**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 June 30, 2004**                                                                                        |
|                                                                                                                                         |       |                                                                                               |
| **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’s  telephone number, including area code: **(530)  677-5600** |
|                                                                          |
| Securities  registered pursuant to Section 12(b) of the Act: **None**    |
|                                                                          |
| Securities  registered pursuant to Section 12(g) of the Act:             |
| **Common Stock, no par value per share**                                      |

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 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.  Yesý No o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2) Yes ýNo o

 

As of July 27, 2004there were approximately 7,585,531 shares outstanding of the Registrant’scommon stock.

 

 

----

 

**WESTERN SIERRA BANCORP & SUBSIDIARIES**

 

**Index to Form 10-Q**

 
| PART I. Financial  Information |
|--------------------------------|
|                           | Item 1. Consolidated  Financial Statements (unaudited) |
|                           | Consolidated  Balance Sheet  June 30, 2004 and December 31, 2003 |
|                           | Consolidated  Statement of Income  Three and six months ended June 30, 2004 and 2003 |
|                           | Consolidated  Statement of Cash Flows  Six months ended June 30, 2004 and 2003 |
|                           | 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 |
|                           | Item 4. Controls and Procedures |
| PART  II. Other Information    |
|                           | Item 1. Legal proceedings |
|                           | Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity  Securities |
|                           | Item 3. Defaults Upon Senior Securities |
|                           | Item 4. Submission of Matters to a  Vote of Security Holders |
|                           | Item 5. Other Information |
|                           | Item 6. Exhibits and Report on Form 8-K |
| SIGNATURES                     |

 

2

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**PART I. FINANCIAL INFORMATION**

 

##### **Western Sierra Bancorp and Subsidiaries**

**Unaudited Consolidated Balance Sheet**

(dollars in thousands, except number of shares)

 
| ** **                                                                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                               | ** ** | **2004**          | ** ** | **2003**              | ** ** |
| **ASSETS:**                                                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and due from banks                                                                                                  |       | $                 | 38,382     |                  | $          | 38,584 |   |
| Federal funds sold                                                                                                       |       | 98,245            |       | 17,380                |       |
| Cash and cash equivalents                                                                                                |       | 136,627           |       | 55,964                |       |
|                                                                                                                     |       |              |       |                  |       |
| Interest-bearing deposits                                                                                                |       | 4,000             |       | 4,198                 |       |
| Loans held for sale                                                                                                      |       | 1,909             |       | 940                   |       |
| Investment securities:                                                                                                   |       |              |       |                  |       |
| Trading, at estimated market value                                                                                       |       | 31                |       | 28                    |       |
| Available for sale (amortized cost $86,076  in 2004 and $78,156 in 2003)                                                 |       | 86,213            |       | 79,502                |       |
| Held to maturity (market value of $3,839 in  2004 and $4,219 in 2003)                                                    |       | 3,741             |       | 4,058                 |       |
| Total investments                                                                                                        |       | 89,985            |       | 83,588                |       |
| Portfolio loans and leases:                                                                                              |       |              |       |                  |       |
| Real estate mortgage                                                                                                     |       | 548,629           |       | 495,948               |       |
| Real estate construction                                                                                                 |       | 186,380           |       | 195,889               |       |
| Commercial                                                                                                               |       | 119,035           |       | 109,685               |       |
| Agricultural                                                                                                             |       | 12,702            |       | 12,185                |       |
| Installment                                                                                                              |       | 4,197             |       | 5,795                 |       |
| Lease financing                                                                                                          |       | 1,923             |       | 2,016                 |       |
| Total gross loans and leases                                                                                             |       | 872,866           |       | 821,518               |       |
| Deferred loan and lease fees, net                                                                                        |       | (2,587            | )          | (2,729                | )          |
| Allowance for loan and lease losses                                                                                      |       | (12,661           | )          | (11,529               | )          |
| Net portfolio loans and leases                                                                                           |       | 857,618           |       | 807,260               |       |
|                                                                                                                     |       |              |       |                  |       |
| Premises and equipment, net                                                                                              |       | 19,637            |       | 19,591                |       |
| Goodwill and other intangible assets                                                                                     |       | 34,371            |       | 34,731                |       |
| Other assets                                                                                                             |       | 30,497            |       | 29,439                |       |
| Total assets                                                                                                             |       | $                 | 1,174,644  |                  | $          | 1,035,711 |   |
|                                                                                                                     |       |              |       |                  |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY:**                                                                          |       |              |       |                  |       |
| Non-interest bearing deposits                                                                                            |       | $                 | 267,453    |                  | $          | 221,898 |   |
| Interest bearing deposits:                                                                                               |       |              |       |                  |       |
| NOW, money market and savings                                                                                            |       | 363,031           |       | 340,922               |       |
| Time, over $100,000                                                                                                      |       | 198,633           |       | 145,608               |       |
| Other time                                                                                                               |       | 168,504           |       | 164,710               |       |
| Total deposits                                                                                                           |       | 997,621           |       | 873,138               |       |
|                                                                                                                     |       |              |       |                  |       |
| Borrowed funds                                                                                                           |       | 31,150            |       | 20,650                |       |
| Subordinated debentures                                                                                                  |       | 36,496            |       | 36,496                |       |
| Other liabilities                                                                                                        |       | 8,700             |       | 11,990                |       |
| Total liabilities                                                                                                        |       | 1,073,967         |       | 942,274               |       |
|                                                                                                                     |       |              |       |                  |       |
| Commitments and contingencies (Note 6)                                                                                   |       |              |       |                  |       |
| Shareholders’ equity:                                                                                               |       |              |       |                  |       |
| Preferred stock- no par value; 15,000,000  shares authorized; none issued                                                |       | —            |       | —                |       |
| Common stock- no par value; 15,000,000  shares authorized; 7,584,638 shares issued in 2004 and 7,439,029 shares in  2003 |       | 67,348            |       | 66,459                |       |
| Retained earnings                                                                                                        |       | 33,244            |       | 26,097                |       |
| Accumulated other comprehensive income                                                                                   |       | 85                |       | 881                   |       |
| Total shareholders’ equity                                                                                          |       | 100,677           |       | 93,437                |       |
| Total liabilities and shareholders’ equity                                                                          |       | $                 | 1,174,644  |                  | $          | 1,035,711 |   |

 

Seenotes to the unaudited consolidated financial statements.

 

3

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**WesternSierra Bancorp and Subsidiaries**

**ConsolidatedStatements of Income**

(dollars inthousands, except per share data)

 
| ** **                                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Unaudited)**                                                                                    | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income:                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Interest and fees on loans                                                                         |       | $                                     | 14,392     |                                | $          | 10,046 |   | $ | 28,427 |   | $ | 19,798 |   |
| Interest on investment securities:                                                                 |       |                                  |       |                                |       |   |   |   |   |
| Taxable                                                                                            |       | 386                                   |       | 378                                 |       | 755 |   | 779 |   |
| Exempt from federal taxes                                                                          |       | 389                                   |       | 368                                 |       | 776 |   | 728 |   |
| Interest on Fed Funds Sold                                                                         |       | 141                                   |       | 128                                 |       | 194 |   | 170 |   |
| Total interest income                                                                              |       | 15,308                                |       | 10,920                              |       | 30,152 |   | 21,475 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Interest expense:                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Interest on deposits                                                                               |       | 2,170                                 |       | 2,047                               |       | 4,174 |   | 4,046 |   |
| Interest on borrowed funds and subordinated debentures                                             |       | 552                                   |       | 282                                 |       | 1,109 |   | 553 |   |
| Total interest expense                                                                             |       | 2,722                                 |       | 2,328                               |       | 5,283 |   | 4,599 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Net interest income                                                                                |       | 12,586                                |       | 8,592                               |       | 24,869 |   | 16,876 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Provision for loan and lease losses (LLP)                                                          |       | 600                                   |       | 530                                 |       | 1,310 |   | 1,055 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Net interest income after LLP                                                                      |       | 11,986                                |       | 8,062                               |       | 23,559 |   | 15,821 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Non-interest income:                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Service charges and fees                                                                           |       | 1,220                                 |       | 875                                 |       | 2,415 |   | 1,696 |   |
| Investment service fee income                                                                      |       | 86                                    |       | —                              |       | 377 |   | 16 |   |
| Net gain on sale and packaging of  residential mortgage and government-guaranteed commercial loans |       | 1,192                                 |       | 1,231                               |       | 2,047 |   | 2,335 |   |
| Loss on sale of investment securities                                                              |       | (11                                   | )          | —                              |       | (11 | ) | — |   |
| Other income                                                                                       |       | 226                                   |       | 154                                 |       | 453 |   | 268 |   |
| Total non-interest income                                                                          |       | 2,713                                 |       | 2,259                               |       | 5,281 |   | 4,315 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Other expenses:                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Salaries and benefits                                                                              |       | 4,881                                 |       | 3,434                               |       | 9,768 |   | 6,851 |   |
| Occupancy and equipment                                                                            |       | 1,435                                 |       | 1,154                               |       | 2,787 |   | 2,206 |   |
| Other expenses                                                                                     |       | 2,414                                 |       | 1,789                               |       | 4,723 |   | 3,434 |   |
| Amortization of core deposit intangibles                                                           |       | 180                                   |       | 62                                  |       | 360 |   | 123 |   |
| Total non-interest expense                                                                         |       | 8,910                                 |       | 6,438                               |       | 17,638 |   | 12,614 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Income before income tax                                                                           |       | 5,790                                 |       | 3,883                               |       | 11,202 |   | 7,522 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Income taxes                                                                                       |       | 2,109                                 |       | 1,421                               |       | 4,056 |   | 2,772 |   |
| Net income                                                                                         |       | $                                     | 3,681      |                                | $          | 2,462 |   | $ | 7,146 |   | $ | 4,750 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Basic earnings per share                                                                           |       | $                                     | 0.49       |                                | $          | 0.39 |   | $ | 0.95 |   | $ | 0.76 |   |
| Fully diluted earnings per share                                                                   |       | $                                     | 0.47       |                                | $          | 0.37 |   | $ | 0.91 |   | $ | 0.72 |   |

 

Seenotes to the unaudited consolidated financial statements.

 

4

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**Western Sierra Bancorp and Subsidiaries**

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

(dollars in thousands)

 
| ** **                                                                                      | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                      | ** ** | **June 30,**    | ** ** | **June 30,** | ** ** |
| ** **                                                                                      | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                           |       |                 |       |   |   |
| Net income                                                                                      |       | $                    | 7,146      |   | $ | 4,750 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:              |       |                 |       |   |   |
| Provision for loan and lease losses                                                             |       | 1,310                |       | 1,055 |   |
| Depreciation and amortization                                                                   |       | 1,531                |       | 1,099 |   |
| Deferred loan and lease origination fees,  net                                                  |       | (142                 | )          | 206 |   |
| Amortization of investment security  premiums, net of accretion of discount                     |       | 438                  |       | 219 |   |
| Loss on sale and call of available-for-sale  investment securities                              |       | 11                   |       | — |   |
| Increase in trading securities                                                                  |       | (3                   | )          | (3 | ) |
| Loss on sale of premises and equipment                                                          |       | 3                    |       | — |   |
| Gain on sale of other real estate                                                               |       | —               |       | 3 |   |
| Increase in cash surrender value of life  insurance policies                                    |       | (322                 | )          | (129 | ) |
| Compensation cost associated with the  Bank’s ESOP                                         |       | 150                  |       | — |   |
| (Increase) decrease in loans held for sale                                                      |       | (969                 | )          | (208 | ) |
| Increase in accrued interest receivable and  other assets                                       |       | (303                 | )          | (965 | ) |
| (Decrease) increase in accrued interest  payable and other liabilities                          |       | (3,290               | )          | 920 |   |
| Net cash provided by operating activities                                                       |       | 5,560                |       | 6,947 |   |
|                                                                                            |       |                 |       |   |   |
| Cash flows from investing activities:                                                           |       |                 |       |   |   |
| Proceeds from sale and call of  available-for-sale investment securities                        |       | 2,000                |       | — |   |
| Proceeds from called held-to-maturity  investment securities                                    |       | —               |       | 1,500 |   |
| Proceeds from matured available-for-sale  investment securities                                 |       | —               |       | 500 |   |
| Proceeds from matured held-to-maturity  investment securities                                   |       | —               |       | 500 |   |
| Purchases of available-for-sale investment  securities                                          |       | (16,773              | )          | (5,247 | ) |
| Principal repayments received from  available-for-sale SBA Pools and mortgage-backed securities |       | 6,408                |       | 5,255 |   |
| Principal repayments received from  held-to-maturity mortgaged-backed securities                |       | 313                  |       | 371 |   |
| Net decrease in interest-bearing deposits  in banks                                             |       | 198                  |       | 694 |   |
| Proceeds from sale of OREO                                                                      |       | —               |       | 137 |   |
| Net increase in loans and leases                                                                |       | (51,526              | )          | (47,334 | ) |
| Purchases of premises and equipment                                                             |       | (1,220               | )          | (719 | ) |
| Purchase of life insurance policies                                                             |       | —               |       | (7,000 | ) |
| Net cash used in investing activities                                                           |       | (60,600              | )          | (51,342 | ) |
|                                                                                            |       |                 |       |   |   |
| Cash flows from financing activities:                                                           |       |                 |       |   |   |
| Net increase in demand, interest-bearing  and savings deposits                                  |       | $                    | 67,664     |   | $ | 16,083 |   |
| Net increase in time deposits                                                                   |       | 56,819               |       | 48,948 |   |
| Net increase (decrease) in short-term  borrowings                                               |       | 10,500               |       | (500 | ) |
| Proceeds from ESOP borrowings                                                                   |       | 150                  |       | 325 |   |
| Repayment of ESOP borrowings                                                                    |       | (150                 | )          | — |   |
| Purchase of unearned ESOP shares                                                                |       | (150                 | )          | (325 | ) |
| Repurchase of common stock                                                                      |       | (85                  | )          | — |   |
| Proceeds from the exercise of stock options                                                     |       | 954                  |       | 144 |   |
| Net cash provided by financing activities                                                       |       | 135,702              |       | 64,675 |   |
| Increase in cash and cash equivalents                                                           |       | 80,663               |       | 20,280 |   |
| Cash and cash equivalents at beginning of  year                                                 |       | 55,964               |       | 36,964 |   |
| Cash and cash equivalents at end of year                                                        |       | $                    | 136,627    |   | $ | 57,244 |   |
|                                                                                            |       |                 |       |   |   |
| Non-cash investing activities:                                                                  |       |                 |       |   |   |
| Net change in unrealized gain on  available-for-sale investment securities                      |       | $                    | (1,208     | ) | $ | 782 |   |

 

Seenotes to the unaudited consolidated financial statements.

 

5

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**NOTES TOTHE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Basis ofPresentation**

 

Theaccompanying unaudited condensed consolidated financial statements of WesternSierra Bancorp and subsidiaries (the “Company”) have been prepared inaccordance with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, certain information and notes required byaccounting principles generally accepted in the United States of America forannual financial statements are not included herein.  In the opinion of Management, all adjustments(which consist solely of normal recurring accruals) considered necessary for afair presentation of the results for the interim periods presented have beenincluded. These interim condensed consolidated financial statements should beread in conjunction with the financial statements and related notes containedin the Company’s 2003 Annual Report to Shareholders.

 

Thecondensed consolidated financial statements include the accounts of the Companyand its wholly owned subsidiaries, Western Sierra National Bank (WSNB) and itssubsidiary WSNB Investment Trust (a Real Estate Investment Trust (“REIT”), LakeCommunity Bank (LCB), Central California Bank (CCB) and Auburn Community Bank(ACB).  All significant inter-companybalances and transactions have been eliminated. Western Sierra Statutory Trusts I, II, III, and IV are unconsolidatedsubsidiaries formed solely for the purpose of issuing trust preferredsecurities.  Operating results for thethree and six months ended June 30, 2004 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2004.Certain amounts in the consolidated financial statements for the year endedDecember 31, 2003 and the three and six-month period ended March 31,2003 may have been reclassified to conform to the presentation of theconsolidated financial statements in 2004.

#### ** **

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

 

**2. Stock-based Compensation**

 

At June 30, 2004, the Company has five stock-based compensationplans.  The Company accounts for theseplans under the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations.  No stock-basedcompensation cost is reflected in net income, as all options granted underthese plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.  Inaccordance with Financial Accounting Standards Board (“FASB”) No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure, an Amendment of FASB No. 12,* the following tableillustrates the effect on net income and earnings per share as if the Companyhad applied the fair value recognition provisions of FASB StatementNo. 123, *Accounting for Stock-Based Compensation*,to stock-based compensation.

 

Pro forma adjustments tothe Company’s consolidated net earnings and earnings per share are disclosedduring the years in which the options become vested (dollars in thousands,except per share data).

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended****    June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                                         | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings  as reported                                                                                                                     |       | $                                                | 3,681      |                                | $          | 2,462 |   | $ | 7,146 |   | $ | 4,750 |   |
| Deduct:  Total stock-based compensation expense  determined under the fair value based  method for all awards,net of related tax effects |       | (214                                             | )          | (195                                | )          | (501 | ) | (390 | ) |
|                                                                                                                                          |       |                                             |       |                                |       |   |   |   |   |
| Pro forma net  income                                                                                                                         |       | $                                                | 3,467      |                                | $          | 2,267 |   | $ | 6,645 |   | $ | 4,360 |   |
|                                                                                                                                          |       |                                             |       |                                |       |   |   |   |   |
| Basic earnings  per share - as reported                                                                                                       |       | $                                                | 0.49       |                                | $          | 0.39 |   | $ | 0.95 |   | $ | 0.76 |   |
| Basic earnings  per share - pro forma                                                                                                         |       | $                                                | 0.46       |                                | $          | 0.36 |   | $ | 0.89 |   | $ | 0.69 |   |
|                                                                                                                                          |       |                                             |       |                                |       |   |   |   |   |
| Diluted  earnings per share - as reported                                                                                                     |       | $                                                | 0.47       |                                | $          | 0.37 |   | $ | 0.91 |   | $ | 0.72 |   |
| Diluted  earnings per share - pro forma                                                                                                       |       | $                                                | 0.44       |                                | $          | 0.35 |   | $ | 0.85 |   | $ | 0.68 |   |

 

6

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The fair value of each option is estimated on the date of grant using an option-pricing model with the following assumptions:

 
| ** **                                                      | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **June 30, 2004** | ** ** |
| Dividend yield (not applicable)                                 |       |                   |       |
| Expected volatility                                             |       | 19.14 - 20.27          | %          |
| Risk-free interest rate                                         |       | 3.90 - 3.96            | %          |
| Expected option life                                            |       | 10 years               |       |
| Weighted average fair value of options  granted during the year |       | $                      | 16.21      |   |
|                                                                 |            |                        |            |  |

 

**3. Earningsper Share**

 

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

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                       | ** ** | **2004**               | ** ** | **2003**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic EPS Computation:                                           |       |                   |       |                 |       |   |   |   |   |
| Numerator—net income                                        |       | $                      | 3,681      |                 | $          | 2,462 |   | $ | 7,146 |   | $ | 4,750 |   |
| Denominator— weighted average number of shares  outstanding |       | 7,556,145              |       | 6,291,810            |       | 7,506,844 |   | 6,288,779 |   |
| Basic earnings per share                                         |       | $                      | 0.49       |                 | $          | 0.39 |   | $ | 0.95 |   | $ | 0.76 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| Diluted EPS Computation:                                         |       |                   |       |                 |       |   |   |   |   |
| Numerator—net income                                        |       | $                      | 3,681      |                 | $          | 2,462 |   | $ | 7,146 |   | $ | 4,750 |   |
| Denominator— weighted average number of shares  outstanding |       | 7,556,145              |       | 6,291,810            |       | 7,506,844 |   | 6,288,779 |   |
| Effect of dilutive stock options                                 |       | 317,054                |       | 309,777              |       | 349,414 |   | 298,626 |   |
|                                                             |       | 7,873,199              |       | 6,601,587            |       | 7,856,258 |   | 6,587,405 |   |
| Diluted earnings per share                                       |       | $                      | 0.47       |                 | $          | 0.37 |   | $ | 0.91 |   | $ | 0.72 |   |

 

**4.Shareholders’ Equity**

 

On April 22, 2004, the Company announceda three-for-two stock split effective May 7, 2004.  All shares and per share amounts have beenretroactively restated to give effect for the stock split as if it had beendeclared at the beginning of the earliest period presented.

 

OnJanuary 16, 2004 the Company announced that the Board of Directorsapproved a plan to utilize up to $2 million (or approximately 1% of the totaloutstanding shares) to repurchase the Company’s common stock.  As of June 30, 2004, the Company had purchased  3,000shares at an average price of approximately $28.27 under this plan.

 

OnMay 29, 2002, the Company announced that the Board of Directors approved a planto repurchase up to 5% (or approximately 200,000 shares) of the Company’scommon stock. The Company has purchased 7,875 shares at an average price ofapproximately $13.33 under the plan through June 30, 2004.

 

7

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**5.  Acquisitions**

 

During 2003, the Company acquired Auburn Community Bank (ACB) andCentral Sierra Bank (CSB).  ACB became awholly-owned subsidiary of the Company and CSB was merged into CCB.  These acquisitions were completed becausemanagement believes that their combined performance exceeds what each entitycould accomplish independently and furthers the Company’s expansion throughoutNorthern California.  Total considerationpaid to each entity acquired was determined through extensive negotiationsupported by internal modeling.  The fundsrequired to pay the cash portion of the consideration for these mergers wasgenerally obtained through the issuance of subordinated debentures (see Note 11of the Company’s 2003 audited financial statements).

 

The following table summarizes the terms of each acquisition (dollarsin thousands):

 
| ** **                       | ** ** | **ACB**                | ** ** | **CSB**            | ** ** |
|----------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                       | ** ** | ** **             | ** ** | ** **         | ** ** |
| Date of acquisition              |       | December 13, 2003 |       | July 11, 2003 |       |
| Common stock issued              |       | 349,976                |       | 404,173            |       |
| Value of common stock issued     |       | $                      | 15,900     |               | $          | 12,700 |   |
| Cash paid                        |       | $                      | 6,500      |               | $          | 10,700 |   |
| Total consideration              |       | $                      | 22,400     |               | $          | 23,400 |   |
| Goodwill recorded                |       | $                      | 14,500     |               | $          | 11,600 |   |
| Core deposit intangible recorded |       | $                      | 1,800      |               | $          | 2,900 |   |

 

**6.  Commitmentsand Contingencies**

 

#### **Leases**

 

The Company leases certain of its branch offices under non-cancelableoperating leases.  These leases expire onvarious dates through 2019 and have various renewal options ranging from fiveto ten years.  Rental payments includeminimum rentals, plus adjustments for changing price indexes.  The Company has subleased various office spacesto other companies under non-cancelable agreements that expire in 2007 and2008.  Future minimum lease payments andsublease rental income are as follows (dollars in thousands):

 

| ** **            | ** ** | ** **   | ** ** | **Minimum**  | ** ** |
|-----------------------|------------|--------------|------------|--------------|------------|
| ** **            | ** ** | **Minimum**  | ** ** | **Sublease** | ** ** |
| **Year  Ending**      | ** ** | **Lease**    | ** ** | **Rental**   | ** ** |
| **December 31,** | ** ** | **Payments** | ** ** | **Income**   | ** ** |
| 2004                  |       |         | $          | 1,541        |       | $ | 96 |   |
| 2005                  |       |         | 1,582      |         | 96         |   |
| 2006                  |       |         | 1,451      |         | 96         |   |
| 2007                  |       |         | 1,208      |         | 95         |   |
| 2008                  |       |         | 943        |         | 64         |   |
| Thereafter            |       |         | 4,378      |         | —     |   |
|                  |       | $            | 11,103     |         | $          | 447 |   |

 

#### **Financial Instruments WithOff-Balance-Sheet Risk**

 

The Company is a party to financial instruments with off-balance-sheetrisk in the normal course of business in order to meet the financing needs ofits customers and to reduce its exposure to fluctuations in interestrates.  These financial instrumentsinclude commitments to extend credit, letters of credit and commitments to sellloans.  These instruments involve, tovarying degrees, elements of credit and interest rate risk in excess of theamount recognized on the consolidated balance sheet.

 

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

 

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

 
| ** **                                                                                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Commitments to extend credit:                                                                 |       |                    |       |                        |       |
|                                                                                          |       |                    |       |                        |       |
| Revolving lines of credit secured by 1-4  family residences                                   |       | $                       | 30,905     |                        | $          | 21,691 |   |
| Commercial real estate, construction and  land development commitments secured by real estate |       | 193,426                 |       | 161,107                     |       |
| Other commercial commitments not secured by  real estate                                      |       | 739                     |       | 1,023                       |       |
| Agricultural commitments                                                                      |       | 1,808                   |       | 4,237                       |       |
| Other commitments                                                                             |       | 55,800                  |       | 49,949                      |       |
|                                                                                          |       | $                       | 282,678    |                        | $          | 238,007 |   |
| Letters of credit                                                                             |       | $                       | 20,015     |                        | $          | 18,752 |   |

 

Real estate commitments are generallysecured by property with loan-to-value ratios not to exceed 80%.  In addition, the majority of the Company’scommitments have variable interest rates.

 

Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  Each customer’screditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemednecessary upon extension of credit, is based on Management’s credit evaluationof the borrower.  Collateral held varies,but may include deposits, accounts receivable, inventory, equipment,income-producing commercial properties and residential real estate.

 

Letters of credit are conditionalcommitments to guarantee the performance or financial obligation of a customerto a third party.  The credit riskinvolved in issuing letters of credit is essentially the same as that involvedin extending loans to customers.

 

Commitments to sell loans areagreements to sell to another party loans originated by the Company.  The Company only sells loans to third partieswithout recourse.  The Company is notexposed to credit loss if the borrower fails to perform according to thepromissory note as long as the Company has fulfilled its obligations stated inthe sales commitment.  Commitments tosell loans include the Loans Held for Sale on the balance sheet andapproximately $2 million in unfounded loans at June 30, 2004.

 

**7. Comprehensive Income**

 

Comprehensive income includes net income and other comprehensive income(loss).  The Company’s only source ofother comprehensive income (loss) is derived from unrealized gains and losseson investment securities available-for-sale. Reclassification adjustments resulting from gains or losses oninvestment securities that were realized and included in net income of the currentperiod that also had been included in other comprehensive income (loss) asunrealized holding gains or losses in the period in which they arose areexcluded from comprehensive income of the current period.  The Company’s total comprehensive income was asfollows:

 
| ** **                                                | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(In  thousands)**                                       | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                      |       |                                  |       |                                |       |   |   |   |   |
| Net income                                                |       | 3,681                                 |       | $                                   | 2,462      |   | 7,146 |   | $ | 4,750 |   |
| Other comprehensive income:                               |       |                                  |       |                                |       |   |   |   |   |
| Holding gains (losses) arising during  period, net of tax |       | (1,247                                | )          | 245                                 |       | (789 | ) | 511 |   |
| Re-classification adjustment, net of tax                  |       | (7                                    | )          | —                              |       | (7 | ) | — |   |
| Total other comprehensive income                          |       | (1,254                                | )          | 245                                 |       | (796 | ) | 511 |   |
| Total comprehensive income                                |       | 2,427                                 |       | $                                   | 2,707      |   | 6,350 |   | $ | 5,261 |   |

 

Given the prevailing rise in interest rates,the unrealized gains on investment securities available-for-sale, on an aftertax basis, was reduced from $1,339,000 atMarch 31, 2004 to $85,000 at June 30, 2004.  If rates increase further, management expectsfurther devaluation to the investment portfolio.

 

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**ITEM 2.****MANAGEMEN****T’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATION.**

 

**Privatesecurities litigation reform act safe harbor statement**

 

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

 

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

 

2.                         Non-compliance with banking regulations andthe potential for regulatory penalties and mandates.

 

3.                         Exposure to changes in the interest rateenvironment and the resulting impact on the Company’s interest rate sensitiveassets and liabilities.

 

4.                         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.

 

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

 

6.                         Asset/Liability matching risks and liquidityrisks.

 

7.                         Volatility and devaluation in the securitiesmarkets.

 

8.                         Exposure to losses from fraud and processingof customer transactions deposits, loans, checks, wires and deposits.

 

Foradditional information concerning risks and uncertainties related to theCompany and its operations, please refer to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003 under the heading“Forward-Looking Information”.  Readersare cautioned not to place undue reliance on these forward-looking statements,which speak only as of the date hereof. The Company undertakes no obligation torevise or publicly 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.

 

Thefollowing sections discuss significant changes and trends in financialcondition, capital resources and liquidity of the Company fromDecember 31, 2003 to June 30, 2004. Also discussed are significanttrends and changes in the Company’s results of operations for the three and sixmonths ended June 30, 2004 compared to the same periods in 2003. Theconsolidated financial statements and related notes appearing elsewhere in thisreport are condensed and unaudited.

 

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**General**

 

WesternSierra Bancorp (the “Company”) was incorporated under the laws of the State ofCalifornia on July 11, 1996. The Company was organized pursuant to a planof reorganization for the purpose of becoming the parent corporation of WesternSierra National Bank, and on December 31, 1996, the reorganization was effectedand shares of the Company’s common stock were issued to the shareholders ofWestern Sierra National Bank for the common shares held by Western SierraNational Bank’s shareholders.

 

In April 1999, the Company acquired Roseville 1st National Bankand Lake Community Bank in a stock for stock exchange. In May of 2000, theCompany acquired Sentinel Community Bank in a stock for stock exchange. All ofthese mergers were accounted for as poolings of interests and, accordingly, allprior period financial information has been restated to reflect the combinedoperations of the Company, Roseville 1st National Bank, Lake Community Bank andSentinel Community Bank. Sentinel Community Bank was immediately merged intoWestern Sierra National Bank. In May of 2000, Roseville 1st National Bank wasalso merged into Western Sierra National Bank.

 

InApril 2002, the Company acquired Central California Bank for $3.7 millionin cash and 252,181 shares of the Company’s stock.  This transaction was accounted for underpurchase accounting, which resulted in a purchase price allocation resulting inintangible assets totaling $2.3 million in goodwill and $1.9 million in coredeposit premium. As required under purchase accounting, no prior periodfinancial statements have been restated to reflect the combined operations ofCentral California Bank.  In July of2002, certain assets and liabilities of the Sentinel Community Bank brancheswere transferred from Western Sierra National Bank to Central California Bank.

 

InJuly 2003, the Company acquired Central Sierra Bank for $10.7 million incash and 404,173 shares of the Company’s stock. This transaction was accounted for under purchase accounting, whichresulted in a purchase price allocation resulting in intangible assets totaling$11.6 million in goodwill and $2.9 million in core deposit premium. As requiredunder purchase accounting, no prior period financial statements have beenrestated to reflect the combined operations of Central California Bank.

 

In December 2003, theCompany acquired Auburn Community Bank for $6.5 million in cash and 349,976shares of the Company’s stock.  Thistransaction was accounted for under purchase accounting, which resulted in apurchase price allocation resulting in intangible assets totaling $14.5 millionin goodwill and $1.8 million in core deposit premium. As required underpurchase accounting, no prior period financial statements have been restated toreflect the combined operations of Auburn Community Bank.

 

The Company is a registered bank holding company under the Bank HoldingCompany Act. The Company conducts its operations at 4080 Plaza GoldoradoCircle, Cameron Park, California 95682.

 

WesternSierra National Bank was organized under national banking laws and commencedoperations as a national bank on January 4, 1984. Western Sierra NationalBank is a member of the Federal Reserve System and the FDIC insures itsdeposits to the maximum amount permitted by law. Western Sierra National Bank’shead office is located at 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, 1450Broadway, Placerville, 3880 El Dorado Hills Blvd., El Dorado Hills, 571 5thStreet, Lincoln, 1545 River Park Dr. #101 & #200, Sacramento,1801 Douglas Blvd., Roseville, 6951 Douglas Blvd., Granite Bay, 9050 FairwayDrive, Roseville, and 2779 East Bidwell, Folsom, CA.  In March 2002, Western Sierra NationalBank formed WSNB Investment Trust, a Real Estate Investment Trust (“REIT”), topotentially generate additional capital at Western Sierra National Bank andreduce the Company’s overall effective tax rate. Western Sierra National Bankdoes not have any other affiliates other than Sentinel Associates, Inc.,an inactive entity formed by Sentinel Bank in 1983 to develop single-familyresidential real estate.

 

LakeCommunity Bank was incorporated as a banking corporation under the laws of theState of California on March 9, 1984 and commenced operations as aCalifornia state-chartered bank on November 15, 1984. Lake Community Bankis an insured bank under the Federal Deposit Insurance Act and became a memberof the Federal Reserve System in June 2003. Lake Community Bank engages inthe general commercial banking business in Lake County in the State ofCalifornia from its headquarters 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.

 

Central California Bank was incorporated under the laws of the State ofCalifornia on January 13, 1997, and commenced operations on April 24,1998. Central California Bank is an insured bank under the Federal DepositInsurance Act and became a member of the Federal Reserve System inJanuary 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

 

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Mono Way,Sonora, CA, and its branches located at 400 E. Olive Ave, Turlock, CA, 3700Lone Tree Way, Antioch, CA, 229 South Washington Street, Sonora, CA, 18711Tiffeni Drive, Twain Harte, CA, 22712 Main Street, Columbia, CA and loanproduction offices located at 3400 Tully Rd., #B, Modesto, CA, 1111 DunbarRoad, Arnold, CA,  373 West St. CharlesStreet, San Andreas, CA, 1239 South Main Street, Angels Camp, CA, 18281 MainStreet, Jamestown, CA, 89 Lakewood Mall, Lodi, CA, 11 Ridge Road, Sutter Creek,CA, 87 Highway 26, Valley Springs, CA, and 3505 Spangler Lane, Suite 300,Copperopolis, CA.  Central CaliforniaBank does not have any affiliates or subsidiaries.  In July 2003, Central Sierra Bank mergedinto Central California Bank and its branches are located at 373 West St.Charles Street, San Andreas, CA, 1239 South Main Street, Angels Camp, CA, 18281Main Street, Jamestown, CA, 89 Lakewood Mall, Lodi, CA, 11 Ridge Road, SutterCreek, CA, 87 Highway 26, Valley Springs, CA, and 3505 Spangler Lane, Suite300, Copperopolis, CA.

 

The Company will be opening three de novo branches before year-end2004.  Western Sierra Bank will addbranches located at 9610 Bruceville Rd., Suite 100, Elk Grove, CA and 2761 DelPaso Rd, Sacramento, CA.  The Elk Grovebranch is expected to open in August 2004 and the Sacramento (Natomis)branch is expected to open in October 2004.  Central California bank will also open a denovo branch located at 2525 McHenry Ave., Modesto, CA that is expected to openin October 2004.

 

InJuly 2001, December 2001 and September 30, 2003, respectively,four trusts, Western Sierra Statutory Trust I, Western Sierra Statutory TrustII and Western Sierra Statutory Trust III /IV, were established as wholly-ownedunconsolidated subsidiaries of the Company for the purpose of issuing andholding Trust Preferred Securities.

 

Auburn Community Bank, a state non-memberbank, was originally operating under the name of Auburn National Bank which wasincorporated under the laws of the State of California on July 28, 1997,and commenced operations on February 2, 1998.                                          On July 29, 1999, Auburn National Bankconverted from national bank to a state non-member bank and was renamed AuburnCommunity Bank.  Auburn Community Bank isan insured bank under the Federal Deposit Insurance Act and operates itsheadquarters banking office located at 412 Auburn-Folsom Road, Auburn, CA andits branch located at 11795 Atwood Road, Auburn, CA.  Auburn Community Bank does not have anyaffiliates or subsidiaries.

 

**Banking Services.****** The Company is a locally owned andoperated bank holding company, and its primary service area is the NorthernCalifornia communities of Cameron Park, Pollock Pines, Placerville, El DoradoHills, Folsom, Lincoln, Sacramento, Roseville, Granite Bay, Sonora, TwainHarte, Columbia, Turlock, Lakeport, Antioch, Rocklin, Sand Andreas, AngelsCamp, Jamestown, Lodi, Sutter Creek, Valley Springs, Copperopolis, Auburn andthe surrounding communities. The Company’s primary business is serving thebanking needs of these communities and its marketing strategy stresses itslocal ownership and commitment to serve the banking needs of individuals livingand working in the Company’s primary service areas and local businesses,including retail, professional and real estate-related activities, in thoseservice areas.

 

TheCompany offers a broad range of services to individuals and businesses in itsprimary service areas with an emphasis upon efficiency and personalized attention.The Company provides a full line of consumer services and also offersspecialized services, such as courier services to small businesses, middlemarket companies and professional firms. Each of the Company’s subsidiary banksoffers personal and business checking and savings accounts (includingindividual interest-bearing negotiable orders of withdrawal (“NOW”), moneymarket accounts and/or accounts combining checking and savings accounts withautomatic transfer), IRA accounts, time certificates of deposit and directdeposit of social security, pension and payroll checks, computer cashmanagement and internet banking including bill payment. The Company’ssubsidiary banks also make available commercial, construction, accountsreceivable, inventory, automobile, home improvement, real estate, commercialreal estate, single family mortgage, agricultural, Small BusinessAdministration, office equipment, leasehold improvement, installment and creditcard loans (as well as overdraft protection lines of credit), issue drafts andstandby letters of credit, sell travelers’ checks (issued by an independententity), offer ATMs tied in with major statewide and national networks,extend special considerations to senior citizens and offer other customarycommercial banking services.

 

Mostof the Company’s deposits are obtained from commercial businesses,professionals and individuals. At June 30, 2004 there was a large titlecompany deposit customer with $6.9 million or 6.5% of total deposits at LakeCommunity Bank and another large deposit customer with $5.9 million or 7.7% oftotal deposits at Auburn Community Bank. There were no other customers with 5% or more of any of the subsidiarybanks’ deposits.

 

Otherspecial services and products include both personal and business economychecking products, business cash management products, financial servicesthrough Western Sierra Bank’s Financial Services Division and mortgage productsand services.

 

**Employees.****** At June 30, 2004, the Company andits subsidiaries employed 346 persons on a full-time equivalent basis. TheCompany believes its employee relations are satisfactory.

 

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#### **Impact of New Financial Accounting Standards**

 

In December,2003, the FASB revised FASB Interpretation No. 46, *Consolidation of Variable Interest Entities* (FIN 46). Thisinterpretation of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*,addresses consolidation by business enterprises of a variable interest entity(VIE) that posses certain characteristics. A company that holds variableinterests in an entity will need to consolidate that entity if the company’sinterest in the VIE is such that the company will absorb a majority of theVIE’s expected losses and or receive a majority of the VIE’s expected residualreturns, if they occur. The Company adopted FIN 46 on December 31,2003.  Adoption of this standard requiredthe Company to deconsolidate its investment in Western Sierra Statutory Trust I, Western Sierra Statutory Trust II,Western Sierra Statutory Trust III and Western Sierra Statutory Trust IV.  The deconsolidation of the Trusts, formed inconnection with the issuance of trust preferred securities, appears to be anunintended consequence of FIN 46.  Inmanagement’s opinion, the effect of deconsolidation on the Company’s financialposition and results of operations was not material.  In addition, management does not believe that the Company has any VIEs that would beconsolidated under the provisions of FIN 46.

 

InJuly 2003, the Board of Governors of the Federal Reserve System issued asupervisory letter instructing bank holding companies to continue to includetrust preferred securities in their Tier 1 capital for regulatory capitalpurposes until notice is given to the contrary. The Federal Reserve intends toreview the regulatory implications of the accounting changes resulting from FIN46 and, if necessary or warranted, provide further appropriate guidance. Therecan be no assurance that the Federal Reserve will continue to allowinstitutions to include trust preferred securities in Tier 1 capital forregulatory capital purposes.

 

InDecember 2003, the Accounting Standards Executive Committee of theAmerican Institute of Certified Public Accountants issued Statement of Position03-03, *Accounting for Certain Loans or DebtSecurities Acquired in a Transfer*(SOP 03-03).  This SOP addresses accounting for differencesbetween contractual cash flows and cash flows expected to be collected from aninvestor’s initial investment in loans or debt securities (loans) acquired in atransfer if those differences are attributable, at least in part, to creditquality.  It includes such loans acquiredin purchase business combinations and applies to all nongovernmental entities,including not-for-profit organizations. This SOP does not apply to loans originated by the entity.  This SOP limits the yield that may beaccreted (accretable yield) to the excess of the investor’s estimate ofundiscounted expected principal, interest, and other cash flows (cash flowsexpected at acquisition to be collected) over the investor’s initial investmentin the loan.  This SOP requires that theexcess of contractual cash flows over cash flows expected to be collected (nonaccretabledifference) not be recognized as an adjustment of yield, loss accrual, orvaluation allowance.  This SOP prohibitsinvestors from displaying accretable yield and nonaccretable difference in thebalance sheet.  Subsequent increases incash flows expected to be collected generally should be recognizedprospectively through adjustment of the loan’s yield over its remaininglife.  Decreases in cash flows expectedto be collected should be recognized as impairment, thereby retaining theaccretable yield on the loan as adjusted.

 

This SOPprohibits “carrying over” or creation of valuation allowances in the initialaccounting of all loans acquired in a transfer that are within the scope ofthis SOP.  The prohibition of thevaluation allowance carryover applies to the purchase of an individual loan, apool of loans, a group of loans, and loans acquired in a purchase businesscombination.

 

This SOP iseffective for loans acquired in fiscal years beginning after December 15,2004.  Management has not completed itsevaluation of the impact this pronouncement may have on the Company’sconsolidated financial position or results of operations.

 

InMay 2003, the FASB issued SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities**and Equity*. This Statement establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances).  This Statement iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  TheCompany adopted the provisions of this Statement on July 1, 2003 and, inmanagement’s opinion, adoption of the Statement did not have a material effecton the Company’s consolidated financial position or results of operations.

 

On April 30, 2003, the FASB issued SFAS No. 149, *Amendment of Statement 133 on Derivative Instruments and Hedging Activities*.  This Statement amends and clarifies the accounting for derivative instruments by providing guidance related to circumstances under which a contract with a net investment meets the characteristics of a derivative as discussed in SFAS No. 133.  The Statement also clarifies when a derivative contains a financing component.              The Statement is intended to result in more consistent reporting for derivative contracts and must be applied prospectively for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003.  In management’s opinion, adoption of this Statement did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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**Financial Condition**

 

TheCompany increased total assets from $1.04 billion at December 31, 2003 to$1.17 billion at June 30, 2004, an increase of $139 million or13%. The two primary components of asset growth were portfolio loans, whichgrew $51 million, and cash and equivalents, which increased $81 million.  Current excess cash is expected to bedeployed into loans and investments over the coming quarters.                Asset growth was primarily funded by growthin deposits of $124 million.

 

During the first six monthsof 2004, non-interest bearing deposits increased from $222 million at year-end2003 to $267 million at June 30, 2004. Included in non-interest deposits are local title company deposits,which have increased $29 million to $56 million at June 30, 2004 from $27million at December 31, 2003.  Thesefunds do not receive interest but do result in an assessment of service fees bythe title company’s service bureau to the Company.  During the first six months of 2004, theservice fees on title company deposits incurred by the Company were less than1% of the average title company deposits outstanding.

 

**Results ofOperations**

 

The Central Sierra Bank(“CSB”) acquisition was effective July 11, 2003 and was accounted forunder purchase accounting.  The AuburnCommunity Bank (“ACB”) acquisition was effective December 13, 2003 and wasalso accounted for under purchase accounting. Pursuant to purchase accounting rules, the operating results of theCompany for the three and six-month periods ended June 30, 2003 does notinclude the operational results of CSB and ACB.

 

The Company reported net income of $3.68 million for the threemonths ended June 30, 2004 (or $0.47 per share, diluted) compared to $2.46million (or $0.37 per share, diluted) for the same period in 2003. Thequarterly earnings represent an increase of $1.22 million or a 50% increase innet income and a 26% increase in diluted earnings per share.

 

The Company reported net income of $7.15 million for the sixmonths ended June 30, 2004 (or $0.91 per share, diluted) compared to $4.75million (or $0.72 per share, diluted) for the same period in 2003. Theseearnings represent an increase of $2.40 million or a 50% increase in net incomeand a 26% increase in diluted earnings per share.

 

The primary factors contributing to the increase in operating resultsduring the three and six-month period ended June 30, 2004 as compared tothe same period in 2003 include:

 

1.               An increase in net interest income of $4.0million or 47% in the second quarter over the same period in 2003 and $8.0million or 47% in the first six months of 2004 as compared to 2003.  The net increase is the result of an overallincrease in average earning assets, which is partially due to the acquisitionof $133 million in earning assets from the CSB transaction completed inJuly 2003, and $84 million in earning assets from the ACB transactioncompleted in December 2003.  Thisearning asset acquisition total of $217 million represents 57% of the increasein the Company’s earning assets for the twelve-month period ended June 30,2004.

 

2.               An increase in non-interest income, primarilyservice fees on deposit accounts. Non-interest income increased $454,000 or 20% and $967,000 or 22% overthe second quarter and year-to-date totals in the previous year.  Approximately $351,000 or 77% and$695,000 or 72% of the increase relates to CSB’s and ACB’s non-interest incomein the three and six months ended June 30, 2004, which were not includedin the three and six months ended June 30, 2003 results.

 

3.               An effective tax rate of 36.2% for the firstsix months of 2004 as compared to 36.9% for the same period of the previousyear.

 

The above factors wereoffset in part by:

 

1.               An increase in loan and lease loss provisionsof $70,000 and $255,000 for the three and six months ended June 30, 2004as compared to the same period in 2003. Additional provisions were recorded as a result of growth in loansoutstanding.  The percentage of loan andlease loss reserves to gross loans and leases increased to 1.45% atJune 30, 2004 as compared to 1.40% at December 31, 2003 and 1.39% atJune 30, 2003.

 

2.               Total other expenses increased $2.47 millionor 38% and $5.03 million or 40% over the second quarter and year-to-date totalsin the previous year. Total other expenses increased significantly as a resultof the addition of CSB and ACB’s operating costs, which totaled approximately$1.87 million (76% of the total increase) and $3.68 million (73% of the totalincrease) in the second quarter and year-to-date totals of 2004, that were notincluded in the 2003 results as the acquisitions, accounted for under purchaseaccounting, did not close until July and December of 2003.

 

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**Return onAverage Assets and Average Equity**

 

Returnon average assets (“ROA”) was 1.32% for the second quarter of 2004 as comparedto 1.35% for the second quarter of 2003. Return on equity (“ROE”) was 14.94% for the second quarter of 2004 ascompared to 17.10% for the second quarter of 2003.  Thecompression of ROE was largely due to growth in equity which exceeded theCompany’s income growth rate.  Equitygrew significantly since June 30, 2003, primarily due to the issuance ofstock to acquire two bank subsidiaries and the retention of the Company’searnings.

 

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

 

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

 

Forthe three months ended June 30, 2004, interest income on a tax equivalentbasis increased by $4.4 million to $15.5 million or 40% over the same period in2003. Interest expense on deposit accounts and borrowings increased $393,000 or17% over the same three-month period ended June 30, 2003. Average earningassets yielded (on a fully tax equivalent basis) 6.20% versus 6.55% a year ago,the effect of which was partially offset by a decrease in the cost of fundswhere the average cost of funds decreased to 1.42% from 1.79% a year ago. Netinterest income (on a tax equivalent basis) increased $4.0 million or 46% to$12.8 million. The net interest margin decreased 7 basis points to 5.11% from5.18% for the same three-month period a year ago.

 

Forthe six months ended June 30, 2004, interest income on a tax equivalentbasis increased by $8.7 million to $21.9 million or 40% over the same period in2003. Interest expense on deposit accounts and borrowings increased $683,000 or15% over the same six-month period ended June 30, 2003. Average earningassets yielded (on a fully tax equivalent basis) 6.30% versus 6.67% a year ago,the effect of which was partially offset by a decrease in the cost of fundswhere the average cost of funds decreased to 1.42% from 1.83% a year ago. Netinterest income (on a tax equivalent basis) increased $8.0 million or 46% to$25.3 million. The net interest margin decreased 6 basis points to 5.21% from5.27% for the same six-month period a year ago.

 

Net interest margin has remained stable, decreasing just 7 and 6 basispoints for the three and six-month periods ended June 30, 2004 as comparedto the same periods in 2003.  The primaryreasons that the Company was able to stabilize its net interest margin duringthis challenging rate environment are 1) an increase in the average loan todeposit ratio from 90% and 91% for the three and six-month periods endedJune 30, 2003 to 92% and 94% for the same periods in 2004. 2) the benefitof approximately 65% of the loan portfolio that are fixed rate loans and loansthat have reached contractual interest rate floors and 3) an increase in thepercentage of average non-interest deposits to total deposits from 23% for thethree and six-month periods ended June 30, 2003 to 26% and 25% for thesame periods in 2004.

 

Overall,yields trended down from the prior year as a result of market interestrates.  The most material decrease wasrealized in taxable investment securities, which decreased to 3.32% for thesecond quarter of 2004 as compared to 4.52% in the same period of 2003 as a resultof declining interest rates over the last few years in the bond market,accelerated prepayments on mortgage-backed securities and a lower yield on newinvestments than the effective yield of the existing portfolio.

 

15

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Thefollowing tables present, for the periods indicated, the distribution ofconsolidated average assets, liabilities and shareholders’ equity, as well asthe total dollar amounts of interest income from average earning assets and theresultant yields and the dollar amounts of interest expense and averageinterest-bearing liabilities, expressed both in dollars and in rates.Non-accrual loans, which are not considered material, are included in thecalculation of the average balances of loans. Savings deposits include NOW and money market accounts. To compare thetax-exempt asset yields to taxable yields, amounts are adjusted to pre-taxequivalents based on the marginal corporate federal tax rate of 35 percent forthe three and six-month periods ending June 30, 2004 and 34 percent forthe same periods in 2003 (dollars in thousands).

 

**Average Balances, Interest Income/Expense and Yields/RatesPaid**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
| ** **                                               | ** ** | **Average  Balance**   | ** ** | **Interest** | ** ** | **Yield/   Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/   Rate** | ** ** |
| Earning assets:                                          |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Portfolio loans                                          |       | $                      | 866,378    |   | $ | 14,405 |   | 6.69% |   | $ | 572,440 |   | $ | 10,061 |   | 7.05% |   |
| Tax exempt investment securities                         |       | 34,399                 |       | 598 |   | 7.00% |   | 30,969 |   | 558 |   | 7.22% |   |
| Taxable investment securities                            |       | 45,541                 |       | 376 |   | 3.32% |   | 32,854 |   | 370 |   | 4.52% |   |
| Federal funds sold                                       |       | 57,604                 |       | 141 |   | 0.98% |   | 43,439 |   | 128 |   | 1.18% |   |
| Interest bearing deposits in banks                       |       | 4,000                  |       | 10 |   | 1.01% |   | 1,280 |   | 8 |   | 2.41% |   |
| Average earning assets                                   |       | 1,007,923              |       | 15,530 |   | 6.20% |   | 680,982 |   | 11,125 |   | 6.55% |   |
| Other assets                                             |       | 124,402                |       |   |   |   |   | 60,441 |   |   |   |   |   |
| Less ALLL                                                |       | (12,446                | )          |   |   |   |   | (7,905 | ) |   |   |   |   |
| Average total assets                                     |       | $                      | 1,119,879  |   |   |   |   |   | $ | 733,518 |   |   |   |   |   |
| Interest bearing liabilities:                            |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Savings deposits                                         |       | $                      | 349,772    |   | $ | 599 |   | 0.69% |   | $ | 192,936 |   | $ | 399 |   | 0.83% |   |
| Time deposits                                            |       | 351,437                |       | 1,571 |   | 1.80% |   | 299,093 |   | 1,648 |   | 2.21% |   |
| Other borrowings (1)                                     |       | 68,279                 |       | 552 |   | 3.25% |   | 29,633 |   | 282 |   | 3.82% |   |
| Average interest bearing liabilities                     |       | 769,487                |       | 2,722 |   | 1.42% |   | 521,662 |   | 2,329 |   | 1.79% |   |
| Non-interest bearing liabilities                         |       | 241,998                |       |   |   |   |   | 147,767 |   |   |   |   |   |
| Other liabilities                                        |       | 9,291                  |       |   |   |   |   | 6,345 |   |   |   |   |   |
| Shareholders’ equity                                |       | 99,103                 |       |   |   |   |   | 57,744 |   |   |   |   |   |
| Average total liabilities and shareholders’  equity |       | $                      | 1,119,879  |   |   |   |   |   | $ | 733,518 |   |   |   |   |   |
| Net interest income and net interest margin              |       |                   |       | $ | 12,808 |   | 5.11% |   |   |   | $ | 8,796 |   | 5.18% |   |

 

----

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

(2) Net interest margin iscalculated by dividing net interest income by average earning assets.

 

16

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| ** **                                               | ** ** | **Six Months Ended**   | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
| ** **                                               | ** ** | **Average   Balance**  | ** ** | **Interest** | ** ** | **Yield/   Rate** | ** ** | **Average   Balance** | ** ** | **Interest** | ** ** | **Yield/   Rate** | ** ** |
| Earning assets:                                          |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Portfolio loans                                          |       | $                      | 852,007    |   | $ | 28,453 |   | 6.72% |   | $ | 565,799 |   | $ | 19,835 |   | 7.07% |   |
| Tax exempt investment securities                         |       | 34,231                 |       | 1,194 |   | 7.01% |   | 30,914 |   | 1,103 |   | 7.20% |   |
| Taxable investment securities                            |       | 46,349                 |       | 735 |   | 3.19% |   | 34,358 |   | 758 |   | 4.45% |   |
| Federal funds sold                                       |       | 39,667                 |       | 194 |   | 0.98% |   | 29,016 |   | 170 |   | 1.18% |   |
| Interest bearing deposits in banks                       |       | 3,974                  |       | 20 |   | 1.01% |   | 1,467 |   | 21 |   | 2.93% |   |
| Average earning assets                                   |       | 976,229                |       | 30,596 |   | 6.30% |   | 661,555 |   | 21,888 |   | 6.67% |   |
| Other assets                                             |       | 121,863                |       |   |   |   |   | 60,108 |   |   |   |   |   |
| Less ALLL                                                |       | (12,151                | )          |   |   |   |   | (7,642 | ) |   |   |   |   |
| Average total assets                                     |       | $                      | 1,085,941  |   |   |   |   |   | $ | 714,020 |   |   |   |   |   |
| Interest bearing liabilities:                            |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Savings deposits                                         |       | $                      | 342,769    |   | $ | 1,142 |   | 0.67% |   | $ | 189,077 |   | $ | 775 |   | 0.83% |   |
| Time deposits                                            |       | 340,019                |       | 3,032 |   | 1.79% |   | 288,656 |   | 3,271 |   | 2.29% |   |
| Other borrowings (1)                                     |       | 67,556                 |       | 1,109 |   | 3.30% |   | 29,427 |   | 554 |   | 3.79% |   |
| Average interest bearing liabilities                     |       | 750,343                |       | 5,283 |   | 1.42% |   | 507,160 |   | 4,600 |   | 1.83% |   |
| Non-interest bearing liabilities                         |       | 228,424                |       |   |   |   |   | 144,316 |   |   |   |   |   |
| Other liabilities                                        |       | 10,331                 |       |   |   |   |   | 6,127 |   |   |   |   |   |
| Shareholders’ equity                                |       | 96,843                 |       |   |   |   |   | 56,417 |   |   |   |   |   |
| Average total liabilities and shareholders’  equity |       | $                      | 1,085,941  |   |   |   |   |   | $ | 714,020 |   |   |   |   |   |
| Net interest income and net interest margin              |       |                   |       | $ | 25,313 |   | 5.21% |   |   |   | $ | 17,288 |   | 5.27% |   |

 

----

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

(2) Net interest margin iscalculated by dividing net interest income by average earning assets.

 

17

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The followingtables set 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 rate changes (dollars inthousands).

###### ** **

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

 
| ** **                               | ** ** | **Three Months Ended June 30, 2004 over 2003** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **Volume**                                          | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase (decrease) in interest income:  |       |                                                |       |   |   |   |   |
| Portfolio loans                          |       | $                                                   | 5,152      |   | $ | (809 | ) | $ | 4,343 |   |
| Investment securities, tax exempt        |       | 62                                                  |       | (20 | ) | 41 |   |
| Investment securities                    |       | 143                                                 |       | (137 | ) | 6 |   |
| Federal funds sold                       |       | 42                                                  |       | (29 | ) | 13 |   |
| Interest bearing deposits                |       | 16                                                  |       | (14 | ) | 2 |   |
| Net increase (decrease)                  |       | 5,414                                               |       | (1,009 | ) | 4,405 |   |
|                                     |       |                                                |       |   |   |   |   |
| Increase (decrease) in interest expense: |       |                                                |       |   |   |   |   |
| Interest bearing accounts                |       | 323                                                 |       | (123 | ) | 200 |   |
| Time deposits                            |       | 288                                                 |       | (365 | ) | (77 | ) |
| Other borrowings (1)                     |       | 367                                                 |       | (97 | ) | 270 |   |
| Net increase (decrease)                  |       | 978                                                 |       | (585 | ) | 393 |   |
| Total net increase (decrease)            |       | $                                                   | 4,437      |   | $ | (425 | ) | $ | 4,012 |   |

 

----

(1) For the purpose of thisschedule the interest on the Company’s subordinated debentures is includedin other borrowings.

 
| ** **                               | ** ** | **Six Months Ended June 30, 2004 over 2003** | ** ** |
|------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **Volume**                                        | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase (decrease) in interest income:  |       |                                              |       |   |   |   |   |
| Portfolio loans                          |       | $                                                 | 10,062     |   | $ | (1,444 | ) | $ | 8,617 |   |
| Investment securities, tax exempt        |       | 119                                               |       | (28 | ) | 91 |   |
| Investment securities                    |       | 265                                               |       | (288 | ) | (23 | ) |
| Federal funds sold                       |       | 63                                                |       | (39 | ) | 24 |   |
| Interest bearing deposits                |       | 37                                                |       | (37 | ) | (1 | ) |
| Net increase (decrease)                  |       | 10,545                                            |       | (1,837 | ) | 8,708 |   |
|                                     |       |                                              |       |   |   |   |   |
| Increase (decrease) in interest expense: |       |                                              |       |   |   |   |   |
| Interest bearing accounts                |       | 632                                               |       | (265 | ) | 367 |   |
| Time deposits                            |       | 584                                               |       | (823 | ) | (239 | ) |
| Other borrowings (1)                     |       | 719                                               |       | (164 | ) | 555 |   |
| Net increase (decrease)                  |       | 1,934                                             |       | (1,252 | ) | 683 |   |
| Total net increase (decrease)            |       | $                                                 | 8,610      |   | $ | (585 | ) | $ | 8,025 |   |

 

----

(1) For the purpose of thisschedule the interest on the Company’s subordinated debentures is includedin other borrowings

 

18

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**Non-interest Income**

 

TheCompany’s non-interest income consists primarily of service charges on depositaccounts, investment service fee income, other service fees, and the sale andpackaging of residential mortgage and government-guaranteed commercial loans.

 

For the threemonths ended June 30, 2004, total non-interest income increased $454,000or 20% over the same period in 2003.  Forthe six months ended June 30, 2004, total non-interest income increased$967,000 or 22% over the same period in 2003.

 

Service charge income rose $345,000 or 39% and $719,000 or 42% over thesame three-month and six-month periods of 2003. Approximately $351,000 or 102%and $695 or 97% of the increase relates to CSB and ACB’s service charges in thethree and six months ended June 30, 2004, which were not included in thethree and six months ended June 30, 2003 results.

 

Inaddition, income from mortgage loan origination and packaging fees decreased$39,000 or 3% and $288,000 or 12% over the same three and six-monthperiods of 2003. The decreasecan be primarily attributed to an increase in mortgage interest rates which hashad a negative effect on refinance activity. The decline in mortgage revenues were completely offset by an increasein investment service fee income of $86,000 and $361,000 over the three andsix-month periods of 2003 as Western Sierra Bank’s Investment Services Divisionwas not in operation in the first six months of 2003.

 

**Non-interestExpense**

 

Non-interest expenses consist of salaries and related employeebenefits, occupancy and equipment expenses, data processing fees, professionalfees, directors’ fees, and other operating expenses. Non-interest expenseincreased $2.47 million or 38% and $5.03 million or 40% over the same three andsix-month periods of 2003. Approximately $1.87 million or 76% and $3.68 millionor 73% of the increase relates to CSB and ACB’s non-interest expenses in thethree and six-month periods of 2004, which were not included in the sameperiods of 2003.

 

Salariesand benefits increased $1.45 million or 42% and $2.92 million or 43% over thesame three and six-month periods of last year. This increase was due primarilyto the integration of the CSB and ACB employees after their respective mergersboth of which occurred after the second quarter of 2003.

 

The following tables set forth a summary ofnon-interest expense for the periods indicated (dollars in thousands,percentages are annualized):

 
| ** **                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **Expense**                          | ** ** | **%****of  Avg  Earning  Assets**  | ** ** | **Expenses** | ** ** | **%****of  Avg  Earning  Asset** | ** ** | **Expense** | ** ** | **%****of  Avg   Earning   Assets** | ** ** | **Expense** | ** ** | **%****of  Avg   Earning   Assets** | ** ** |
| Salaries and benefits                    |       | $                                    | 4,881      |                               | 1.95%      |   | $ | 3,434 |   | 2.02% |   | $ | 9,768 |   | 2.01% |   | $ | 6,851 |   | 2.09% |   |
| Occupancy & equipment                |       | 1,435                                |       | 0.57%                              |       | 1,154 |   | 0.68% |   | 2,787 |   | 0.57% |   | 2,206 |   | 0.67% |   |
| Other expenses                           |       | 2,414                                |       | 0.96%                              |       | 1,789 |   | 1.05% |   | 4,723 |   | 0.97% |   | 3,434 |   | 1.05% |   |
| Amortization of core deposit intangibles |       | 180                                  |       | 0.07%                              |       | 62 |   | 0.04% |   | 360 |   | 0.07% |   | 123 |   | 0.04% |   |
| Total non-interest expense               |       | $                                    | 8,910      |                               | 3.56%      |   | $ | 6,438 |   | 3.79% |   | $ | 17,638 |   | 3.63% |   | $ | 12,613 |   | 3.84% |   |

 

19

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**EfficiencyRatio**

 

The Company uses a widely used banking operating ratio as a measure ofits progress in increasing operating efficiency.  The efficiency ratio is derived by dividingtotal other (i.e. operating) expenses by the sum of tax adjusted net interestincome and non-interest income.  Simplyput, this ratio describes the funds necessary to generate $1 in tax equivalenttotal revenue.  The Company’s efficiencyratio has continued to improve in 2004 and management has targeted to operatebetween 52% and 56% going forward.  Therecould be a negative short-term impact on the efficiency ratio in the event theCompany engages in future mergers and acquisitions, de novo branches, or newdepartment operations.

 

The followingtable sets forth the Company’s tax adjusted efficiency ratio for the periodsindicated (dollars in thousands):

 
| ** **                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                |       |                                  |       |                                |       |   |   |   |   |
| Non-interest expense                                |       | $                                     | 8,910      |                                | $          | 6,438 |   | $ | 17,638 |   | $ | 12,613 |   |
| Amortization of core deposit and other  intangibles |       | (180                                  | )          | (62                                 | )          | (360 | ) | (123 | ) |
| Investment in limited partnership                   |       | (56                                   | )          | —                              |       | (112 | ) | — |   |
| Net non-interest expense                            |       | $                                     | 8,674      |                                | $          | 6,376 |   | $ | 17,166 |   | $ | 12,490 |   |
|                                                |       |                                  |       |                                |       |   |   |   |   |
| Fully tax equivalent income:                        |       |                                  |       |                                |       |   |   |   |   |
| Net interest income                                 |       | $                                     | 12,586     |                                | $          | 8,592 |   | $ | 24,869 |   | $ | 16,876 |   |
| Non-interest income                                 |       | 2,713                                 |       | 2,259                               |       | 5,281 |   | 4,315 |   |
| Tax benefit adjustment for tax-exempt  income       |       | 310                                   |       | 248                                 |       | 596 |   | 484 |   |
| Total fully tax equivalent Income                   |       | $                                     | 15,609     |                                | $          | 11,099 |   | $ | 30,746 |   | $ | 21,675 |   |
|                                                |       |                                  |       |                                |       |   |   |   |   |
| Efficiency Ratio                                    |       | 55.6                                  | %          | 57.5                                | %          | 55.8 | % | 57.6 | % |

 

20

----

 

**IncomeTaxes**

 

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

 
| ** **         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **         | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Tax provision      |       | $                                     | 2,109      |                                | $          | 1,421 |   | $ | 4,056 |   | $ | 2,772 |   |
| Effective tax rate |       | 36.42                                 | %          | 36.60                               | %          | 36.21 | % | 36.85 | % |
|                    |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

TheCompany’s effective tax rate varies with changes in the relative amounts of itsnon-taxable income and non-deductible expenses. The increase in the Company’stax provision is attributable to increases in the Company’s net income and therelative amount of tax-exempt income.

 

Aspreviously disclosed, the Company abandoned its Real Estate Investment Trust(REIT) tax strategy in the fourth quarter of 2003.  While the Company took no book tax benefitfor the REIT during 2003, a charge of $940,000 was taken in the fourth quarterof 2003 for the 2002 tax benefits and related potential penalties.  The Company has retained its right of appealrelative to the REIT transaction and will continue to evaluate its alternativesin the future.

 

Duringthe second quarter of 2004, the Company filed amended 2002 tax returns with theFranchise Tax Board and reviewed its quarterly tax liability for 2003.  The Company remitted $1.51 million to theFranchise Tax Board during the second quarter of 2004, which the Companybelieves represents full payment of its historical tax liability.  The Company will realize a federal taxbenefit for this payment for 2004.

 

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

 

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

 

TheCompany manages its credit risk through diversification of its loan portfolio,the application of underwriting policies and procedures and credit monitoringpractices. Although the Company has a diversified loan portfolio, a significantportion of its borrowers’ ability to repay their loans is dependent upon theprofessional services and residential real estate development industry sectors.Generally, loans are secured by real estate or other assets and are expected tobe repaid from the cash flows of the borrower or proceeds from the sale ofcollateral.

 

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

 
| ** **                               | ** ** | **June 30,  2004** | ** ** | **% of  Total** | ** ** | **December 31,  2003** | ** ** | **% of  Total** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------|------------|-----------------------------|------------|-----------------|------------|
| Real estate mortgage                     |       | $                       | 548,629    |            | 62.85%     |                        | $          | 495,948         |       | 60.37% |   |
| Real estate construction                 |       | 186,380                 |       | 21.35%          |       | 195,889                     |       | 23.84%          |       |
| Commercial                               |       | 119,035                 |       | 13.64%          |       | 109,685                     |       | 13.35%          |       |
| Agricultural                             |       | 12,702                  |       | 1.46%           |       | 12,185                      |       | 1.48%           |       |
| Installment                              |       | 4,197                   |       | 0.60%           |       | 5,795                       |       | 0.71%           |       |
| Lease financing                          |       | 1,923                   |       | 0.22%           |       | 2,016                       |       | 0.25%           |       |
| Total                                    |       | 872,866                 |       | 100.00%         |       | 821,518                     |       | 100.00%         |       |
| Deferred loan fees and costs, net        |       | (2,587                  | )          | -0.29%          |       | (2,729                      | )          | -0.33%          |       |
| Less allowance for loan and lease losses |       | (12,661                 | )          | -1.45%          |       | (11,529                     | )          | -1.40%          |       |
| Total net loans and leases               |       | $                       | 857,618    |            |       |                        | $          | 807,260         |       |   |   |

 

21

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

 
| ** **                                                         | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Non-accrual loans                                                  |       | $                       | 1,272      |                        | $          | 1,554 |   |
| Non-performing assets as a% of total assets                        |       | 0.11                    | %          | 0.15                        | %          |
| Non-accrual loans as a% of gross loans                             |       | 0.15                    | %          | 0.19                        | %          |
| Ratio of allowance for loan and lease losses to  non-accrual loans |       | 9.95                    |       | 7.42                        |       |
|                                                                    |            |                         |            |                             |            |  |  |

 

TheCompany’s non-accrual loans decreased from $1,554,000 to $1,272,000 in thefirst six months of 2004. The Company’s “coverage ratio” or the ratio ofallowance for loan and lease losses to non-accrual loans increased from 7.42 to9.95 during the first six months of 2004. The Company carried no other real estate as of June 30, 2004.

 

**Allowancefor Loan and Lease Losses**

 

The allowance for loan and lease losses is established through chargesto earnings in the form of the provision for loan and lease losses. Loan andlease losses are charged to, and recoveries are credited to, the allowance forloan and lease losses. The provision for loan and lease losses is determinedafter considering various factors such as loan and lease loss experience,current economic conditions, maturity of the portfolio, size of the portfolio,industry concentrations, borrower credit history, the existing allowance forloan and lease losses, independent loan reviews, current charges to andrecoveries within the allowance for loan and lease losses and the overallquality of the portfolio as determined by management, regulatory agencies, andindependent credit review consultants retained by the Company.

 

The adequacy of the Company’s allowance forloan and lease losses is based on specific and formula allocations to theCompany’s loan and lease portfolio. Specific allocations are made for impairedloans and leases. The specific allocations are increased or decreased throughmanagement’s reevaluation of the status of the particular problem loans andleases. Loans and leases which do not receive a specific allocation receive anallowance allocation based on a formula represented by a percentage factorbased on underlying collateral, type of loan and lease, historical charge-offsand general economic conditions which is applied against the general portfoliosegments.

 

It is the policy of management to make additions to the allowance forloan and lease losses so that it remains adequate to cover anticipatedcharge-offs and management believes that the allowance at June 30, 2004 isadequate. However, the determination of the amount of the allowance isjudgmental and subject to economic conditions which cannot be predicted withcertainty. Accordingly, the Company cannot predict whether charge-offs of loansand leases in excess of the allowance may be required in future periods. Theprovision for loan and lease losses reflects an accrual sufficient to coverprojected potential charge-offs.

 

Theallowance for loan and lease losses percentage to portfolio loans increased inthe second quarter of 2004 because CSB and ACB had a greater percentage of landand development loans that required a higher reserve percentage.

 

22

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The following table summarizes the activity in the allowance for loanand lease losses for the periods indicated (dollars in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Beginning balance for allowance for loan  and lease losses |       | $                                     | 12,165     |                                | $          | 7,661 |   | $ | 11,529 |   | $ | 7,113 |   |
| Provision for loan and lease losses                        |       | 600                                   |       | 530                                 |       | 1,310 |   | 1,055 |   |
| Charge offs:                                               |       |                                  |       |                                |       |   |   |   |   |
| Commercial                                                 |       | 150                                   |       | 23                                  |       | 175 |   | 23 |   |
| Real estate                                                |       | —                                |       | —                              |       | — |   | — |   |
| Agricultural                                               |       | —                                |       | —                              |       | — |   | — |   |
| Other                                                      |       | 6                                     |       | 26                                  |       | 25 |   | 26 |   |
| Total charge offs                                          |       | 156                                   |       | 49                                  |       | 200 |   | 49 |   |
| Recoveries:                                                |       |                                  |       |                                |       |   |   |   |   |
| Commercial                                                 |       | 7                                     |       | 6                                   |       | 20 |   | 14 |   |
| Real estate                                                |       | —                                |       | 15                                  |       | — |   | 15 |   |
| Agricultural                                               |       | —                                |       | —                              |       | — |   | 14 |   |
| Other                                                      |       | 1                                     |       | 2                                   |       | 2 |   | 3 |   |
| Total recoveries                                           |       | 8                                     |       | 23                                  |       | 22 |   | 46 |   |
| Net charge offs                                            |       | (148                                  | )          | (26                                 | )          | (178 | ) | (3 | ) |
| Undisbursed amount transferred in                          |       | 44                                    |       | —                              |       | — |   | — |   |
| Ending balance                                             |       | $                                     | 12,661     |                                | $          | 8,165 |   | $ | 12,661 |   | $ | 8,165 |   |
| ALLL to total loans                                        |       | 1.45                                  | %          | 1.39                                | %          | 1.45 | % | 1.39 | % |
| Annualized net charge offs to average loans                |       | -0.07                                 | %          | -0.02                               | %          | -0.04 | % | 0.00 | % |

 

**Liquidity**

 

AFunds Management Policy has been developed by the Company’s Management andapproved by the Company’s Board of Directors that establishes guidelines forthe investments and liquidity of the Company. The goals of this policy are toprovide liquidity to meet the financial requirements of the Company’scustomers, maintain adequate reserves as required by regulatory agencies andmaximize earnings of the Company. The Company’s liquidity ratio atJune 30, 2004 was 17.3% and was 9.6% at December 31, 2003.  The increased liquidity ratio atJune 30, 2004 is due to an increase in Federal Funds Sold of $81million.  Liquidity is computed by dividingliquid assets (consisting of cash and due from banks, available-for-saleinvestments not pledged, federal funds sold and loans available-for-sale) bytotal liabilities. The Company’s Management believes it maintains adequateliquidity levels.

 

23

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**CapitalAdequacy**

 

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

 

Thisstandard characterizes an institution’s capital as being “Tier 1” capital(defined as principally comprising shareholders’ equity and qualifying subordinateddebentures) and “Tier 2” capital (defined as principally comprising thequalifying portion of the allowance for loan and lease losses and any remainingsubordinated debentures).

 

The minimum ratio oftotal risk-based capital to risk-weighted assets, including certain off-balancesheet 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 considered well-capitalized).  The minimum ratio of Tier 1 capital torisk-weighted assets is 4.0% (6.0% to be considered well-capitalized).  At least one-half (4%) of the totalrisk-based capital (Tier 1) is to be comprised of common equity; thebalance may consist of debt securities and a limited portion of the allowancefor loan and lease losses.  Subordinateddebentures in the amount of $33.5 million and $30.9 million are included in the Company’sTier 1 capital as of June 30, 2004 and December 31, 2003,respectively, as allowed by Federal Reserve regulations, in the consolidatedtotals below.  The remaining $2.5 millionand $5.1 million, respectively, in subordinated debentures are included in Tier2.

 

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

 
| ** **                                         | ** ** | **June 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **ACB**                | ** ** | **CCB**                    | ** ** | **LCB** | ** ** | **WSNB** | ** ** | **Company** | ** ** | **ACB** | ** ** | **CCB** | ** ** | **LCB** | ** ** | **WSNB** | ** ** | **Company** | ** ** |
|                                               |       |                   |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total risk-based capital to risk-weighted  assets  |       | 12.2                   | %          | 11.5                       | %          | 12.2 | % | 10.4 | % | 12.2 | % | 11.0 | % | 11.0 | % | 11.0 | % | 10.3 | % | 12.1 | % |
| Tier 1 capital to risk-weighted assets             |       | 10.9                   | %          | 10.3                       | %          | 11.0 | % | 9.2 | % | 10.7 | % | 9.7 | % | 9.8 | % | 9.7 | % | 9.0 | % | 10.3 | % |
| Tier 1 capital to average assets (leverage  ratio) |       | 7.8                    | %          | 7.8                        | %          | 10.0 | % | 7.9 | % | 8.7 | % | 7.1 | % | 7.8 | % | 9.2 | % | 8.3 | % | 8.8 | % |

 

The Company and its bank subsidiaries continue to meet all regulatorycapital requirements at June 30, 2004.

 

24

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**ITEM 3.****QUANT****ITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Asa financial institution, the Company’s primary component of market risk isinterest rate volatility. Fluctuation in interest rates will ultimately impactboth the level of income and expense recorded on a large portion of theCompany’s assets and liabilities, and the market value of all interest earningassets and interest bearing liabilities, other than those which possess a shortterm to maturity. Virtually all of the Company’s interest earning assets andinterest bearing liabilities are located at the banking subsidiary level. Thus,virtually all of the Company’s interest rate risk exposure lies at the bankingsubsidiary level. As a result, all significant interest rate risk  procedures are performed at thebanking subsidiary level. The subsidiary banks’ real estate loan portfolios,concentrated primarily within Northern California, are subject to risksassociated with their local economies.

 

Thefundamental objective of the Company’s management of its assets and liabilitiesis to maximize the Company’s economic value while maintaining adequateliquidity and an exposure to interest rate risk deemed by Management to beacceptable. Management believes an acceptable degree of exposure to interestrate risk results from the management of assets and liabilities throughmaturities, pricing and mix to attempt to neutralize the potential impact ofchanges in market interest rates. The Company’s profitability is dependent to alarge extent upon its net interest income, which is the difference between itsinterest income on interest-earning assets, such as loans and investments, andits interest expense on interest-bearing liabilities, such as deposits andborrowings. The Company is subject to interest rate risk to the degree that itsinterest-earning assets reprice differently than its interest-bearingliabilities. The Company manages its mix of assets and liabilities with thegoals of limiting its exposure to interest rate risk, ensuring adequateliquidity, and coordinating its sources and uses of funds.

 

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

 

25

 

The following table sets forth, as of June 30, 2004, thedistribution of re-pricing opportunities for the Company’s earning assets andinterest-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.

 
| **Earning  assets:**                                              | ** ** | **Within 3   Months** | ** ** | **After 3   Months But  Within One  Year** | ** ** | **After One   Year But   Within Five  Years** | ** ** | **After Five   Years** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|-----------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                        | ** ** | ** **            | ** ** | ** **                                 | ** ** | ** **                                    | ** ** | ** **             | ** ** | ** ** | ** ** |
| Federal funds sold                                                |       | $                     | 98,245     |                                       | $          | —                                        |       | $                      | —     |       | $          | — |   | $ | 98,245 |   |
| Investment securities and other                                   |       | 8,430                 |       | 9,019                                      |       | 45,624                                        |       | 30,775                 |       | 93,848     |       |
| Loans                                                             |       | 249,224               |       | 180,408                                    |       | 222,796                                       |       | 219,760                |       | 872,188    |       |
| Total earning assets                                              |       | 355,899               |       | 189,427                                    |       | 268,419                                       |       | 250,536                |       | 1,064,280  |       |
|                                                              |       |                  |       |                                       |       |                                          |       |                   |       |       |       |
| Interest-bearing liabilities:                                     |       |                  |       |                                       |       |                                          |       |                   |       |       |       |
| Savings                                                           |       | 52,119                |       | 26,060                                     |       | —                                        |       | —                 |       | 78,179     |       |
| Interest-bearing transaction accounts                             |       | 244,203               |       | 40,649                                     |       | —                                        |       | —                 |       | 284,852    |       |
| Time deposits                                                     |       | 151,441               |       | 132,707                                    |       | 82,989                                        |       | —                 |       | 367,137    |       |
| Subordinated debentures                                           |       | 36,496                |       | —                                     |       | —                                        |       | —                 |       | 36,496     |       |
| Other borrowings                                                  |       | 10,000                |       | 14,000                                     |       | 7,150                                         |       | —                 |       | 31,150     |       |
| Total interest-bearing liabilities                                |       | 494,259               |       | 213,416                                    |       | 90,139                                        |       | —                 |       | 797,814    |       |
| Interest rate sensitivity gap                                     |       | (138,360              | )          | (23,989                                    | )          | 178,280                                       |       | 250,536                |       | 266,466    |       |
| Cumulative interest rate sensitivity gap                          |       | $                     | (138,360   | )                                          | $          | (162,349                                      | )          | $                      | 15,931     |       | $          | 266,466 |   | $ | — |   |
| Interest rate sensitivity gap to total  earning assets            |       | -13.00                | %          | -2.25                                      | %          | 16.75                                         | %          | 23.54                  | %          | 25.04      | %          |
| Cumulative interest rate sensitivity gap to  total earning assets |       | -13.00                | %          | -15.25                                     | %          | 1.50                                          | %          | 25.04                  | %          |       |       |
| Ratio of rate sensitive assets to rate  sensitive liabilities     |       | 0.72                  |       | 0.89                                       |       | 2.98                                          |       | N/A                    |       | 1.33       |       |
| Cumulative ratio                                                  |       | 0.72                  |       | 0.77                                       |       | 1.02                                          |       | 1.33                   |       | 1.33       |       |

 

The opportunity to reprice assets in the same dollar amounts and at thesame time as 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.

 

Becauseof the inherent limitations of the static GAP model described above, managementdeployed a new interest rate sensitivity measurement tool in April 2003that more accurately measures the Company’s exposure to future changes ininterest rates.  This model measures the expected cash flows and repricingof each financial asset/liability separately in measuring the Company’s andeach bank’s interest sensitivity. Management and the Board’s Investment/ALCOCommittee have carefully reviewed the initial reports that indicate that theCompany as a whole is “asset sensitive”. This means the Company expects (all other things being equal) to expandits net interest income if rates rise and expects it conversely to contract ifrates fall.  The level of potential orexpected contraction is considered manageable at this time.  Management will continue to perform thisanalysis each quarter to further validate the expected results against actualdata.

 

26

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The following tables, in management’s opinion, reflectestimates of the Company’s future net interest income under different interestrate scenarios.  The net interest incomeestimates are one-year projections based on the earning assets and interest-bearing liabilities as of June 30, 2004. The estimates are derived from an asset/liability management model deployedin 2003.  There are numerous underlying assumptionsthat management believes are accurate, but if they are inaccurate could have animpact to the results of operations. Under the shock scenarios, the changes to interest rates are assumed tooccur immediately (on July 1, 2004). Under the ramp scenarios the changes to interest rates gradually ramp upor down over the course of one year (dollars in thousands).

 
| ** **                            | ** ** | **Shock Scenario**                         | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| **Change  in    Interest Rates** | ** ** | **Estimated    Net Interest  Income** | ** ** | **Dollar Change  from Base** | ** ** | **Percentage   Change    from Base** | ** ** |
| 300 basis point rise                  |       | $                                          | 60,076     |   | $ | 8,319 |   | 6.07 | % |
| 200 basis point rise                  |       | 57,219                                     |       | 5,462 |   | 10.55 | % |
| 100 basis point rise                  |       | 54,364                                     |       | 2,607 |   | 5.04 | % |
| 50 basis point rise                   |       | 52,979                                     |       | 1,222 |   | 2.36 | % |
| **Base  scenario**                    | ** ** | **51,757**                                 | ** ** | **0** | ** ** | **0.00** | **%** |
| 50 basis point decline                |       | 50,147                                     |       | (1,609 | ) | -3.11 | % |
| 100 basis point decline               |       | 48,439                                     |       | (3,317 | ) | -6.41 | % |
|                                       |            |                                            |            |  |  |  |  |  |  |

 
| ** **                            | ** ** | **Ramp Scenario**                          | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| **Change  in    Interest Rates** | ** ** | **Estimated    Net Interest  Income** | ** ** | **Dollar Change  from Base** | ** ** | **Percentage   Change    from Base** | ** ** |
| 300 basis point rise                  |       | $                                          | 54,654     |   | $ | 2,897 |   | 5.60 | % |
| 200 basis point rise                  |       | 53,646                                     |       | 1,889 |   | 3.65 | % |
| 100 basis point rise                  |       | 52,644                                     |       | 887 |   | 1.71 | % |
| 50 basis point rise                   |       | 52,167                                     |       | 410 |   | 0.79 | % |
| **Base  scenario**                    | ** ** | **51,757**                                 | ** ** | **0** | ** ** | **0.00** | **%** |
| 50 basis point decline                |       | 51,069                                     |       | (687 | ) | -1.33 | % |
| 100 basis point decline               |       | 50,340                                     |       | (1,416 | ) | -2.74 | % |
|                                       |            |                                            |            |  |  |  |  |  |  |

 

27

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

 

The Company’s ChiefExecutive Officer and Chief Financial Officer, based on their evaluation as ofthe date of this report of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rule 13a—15(e), have concluded that the Company’sdisclosure controls and procedures are adequate and effective for purposes ofRule 13a—15(e) in timely alerting them to material information relating tothe Company required to be included in the Company’s filings with the SEC underthe 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.

 

28

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**PART II.****Other Informati****on**

 

**Item #1.****Legalproceedings**

 

TheCompany and its subsidiaries are involved in various routine legal actionsarising in the ordinary course of business. The Company believes that theultimate disposition of all currently pending matters will not have a materialadverse effect on the Company’s financial condition or results of operations.

 

# **Item #2.**Changes in securities, use of proceeds and IssuerPurchases of Equity Securities

 

OnJanuary 16, 2004 the Company announced that the Board of Directorsapproved a plan to utilize up to $2 million (or approximately 1% of the totaloutstanding shares) to repurchase the Company’s common stock.  As of June 30, 2004, the Companypurchased 3,000 shares at an average price of approximately $28.27 under thisplan, all of which were purchased in the second quarter of 2004.

 

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

 

N/A

 

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

 

OnMay 6, 2004 the annual meeting of the shareholders of the Company was held forthe purpose of voting on the following matters:

 

Proposal  1.**Election of Directors**:

 

| ** **          | ** ** | **Voted For** | ** ** | **Withheld** | ** ** |
|---------------------|------------|---------------|------------|--------------|------------|
| Charles W. Bacchi   |       | 3,185,621     |       | 11,077       |       |
| Mathew A. Bruno Sr. |       | 3,185,621     |       | 11,077       |       |
| Lary A. Davis       |       | 3,171,456     |       | 25,242       |       |
| William M. Eames    |       | 3,185,621     |       | 11,077       |       |
| William Fisher      |       | 3,185,621     |       | 11,077       |       |
| Gary D. Gall        |       | 3,180,158     |       | 16,540       |       |
| Jan T. Haldeman     |       | 3,185,621     |       | 11,077       |       |
| Howard Jahn         |       | 3,185,621     |       | 11,077       |       |
| Alan J. Kleinert    |       | 3,171,397     |       | 25,301       |       |
| Thomas Manz         |       | 3,185,621     |       | 11,077       |       |
| Douglas A. Nordell  |       | 3,185,621     |       | 11,077       |       |
| Lori A. Warden      |       | 3,185,621     |       | 11,077       |       |

 

Proposal 2**.****Approvalof the Western Sierra Bancorp 2004 Stock Option Plan.**

 

| Voted for: |   | 1,693,593 |   |
|------------|--------|-----------|--------|
| Abstained: |   | 59,138    |   |
| Against:   |   | 344,117   |   |
| Not Voted  |   | 1,099,850 |   |

 

 

Proposal 3.**Ratification of Appointment of Accountants.******To ratify theappointment of Perry-Smith LLP as the Company’s independent public accountants.

 

| Voted for: |   | 3,120,520 |   |
|------------|--------|-----------|--------|
| Abstained: |   | 22,356    |   |
| Against:   |   | 53,822    |   |

# ** **

29

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# **Item #5.**OtherInformation

 

N/A

 

**Item #6.****Exhibits**

 
| **(a)**         | ** ** | ** **                                                                                                                                                                                                                                                                                          |   |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **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.                                                                                                                   |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 3.4             |       | Amendment to  Articles of Incorporation dated May 7, 2004.                                                                                                                                                                                                                                          |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 10.1            |       | Severance Compensation Agreement dated December 4, 1997 between  Mr. Kirk Dowdell and Western Sierra National Bank is contained in the  Registrant’s Registration Statement on Form S-4, file #333-33256, as Exhibit  10.1 and is incorporated herein by this reference.                  |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 10.2            |       | Stock Option Agreement dated September 22, 1997 between Mr. Kirk  Dowdell and Western is contained in the Registrant’s Registration Statement  on Form S-4, file # 333-33256, as Exhibit 10.2 and  is incorporated herein by this reference.                                              |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 10.3            |       | Stock Option Agreement dated May 19, 1999 between Mr. Kirk Dowdell  and Western is contained in the Registrant’s Registration Statement on Form  S-4, file # 333-33256, as Exhibit 10.3 and is  incorporated herein by this reference.                                                         |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 10.4            |       | Stock Option Agreement dated May 19, 1999 between Mr. Gary D. Gall  and Western is contained in the Registrant’s Registration Statement on Form  S-4 file, # 333-33256, as Exhibit 10.3 and is incorporated herein by this  reference.                                                         |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 10.5            |       | Executive Salary Continuation Agreement dated August 22, 2002,  between Mr. Gary D. Gall and Western Sierra National Bank. (1)                                                                                                                                                                 |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 10.6            |       | Stock Option Agreement dated April 11, 1995 between Mr. Gary D.  Gall and Western Sierra National Bank is contained in the Registrant’s  Registration Statement on Form S-4, file #333-66675, as Exhibit 10.5 and is  incorporated herein by this reference.                              |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 10.7            |       | Stock Option Agreement dated November 14, 1996 between Mr. Gary  D. Gall and Western Sierra National Bank is contained in the Registrant’s  Registration Statement on Form S-4, file #333-66675, as Exhibit 10.6 and is  incorporated herein by this reference.                           |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 10.8            |       | Stock Option Agreement dated May 20, 1997 between Mr. Gary D. Gall  and Western is contained in the Registrant’s Registration Statement on Form  S-4, file #333-66675, as Exhibit 10.7 and is  incorporated herein by this reference.                                                          |   |
|            |       |                                                                                                                                                                                                                                                                                                |   |
| 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. |   |

 

30

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| 10.11  |   | Western Sierra Bancorp 1997 Stock Option Plan, form of incentive  stock option and form of nonqualified stock option agreements are contained  in the Registrant’s Registration Statement on Form S-4  ,file #333-66675, as Exhibit 10.11 and are incorporated herein by this  reference.    |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.12  |   | Indemnification Agreement between Mr. Gary D. Gall and Western Sierra  National Bank is contained in the Registrant’s Registration Statement on Form  S-4, file #333-66675, as Exhibit 10.13 and is incorporated herein by this  reference.                                                  |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.13  |   | Indemnification Agreement between Mr. Kirk Dowdell and Western is  contained in the Registrant’s Registration Statement on Form S-4, file  #333-86653, as Exhibit 10.14 and is incorporated herein by this reference.                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.14  |   | Form of Indemnification Agreement for the directors of Western Sierra  National Bank is contained in the Registrant’s Registration Statement on Form  S-4 file,  #333-66675, as Exhibit 10.15 and is incorporated herein by this reference.                                             |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.15  |   | Placerville Branch lease is contained in the Registrant’s  Registration Statement on Form S-4, file #333-66675, as Exhibit 10.1 and is  incorporated herein by this reference.                                                                                                               |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.16  |   | Executive Salary Continuation Agreement dated February 1, 2002,  between Mr. Kirk N. Dowdell. (1)                                                                                                                                                                                            |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.17  |   | Severance Benefits Agreement dated December 4, 1997 between Mr.  Gary D. Gall and Western Sierra National Bank is contained in the  Registrant’s Registration Statement on Form S-4, file #333-66675, as Exhibit  10.2 and is incorporated herein by this reference.                    |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.18  |   | Western Sierra National Bank Incentive Compensation Plan for Senior  Management is contained in the Registrant’s Registration Statement on Form  S-4, file # 333-66675, as Exhibit 10.12 and is  incorporated herein by this reference.                                                      |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.19  |   | Stock Option Agreement dated April 11, 2000 between Mr. Kirk  Dowdell and Western is contained in the Registrant’s Registration Statement  on Form S-4, file # 333-76678, as Exhibit 10.19 and  is incorporated herein by this reference.                                               |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.20  |   | Stock Option Agreement dated April 11, 2000 between Mr. Gary D.  Gall and Western is contained in the Registrant’s Registration Statement on  Form S-4, file # 333-76678, as Exhibit 10.20 and is  incorporated herein by this reference.                                               |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.21  |   | Stock Option Agreement dated April 10, 2001 between Mr. Kirk  Dowdell and Western is contained in the Registrant’s Registration Statement  on Form S-4, file # 333-76678, as Exhibit 10.21 and  is incorporated herein by this reference.                                               |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.22  |   | Stock Option Agreement dated April 10, 2001 between Mr. Gary D.  Gall and Western is contained in the Registrant’s Registration Statement on  Form S-4, file # 333-76678, as Exhibit 10.22 and is  incorporated herein by this reference.                                               |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.23  |   | Stock Option Agreement dated December 11, 2001 between Mr. Kirk  Dowdell and Western is contained in the Registrant’s Registration Statement  on Form S-4, file # 333-76678, as Exhibit 10.23 and  is incorporated herein by this reference.                                            |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.24  |   | Folsom Western Sierra National Bank branch lease and lease amendment.  (1)                                                                                                                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.25  |   | Agreement and Plan of Reorganization by and between the Western and  Central Sierra Bank dated as of March 12, 2003 is attached as Appendix A  to the proxy statement-prospectus contained in the S-4 Registration Statement  file #333-104817 and is incorporated herein by this reference. |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.26  |   | Wells Fargo Note Contract dated April 10, 2003. (1)                                                                                                                                                                                                                                          |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.27  |   | Stock Option Agreement dated December 11, 2001 between Mr.  Phillip Wood and Western Sierra Bancorp. (1)                                                                                                                                                                                     |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.28  |   | Stock Option Agreement dated December 11, 2001 between Mr. Doug  Nordell and Western Sierra Bancorp. (1)                                                                                                                                                                                     |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.29  |   | Stock Option Agreement dated April 25, 2002 between Mr. Doug  Nordell and Western Sierra Bancorp. (1)                                                                                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.30  |   | Stock Option Agreement dated April 25, 2002  between Mr. Fred Rowden and Western  Sierra Bancorp. (1)                                                                                                                                                                                   |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.31  |   | Stock Option Agreement dated April 25, 2002 between Mr. Kirk  Dowdell and Western Sierra Bancorp. (1)                                                                                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.32  |   | Stock Option Agreement dated June 27, 2002 between Mr. Gary Gall  and Western Sierra Bancorp. (1)                                                                                                                                                                                            |   |
|   |   |                                                                                                                                                                                                                                                                                              |   |
| 10.33  |   | Stock Option Agreement dated June 27, 2002 between Mr. Anthony  Gould and Western Sierra Bancorp. (1)                                                                                                                                                                                        |   |

 

31

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| 10.34  |   | Stock Option Agreement dated March 30, 2003 between Mr. Phillip  Wood and Western Sierra Bancorp. (1)                       |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                             |   |
| 10.35  |   | Stock Option Agreement dated March 30, 2003 between Mr. Gary  Gall and Western Sierra Bancorp. (1)                          |   |
|   |   |                                                                                                                             |   |
| 10.36  |   | Stock Option Agreement dated March 30, 2003 between Mr. Kirk  Dowdell and Western Sierra Bancorp. (1)                       |   |
|   |   |                                                                                                                             |   |
| 10.37  |   | Stock Option Agreement dated March 30, 2003 between Mr. Anthony  Gould and Western Sierra Bancorp. (1)                      |   |
|   |   |                                                                                                                             |   |
| 10.38  |   | Stock Option Agreement dated March 30, 2003 between Mr. Doug  Nordell and Western Sierra Bancorp. (1)                       |   |
|   |   |                                                                                                                             |   |
| 10.39  |   | Stock Option Agreement dated March 30, 2003 between Mr. Fred  Rowden and Western Sierra Bancorp. (1)                        |   |
|   |   |                                                                                                                             |   |
| 10.40  |   | Stock Option Agreement dated January 1, 2002 between Mr. Charles  Bacchi and Western Sierra Bancorp. (1)                    |   |
|   |   |                                                                                                                             |   |
| 10.41  |   | Stock Option Agreement dated January 1, 2002 between Mrs.  Barbara Cook and Western Sierra Bancorp. (1)                     |   |
|   |   |                                                                                                                             |   |
| 10.42  |   | Stock Option Agreement dated January 1, 2002 between Mr. William  Fisher and Western Sierra Bancorp. (1)                    |   |
|   |   |                                                                                                                             |   |
| 10.43  |   | Stock Option Agreement dated January 1, 2002 between Mr. Howard  Jahn and Western Sierra Bancorp. (1)                       |   |
|   |   |                                                                                                                             |   |
| 10.44  |   | Stock Option Agreement dated January 1, 2002 between Mr. Alan  Kleinert and Western Sierra Bancorp. (1)                     |   |
|   |   |                                                                                                                             |   |
| 10.45  |   | Stock Option Agreement dated January 1, 2002 between Mr. Thomas  Manz and Western Sierra Bancorp. (1)                       |   |
|   |   |                                                                                                                             |   |
| 10.46  |   | Stock Option Agreement dated January 1, 2002 between Mr. Harold  Prescott and Western Sierra Bancorp. (1)                   |   |
|   |   |                                                                                                                             |   |
| 10.47  |   | Stock Option Agreement dated January 1, 2002 between Mr. Lary  Davis and Western Sierra Bancorp. (1)                        |   |
|   |   |                                                                                                                             |   |
| 10.48  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Charles Bacchi and Western Sierra Bancorp. (1)                  |   |
|   |   |                                                                                                                             |   |
| 10.49  |   | Stock Option Agreement dated December 31, 2002 between Ms.  Barbara Cook and Western Sierra Bancorp. (1)                    |   |
|   |   |                                                                                                                             |   |
| 10.50  |   | Stock Option Agreement dated December 31, 2002 between Mr.  William Fisher and Western Sierra Bancorp. (1)                  |   |
|   |   |                                                                                                                             |   |
| 10.51  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Howard Jahn and Western Sierra Bancorp. (1)                     |   |
|   |   |                                                                                                                             |   |
| 10.52  |   | Stock Option Agreement dated December 31, 2002 between Mr. Alan  Kleinert and Western Sierra Bancorp. (1)                   |   |
|   |   |                                                                                                                             |   |
| 10.53  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Thomas Manz and Western Sierra Bancorp. (1)                     |   |
|   |   |                                                                                                                             |   |
| 10.54  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Harold Prescott and Western Sierra Bancorp. (1)                 |   |
|   |   |                                                                                                                             |   |
| 10.55  |   | Stock Option Agreement dated December 31, 2002 between Mr.  Matthew Bruno Sr. and Western Sierra Bancorp. (1)               |   |
|   |   |                                                                                                                             |   |
| 10.56  |   | Stock Option Agreement dated December 31, 2002 between Mr. Lary  Davis and Western Sierra Bancorp. (1)                      |   |
|   |   |                                                                                                                             |   |
| 10.57  |   | Stock Option Agreement dated December 31, 2002 between Mr.  William Eames and Western Sierra Bancorp. (1)                   |   |
|   |   |                                                                                                                             |   |
| 10.58  |   | Executive Salary Continuation Agreement dated June 22, 2002,  between Mr. Fred Rowden and Central California Bank. (1)      |   |
|   |   |                                                                                                                             |   |
| 10.59  |   | Executive Salary Continuation Agreement dated June 1, 2002,  between Mr. Phillip Wood and Western Sierra National Bank. (1) |   |
|   |   |                                                                                                                             |   |
| 10.60  |   | Executive Salary Continuation Agreement dated June 25, 2002,  between Mr. Doug Nordell and Roseville 1st National Bank. (1) |   |
|   |   |                                                                                                                             |   |
| 10.61  |   | Stock Option Agreement dated July 1, 2003 between Mr. Charles  Bacchi and Western Sierra Bancorp. (2)                       |   |
|   |   |                                                                                                                             |   |
| 10.62  |   | Stock Option Agreement dated July 1, 2003 between Mr. Matthew  Bruno Sr. and Western Sierra Bancorp. (2)                    |   |

 

32

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| 10.63  |   | Stock Option Agreement dated July 1, 2003 between Mr. Lary Davis  and Western Sierra Bancorp. (2)                                                                                                                                                                                                    |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.64  |   | Stock Option Agreement dated July 1, 2003 between Mr. William  Fisher and Western Sierra Bancorp. (2)                                                                                                                                                                                                |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.65  |   | Stock Option Agreement dated December 31, 2002 between Mr.  William Fisher and Western Sierra Bancorp. (2)                                                                                                                                                                                           |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.66  |   | Stock Option Agreement dated July 1, 2003 between Mr. Howard  Jahn and Western Sierra Bancorp. (2)                                                                                                                                                                                                   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.67  |   | Stock Option Agreement dated July 1, 2003 between Mr. Alan  Kleinert and Western Sierra Bancorp. (2)                                                                                                                                                                                                 |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.68  |   | Stock Option Agreement dated July 1, 2003 between Mr. Thomas  Manz and Western Sierra Bancorp. (2)                                                                                                                                                                                                   |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.69  |   | Stock Option Agreement dated July 1, 2003 between Mr. Harold  Prescott and Western Sierra Bancorp. (2)                                                                                                                                                                                               |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.70  |   | Stock Option Agreement dated July 15, 2003 between Mr. Kirk  Dowdell and Western Sierra Bancorp. (2)                                                                                                                                                                                                 |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.71  |   | Agreement and Plan of Reorganization by and between the Western and  Auburn Community Bank dated as of August 20, 2003 is attached as  Appendix A to the proxy statement-prospectus contained in the S-4  Registration Statement file #333-109833 and is incorporated herein by this  reference. (2) |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.72  |   | Contract between Woodbury Financial Services, Inc. and Western Sierra  National Bank dated July 22, 2003. (2)                                                                                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.73  |   | Summary of financial terms for Western Sierra Statutory Trusts III,  and IV. (2)                                                                                                                                                                                                                          |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.74  |   | Stock Option Agreement dated January 1, 2004 between Mr. Howard  Jahn and Western Sierra Bancorp. (3)                                                                                                                                                                                                |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.75  |   | Stock Option Agreement dated January 1, 2004 between Mr. Charles  Bacchi and Western Sierra Bancorp. (3)                                                                                                                                                                                             |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.76  |   | Stock Option Agreement dated January 1, 2004 between Ms. Barbara  Cook and Western Sierra Bancorp. (3)                                                                                                                                                                                               |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.77  |   | Stock Option Agreement dated January 1, 2004 between Mr. William  Fisher and Western Sierra Bancorp. (3)                                                                                                                                                                                             |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.78  |   | Stock Option Agreement dated January 1, 2004 between Mr. Thomas  Manz and Western Sierra Bancorp. (3)                                                                                                                                                                                                |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.79  |   | Stock Option Agreements dated January 1, 2004 between Mr.  Matthew Bruno Sr. and Western Sierra Bancorp (two identical agreements both  represented by exhibit 10.79). (3)                                                                                                                           |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.80  |   | Stock Option Agreement dated January 1, 2004 between Mr. Lary  Davis and Western Sierra Bancorp. (3)                                                                                                                                                                                                 |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.81  |   | Stock Option Agreement dated January 1, 2004 between Mr. Lary  Davis and Western Sierra Bancorp. (3)                                                                                                                                                                                                 |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.82  |   | Stock Option Agreements dated January 1, 2004 between Mr.  William Eames and Western Sierra Bancorp (two identical agreements both  represented by exhibit 10.82). (3)                                                                                                                               |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.83  |   | Stock Option Agreement dated January 1, 2004 between Ms. Lori  Warden and Western Sierra Bancorp. (3)                                                                                                                                                                                                |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.84  |   | Stock Option Agreement dated January 1, 2004 between Mr. Alan  Kleinert and Western Sierra Bancorp. (3)                                                                                                                                                                                              |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.85  |   | Stock Option Agreement dated January 1, 2004 between Mr. Harold  Prescott and Western Sierra Bancorp. (3)                                                                                                                                                                                            |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.86  |   | Severance Benefits Agreement dated January 16, 2004 between Mr.  Kirk Dowdell and Western Sierra Bancorp. (3)                                                                                                                                                                                        |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.87  |   | Severance Benefits Agreement dated February 10, 2004 between Mr.  Anthony Gould and Western Sierra Bancorp. (3)                                                                                                                                                                                      |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.88  |   | Stock Option Agreement dated March 25, 2004 between Mr. Kirk  Dowdell and Western Sierra Bancorp.                                                                                                                                                                                                    |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.89  |   | Stock Option Agreement dated March 25, 2004 between Mr. Jack  Briner and Western Sierra Bancorp.                                                                                                                                                                                                     |   |
|   |   |                                                                                                                                                                                                                                                                                                      |   |
| 10.90  |   | Stock Option Agreement dated March 25, 2004 between Mr. Doug  Nordell and Western Sierra Bancorp.                                                                                                                                                                                                    |   |

 

33

----

 
| 10.91  |   | Stock Option Agreement dated March 25, 2004 between Mr. Wayne  Koonce and Western Sierra Bancorp.                                                                               |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                 |   |
| 10.92  |   | Western Sierra Bancorp 2004 Stock Option Plan is included as an  exhibit in the Registrant’s Definitive Proxy Statement for 2004 and is  incorporated herein by this reference. |   |
|   |   |                                                                                                                                                                                 |   |
| 11.1   |   | Statement re: Computation of earnings per share is included in Note 3  to the financial statements.                                                                                  |   |
|   |   |                                                                                                                                                                                 |   |
| 31.1   |   | Section 302 Certification by Anthony J. Gould                                                                                                                                   |   |
|   |   |                                                                                                                                                                                 |   |
| 31.2   |   | Section 302 Certification by Gary D. Gall                                                                                                                                       |   |
|   |   |                                                                                                                                                                                 |   |
| 32.1   |   | Section 906 Certification by Anthony J. Gould.                                                                                                                                  |   |
|   |   |                                                                                                                                                                                 |   |
| 32.2   |   | Section 906 Certification by Gary D. Gall.                                                                                                                                      |   |

 

----

(1) includedas an exhibit to the Registrant’s 10-Q for March 31, 2003, which isincorporated by this reference herein.

(2) includedas an exhibit to the Registrant’s 10-Q for September 30, 2003, which isincorporated by this reference herein.

(3) includedas an exhibit to the Registrant’s 10-Q for March 31, 2004, which isincorporated by this reference herein.

 

**(b).Reports on Form 8-K**

 
| April 21,  2004: |   | Press  Release results for the  1st quarter of 2004                                                        |
|-----------------------|--------|-----------------------------------------------------------------------------------------------------------------|
| May 5, 2004:          |   | Slide  presentation for D.A. Davidson & Co. Financial Services Conference  and Annual Shareholders meeting. |

 

34

----

 

**SIGNATURES**

 

Followingthe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
| **WESTERN SIERRA BANCORP**(Registrant) |   |                                                               |
|----------------------------------------|--------|--------------------------------------------------------------------|
|                                   |   |                                                               |
| Date: August 6, 2004              |   |                                                               |
|                                   |   | /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* |   |
|                                        |        |                                                                    |  |  |

 

35

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