**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 
| **(Mark  One)**                                        |
|--------------------------------------------------------|
|                                                   |   |   |
| **ý**                                             |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                   |
| **For the Quarterly Period Ended March 31, 2003** |
|                                                   |   |   |
| **OR**                                                 |
|                                                   |
| **o**                                                  |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                        |  |  |  |  |

 

**For the transition period from             to             **

 

##### **Commission filenumber 0-25979**

 

**WESTERNSIERRA BANCORP**

(Exactname 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’stelephone number, including area code: **(530)677-5600**

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**Common Stock, no par value per share**

 

   Indicate bycheck mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ýNo o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)Yes ý No o

 

As of April117, 2003 there wereapproximately 3,997,466 shares outstanding of the Registrant’s common stock. 

 

 

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**WESTERNSIERRA BANCORP & SUBSIDIARIES**

**Index to Form 10-Q**

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

 

2

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**PART I.FINANCIAL INFORMATION**

 

**Western Sierra Bancorp and Subsidiaries**

**UnauditedConsolidated Balance Sheet**

(dollarsin thousands)

 
|                                                                                                                      |   | **March  31,   2003** |       | **December  31,   2002** |       |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|--------------------------|------------|
| **ASSETS:**                                                                                                               |   |                  | ** ** |                     | ** ** |
| Cash and due from banks                                                                                                   |   | $                     | 23,668     |                     | $          | 29,064 |   |
| Federal funds sold                                                                                                        |   | 32,920                |       | 7,900                    |       |
| Cash and cash equivalents                                                                                                 |   | 56,588                |       | 36,964                   |       |
|                                                                                                                      |   |                  |       |                     |       |
| Interest-bearing deposits                                                                                                 |   | 1,388                 |       | 1,784                    |       |
| Loans held for sale                                                                                                       |   | 4,345                 |       | 4,926                    |       |
| Investment securities:                                                                                                    |   |                  |       |                     |       |
| Trading                                                                                                                   |   | 18                    |       | 18                       |       |
| Available for sale (amortized cost $57,667 in 2003  and $60,018 in 2002)                                                  |   | 59,096                |       | 61,038                   |       |
| Held to maturity (market value of $7,021 in 2003  and $8,203 in 2002)                                                     |   | 6,794                 |       | 8,001                    |       |
| Total investments                                                                                                         |   | 65,908                |       | 69,057                   |       |
| Portfolio loans and leases:                                                                                               |   |                  |       |                     |       |
| Real estate mortgage                                                                                                      |   | 335,924               |       | 311,030                  |       |
| Real estate construction                                                                                                  |   | 131,890               |       | 124,726                  |       |
| Commercial                                                                                                                |   | 84,981                |       | 88,084                   |       |
| Agricultural                                                                                                              |   | 9,161                 |       | 8,540                    |       |
| Installment                                                                                                               |   | 4,136                 |       | 4,630                    |       |
| Lease financing                                                                                                           |   | 3,296                 |       | 3,325                    |       |
| Total gross loans and leases                                                                                              |   | 569,387               |       | 540,335                  |       |
| Deferred loan and lease fees, net                                                                                         |   | (1,435                | )          | (1,551                   | )          |
| Allowance for loan and lease losses                                                                                       |   | (7,661                | )          | (7,113                   | )          |
| Net portfolio loans and leases                                                                                            |   | 560,291               |       | 531,671                  |       |
|                                                                                                                      |   |                  |       |                     |       |
| Premises and equipment, net                                                                                               |   | 15,788                |       | 16,034                   |       |
| Other real estate                                                                                                         |   | 485                   |       | 489                      |       |
| Goodwill and other intangible assets                                                                                      |   | 5,089                 |       | 4,364                    |       |
| Other assets                                                                                                              |   | 13,291                |       | 12,499                   |       |
| Total Assets                                                                                                              |   | $                     | 723,173    |                     | $          | 677,788 |   |
|                                                                                                                      |   |                  |       |                     |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY:**                                                                           |   |                  |       |                     |       |
| Non-interest bearing deposits                                                                                             |   | $                     | 150,393    |                     | $          | 162,108 |   |
| Interest bearing deposits:                                                                                                |   |                  |       |                     |       |
| NOW, money market and savings                                                                                             |   | 187,162               |       | 179,624                  |       |
| Time, over $100,000                                                                                                       |   | 165,307               |       | 124,020                  |       |
| Other time                                                                                                                |   | 134,266               |       | 123,620                  |       |
| Total deposits                                                                                                            |   | 637,128               |       | 589,373                  |       |
|                                                                                                                      |   |                  |       |                     |       |
| Borrowed funds                                                                                                            |   | 7,500                 |       | 14,500                   |       |
| Mandatorily redeemable cumulative trust preferred  securities                                                             |   | 16,000                |       | 16,000                   |       |
| Other liabilities                                                                                                         |   | 5,526                 |       | 3,576                    |       |
| Total liabilities                                                                                                         |   | 666,154               |       | 623,449                  |       |
|                                                                                                                      |   |                  |       |                     |       |
| Shareholders’ equity:                                                                                                |   |                  |       |                     |       |
| Preferred stock - no par value; 10,000,000 shares  authorized; none issued                                                |   | —                |       | —                   |       |
| Common stock - no par value; 10,000,000  shares authorized;  3,997,466 shares issued in 2003 and 3,986,917 shares in 2002 |   | 31,085                |       | 30,958                   |       |
| Retained earnings                                                                                                         |   | 24,999                |       | 22,712                   |       |
| Accumulated other comprehensive income                                                                                    |   | 935                   |       | 669                      |       |
| Total shareholders’ Equity                                                                                           |   | 57,020                |       | 54,339                   |       |
| Total Liabilities and Shareholders’ equity                                                                           |   | $                     | 723,173    |                     | $          | 677,788 |   |

 

Seenotes to consolidated financial statements.

 

3

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**Western Sierra Bancorp and Subsidiaries**

**UnauditedConsolidated Statements of Income**

(dollarsin thousands, except per share data)

 
|                                                                                               |   | **Three Months Ended** |   |
|----------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                               |   | **March 31,****2003**  |   | **March 31,****2002** |   |
|                                                                                               |   |                   |   |   | ** ** |
| Interest income:                                                                                   |   |                   |   |   |   |
| Interest and fees on loans                                                                         |   | $                      | 9,752  |   | $ | 7,444 |   |
| Interest on investment securities:                                                                 |   |                   |   |   |   |
| Taxable                                                                                            |   | 401                    |   | 565 |   |
| Exempt from federal taxes                                                                          |   | 359                    |   | 362 |   |
| Interest on Fed funds sold                                                                         |   | 42                     |   | 53 |   |
| Total interest income                                                                              |   | 10,555                 |   | 8,424 |   |
|                                                                                               |   |                   |   |   |   |
| Interest expense:                                                                                  |   |                   |   |   |   |
| Interest on deposits                                                                               |   | 1,999                  |   | 2,039 |   |
| Interest on borrowed funds                                                                         |   | 272                    |   | 248 |   |
| Total interest expense                                                                             |   | 2,271                  |   | 2,287 |   |
|                                                                                               |   |                   |   |   |   |
| Net interest income                                                                                |   | 8,284                  |   | 6,137 |   |
|                                                                                               |   |                   |   |   |   |
| Provision for loan and lease losses                                                                |   | 525                    |   | 400 |   |
|                                                                                               |   |                   |   |   |   |
| Net interest income after provision for loan and  lease losses                                     |   | 7,759                  |   | 5,737 |   |
|                                                                                               |   |                   |   |   |   |
| Non-interest income:                                                                               |   |                   |   |   |   |
| Service charges and fees                                                                           |   | 835                    |   | 626 |   |
| Net gain on sale and packaging of residential  mortgage and government-guaranteed commercial loans |   | 1,104                  |   | 759 |   |
| Gain on trading securities                                                                         |   | 2                      |   | 8 |   |
| Other income                                                                                       |   | 115                    |   | 71 |   |
| Total non-interest income                                                                          |   | 2,055                  |   | 1,464 |   |
|                                                                                               |   |                   |   |   |   |
| Other expenses:                                                                                    |   |                   |   |   |   |
| Salaries and benefits                                                                              |   | 3,416                  |   | 2,540 |   |
| Occupancy and equipment                                                                            |   | 1,052                  |   | 703 |   |
| Other expenses                                                                                     |   | 1,645                  |   | 1,382 |   |
| Amortization of core deposits and other intangibles                                                |   | 62                     |   | 14 |   |
| Total other expenses                                                                               |   | 6,175                  |   | 4,639 |   |
|                                                                                               |   |                   |   |   |   |
| Income before income tax                                                                           |   | 3,639                  |   | 2,562 |   |
|                                                                                               |   |                   |   |   |   |
| Income taxes                                                                                       |   | 1,352                  |   | 747 |   |
|                                                                                               |   |                   |   |   |   |
| Net income                                                                                         |   | $                      | 2,287  |   | $ | 1,816 |   |
|                                                                                               |   |                   |   |   |   |
| Basic earnings per share                                                                           |   | $                      | 0.57   |   | $ | 0.49 |   |
| Fully diluted earnings per share                                                                   |   | $                      | 0.55   |   | $ | 0.47 |   |

 

Seenotes to consolidated financial statements.

 

4

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**Western Sierra Bancorp and Subsidiaries**

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

(dollarsin thousands)

 
|                                                                               |   | **Three Months Ended** |   |
|------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                               |   | **March 31,****2003**  |   | **March 31,****2002** |   |
|                                                                               |   |                   |   |   | ** ** |
| Cash flows from operating activities:                                              |   |                   |   |   |   |
| Net income                                                                         |   | $                      | 2,287  |   | $ | 1,816 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                   |   |   |   |
| Provision for loan and lease losses                                                |   | 525                    |   | 400 |   |
| Depreciation and amortization                                                      |   | 544                    |   | 347 |   |
| Deferred loan and lease origination fees, net                                      |   | (116                   | )      | 58 |   |
| Amortization of investment security premiums, net  of accretion                    |   | 110                    |   | 93 |   |
| Gain on sale of available-for-sale investment  securities                          |   | —                 |   | (6 | ) |
| Increase in trading securities                                                     |   | —                 |   | (4 | ) |
| Loss on sale of premises and equipment                                             |   | 49                     |   |   |   |
| Loss on sale of other real estate                                                  |   | 4                      |   | — |   |
| Increase in cash surrender value of life insurance  policies                       |   | (50                    | )      | (20 | ) |
| Compensation cost associated with the Bank’s ESOP                             |   | —                 |   | 50 |   |
| Decrease in loans held for sale                                                    |   | 581                    |   | 833 |   |
| Decrease (increase) in other assets                                                |   | (1,670                 | )      | 514 |   |
| Increase in other liabilities                                                      |   | 1,950                  |   | 867 |   |
| Net cash provided by operating activities                                          |   | 4,164                  |   | 4,997 |   |
|                                                                               |   |                   |   |   |   |
| Cash flows from investing activities:                                              |   |                   |   |   |   |
| Proceeds from sale and call of available-for-sale  investment securities           |   | —                 |   | 1,000 |   |
| Proceeds from called held-to-maturity investment  securities                       |   | 1,000                  |   | — |   |
| Proceeds from matured available-for-sale investment  securities                    |   | 500                    |   | 500 |   |
| Purchases of available-for-sale investment  securities                             |   | (488                   | )      | — |   |
| Principal repayments received from available-for-sale  securities                  |   | 2,256                  |   | 2,521 |   |
| Principal repayments received from held-to-maturity  mortgage-backed securities    |   | 178                    |   | 596 |   |
| Net decrease in interest-bearing deposits in banks                                 |   | 396                    |   | 396 |   |
| Net increase in loans and leases                                                   |   | (29,029                | )      | (3,770 | ) |
| Proceeds from the sale of premises and equipment                                   |   | —                 |   | 48 |   |
| Purchases of premises and equipment                                                |   | (236                   | )      | (1,558 | ) |
| Purchase of life insurance policies at cash value                                  |   | —                 |   | (935 | ) |
| Net cash used in investing activities                                              |   | (25,423                | )      | (1,202 | ) |
|                                                                               |   |                   |   |   |   |
| Cash flows from financing activities:                                              |   |                   |   |   |   |
| Net (decrease) increase in demand, interest-bearing  and savings deposits          |   | $                      | (4,177 | ) | $ | 28,632 |   |
| Net increase (decrease) in time deposits                                           |   | 51,933                 |   | (2,247 | ) |
| Net (decrease) increase in short-term borrowings                                   |   | (7,000                 | )      | 2,700 |   |
| Repayment of ESOP borrowings                                                       |   | —                 |   | (50 | ) |
| Proceeds from the exercise of stock options                                        |   | 127                    |   | 18 |   |
| Net cash provided by financing activities                                          |   | 40,883                 |   | 29,053 |   |
| Increase in cash and cash equivalents                                              |   | 19,624                 |   | 32,848 |   |
| Cash and cash equivalents at beginning of year                                     |   | 36,964                 |   | 19,624 |   |
| Cash and cash equivalents at end of period                                         |   | $                      | 56,588 |   | $ | 52,472 |   |
|                                                                               |   |                   |   |   |   |
| Non-cash investing activities:                                                     |   |                   |   |   |   |
| Net change in unrealized gain on available-for-sale  investment securities         |   | 407                    |   | 129 |   |

 

Seenotes to consolidated financial statements.

 

5

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.Basis of Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements of WesternSierra Bancorp and subsidiaries (the “Company”) have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X. In the opinion ofManagement, all adjustments (which consist solely of normal recurring accruals)considered necessary for a fair presentation of the results for the interimperiods presented have been included. These interim condensed consolidatedfinancial statements should be read in conjunction with the financialstatements and related notes contained in the Company’s 2002 Annual Report toShareholders.

 

The condensedconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries, Western Sierra National Bank (WSNB) and itssubsidiary WSNB Investment Trust (a Real Estate Investment Trust (“REIT”)),Lake Community Bank (LCB), Central California Bank (CCB), Western SierraStatutory Trust I and Western Sierra Statutory Trust II. All significantinter-company balances and transactions have been eliminated. Operating resultsfor the three months ended March 31, 2003 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2003. Certainamounts in the consolidated financial statements for the year endedDecember 31, 2002 and the three-month period ended March 31, 2002 may havebeen reclassified to conform to the presentation of the consolidated financialstatements in 2003.

 

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

 

**2.  Stock-based Compensation**

 

At March 31, 2003, the Companyhas four stock-based compensation plans. The Company accounts for these plans under the recognition andmeasurement principles of APB Opinion No. 25, *Accounting for Stock Issued toEmployees*, and related Interpretations.  No stock-based compensation cost is reflected in net income, asall options granted under these plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.  In accordance with Financial Accounting StandardsBoard (“FASB”) No. 148, *Accounting forStock-Based Compensation — Transition and Disclosure, an Amendment of FASB No.12,* the following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*,to stock-based compensation.

 

Pro formaadjustments to the Company’s consolidated net earnings and earnings per shareare disclosed during the years in which the options become vested (dollars inthousands, except per share data).

 
|                                                                                                                                           |   | **March 31,   2003** |   | **March 31,   2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|----------------------|--------|
|                                                                                                                                           |   |                 |   |                 |   |
| Net earnings  as reported                                                                                                                      |   | $                    | 2,287  |                 | $      | 1,816 |   |
| Deduct:  Total stock-based compensation expense  determined under the fair value based method for all awards, net of related  tax effects |   | (260                 | )      | (134                 | )      |
|                                                                                                                                           |   |                 |   |                 |   |
| Pro forma net  income                                                                                                                          |   | $                    | 2,027  |                 | $      | 1,680 |   |
|                                                                                                                                           |   |                 |   |                 |   |
| Basic earnings  per share - as reported                                                                                                        |   | $                    | 0.57   |                 | $      | 0.49 |   |
| Basic earnings  per share - pro forma                                                                                                          |   | $                    | 0.51   |                 | $      | 0.46 |   |
|                                                                                                                                           |   |                 |   |                 |   |
| Diluted  earnings per share - as reported                                                                                                      |   | $                    | 0.55   |                 | $      | 0.47 |   |
| Diluted earnings per share - pro forma                                                                                                         |   | $                    | 0.50   |                 | $      | 0.45 |   |

 

6

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**3.Earnings per Share**

 

Basic earningsper share (EPS), which excludes dilution, is computed by dividing net income bythe weighted-average number of common shares outstanding for the period.Diluted EPS reflects the potential dilution that could occur if securities orother contracts to issue common stock, such as stock options, result in theissuance of common stock which shares in the earnings of the Company. Earningsper share is retroactively adjusted for stock dividends for all periodspresented. A reconciliation of the numerators and denominators of the basic anddiluted EPS computations is as follows (dollars in thousands, except for pershare data).

 
|                                                             |   | **Three Months Ended** |   |
|------------------------------------------------------------------|--------|------------------------|--------|
|                                                             |   | **March 31,****2003**  |   | **March 31,****2002** |   |
|                                                             |   |                   |   |   | ** ** |
| Basic EPS Computation:                                           |   |                   |   |   |   |
| Numerator—net income                                        |   | $                      | 2,287  |   | $ | 1,816 |   |
| Denominator—weighted average number of shares  outstanding  |   | 3,992,594              |   | 3,704,990 |   |
| Basic earnings per share                                         |   | $                      | 0.57   |   | $ | 0.49 |   |
|                                                             |   |                   |   |   |   |
| Diluted EPS Computation:                                         |   |                   |   |   |   |
| Numerator—net income                                        |   | $                      | 2,287  |   | $ | 1,816 |   |
| Denominator— weighted average number of shares  outstanding |   | 3,992,594              |   | 3,704,990 |   |
| Effect of dilutive stock options                                 |   | 174,530                |   | 140,519 |   |
|                                                             |   | 4,167,124              |   | 3,845,510 |   |
| Diluted earnings per share                                       |   | $                      | 0.55   |   | $ | 0.47 |   |

 

 

**4.Stock Repurchase Plan**

 

On May 29, 2002, the Company announced that the Board ofDirectors approved a plan to repurchase up to 5% (or approximately 200,000shares) of the Company’s common stock. The Company has purchased 5,000 sharesat an average price of approximately $21.00 under the plan through March 31,2003.

 

On October 23,2001, the Company announced that the Board of Directors approved a plan torepurchase up to 5% (or approximately 165,000 shares) of the Company’s commonstock effective November 20, 2001 through May 31, 2002.  The Company did not repurchase any sharesfrom this plan. 

 

**5.  Acquisition of Central California Bank**

 

OnApril 1, 2002, pursuant to the Agreement and Plan of Reorganization datedNovember 15, 2001, Central California Bank (“CCB”) was acquired by theCompany through a merger and tax-free reorganization whereby CCB became awholly-owned subsidiary of the Company. The Company believes that its shareholders will benefit from the mergerbecause the business potential for the combined companies exceeds what eachcompany could accomplish individually. Both the Company and CCB provide similar and complementary financialproducts and services in the Northern California market.  As of March 31, 2002, CCB had$68.1 million in total assets, $46.5 million in net loans, and $61.5 million in deposits.

 

The total consideration paidto CCB’s shareholders was approximately $8.6 million, which was comprised of$3.7 million in cash and 252,271 shares of common stock valued at approximately$5.0 million based on the market value of the Company’s stock. The fundsrequired to pay the cash portion of the consideration were obtained by theCompany through the issuance of $10 million of trust-preferred securities inDecember 2001 (Western Sierra Statutory Trust II).  The accompanying unaudited consolidated financial statementsinclude the accounts of CCB since April 1, 2002.

 

The purchaseprice has been allocated to the assets acquired and liabilities assumed basedon their estimated fair values at the date of acquisition.  The excess of the purchase price over theestimated fair value of the net assets acquired was $2.4 million, which wasrecorded as goodwill.  Assets acquired includeda core deposit intangible of $1.9 million that will be amortized using thestraight-line method over a period of ten years.  Prospectively, goodwill will be evaluated for possible impairmentunder the provisions of SFAS No. 142. Based upon an initial evaluation as of October 1, 2002, no impairmentexists.  In Management’s opinion, thegoodwill in this transaction arose from the synergies associated with themerger.

 

7

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The followingsupplemental pro forma information discloses selected financial information forthe periods indicated as though the merger had been completed as of thebeginning of each of the periods being reported.  Pro forma net income for the three months ended March 31, 2002includes a nonrecurring charge of approximately $425,000, on an after-taxbasis, representing CCB’s merger-related expenses and the cost of retiring theoutstanding stock options of CCB at March 31, 2002.  Dollars are in thousands except per share data.

 
|                        |   | **Three Months Ended** |   |
|-----------------------------|--------|------------------------|--------|
|                        |   | **March 31,   2003**   |   | **March 31,   2002** |   |
| Revenue                     |   | $                      | 12,610 |   | $ | 11,202 |   |
| Net income                  |   | $                      | 2,287  |   | $ | 1,883 |   |
| Diluted earnings  per share |   | $                      | 0.52   |   | $ | 0.46 |   |

 

**6.Recent Accounting Pronouncements**

 

In December2002, the FASB issued SFAS No. 148, Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB StatementNo. 123.  This Statement amendsSFAS No. 123, Accounting for Stock-Based Compensation, to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based compensation.  In addition, this Statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosuresin both annual and interim financial statements about the method of accounting forstock-based compensation and the effect of the method used on reportedresults.  The transition guidance andannual disclosure provisions of SFAS No.  148 are effective for fiscalyears ending after December 15, 2002. The interim disclosure provisions are effective for financial reportingcontaining financial statements for interim periods beginning afterDecember 15, 2002.  Because theCompany accounts for the compensation cost associated with its stock optionplan under the intrinsic value method, the alternative methods of transitionwill not apply to the Company.  Theadditional disclosure requirements of the Statement for the interim periods areincluded in these financial statements. In management’s opinion, the adoption of this Statement did not have amaterial impact on the Company’s financial position or results of operations.

 

On April 30,2003, the Financial Accounting Standards Board issued Statement No. 149,“Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”  This Statement amends andclarifies the accounting for derivative instruments by providing guidancerelated to circumstances under which a contract with a net investment meets thecharacteristics of a derivative as discussed in Statement 133.  The Statement also clarifies when aderivative contains a financing component.  The Statement is intended to result in more consistent reporting forderivative contracts and must be applied prospectively for contracts enteredinto or modified after June 30, 2003, except for hedging relationshipsdesignated after June 30, 2003.   Inmanagement’s opinion, adoption of this statement is not expected to have amaterial effect on the Company’s consolidated financial position or results ofoperations

 

**7.  Comprehensive Income**

 

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

 
|                                                     |   | **Three  months ended March 31,** |   |
|----------------------------------------------------------|--------|-----------------------------------|--------|
| **(In thousands)**                                       |   | **2003**                          |   | **2002** |   |
|                                                     |   |                              |   |   |   |
| Net income                                               |   | $                                 | 2,287  |   | $ | 1,816 |   |
| Other comprehensive income (loss):                       |   |                              |   |   |   |
| Holding gains (losses) arising during period, net of tax |   | 266                               |   | (129 | ) |
| Total comprehensive income                               |   | $                                 | 2,553  |   | $ | 1,687 |   |

 

8

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**8.  Agreement and Plan of Reorganization andMerger**

#### ** **

On March 13, 2003, the Companyand Central Sierra Bank (CSB) announced the signing of a definitive Agreementand Plan of Reorganization and Merger (the “Agreement”). Under the terms of theAgreement, the Company will pay $10,700,000 in cash and issue 385,000 shares ofcommon stock for all of the outstanding common shares and options of CSB. TheAgreement, which has been approved by the Board of Directors of both companies,is subject to approval by CSB shareholders and bank regulatoryauthorities.  It is anticipated that themerger will be completed during July 2003, at which time CSB will be mergedinto Central California Bank, a wholly owned subsidiary of the Company.

 

9

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATION.**

** **

**Privatesecurities litigation reform act safe harbor statement**

 

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

 

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

 

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

 

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

 

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

 

5.               Asset/Liability matching risks and liquidityrisks.

 

6.               Volatility and devaluation in the securitiesmarkets.

 

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

 

The following sectionsdiscuss significant changes and trends in financial condition, capitalresources and liquidity of the Company from December 31, 2002 to March 31,2003. Also discussed are significant trends and changes in the Company’sresults of operations for the three months ended March 31, 2003 compared to thesame periods in 2002. The consolidated financial statements and related notesappearing elsewhere in this report are condensed and unaudited.

 

10

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**General**

 

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

 

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

 

In April 2002, the Companyacquired Central California Bank for $3.7 million in cash and 252,181 shares ofthe Company’s stock.  This transactionwas accounted for under purchase accounting, which resulted in a preliminarypurchase price allocation of $2.4 million in goodwill and $1.9 million in coredeposit premium intangible assets. As required under purchase accounting, noprior period financial statements have been restated to reflect the combinedoperations of Central California Bank. In July of 2002, certain assets and liabilities of the SentinelCommunity Banks branches were transferred from Western Sierra National Bank toCentral California Bank.

 

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

 

Western SierraNational 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 4080 Plaza Goldorado Circle, Cameron Park, and itsbranch offices are located at 4011 Plaza Goldorado Circle, Cameron Park, 2661Sanders Drive, Pollock Pines, 3970 J Missouri Flat Road, Placerville, 1450 Broadway,Placerville, 3880 El Dorado Hills Blvd., El Dorado Hills, 571 5th Street,Lincoln, 1545 River Park Dr. #101 & #200, Sacramento, 1801Douglas Blvd., Roseville, 6951 Douglas Blvd., Granite Bay and 9050 FairwayDrive, Roseville, CA.   In March 2002, WesternSierra National Bank formed WSNB Investment Trust, a Real Estate InvestmentTrust (“REIT”), to potentially generate additional capital at Western SierraNational Bank and reduce the Company’s overall effective tax rate. WesternSierra National Bank does not have any other affiliates other than SentinelAssociates, Inc., an inactive entity formed by Sentinel Bank in 1983 todevelop single-family residential real estate. In April of 2003 a new branch facility was opened in Folsom, CA.

 

The Company enteredinto a 7,000 square foot lease agreement in May 2002 for Western Sierra Bank’snew 4,000 square foot branch facility in Folsom, California which opened inApril, 2003.  The Company has an annualcommitment of $258,000 per year for the first five years of the lease term and$297,000 per year for years six through ten. The Company expects to enter a sublease agreement(s) for 3,000 feet ofthe space at approximately the Company’s cost in 2003, which will offset approximately43% of the lease commitment.

 

Lake CommunityBank was incorporated as a banking corporation under the laws of the State ofCalifornia on March 9, 1984 and commenced operations as a Californiastate-chartered bank on November 15, 1984. Lake Community Bank is aninsured bank under the Federal Deposit Insurance Act and is not a member of theFederal Reserve System. Lake Community Bank engages in the general commercialbanking business in Lake County in the State of California from itsheadquarters banking office located at 805 Eleventh Street, Lakeport,California, and its branch located at 4280 Main Street, Kelseyville,California. Lake Community Bank does not have any affiliates or subsidiaries.

 

CentralCalifornia Bank was incorporated under the laws of the State of California onJanuary 13, 1997, and commenced operations on April 24, 1998. CentralCalifornia Bank is an insured bank under the Federal Deposit Insurance Act andbecame a  member of the Federal ReserveSystem in January 2003. Central California Bank engages in the general commercialbanking business in Tuolumne and Stanislaus counties in the state of Californiafrom its headquarters banking office located at 13753-A Mono Way, Sonora, CA,and its branches located at 400 E. Olive Ave, Turlock, CA, 3700 Lone Tree Way,Antioch, CA, 229 South Washington Street, Sonora, CA, 18711 Tiffeni Drive,Twain Harte, CA, 22712 Main Street, Columbia, CA and loan production officeslocated at 3400 Tully Rd., #B, Modesto, CA, and 1111 Dunbar Road, Arnold,CA.  Central California Bank does not haveany affiliates or subsidiaries.

 

In July 2001 and December2001, respectively, two trusts, Western Sierra Statutory Trust I and WesternSierra Statutory Trust II, were established as wholly owned subsidiaries of theCompany for the purpose of issuing and holding Trust Preferred

 

11

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Securities.

 

**Banking Services.** The Company is a locally owned and operated bank holding company,and its primary service area is the Northern California communities of CameronPark, Pollock Pines, Placerville, El Dorado Hills, Lincoln, Sacramento,Roseville, Granite Bay, Sonora, Twain Harte, Columbia, Lakeport, Antioch,Rocklin and the surrounding communities. The Company’s primary business isserving the banking needs of these communities and its marketing strategystresses its local ownership and commitment to serve the banking needs ofindividuals living and working in the Company’s primary service areas and localbusinesses, including retail, professional and real estate-related activities,in those service areas.

 

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

 

Most of the Company’sdeposits are obtained from commercial businesses, professionals andindividuals. At March 31, 2003 there was a title company customer with $19.2million or 5.2% of total deposits at Western Sierra National Bank. There wereno other customers with 5% or more of any of the subsidiary banks’ deposits.

 

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

 

**Employees.** At March 31, 2003, the Company and its subsidiaries employed 238persons on a full-time equivalent basis. The Company believes its employeerelations are excellent.

 

**FinancialCondition**

 

The Company increased totalassets from $677.8 million at December 31, 2002 to$723.2 million at March 31, 2003, an increase of $45.4 million or 7%.The two primary components of asset growth were Loans, which grew $28.9million, and Cash and Equivalents, which increased $19.6 million.  Asset growth was primarily funded by growthin deposits of $47.7 million.

 

During the first threemonths of 2003, Non-interest bearing deposits decreased from $162.1 million atyear-end 2002 to $150.4 million at March 31, 2003.  This was primarily caused by a reduction in title companydeposits which management considers to be primarily caused by seasonalfactors.  In order to offset the $11.7million decrease in non-interest bearing deposits and to fund a $29.1 millionincrease in gross loans and leases, management embarked on an institutional andretail campaign to raise deposits primarily through growth in time depositswhich increased $51.9 million in the first 90 days of 2003.  Management also believes that by fixing thecots of these deposits for a term, the Company has reduced its exposure to raisingrates in 2003.

 

**Resultsof Operations**

 

The Central California Bank(“CCB”) acquisition effective April 1, 2002 was accounted for under purchaseaccounting.  Pursuant to purchaseaccounting rules, the operating results of the Company below include the effectof this acquisition for the three months ended March 31, 2003, but priorperiods have not been restated to reflect CCB’s operating results during thoseperiods. Please refer to the proforma-operating table in footnote 5 of theconsolidated unaudited financial statements included in Item 1 of this report.

 

The Company reported netincome of $2.29 million for the three months ended March 31, 2003 (or$0.55 per share, diluted) compared to $1.82 million  (or $0.47 per share, diluted) for the same period in 2002. Thequarterly earnings represent an increase of $471,000 or a 26.0% increase in netincome and a 16.2% increase in diluted earnings per share.

 

The primary factorscontributing to the increase in operating results during the three months endedMarch 31, 2003 as compared to the same period in 2002 include:

 

1.         An increase in net interest income of $2.14 million or 35% overthe first quarter of 2002.  The netincrease is due to an increase of $182 million in average earning assets, whichincludes approximately $63 million in earning assets acquired in 

 

12

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the CCB transaction, andproportionally more higher yielding loans as evidenced by an increase in theaverage loan to deposit ratio from 83% in the first quarter of 2002 to 88% inthe first quarter of 2003.

 

2.         An increase in other income, primarily service fees on deposit accountsand gains on the sale and packaging of residential mortgage loans.  Other income increased $565,000 or 38% overthe first quarter of the previous year. Approximately 40% of this increaserelated to an increase in service charges and fees with the remainder a resultof an increase in the gain on sale and packaging of mortgage loans.

 

3.         The Company’s effective tax rate increased to 37.2% in the firstquarter of 2003 as compared to 29.2% in the first quarter of 2002.  The primary reason for the increase is thatmanagement has opted not to account for the tax benefit of the Real EstateInvestment Trust (“REIT”) thus far in 2003 because it is management’sassessment that certain tax-exempt income may be recharacterized as taxable in2003 through action by the California Legislature.  Management will continuously monitor developments throughout theyear and a determination could be made to recognize a tax benefit if it appearslikely that the law will remain unchange.

 

The factors above were offsetin part by:

 

1.         An increase in loss provisions of $125,000 for quarter ended March 31,2003 as compared to the same periods in 2002. Additional provisions wererecorded as a result of growth in loans outstanding.  The percentage of loan and lease loss reserves to gross loans andleases increased just .03% to 1.34% at March 31, 2003 as compared to 1.32% atMarch 31, 2002.

 

2.         Total other expenses increased $1.54 million or 32% as a result of theaddition of Central California Bank’s operating costs, which were approximately$1.27 million in the first quarter of 2003, that were not included in the 2002first quarter results as the acquisition, accounted for under purchase accounting,did not close until April 2002.

 

**Returnon Average Assets and Average Equity**

 

For the first quarter of2003, return on average equity (“ROE”) and return on average assets (“ROA”)were 16.84% and 1.34% respectively as compared to 17.37% and 1.44%  respectively in the first quarter of2002.  The modest compression of REOrelates primarily to the $4 million in goodwill generated in the CentralCalifornia bank transaction and the resulting additional equity it generated.  ROA compressed modestly as average assetsgrew at a faster rate (35.6%)  thanearnings, which grew 26.0%.

 

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

 

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

 

For the three months endedMarch 31, 2003, interest income on a tax equivalent basis increased by $2.13million to $10.8 million or 24.6% over the same period in 2002. Interestexpense on deposit accounts and borrowings decreased $15,000 or 0.66% over thesame three-month period ended March 31, 2002. Average earning assets yielded(on a fully tax equivalent basis) 6.80% versus 7.40% a year ago, furtheraugmented by a decrease in the cost of funds where the average cost of fundsdecreased to 1.87% from 2.49% a year ago. Net interest income (on a tax equivalentbasis) increased $2.14 million or 33.7% to $8.49 million. The net interestmargin decreased 8 basis points to 5.36% from 5.44% for the same three-monthperiod a year ago.

 

The followingtable presents, for the periods indicated, the distribution of consolidatedaverage assets, liabilities and shareholders’ equity, as well as the totaldollar amounts of interest income from average earning assets and the resultantyields and the dollar amounts of interest expense and average interest-bearingliabilities, expressed both in dollars and in rates. Non-accrual loans, whichare not considered material, are included in the calculation of the averagebalances of loans.  Savings depositsinclude NOW and money market accounts. To compare the tax-exempt asset yieldsto taxable yields, amounts are adjusted to pre-tax equivalents based on themarginal corporate federal tax rate of 34 percent (dollars in thousands).

 

13

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

 
|                                               |   | **Three  Months Ended** |    |
|----------------------------------------------------|--------|-------------------------|---------|
|                                               |   | **March 31,  2003**     |    | **March 31,  2002** |   |
|                                               |   | **Average  Balance**    |    | **Interest** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Rate** | ** ** |
| Earning assets:                                    |   |                    |    |   |   |   |   |   |   |   |   |   |   |
| Portfolio loans                                    |   | $                       | 559,085 |   | $ | 9,775 |   | 7.09% |   | $ | 387,590 |   | $ | 7,467 |   | 7.81 | % |
| Tax exempt investment securities                   |   | 30,858                  |    | 545 |   | 7.16% |   | 30,070 |   | 548 |   | 7.39 | % |
| Taxable investment securities                      |   | 36,715                  |    | 387 |   | 4.27% |   | 42,481 |   | 559 |   | 5.34 | % |
| Federal funds sold                                 |   | 13,596                  |    | 42 |   | 1.27% |   | 12,797 |   | 53 |   | 1.68 | % |
| Interest bearing deposits in banks                 |   | 1,656                   |    | 14 |   | 3.42% |   | 253 |   | 6 |   | 9.62 | % |
| Average earning assets                             |   | 641,911                 |    | 10,763 |   | 6.80% |   | 473,191 |   | 8,633 |   | 7.40 | % |
| Other assets                                       |   | 59,772                  |    |   |   |   |   | 44,093 |   |   |   |   |   |
| Less ALLL                                          |   | (7,377                  | )       |   |   |   |   | (5,230 | )  |   |   |   |   |
| Average total assets                               |   | $                       | 694,306 |   |   |   |   |   | $ | 512,054 |   |   |   |   |   |
| Interest bearing liabilities:                      |   |                    |    |   |   |   |   |   |   |   |   |   |   |
| Savings Deposits                                   |   | $                       | 185,174 |   | $ | 376 |   | 0.82% |   | $ | 149,171 |   | $ | 377 |   | 1.02 | % |
| Time deposits                                      |   | 278,104                 |    | 1,623 |   | 2.37% |   | 201,787 |   | 1,662 |   | 3.34 | % |
| Other borrowings (1)                               |   | 29,200                  |    | 272 |   | 3.78% |   | 20,779 |   | 248 |   | 4.84 | % |
| Average interest bearing liabilities               |   | 492,478                 |    | 2,271 |   | 1.87% |   | 371,737 |   | 2,287 |   | 2.50 | % |
| Non-interest bearing liabilities                   |   | 140,825                 |    |   |   |   |   | 94,995 |   |   |   |   |   |
| Other liabilities                                  |   | 5,927                   |    |   |   |   |   | 2,914 |   |   |   |   |   |
| Shareholders equity                                |   | 55,076                  |    |   |   |   |   | 42,408 |   |   |   |   |   |
| Average total liabilities and shareholders' equity |   | $                       | 694,306 |   |   |   |   |   | $ |  512,054 |   |   |   |   |   |
| Net interest income and net interest margin        |   |                    |    | $ | 8,492 |   | 5.36% |   |   |   | $ | 6,346 |   | 5.44 | % |

 

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(1) For the purpose of thisschedule the interest on the trust preferred securities is included in otherborrowings.

 

The followingtable sets forth changes in interest income and expense for each major categoryof earning assets and interest-bearing liabilities, and the amount of changeattributable to volume and rate changes for the periods indicated. Changesattributable to rate/volume have been allocated to volume changes (dollars inthousands).

 

**Analysisof Changes in Net Interest Income**

 
|                                     |   | **Three  Months Ended   March 31, 2003 over 2002** |   |
|------------------------------------------|--------|----------------------------------------------------|--------|
|                                     |   | **Volume**                                         |   | **Rate** |   | **Total** |   |
| Increase (decrease) in interest income:  |   |                                               |   |   |   |   |   |
| Portfolio loans                          |   | $                                                  | 3,304  |   | $ | (996 | ) | $ | 2,308 |   |
| Investment securities, tax exempt        |   | 14                                                 |   | (18 | ) | (3 | ) |
| Investment securities                    |   | (76                                                | )      | (96 | ) | (172 | ) |
| Federal funds sold                       |   | 3                                                  |   | (14 | ) | (11 | ) |
| Interest bearing deposits                |   | 33                                                 |   | (25 | ) | 8 |   |
| Net increase (decrease)                  |   | 3,279                                              |   | (1,149 | ) | 2,130 |   |
| Increase (decrease) in interest expense: |   |                                               |   |   |   |   |   |
| Interest bearing accounts                |   | 91                                                 |   | (92 | ) | (1 | ) |
| Time deposits                            |   | 629                                                |   | (668 | ) | (39 | ) |
| Borrowings (1)                           |   | 101                                                |   | (77 | ) | 24 |   |
| Net increase (decrease)                  |   | 820                                                |   | (836 | ) | (16 | ) |
| Total net increase (decrease)            |   | $                                                  | 2,459  |   | $ | (313 | ) | $ | 2,146 |   |

 

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(1) For the purpose of thisschedule the interest on the trust preferred securities is included in otherborrowings.

 

14

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**Non-interestIncome**

 

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

 

For the threemonths ended March 31, 2003, total non-interest income increased $591,000 or41% over the same period in 2002.

 

Service chargeincome rose $211,000 or 33% in the first quarter of 2003 versus the firstquarter of 2002. Approximately $123,000 or 58% of the increase relates to CCB’sservice charges in the first quarter of 2003, which were not included in thefirst quarter 2002 results.

 

In addition, income frommortgage loan origination and packaging fees increased $345,000 or 45% inthe first quarter  of 2003 as comparedto 2002. The increase was primarily a result of:  1) an increase in the number of refinances (due to a decrease ininterest rates), 2) an increase in mortgages for home buyers as interest ratesare at historic lows, 3) an increase in market share due to expansion of loanstaff and marketing and 4) expansion of the mortgage product line.

 

**Non-interestExpense**

 

Non-interestexpenses consist of salaries and related employee benefits, occupancy andequipment expenses, data processing fees, professional fees, directors’ fees,and other operating expenses. For the three months ended March 31, 2003,non-interest expense increased $1.54 million or 32% over the same period in2002. Approximately $1.27 million or 82% of the increase relates to CCB’snon-interest expenses in the first quarter of 2003,  which were not included in the first quarter 2002 results.

 

Salaries and benefitsincreased $876,000 or 34% over the same three-month period last year. Thisincrease was due primarily to the integration of the CCB employees into theCompany’s operation, the increase in commissions related to the increasedincome on mortgage loan origination and packaging fees and the implementationof new company-wide incentive programs.

 

15

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The following table sets fortha summary of non-interest expense for the periods indicated (dollars inthousands):

 
|                                                |   | **Three Months Ended  March 31,** |        |
|-----------------------------------------------------|--------|-----------------------------------|-------------|
|                                                |   | **2003**                          |        | **2002** |   |
|                                                |   | **Expense**                       |        | **%****of Avg  Earning  Assets** |   | **Expense** |   | **%****of Avg  Earning  Assets** |   |
| Salaries and benefits                               |   | $                                 | 3,416       |   | 0.53% |   | $ | 2,540 |   | 0.54 | % |
| Occupancy & equipment                           |   | 1,052                             |        | 0.16% |   | 565 |   | 0.12 | % |
| Other expenses                                      |   | 1,645                             |        | 0.26% |   | 1,550 |   | 0.33 | % |
| Amortization of core deposits and other intangibles |   | 62                                |        | 0.01% |   | 14 |   | 0.00 | % |
| Total non-interest expense                          |   | $                                 |  6,175 |   | 0.96% |   | $ |  4,669 |   | 0.99 | % |
|                                                     |        |                                   |             |  |  |  |  |  |  |  |  |  |  |

 

**IncomeTaxes**

 

The followingtable reflects the Company’s tax provision and the related effective tax ratefor the periods indicated (dollars in thousands):

 
|               |   | **March 31,** |   |
|--------------------|--------|---------------|--------|
|               |   | **2003**      |   | **2002** |   |
| Tax provision      |   | $             | 1,352  |   | $ | 747 |   |
| Effective tax rate |   | 37.2          | %      | 29.1 | % |
|                    |        |               |        |  |  |  |  |

 

The Company’s effective taxrate varies with changes in the relative amounts of its non-taxable income andnon-deductible expenses. The Company’s tax provision is attributable toincreases in the Company’s net income and the relative amount of tax-exemptincome. The Company decreased its effective tax rate in 2002 by deploying aseries of tax strategies including the purchase of tax-exempt municipal bonds,the funding of enterprise zone loans and the establishment of a real estateinvestment trust (“REIT”) in the first quarter of 2002.   The Company’s effective tax rate increasedto 37.2% in the first quarter of 2003 as compared to 29.2% in the first quarterof 2002.  The increase in the effectivetax rate is due primarily to management’s assessment that certain tax-exemptincome may be recharacterized as taxable in 2003 through action by theCalifornia Legislature.  Management willcontinuously monitor developments throughout the year and a determination couldbe made to recognize a tax benefit if it appears likely that the law willremain unchanged.

 

**AssetQuality**

 

The Company concentrates itslending activities primarily within areas directly serviced by branches aspreviously discussed.

 

The Company manages itscredit risk through diversification of its loan portfolio, the application ofunderwriting policies and procedures and credit monitoring practices. Althoughthe Company has a diversified loan portfolio, a significant portion of itsborrowers’ ability to repay their loans is dependent upon the professionalservices and residential real estate development industry sectors. Generally,loans are secured by real estate or other assets and are expected to be repaidfrom the cash flows of the borrower or proceeds from the sale of collateral.

 

16

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

 
|                                                |   | **March 31,  2003** |    | **% of  Total** |   | **December 31,  2002** |   | **% of  Total** |   |
|-----------------------------------------------------|--------|---------------------|---------|-----------------|--------|------------------------|--------|-----------------|--------|
| Commercial                                          |   | $                   | 84,981  |            | 14.96% |                   | $      | 88,084          |   | 16.35 | % |
| Commercial and residential real estate mortgage     |   | 335,924             |    | 59.15%          |   | 311,030                |   | 57.73           | %      |
| Commercial and residential real estate construction |   | 131,890             |    | 23.22%          |   | 124,726                |   | 23.15           | %      |
| Agricultural                                        |   | 9,161               |    | 1.61%           |   | 8,540                  |   | 1.59            | %      |
| Lease financing                                     |   | 3,296               |    | 0.58%           |   | 3,325                  |   | 0.62            | %      |
| Installment and other                               |   | 4,136               |    | 0.73%           |   | 4,630                  |   | 0.86            | %      |
| Deferred loan fees and costs, net                   |   | (1,435              | )       | -0.25%          |   | (1,551                 | )      | -0.29           | %      |
| Total                                               |   | 567,952             |    | 100%            |   | 538,784                |   | 100             | %      |
| Less allowance for loan and lease losses            |   | (7,661              | )       | -1.35%          |   | (7,113                 | )      | -1.32           | %      |
| Total net loans and leases                          |   | $                   | 560,291 |            |   |                   | $      | 531,671         |   |   |   |

 

The following table sets fortha summary of the Company’s non-performing assets as of the dates indicated(dollars in thousands):

 
|                                                              |   | **March  31,  2003** |   | **December  31,  2002** |   |
|-------------------------------------------------------------------|--------|----------------------|--------|-------------------------|--------|
|                                                              |   |                 |   |                    |   |
| Nonaccrual loans                                                  |   | $                    | 579    |                    | $      | 692 |   |
| 90 days past due and still accruing                               |   | 251                  |   | 0                       |   |
| Other real estate                                                 |   | 485                  |   | 489                     |   |
| Total non-performing assets                                       |   | $                    | 1,315  |                    | $      | 1,181 |   |
| Non-performing assets as a% of total assets                       |   | 0.18                 | %      | 0.17                    | %      |
| Non-accrual loans as a% of gross loans                            |   | 0.10                 | %      | 0.13                    | %      |
| Ratio of allowance for loan and lease losses to non accrual loans |   | 13.23                |   | 10.28                   |   |

 

The Company’s non-accrualloans decreased from $0.69 million to $0.58 million in the first three monthsof 2003. The Company’s “coverage ratio” or the ratio of allowance for loan andlease losses to non-accrual loans increased from 10.28 to 13.23 during thefirst three months of 2003.  The Companycarries other real estate (acquired through foreclosure) at what Managementbelieves to be the current market value at March 31, 2003.

 

There was a single loan of$251,000 that was past 90 days delinquent which the company continued to accrueinterest for at march 31, 2003.  Theborrower brought this loan current in April 2003.

 

**Allowancefor Loan and Lease Losses (ALLL)**

 

The Company makes provisionsto the ALLL on a regular basis through charges to operations that are reflectedin the Company’s statements of income as a provision for loan and lease losses.When a loan or lease is deemed uncollectible, it is charged against theallowance. Any recoveries of previously charged-off loans are credited back tothe allowance. There is no precise method of predicting specific losses oramounts that ultimately may be charged-off on particular categories of the loanportfolio.

 

Accordingly, the adequacy ofthe ALLL and the level of the related provision for possible loan and leaselosses is determined based on management’s judgment after consideration of(i) economic conditions, (ii) borrowers’ financial condition, (iii) loanimpairment, (iv) evaluation of industry trends, (v) industry andother concentrations, (vi) loans which are contractually current as topayment terms but demonstrate a higher degree of risk as identified byManagement, (vii) continuing evaluation of the

 

17

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performing loan portfolio,(viii) monthly review and evaluation of problem loans identified as havingloss potential, (ix) quarterly review by the Board of Directors, and(x)  assessments by banking regulators and other third parties. Managementand the Board of Directors evaluate the ALLL and determine its desired levelconsidering objective and subjective measures, such as knowledge of theborrowers’ business, valuation of collateral, the determination of impairedloans or leases and exposure to potential losses.

 

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

 

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

 

The adequacy of the ALLL isdetermined based on three components. First is the dollar weighted risk ratingof the loan portfolio, including all outstanding loans and leases. Everyextension of credit has been assigned a risk rating based upon a comprehensivedefinition intended to measure the inherent risk of lending money. Each ratinghas an assigned risk factor expressed as a reserve percentage. Secondly,established specific reserves are assigned to individual loans currently on theCompany’s Problem Loan Reports. These are estimated potential losses associatedwith specific borrowers based upon collateral value and event(s) affecting therisk rating. Thirdly, the Company maintains a reserve for qualitative factorsthat may affect the portfolio as a whole, such as those factors describedabove, including an unallocated reserve for model imprecision.

 

Management believes theassigned risk grades and methods for managing changes in assigned risk gradesare satisfactory.

 

The following table summarizesthe activity in the ALLL for the periods indicated (dollars in thousands):

 
|                                                      |   | **Three Months  Ended** |   |
|-----------------------------------------------------------|--------|-------------------------|--------|
|                                                      |   | **March  31,  2003**    |   | **March  31,  2002** |   |
| Beginning balance for allowance for loan and lease losses |   | $                       | 7,113  |   | $ | 5,097 |   |
| Provision for loan and lease losses                       |   | 525                     |   | 400 |   |
| Charge offs:                                              |   |                    |   |   |   |
| Commercial                                                |   | —                  |   | 14 |   |
| Real estate                                               |   | —                  |   | — |   |
| Agricultural                                              |   | —                  |   | 256 |   |
| Other                                                     |   | —                  |   | 6 |   |
| Total charge offs                                         |   | —                  |   | 276 |   |
| Recoveries:                                               |   |                    |   |   |   |
| Commercial                                                |   | 7                       |   | 5 |   |
| Real estate                                               |   | —                  |   | — |   |
| Agricultural                                              |   | 14                      |   | — |   |
| Other                                                     |   | 2                       |   | 3 |   |
| Total recoveries                                          |   | 23                      |   | 8 |   |
| Net (charge offs) recoveries                              |   | 23                      |   | (268 | ) |
| Ending balance                                            |   | $                       | 7,661  |   | $ | 5,229 |   |
| ALLL to total loans                                       |   | 1.35                    | %      | 1.32 | % |
| Annualized net (charge offs) recoveries to average loans  |   | 0.02                    | %      | -0.28 | % |

 

18

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# **InvestmentPortfolio**

 

Total investment securitiesdecreased $3.15 million in the first three months of 2003 or 4.6%. Thedecrease was primarily due to the prepayment of mortgage-backed securities as aresult of the decrease in rates.

 

**Liquidity**

 

A Funds Management Policyhas been developed by the Company’s Management and approved by the Company’sBoard of Directors that establishes guidelines for the investments andliquidity of the Company. The goals of this policy are to provide liquidity tomeet the financial requirements of the Company’s customers, maintain adequatereserves as required by regulatory agencies and maximize earnings of theCompany. The Company’s liquidity ratio at March 31, 2003 was 12.0% and was10.5% at December 31, 2002. Liquidity is computed by dividing liquid assets (consisting of cash anddue from banks, available-for-sale investments not pledged, federal funds soldand loans available-for-sale) by total liabilities. The Company’s Managementbelieves it maintains adequate liquidity levels.

 

**CapitalAdequacy**

 

Overall capital adequacy ismonitored on a day-to-day basis by the Company’s Management and reported to theCompany’s Board of Directors on a monthly basis. The Company’s and subsidiarybanks’ regulators measure capital adequacy by using a risk-based capitalframework and by monitoring compliance with minimum risk-based and leverageratio guidelines. Under the risk-based capital standards, assets reported onthe Company’s balance sheet and certain off-balance sheet items are assigned torisk categories, each of which is assigned a risk weight.

 

This standard characterizesan institution’s capital as being “Tier 1” capital (defined as principallycomprising shareholders’ equity) and “Tier 2” capital (defined as principallycomprising the qualifying portion of the ALLL).

 

The minimumratio of total risk-based capital to risk-weighted assets, including certainoff-balance sheet items, is 8% (10% to be considered well-capitalized).  The minimum ratio of Tier 1 capital toaverage assets (leverage ratio) is 4.0% (5.0% to be consideredwell-capitalized).  The minimum ratio ofTier 1 capital to risk-weighted assets is 4.0% (6.0% to be consideredwell-capitalized).  At least one-half(4%) of the total risk-based capital (Tier 1) is to be comprised of commonequity; the balance may consist of debt securities and a limited portion of theALLL.  Trust Preferred Securities in theamount of  $16.0 million are included inthe Company’s Tier 1 capital, as allowed by Federal Reserve regulations, in theconsolidated totals below.

 

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

 
|                                              |   | **March  31, 2003** |       | **December  31, 2002** |       |
|---------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                              |   | **Central**         |       | **Lake**               |       | **Western** |   | **Company** |   | **Central** |   | **Lake** |   | **Western** |   | **Company** |   |
|                                              |   |                | ** ** |                   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Total risk-based capital to risk-weighted assets  |   | 10.7                | %          | 11.0                   | %          | 10.7 | % | 12.4 | % | 11.4 | % | 10.4 | % | 10.7 | % | 12.7 | % |
|                                              |   |                |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 capital to risk-weighted assets            |   | 9.5                 | %          | 9.7                    | %          | 9.5 | % | 11.1 | % | 10.2 | % | 9.2 | % | 9.5 | % | 11.4 | % |
|                                              |   |                |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier 1 capital to average assets (leverage ratio) |   | 7.3                 | %          | 8.8                    | %          | 8.1 | % | 9.4 | % | 7.0 | % | 8.5 | % | 8.3 | % | 9.6 | % |

 

The Company and its banksubsidiaries continue to meet all regulatory capital requirements at March 31,2003.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK.**

 

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

 

19

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

 

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

 

The followingtable sets forth, as of  March 31, 2003,the distribution of re-pricing opportunities for the Company’s earning assetsand interest-bearing liabilities, the interest rate sensitivity gap, the cumulativeinterest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.earning assets divided by interest-bearing liabilities) and the cumulativeinterest rate sensitivity gap ratio.

 
| **(Dollars In Thousands)**                                       |   | **Within  3 Months** |    | **After 3  Months But  Within One  One Year** |   | **After  One Year  But Within  Five Years** |   | **After Five  Years** |    | **Total** |   |
|------------------------------------------------------------------|--------|----------------------|---------|-----------------------------------------------|--------|---------------------------------------------|--------|-----------------------|---------|-----------|--------|
| **Earning assets:**                                              |   |                 |    |                                          |   |                                        |   |                  |    |      |   |
| Federal funds sold                                               |   | $                    | 32,920  |                                          | $      | —                                      |   | $                     | —  |      | $      | — |   | $ | 32,920 |   |
| Investment securities and other                                  |   | 6,159                |    | 11,019                                        |   | 13,882                                      |   | 36,236                |    | 67,296    |   |
| Loans                                                            |   | 184,752              |    | 88,993                                        |   | 138,340                                     |   | 161,647               |    | 573,732   |   |
| Total earning assets                                             |   | 223,831              |    | 100,012                                       |   | 152,222                                     |   | 197,883               |    | 673,948   |   |
|                                                             |   |                 |    |                                          |   |                                        |   |                  |    |      |   |
| **Interest-bearing liabilities:**                                |   |                 |    |                                          |   |                                        |   |                  |    |      |   |
| Savings                                                          |   | 27,735               |    | 13,867                                        |   | —                                      |   | —                |    | 41,602    |   |
| Interest-bearing transaction accounts                            |   | 122,471              |    | 23,089                                        |   | —                                      |   | —                |    | 145,560   |   |
| Time deposits                                                    |   | 80,649               |    | 179,311                                       |   | 39,611                                      |   | 2                     |    | 299,573   |   |
| Trust Preferred Securities                                       |   | 16,000               |    | —                                        |   | —                                      |   | —                |    | 16,000    |   |
| Other borrowings                                                 |   | —               |    | 5,000                                         |   | 2,500                                       |   | —                |    | 7,500     |   |
| Total interest-bearing liabilities                               |   | 246,854              |    | 221,267                                       |   | 42,111                                      |   | 2                     |    | 510,235   |   |
| Interest rate sensitivity gap                                    |   | (23,023              | )       | (121,255                                      | )      | 110,111                                     |   | 197,881               |    | 163,713   |   |
| Cumulative interest rate sensitivity gap                         |   | $                    | (23,023 | )                                             | $      | (144,278                                    | )      | $                     | (34,167 | )         | $      | 163,713 |   | $ | — |   |
| Interest rate sensitivity gap to total assets                    |   | -3.42                | %       | -17.99                                        | %      | 16.34                                       | %      | 29.36                 | %       | 24.29     | %      |
| Cumulative interest rate sensitivity gap to total earning assets |   | -3.18                | %       | -19.95                                        | %      | -4.72                                       | %      | 22.64                 | %       |      |   |
| Ratio of rate sensitive assets to rate sensitive liabilities     |   | 0.91                 |    | 0.45                                          |   | 3.61                                        |   | N/A                   |    | 1.32      |   |
| Cumulative ratio                                                 |   | 0.91                 |    | 0.69                                          |   | 0.93                                        |   | 1.32                  |    | 1.32      |   |

 

Theopportunity to reprice assets in the same dollar amounts and at the same timeas liabilities would minimize interest rate risk in any interest rateenvironment. The difference between the amounts of assets and liabilitiesrepriced at the same time, or “gap”, represents the risk, or opportunity, inrepricing. In general, if more assets than liabilities are repriced at a giventime in a rising rate environment, net interest income would improve while in adeclining rate environment, net interest income would decline. If moreliabilities than assets were repriced under the same conditions the oppositewould result. The Company appears liability sensitive in the immediate toone-year period, and turns asset sensitive in the longer term. This can be andis influenced by the fact that the majority of interest-bearing transactionaccounts which consist of money market, NOW and savings deposit accounts areclassified as repricing within three months when in fact these deposits may beimmediately repriced at Management’s option, thus assisting in the furthermanagement of interest rate risk. The Company lists these deposits as it hasbecause this is the actual historical trend the Company has experienced.Management believes that longer term municipal bonds, fixed rate loans, andloans at contractual floors have benefited the Company’s interest margin overthe last three years. Because

 

20

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these assets’yields will not immediately rise in an increasing rate cycle there may be somenet interest margin compression in a rising rate environment as the relatedassets will reprice at a slower pace as a result of their fixed rate terms or,in the near term, the effect of the interest rate floors.  Management is taking steps to lengthen thematurities of its liabilities by taking out FHLB advances and longer-term timedeposits to hedge the impact of increasing interest rates.

 

Management will be deploying a new interest rate sensitivitymeasurement tool in 2003 that will better measure the Company’s exposure tofuture changes in interest rates.  Whilea significant change to interest rates , such as a  200 basis point rate shock, may negatively affect the Company’snet interest margin in the near tem, Management believes that the Company canmange the effect of such changes to net income through balance sheet growth anddeploying additional defensive strategies.

 

**ITEM 4.    Controls andProcedures.**

 

The Company’s ChiefExecutive Officer and Chief Financial Officer, based on their evaluation within90 days prior to the date of this report of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rule 13a—14(c)), haveconcluded that the Company’s disclosure controls and procedures are adequateand effective for purposes of Rule 13a—14(c) in timely alerting them tomaterial information relating to the Company required to be included in theCompany’s filings with the SEC under the Securities Exchange Act of 1934.

 

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

 

21

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**PART II. Other Information**

 

**Item #1. Legal proceedings**

 

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

 

**Item #2. Changes in securities and use of proceeds**

 

N/A

 

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

 

N/A

 

**ITEM #4. Submission of Matters to a Voteof Security Holders**

 

N/A

 

**Item #5. Other Information**

 

N/A

 

**Item #6A. Exhibits**

 
| **Exhibit  No.** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                          |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                 |
| 3.1              |   | Articles of  Incorporation are contained in the Registrant’s Registration Statement on  Form S-4, file #333-66675, as Exhibit 3.1 and are incorporated herein  by this reference.                                                                                                               |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 3.2              |   | Bylaws are  contained in the Registrant’s Registration Statement on Form S-4, file #333-66675,  as Exhibit 3.2 and are incorporated herein by this reference.                                                                                                                                   |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 3.3              |   | Amendments to Bylaws  are contained in the Registrant’s Registration Statement on Form S-4, file  #333-76678, as Exhibit 3.2 and are incorporated herein by this reference.                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.1             |   | Severance  Compensation Agreement dated December 4, 1997 between Mr. Kirk Dowdell and  Western Sierra National Bank is contained in the Registrant’s Registration  Statement on Form S-4, file #333-33256, as Exhibit 10.1 and is incorporated  herein by this reference.                       |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.2             |   | Stock Option  Agreement dated September 22, 1997 between Mr. Kirk Dowdell and Western is contained  in the Registrant’s Registration Statement on Form S-4, file # 333-33256, as  Exhibit 10.2 and is incorporated herein by this reference.                                                    |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.3             |   | Stock Option  Agreement dated May 19, 1999 between Mr. Kirk Dowdell and Western is  contained in the Registrant’s Registration Statement on Form S-4, file #  333-33256, as Exhibit 10.3 and is incorporated herein by this reference.                                                          |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.4             |   | Stock Option  Agreement dated May 19, 1999 between Mr. Gary D. Gall and Western is  contained in the Registrant’s Registration Statement on Form S-4 file, #  333-33256, as Exhibit 10.3 and is incorporated herein by this reference.                                                          |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.5             |   | Executive  Salary Continuation Agreement dated August 22, 2002, between Mr. Gary D. Gall  and Western Sierra National Bank.                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.6             |   | Stock Option  Agreement dated April 11, 1995 between Mr. Gary D. Gall and Western Sierra  National Bank is contained in the Registrant’s Registration Statement on Form  S-4, file #333-66675, as Exhibit 10.5 and is incorporated herein by this  reference.                                   |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.7             |   | Stock Option  Agreement dated November 14, 1996 between Mr. Gary D. Gall and Western Sierra  National Bank is contained in the Registrant’s Registration Statement on Form  S-4, file #333-66675, as Exhibit 10.6 and is incorporated herein by this  reference.                                |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.8             |   | Stock Option  Agreement dated May 20, 1997 between Mr. Gary D. Gall and Western is  contained in the Registrant’s Registration Statement on Form S-4, file  #333-66675, as Exhibit 10.7 and is incorporated herein by this reference.                                                           |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.9             |   | Western  Sierra Bancorp 1999 Stock Option Plan and form of stock option agreements are  contained in the Registrant’s Registration Statement on Form S-8, file  #333-86653, as Exhibit 99.3 and are incorporated herein by this reference.                                                      |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.10            |   | Western  Sierra National Bank 1989 Stock Option Plan, form of incentive stock option  and form of nonqualified stock option agreements are contained in the  Registrant’s Registration Statement on Form S-4, file #333-66675, as Exhibit  10.10 and are incorporated herein by this reference. |
|             |   |                                                                                                                                                                                                                                                                                                 |
| 10.11            |   | Western  Sierra Bancorp 1997 Stock Option Plan, form of incentive stock option and  form of nonqualified stock option agreements are contained in the  Registrant's Registration Statement on Form S-4 ,file #333-66675, as Exhibit  10.11 and are incorporated herein by this reference.            |

 

22

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

 

23

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

 

24

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| 10.56  |   | Stock Option  Agreement dated December 31, 2002 between Mr. Lary Davis and Western Sierra  Bancorp.                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                     |
| 10.57  |   | Stock Option  Agreement dated December 31, 2002 between Mr. William Eames and Western  Sierra Bancorp.                   |
|   |   |                                                                                                                     |
| 10.58  |   | Executive  Salary Continuation Agreement dated June 22, 2002, between Mr. Fred Rowden  and Central California Bank.      |
|   |   |                                                                                                                     |
| 10.59  |   | Executive  Salary Continuation Agreement dated June 1, 2002, between Mr. Phillip Wood  and Western Sierra National Bank. |
|   |   |                                                                                                                     |
| 10.60  |   | Executive  Salary Continuation Agreement dated June 25, 2002, between Mr. Doug Nordell  and Roseville 1st National Bank. |
|   |   |                                                                                                                     |
| 11.1   |   | Statement  re: Computation of earnings per share is included in Note 3 to the financial  statements.                     |
|   |   |                                                                                                                     |
| 99.1   |   | Section 906  Certification by Anthony J. Gould.                                                                          |
|   |   |                                                                                                                     |
| 99.2   |   | Section 906  Certification by Gary D. Gall.                                                                              |

 

25

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

 

March 20,2003: Agreement for the acquisition of Central Sierra Bank

April 25,2003: Press Release results for the 1st quarter of 2003 

 

26

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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 12, 2003    |                                                               |
|                       |                                                               |
|                       |                                                               |
|                       | /s/   GARY D. GALL                                            |   |
|                       | Gary  D. Gall                                                      |   |
|                       | *President/Chief Executive Officer*                                |   |
|                       |                                                               |
|                       |                                                               |
|                       | /s/   ANTHONY J. GOULD                                        |   |
|                       | Anthony  J. Gould                                                  |   |
|                       | *Executive Vice President Chief Financial and Accounting  Officer* |   |

 

27

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**Section 302Certifications for the Signatures**

 

I,Anthony J. Gould Executive Vice President, Chief Financial and Chief AccountingOfficer, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Western Sierra Bancorp(the “Registrant”);

 

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.The registrant’s other certifying officer and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors:

 

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant’s internal controls; and

 

6.The registrant’s other certifying officer and I have indicated in thisquarterly report whether or not there were significant changes in internal controlsor in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

 
| Date:  May 12, 2003 |
|---------------------|
|                | /s/ Anthony J. Gould |   |
|                | Chief Financial and Accounting Officer |   |

 

28

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I,Gary D. Gall, President, Chief Executive Officer, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Western Sierra Bancorp(the “Registrant”);

 

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.The registrant’s other certifying officer and I am responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this quarterly report is being prepared;

 

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.The registrant’s other certifying officer and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors:

 

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant’s internal controls; and

 

6.The registrant’s other certifying officer and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

 
| Date:  May 12, 2003 |
|---------------------|
|                | /s/ Gary D. Gall |   |
|                | President and Chief Executive Officer |   |

 

 

**End of Filing**

 

29

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