**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, 2003**                                                                                                                                                  |
|                                                                                                                                                                                                   |
| **OR**                                                                                                                                                                                                 |
|                                                                                                                                                                                                   |
| **o**                                                                                                                                                                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                   |                                                                                          |
| **For the transition period from                 to               ** |

 

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

 

**WESTERNSIERRA BANCORP**

(Exactname of Registrant as specified in its charter)

 

| **California**                                                  |   | **68-0390121**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |   | (I.R.S.  Employer Identification No.) |
|                                                            |   |                                  |
| **4080 Plaza Goldorado Circle****Cameron Park,  California**    |   | **95682**                             |
| (Address  of principal executive offices)                       |   | (Zip  code)                           |

 

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

 

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

 

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

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

 

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

 

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

 

As of August 7, 2003 there wereapproximately 4,600,760 shares outstanding of the Registrant’s common stock. 

 

 

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**WESTERN SIERRA BANCORP & SUBSIDIARIES**

**Index to Form 10-Q**

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

 

2

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**PART I.FINANCIAL INFORMATION**

 

**Western SierraBancorp and SubsidiariesUnaudited Consolidated Balance Sheet**(dollars in thousands, except number ofshares)

 
|                                                                                                                     |   | **June  30,  2003** |       | **December  31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
| **ASSETS:**                                                                                                              |   |                | ** ** |                    | ** ** |
| Cash and due from banks                                                                                                  |   | $                   | 33,724     |                    | $          | 29,064 |   |
| Federal funds sold                                                                                                       |   | 23,520              |       | 7,900                   |       |
| Cash and cash equivalents                                                                                                |   | 57,244              |       | 36,964                  |       |
|                                                                                                                     |   |                |       |                    |       |
| Interest-bearing deposits                                                                                                |   | 1,090               |       | 1,784                   |       |
| Loans held for sale                                                                                                      |   | 5,134               |       | 4,926                   |       |
| Investment securities:                                                                                                   |   |                |       |                    |       |
| Trading                                                                                                                  |   | 21                  |       | 18                      |       |
| Available for sale (amortized cost $59,322 in 2003 and $60,018 in  2002)                                                 |   | 61,124              |       | 61,038                  |       |
| Held to maturity (market value of $5,851 in 2003 and $8,203 in 2002)                                                     |   | 5,597               |       | 8,001                   |       |
| Total investments                                                                                                        |   | 66,742              |       | 69,057                  |       |
| Portfolio loans and leases:                                                                                              |   |                |       |                    |       |
| Real estate mortgage                                                                                                     |   | 334,639             |       | 311,030                 |       |
| Real estate construction                                                                                                 |   | 146,483             |       | 124,726                 |       |
| Commercial                                                                                                               |   | 86,826              |       | 88,084                  |       |
| Agricultural                                                                                                             |   | 13,565              |       | 8,540                   |       |
| Installment                                                                                                              |   | 4,264               |       | 4,630                   |       |
| Lease financing                                                                                                          |   | 2,238               |       | 3,325                   |       |
| Total gross loans and leases                                                                                             |   | 588,015             |       | 540,335                 |       |
| Deferred loan and lease fees, net                                                                                        |   | (1,757              | )          | (1,551                  | )          |
| Allowance for loan and lease losses                                                                                      |   | (8,165              | )          | (7,113                  | )          |
| Net portfolio loans and leases                                                                                           |   | 578,093             |       | 531,671                 |       |
|                                                                                                                     |   |                |       |                    |       |
| Premises and equipment, net                                                                                              |   | 15,777              |       | 16,034                  |       |
| Other real estate                                                                                                        |   | —              |       | 489                     |       |
| Goodwill and other intangible assets                                                                                     |   | 5,028               |       | 4,364                   |       |
| Other assets                                                                                                             |   | 19,535              |       | 12,499                  |       |
| Total Assets                                                                                                             |   | $                   | 748,643    |                    | $          | 677,788 |   |
|                                                                                                                     |   |                |       |                    |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY:**                                                                           |   |                |       |                    |       |
| Non-interest bearing deposits                                                                                            |   | $                   | 163,203    |                    | $          | 162,108 |   |
| Interest bearing deposits:                                                                                               |   |                |       |                    |       |
| NOW, money market and savings                                                                                            |   | 194,612             |       | 179,624                 |       |
| Time, over $100,000                                                                                                      |   | 153,549             |       | 124,020                 |       |
| Other time                                                                                                               |   | 143,039             |       | 123,620                 |       |
| Total deposits                                                                                                           |   | 654,403             |       | 589,373                 |       |
|                                                                                                                     |   |                |       |                    |       |
| Borrowed funds                                                                                                           |   | 14,000              |       | 14,500                  |       |
| Mandatorily redeemable cumulative trust preferred securities                                                             |   | 16,000              |       | 16,000                  |       |
| Other liabilities                                                                                                        |   | 4,821               |       | 3,576                   |       |
| Total liabilities                                                                                                        |   | 689,224             |       | 623,449                 |       |
|                                                                                                                     |   |                |       |                    |       |
| Shareholders’ equity:                                                                                               |   |                |       |                    |       |
| Preferred stock- no par value; 10,000,000 shares authorized; none  issued                                                |   | —              |       | —                  |       |
| Common stock- no par value; 10,000,000  shares authorized; 4,197,042  shares issued in 2003 and 4,184,188 shares in 2002 |   | 31,102              |       | 30,958                  |       |
| Retained earnings                                                                                                        |   | 27,462              |       | 22,712                  |       |
| Unearned ESOP shares                                                                                                     |   | (325                | )          | —                  |       |
| Accumulated other comprehensive income                                                                                   |   | 1,180               |       | 669                     |       |
| Total shareholders’ equity                                                                                          |   | 59,419              |       | 54,339                  |       |
| Total liabilities and shareholders’ equity                                                                          |   | $                   | 748,643    |                    | $          | 677,788 |   |

 

Seenotes to consolidated financial statements.

 

3

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**WesternSierra Bancorp and SubsidiariesConsolidated Statements of Income**(dollars in thousands,except per share data)

 
|                                                          |   | **Three Months Ended** |   | **Six Months Ended** |   |
|---------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
| **(Unaudited)**                                               |   | **June 30,  2003**     |   | **June 30,  2002**   |   | **June 30,  2003** |   | **June 30,  2002** |   |
| Interest income:                                              |   |                   |   |                 |   |   |   |   |   |
| Interest and fees on loans                                    |   | $                      | 10,046 |                 | $      | 8,679 |   | $ | 19,798 |   | $ | 16,124 |   |
| Interest on investment securities:                            |   |                   |   |                 |   |   |   |   |   |
| Taxable                                                       |   | 378                    |   | 585                  |   | 779 |   | 1,153 |   |
| Exempt from federal taxes                                     |   | 368                    |   | 363                  |   | 728 |   | 725 |   |
| Interest on Fed funds sold                                    |   | 128                    |   | 93                   |   | 170 |   | 146 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Total interest income                                         |   | 10,921                 |   | 9,720                |   | 21,475 |   | 18,148 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Interest expense:                                             |   |                   |   |                 |   |   |   |   |   |
| Interest on deposits                                          |   | 2,047                  |   | 2,148                |   | 4,046 |   | 4,187 |   |
| Interest on borrowed funds                                    |   | 282                    |   | 331                  |   | 553 |   | 593 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Total interest expense                                        |   | 2,328                  |   | 2,479                |   | 4,599 |   | 4,779 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Net interest income                                           |   | 8,592                  |   | 7,241                |   | 16,876 |   | 13,368 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Provision for loan and lease losses                           |   | 530                    |   | 525                  |   | 1,055 |   | 925 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Net interest income after provision for loan and lease losses |   | 8,062                  |   | 6,716                |   | 15,821 |   | 12,443 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Non-interest income:                                          |   |                   |   |                 |   |   |   |   |   |
| Service charges and fees                                      |   | 875                    |   | 706                  |   | 1,712 |   | 1,326 |   |
| Net gain on sale and packaging of residential mortgage and    |   |                   |   |                 |   |   |   |   |   |
| government-guaranteed commercial loans                        |   | 1,231                  |   | 854                  |   | 2,335 |   | 1,613 |   |
| Gain (loss) on sale of investment securities                  |   | —                 |   | (4                   | )      | — |   | (5 | ) |
| Other income                                                  |   | 154                    |   | 130                  |   | 268 |   | 242 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Total non-interest income                                     |   | 2,259                  |   | 1,686                |   | 4,314 |   | 3,176 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Other expenses:                                               |   |                   |   |                 |   |   |   |   |   |
| Salaries and benefits                                         |   | 3,434                  |   | 2,969                |   | 6,851 |   | 5,510 |   |
| Occupancy and equipment                                       |   | 1,154                  |   | 848                  |   | 2,206 |   | 1,551 |   |
| Other expenses                                                |   | 1,789                  |   | 1,813                |   | 3,434 |   | 3,212 |   |
| Amortization of core deposits and other intangibles           |   | 62                     |   | 62                   |   | 123 |   | 76 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Total other expenses                                          |   | 6,438                  |   | 5,692                |   | 12,613 |   | 10,348 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Income before income tax                                      |   | 3,883                  |   | 2,710                |   | 7,522 |   | 5,271 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Income taxes                                                  |   | 1,421                  |   | 751                  |   | 2,772 |   | 1,497 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Net income                                                    |   | $                      | 2,462  |                 | $      | 1,959 |   | $ | 4,750 |   | $ | 3,774 |   |
|                                                          |   |                   |   |                 |   |   |   |   |   |
| Basic earnings per share                                      |   | $                      | 0.59   |                 | $      | 0.47 |   | $ | 1.13 |   | $ | 0.93 |   |
| Fully diluted earnings per share                              |   | $                      | 0.56   |                 | $      | 0.45 |   | $ | 1.08 |   | $ | 0.90 |   |

 

Seenotes to consolidated financial statements.

 

4

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**Western SierraBancorp and SubsidiariesUnaudited Consolidated Statementof Cash Flows**(dollars in thousands)

 
|                                                                               |   | **Six Months Ended** |   |
|------------------------------------------------------------------------------------|--------|----------------------|--------|
|                                                                               |   | **June 30,  2003**   |   | **June 30,  2002** |   |
| Cash flows from operating activities:                                              |   |                 |   |   |   |
| Net income                                                                         |   | $                    | 4,750  |   | $ | 3,774 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                 |   |   |   |
| Provision for loan and lease losses                                                |   | 1,055                |   | 925 |   |
| Depreciation and amortization                                                      |   | 1,099                |   | 576 |   |
| Deferred loan and lease origination fees, net                                      |   | 206                  |   | 223 |   |
| Amortization of investment security premiums, net of accretion                     |   | 219                  |   | — |   |
| Loss on sale of available-for-sale  investment securities                          |   | —               |   | (5 | ) |
| Increase in trading securities                                                     |   | (3                   | )      | (3 | ) |
| Loss on sale of premises and equipment                                             |   | —               |   | 48 |   |
| Gain on sale of other real estate                                                  |   | 3                    |   | — |   |
| Increase in cash surrender value of life insurance policies                        |   | (129                 | )      | — |   |
| Compensation cost associated with the Bank’s ESOP                             |   | —               |   | 50 |   |
| (Increase) decrease in loans held for sale                                         |   | (208                 | )      | 2,563 |   |
| Increase in other assets                                                           |   | (965                 | )      | (2,431 | ) |
| Increase in other liabilities                                                      |   | 920                  |   | 924 |   |
| Net cash provided by operating activities                                          |   | 6,947                |   | 6,644 |   |
|                                                                               |   |                 |   |   |   |
| Cash flows from investing activities:                                              |   |                 |   |   |   |
| Proceeds from sale and call of available-for-sale investment securities            |   | —               |   | 1,200 |   |
| Proceeds from called held-to-maturity investment securities                        |   | 1,500                |   | 93 |   |
| Proceeds from matured available-for-sale investment securities                     |   | 500                  |   | 1,485 |   |
| Proceeds from matured held-to-maturity investment securities                       |   | 500                  |   | 500 |   |
| Purchases of available-for-sale investment securities                              |   | (5,247               | )      | (1,636 | ) |
| Purchases of held-to-maturity investment securities                                |   | —               |   | (436 | ) |
| Principal repayments received from available-for-sale mortgage-backed  securities  |   | 5,255                |   | 4,185 |   |
| Principal repayments received from held-to-maturity mortgage-backed  securities    |   | 371                  |   | 908 |   |
| Net decrease in interest-bearing deposits in banks                                 |   | 694                  |   | 495 |   |
| Proceeds from sale of OREO                                                         |   | 137                  |   | — |   |
| Net increase in loans and leases                                                   |   | (47,334              | )      | (42,968 | ) |
| Proceeds from the sale of premises and equipment                                   |   | —               |   | 50 |   |
| Purchases of premises and equipment                                                |   | (719                 | )      | (2,634 | ) |
| Purchase of life insurance policies at cash value                                  |   | (7,000               | )      | — |   |
| Net cash used in investing activities                                              |   | (51,342              | )      | (38,758 | ) |
|                                                                               |   |                 |   |   |   |
| Cash flows from financing activities:                                              |   |                 |   |   |   |
| Net increase in demand, interest-bearing and savings deposits                      |   | $                    | 16,083 |   | 40,961 |   |
| Net increase in time deposits                                                      |   | 48,948               |   | 17,348 |   |
| Net (decrease) increase in short-term borrowings                                   |   | (500                 | )      | 9,650 |   |
| Borrowing (repayment) of ESOP loan                                                 |   | 325                  |   | (50 | ) |
| Purchase of unearned ESOP shares                                                   |   | (325                 | )      | — |   |
| Redemption of fractional shares                                                    |   | —               |   | (30 | ) |
| Acquisition of Central California Bank, net of cash acquired                       |   | —               |   | 9,234 |   |
| Proceeds from the exercise of stock options                                        |   | 144                  |   | 186 |   |
| Net cash provided by financing activities                                          |   | 64,675               |   | 77,299 |   |
| Increase in cash and cash equivalents                                              |   | 20,280               |   | 45,185 |   |
| Cash and cash equivalents at beginning of year                                     |   | 36,964               |   | 23,038 |   |
| Cash and cash equivalents at end of period                                         |   | $                    | 57,244 |   | $ | 68,223 |   |
|                                                                               |   |                 |   |   |   |
| Non-cash investing activities:                                                     |   |                 |   |   |   |
| Net change in unrealized gain on available-for-sale investment  securities         |   | $                    | 782    |   | $ | 701 |   |
|                                                                               |   |                 |   |   |   |
| Supplemental schedules related to  acquisition:                                    |   |                 |   |   |   |
| Acquisition of Central California Bank  (CCB) (Note 5):                            |   |                 |   |   |   |
| Deposits assumed                                                                   |   |                 |   | $ | 61,469 |   |
| Other liabilities                                                                  |   |                 |   | 385 |   |
| Interest-bearing deposits in banks                                                 |   |                 |   | (2,675 | ) |
| Held-to-maturity investment securities                                             |   |                 |   | (3,032 | ) |
| Loans, net                                                                         |   |                 |   | (46,489 | ) |
| Premises and equipment                                                             |   |                 |   | (280 | ) |
| Other assets                                                                       |   |                 |   | (895 | ) |
| Intangibles acquired                                                               |   |                 |   | (4,247 | ) |
| Stock issued                                                                       |   |                 |   | 4,998 |   |
|                                                                               |   |                 |   |   |   |
| Cash acquired, net of cash paid to CCB  shareholders                               |   |                 |   | $ | 9,234 |   |

 

Seenotes to consolidated financial statements.

 

5

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Basis of Presentation**

 

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

 

The condensed consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, Western Sierra National Bank (WSNB) and its subsidiary WSNBInvestment Trust (a Real Estate Investment Trust (“REIT”), Lake Community Bank (LCB),Central California Bank (CCB), Western Sierra Statutory Trust I and WesternSierra Statutory Trust II. All significant inter-company balances andtransactions have been eliminated. Operating results for the three and sixmonths ended June 30, 2003 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2003. Certain amounts inthe consolidated financial statements for the year ended December 31, 2002and the three and six month periods ended June 30, 2002 may have beenreclassified to conform to the presentation of the consolidated financialstatements in 2003.

 

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

 

**2.  Stock-based Compensation**

 

At June 30, 2003, the Company has fourstock-based compensation plans.  TheCompany accounts for these plans under the recognition and measurementprinciples of APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations.  Nostock-based compensation cost is reflected in net income, as all optionsgranted under these plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  In accordance with Financial Accounting Standards Board (“FASB”)No. 148, *Accounting for Stock-BasedCompensation – Transition and Disclosure, an Amendment of*FASB*No. 12,* the following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*, to stock-based compensation.

 

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

 
|                                                                                                                                           |   | **Three Months Ended,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                           |   | **June 30,  2003**      |   | **June 30,  2002** |   |
|                                                                                                                                           |   |                    |   |   |   |
| Net earnings as reported                                                                                                                       |   | $                       | 2,462  |   | $ | 1,959 |   |
| Deduct:  Total stock-based compensation expense  determined under the fair value based  method for all awards, net of related tax effects |   | (208                    | )      | (180 | ) |
|                                                                                                                                           |   |                    |   |   |   |
| Pro forma net income                                                                                                                           |   | $                       | 2,254  |   | $ | 1,779 |   |
|                                                                                                                                           |   |                    |   |   |   |
| Basic earnings per share - as  reported                                                                                                        |   | $                       | 0.59   |   | $ | 0.47 |   |
| Basic earnings per share - pro  forma                                                                                                          |   | $                       | 0.54   |   | $ | 0.43 |   |
|                                                                                                                                           |   |                    |   |   |   |
| Diluted earnings per share - as  reported                                                                                                      |   | $                       | 0.56   |   | $ | 0.45 |   |
| Diluted earnings per share - pro forma                                                                                                         |   | $                       | 0.52   |   | $ | 0.42 |   |

 

6

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|                                                                                                                                           |   | **Six Months Ended,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                                                                           |   | **June 30,  2003**    |   | **June 30,  2002** |   |
|                                                                                                                                           |   |                  |   |   |   |
| Net earnings as reported                                                                                                                       |   | $                     | 4,750  |   | $ | 3,775 |   |
| Deduct:  Total stock-based compensation expense  determined under the fair value based  method for all awards, net of related tax effects |   | (469                  | )      | (316 | ) |
|                                                                                                                                           |   |                  |   |   |   |
| Pro forma net income                                                                                                                           |   | $                     | 4,281  |   | $ | 3,458 |   |
|                                                                                                                                           |   |                  |   |   |   |
| Basic earnings per share - as  reported                                                                                                        |   | $                     | 1.13   |   | $ | 0.93 |   |
| Basic earnings per share - pro  forma                                                                                                          |   | $                     | 1.02   |   | $ | 0.86 |   |
|                                                                                                                                           |   |                  |   |   |   |
| Diluted earnings per share - as  reported                                                                                                      |   | $                     | 1.08   |   | $ | 0.90 |   |
| Diluted earnings per share - pro forma                                                                                                         |   | $                     | 0.99   |   | $ | 0.85 |   |

 

**3. Earnings per Share**

 

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

 
|                                                            |   | **Three Months Ended** |   | **Six Months Ended** |   |
|-----------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                                            |   | **June 30,  2003**     |   | **June 30,  2002**   |   | **June 30,  2003** |   | **June 30,  2002** |   |
| Basic EPS  Computation:                                         |   |                   |   |                 |   |   |   |   |   |
| Numerator—net income                                       |   | $                      | 2,462  |                 | $      | 1,959 |   | $ | 4,750 |   | $ | 3,774 |   |
| Denominator—weighted average number of  shares outstanding |   | 4,194,540              |   | 4,170,350            |   | 4,192,519 |   | 4,038,265 |   |
| Basic earnings per share                                        |   | $                      | 0.59   |                 | $      | 0.47 |   | $ | 1.13 |   | $ | 0.93 |   |
|                                                            |   |                   |   |                 |   |   |   |   |   |
| Diluted EPS  Computation:                                       |   |                   |   |                 |   |   |   |   |   |
| Numerator—net income                                       |   | $                      | 2,462  |                 | $      | 1,959 |   | $ | 4,750 |   | $ | 3,774 |   |
| Denominator—weighted average number of  shares outstanding |   | 4,194,540              |   | 4,170,350            |   | 4,192,519 |   | 4,038,265 |   |
| Effect of dilutive stock options                                |   | 206,518                |   | 162,625              |   | 199,084 |   | 157,705 |   |
|                                                            |   | 4,401,058              |   | 4,332,975            |   | 4,391,603 |   | 4,195,970 |   |
| Diluted earnings per share                                      |   | $                      | 0.56   |                 | $      | 0.45 |   | $ | 1.08 |   | $ | 0.90 |   |

 

7

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**4. Stock Repurchase Plan**

 

On May 29, 2002, the Companyannounced that the Board of Directors approved a plan to repurchase up to 5%(or approximately 200,000 shares) of the Company’s common stock. The Companyhas purchased 5,000 shares at an average price of approximately $21.00 underthe plan through June 30, 2003.

 

On October 23, 2001, theCompany announced that the Board of Directors approved a plan to repurchase upto 5% (or approximately 165,000 shares) of the Company’s common stock effectiveNovember 20, 2001 through May 31, 2002. The Company did not repurchase anyshares under this plan.

 

**5.  Acquisition ofCentral California Bank**

 

OnApril 1, 2002, pursuant to the Agreement and Plan of Reorganization datedNovember 15, 2001, Central California Bank (“CCB”) was acquired by theCompany through a merger and tax-free reorganization whereby CCB became awholly-owned subsidiary of the Company. As of the date of acquistion, CCB had $67.7 million in totalassets,  $46.7 million in netloans, and $62.9 million in deposits.

 

The excess ofthe purchase price over the estimated fair value of the net assets acquired was$2.4 million, which was recorded as goodwill. Based upon an initial evaluationas of October 1, 2002, no impairment exists. Assets acquired also included acore deposit intangible of $1.9 million that is being amortized using thestraight-line method over a period of ten years.  The accompanying unaudited consolidated financial statementsinclude the accounts of CCB since April 1, 2002

 

**6. Recent Accounting Pronouncements**

 

In December2002, the FASB issued SFAS No. 148, Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASBStatement No. 123.  This Statementamends SFAS No. 123, Accounting for Stock-Based Compensation, to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based compensation.  In addition, this Statement amends thedisclosure requirements of SFAS No. 123 to require prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based compensation and the effect of the method used on reportedresults.  The transition guidance andannual disclosure provisions of SFAS No.  148 are effective for fiscalyears ending after December 15, 2002. The interim disclosure provisions are effective for financial reportingcontaining financial statements for interim periods beginning afterDecember 15, 2002.  Because the Companyaccounts for the compensation cost associated with its stock option plan underthe intrinsic value method, the alternative methods of transition will notapply to the Company.  The additionaldisclosure requirements of the Statement for the interim periods are includedin these financial statements.  Inmanagement’s opinion, the adoption of this Statement did not have a materialimpact on the Company’s financial position or results of operations.

 

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

 

In January2003, the Financial Accounting Standards Board (FASB) issued FASBInterpretation *No. 46, Consolidation ofVariable Interest Entities*(FIN 46).  This interpretation of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*,addresses consolidation by business enterprises of variable interest entitiesthat posses certain characteristics. FIN 46 requires that if a business enterprise has a controllingfinancial interest in a variable interest entity, the assets, liabilities, andresults of the activities of the variable interest entity must be included inthe consolidated financial statements with those of the business enterprise.  FIN 46 applies immediately to variableinterest entities in which an enterprise obtains an interest after January 31,2003.  FIN 46 also applies in the firstfiscal year or interim period beginning after June 15, 2003 to variable interestentities in which an enterprise holds a variable interest that it acquiredbefore February 15, 2003. 

 

The Companyadopted FIN 46 on July 1, 2003.  In itscurrent form, FIN 46 may require the Company to de-consolidate its investmentin Western Sierra Statutory Trusts I and II (the “Trusts”) in future financialstatements. The potential de-consolidation of subsidiary trusts of bank holdingcompanies formed in connection with the issuance of trust preferred securities,like the Trusts, appears to be an unintended consequence of FIN 46.  It is currently unknown if, or when, theFASB will address this issue.  In July2003, the Board of Governors of the Federal Reserve Systems issued asupervisory letter instructing bank holding companies to continue to includethe trust preferred securities in their Tier I capital for regulatory capitalpurposes until notice is given to the contrary.  The Federal Reserve intends to review the regulatory implicationsof any accounting treatment changes and, if necessary or warranted, providefurther appropriate guidance. If the current regulatory capital treatment fortrust preferred securities is not grandfathered, the Company’s regulatorycapital ratios would be negatively impacted and the Company may be required toobtain additional capital.  Thisparagraph contains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act. See "Forward-Looking Statements" onpage 10.

 

In May 2003,the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.  This Statement establishes standards for howan issuer classifies and measures certain financial instruments with characteristicsof both liabilities and equity.  Itrequires that an issuer classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances).  This Statement is effective for financialinstruments entered into or modified by the Company after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  The Company haspreviously accounted for its mandatorily redeemable cumulative trust preferredsecurities in a manner consistent with the Statement and, in management’sopinion, adoption of this Statement did not have a material effect on theCompany’s consolidated financial position or results of operations.

 

**7. Comprehensive Income**

 

Comprehensiveincome includes net income and other comprehensive income.  The Company’s only source of other comprehensiveincome is derived from unrealized gains and losses on investment securitiesavailable-for-sale.  Reclassification 

 

8

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adjustments resulting from gains or losses oninvestment securities that were realized and included in net income of thecurrent period that also had been included in other comprehensive income asunrealized holding gains or losses in the period in which they arose areexcluded from comprehensive income of the current period.  The Company’s total comprehensive income wasas follows:

 
|                                            |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|-------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(In  thousands)**                             |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                            |   |                             |   |                           |   |   |   |   |   |
| Net income                                      |   | $                                | 2,462  |                           | $      | 1,959 |   | $ | 4,750 |   | $ | 3,774 |   |
| Other comprehensive income:                     |   |                             |   |                           |   |   |   |   |   |
| Holding gains arising during period, net of tax |   | 245                              |   | 589                            |   | 511 |   | 461 |   |
| Re-classification adjustment, net of tax        |   | —                           |   | (2                             | )      | — |   | (3 | ) |
| Total other comprehensive income                |   | 245                              |   | 587                            |   | 511 |   | 458 |   |
| Total comprehensive income                      |   | $                                | 2,707  |                           | $      | 2,546 |   | $ | 5,261 |   | $ | 4,232 |   |

 

**8.  SubsequentEvents**

 

**Acquisition**

 

On July 11, 2003, pursuant to the Agreement and Planof Reorganization dated March 12, 2003, Central Sierra Bank (“Central Sierra”)was acquired by Western Sierra Bancorp (“WSBA”) through a merger and willoperate as a DBA of Central California Bank.

 

As of July 11, 2003, CentralSierra had total assets of $148.1 million, comprised of  $12.8 million in cash and due frombanks, $49.4 million in federal funds sold, interest-bearing deposits atother banks and investment securities, $82.7 million in net loans, and$3.2 million in other assets. Total liabilities at December 31, 2002amounted to $72.0 million, including $71.5 million in deposits.

 

The total consideration tobe paid to Central Sierra shareholders amounts to approximately $23.5 million,which will be comprised of approximately $10,700,000 in cash and 404,250 shares(as adjusted for the 5% stock dividend declared July 14, 2003) of WSBA’s CommonStock valued at approximately $12,800,000. The funds required to pay the cash portion ofthe consideration were obtained by WSBA through cash on hand and an advance of$3.3 million against an existing $7 million line of credit through Wells FargoBank.

 

**Stock Dividend**

 

In addition, on July 16,2003 the Company announced a 5% stock dividend. Thedividend is payable on August 08, 2003, to shareholders ofrecord on July 21, 2003.  Alloutstanding shares and earnings per share data throughout this 10-Q reportreflect the impact of this dividend.

 

9

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

 

**Private securities litigation reform act safe harborstatement**

 

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

 

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

 

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

 

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

 

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

 

5.               Asset/Liability matching risks and liquidityrisks.

 

6.               Volatility and devaluation in the securitiesmarkets.

 

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

 

The following sectionsdiscuss significant changes and trends in financial condition, capitalresources and liquidity of the Company from December 31, 2002 to June 30,2003. Also discussed are significant trends and changes in the Company’sresults of operations for the three months ended June 30, 2003 compared to thesame periods in 2002. The consolidated financial statements and related notesappearing elsewhere in this report are condensed and unaudited.

 

10

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**General**

 

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

 

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

 

In April 2002, the Companyacquired Central California Bank for $3.7 million in cash and 252,181 shares ofthe Company’s stock.  This transactionwas accounted for under purchase accounting, which resulted in a preliminarypurchase price allocation  resulting inintangible assets totaling $2.4 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.

 

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

 

Western SierraNational Bank was organized under national banking laws and commencedoperations as a national bank on January 4, 1984. WesternSierra National Bank is a member of the Federal Reserve System and the FDICinsures its deposits to the maximum amount permitted by law. Western SierraNational Bank’s head office is located at 4080 Plaza Goldorado Circle, CameronPark, and its branch offices are located at 4011 Plaza Goldorado Circle, CameronPark, 2661 Sanders Drive, Pollock Pines, 3970 J Missouri Flat Road,Placerville, 1450 Broadway, Placerville, 3880 El Dorado Hills Blvd., El DoradoHills, 571 5th Street, Lincoln, 1545 River Park Dr. #101 & #200,Sacramento, 1801 Douglas Blvd., Roseville, 6951 Douglas Blvd., Granite Bay,9050 Fairway Drive, Roseville, and 2779 East Bidwell, Folsom, CA.  In March 2002, Western Sierra National Bankformed 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.

 

Lake CommunityBank was incorporated as a banking corporation under the laws of the State ofCalifornia on March 9, 1984 and commenced operations as a Californiastate-chartered bank on November 15, 1984. Lake Community Bank is aninsured bank under the Federal Deposit Insurance Act and became amember of the Federal Reserve System in June 2003. Lake Community Bank engagesin the 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.

 

CentralCalifornia Bank was incorporated under the laws of the State of California onJanuary 13, 1997, and commenced operations on April 24, 1998. CentralCalifornia Bank is an insured bank under the Federal Deposit Insurance Act andbecame a  member of the Federal ReserveSystem in January 2003. Central California Bank engages in the generalcommercial banking business in Tuolumne and Stanislaus counties in the state ofCalifornia from its headquarters banking office located at 13753-A Mono Way,Sonora, CA, and its branches located at 400 E. Olive Ave, Turlock, CA, 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, and 1111 DunbarRoad, Arnold, CA.  Central CaliforniaBank does not have any affiliates or subsidiaries.

 

11

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

 

**BankingServices.** TheCompany is a locally owned and operated bank holding company, and its primaryservice area is the Northern California communities of Cameron Park, PollockPines, Placerville, El Dorado Hills, Folsom, Lincoln, Sacramento, Roseville,Granite Bay, Sonora, Twain Harte, Columbia, Lakeport, Antioch, Rocklin and thesurrounding communities. The Company’s primary business is serving the bankingneeds of these communities and its marketing strategy stresses its localownership and commitment to serve the banking needs of individuals living andworking in the Company’s primary service areas and local businesses, includingretail, professional and real estate-related activities, in those serviceareas.

 

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

 

Most of the Company’sdeposits are obtained from commercial businesses, professionals andindividuals. At June 30, 2003 there was a title company customer with $21.7million or 5.6% of total deposits at Western Sierra National Bank. There wasanother title company customer with $7.9 million or 7.4% of total deposits atLake Community Bank. There were no other customers with 5% or more of any ofthe subsidiary banks’ deposits.

 

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

 

**Employees.** At June 30, 2003, the Company and itssubsidiaries employed 250 persons on a full-time equivalent basis. The Companybelieves its employee relations are excellent.

 

**Financial Condition**

 

The Company increased totalassets from $677.8 million at December 31, 2002 to$748.6 million at June 30, 2003, an increase of $70.8 million or10.4%. The two primary components of asset growth were loans, which grew $46.4million, and cash and equivalents, which increased $20.2 million.  Asset growth was primarily funded by growthin deposits of $65 million.

 

During the first six monthsof 2003, non-interest bearing deposits were relatively flat with $1.1 millionin growth to $163.2 million at June 30, 2003. Included in non-interest deposits are local title company deposits,which have increased $2.9 million from $45.2 million at December 31, 2002 to$48.1 million at June 30, 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 2003, the Company incurredapproximately $84,000 in service fees on title company deposits orapproximately 0.25% of the average title company deposits outstanding.

 

**Results of Operations**

 

All per share results belowreflect the impact of a 5% stock dividend to be paid to shareholders of recordas of July 21, 2003 and payable on August 8, 2003.

 

The Central California Bank(“CCB”) acquisition effective April 1, 2002 was accounted for under purchaseaccounting.  Pursuant to purchaseaccounting rules, the operating results of the Company for the period endedJune 30, 2002 do not include the operational results of CCB for the quarterended March 31, 2002.

 

The Company reported netincome of $2.46 million for the three months ended June 30, 2003 (or $0.56per share, diluted) compared to $1.96 million (or $0.45 per share, diluted) for the same period in 2002. The quarterlyearnings represent an increase of $503,000 or a 26.0% increase in net incomeand a 24% increase in diluted earnings per share.

 

12

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The Company reported netincome of $4.75 million for the six months ended June 30, 2003 (or $1.08per share, diluted) compared to $3.77 million (or $0.90 per share, diluted) for the same period in 2002. The six-monthearnings represent an increase of $976,000 or a 26.0% increase in net incomeand a 20% increase in diluted earnings per share.

 

The primary factorscontributing to the increase in operating results during the three andsix-month periods ended June 30, 2003 as compared to the same periods in 2002include:

 

1.               An increase in net interest income of $1.35million or 19% in the second quarter over the same period in 2002 and $3.5million or 26% in the first six months of 2003 as compared to 2002.  The net increase in both periods is due toan overall increase in average earning assets (year-to-date increased partiallydue to the acquisition of $63 million from the CCB transaction completed inApril 2002).  In addition, averageearning assets were composed of proportionally more higher yielding loans asevidenced by an increase in the average loan to deposit ratio from 87% and  89% in the second quarter and six-monthperiod of 2002 to 90% and 91% in the second quarter and six-month period of2003.

 

2.               An increase in non-interest income, primarilyservice fees on deposit accounts and gains on the sale and packaging of residentialmortgage loans.  Non-interest incomeincreased $573,000 or 34% and $1,138,000 or 36% over the second quarter andyear-to-date totals in the previous year. Approximately 66% of the secondquarter increase and 64% of the year-to-date increase is the result of anincrease in gain on sale and packaging of mortgage loans with the remainderrelated to an increase in service charges and fees.

 

The above factors were offset in part by:

 

1.               An increase in loan and lease loss provisionsof $130,000 for the six-month period ended June 30, 2003 as compared to thesame period in 2002. Additional provisions were recorded as a result of growthin loans outstanding.  The percentage ofloan and lease loss reserves to gross loans and leases increased .07% to 1.39%at June 30, 2003 as compared to 1.32% at June 30, 2002 and 1.32% at December31, 2002.

 

2.               Total other expenses increased $746,000 or13% and $2,265,000 or 22% over the second quarter and year-to-date totals inthe previous year.  Year-to-date totalsincreased significantly as a result of the addition of Central CaliforniaBank’s operating costs, which were approximately $1.27 million in the firstquarter of 2003, that were not included in the 2002 first quarter results asthe acquisition, accounted for under purchase accounting, did not close untilApril 2002.

 

3.               The Company’s effective tax rate increased to36.6% and 36.9% in the second quarter and six-month period of 2003 as comparedto 27.7% and 28.4% in the second quarter six-month period of 2002.  The primary reason for the increase is thatmanagement has opted not to account for the tax benefit of the Real EstateInvestment Trust (“REIT”) thus far in 2003 because it is management’sassessment that certain tax-exempt income may be recharacterized as taxable in2003 through action by the California Legislature.  Management will continuously monitor developments throughout theyear and a determination could be made to recognize a tax benefit if it appearslikely that the law will remain unchanged.

 

**Return on Average Assets and Average Equity**

 

Return on average assets(“ROA”) was 1.35% and 1.34% for the second quarter and six-month period of 2003as compared to 1.30% and 1.39% for the second quarter and six-month period of2002.  Return on equity (“ROE”) was 17.09%and 16.97% for the second quarter and six-month period of 2003 as compared to17.23% and 17.67% for the second quarter and six-month period of 2002.  The six-month period ROA compressed modestlyas average assets grew at a faster rate than earnings. The modest compressionof ROE relates primarily to the $4 million in goodwill generated in the CentralCalifornia bank transaction and the resulting additional equity it generated.

 

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

 

Net interest income is the primarysource of income for the Company and represents the excess of interest and feesearned on interest-earning assets (loans, investments and Federal funds sold)over the interest paid on deposits and borrowed funds. Net interest margin isnet interest income expressed as a percentage of average earning assets.

 

For the three months endedJune 30, 2003, interest income on a tax equivalent basis increased by $1.2million to $11.1 million or 12.0% over the same period in 2002. Interestexpense on deposit accounts and borrowings decreased $151,000 or 6.1% over thesame three-month period ended June 30, 2002. Average earning assets yielded (ona fully tax equivalent basis) 6.55% versus 7.22% a year ago, further augmentedby a decrease in the cost of funds where the average cost of funds decreased to1.79% from 2.29% a year ago. Net interest income (on a tax equivalent basis)increased $1.3 million or 18.0% to $8.8 million. 

 

13

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The net interest margin decreased 24 basis points to 5.18% from 5.42%for the same three-month period a year ago.

 

For the six months endedJune 30, 2003, interest income on a tax equivalent basis increased by $3.3million to $21.9 million or 17.9% over the same period in 2002. Interest expenseon deposit accounts and borrowings decreased $181,000 or 3.8% over the samesix-month period ended June 30, 2002. Average earning assets yielded (on afully tax equivalent basis) 6.67% versus 7.31% a year ago, further augmented bya decrease in the cost of funds where the average cost of funds decreased to1.83% from 2.37% a year ago. Net interest income (on a tax equivalent basis)increased $3.5 million or 25.4% to $17.3 million. The net interest margindecreased 15 basis points to 5.27% from 5.42% for the same six-month period ayear ago.

 

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

 

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

 
|                                                    |   | **Three Months Ended** |    |
|---------------------------------------------------------|--------|------------------------|---------|
|                                                    |   | **June 30, 2003**      |    | **June 30, 2002** |   |
|                                                    |   | **Average  Balance**   |    | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
| Earning assets:                                         |   |                   |    |   |   |   |   |   |   |   |   |   |   |
| Portfolio loans                                         |   | $                      | 572,440 |   | $ | 10,061 |   | 7.05% |   | $ | 454,455 |   | $ | 8,703 |   | 7.68% |   |
| Tax exempt investment securities                        |   | 30,969                 |    | 558 |   | 7.22% |   | 30,759 |   | 550 |   | 7.17% |   |
| Taxable investment securities                           |   | 32,854                 |    | 370 |   | 4.52% |   | 42,729 |   | 565 |   | 5.30% |   |
| Federal funds sold                                      |   | 43,439                 |    | 128 |   | 1.18% |   | 22,010 |   | 93 |   | 1.69% |   |
| Interest bearing deposits in banks                      |   | 1,280                  |    | 8 |   | 2.41% |   | 1,657 |   | 20 |   | 4.84% |   |
| Average earning assets                                  |   | 680,982                |    | 11,125 |   | 6.55% |   | 551,610 |   | 9,931 |   | 7.22% |   |
| Other assets                                            |   | 60,441                 |    |   |   |   |   | 57,008 |   |   |   |   |   |
| Less ALLL                                               |   | (7,905                 | )       |   |   |   |   | (5,230 | ) |   |   |   |   |
| Average total assets                                    |   | $                      | 733,518 |   |   |   |   |   | $ | 603,388 |   |   |   |   |   |
| Interest bearing liabilities:                           |   |                   |    |   |   |   |   |   |   |   |   |   |   |
| Savings Deposits                                        |   | $                      | 192,936 |   | $ | 399 |   | 0.83% |   | $ | 173,396 |   | $ | 443 |   | 1.02% |   |
| Time deposits                                           |   | 299,093                |    | 1,648 |   | 2.21% |   | 233,263 |   | 1,705 |   | 2.93% |   |
| Other borrowings (1)                                    |   | 29,633                 |    | 282 |   | 3.82% |   | 26,663 |   | 331 |   | 4.98% |   |
| Average interest bearing liabilities                    |   | 521,662                |    | 2,328 |   | 1.79% |   | 433,322 |   | 2,479 |   | 2.29% |   |
| Non-interest bearing deposits                           |   | 147,767                |    |   |   |   |   | 120,041 |   |   |   |   |   |
| Other liabilities                                       |   | 6,345                  |    |   |   |   |   | 4,420 |   |   |   |   |   |
| Shareholders’ equity                               |   | 57,744                 |    |   |   |   |   | 45,605 |   |   |   |   |   |
| Average total liabilities and shareholders’ equity |   | $                      | 733,518 |   |   |   |   |   | $ | 603,388 |   |   |   |   |   |
| Net interest income and net interest margin             |   |                   |    | $ | 8,796 |   | 5.18% |   |   |   | $ | 7,452 |   | 5.42% |   |

 

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(1)          For the purpose of this schedule the average balance and interest on thetrust preferred securities is included in other borrowings

 

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|                                                    |   | **Six Months Ended** |    |
|---------------------------------------------------------|--------|----------------------|---------|
|                                                    |   | **June 30, 2003**    |    | **June 30, 2002** |   |
|                                                    |   | **Average  Balance** |    | **Interest** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/  Rate** |   |
| Earning assets:                                         |   |                 |    |   |   |   |   |   |   |   |   |   |   |
| Portfolio loans                                         |   | $                    | 565,799 |   | $ | 19,835 |   | 7.07% |   | $ | 421,058 |   | $ | 16,172 |   | 7.75% |   |
| Tax exempt investment securities                        |   | 30,914               |    | 1,103 |   | 7.20% |   | 30,827 |   | 1,098 |   | 7.19% |   |
| Taxable investment securities                           |   | 34,358               |    | 758 |   | 4.45% |   | 41,678 |   | 1,114 |   | 5.39% |   |
| Federal funds sold                                      |   | 29,016               |    | 170 |   | 1.18% |   | 17,407 |   | 146 |   | 1.69% |   |
| Interest bearing deposits in banks                      |   | 1,467                |    | 21 |   | 2.93% |   | 1,624 |   | 39 |   | 4.84% |   |
| Average earning assets                                  |   | 661,555              |    | 21,887 |   | 6.67% |   | 512,594 |   | 18,569 |   | 7.31% |   |
| Other assets                                            |   | 60,108               |    |   |   |   |   | 42,392 |   |   |   |   |   |
| Less ALLL                                               |   | (7,642               | )       |   |   |   |   | (5,642 | ) |   |   |   |   |
| Average total assets                                    |   | $                    | 714,020 |   |   |   |   |   | $ | 549,344 |   |   |   |   |   |
| Interest bearing liabilities:                           |   |                 |    |   |   |   |   |   |   |   |   |   |   |
| Savings Deposits                                        |   | $                    | 189,077 |   | $ | 775 |   | 0.83% |   | $ | 165,592 |   | $ | 820 |   | 1.00% |   |
| Time deposits                                           |   | 288,656              |    | 3,271 |   | 2.28% |   | 217,526 |   | 3,367 |   | 3.12% |   |
| Other borrowings (1)                                    |   | 29,427               |    | 554 |   | 3.80% |   | 23,738 |   | 593 |   | 5.04% |   |
| Average interest bearing liabilities                    |   | 507,160              |    | 4,599 |   | 1.83% |   | 406,855 |   | 4,780 |   | 2.37% |   |
| Non-interest bearing deposits                           |   | 144,316              |    |   |   |   |   | 91,323 |   |   |   |   |   |
| Other liabilities                                       |   | 6,127                |    |   |   |   |   | 8,091 |   |   |   |   |   |
| Shareholders’ equity                               |   | 56,417               |    |   |   |   |   | 43,075 |   |   |   |   |   |
| Average total liabilities and shareholders’ equity |   | $                    | 714,020 |   |   |   |   |   | $ | 549,344 |   |   |   |   |   |
| Net interest income and net interest margin             |   |                 |    | $ | 17,288 |   | 5.27% |   |   |   | $ | 13,789 |   | 5.42% |   |

 

----

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

 

15

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

 

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

 
|                                     |   | **Three Months Ended June 30, 2003 over 2002** |   |
|------------------------------------------|--------|------------------------------------------------|--------|
|                                     |   | **Volume**                                     |   | **Rate** |   | **Total** |   |
| Increase (decrease) in interest income:  |   |                                           |   |   |   |   |   |
| Portfolio loans                          |   | $                                              | 2,259  |   | $ | (901 | ) | $ | 1,358 |   |
| Investment securities, tax exempt        |   | 4                                              |   | 4 |   | 8 |   |
| Investment securities                    |   | (131                                           | )      | (64 | ) | (195 | ) |
| Federal funds sold                       |   | 91                                             |   | (56 | ) | 35 |   |
| Interest bearing deposits                |   | (5                                             | )      | (8 | ) | (12 | ) |
| Net increase (decrease)                  |   | 2,219                                          |   | (1,025 | ) | 1,194 |   |
| Increase (decrease) in interest expense: |   |                                           |   |   |   |   |   |
| Interest bearing accounts                |   | 50                                             |   | (94 | ) | (44 | ) |
| Time deposits                            |   | 481                                            |   | (539 | ) | (58 | ) |
| Other borrowings (1)                     |   | 38                                             |   | (86 | ) | (48 | ) |
| Net increase (decrease)                  |   | 569                                            |   | (719 | ) | (150 | ) |
| Total net increase (decrease)            |   | $                                              | 1,650  |   | $ | (306 | ) | $ | 1,344 |   |

 

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

 
|                                     |   | **Six Months Ended June 30, 2003 over 2002** |   |
|------------------------------------------|--------|----------------------------------------------|--------|
|                                     |   | **Volume**                                   |   | **Rate** |   | **Total** |   |
| Increase (decrease) in interest income:  |   |                                         |   |   |   |   |   |
| Portfolio loans                          |   | $                                            | 5,559  |   | $ | (1,896 | ) | $ | 3,663 |   |
| Investment securities, tax exempt        |   | 3                                            |   | 2 |   | 5 |   |
| Investment securities                    |   | (196                                         | )      | (160 | ) | (356 | ) |
| Federal funds sold                       |   | 97                                           |   | (73 | ) | 24 |   |
| Interest bearing deposits                |   | (4                                           | )      | (14 | ) | (18 | ) |
| Net increase (decrease)                  |   | 5,460                                        |   | (2,141 | ) | 3,319 |   |
| Increase (decrease) in interest expense: |   |                                         |   |   |   |   |   |
| Interest bearing accounts                |   | 116                                          |   | (161 | ) | (45 | ) |
| Time deposits                            |   | 1,101                                        |   | (1,198 | ) | (97 | ) |
| Other borrowings (1)                     |   | 142                                          |   | (181 | ) | (39 | ) |
| Net increase (decrease)                  |   | 1,359                                        |   | (1,540 | ) | (181 | ) |
| Total net increase (decrease)            |   | $                                            | 4,101  |   | $ | (601 | ) | $ | 3,499 |   |

 

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

 

16

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**Non-interest Income**

 

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

 

For the threemonths ended June 30, 2003, total non-interest income increased $573,000 or 34%over the same period in 2002.  For thesix months ended June 30, 2003, total non-interest income increased $1,138,000or 36% over the same period in 2002.

 

Service chargeincome rose $169,000 or 24% and $386,000 or 29% over the same three andsix-month periods of 2002. Approximately $123,000 or 32% of thesix-month period increase relates to CCB’s service charges in the first quarterof 2003, which were not included in the first quarter 2002 results.

 

In addition, income frommortgage loan origination and packaging fees increased $377,000 or 44% and$722,000 or 45% over the samethree and six-month periods of 2002.The increase was primarily a result of: 1) an increase in the number of refinance transactions (due to historiclow interest rates), 2) an increase in market share due to expansion of loanstaff and marketing and 3) expansion of the mortgage product line.

 

**Non-interest Expense**

 

Non-interest expensesconsist of salaries and related employee benefits, occupancy and equipmentexpenses, data processing fees, professional fees, directors’ fees, and otheroperating expenses. Non-interest expense increased $746,000 or 13.1% and $2.27million or 21.9% over the same three and six-month periods of 2002.Approximately $1.27 million or 56% of the six-month period increase relates toCCB’s non-interest expenses in the first quarter of 2003,  which were not included in the first quarter2002 results.

 

Salaries and benefits increased$465,000 or 16% and $1.34 million or 24% over the same three and six-monthperiods of last year. This increase was due primarily to the integration of theCCB employees into the Company’s operation, the increase in commissions relatedto the increased income on mortgage loan origination and packaging fees and theimplementation of new company-wide incentive programs.

 

**Efficiency Ratio**

 

The Companyuses a widely used banking operating ratio as a measure of its progress inincreasing operating efficiency.  TheEfficiency ratio is derived by dividing total other (i.e. operating) expensesby the sum of tax adjusted net interest income and non-interest income.  Simply put, this ratio describes the fundsnecessary to generate $1 in tax equivalent total revenue.  The Company’s efficiency ratio has continuedto improve in 2003.

 

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

 
|                                                |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                |   |                             |   |                           |   |   |   |   |   |
| Non-interest expense                                |   | $                                | 6,438  |                           | $      | 5,692 |   | $ | 12,613 |   | $ | 10,348 |   |
| Amortization of core deposit and other  intangibles |   | (62                              | )      | (62                            | )      | (123 | ) | (76 | ) |
| Net non-interest expense                            |   | $                                | 6,376  |                           | $      | 5,630 |   | $ | 12,490 |   | $ | 10,272 |   |
|                                                |   |                             |   |                           |   |   |   |   |   |
| Fully tax equivalent income:                        |   |                             |   |                           |   |   |   |   |   |
| Net interest income                                 |   | $                                | 8,592  |                           | $      | 7,241 |   | $ | 16,876 |   | $ | 13,368 |   |
| Non-interest income                                 |   | 2,259                            |   | 1,686                          |   | 4,314 |   | 3,176 |   |
| Tax benefit adjustment for tax-exempt  income       |   | 248                              |   | 217                            |   | 484 |   | 443 |   |
| Total fully tax equivalent Income                   |   | $                                | 11,099 |                           | $      | 9,144 |   | $ | 21,674 |   | $ | 16,987 |   |
|                                                |   |                             |   |                           |   |   |   |   |   |
| Efficiency Ratio                                    |   | 57.5                             | %      | 61.6                           | %      | 57.6 | % | 60.5 | % |

 

17

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

 
|                                               |   | **Three Months Ended June 30,** |   |
|----------------------------------------------------|--------|---------------------------------|--------|
|                                               |   | **2003**                        |   | **2002** |   |
|                                               |   | **Expense**                     |   | **%****of Avg  Earning  Assets** |   | **Expense** |   | **%****of Avg  Earning  Assets** |   |
| Salaries and benefits                              |   | $                               | 3,434  |   | 0.50% |   | $ | 2,969 |   | 0.54% |   |
| Occupancy & equipment                          |   | 1,154                           |   | 0.17% |   | 848 |   | 0.15% |   |
| Other expenses                                     |   | 1,789                           |   | 0.26% |   | 1,813 |   | 0.33% |   |
| Amortization of core deposit and other intangibles |   | 62                              |   | 0.01% |   | 62 |   | 0.01% |   |
| Total non-interest expense                         |   | $                               | 6,438  |   | 0.95% |   | $ | 5,692 |   | 1.03% |   |

 
|                                               |   | **Six Months Ended June 30,** |   |
|----------------------------------------------------|--------|-------------------------------|--------|
|                                               |   | **2003**                      |   | **2002** |   |
|                                               |   | **Expense**                   |   | **%****of Avg  Earning  Assets** |   | **Expense** |   | **%****of Avg  Earning  Assets** |   |
| Salaries and benefits                              |   | $                             | 6,851  |   | 1.04 | % | $ | 5,510 |   | 1.07 | % |
| Occupancy & equipment                          |   | 2,206                         |   | 0.33 | % | 1,551 |   | 0.30 | % |
| Other expenses                                     |   | 3,434                         |   | 0.52 | % | 3,212 |   | 0.63 | % |
| Amortization of core deposit and other intangibles |   | 123                           |   | 0.02 | % | 76 |   | 0.01 | % |
| Total non-interest expense                         |   | $                             | 12,613 |   | 1.91 | % | $ | 10,348 |   | 2.02 | % |

 

**Income Taxes**

 

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

 
|               |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|--------------------|--------|---------------------------------|--------|-------------------------------|--------|
|               |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| Tax provision      |   | $                               | 1,421  |                          | $      | 751 |   | $ | 2,772 |   | $ | 1,497 |   |
| Effective tax rate |   | 36.6                            | %      | 27.7                          | %      | 36.9 | % | 28.4 | % |
|                    |        |                                 |        |                               |        |  |  |  |  |  |  |  |  |

 

The Company’seffective tax rate varies with changes in the relative amounts of itsnon-taxable income and non-deductible expenses. The Company’s tax provision isattributable to increases in the Company’s net income and the relative amountof tax-exempt income. The Company decreased its effective tax rate in 2002 bydeploying a series of tax strategies including the purchase of tax-exemptmunicipal bonds, the funding of enterprise zone loans and the establishment ofa real estate investment trust (“REIT”) in the first quarter of 2002.  The Company’s effective tax rate increasedto 36.6% and 36.9% in the second quarter and six-month periods of 2003 ascompared to 27.7% and 28.4% in the same periods of 2002.  The increase in the effective tax rate isdue primarily to management’s assessment that certain tax-exempt income may berecharacterized as taxable in 2003 through action by the CaliforniaLegislature.  Management willcontinuously monitor developments throughout the year and a determination couldbe made to recognize a tax benefit if it appears likely that the law willremain unchanged.

 

18

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

 

The Companyconcentrates its lending activities primarily within areas directly serviced bybranches as previously discussed.

 

The Companymanages its credit risk through diversification of its loan portfolio, theapplication 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,  2003** |    | **% of  Total** |   | **December 31,  2002** |   | **% of  Total** |   |
|-----------------------------------------------------|--------|--------------------|---------|-----------------|--------|------------------------|--------|-----------------|--------|
| Commercial                                          |   | $                  | 86,826  |            | 14.81% |                   | $      | 88,084          |   | 16.35% |   |
| Commercial and residential real estate mortgage     |   | 334,639            |    | 57.08%          |   | 311,030                |   | 57.73%          |   |
| Commercial and residential real estate construction |   | 146,483            |    | 24.99%          |   | 124,726                |   | 23.15%          |   |
| Agricultural                                        |   | 13,565             |    | 2.31%           |   | 8,540                  |   | 1.59%           |   |
| Lease financing                                     |   | 2,238              |    | 0.38%           |   | 3,325                  |   | 0.62%           |   |
| Installment and other                               |   | 4,264              |    | 0.73%           |   | 4,630                  |   | 0.86%           |   |
| Deferred loan fees and costs, net                   |   | (1,757             | )       | -0.30%          |   | (1,551                 | )      | -0.29%          |   |
| Total                                               |   | 586,259            |    | 100%            |   | 538,784                |   | 100%            |   |
| Less allowance for loan and lease losses            |   | (8,165             | )       | -1.39%          |   | (7,113                 | )      | -1.32%          |   |
| Total net loans and leases                          |   | $                  | 578,093 |            |   |                   | $      | 531,671         |   |   |   |
|                                                     |        |                    |         |                 |        |                        |        |                 |        |  |  |  |  |

 

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

 

|                                                              |   | **June  30,  2003** |   | **December  31,  2002** |   |
|-------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| Non-accrual loans                                                 |   | $                   | 1,020  |                    | $      | 692 |   |
| 90 days past due and still accruing                               |   | —              |   | —                  |   |
| Other real estate                                                 |   | —              |   | 489                     |   |
| Total non-performing assets                                       |   | $                   | 1,020  |                    | $      | 1,181 |   |
| Non-performing assets as a% of total assets                       |   | 0.14                | %      | 0.17                    | %      |
| Non-accrual loans as a% of gross loans                            |   | 0.17                | %      | 0.13                    | %      |
| Ratio of allowance for loan and lease losses to non accrual loans |   | 8.00                |   | 10.28                   |   |

 

The Company’s non-accrualloans increased from $0.69 million to $1.02 million in the first six months of2003. The Company’s “coverage ratio” or the ratio of allowance for loan andlease losses to non-accrual loans decreased from 10.28 to 8.00 during the firstsix months of 2003.  The Company carriedno other real estate as of June 30, 2003.

 

19

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

 

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

 

Accordingly, the adequacy ofthe ALLL and the level of the related provision for possible loan and leaselosses is determined based on management’s judgment after consideration of(i) economic conditions, (ii) borrowers’ financial condition, (iii) loanimpairment, (iv) evaluation of industry trends, (v) industry andother concentrations, (vi) loans which are contractually current as topayment terms but demonstrate a higher degree of risk as identified byManagement, (vii) continuing evaluation of the performing loan portfolio,(viii) monthly review and evaluation of problem loans identified as havingloss potential, (ix) quarterly review by the Board of Directors, and(x)  assessments by banking regulators and other third parties. Managementand the Board of Directors evaluate the ALLL and determine its desired levelconsidering objective and subjective measures, such as knowledge of theborrowers’ business, valuation of collateral, the determination of impairedloans or leases and exposure to potential losses.

 

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

 

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

 

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

 

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

 

20

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

 
|                                                      |   | **Three  Months Ended** |   | **Six  Months Ended** |   |
|-----------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                      |   | **June  30,  2003**     |   | **June  30,  2002**   |   | **June  30,  2003** |   | **June  30,  2002** |   |
| Beginning balance for allowance for loan and lease losses |   | $                       | 7,661  |                  | $      | 5,229 |   | $ | 7,113 |   | $ | 5,096 |   |
| Provision for loan and lease losses                       |   | 530                     |   | 525                   |   | 1,055 |   | 925 |   |
| Charge offs:                                              |   |                    |   |                  |   |   |   |   |   |
| Commercial                                                |   | (23                     | )      | (4                    | )      | (23 | ) | (17 | ) |
| Real estate                                               |   | —                  |   | (79                   | )      | — |   | (79 | ) |
| Agricultural                                              |   | —                  |   | —                |   | — |   |   |   |
| Other                                                     |   | (26                     | )      | (31                   | )      | (26 | ) | (293 | ) |
| Total charge offs                                         |   | (49                     | )      | (114                  | )      | (49 | ) | (389 | ) |
| Recoveries:                                               |   |                    |   |                  |   |   |   |   |   |
| Commercial                                                |   | 6                       |   | 10                    |   | 14 |   | 15 |   |
| Real estate                                               |   | 15                      |   | —                |   | 15 |   | — |   |
| Agricultural                                              |   | —                  |   | —                |   | 14 |   | — |   |
| Other                                                     |   | 2                       |   | 15                    |   | 3 |   | 18 |   |
| Total recoveries                                          |   | 23                      |   | 25                    |   | 46 |   | 33 |   |
| Net (charge offs) recoveries                              |   | (26                     | )      | (89                   | )      | (3 | ) | (356 | ) |
| ALLL of CCB acquired during the period                    |   | —                  |   | 647                   |   | — |   | 647 |   |
| Ending balance                                            |   | $                       | 8,165  |                  | $      | 6,312 |   | $ | 8,165 |   | $ | 6,312 |   |
| ALLL to total loans                                       |   | 1.39                    | %      | 1.32                  | %      | 1.39 | % | 1.32 | % |
| Annualized net charge offs to average loans               |   | -0.02                   | %      | -0.08                 | %      | 0.00 | % | -0.16 | % |

 

21

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# **Investment Portfolio and Other Assets**

 

Total investment securitiesdecreased $2.32 million or 3.4% in the first six months of 2003.  The decrease was primarily due to theprepayment of mortgage-backed securities as a result of the decrease in rates.

 

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

 

**Liquidity**

 

A Funds Management Policyhas been developed by the Company’s Management and approved by the Company’sBoard of Directors that establishes guidelines for the investments andliquidity of the Company. The goals of this policy are to provide liquidity tomeet the financial requirements of the Company’s customers, maintain adequatereserves as required by regulatory agencies and maximize earnings of theCompany. The Company’s liquidity ratio at June 30, 2003 was 11.0% and was 10.5%at December 31, 2002.  Liquidity iscomputed by dividing liquid assets (consisting of cash and due from banks,available-for-sale investments not pledged, federal funds sold and loansavailable-for-sale) by total liabilities. The Company’s Management believes itmaintains adequate liquidity levels.

 

**Capital Adequacy**

 

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

 

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

 

The minimumratio of total risk-based capital to risk-weighted assets, including certainoff-balance sheet items, is 8% (10% to be consideredwell-capitalized).  The minimum ratio ofTier 1 capital to average assets (leverage ratio) is 4.0% (5.0% to beconsidered well-capitalized).  Theminimum ratio of Tier 1 capital to risk-weighted assets is 4.0% (6.0% to beconsidered well-capitalized).  At leastone-half (4%) of the total risk-based capital (Tier 1) is to be comprisedof common equity; the balance may consist of debt securities and a limitedportion of the ALLL.  Trust PreferredSecurities in the amount of  $16.0million are included in the Company’s Tier 1 capital, as allowed by FederalReserve regulations, in the consolidated totals below.

 

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

 
|                                              |   | **June  30, 2003** |       | **December  31, 2002** |       |
|---------------------------------------------------|--------|--------------------|------------|------------------------|------------|
|                                              |   | **CCB**            |       | **Lake**               |       | **Western** |   | **Company** |   | **CCB** |   | **Lake** |   | **Western** |   | **Company** |   |
|                                              |   |               | ** ** |                   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Total risk-based capital to risk-weighted assets  |   | 10.8               | %          | 10.4                   | %          | 10.3 | % | 12.3 | % | 11.4 | % | 10.4 | % | 10.7 | % | 12.7 | % |
| Tier 1 capital to risk-weighted assets            |   | 9.5                | %          | 9.1                    | %          | 9.1 | % | 11.1 | % | 10.2 | % | 9.2 | % | 9.5 | % | 11.4 | % |
| Tier 1 capital to average assets (leverage ratio) |   | 7.6                | %          | 8.2                    | %          | 7.8 | % | 9.4 | % | 7.0 | % | 8.5 | % | 8.3 | % | 9.6 | % |

 

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

 

22

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

 

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

 

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

 

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

 

23

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The followingtable sets forth, as of  June 30, 2003,the distribution of re-pricing opportunities for the Company’s earning assetsand interest-bearing liabilities, the interest rate sensitivity gap, thecumulative interest rate sensitivity gap, the interest rate sensitivity gapratio (i.e. earning assets divided by interest-bearing liabilities) and thecumulative interest rate sensitivity gap ratio.

 
| **(Dollars In Thousands)**                                       |   | **Within  3 Months** |   | **After 3  Months But  Within One  One Year** |   | **After  One Year  But Within  Five Years** |   | **After Five  Years** |   | **Total** |   |
|------------------------------------------------------------------|--------|----------------------|--------|-----------------------------------------------|--------|---------------------------------------------|--------|-----------------------|--------|-----------|--------|
|                                                             |   |                 |   |                                          |   |                                        |   |                  |   |      |   |
| **Earning assets:**                                              |   |                 |   |                                          |   |                                        |   |                  |   |      |   |
| Federal funds sold                                               |   | $                    | 23,520 |                                          | $      | —                                      |   | $                     | — |      | $      | — |   | $ | 23,520 |   |
| Investment securities and other                                  |   | 6,973                |   | 7,071                                         |   | 15,064                                      |   | 38,723                |   | 67,831    |   |
| Loans                                                            |   | 340,853              |   | 42,171                                        |   | 80,425                                      |   | 129,701               |   | 593,150   |   |
|                                                             |   |                 |   |                                          |   |                                        |   |                  |   |      |   |
| Total earning assets                                             |   | 371,346              |   | 49,242                                        |   | 95,489                                      |   | 168,424               |   | 684,501   |   |
|                                                             |   |                 |   |                                          |   |                                        |   |                  |   |      |   |
| **Interest-bearing liabilities:**                                |   |                 |   |                                          |   |                                        |   |                  |   |      |   |
| Savings                                                          |   | 27,616               |   | 13,808                                        |   | —                                      |   | —                |   | 41,424    |   |
| Interest-bearing transaction accounts                            |   | 130,844              |   | 22,345                                        |   | —                                      |   | —                |   | 153,188   |   |
| Time deposits                                                    |   | 109,499              |   | 144,022                                       |   | 43,064                                      |   | 2                     |   | 296,588   |   |
| Trust Preferred Securities                                       |   | 16,000               |   | —                                        |   | —                                      |   | —                |   | 16,000    |   |
| Other borrowings                                                 |   | —               |   | 5,000                                         |   | 9,000                                       |   | —                |   | 14,000    |   |
| Total interest-bearing liabilities                               |   | 283,959              |   | 185,175                                       |   | 52,064                                      |   | 2                     |   | 521,200   |   |
| Interest rate sensitivity gap                                    |   | 87,387               |   | (135,933                                      | )      | 43,425                                      |   | 168,422               |   | 163,301   |   |
| Cumulative interest rate sensitivity gap                         |   | $                    | 87,387 |                                          | $      | (48,546                                     | )      | $                     | (5,121 | )         | $      | 163,301 |   | $ | — |   |
| Interest rate sensitivity gap to total earning assets            |   | 12.77                | %      | -19.86                                        | %      | 6.34                                        | %      | 24.61                 | %      | 23.86     | %      |
| Cumulative interest rate sensitivity gap to total earning assets |   | 11.67                | %      | -6.48                                         | %      | -0.68                                       | %      | 21.81                 | %      |      |   |
| Ratio of rate sensitive assets to rate sensitive liabilities     |   | 1.31                 |   | 0.27                                          |   | 1.83                                        |   | N/A                   |   | 1.31      |   |
| Cumulative ratio                                                 |   | 1.31                 |   | 0.90                                          |   | 0.99                                        |   | 1.31                  |   | 1.31      |   |

 

The opportunity to reprice assets in the same dollar amountsand at the same time as liabilities would minimize interest rate risk in anyinterest rate environment. The difference between the amounts of assets andliabilities repriced at the same time, or “gap”, represents the risk, or opportunity,in repricing. In general, if more assets than liabilities are repriced at agiven time in a rising rate environment, net interest income would improvewhile in a declining rate environment, net interest income would decline. Ifmore liabilities than assets were repriced under the same conditions theopposite would result. The Company appears liability sensitive in the immediateto one-year period, and turns asset sensitive in the longer term. This can beand is 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.

 

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

 

24

----

 

**ITEM 4.    Controls and Procedures.**

 

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

 

25

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**PART II. Other Information**

 

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

 

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

 

**Item #2.** **Changes in securities anduse of proceeds**

 

N/A

 

**Item #3.** **Defaults upon SeniorSecurities**

 

N/A

 

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

 

On June 25, 2003 theannual meeting of the shareholders of the Company was held for the purpose ofvoting on the following matters:

 

Proposal  1. **Election ofDirectors**:

 

|                    |   | **Voted For** |   | **Withheld** |   |
|-------------------------|--------|---------------|--------|--------------|--------|
| Charles W. Bacchi       |   | 1,288,437     |   | 22,996       |   |
| Barbara L. Cook         |   | 1,305,416     |   | 6,017        |   |
| Lary A. Davis           |   | 1,291,768     |   | 19,665       |   |
| William M. Eames        |   | 1,295,479     |   | 15,954       |   |
| Mathew A. Bruno Sr.     |   | 1,305,592     |   | 5,841        |   |
| Douglas A. Nordell      |   | 1,304,398     |   | 7,035        |   |
| William Fisher          |   | 1,304,157     |   | 7,276        |   |
| Gary D. Gall            |   | 1,300,113     |   | 11,320       |   |
| Howard Jahn             |   | 1,305,738     |   | 5,695        |   |
| Alan J. Kleinert        |   | 1,289,149     |   | 22,284       |   |
| Thomas Manz             |   | 1,302,253     |   | 9,180        |   |
| Harold S. Prescott, Jr. |   | 1,301,576     |   | 9,857        |   |
| Lori A. Warden          |   | 1,301,385     |   | 10,048       |   |

 

Proposal 2**. Approval of an Amendment**to the Bancorp’s articles of incorporation to require the affirmative vote ofthe holders of at least 60% of the outstanding shares to approve certainbusiness transactions.

 

| Voted for: |   | 2,135,976 |   |
|------------|--------|-----------|--------|
| Abstained: |   | 24,349    |   |
| Against:   |   | 339,927   |   |
| Not Voted  |   | 9         |   |

 

This proposal required approval votes from 60%, equaling 2,398,309 ofthe 3,997,183 total outstanding shares in order to be approved.  Although 85% of votes received were in favorof the proposal, the number of approval votes fell short of the requirement dueto the large number of non-votes and therefore was not approved.

 

26

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Proposal 3. **Ratification ofAppointment of Accountants.**To ratify the appointment of Perry-SmithLLP as the Company’s independent public accountants.

 

| Voted for: |   | 1,276,489 |   |
|------------|--------|-----------|--------|
| Abstained: |   | 31,536    |   |
| Against:   |   | 3,408     |   |

 

# **Item #5. OtherInformation**

N/A

 

**Item #6A. Exhibits**

 
| **Exhibit No.** |   | **Description  of Exhibit** |
|-----------------|--------|-----------------------------|
|            |   |                        |
|            | 3.1    |                        | Articles of  Incorporation are contained in the Registrant’s Registration Statement on  Form S-4, file #333-66675, as Exhibit 3.1 and are incorporated herein by this  reference. |
|            |   |                        |
|            | 3.2    |                        | Bylaws are  contained in the Registrant’s Registration Statement on Form S-4, file #333-66675,  as Exhibit 3.2 and are incorporated herein by this reference. |
|            |   |                        |
|            | 3.3    |                        | Amendments to  Bylaws are contained in the Registrant’s Registration Statement on Form S-4,  file #333-76678, as Exhibit 3.2 and are incorporated herein by this  reference. |
|            |   |                        |
|            | 10.1   |                        | Severance  Compensation Agreement dated December 4, 1997 between Mr. Kirk Dowdell and  Western Sierra National Bank is contained in the Registrant’s Registration  Statement on Form S-4, file #333-33256, as Exhibit 10.1 and is incorporated  herein by this reference. |
|            |   |                        |
|            | 10.2   |                        | Stock Option  Agreement dated September 22, 1997 between Mr. Kirk Dowdell and Western is  contained in the Registrant’s Registration Statement on Form S-4, file #  333-33256, as Exhibit 10.2 and is incorporated herein by this reference. |
|            |   |                        |
|            | 10.3   |                        | Stock Option  Agreement dated May 19, 1999 between Mr. Kirk Dowdell and Western is  contained in the Registrant’s Registration Statement on Form S-4, file #  333-33256, as Exhibit 10.3 and is incorporated herein by this reference. |
|            |   |                        |
|            | 10.4   |                        | Stock Option  Agreement dated May 19, 1999 between Mr. Gary D. Gall and Western is  contained in the Registrant’s Registration Statement on Form S-4 file, #  333-33256, as Exhibit 10.3 and is incorporated herein by this reference. |
|            |   |                        |
| (1)             | 10.5   |                        | Executive  Salary Continuation Agreement dated August 22, 2002, between Mr. Gary D. Gall  and Western Sierra National Bank. |
|            |   |                        |
|            | 10.6   |                        | Stock Option  Agreement dated April 11, 1995 between Mr. Gary D. Gall and Western Sierra  National Bank is contained in the Registrant’s Registration Statement on Form  S-4, file #333-66675, as Exhibit 10.5 and is incorporated herein by this  reference. |
|            |   |                        |
|            | 10.7   |                        | Stock Option  Agreement dated November 14, 1996 between Mr. Gary D. Gall and Western Sierra  National Bank is contained in the Registrant’s Registration Statement on Form  S-4, file #333-66675, as Exhibit 10.6 and is incorporated herein by this  reference. |
|            |   |                        |
|            | 10.8   |                        | Stock Option  Agreement dated May 20, 1997 between Mr. Gary D. Gall and Western is  contained in the Registrant’s Registration Statement on Form S-4, file  #333-66675, as Exhibit 10.7 and is incorporated herein by this reference. |
|            |   |                        |
|            | 10.9   |                        | Western  Sierra Bancorp 1999 Stock Option Plan and form of stock option agreements are  contained in the Registrant’s Registration Statement on Form S-8, file  #333-86653, as Exhibit 99.3 and are incorporated herein by this reference. |
|            |   |                        |
|            | 10.10  |                        | Western  Sierra National Bank 1989 Stock Option Plan, form of incentive stock option  and form of nonqualified stock option agreements are contained in the  Registrant’s Registration Statement on Form S-4, file #333-66675, as Exhibit  10.10 and are incorporated herein by this reference. |

 

27

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

 

28

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

 

29

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| 11.1   |   | Statement  re: Computation of earnings per share is included in Note 3 to the financial  statements. |
|--------|--------|------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                 |
| 31.1   |   | Section 302  Certification by Anthony J. Gould                                                       |
|   |   |                                                                                                 |
| 31.2   |   | Section 302 Certification by Gary D. Gall                                                            |
|   |   |                                                                                                 |
| 32.1   |   | Section 906  Certification by Anthony J. Gould.                                                      |
|   |   |                                                                                                 |
| 32.2   |   | Section 906  Certification by Gary D. Gall.                                                          |

 
| (1) |   | included as an exhibit to the Registrant's  10-Q for March 31, 2003, which is incorporated by this reference herein. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------|

 

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

 

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

July 17,2003:  Acquisition of Central CaliforniaBank is completed

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

 

30

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**SIGNATURES**

 

 

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

 

 
| **WESTERN SIERRA BANCORP**(Registrant) |   |                                                               |
|----------------------------------------|--------|--------------------------------------------------------------------|
|                                   |   |                                                               |
| Date: August 11, 2003             |   |                                                               |
|                                   |   |                                                               |
|                                   |   |                                                               |
|                                   |   |                                                               | /s/  GARY D. GALL |    Gary D. Gall |
|                                   |   | *President/Chief  Executive Officer*                               |
|                                   |   |                                                               |
|                                   |   |                                                               |
|                                   |   |                                                               | /s/  ANTHONY J. GOULD |    Anthony J. Gould |
|                                   |   | *Executive  Vice President Chief Financial and Accounting Officer* |
|                                        |        |                                                                    |  |  |  |  |

 

31

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