          | (180 | ) |
| Investment  in limited partnership                  |       | (101                             | )          | (108 | ) |
| Merger  expenses                                    |       | (667                             | )          | — |   |
| Net  non-interest expense                           |       | $                                | 10,268     |   | $ | 9,527 |   |
|                                                |       |                             |       |   |   |
| Fully tax  equivalent income:                       |       |                             |       |   |   |
| Net interest  income                                |       | $                                | 15,444     |   | $ | 13,845 |   |
| Non-interest  income                                |       | 3,151                            |       | 2,609 |   |
| Tax benefit  adjustment for tax-exempt income       |       | 375                              |       | 330 |   |
| Total fully  tax equivalent income                  |       | $                                | 18,970     |   | $ | 16,783 |   |
|                                                |       |                             |       |   |   |
| Efficiency  Ratio                                   |       | 54.1%                            |       | 56.8% |   |

 

19

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**IncomeTaxes**

 

The following table reflects the Company’s tax provision and therelated effective tax rate for the periods indicated (dollars in thousands):

 
| ** **         | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------|------------|----------------------------------------|------------|
| ** **         | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Tax provision      |       | $                                      | 2,923      |   | $ | 2,166 |   |
| Effective tax rate |       | 39.6%                                  |       | 35.0% |   |
|                    |            |                                        |            |  |  |  |  |

 

TheCompany’s effective tax rate varies with changes in the relative amounts of itsnon-taxable income and non-deductible expenses. The increase in the Company’stax provision is attributable to increases in the Company’s net income and therelative amount of tax-exempt income. In addition, the Company incurred$667,000 in merger related expenses of which, in management’s opinion, approximately75% is not expected to be deductible for tax purposes.

 

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

###### ** **

TheCompany concentrates its lending activities primarily within areas directlyserviced by its branches as previously discussed.

 

Creditrisk is mananaged through the application of underwriting policies andprocedures as well as credit monitoring practices. A significant portion of itsborrowers’ ability to repay their loans is dependent upon the strength of thelocal economy and specifically the strength of the commercial and residentialreal estate markets. Generally, loans are secured by real estate or otherassets and are expected to be repaid from the cash flows of the borrower orproceeds from the sale of collateral.

 

The following table setsforth the amounts of loans outstanding by category as of the dates indicated(dollars in thousands):

 
| ** **                                           | ** ** | **March 31,** | ** ** | **% of**  | ** ** | **December 31,** | ** ** | **% of**  | ** ** |
|------------------------------------------------------|------------|--------------------|------------|-----------|------------|-----------------------|------------|-----------|------------|
| ** **                                           | ** ** | **2006**           | ** ** | **Total** | ** ** | **2005**              | ** ** | **Total** | ** ** |
| Commercial and residential real estate  mortgage     |       | $                  | 540,524    |      | 52.30%     |                  | $          | 547,750   |       | 52.28% |   |
| Commercial  and residential real estate construction |       | 242,645            |       | 23.48%    |       | 244,872               |       | 23.37%    |       |
| Lot and land loans                                   |       | 134,151            |       | 12.98%    |       | 134,147               |       | 12.80%    |       |
| Commercial                                           |       | 95,090             |       | 9.20%     |       | 98,152                |       | 9.37%     |       |
| Agricultural                                         |       | 15,005             |       | 1.45%     |       | 15,828                |       | 1.51%     |       |
| Other loans                                          |       | 6,152              |       | 0.60%     |       | 7,066                 |       | 0.67%     |       |
| Total                                                |       | 1,033,567          |       | 100.00%   |       | 1,047,635             |       | 100.00%   |       |
| Deferred loan fees and costs, net                    |       | (3,234             | )          | -0.31%    |       | (3,663                | )          | -0.35%    |       |
| Less allowance for loan losses                       |       | (15,440            | )          | -1.49%    |       | (15,505               | )          | -1.48%    |       |
| Total net  loans and leases                          |       | $                  | 1,014,893  |      |       |                  | $          | 1,028,467 |       |   |   |

 

20

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The following table sets forth a summary of the Company’snon-performing assets as of the dates indicated (dollars in thousands):

 
| ** **                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Gross non-accrual loans                                        |       | $                  | 1,646      |                  | $          | 1,412 |   |
| Less: government guaranteed portion of non  performing loans   |       | (355               | )          | (500                  | )          |
| Total net nonperforming assets                                 |       | 1,291              |       | 912                   |       |
|                                                           |       |               |       |                  |       |
| Gross non-performing assets as a % of total  assets            |       | 0.13%              |       | 0.11%                 |       |
| Gross non-accrual loans as a % of gross  loans                 |       | 0.16%              |       | 0.14%                 |       |
| Ratio of allowance for loan losses to gross  non-accrual loans |       | 9.38               |       | 10.98                 |       |
|                                                                |            |                    |            |                       |            |  |  |

 

TheCompany’s gross non-accrual loans increased from $1.41 million at December 31,2005 to $1.65 million during the first three months of 2006. The Company’s “coverageratio” or the ratio of allowance for loan losses to gross non-accrual loansdecreased from 10.98 to 9.38 during the first three months of 2006. The Companycarried no other real estate as of March 31, 2006 or December 31, 2005.

 

**Allowancefor Loan Losses**

 

The allowance for loan losses is established through charges toearnings in the form of the provision for loan losses. Loan losses arecharged to, and recoveries are credited to, the allowance for loan losses. Theprovision for loan losses is determined after considering various factors suchas loan loss experience, current economic conditions, maturity of theportfolio, size of the portfolio, industry concentrations, borrower credithistory, the existing allowance for loan losses, independent loan reviews,current charges to and recoveries within the allowance for loan losses and theoverall quality of the portfolio as determined by management, regulatoryagencies, and independent credit review consultants retained by the Company.

 

The adequacy of the Company’s allowance for loanlosses is based on specific and formula allocations to the Company’s loanportfolio. Specific allocations are made for impaired loans and leases. Thespecific allocations are increased or decreased through management’sreevaluation of the status of the particular problem loans and leases. Loansand leases which do not receive a specific allocation receive an allowanceallocation based on a formula represented by a percentage factor based onunderlying collateral, type of loan, historical charge-offs and generaleconomic conditions which is applied against the general portfolio segments.

 

It is the policy of management to make additions to the allowance for loanlosses so that it remains adequate to cover anticipated charge-offs andmanagement believes that the allowance at March 31, 2006 is adequate.However, the determination of the amount of the allowance is judgmental andsubject to economic conditions which cannot be predicted with certainty.Accordingly, the Company cannot predict whether charge-offs of loans in excessof the allowance may be required in future periods. The provision for loanlosses reflects an accrual sufficient to cover projected potential charge-offs.The table below sets forth the allocation of the allowance for loan losses byloan type as of the dates specified. The allocation of individual categories ofloans includes amounts applicable to specifically identified, as well asunidentified, losses inherent in that segment of the loan portfolio and willnecessarily change whenever management determines that the risk characteristicsof the loan portfolio have changed.

 

Management believes that any breakdown or allocation of the allowancefor loan losses into loan categories lends an appearance of exactness whichdoes not exist, in that the allowance is utilized as a single allowanceavailable for all loans and undisbursed commitments.

 

21

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The followingtable summarizes the activity in the allowance for loan losses for the periodsindicated (dollars in thousands):

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **March 31,**     | ** ** |
| ** **                                                | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Beginning balance for allowance for loan  losses          |       | $                      | 15,505     |   | $ | 13,786 |   |
| Provision for loan losses                                 |       | —                 |       | 450 |   |
| Charge offs:                                              |       |                   |       |   |   |
| Commercial                                                |       | 15                     |       | 45 |   |
| Real estate                                               |       | —                 |       | — |   |
| Agricultural                                              |       | —                 |       | — |   |
| Other                                                     |       | 69                     |       | 8 |   |
| Total charge offs                                         |       | 84                     |       | 53 |   |
| Recoveries:                                               |       |                   |       |   |   |
| Commercial                                                |       | 3                      |       | 103 |   |
| Real estate                                               |       | —                 |       | — |   |
| Agricultural                                              |       | —                 |       | — |   |
| Other                                                     |       | 16                     |       | 2 |   |
| Total recoveries                                          |       | 19                     |       | 105 |   |
| Net (charge  offs)  recoveries                            |       | (65                    | )          | 52 |   |
| Ending balance                                            |       | $                      | 15,440     |   | $ | 14,288 |   |
| Allowance for loan losses to total loans                  |       | 1.49%                  |       | 1.47% |   |
| Annualized net (charge offs) recoveries to  average loans |       | (0.02)%                |       | 0.02% |   |

 

**Liquidity**

 

AFunds Management Policy has been developed by the Company’s Management andapproved by the Company’s Board of Directors that establishes guidelines forthe investments and liquidity of the Company. The goals of this policy are toprovide liquidity to meet the financial requirements of the Company’scustomers, maintain adequate reserves as required by regulatory agencies andmaximize earnings of the Company. The Company’s liquidity ratio at March 31,2006 was 9.05% and was 8.78% at December 31, 2005. Liquidity is computedby dividing liquid assets (consisting of cash and due from banks,available-for-sale investments not pledged, federal funds sold and loans heldfor sale) by total liabilities. While the Company has over $100 million inavailable FHLB borrowings, management has deployed a series of strategiesdesigned to increase deposit gathering which management expects will result inimproved deposit growth in the coming periods. The Company’s Managementbelieves it maintains adequate liquidity levels.

 

22

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**CapitalAdequacy**

 

Overallcapital adequacy is monitored on a day-to-day basis by the Company’s Managementand reported to the Company’s Board of Directors on a monthly basis. TheCompany’s and subsidiary banks’ regulators measure capital adequacy by using arisk-based capital framework and by monitoring compliance with minimumrisk-based and leverage ratio guidelines. Under the risk-based capital standards,assets reported on the Company’s balance sheet and certain off-balance sheetitems are assigned to risk categories, each of which is assigned a risk weight.

 

Thisstandard characterizes an institution’s capital as being “Tier 1” capital(defined as principally comprising shareholders’ equity and qualifyingsubordinated debentures) and “Tier 2” capital (defined as principallycomprising the qualifying portion of the allowance for loan losses and anyremaining subordinated debentures).

 

The minimum ratio of total risk-based capital to risk-weighted assets,including certain off-balance sheet items, is 8% (10% to be consideredwell-capitalized). The minimum ratio of Tier 1 capital to average assets(leverage ratio) is 4.0% (5.0% to be considered well-capitalized). The minimumratio of Tier 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 (Tier1) is to be comprised of common equity; the balance may consist ofdebt securities and a limited portion of the allowance for loan losses. Subordinateddebentures in the amount of $36 million are included in the Company’s Tier 1capital as of March 31, 2006 and December 31, 2005, respectively, asallowed by Federal Reserve regulations, in the consolidated totals below.

 

The following table setsforth the Company’s and its banking subsidiaries’ capital ratios as of thedates indicated.

 
| ** **                                         | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **ACB**                 | ** ** | **CCB**                    | ** ** | **LCB** | ** ** | **WSNB** | ** ** | **Company** | ** ** | **ACB** | ** ** | **CCB** | ** ** | **LCB** | ** ** | **WSNB** | ** ** | **Company** | ** ** |
| Total  risk-based capital to risk-weighted assets  |       | 12.50%                  |       | 12.18%                     |       | 15.22% |   | 12.96% |   | 13.82% |   | 11.86% |   | 11.50% |   | 13.68% |   | 12.36% |   | 13.24% |   |
| Tier 1  capital to risk-weighted assets            |       | 11.25%                  |       | 10.93%                     |       | 13.97% |   | 11.71% |   | 12.57% |   | 10.61% |   | 10.25% |   | 12.38% |   | 11.11% |   | 11.99% |   |
| Tier 1  capital to average assets (leverage ratio) |       | 9.75%                   |       | 8.66%                      |       | 11.72% |   | 10.85% |   | 10.94% |   | 9.29% |   | 8.68% |   | 10.64% |   | 9.87% |   | 10.45% |   |

 

The Company andits bank subsidiaries continue to meet all regulatory capital requirements at March 31,2006.

 

23

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**Cash Dividends and Payout Ratios**

 

On March 21, 2006, the Company declared a cashdividend of $0.12 to shareholders on record as of March 31, 2006. Thedividend was paid on April 14, 2006.

 

The Company did not pay cash dividends prior to thefirst quarter of 2006. Although it is the intention of the Company to pay cashdividends on a quarterly basis, there is no assurance that any future cashdividends will be paid. The payment of cash dividends is subject to Federalregulatory requirements for capital levels and other restrictions. In addition,the cash dividends paid from the Banks’ to the Company (the primary source ofcash available for dividends by the Company) is subject to both Federal andState regulatory requirements as set forth in the Company’s Form 10-K forthe year ended December 31, 2005.

 

The following table presents cash dividends declaredand dividend payout ratios (dividends declared per share divided by basicearnings per share) for the three months ended March 31, 2006 and 2005.

 
| ** **                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **March 31,**     | ** ** |
| ** **                  | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Dividend declared per share |       | $                      | 0.12       |   | $ | 0.00 |   |
| Dividend payout ratio       |       | 21%                    |       | 0% |   |
|                             |            |                        |            |  |  |  |  |

 

24

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK.**

 

Asa financial institution, the Company’s primary component of market risk isinterest rate volatility. Fluctuations in interest rates will ultimately impactboth the level of interest income and interest expense recorded on a largeportion of the Company’s assets and liabilities, and the market value of allinterest earning assets and interest bearing liabilities, other than thosewhich possess a short term to maturity. Since substantially all of the Company’sinterest earning assets and interest bearing liabilities are located at thebanking subsidiary level, most of the Company’s interest rate risk exposurelies at the banking subsidiary level other than $36 million in subordinateddebentures issued by the Company’s subsidiary grantor trusts. As a result, allsignificant interest rate risk procedures are performed at the bankingsubsidiary level. The subsidiary banks’ real estate loan portfolios,concentrated primarily within Northern California, are subject to risksassociated with their local economies.

 

Thefundamental objective of the Company’s management of its assets and liabilitiesis to maximize the Company’s economic value while maintaining adequateliquidity and an exposure to interest rate risk deemed by Management to be acceptable.Management believes an acceptable degree of exposure to interest rate riskresults from the management of assets and liabilities through maturities,pricing and mix to attempt to neutralize the potential impact of changes inmarket interest rates. The Company’s profitability is dependent to a largeextent upon its net interest income, which is the difference between itsinterest income on interest-earning assets, such as loans and investments, andits interest expense on interest-bearing liabilities, such as deposits andborrowings. The Company 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 the goalsof limiting its exposure to interest rate risk, ensuring adequate liquidity,and coordinating its sources and uses of funds.

 

TheCompany seeks to control interest rate risk exposure in a manner that willallow for adequate levels of earnings and capital over a range of possibleinterest rate environments. The Company has adopted formal policies andpractices to monitor and manage interest rate risk exposure. Managementbelieves historically it has effectively managed the effect of changes ininterest rates on its operating results. Management believes that it cancontinue to manage the short-term effect of interest rate changes under variousinterest rate scenarios.

 

Management deploys an interest ratesensitivity measurement tool to measure the Company’s exposure to futurechanges in interest rates. This model measures the expected cash flows andrepricing of each financial asset/liability separately in measuring the Company’sand each bank’s interest sensitivity. Based on the results of this model, managementbelieves the Company balance sheet is “asset sensitive” at this time. Thismeans the Company expects (all other things being equal) to expand its netinterest income if market rates rise and expects it conversely to contract ifmarket rates fall. The level of potential or expected contraction indicated bythe tables below is considered acceptable by management and is compliant withthe Company’s ALCO policies. Management will continue to perform thisanalysis each quarter to further validate the expected results against actualdata.

 

25

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The following tables, in management’s opinion, reflect estimates of theCompany’s future net interest income under different interest rate scenarios. Thenet interest income estimates are one-year projections based on the earningassets and interest- bearing liabilities as of March 31, 2006. Theestimates are derived from an asset/liability management model first deployedin April 2003. There are numerous underlying assumptions, including butnot limited to, 1) a static balance sheet and mix of earning assets andinterest-bearing liabilities; 2) instruments that mature are assumed to bereplaced by similar instruments at prevailing market rates; 3) interest ratechanges assume a parallel shift in the yield curve and 4) changes in depositrates will correlate to prevailing interest rates to the same degree that theCompany has experienced in the past. Management believes these modelassumptions individually and in the aggregate are reasonable. However, theoutput of simulation modeling results in an estimate, not a precise calculation.If any of the assumptions used in the simulation modeling prove to beinaccurate, actual future results could differ materially from those projected.

 

Under the shock scenarios, the changes to interest rates are assumed tooccur immediately (on April 1, 2006). Under the ramp scenarios the changesto interest rates gradually ramp up or down over the course of one year(dollars in thousands).

 
| ** **                              | ** ** | **Shock scenario**                       | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|
| **Change in  Interest Rates** | ** ** | **Estimated  Net Interest  Income** | ** ** | **Dollar Change  from Base** | ** ** | **Percentage  Change  from Base** | ** ** |
|                                    |       |                                     |       |   |   |   |   |
| 300 basis point rise                    |       | $                                        | 66,899     |   | $ | 6,237 |   | 10.28% |   |
| 200 basis point rise                    |       | 64,864                                   |       | 4,202 |   | 6.93% |   |
| 100 basis point rise                    |       | 62,720                                   |       | 2,058 |   | 3.39% |   |
| 50 basis point rise                     |       | 61,722                                   |       | 1,060 |   | 1.75% |   |
| **Base scenario**                       | ** ** | **60,662**                               | ** ** | **0** | ** ** | **0.00%** | ** ** |
| 50 basis point decline                  |       | 58,990                                   |       | (1,672 | ) | -2.76% |   |
| 100 basis point decline                 |       | 57,248                                   |       | (3,414 | ) | -5.63% |   |
| 200 basis point decline                 |       | 53,459                                   |       | (7,203 | ) | -11.87% |   |
|                                         |            |                                          |            |  |  |  |  |  |  |

 
| ** **                     | ** ** | **Ramp scenario**                    | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| **Change in   Interest Rates** | ** ** | **Estimated   Net Interest  Income** | ** ** | **Dollar Change from Base** | ** ** | **Percentage Change   from Base** | ** ** |
|                           |       |                                 |       |   |   |   |   |
| 300 basis point rise           |       | $                                    | 62,745     |   | $ | 2,083 |   | 3.43% |   |
| 200 basis point rise           |       | 62,041                               |       | 1,379 |   | 2.27% |   |
| 100 basis point rise           |       | 61,306                               |       | 644 |   | 1.06% |   |
| 50 basis point rise            |       | 60,999                               |       | 337 |   | 0.56% |   |
| **Base scenario**              | ** ** | **60,662**                           | ** ** | **0** | ** ** | **0.00%** | ** ** |
| 50 basis point decline         |       | 60,015                               |       | (647 | ) | -1.07% |   |
| 100 basis point decline        |       | 59,339                               |       | (1,323 | ) | -2.18% |   |
| 200 basis point decline        |       | 57,833                               |       | (2,829 | ) | -4.66% |   |
|                                |            |                                      |            |  |  |  |  |  |  |

 

26

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The following table shows the approximate loan portfolio composition byrate type as of March 31, 2006. It further identifies when and at whatrate increase scenario the variable rate loans at floors will most likely comeoff their floor and reprice. Loans at floors can generally be refinanced byanother financial institution at anytime by the borrower without penalty if theborrower chooses to do so. The Company monitors the rate of these loansrelative to prevailing rates and will modify terms of certain loans that are ata significantly higher rate than market directly with the borrower when therelationship dictates it is a prudent business decision to do so (dollars inthousands).

 
| **Loans**            | ** ** | **Balance** | ** ** | **%****of  Total** | ** ** |
|----------------------|------------|-------------|------------|--------------------|------------|
| Variable             |       | $           | 626,869    |               | 60.7%      |   |
| Variable at Floor  * |       | 177,898     |       | 17.2%              |       |
| Fixed                |       | 228,800     |       | 22.1%              |       |
| Total Gross Loans    |       | $           | 1,033,567  |               | 100.0%     |   |

 

***Variable Loans at Floor**

 
| ** **                    | ** ** | **Coming off Floor** | ** ** | **Repricing Schedule** | ** ** |
|-------------------------------|------------|----------------------|------------|------------------------|------------|
| **Rate  Increase  Scenarios** | ** ** | **Balance**          | ** ** | **%****of  Total**     | ** ** | **Within 1 year** | ** ** | **1-2 years** | ** ** | **2-3 years** | ** ** | **3-4 years** | ** ** | **4+ years** | ** ** | **Total** | ** ** |
| 50 bps                        |       | $                    | 175,285    |                   | 98.5%      |   | $ | 52,543 |   | $ | 27,559 |   | $ | 57,567 |   | $ | 30,404 |   | $ | 7,212 |   | $ | 175,285 |   |
| 100 bps                       |       | 1,088                |       | 0.6%                   |       | 26 |   | 727 |   | — |   | 335 |   | — |   | 1,088 |   |
| >100 bps                   |       | 1,525                |       | 0.9%                   |       | 290 |   | 767 |   | 164 |   | 304 |   | — |   | 1,525 |   |
| Total at Floor                |       | $                    | 177,898    |                   | 100.0%     |   | $ | 52,859 |   | $ | 29,053 |   | $ | 57,731 |   | $ | 31,043 |   | $ | 7,212 |   | $ | 177,898 |   |

 

27

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**ITEM 4.   Controls and Procedures.**

 

Duringthe quarter, the Company carried out an evaluation, under the supervision andwith the participation of the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures were effective,as of the end of the period covered by this report, in ensuring that thematerial information relating to the Company, including its consolidatedsubsidiaries, required to be disclosed by the Company in reports that it filesor submits under the Exchange Act is recorded, processed, and summarized andreported within the time periods specified in the SEC’s rules and forms.

 

There were no changes in the Company’s internal control over financialreporting or in other factors that could materially affect internal controlover financial reporting during the quarter.

 

28

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**PART II. Other Information**

 

**Item #1. Legal proceedings**

 

TheCompany and its subsidiaries are involved in various routine legal actions arisingin the ordinary course of business. The Company believes that the ultimatedisposition of all currently pending matters will not have a material adverseeffect on the Company’s financial condition or results of operations.

 

**Item 1A.Risk Factors**

 

**RisksRelated To The Company’s Business**

 

*The Company Is Subject To Interest Rate Risk*

 

The Company’s earningsand cash flows are largely dependent upon its net interest income. Net interestincome is the difference between interest income earned on interest-earningassets such as loans and securities and interest expense paid oninterest-bearing liabilities such as deposits and borrowed funds. Interestrates are highly sensitive to many factors that are beyond the Company’scontrol, including general economic conditions and policies of variousgovernmental and regulatory agencies and, in particular, of the FRB. Changes inmonetary policy, including changes in interest rates, could influence not onlythe interest the Company receives on loans and securities and the amount ofinterest it pays on deposits and borrowings, but such changes could also affect(i) the Company’s ability to originate loans and obtain deposits, (ii) thefair value of the Company’s financial assets and liabilities, and (iii) theaverage duration of the Company’s mortgage-backed securities portfolio. If theinterest rates paid on deposits and other borrowings increase at a faster ratethan the interest rates received on loans and other investments, the Company’snet interest income, and therefore earnings, could be adversely affected.Earnings could also be adversely affected if the interest rates received onloans and other investments fall more quickly than the interest rates paid ondeposits and other borrowings.

 

Although management believes it hasimplemented effective asset and liability management strategies to reduce thepotential effects of changes in interest rates on the Company’s results ofoperations, any substantial, unexpected, prolonged change in market interestrates could have a material adverse effect on the Company’s financial conditionand results of operations. *See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”*for further discussion related to the Company’s management of interest raterisk.

 

*The Company Is Subject To Lending Risk*

 

There are inherent risks associated with theCompany’s lending activities. These risks include, among other things, theimpact of changes in interest rates and changes in the economic conditions inthe markets where the Company operates as well as those across the State ofCalifornia and the United States. Increases in interest rates and/or weakeningeconomic conditions could adversely impact the ability of borrowers to repayoutstanding loans or the value of the collateral securing these loans. TheCompany is also subject to various laws and regulations that affect its lendingactivities. Failure to comply with applicable laws and regulations couldsubject the Company to regulatory enforcement action that could result in theassessment of significant civil money penalties against the Company.

 

*The Company Has A High Concentration Of RealEstate Collateral Securing Its Loans*

 

Approximately 90% of the Company’s loanportfolio is directly or indirectly secured by real property. Because theCompany’s loan portfolio contains a significant number of land development,construction, commercial and residential real estate loans, the deteriorationof one or a few of these loans could cause a significant increase in non-performingloans. While the Company generally underwrites loans in a manner thatcollateral is not viewed as the primary source of repayment, the financialcondition of many of the Company’s borrowers is directly or indirectlydependent on the health of the local real estate industry.

 

Real estate nationwide, and in the Company’smarketplace, has experienced significant appreciation over the last eight yearsor more. If there is a significant devaluation of the real estate collateralthat secures these loans, there may also be related decline in generaleconomic conditions. This may result in increased levels of nonperformingloans. An increase in non-performing loans could result in a net loss ofearnings from these loans, an increase in the provision for loan losses and anincrease in loan charge-offs, all of which could have a material adverse effecton the Company’s financial condition and results of operations. *See**“Management’s Discussionand Analysis of Financial Condition and Results of Operations”* inthis report for further discussion related to commercial and industrial,construction and commercial real estate loans.

 

*The Company’s Allowance For Loan Losses May BeInsufficient*

 

The Company maintains an allowance for loanlosses, which is a reserve established through a provision for loan lossescharged to expense, that represents management’s best estimate of probablelosses that have been incurred within the existing portfolio of loans. Theallowance, in the judgment of management, is necessary to reserve for estimatedloan losses and risks inherent in the loan portfolio. The level of theallowance reflects management’s continuing evaluation of industryconcentrations; specific credit risks; loan loss experience; current loanportfolio quality; present economic, political and regulatory conditions andunidentified losses inherent in the current loan portfolio. The determinationof the appropriate level of the allowance for loan losses inherently involves ahigh degree of subjectivity and requires the Company to make significantestimates of current credit risks and future trends, all of which may undergomaterial changes.

 

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Changes in economic conditions affectingborrowers, new information regarding existing loans, identification ofadditional problem loans and other factors, both within and outside of theCompany’s control, may require an increase in the allowance for loanlosses. In addition, bank regulatory agencies periodically review the Company’sallowance for loan losses and may require an increase in the provision forloan losses or the recognition of further loan charge-offs, based on judgmentsdifferent than those of management. In addition, if charge-offs in futureperiods exceed the allowance for loan losses; the Company will need additionalprovisions to increase the allowance for loan losses. Any increases in theallowance for loan losses will result in a decrease in net income and,possibly, capital, and may have a material adverse effect on the Company’sfinancial condition and results of operations. See*“Management’sDiscussion and Analysis of Financial Condition and Results of Operations”*in this report for further discussion related to the Company’s process fordetermining the appropriate level of the allowance for loan losses.

 

*The Company needs togenerate liquidity to fund its loan demand.*

 

In order to support its loan growth, theCompany will be required generate liquidity primarily through new deposits. Whilethe Company has sources of borrowings, including the FHLB, deposit growth needsto keep pace with loan growth in the long term to insure that loan growth isnot restricted. During the year ended December 31, 2005, depositsincreased by 8.3% and loans increased 11.8%. However, the Company’s loan growthcontinued to outpace deposit growth in 2005 resulting in the average loan toaverage deposit ratio increasing from 92% in 2004 to 96% in 2005. Thiscontinued imbalance in growth has reduced the liquidity levels to the Company’spolicy minimums and increased the reliance on borrowings as a source of fundingloan growth. If the Company is unable to attract a sufficient amount ofdeposits to support its loan growth, it may be required to slow loangrowth which may have an adverse effect on the Company’s results ofoperations.

 

*The Company Is Subject To EnvironmentalLiability Risk Associated With Lending Activities*

 

A significant portion of the Company’s loanportfolio is secured by real property. During the ordinary course of business, theCompany may foreclose on and take title to properties securing certainloans. In doing so, there is a risk that hazardous or toxic substances could befound on these properties. If hazardous or toxic substances are found, theCompany may be liable for remediation costs, as well as for personalinjury and property damage. Environmental laws may require the Company toincur substantial expenses and may materially reduce the affected property’svalue or limit the Company’s ability to use or sell the affected property. Inaddition, future laws or more stringent interpretations or enforcement policieswith respect to existing laws may increase the Company’s exposure toenvironmental liability. Although the Company has policies and procedures toperform an environmental review before initiating any foreclosure actionon real property, these reviews may not be sufficient to detect allpotential environmental hazards. The remediation costs and any other financialliabilities associated with an environmental hazard could have a materialadverse effect on the Company’s financial condition and results of operations.

 

*The Company’s Profitability DependsSignificantly On Economic Conditions In the State Of California*

 

The Company’s success depends primarily onthe general economic conditions of the State of California and the specificlocal markets in which the Company operates. Unlike larger national or otherregional banks that are more geographically diversified, the Company providesbanking and financial services to customers primarily Sacramento and theCentral Valley. The local economic conditions in these areas have a significantimpact on the demand for the Company’s products and services as well as theability of the Company’s customers to repay loans, the value of the collateralsecuring loans and the stability of the Company’s deposit funding sources. Asignificant decline in general economic conditions, caused by inflation,recession, acts of terrorism, outbreak of hostilities or other international ordomestic occurrences, unemployment, changes in securities markets or otherfactors could impact these local economic conditions and, in turn, have amaterial adverse effect on the Company’s financial condition and results ofoperations.

 

*The Company Operates In A Highly CompetitiveIndustry and Market Area*

 

The Company faces substantial competition inall areas of its operations from a variety of different competitors, many ofwhich are larger and may have more financial resources. Such competitorsprimarily include national, regional, and community banks within the variousmarkets the Company operates. Additionally, various out-of-state banks havebegun to enter or have announced plans to enter the market areas in which theCompany currently operates. The Company also faces competition from many othertypes of financial institutions, including, (but not limited to) savings andloans, credit unions, finance companies, brokerage firms, insurance companies,factoring companies and other financial intermediaries. The financial servicesindustry could become even more competitive as a result of legislative,regulatory and technological changes and continued consolidation. Banks,securities firms and insurance companies can merge under the umbrella of afinancial holding company, which can offer virtually any type of financialservice, including banking, securities underwriting, insurance (both agency andunderwriting) and merchant banking. Also, technology has lowered barriers toentry and made it possible for non-banks to offer products and servicestraditionally provided by banks, such as automatic transfer and automaticpayment systems. Many of the Company’s competitors have fewer regulatoryconstraints and may have lower cost structures. Additionally, due to theirsize, many competitors may be able to achieve economies of scale and, as aresult, may offer a broader range of products and services as well asbetter pricing for those products and services than the Company can.

 

The Company’s ability to compete successfullydepends on a number of factors, including, among other things:

 

•                  Theability to develop, maintain and build upon long-term customer relationshipsbased on top quality service, high ethical standards and safe, sound assets.

•                  Theability to expand the Company’s market position.

•                  Thescope, relevance and pricing of products and services offered to meet customerneeds and demands.

•                  Therate at which the Company introduces new products and services relative to itscompetitors.

•                  Customersatisfaction with the Company’s level of service.

•                  Industryand general economic trends.

 

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Failure to perform in any of these areascould significantly weaken the Company’s competitive position, which couldadversely affect the Company’s growth and profitability, which, in turn, couldhave a material adverse effect on the Company’s financial condition and resultsof operations.

 

*The Company Is Subject To ExtensiveGovernment Regulation and Supervision*

 

The Company, primarily through its subsidiarybanks, is subject to extensive federal and state regulation and supervision.Banking regulations are primarily intended to protect depositors’ funds,federal deposit insurance funds and the banking system as a whole, notshareholders. These regulations affect the Company’s lending practices, capitalstructure, investment practices, dividend policy and growth, among otherthings. Congress and federal regulatory agencies continually review bankinglaws, regulations and policies for possible changes. Changes to statutes,regulations or regulatory policies, including changes in interpretation orimplementation of statutes, regulations or policies, could affect the Companyin substantial and unpredictable ways. Such changes could subject the Companyto additional costs, limit the types of financial services and products theCompany may offer and/or increase the ability of non-banks to offercompeting financial services and products, among other things. Failure tocomply with laws, regulations or policies could result in sanctions byregulatory agencies, civil money penalties and/or reputation damage, whichcould have a material adverse effect on the Company’s business, financialcondition and results of operations. While the Company has policies andprocedures designed to prevent any such violations, there can be no assurancethat such violations will not occur. See*“Supervision andRegulation”*in Item 1**of the Company’sForm 10-K for the year ended December 31, 2005.

 

*The Company’s Controls and Procedures May Failor Be Circumvented*

 

Management regularly reviews and updates theCompany’s internal controls, disclosure controls and procedures, and corporategovernance policies and procedures. Any system of controls, however welldesigned and operated, is based in part on certain assumptions and canprovide only reasonable, not absolute, assurances that the objectives of thesystem are met. Any failure or circumvention of the Company’s controls andprocedures or failure to comply with regulations related to controls andprocedures could have a material adverse effect on the Company’s business,results of operations and financial condition.

 

*New Lines of Business or New Products andServices May Subject The Company to Additional Risks*

 

From time to time, the Company may implementnew lines of business or offer new products and services within existing linesof business. There are substantial risks and uncertainties associated withthese efforts, particularly in instances where the markets are not fullydeveloped. In developing and marketing new lines of business and/or newproducts and services the Company may invest significant time andresources. Initial timetables for the introduction and development of new linesof business and/or new products or services may not be achieved and priceand profitability targets may not prove feasible. External factors, suchas compliance with regulations, competitive alternatives, and shifting marketpreferences, may also impact the successful implementation of a new lineof business or a new product or service. Furthermore, any new line of businessand/or new product or service could have a significant impact on theeffectiveness of the Company’s system of internal controls. Failure tosuccessfully manage these risks in the development and implementation of newlines of business or new products or services could have a material adverseeffect on the Company’s business, results of operations and financialcondition.

 

*The Company May Not Be Able To Attractand Retain Skilled People*

 

The Company’s success depends, in large part,on its ability to attract and retain key people. Competition for the bestpeople in most activities engaged in by the Company can be intense and theCompany may not be able to hire people or to retain them. The unexpectedloss of services of one or more of the Company’s key personnel could have amaterial adverse impact on the Company’s business because of their skills,knowledge of the Company’s market, years of industry experience and the difficultyof promptly finding qualified replacement personnel.

 

*The Company’s Information Systems May ExperienceAn Interruption Or Breach In Security*

 

The Company relies heavily on communicationsand information systems to conduct its business. Any failure, interruption orbreach in security of these systems could result in failures or disruptions inthe Company’s customer relationship management, general ledger, deposit, loanand other systems. While the Company has policies and procedures designed toprevent or limit the effect of the failure, interruption or security breach ofits information systems, there can be no assurance that any such failures,interruptions or security breaches will not occur or, if they do occur, thatthey will be adequately addressed. The occurrence of any failures,interruptions or security breaches of the Company’s information systems coulddamage the Company’s reputation, result in a loss of customer business, subjectthe Company to additional regulatory scrutiny, or expose the Company to civillitigation and possible financial liability, any of which could have a materialadverse effect on the Company’s financial condition and results of operations.

 

*The Company Continually EncountersTechnological Change*

 

The financial services industry iscontinually undergoing rapid technological change with frequent introductionsof new technology-driven products and services. The effective use of technologyincreases efficiency and enables financial institutions to better servecustomers and to reduce costs. The Company’s future success depends, in part,upon its ability to address the needs of its customers by using technology toprovide products and services that will satisfy customer demands, as well as tocreate additional efficiencies in the Company’s operations. Many of the Company’scompetitors have substantially greater resources to invest in technologicalimprovements. The Company may not be able to effectively implement newtechnology-driven products and services or be successful in marketing theseproducts and services to its customers. Failure to successfully keep pace withtechnological change affecting the financial services industry could have amaterial adverse impact on the Company’s business and, in turn, the Company’sfinancial condition and results of operations.

 

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*The Company Is Subject To Claims andLitigation Pertaining To Fiduciary Responsibility*

 

From time to time, customers make claims andtake legal action pertaining to the Company’s performance of its fiduciaryresponsibilities. Whether customer claims and legal action related to theCompany’s performance of its fiduciary responsibilities are founded orunfounded, if such claims and legal actions are not resolved in a mannerfavorable to the Company they may result in significant financialliability and/or adversely affect the market perception of the Company and itsproducts and services as well as impact customer demand for those products andservices. Any financial liability or reputation damage could have a materialadverse effect on the Company’s business, which, in turn, could have a materialadverse effect on the Company’s financial condition and results of operations.

 

*Severe Weather, Natural Disasters, Acts OfWar Or Terrorism and Other External Events Could Significantly Impact TheCompany’s Business*

 

Severe weather, natural disasters, acts ofwar or terrorism and other adverse external events could have a significantimpact on the Company’s ability to conduct business. Such events could affectthe stability of the Company’s deposit base, impair the ability of borrowers torepay outstanding loans, impair the value of collateral securing loans, causesignificant property damage, result in loss of revenue and/or cause the Companyto incur additional expenses. Although management has established disasterrecovery policies and procedures, the occurrence of any such event could have amaterial adverse effect on the Company’s business, which, in turn, could have amaterial adverse effect on the Company’s financial condition and results ofoperations.

 

**RisksAssociated With The Company’s Common Stock**

 

*Possible Price Effects if the Merger WithUmpqua Does Not Occur*

 

As previously disclosed, the Company hasentered into a definitive agreement to merge with Umpqua Holdings Corporation. Consummationof the merger is subject to certain conditions, including shareholder andregulatory approval. The Company’s common stock currently trades at a levelthat is primarily based on the expectation that the merger with Umpqua will becompleted as expected. If the transaction does not transpire as expectedbecause it fails to be approved by either the Company’s or Umpqua’sshareholders (see anti-takeover effects below) or for any other reason, therewill likely be a significant devaluation in the market price of the Company’scommon stock.

 

*The Company’s Articles Of Incorporation,By-Laws As Well As Certain Banking Laws May Have An Anti-Takeover Effect*

 

Provisions of the Company’s articles of incorporation and by-laws,federal banking laws, including regulatory approval requirements could make itmore difficult for a third party to acquire the Company, even if doing so would be perceived to bebeneficial to the Company’s shareholders. The combination of these provisionseffectively inhibits a non-negotiated merger or other business combination,which, in turn, could adversely affect the market price of the Company’s commonstock.

 

TheCompany’s articles of incorporation state: *“The stockholder voterequired to approve a Business Combination shall be at least 66-2/3% of thecorporation’s outstanding shares of voting stock voting together as a singleclass. The corporation shall not be a party to any Business Combination withoutthe shareholder approval specified herein.”*

 

*The Company’s Stock Price Can Be Volatile*

 

Stock price volatility may make it moredifficult for you to resell your common stock when you want and at prices youfind attractive. The Company’s stock price can fluctuate significantly inresponse to a variety of factors including, among other things:

 

•                  Actualor anticipated variations in quarterly results of operations.

•                  Recommendationsby securities analysts.

•                  Operatingand stock price performance of other companies that investors deem comparableto the Company.

•                  Newsreports relating to trends, concerns and other issues in the financial servicesindustry.

•                  Perceptionsin the marketplace regarding the Company and/or its competitors.

•                  Newtechnology used, or services offered, by competitors.

•                  Significantacquisitions or business combinations, strategic partnerships, joint venturesor capital commitments by or involving the Company or its competitors.

•                  Failureto integrate acquisitions or realize anticipated benefits from acquisitions.

•                  Changesin government regulations.

•                  Geopoliticalconditions such as acts or threats of terrorism or military conflicts.

 

General market fluctuations, industry factorsand general economic and political conditions and events, such as economic slowdownsor recessions, interest rate changes or credit loss trends, could also causethe Company’s stock price to decrease regardless of operating results.

 

*The Trading Volume In The Company’s CommonStock Is Less Than That Of Other Larger Financial Services Companies*

 

Although the Company’s common stock is listedfor trading on the NASDAQ, the trading volume in its common stock is less thanthat of other larger financial services companies. A public trading markethaving the desired characteristics of depth, liquidity and orderliness dependson

 

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the presence in the marketplace of willingbuyers and sellers of the Company’s common stock at any given time. Thispresence depends on the individual decisions of investors and general economicand market conditions over which the Company has no control. Given the lowertrading volume of the Company’s common stock, significant sales of the Company’scommon stock, or the expectation of these sales, could cause the Company’sstock price to fall.

 

*An Investment In The Company’s Common StockIs Not An Insured Deposit*

 

The Company’s common stock is not a bankdeposit and, therefore, is not insured against loss by the Federal DepositInsurance Company (FDIC), any other deposit insurance fund or by any otherpublic or private entity. Investment in the Company’s common stock isinherently risky for the reasons described in this “Risk Factors” section andelsewhere in this report and is subject to the same market forces that affectthe price of common stock in any company. As a result, if you acquire theCompany’s common stock, you may lose some or all of your investment.

 

**RisksAssociated With The Banking Industry**

 

*The Earnings Of Banks Are SignificantlyAffected By General Business And Economic Conditions*

 

The Company’s operations and profitabilityare impacted by general business and economic conditions in the United Statesand abroad. These conditions include short-term and long-term interest rates,inflation, money supply, political issues, legislative and regulatory changes,fluctuations in both debt and equity capital markets, broad trends in industryand finance, and the strength of the U.S. economy and the local economiesin which the Company operates, all of which are beyond the Company’s control. Anydeterioration in economic conditions could result in an increase in loandelinquencies and non-performing assets, decreases in loan collateral valuesand a decrease in demand for the Company’s products and services, among otherthings, any of which could have a material adverse impact on the Company’sfinancial condition and results of operations.

 

*Banks Depend On The Accuracy And CompletenessOf Information About Customers And Counterparties*

 

In deciding whether to extend credit or enterinto other transactions, the Company may rely on information furnished byor on behalf of customers and counterparties, including financial statements,credit reports and other financial information. The Company may also relyon representations of those customers, counterparties or other third parties,such as independent auditors, as to the accuracy and completeness of thatinformation. Reliance on inaccurate or misleading financial statements, creditreports or other financial information could have a material adverse impact onthe Company’s business and, in turn, the Company’s financial condition andresults of operations.

 

*Consumers May Decide Not To Use Banks ToComplete Their Financial Transactions*

 

Technology and other changes are allowing parties to complete financialtransactions that historically have involved banks through alternative methods.For example, consumers can now maintain funds that would have historically beenheld as bank deposits in brokerage accounts or mutual funds. Consumers can alsocomplete transactions such as paying bills and/or transferring funds directlywithout the assistance of banks. The process of eliminating banks asintermediaries, known as “disintermediation,” could result in the loss of feeincome, as well as the loss of customer deposits and the related incomegenerated from those deposits. The loss of these revenue streams and the lowercost deposits as a source of funds could have a material adverse effect on theCompany’s financial condition and results of operations.

 

# **Item#2. Unregistered sales of equity securities and use of proceeds**

# ** **

N/A

 

# **Item#3. Defaults upon Senior Securities**

# ** **

N/A

 

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

# ** **

# **N/A**

# ** **

# **Item#5. Other Information**

# ** **

N/A

 

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**Item #6. Exhibits**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                |
|----------------------|------------|-----------------------------------------------------|
|                 |       |                                                |
| 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     |

 

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**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: May 5, 2006      |                                                               |
|                        |                                                               |
|                        |                                                               |
|                        | /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* |
|                             |                                                                    |  |  |

 

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