**UNITEDSTATES**

### **SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

 

**(Mark One)**

 

 

**ý****              QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe Quarterly Period Ended September 30, 2005**

 

**OR**

 

**o****              TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

 

**For thetransition period from              to              **

 

##### **Commission file number 0-25979**

 

 

**WESTERNSIERRA BANCORP**

(Exact name of Registrantas specified in its charter)

 
| **California**

(State or other  jurisdiction of incorporation or organization)                      |   | **68-0390121**

(I.R.S. Employer  Identification No.) |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|
| **4080 Plaza Goldorado Circle  Cameron Park, California**

(Address of principal  executive offices) |   | **95682**

(Zip code)                                 |   |

 

Registrant’s telephonenumber, including area code: **(530) 677-5600**

 

Securities registeredpursuant to Section 12(b) of the Act: **None**

 

Securities registeredpursuant to Section 12(g) of the Act:

**CommonStock, no par value per share**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý  No o

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No ý

 

As of November 4,2005 there were approximately 7,732,000 shares outstanding of the Registrant’scommon stock. 

 

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**WESTERNSIERRA BANCORP & SUBSIDIARIES**

 

**Index to Form 10-Q**

 
| PART I. Financial Information |                                                                                                 |
|------------------------------------|------------------------------------------------------------------------------------------------------|
|                               | Item 1. Consolidated Financial Statements (unaudited)                                                |   |
|                               |                                                                                                 | Consolidated Balance Sheet  September 30, 2005 and December 31, 2004 |   |
|                               |                                                                                                 | Consolidated  Statement of Income  Three and nine months ended September 30, 2005 and 2004 |   |
|                               |                                                                                                 | Consolidated  Statement of Cash Flows  Nine months ended September 30, 2005 and 2004 |   |
|                               |                                                                                                 | 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. Unregistered Sales of Equity Securities and Use of Proceeds                                 |   |
|                               | Item  3. Defaults Upon Senior Securities                                                             |   |
|                               | Item  4. Submission of Matters to a Vote of Security Holders                                         |   |
|                               | Item 5.  Other Information                                                                           |   |
|                               | Item 6. Exhibits                                                                                     |   |
| SIGNATURES                         |                                                                                                 |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**WesternSierra Bancorp and Subsidiaries**

**Consolidated Balance Sheet**

(dollars in thousands)

 

**(Unaudited)**

 
| ** **                                                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                 | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **ASSETS:**                                                                                                                | ** ** | ** **             | ** ** | ** **            | ** ** |
| Cash and due  from banks                                                                                                   |       | $41,824                |       | $29,975               |       |
| Federal  funds sold                                                                                                        |       | 65,400                 |       | 74,630                |       |
| Cash and  cash equivalents                                                                                                 |       | 107,224                |       | 104,605               |       |
|                                                                                                                       |       |                   |       |                  |       |
| Interest-bearing  deposits                                                                                                 |       | —                 |       | 1,200                 |       |
| Loans held  for sale                                                                                                       |       | 2,242                  |       | 2,685                 |       |
| Investment  securities:                                                                                                    |       |                   |       |                  |       |
| Trading                                                                                                                    |       | 42                     |       | 42                    |       |
| Available  for sale (amortized cost $79,982 in 2005 and $81,106 in 2004)                                                   |       | 80,759                 |       | 82,521                |       |
| Held to  maturity (market value of $3,005 in 2005 and $3,202 in 2004)                                                      |       | 2,918                  |       | 3,067                 |       |
| Total  investments                                                                                                         |       | 83,719                 |       | 85,630                |       |
| Portfolio  loans:                                                                                                          |       |                   |       |                  |       |
| Real estate  mortgage                                                                                                      |       | 667,532                |       | 600,108               |       |
| Real estate  construction                                                                                                  |       | 226,535                |       | 199,140               |       |
| Commercial                                                                                                                 |       | 109,048                |       | 119,823               |       |
| Agricultural                                                                                                               |       | 17,841                 |       | 11,514                |       |
| Other loans                                                                                                                |       | 8,540                  |       | 5,928                 |       |
| Total gross  loans                                                                                                         |       | 1,029,496              |       | 936,513               |       |
| Deferred  loan fees, net                                                                                                   |       | (3,506                 | )          | (3,008                | )          |
| Allowance  for loan losses                                                                                                 |       | (15,251                | )          | (13,786               | )          |
| Net portfolio  loans                                                                                                       |       | 1,010,739              |       | 919,719               |       |
|                                                                                                                       |       |                   |       |                  |       |
| Premises and equipment, net                                                                                                |       | 21,084                 |       | 20,808                |       |
| Goodwill and  other intangible assets                                                                                      |       | 33,357                 |       | 33,913                |       |
| Other assets                                                                                                               |       | 39,110                 |       | 30,150                |       |
| Total Assets                                                                                                               |       | $1,297,475             |       | $1,198,710            |       |
|                                                                                                                       |       |                   |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY:**                                                                            | ** ** | ** **             | ** ** | ** **            | ** ** |
| Non-interest  bearing deposits                                                                                             |       | $317,092               |       | $272,250              |       |
| Interest  bearing deposits:                                                                                                |       |                   |       |                  |       |
| NOW, money  market and savings                                                                                             |       | 375,499                |       | 405,967               |       |
| Time, over  $100,000                                                                                                       |       | 225,951                |       | 185,935               |       |
| Other time                                                                                                                 |       | 157,530                |       | 158,814               |       |
| Total  deposits                                                                                                            |       | 1,076,072              |       | 1,022,966             |       |
|                                                                                                                       |       |                   |       |                  |       |
| Borrowed  funds                                                                                                            |       | 52,000                 |       | 21,500                |       |
| Subordinated  debentures                                                                                                   |       | 37,116                 |       | 37,116                |       |
| Other  liabilities                                                                                                         |       | 7,958                  |       | 6,977                 |       |
| Total  liabilities                                                                                                         |       | 1,173,146              |       | 1,088,559             |       |
|                                                                                                                       |       |                   |       |                  |       |
| Shareholders’  equity:                                                                                                |       |                   |       |                  |       |
| Preferred  stock- no par value; 15,000,000 shares authorized; none issued                                                  |       | —                 |       | —                |       |
| Common  stock- no par value; 15,000,000 shares authorized; issued - 7,732,216 shares  in 2005 and 7,629,762 shares in 2004 |       | 69,895                 |       | 68,125                |       |
| Retained  earnings                                                                                                         |       | 53,934                 |       | 41,109                |       |
| Accumulated  other comprehensive income                                                                                    |       | 500                    |       | 917                   |       |
| Total  shareholders’ equity                                                                                           |       | 124,329                |       | 110,151               |       |
| Total  Liabilities and Shareholders’ Equity                                                                           |       | $1,297,475             |       | $1,198,710            |       |

 

See notes to the unaudited consolidated financial statements.

 

3

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**WesternSierra Bancorp and Subsidiaries**

**Consolidated Statements of Income**

(dollars in thousands, except per share data)

 

**(Unaudited)**

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                    | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest  income:                                             |       |                   |       |                   |       |   |   |   |   |
| Interest and  fees on loans                                   |       | $18,715                |       | $14,971                |       | $52,053 |   | $43,398 |   |
| Interest on  investment securities:                           |       |                   |       |                   |       |   |   |   |   |
| Taxable                                                       |       | 443                    |       | 485                    |       | 1,346 |   | 1,238 |   |
| Exempt from  federal taxes                                    |       | 429                    |       | 391                    |       | 1,256 |   | 1,167 |   |
| Interest on  Federal funds sold                               |       | 481                    |       | 203                    |       | 1,017 |   | 397 |   |
| Total  interest income                                        |       | 20,068                 |       | 16,050                 |       | 55,672 |   | 46,200 |   |
|                                                          |       |                   |       |                   |       |   |   |   |   |
| Interest  expense:                                            |       |                   |       |                   |       |   |   |   |   |
| Interest on  deposits                                         |       | 3,613                  |       | 2,336                  |       | 9,368 |   | 6,510 |   |
| Interest on  borrowed funds                                   |       | 1,116                  |       | 549                    |       | 2,765 |   | 1,658 |   |
| Total  interest expense                                       |       | 4,729                  |       | 2,885                  |       | 12,133 |   | 8,168 |   |
|                                                          |       |                   |       |                   |       |   |   |   |   |
| Net interest  income                                          |       | 15,339                 |       | 13,165                 |       | 43,539 |   | 38,032 |   |
|                                                          |       |                   |       |                   |       |   |   |   |   |
| Provision  for loan losses (LLP)                              |       | 540                    |       | 600                    |       | 1,450 |   | 1,910 |   |
|                                                          |       |                   |       |                   |       |   |   |   |   |
| Net interest  income after LLP                                |       | 14,799                 |       | 12,565                 |       | 42,089 |   | 36,122 |   |
|                                                          |       |                   |       |                   |       |   |   |   |   |
| Non-interest  income:                                         |       |                   |       |                   |       |   |   |   |   |
| Service  charges and fees                                     |       | 1,531                  |       | 1,205                  |       | 4,049 |   | 3,620 |   |
| Investment  service fee income                                |       | 254                    |       | 140                    |       | 632 |   | 517 |   |
| Net gain on  sale and packaging of residential mortgage loans |       | 1,160                  |       | 986                    |       | 3,192 |   | 3,033 |   |
| Gain on sale  of government-guaranteed loans                  |       | 152                    |       | —                 |       | 555 |   | — |   |
| Gain (Loss)  on sale of investment securities                 |       | 1                      |       | (1                     | )          | (2 | ) | (12 | ) |
| Other income                                                  |       | 332                    |       | 216                    |       | 1,144 |   | 671 |   |
| Total  non-interest income                                    |       | 3,430                  |       | 2,546                  |       | 9,570 |   | 7,829 |   |
|                                                          |       |                   |       |                   |       |   |   |   |   |
| Other  expenses:                                              |       |                   |       |                   |       |   |   |   |   |
| Salaries and  benefits                                        |       | 5,972                  |       | 4,892                  |       | 17,277 |   | 14,660 |   |
| Occupancy  and equipment                                      |       | 1,757                  |       | 1,505                  |       | 5,037 |   | 4,292 |   |
| Other  expenses                                               |       | 2,904                  |       | 2,338                  |       | 8,442 |   | 7,061 |   |
| Terminated  merger expenses                                   |       | —                 |       | —                 |       | 398 |   | — |   |
| Amortization  of core deposit intangibles                     |       | 180                    |       | 180                    |       | 540 |   | 540 |   |
| Total other  expenses                                         |       | 10,813                 |       | 8,915                  |       | 31,694 |   | 26,553 |   |
|                                                          |       |                   |       |                   |       |   |   |   |   |
| Income  before income tax                                     |       | 7,416                  |       | 6,196                  |       | 19,965 |   | 17,398 |   |
|                                                          |       |                   |       |                   |       |   |   |   |   |
| Income taxes                                                  |       | 2,706                  |       | 2,347                  |       | 7,141 |   | 6,403 |   |
| Net income                                                    |       | $4,710                 |       | $3,849                 |       | $12,824 |   | $10,995 |   |
|                                                          |       |                   |       |                   |       |   |   |   |   |
| Basic  earnings per share                                     |       | $0.61                  |       | $0.51                  |       | $1.67 |   | $1.46 |   |
| Diluted  earnings per share                                   |       | $0.59                  |       | $0.49                  |       | $1.61 |   | $1.40 |   |

 

See notes to the unaudited consolidated financial statements.

 

4

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**Western Sierra Bancorp and Subsidiaries**

##### **ConsolidatedStatement of Cash Flows**

(dollars in thousands)

 
| ** **                                                                                       | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                       | ** ** | **September 30,** | ** ** |
| ** **                                                                                       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Cash flows  from operating activities:                                                           |       |                   |       |   |   |
| Net income                                                                                       |       | $12,824                |       | $10,995 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:               |       |                   |       |   |   |
| Provision  for loan losses                                                                       |       | 1,450                  |       | 1,910 |   |
| Depreciation  and amortization                                                                   |       | 2,557                  |       | 2,311 |   |
| Deferred  loan origination fees, net                                                             |       | 498                    |       | 77 |   |
| Amortization  of investment security premiums, net of accretion of discount                      |       | 321                    |       | 647 |   |
| Loss on sale  and call of available-for-sale investment securities                               |       | 2                      |       | 12 |   |
| Increase in  trading securities                                                                  |       | —                 |       | (7 | ) |
| (Gain) loss  on sale of premises and equipment                                                   |       | (17                    | )          | 3 |   |
| Increase in  cash surrender value of life insurance policies                                     |       | (733                   | )          | (479 | ) |
| Compensation  cost associated with ESOP                                                          |       | —                 |       | 150 |   |
| Decrease in  loans held for sale                                                                 |       | 443                    |       | 129 |   |
| Decrease in  accrued interest receivable and other assets                                        |       | 2,152                  |       | 29 |   |
| Increase  (decrease) in accrued interest payable and other liabilities                           |       | 981                    |       | (2,296 | ) |
| Decrease in  deferred taxes                                                                      |       | (60                    | )          | (60 | ) |
| Net cash  provided by operating activities                                                       |       | 19,864                 |       | 13,421 |   |
|                                                                                             |       |                   |       |   |   |
| Cash flows  from investing activities:                                                           |       |                   |       |   |   |
| Proceeds  from sale and call of available-for-sale investment securities                         |       | 5,179                  |       | 2,550 |   |
| Proceeds  from called held-to-maturity investment securities                                     |       | 4                      |       | — |   |
| Proceeds  from matured available-for-sale investment securities                                  |       | —                 |       | 45 |   |
| Purchases of  available-for-sale investment securities                                           |       | (14,449                | )          | (20,770 | ) |
| Principal  repayments received from available-for-sale SBA Pools and mortgage-backed  securities |       | 10,070                 |       | 9,621 |   |
| Principal  repayments received from held-to-maturity mortgaged-backed securities                 |       | 143                    |       | 378 |   |
| Net decrease  in interest-bearing deposits in banks                                              |       | 1,200                  |       | 198 |   |
| Net increase  in loans and leases                                                                |       | (92,968                | )          | (104,634 | ) |
| Proceeds  from the sale of premises and equipment                                                |       | 42                     |       | — |   |
| Purchases of  premises and equipment                                                             |       | (2,318                 | )          | (2,237 | ) |
| Purchase of  life insurance policies                                                             |       | (8,800                 | )          | — |   |
| Net cash  used in investing activities                                                           |       | (101,897               | )          | (114,849 | ) |
|                                                                                             |       |                   |       |   |   |
| Cash flows  from financing activities:                                                           |       |                   |       |   |   |
| Net increase  in demand, interest-bearing and savings deposits                                   |       | $14,374                |       | $96,155 |   |
| Net increase  in time deposits                                                                   |       | 38,732                 |       | 37,318 |   |
| Net increase  in borrowings                                                                      |       | 30,500                 |       | 850 |   |
| Proceeds  from ESOP borrowings                                                                   |       | —                 |       | 150 |   |
| Repayment of  ESOP borrowings                                                                    |       | —                 |       | (150 | ) |
| Purchase of  unearned ESOP shares                                                                |       | —                 |       | (150 | ) |
| Repurchase  of common stock                                                                      |       | —                 |       | (85 | ) |
| Proceeds  from the exercise of stock options                                                     |       | 1,046                  |       | 1,190 |   |
| Net cash  provided by financing activities                                                       |       | 84,652                 |       | 135,278 |   |
|                                                                                             |       |                   |       |   |   |
| Increase in  cash and cash equivalents                                                           |       | 2,619                  |       | 33,850 |   |
|                                                                                             |       |                   |       |   |   |
| Cash and  cash equivalents at beginning of year                                                  |       | 104,605                |       | 55,964 |   |
|                                                                                             |       |                   |       |   |   |
| Cash and  cash equivalents at end of year                                                        |       | $107,224               |       | $89,814 |   |
|                                                                                             |       |                   |       |   |   |
| Cash paid  during the period for income taxes:                                                   |       | 5,864                  |       | 6,980 |   |
|                                                                                             |       |                   |       |   |   |
| Non-cash  investing activities:                                                                  |       |                   |       |   |   |
| Net change  in unrealized gain on available-for-sale investment securities                       |       | $(641                  | )          | $240 |   |

 

See notes to the unaudited consolidated financial statements.

 

5

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**NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  Basis of Presentation**

 

The accompanyingunaudited condensed consolidated financial statements of Western Sierra Bancorpand subsidiaries (the “Company”) have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-Q and Article 10of Regulation S-X. In the opinion of Management, all adjustments (whichconsist solely of normal recurring accruals) considered necessary for a fairpresentation of the results for the interim periods presented have beenincluded. These interim condensed consolidated financial statements should beread in conjunction with the financial statements and related notes containedin the Company’s 2004 Annual Report to Shareholders.

 

The condensed consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, Western Sierra National Bank (WSNB) and its subsidiary WSNBInvestment Trust (a Real Estate Investment Trust (“REIT”), Lake Community Bank(LCB), Central California Bank (CCB) and Auburn Community Bank (ACB),collectively (“Banks”).  All significantinter-company balances and transactions have been eliminated.  Western Sierra Statutory Trusts I, II, III,and IV are unconsolidated subsidiaries formed solely for the purpose of issuingtrust preferred securities.  Operatingresults for the three and nine months ended September 30, 2005 are notnecessarily indicative of the results that may be expected for the year ending December 31,2005. Certain amounts in the consolidated financial statements for the yearended December 31, 2004 and the three and nine-month periods ended September 30,2004 may have been reclassified to conform to the presentation of theconsolidated financial statements in 2005.

 

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

 

**2.  Stock-based Compensation**

 

At September 30, 2005, the Company has four stock-basedcompensation plans.  The Company accountsfor these plans under the recognition and measurement principles of APB OpinionNo. 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 AccountingStandards Board (“FASB”) No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB No. 123,*the following table illustrates the affect on net income and earnings per shareas if the Company had applied the fair value recognition provisions of FASBStatement No. 123, *Accounting for Stock-BasedCompensation*, to stock-based compensation.

 

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

 
| ** **                                                                                                                              | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**                                    | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income as reported                                                                                                                  |       | $4,710                                      |       | $3,849                                     |       | $12,824 |   | $10,995 |   |
|                                                                                                                                    |       |                                        |       |                                       |       |   |   |   |   |
| Deduct: Total stock-based compensation expense determined under the  fair value based method for all awards, net of related tax effects |       | (1,076                                      | )          | (185                                       | )          | (1,514 | ) | (644 | ) |
|                                                                                                                                    |       |                                        |       |                                       |       |   |   |   |   |
| Pro forma net income                                                                                                                    |       | $3,634                                      |       | $3,664                                     |       | $11,310 |   | $10,351 |   |
|                                                                                                                                    |       |                                        |       |                                       |       |   |   |   |   |
| Basic earnings per share - as reported                                                                                                  |       | $0.61                                       |       | $0.51                                      |       | $1.67 |   | $1.46 |   |
| Basic earnings per share - pro forma                                                                                                    |       | $0.47                                       |       | $0.48                                      |       | $1.47 |   | $1.37 |   |
|                                                                                                                                    |       |                                        |       |                                       |       |   |   |   |   |
| Diluted earnings per share - as reported                                                                                                |       | $0.59                                       |       | $0.49                                      |       | $1.61 |   | $1.40 |   |
| Diluted earnings per share - pro forma                                                                                                  |       | $0.46                                       |       | $0.47                                      |       | $1.42 |   | $1.32 |   |

 

6

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On August 25,2005, the Company issued a Form 8-K reporting that the Board of Directorsapproved the acceleration of vesting of certain unvested stock options held bycertain directors, executive officers and employees.  The board believed that was in the best interest of theshareholders to accelerate the vesting of these options, as it will have apositive impact on the future earnings of the Company.

 

The decision toaccelerate vesting of these stock options was made primarily to avoidrecognizing compensation cost in the Consolidated Statement of Income in futurefinancial statements upon the adoption of Statement of Financial AccountingStandards No. 123 (revised 2004), “*Share-Based Payment*”(“SFAS 123R”), which, when effective, will require all share-based payments toemployees, including grants of employee stock options, to be recognized on theCompany’s financial statements based on their fair values at the grantdate.  SFAS 123R will become effective asto the Company beginning January 1, 2006. Thisaction has been taken as a result of Statement of Financial AccountingStandards No. 123R, “Share-Based Payment” issued by the FinancialAccounting Standards Board, which the Company must adopt on January1, 2006.

 

The144,843 stock options (at an average strike price of $26.55) affected by theaccelerated vesting represent approximately 24.7% of the outstanding stockoptions awarded and approximately 1.9% of current shares outstanding. The shareacceleration was comprised of 67,293 to executive officers, 22,050 to Directorsand 55,500 to other officers of the Company.

 

Theeffect of acceleration of options on the total stock-based compensation expense shown above was approximately$649,000.  Thus, absent the acceleration,the $1,076,000 and $1,514,000 stock-based compensation expense, net of relatedtax effects, shown in the table above for the three and nine period ended September 30,2005 would have been $427,000 and $865,000 respectively.

 

**3.  Earnings per Share**

 

Basic earnings per share(EPS), which excludes dilution, is computed by dividing net income by theweighted-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 and splits for all periodspresented. A reconciliation of the numerators and denominators of the basic anddiluted EPS computations is as follows (dollars in thousands, except sharedata).

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                       | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic EPS Computation:                                           |       |                   |       |                   |       |   |   |   |   |
| Numerator—net income                                        |       | $4,710                 |       | $3,849                 |       | $12,824 |   | $10,995 |   |
| Denominator— weighted  average number of shares outstanding |       | 7,729,240              |       | 7,594,692              |       | 7,696,779 |   | 7,535,254 |   |
| Basic earnings per share                                         |       | $0.61                  |       | $0.51                  |       | $1.67 |   | $1.46 |   |
|                                                             |       |                   |       |                   |       |   |   |   |   |
| Diluted EPS Computation:                                         |       |                   |       |                   |       |   |   |   |   |
| Numerator—net income                                        |       | $4,710                 |       | $3,849                 |       | $12,824 |   | $10,995 |   |
| Denominator— weighted  average number of shares outstanding |       | 7,729,240              |       | 7,594,692              |       | 7,696,779 |   | 7,535,254 |   |
| Effect of dilutive stock  options                                |       | 242,805                |       | 316,121                |       | 264,894 |   | 338,165 |   |
|                                                             |       | 7,972,045              |       | 7,910,813              |       | 7,961,673 |   | 7,873,419 |   |
| Diluted earnings per share                                       |       | $0.59                  |       | $0.49                  |       | $1.61 |   | $1.40 |   |

 

**4.   Stock Repurchase Plan**

 

On January 16, 2004the Company announced that the Board of Directors approved a plan to utilize upto $2 million (or less than 1% of the total outstanding shares) to repurchasethe Company’s common stock.  As of September 30,2005, the Company had repurchased 3,000 shares at an average price ofapproximately $28.27.  There was norepurchases in the nine month period ended September 30, 2005.

 

7

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**5.   Commitmentsand Contingencies**

** **

#### **Leases**

#### ** **

In April 2005, the Company signed a contractfor an office lease that will be the headquarters and a branch of WesternSierra National Bank located at One Capital Mall Suite 600, Sacramento,CA  95814.  The term is for 7 years and the monthlypayments begin in October 2005 at approximately $17,000 per month or $2.50per square foot for the first twelve months and increase approximately 2%annually thereafter.

 

#### **Financial InstrumentsWith Off-Balance-Sheet Risk**

#### ** **

TheBanks are party to financial instruments with off-balance-sheet risk in thenormal course of business in order to meet the financing needs of theircustomers and to reduce their exposure to fluctuations in interest rates.  These financial instruments includecommitments to extend credit, letters of credit and commitments to sell loans.  These instruments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized on the consolidated balance sheet.

 

TheBanks exposure to credit loss in the event of nonperformance by the other partyfor commitments to extend credit and letters of credit is represented by thecontractual amount of those instruments. The Banks use the same credit policies in making commitments and lettersof credit as they do for loans included on the consolidated balance sheet.

 

Thefollowing financial instruments represent off-balance-sheet credit risk (inthousands):

 
| ** **                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Commitments  to extend credit:                                          |       |                   |       |                  |       |
| Revolving  lines of credit secured by 1-4 family residences             |       | $38,514                |       | $33,019               |       |
| Commercial  real estate, construction and land development commitments: |       |                   |       |                  |       |
| Secured by  real estate                                                 |       | 214,293                |       | 211,737               |       |
| Not secured  by real estate                                             |       | 745                    |       | 1,105                 |       |
| Other  commercial commitments not secured by real estate                |       | 47,294                 |       | 53,099                |       |
| Agricultural  commitments                                               |       | 1,295                  |       | 3,261                 |       |
| Other  commitments                                                      |       | 4,043                  |       | 3,872                 |       |
|                                                                    |       | $306,184               |       | $306,093              |       |
| Letters of  credit                                                      |       | $21,514                |       | $22,866               |       |

 

Realestate commitments are generally secured by property with loan-to-value ratiosnot to exceed 80%.  In addition, themajority of the Banks’ commitments have variable interest rates.

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since some of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-casebasis.  The amount of collateralobtained, if deemed necessary upon extension of credit, is based on Management’scredit evaluation of the borrower. Collateral held varies, but may include deposits, accounts receivable,inventory, equipment, income-producing commercial properties and residentialreal estate.

 

Lettersof credit are conditional commitments to guarantee the performance or financialobligation of a customer to a third party. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending loans to customers.

 

Commitmentsto sell loans are agreements to sell to another party loans originated by theBanks.  The Banks only sell loans tothird parties without recourse.  TheBanks are not exposed to credit loss if the borrower fails to perform accordingto the promissory note as long as the Banks has fulfilled their obligationsstated in the sales commitment.

 

8

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#### **Legal Proceedings**

#### ** **

The Company is not a party to any legal proceedingthat Management expects will result in an adverse decision resulting in amaterial effect on the future operating results or financial condition of theCompany.

 

**6. Comprehensive Income**

** **

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

 
| ** **                                                | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(In thousands)**                                        | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                      |       |                   |       |                   |       |   |   |   |   |
| Net income                                                |       | $4,710                 |       | $3,849                 |       | $12,824 |   | $10,995 |   |
| Other  comprehensive income:                              |       |                   |       |                   |       |   |   |   |   |
| Holding  gains (losses) arising during period, net of tax |       | (505                   | )          | 896                    |       | (413 | ) | 93 |   |
| Re-classification  adjustment, net of tax                 |       | (1                     | )          | 1                      |       | 2 |   | 8 |   |
| Total other  comprehensive income (loss)                  |       | (506                   | )          | 897                    |       | (411 | ) | 101 |   |
| Total  comprehensive income                               |       | $4,204                 |       | $4,746                 |       | $12,413 |   | $11,096 |   |

 

**7.****              Termination ofAgreement with Gold Country Financial Services**

 

In November 2004,the Company entered into a definitive merger agreement to acquire Gold CountryFinancial Services, the holding company for Gold Country Bank, headquartered inMarysville, California.  This agreementwas terminated by the mutual consent of both parties in June of 2005.  Under the terms of the agreement, GoldCountry Bank was to be merged into WSNB in a stock and cash transaction valuedat approximately $23.1 million.  As aresult of the termination of the merger agreement, the Company recordedterminated mergerexpenses of $398,000 in the quarter ended June 30, 2005.

 

**8.****              New AccountingPronouncements**

 

In December 2004, the Financial AccountingStandards Board (the “FASB”) issued Statement Number 123 (revised 2004)(“SFAS 123 (R)”), *Share-Based Payments*.SFAS 123 (R) requires all entities to recognize compensation expensein an amount equal to the fair value of share-based payments such as stockoptions granted to employees. In April 2005, the Securities and ExchangeCommission adopted a rule amending the effective date of SFAS 123(R) fromthe first reporting period after June 15, 2005 to the first fiscal yearbeginning after June 15, 2005, effectively January 1, 2006, for theCompany.

 

The Company currently expects to adopt SFASNo. 123R effective January 1, 2006. The Company currently uses theintrinsic value method as permitted by APB 25 to account for itsshare-based payments to employees, and as such, generally recognizes nocompensation expense for employee stock options. Accordingly, adopting SFASNo. 123R will result in the Company recording compensation cost foremployee stock options. Future levels of compensation cost recognized relatedto share-based compensation awards may be impacted by new awards and/ormodification, repurchases and cancellations of existing awards before and afterthe adoption of this standard. As further discussed in Note 2, the initialimpact of adopting SFAS 123(R) has been mitigated by the acceleration ofvesting of certain options.

 

9

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATION.**

 

**Privatesecurities litigation reform act safe harbor statement**

 

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

 

1.               Competitive pressure in the banking 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 Bank’s loans.

 

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

 

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

 

6.               Asset/Liability matching risks and liquidityrisks.

 

7.               Volatility and devaluation in the securitiesmarkets.

 

8.               A rise in short term rates that flattens orinverts the yield curve which may have a negative effect on the Company’s netinterest margin, cost of funds ,ability to sustain deposit growth.

 

For additional information concerning risks anduncertainties related to the Company and its operations, please refer to theCompany’s Annual Report on Form 10-K for the year ended December 31,2004 under the heading “Forward-Looking Information”.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof. The Company undertakes no obligation to revise or publicly release theresults of any revision to these forward-looking statements to reflect eventsor circumstances after the date hereof or to reflect the occurrence of unanticipatedevents.

 

The following sections discuss significant changesand trends in financial condition, capital resources and liquidity of theCompany from December 31, 2004 to September 30, 2005. Also discussedare significant trends and changes in the Company’s results of operations forthe three and nine months ended September 30, 2005 compared to the sameperiods in 2004. The consolidated financial statements and related notesappearing elsewhere in this report are condensed and unaudited.

 

10

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**General**

** **

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

 

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

 

InApril 2002, the Company acquired Central California Bank for $3.7 millionin cash and 252,181 shares of the Company’s stock.  This transaction was accounted for usingpurchase accounting, which resulted in a purchase price allocation of $2.3million to goodwill and $1.9 million to core deposit intangible assets.  In July 2002, the Sentinel CommunityBank branches were transferred from Western Sierra National Bank to CentralCalifornia Bank.

 

InJuly 2003, the Company acquired Central Sierra Bank for $10.7 million incash and 404,173 shares of the Company’s stock. This transaction was accounted for using purchase accounting, whichresulted in a purchase price allocation of $11.6 million to goodwill and $2.9million to core deposit intangible assets. Central Sierra Bank operates as a division of Central California Bank.

 

InDecember 2003, the Company acquired Auburn Community Bank for $6.5 millionin cash and 349,976 shares of the Company’s stock.  This transaction was accounted for usingpurchase accounting, which resulted in a purchase price allocation of $14.5million to goodwill and $1.8 million to core deposit intangible assets.

 

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

 

WesternSierra National Bank was organized under national banking laws and commencedoperations as a national bank on January 4, 1984. Western Sierra NationalBank is a member of the Federal Reserve System, and the FDIC insures itsdeposits to the maximum amount permitted by law. Western Sierra National Bank’shead office is located at 4080 Plaza Goldorado Circle, Cameron Park, andoperates twelve branch offices and one loan production office.  The head office will be relocating to OneCapitol Mall, Sacramento California in October 2005 [Status?].  Western Sierra National Bank does not haveany other subsidiaries other than Sentinel Associates, Inc., an inactiveentity formed by Sentinel Bank in 1983 to develop single-family residentialreal estate.

 

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

 

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

 

AuburnCommunity Bank, a state non-member bank, was originally operating under thename of Auburn National Bank which was incorporated under the laws of the Stateof California on July 28, 1997, and commenced operations on February 2,1998.  On July 29, 1999, AuburnNational Bank converted from national bank to a state non-member bank and wasrenamed Auburn Community Bank.  AuburnCommunity Bank is an insured bank under the Federal Deposit Insurance Act andoperates its headquarters banking office located at 500 Auburn-Folsom Road Suite 200,Auburn, CA and its branch located at 11795 Atwood Road, Auburn, CA.  Auburn Community Bank does not have anyaffiliates or subsidiaries.

 

11

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**Employees.** At September 30, 2005, the Companyand its subsidiaries employed 368 persons on a full-time equivalent basis. TheCompany believes its employee relations are satisfactory.

 

**FinancialCondition**

 

TheCompany increased total assets from $1.20 billion at December 31, 2004 to$1.30 billion at September 30, 2005, an increase of $99 millionor 8.3%. The two primary components of asset growth were portfolio loans, whichgrew $93 million, and other assets, which increased $10 million.

 

Theincrease in loans of $99 million was comprised almost entirely of real estatemortgage growth of $68 million and real estate construction growth of $27million.  This growth can be attributedto continued economic growth and development in the markets in which the Banksoperate.  At September 30, 2005 theBanks’ largest single loan outstanding was $17.5 million and the ten largestloans totaled approximately $115 million dollars in aggregate balancesoutstanding.

 

Growthin other assets was primarily a result of purchasing approximately $8.8 millionin bank owned life insurance, or “BOLI”, which was purchased to generate incometo offset rising benefit costs.  Thepolicies yields are subject to change annually by the respective insurancecompanies and are expected to average approximately 4.5% on a tax equivalentbasis during 2005. These increases in total assets were partially funded by areduction in the investment portfolio of $1.9 million.

 

Assetgrowth was primarily funded by growth in deposits of $53 million and growth inborrowed funds of $31 million.  Duringthe first nine months of 2005, non-interest bearing deposits increased from$272 million at year-end 2004 to $317 million at September 30, 2005.  Included in non-interest deposits are localtitle company deposits, which have increased $22 million from $36 million at December 31,2004 to $58 million at September 30, 2005. These funds do not receive interest but do result in an assessment ofservice fees by the title company’s service bureau to the Company.  During the first nine months of 2005, theservice fees on title company deposits incurred by the Company were less than1% of the average title company deposits outstanding.

 

**Results ofOperations**

 

The Company reported net income of$4.71 million for the three months ended September 30, 2005 (or $0.59per diluted share) compared to $3.85 million (or $0.49 per diluted share) forthe same period in 2004.  The quarterlyearnings represent an increase of $861,000 or 22.4% in net income and a 20.4%increase in diluted earnings per share over the third quarter ended September 30,2004.   The nine month earnings representan increase of $1,829,000 or 16.6% in net income and a 15.0% increase indiluted earnings per share over the nine months ended September 30, 2004.

 

The primary factors contributing to the increase inoperating results during the three and nine-month period ended September 30,2005 as compared to the same periods in 2004 include:

 

1.               An increase in net interest income of $2.17million or 16.5% in the third quarter over the same period in 2004 and$5.51 million or 14.5% in the first nine months of 2005 as compared to2004.  The net increase is due to anoverall increase in average earning assets and the benefit of recent rateincreases applied to the Company’s asset sensitive balance sheet.

 

2.               A decrease in loan loss provisions of $60,000and $460,000 for the third quarter and nine-month period ended September 30,2005 as compared to the same periods in 2004.   The percentage of allowance for loan losses to gross loans was 1.48% at September 30,2005 as compared to 1.47% at December 31, 2004 and 1.41% at September 30,2004.

 

3.               An increase in non-interest income of$884,000 and $1,741,000 for the third quarter and nine-month period ended September 30,2005 as compared to the same periods in 2004. The increase is primarily due to deposit service charges and fees of$326,000 and $429,000, the gain on sale of government-guaranteed loans of$152,000 and $555,000 for the third quarter and nine-month period ended September 30,2005 and the settlement of $275,000 from a historical contract disputerecognized in the second quarter of 2005.

 

4.               An effective tax rate of 36.5% and 35.8% forthe three and nine-month periods of 2005 as compared to 37.9% and 36.8% in thesame periods of the previous year.

 

The above factors wereoffset in part by:

 

1.               Total other expenses increased $1.9 millionor 21.3% and $5.14 million or 19.4% over the third quarter and nine-monthperiod of the previous year.  Included intotal other expenses for the nine-month period of 2005 was terminated mergerexpense of $398,000 for the termination of the Gold Country Financial Servicestransaction and $370,000 in compensation expense related to the retirement ofthe Company’s former Chief Operating Officer.

 

12

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**Return onAverage Assets and Average Equity**

 

Return on average assets (“ROA”) was 1.47% for thethird quarter of 2005 as compared to 1.33% for the third quarter of 2004.  Return on equity (“ROE”) was 15.38% for thethird quarter of 2005 as compared to 15.03% for the third quarter of 2004. **  **The increase in ROE was largely due to growthin net income, which exceeded the Company’s equity growth rate despiteincreased capital ratios from the retention of the Company’s earnings and theadditional capital received from the exercise of stock options.

 

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

 

Net interest income is the primary source of incomefor the Company and represents the excess of interest and fees earned oninterest-earning assets (loans, investments and Federal funds sold) over theinterest paid on deposits and borrowed funds. Net interest margin is netinterest income expressed as a percentage of average earning assets.

 

For the three months ended September 30, 2005,interest income on a tax equivalent basis increased by $4.0 million to $20.3million or 24.8% over the same period in 2004. Interest expense on depositaccounts and borrowings increased $1.8 million or 63.9% over the samethree-month period ended September 30, 2004. Average earning assetsyielded (on a fully tax equivalent basis) 7.00% versus 6.20% a year ago, theeffect of which was partially offset by an increase in the cost of funds wherethe average cost of funds increased to 2.21% from 1.46% a year ago. Net interestincome (on a tax equivalent basis) increased $2.2 million or 16.4% to $15.6million. The net interest margin increased 27 basis points to 5.37% from 5.10%for the same three-month period a year ago.

 

Forthe nine months ended September 30, 2005, interest income on a taxequivalent basis increased by $9.5 million to $56.4 million or 20.3% over thesame period in 2004. Interest expense on deposit accounts and borrowingsincreased $4.0 million or 48.6% over the same nine-month period ended September 30,2004. Average earning assets yielded (on a fully tax equivalent basis) 6.79%versus 6.27% a year ago, the effect of which was partially offset by anincrease in the cost of funds where the average cost of funds increased to1.96% from 1.43% a year ago. Net interest income (on a tax equivalent basis)increased $5.5 million or 14.3% to $44.2 million. The net interest marginincreased 16 basis points to 5.33% from 5.17% for the same nine-month period ayear ago.

 

Netinterest margin has improved, increasing 27 and 16 basis points respectivelyfor the three and nine-month periods ended September 30, 2005 as comparedto the same periods in 2004.  The primaryreasons that the Company was able to improve its net interest margin are 1) anincrease in the average loan to deposit ratio from 90.1% and 92.3% for thethree and nine-month periods ended September 30, 2004 to 96.1% and 95.3%for the same periods in 2005; 2) the benefit of the increase in market interestrates to the Company’s “asset sensitive” balance sheet; 3) an increase in thepercentage of average non-interest deposits to total deposits from 26.1% and25.4% for the three and nine-month periods ended September 30, 2004 to28.0% and 27.3% for the same periods in 2005; and 4) the benefit the Companyhas experienced as interest rates paid on Now, Money Market and Savingsaccounts have not yet increased to their normal relationship with prevailingmarket rates since market interest rate increases began in June 2004.

 

Overall,yields trended up from the prior year as a result of market interestrates.  The yield on earning assetsreached 7.00% in the third quarter of 2005 an increase of 20 basis points fromthe second quarter of 2005 and 80 basis points higher than the third quarter of2004.  The Cost of Funds was 1.64% forthe third quarter of 2005 up 17 basis pints from the second quarter of 2005 and54 basis points from the third quarter of 2004. The difference between the increase in yields of 80 basis points and theincrease of cost of funds of just 54 basis points over the past twelve monthswas the primary driver of margin expansion of 27 basis points during theperiod.

 

13

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

 

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

 
| ** **                                                                             | ** ** | **Three Months Ended**      | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                             | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                                                                             | ** ** | **Average**                 | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                                                             | ** ** | **Balance**                 | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning  assets:                                                                       |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Portfolio  loans (3)                                                                   |       | $1,013,338                  |       | $18,726 |   | 7.33% |   | $890,047 |   | $14,983 |   | 6.70% |   |
| Tax exempt  investment securities                                                      |       | 38,417                      |       | 660 |   | 6.82% |   | 34,222 |   | 602 |   | 6.99% |   |
| Taxable  investment securities                                                         |       | 43,482                      |       | 443 |   | 4.04% |   | 56,931 |   | 470 |   | 3.28% |   |
| Federal  funds sold                                                                    |       | 55,475                      |       | 481 |   | 3.44% |   | 59,038 |   | 203 |   | 1.37% |   |
| Interest  bearing deposits in banks                                                    |       | —                      |       | — |   | 4,000 |   | 16 |   | 1.54% |   |   |   |
| Average  earning assets                                                                |       | 1,150,712                   |       | 20,310 |   | 7.00% |   | 1,044,238 |   | 16,273 |   | 6.20% |   |
| Other assets                                                                           |       | 136,695                     |       |   |   |   |   | 124,152 |   |   |   |   |   |
| Less ALLL                                                                              |       | (15,020                     | )          |   |   |   |   | (12,843 | ) |   |   |   |   |
| Average  total assets                                                                  |       | $1,272,387                  |       |   |   |   |   | $1,155,547 |   |   |   |   |   |
| Interest  bearing liabilities:                                                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Savings, Now  and Money Market deposits                                                |       | $357,754                    |       | $732 |   | 0.81% |   | $376,649 |   | $687 |   | 0.73% |   |
| Time  deposits                                                                         |       | 400,984                     |       | 2,881 |   | 2.85% |   | 353,440 |   | 1,648 |   | 1.86% |   |
| Other  borrowings (1)                                                                  |       | 88,991                      |       | 1,116 |   | 4.98% |   | 55,354 |   | 549 |   | 3.95% |   |
| Average  interest bearing liabilities                                                  |       | 847,729                     |       | 4,729 |   | 2.21% |   | 785,444 |   | 2,885 |   | 1.46% |   |
| Non-interest  bearing liabilities                                                      |       | 295,793                     |       |   |   |   |   | 257,783 |   |   |   |   |   |
| Other  liabilities                                                                     |       | 7,402                       |       |   |   |   |   | 10,429 |   |   |   |   |   |
| Shareholders’  equity                                                             |       | 121,463                     |       |   |   |   |   | 101,892 |   |   |   |   |   |
| Average  total liabilities and shareholders’ equity                               |       | $1,272,387                  |       |   |   |   |   | $1,155,547 |   |   |   |   |   |
| Net  Interest-Rate Spread                                                              |       |                        |       |   |   | 4.79% |   |   |   |   |   | 4.74% |   |
| Impact of  non-interest bearing sources and other changes in balance sheet composition |       |                        |       |   |   | 0.58% |   |   |   |   |   | 0.36% |   |
| Net interest  income and net interest margin (2)                                       |       |                        |       | $15,582 |   | 5.37% |   |   |   | $13,388 |   | 5.10% |   |

 

----

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

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

(3) Includes loans onnon-accrual status.

 

14

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| ** **                                                                             | ** ** | **Nine Months Ended**       | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                             | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                                                                             | ** ** | **Average**                 | ** ** | ** ** | ** ** | **Yield/** | ** ** | ** ** | ** ** | **Average** | ** ** | **Yield/** | ** ** |
| ** **                                                                             | ** ** | **Balance**                 | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Earning  assets:                                                                       |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Portfolio  loans (3)                                                                   |       | $980,694                    |       | $52,086 |   | 7.10% |   | $864,779 |   | $43,436 |   | 6.71% |   |
| Tax exempt  investment securities                                                      |       | 37,632                      |       | 1,932 |   | 6.87% |   | 34,228 |   | 1,795 |   | 7.01% |   |
| Taxable  investment securities                                                         |       | 45,080                      |       | 1,339 |   | 3.97% |   | 49,903 |   | 1,202 |   | 3.22% |   |
| Federal  funds sold                                                                    |       | 46,307                      |       | 1,017 |   | 2.94% |   | 46,171 |   | 397 |   | 1.15% |   |
| Interest bearing  deposits in banks                                                    |       | 391                         |       | 7 |   | 2.39% |   | 3,983 |   | 36 |   | 1.19% |   |
| Average  earning assets                                                                |       | 1,110,104                   |       | 56,382 |   | 6.79% |   | 999,064 |   | 46,867 |   | 6.27% |   |
| Other assets                                                                           |       | 135,030                     |       |   |   |   |   | 123,046 |   |   |   |   |   |
| Less ALLL                                                                              |       | (14,582                     | )          |   |   |   |   | (12,383 | ) |   |   |   |   |
| Average  total assets                                                                  |       | $1,230,552                  |       |   |   |   |   | $1,109,727 |   |   |   |   |   |
| Interest  bearing liabilities:                                                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Savings, Now  and Money Market deposits                                                |       | $372,150                    |       | $2,299 |   | 0.83% |   | $354,145 |   | $1,830 |   | 0.69% |   |
| Time  deposits                                                                         |       | 376,315                     |       | 7,069 |   | 2.51% |   | 344,525 |   | 4,680 |   | 1.81% |   |
| Other  borrowings (1)                                                                  |       | 77,159                      |       | 2,765 |   | 4.79% |   | 63,459 |   | 1,658 |   | 3.49% |   |
| Average  interest-bearing liabilities                                                  |       | 825,624                     |       | 12,133 |   | 1.96% |   | 762,129 |   | 8,168 |   | 1.43% |   |
| Non-interest  bearing liabilities                                                      |       | 281,076                     |       |   |   |   |   | 238,281 |   |   |   |   |   |
| Other  liabilities                                                                     |       | 7,493                       |       |   |   |   |   | 10,778 |   |   |   |   |   |
| Shareholders’  equity                                                             |       | 116,359                     |       |   |   |   |   | 98,538 |   |   |   |   |   |
| Average  total liabilities and shareholders’ equity                               |       | $1,230,552                  |       |   |   |   |   | $1,109,727 |   |   |   |   |   |
| Net  Interest-Rate Spread                                                              |       |                        |       |   |   | 4.83% |   |   |   |   |   | 4.83% |   |
| Impact of  non-interest bearing sources and other changes in balance sheet composition |       |                        |       |   |   | 0.50% |   |   |   |   |   | 0.34% |   |
| Net interest  income and net interest margin (2)                                       |       |                        |       | $44,249 |   | 5.33% |   |   |   | $38,699 |   | 5.17% |   |

 

----

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

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

(3) Includes loans onnon-accrual status.

 

15

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

 

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

 
| ** **                               | ** ** | **Three Months Ended September 30,  2005 over 2004** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                               | ** ** | **Volume**                                                | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income: |       |                                                      |       |   |   |   |   |
| Portfolio  loans                         |       | $2,081                                                    |       | $1,662 |   | $3,743 |   |
| Tax-exempt  investment securities        |       | 74                                                        |       | (16 | ) | 58 |   |
| Taxable  investment securities           |       | (111                                                      | )          | 85 |   | (26 | ) |
| Federal  funds sold                      |       | (12                                                       | )          | 290 |   | 278 |   |
| Interest-bearing  deposits               |       | (16                                                       | )          | — |   | (16 | ) |
| Net increase                             |       | 2,016                                                     |       | 2,021 |   | 4,037 |   |
| Increase in  interest expense:           |       |                                                      |       |   |   |   |   |
| Savings, Now  and Money Market deposits  |       | (35                                                       | )          | 80 |   | 45 |   |
| Time  deposits                           |       | 222                                                       |       | 1,010 |   | 1,232 |   |
| Other  borrowings (1)                    |       | 335                                                       |       | 231 |   | 566 |   |
| Net increase                             |       | 522                                                       |       | 1,321 |   | 1,843 |   |
| Total net  increase (decrease)           |       | $1,494                                                    |       | $700 |   | $2,194 |   |

 

----

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

 
| ** **                               | ** ** | **Nine months Ended September 30,  2005 over 2004** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                               | ** ** | **Volume**                                               | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income: |       |                                                     |       |   |   |   |   |
| Portfolio  loans                         |       | $5,822                                                   |       | $2,828 |   | $8,650 |   |
| Tax-exempt  investment securities        |       | 179                                                      |       | (42 | ) | 137 |   |
| Taxable  investment securities           |       | (116                                                     | )          | 253 |   | 137 |   |
| Federal  funds sold                      |       | 1                                                        |       | 619 |   | 620 |   |
| Interest-bearing  deposits               |       | (32                                                      | )          | 3 |   | (29 | ) |
| Net increase                             |       | 5,854                                                    |       | 3,661 |   | 9,515 |   |
| Increase in  interest expense:           |       |                                                     |       |   |   |   |   |
| Savings, Now  and Money Market deposits  |       | 93                                                       |       | 377 |   | 470 |   |
| Time  deposits                           |       | 432                                                      |       | 1,957 |   | 2,389 |   |
| Other  borrowings (1)                    |       | 358                                                      |       | 748 |   | 1,106 |   |
| Net increase                             |       | 883                                                      |       | 3,082 |   | 3,965 |   |
| Total net  increase (decrease)           |       | $4,971                                                   |       | $579 |   | $5,550 |   |

 

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

 

16

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**Non-interestIncome**

** **

The Company’s non-interest income consists primarilyof service charges on deposit accounts, investment service fee income, otherservice fees, gains on the sale of government-guaranteed loans, and mortgageloan origination and processing fees.

 

For the three and nine-month periods ended September 30,2005, total non-interest income increased $884,000 or 34.7% and $1,741,000 or22.2% over the same periods in 2004. This increase is due in part to the increase in service charge income of$326,000 or 27.1% and $429,000 or 11.9% for the three and nine-month periodsended September 30, 2005 as compared to the same periods of 2004.

 

In addition, the companyrecorded gains on the sale of government-guaranteed loans of $152,000 and$555,000 for the three and nine-month periods ended September 30, 2005,there were no such gains recorded in 2004. Income from the sale and packaging of residential mortgage loansincreased $174,000 or 17.6% and $159,000 or 5.2% for the three and nine-monthperiods ended September 30, 2005 as compared to the same periods of2004.  Investment service fee income increased$114,000 or 81.4% and $115,000 or 22.2% for the three and nine-month periodsended September 30, 2005 as compared to the same periods of 2004

 

The Company also receivedproceeds of $275,000 for a settlement of a historic contract dispute, which wasrecorded in other income in the second quarter of 2005.

 

**Non-interestExpense**

 

Non-interest expensesconsist of salaries and related employee benefits, occupancy and equipmentexpenses, data processing fees, professional fees, directors’ fees, and other operatingexpenses. Non-interest expense increased $1.9 million or 21.3% and $5.14million or 19.4% over the same three and nine-month periods of 2004.  Salaries and benefits increased $1.08 millionor 22.1% and $2.62 million or 17.9% over the same three and nine-month periodsof last year, partially due to $370,000 in compensation expense related to theretirement of the Company’s former Chief Operating Officer in the secondquarter of 2005.  Other expensesincreased $566,000 or 24.2% and $1,381,000 or 19.6% over the same three andnine-month periods in 2004, partially due to two separate $100,000 reserves foroperational losses were recorded during the first and second quarter of2005.  Also included in total non-interestexpense was $398,000 in terminated merger charges recorded in the secondquarter of 2005 for the termination of the Gold Country Financial Servicesmerger agreement.

 

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

 
| ** **                                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine months Ended September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **Expense**                               | ** ** | **% of Avg  Earning  Assets**            | ** ** | **Expense** | ** ** | **% of Avg  Earning  Assets** | ** ** | **Expense** | ** ** | **% of Avg  Earning  Assets** | ** ** | **Expense** | ** ** | **% of Avg  Earning  Assets** | ** ** |
| Salaries and  benefits                    |       | $5,972                                    |       | 1.86%                                    |       | $4,892 |   | 1.68% |   | $17,277 |   | 1.88% |   | $14,660 |   | 1.76% |   |
| Occupancy &  equipment           |       | 1,757                                     |       | 0.55%                                    |       | 1,505 |   | 0.52% |   | 5,037 |   | 0.55% |   | 4,292 |   | 0.52% |   |
| Other  expenses                           |       | 2,906                                     |       | 0.91%                                    |       | 2,338 |   | 0.80% |   | 8,442 |   | 0.92% |   | 7,061 |   | 0.85% |   |
| Terminated  merger expenses               |       | (2                                        | )          | 0.00%                                    |       | — |   | 0.00% |   | 398 |   | 0.04% |   | — |   | 0.00% |   |
| Amortization  of core deposit intangibles |       | 180                                       |       | 0.06%                                    |       | 180 |   | 0.06% |   | 540 |   | 0.06% |   | 540 |   | 0.06% |   |
| Total  non-interest expense               |       | $10,813                                   |       | 3.37%                                    |       | $8,915 |   | 3.07% |   | $31,694 |   | 3.44% |   | $26,553 |   | 3.20% |   |

 

17

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**EfficiencyRatio**

 

The Company uses a widely accepted banking operating ratio as a measureof its progress in improving operating efficiency.  The efficiency ratio is derived by dividingtotal non-interest expenses (excluding amortization of intangibles, investmentsin tax credit limited partnerships and terminated merger expenses) by the sumof tax adjusted net interest income and non-interest income.  Simply put, this ratio describes theoperating expense necessary to generate $1 in tax equivalent totalrevenue.  The Company’s efficiency ratioincreased modestly in the third quarter and nine-month periods of 2005 drivenby the expense increases outlined above in the “Non-interest Expense”discussion.

 

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

 
| ** **                                    | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine months Ended   September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                    | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Non-interest  expense                         |       | $10,813                                     |       | $8,915                                     |       | $31,694 |   | $26,553 |   |
| Merger  expenses                              |       | (108                                        | )          | (56                                        | )          | (324 | ) | (168 | ) |
| Amortization  of core deposit intangibles     |       | (2                                          | )          | —                                     |       | (398 | ) | — |   |
| Investment  in limited partnership            |       | (180                                        | )          | (180                                       | )          | (540 | ) | (540 | ) |
| Net  non-interest expense                     |       | $10,523                                     |       | $8,679                                     |       | $30,432 |   | $25,845 |   |
|                                          |       |                                        |       |                                       |       |   |   |   |   |
| Fully tax  equivalent income:                 |       |                                        |       |                                       |       |   |   |   |   |
| Net interest  income                          |       | $15,339                                     |       | $13,165                                    |       | $43,539 |   | $38,032 |   |
| Non-interest  income                          |       | 3,430                                       |       | 2,546                                      |       | 9,570 |   | 7,829 |   |
| Tax benefit  adjustment for tax-exempt income |       | 376                                         |       | 310                                        |       | 1,072 |   | 933 |   |
| Total fully  tax equivalent income            |       | $19,145                                     |       | $16,021                                    |       | $54,181 |   | $46,794 |   |
|                                          |       |                                        |       |                                       |       |   |   |   |   |
| Efficiency  Ratio                             |       | 55.0%                                       |       | 54.2%                                      |       | 56.2% |   | 55.2% |   |

 

**IncomeTaxes**

 

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

 
| ** **          | ** ** | **Three Months Ended** | ** ** | **Nine months Ended**  | ** ** |
|---------------------|------------|------------------------|------------|------------------------|------------|
| ** **          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **          | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Tax  provision      |       | $2,706                 |       | $2,347                 |       | $7,141 |   | $6,403 |   |
| Effective  tax rate |       | 36.5%                  |       | 37.9%                  |       | 35.8% |   | 36.8% |   |

 

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

 

18

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

 

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

 

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

 

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

 
| ** **                                           | ** ** | **September 30,** | ** ** | **% of**  | ** ** | **December 31,** | ** ** | **% of**  | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------|------------|-----------------------|------------|-----------|------------|
| ** **                                           | ** ** | **2005**               | ** ** | **Total** | ** ** | **2004**              | ** ** | **Total** | ** ** |
| Commercial  and residential real estate mortgage     |       | $667,532               |       | 64.84%    |       | $600,108              |       | 64.08%    |       |
| Commercial  and residential real estate construction |       | 226,535                |       | 22.00%    |       | 199,140               |       | 21.26%    |       |
| Commercial                                           |       | 109,048                |       | 10.59%    |       | 119,823               |       | 12.79%    |       |
| Agricultural                                         |       | 17,841                 |       | 1.73%     |       | 11,514                |       | 1.23%     |       |
| Other loans                                          |       | 8,540                  |       | 0.83%     |       | 5,928                 |       | 0.63%     |       |
| Total                                                |       | 1,029,496              |       | 100.00%   |       | 936,513               |       | 100.00%   |       |
| Deferred  loan fees and costs, net                   |       | (3,507                 | )          | -0.34%    |       | (3,008                | )          | -0.29%    |       |
| Less  allowance for loan losses                      |       | (15,251                | )          | -1.48%    |       | (13,786               | )          | -1.47%    |       |
| Total net  loans                                     |       | $1,010,739             |       |      |       | $919,719              |       |      |       |

 

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

 
| ** **                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Non-accrual loans                                        |       | $890                   |       | $889                  |       |
| Non-performing assets as a %  of total assets            |       | 0.07%                  |       | 0.07%                 |       |
| Non-accrual loans as a % of  gross loans                 |       | 0.09%                  |       | 0.10%                 |       |
| Ratio of allowance for loan  losses to non-accrual loans |       | 17.14                  |       | 15.51                 |       |

 

   TheCompany’s non-accrual loans increased from $889,000 to $890,000 in the firstnine months of 2005.  The Company’s “coverageratio” or the ratio of allowance for loan losses to non-accrual loans increasedfrom 15.5 to 17.1 during the first nine months of 2005.  The Company carried no other real estateowned as of September 30, 2005 or December 31, 2004.

 

**Allowancefor Loan losses**

 

Theallowance for loan losses is established through charges to earnings in theform of the provision for loan losses. Loan losses are charged to, andrecoveries are credited to, the allowance for loan losses. The provision forloan losses is determined after considering various factors such as loan loss experience,current economic conditions, maturity of the portfolio, size of the portfolio,industry concentrations, borrower credit history, the existing allowance forloan losses, independent loan reviews, current charges to and recoveries withinthe allowance for loan losses and the overall quality of the portfolio asdetermined by management, regulatory agencies, and independent credit reviewconsultants retained by the Company.

 

19

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The adequacy of the Company’s allowance for loan lossesis based on specific and formula allocations to the Company’s loan portfolio.Specific allocations are made for impaired loans. The specific allocations areincreased or decreased through management’s reevaluation of the status of theparticular problem loans. Loans which do not receive a specific allocationreceive an allowance allocation based on a formula represented by a percentagefactor based on underlying collateral, type of loan, historical charge-offs andgeneral economic conditions which is applied against the general portfoliosegments.

 

It isthe policy of management to make additions to the allowance for loan losses sothat it remains adequate to cover anticipated charge-offs and managementbelieves that the allowance at September 30, 2005 is adequate. However,the determination of the amount of the allowance is judgmental and subject toeconomic conditions which cannot be predicted with certainty. Accordingly, theCompany cannot predict whether charge-offs of loans in excess of the allowancemay be required in future periods. The provision for loan losses reflects anaccrual sufficient to cover projected potential charge-offs.  The table below sets forth the allocation ofthe allowance for loan losses by loan type as of the dates specified. Theallocation of individual categories of loans includes amounts applicable tospecifically identified, as well as unidentified, losses inherent in thatsegment of the loan portfolio and will necessarily change whenever managementdetermines that the risk characteristics of the loan portfolio have changed.

 

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

 

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

 
| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** **                                                                                     | **Nine months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------------------------------------------------------------------------------------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                   | **               ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Beginning  balance for allowance for loan losses          |       | $14,780                                    |                                                                                           | $12,661                                   |       | $13,786 |   | $11,529 |   |
| Provision  for loan losses                                |       | 540                                        |                                                                                           | 600                                       |       | 1,450 |   | 1,910 |   |
| Charge offs:                                              |       |                                       |                                                                                           |                                      |       |   |   |   |   |
| Commercial                                                |       | 105                                        |                                                                                           | 257                                       |       | 393 |   | 432 |   |
| Real estate                                               |       | —                                     |                                                                                           | —                                    |       | — |   | — |   |
| Agricultural                                              |       | —                                     |                                                                                           | —                                    |       | — |   | — |   |
| Other                                                     |       | 4                                          |                                                                                           | 1                                         |       | 44 |   | 26 |   |
| Total charge  offs                                        |       | 109                                        |                                                                                           | 258                                       |       | 437 |   | 458 |   |
| Recoveries:                                               |       |                                       |                                                                                           |                                      |       |   |   |   |   |
| Commercial                                                |       | 40                                         |                                                                                           | 78                                        |       | 416 |   | 97 |   |
| Real estate                                               |       | —                                     |                                                                                           | —                                    |       | — |   | — |   |
| Agricultural                                              |       | —                                     |                                                                                           | —                                    |       | — |   | — |   |
| Other                                                     |       | —                                     |                                                                                           | 2                                         |       | 37 |   | 4 |   |
| Total  recoveries                                         |       | 41                                         |                                                                                           | 80                                        |       | 453 |   | 101 |   |
| Net (charge  offs) recoveries                             |       | (68                                        | )                                                                                              | (178                                      | )          | 15 |   | (357 | ) |
| Ending  balance                                           |       | $15,251                                    |                                                                                           | $13,082                                   |       | $15,251 |   | $13,082 |   |
| ALL to total  loans                                       |       | 1.48%                                      |                                                                                           | 1.41%                                     |       | 1.48% |   | 1.41% |   |
| Annualized  net (charge offs) recoveries to average loans |       | -0.03%                                     |                                                                                           | -0.08%                                    |       | 0.00% |   | -0.06% |   |
| Annualized  provision to average loans                    |       | 0.21%                                      |                                                                                           | 0.27%                                     |       | 0.20% |   | 0.29% |   |

 

20

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**Liquidity**

 

   A FundsManagement Policy has been developed by the Company’s Management and approvedby the Company’s Board of Directors that establishes guidelines for investmentsand liquidity. The objectives of this policy are to provide liquidity to meetthe financial requirements of the Company’s customers, maintain adequatereserves as required by regulatory agencies and maximize earnings of theCompany. The Company’s liquidity ratio at September 30, 2005 was 10.8% andwas 12.7% at December 31, 2004.  Thereduction in the liquidity ratio at September 30, 2005 is due to adecrease in unpledged available-for-sale investments of $13.4 million andgrowth in total liabilities of $85 million. Liquidity is computed by dividing liquid assets (consisting of cash anddue from banks, available-for-sale investments not pledged, federal funds soldand loans held for sale) by total liabilities. In the first nine months of 2005gross loans grew $93 million while deposits grew $53 million.  As a result of this deficit, managementincreased FHLB borrowings by $30.5 million. While the Company has over $100 million in available FHLB borrowings,management has deployed a series of strategies designed to increase depositgathering which management expects will result in improved deposit growth inthe coming periods.  Management believesit maintains adequate liquidity levels.

 

**CapitalAdequacy**

 

   Overallcapital adequacy is monitored on a regular basis by management and reported tothe 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.

 

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

 

    The minimum ratio of totalrisk-based capital to risk-weighted assets, including certain off-balance sheetitems, is 8% (10% to be considered well-capitalized).  The minimum ratio of Tier 1 capital toaverage assets (“leverage ratio”) is 4.0% (5.0% to be consideredwell-capitalized).  The minimum ratio ofTier 1 capital to risk-weighted assets is 4.0% (6.0% to be consideredwell-capitalized).  At least one-half(4%) of the total risk-based capital is to be comprised of common equity; thebalance may consist of debt securities and a limited portion of the allowancefor loan losses.  Subordinated debenturesin the amount of $36 million are included in the Company’s Tier 1 capital as ofSeptember 30, 2005 and December 31, 2004, respectively, as allowed byFederal Reserve regulations, in the consolidated totals below.

 

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

 
| ** **                                                     | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                     | ** ** | **ACB**                     | ** ** | **CCB**                    | ** ** | **LCB** | ** ** | **WSNB** | ** ** | **Company** | ** ** | **ACB** | ** ** | **CCB** | ** ** | **LCB** | ** ** | **WSNB** | ** ** | **Company** | ** ** |
|                                                           |       |                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  risk-based capital to risk-weighted assets              |       | 12.2%                       |       | 11.3%                      |       | 12.2% |   | 12.0% |   | 13.0% |   | 10.3% |   | 12.3% |   | 11.8% |   | 11.2% |   | 12.6% |   |
| Tier 1  capital to risk-weighted assets                        |       | 10.9%                       |       | 10.1%                      |       | 11.0% |   | 10.7% |   | 11.7% |   | 9.0% |   | 11.0% |   | 10.5% |   | 9.9% |   | 11.3% |   |
| Tier 1  capital to average assets (“leverage ratio”) |       | 9.0%                        |       | 8.2%                       |       | 9.9% |   | 9.2% |   | 9.9% |   | 7.3% |   | 8.5% |   | 9.6% |   | 8.6% |   | 9.5% |   |

 

The Company andits bank subsidiaries continue to meet all regulatory capital requirements at September 30,2005.

 

21

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

 

   As a financialinstitution, the Company’s primary component of market risk is interest ratevolatility. Fluctuations in interest rates will ultimately impact both thelevel of interest income and interest expense recorded on a large portion ofthe Company’s assets and liabilities, and the market value of all interestearning assets and interest bearing liabilities, other than those which possessa short term to maturity. Since substantially all of the Company’s interestearning assets and interest bearing liabilities are located at the bankingsubsidiary level, most of the Company’s interest rate risk exposure lies at thebanking subsidiary level other than $36 million in subordinated debenturesissued by the Company’s subsidiary grantor trusts. As a result, all significantinterest rate risk procedures are performed at the banking subsidiary level.The subsidiary banks’ real estate loan portfolios, concentrated primarilywithin Northern California, are subject to risks associated with their localeconomies.

 

   The fundamentalobjective of the Company’s management of its assets and liabilities is tomaximize the Company’s economic value while maintaining adequate liquidity andan exposure to interest rate risk deemed by Management to be acceptable.Management believes an acceptable degree of exposure to interest rate riskresults from the management of assets and liabilities through maturities,pricing and mix to attempt to neutralize the potential impact of changes inmarket interest rates. The Company’s profitability is dependent to a largeextent upon its net interest income, which is the difference between itsinterest income on interest-earning assets, such as loans and investments, andits interest expense on interest-bearing liabilities, such as deposits and borrowings.The Company is subject to interest rate risk to the degree that itsinterest-earning assets reprice differently than its interest-bearingliabilities. The Company manages its mix of assets and liabilities with thegoals of limiting its exposure to interest rate risk, ensuring adequateliquidity, and coordinating its sources and uses of funds.

 

   TheCompany seeks to control interest rate risk exposure in a manner that willallow for adequate levels of earnings and capital over a range of possible interestrate environments. The Company has adopted formal policies and practices tomonitor and manage interest rate risk exposure. Management believes historically it has effectively managed the effectof changes in interest rates on its operating results.  Management believes that it can continue tomanage the short-term effect of interest rate changes under various interestrate scenarios.

 

Managementdeploys an interest rate sensitivity measurement tool to measure the Company’sexposure to future changes in interest rates. This model measures the expected cash flows and repricing of eachfinancial asset/liability separately in measuring the Company’s and each bank’sinterest sensitivity. Based on the results of this model, management believesthe Company balance sheet is “asset sensitive” at this time.  This means the Company expects (all otherthings being equal) to expand its net interest income if market rates rise andexpects it conversely to contract if market rates fall.  The level of potential or expectedcontraction indicated by the tables below is considered acceptable bymanagement and is compliant with the Company’s ALCO policies.  Management will continue to perform thisanalysis each quarter to further validate the expected results against actualdata.

 

22

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Thefollowing tables, in management’s opinion, reflect estimates of the Company’sfuture net interest income under different interest rate scenarios.  The net interest income estimates are one-yearprojections based on the earning assets and interest- bearing liabilities as ofSeptember 30, 2005.  The estimatesare derived from an asset/liability management model first deployed in April 2003.  There are numerous underlying assumptions,including but not limited to, 1) a static balance sheet and mix of earningassets and interest-bearing liabilities; 2) instruments that mature are assumedto be replaced by similar instruments at prevailing market rates; 3) interestrate changes assume a parallel shift in the yield curve and 4) changes indeposit rates will correlate to prevailing interest rates to the same degreethat the Company has experienced in the past. Management believes these model assumptions individually and in theaggregate are reasonable.  However, theoutput of simulation modeling results in an estimate, not a precisecalculation. If any of the assumptions used in the simulation modeling prove tobe inaccurate, actual future results could differ materially from thoseprojected.

 

Underthe shock scenarios, the changes to interest rates are assumed to occurimmediately (on October 1, 2005). Under the ramp scenarios the changes to interest rates gradually ramp upor down over the course of one year (dollars in thousands).

 
| ** **                     | ** ** | **Shock scenario**                   | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| **Change in   Interest Rates** | ** ** | **Estimated   Net Interest  Income** | ** ** | **Dollar Change  from Base** | ** ** | **Percentage  Change  from Base** | ** ** |
|                           |       |                                 |       |   |   |   |   |
| 300 basis point rise           |       | $67,934                              |       | $7,708 |   | 12.80% |   |
| 200 basis point rise           |       | 65,375                               |       | 5,149 |   | 8.55% |   |
| 100 basis point rise           |       | 62,777                               |       | 2,551 |   | 4.24% |   |
| 50 basis point rise            |       | 61,532                               |       | 1,306 |   | 2.17% |   |
| **Base scenario**              | ** ** | **60,226**                           | ** ** | **0** | ** ** | **0.00%** | ** ** |
| 50 basis point decline         |       | 58,308                               |       | (1,918 | ) | -3.19% |   |
| 100 basis point decline        |       | 56,364                               |       | (3,862 | ) | -6.41% |   |
| 200 basis point decline        |       | 52,555                               |       | (7,671 | ) | -12.74% |   |

 
| ** **                     | ** ** | **Ramp scenario**                    | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| **Change in   Interest Rates** | ** ** | **Estimated   Net Interest  Income** | ** ** | **Dollar Change  from Base** | ** ** | **Percentage  Change   from Base** | ** ** |
|                           |       |                                 |       |   |   |   |   |
| 300 basis point rise           |       | $62,730                              |       | $2,504 |   | 4.16% |   |
| 200 basis point rise           |       | 61,895                               |       | 1,669 |   | 2.77% |   |
| 100 basis point rise           |       | 61,044                               |       | 818 |   | 1.36% |   |
| 50 basis point rise            |       | 60,649                               |       | 423 |   | 0.70% |   |
| **Base scenario**              | ** ** | **60,226**                           | ** ** | **0** | ** ** | **0.00%** | ** ** |
| 50 basis point decline         |       | 59,478                               |       | (748 | ) | -1.24% |   |
| 100 basis point decline        |       | 58,707                               |       | (1,519 | ) | -2.52% |   |
| 200 basis point decline        |       | 57,087                               |       | (3,139 | ) | -5.21% |   |

 

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The following table shows the loan portfoliocomposition by rate type as of September 30, 2005.  It further identifies when and at what rateincrease scenario the variable rate loans at floors will most likely come offtheir floor and reprice. Loans at floors can generally be refinanced by anotherfinancial institution at anytime by the borrower without penalty if theborrower chooses to do so.  The Companymonitors the rate of these loans relative to prevailing rates and will modifyterms of certain loans that are at a significantly higher rate than marketdirectly with the borrower when the relationship dictates it is a prudentbusiness decision to do so (dollars in thousands).

 
| **Loans**            | ** ** | **Balance** | ** ** | **% of  Total** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|-------------|------------|-----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Variable             |       | $616,273    |       | 60%             |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Variable at  Floor * |       | 180,071     |       | 17%             |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Fixed                |       | 233,152     |       | 23%             |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Total Gross  Loans   |       | $1,029,496  |       | 100%            |       |       |       |       |       |       |       |       |       |       |       |       |       |

 

**VariableLoans at Floor**

 
| **Rate Increase  Scenarios** | ** **  | **Coming off Floor** | ** **      | **Repricing Schedule** | ** **        |
|------------------------------|-------------|----------------------|-----------------|------------------------|-------------------|
| ** **                   | **Balance** | ** **           | **% of  Total** | ** **             | **Within 1 year** | ** ** | **1-2 years** | ** ** | **2-3 years** | ** ** | **3-4 years** | ** ** | **4+ years** | ** ** | **Total** | ** ** |
| 50 bps                       |        | $174,062             |            | 96.7%                  |              | $44,229 |   | $36,899 |   | $30,978 |   | $43,267 |   | $18,688 |   | $174,062 |   |
| 100 bps                      |        | 1,887                |            | 1.0%                   |              | 1,541 |   | 0 |   | 346 |   |   |   |   |   | 1,887 |   |
| >100 bps                  |        | 4,122                |            | 2.3%                   |              | 2,538 |   | 29 |   | 743 |   | 168 |   | 645 |   | 4,122 |   |
| Total at  Floor              |        | $180,071             |            | 100%                   |              | $48,308 |   | $36,928 |   | $32,067 |   | $43,434 |   | $19,333 |   | $180,071 |   |

 

Of the fixed loans outstanding at September 30, 2005 approximately 40% will come due within one year.

 

24

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**ITEM 4.    Controls and Procedures.**

 

Evaluation of Disclosure Controls andProcedures:  As of the end of the periodcovered by this report and pursuant to Rule 13a-15 of the SecuritiesExchange Act of 1934 (the Exchange Act), the Company’s management, includingthe Chief Executive Officer and Chief Financial Officer, conducted anevaluation of the effectiveness and design of the Company’s disclosure controls and procedures (asthat term is defined in Rules 13a-15(e) and 15d-15(e) of theExchange Act) and concluded that the Company’s disclosure controls andprocedures are effective to ensure that information required to be disclosed inthe Company’s reports filed with the Securities and Exchange Commissionpursuant to the Exchange Act is accumulated and communicated to managementincluding the Company’s Chief Executive Officer and Chief FinancialOfficer.  Based upon that evaluation, asof the end of the period covered by this report, the Chief Executive Officerand Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective inrecording, processing, summarizing and reporting information required to bedisclosed by the Corporation, withinthe time periods specified in the Securities and Exchange Commission’s rules andforms.

 

Changes in Internal Controls:  In addition and as of the end of the periodcovered by this report, there have been no changes in internal control overfinancial reporting (as defined in Rule 13a-15(f) and 15d-15(f) ofthe Exchange Act) during the quarter to which this report relates that havematerially affected or are reasonably likely to materially affect, the internalcontrol over financial reporting.

 

25

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**PART II.Other Information**

 

**Item #1.Legal proceedings**

 

The Company and its subsidiaries are involved invarious routine legal actions arising in the ordinary course of business. TheCompany believes that the ultimate disposition of all currently pending matterswill not have a material adverse effect on the Company’s financial condition orresults of operations.

 

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

N/A

 

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

N/A

 

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

N/A

 

# **Item #5. OtherInformation**

N/A

 

26

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**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 Benefits Agreement dated January 16,  2004 between Mr. Kirk Dowdell and Western Sierra Bancorp. (3)                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.2                 |       | Executive Salary Continuation Agreement  dated August 22, 2002, between Mr. Gary D. Gall and Western Sierra  National Bank. (1)                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.3                 |       | 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.                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.4                 |       | Western Sierra National Bank 1989 Stock  Option Plan, form of incentive stock option and form of nonqualified stock  option agreements are contained in the Registrant’s Registration Statement on  Form S-4, file #333-66675, as Exhibit 10.10 and are incorporated  herein by this reference. |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.5                 |       | 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.       |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.6                 |       | 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.                                                |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.7                 |       | 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.                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.8                 |       | 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.                                                |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.9                 |       | Executive Salary Continuation Agreement  dated February 1, 2002, between Mr. Kirk N. Dowdell. (1)                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.10                |       | Severance Benefits Agreement dated July 25,  2002 between Mr. Gary D. Gall and Western Sierra Bancorp included as an  exhibit to the Registrant’s 10-K for December 31, 2004 and incorporated  herein by this reference.                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.11                |       | 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.                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.12                |       | Wells Fargo Note Contract dated April 10,  2003. (1)                                                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.13                |       | Executive Salary Continuation Agreement  dated June 22, 2002, between Mr. Fred Rowden and Central California  Bank. (1)                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.14                |       | Executive Salary Continuation Agreement  dated June 1, 2002, between Mr. Phillip Wood and Western Sierra  National Bank. (1)                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.15                |       | Executive Salary Continuation Agreement  dated June 25, 2002, between Mr. Doug Nordell and Roseville 1st  National Bank. (1)                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.16                |       | Contract between Woodbury Financial  Services, Inc. and Western Sierra National Bank dated July 22,  2003. (2)                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.17                |       | Summary of financial terms for Western  Sierra Statutory Trusts III and IV. (2)                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.18                |       | Severance Benefits Agreement dated February 10,  2004 between Mr. Anthony Gould and Western Sierra Bancorp. (3)                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.19                |       | Western Sierra Bancorp 2004 Stock Option  Plan is included as an exhibit in the Registrant’s Definitive Proxy Statement  for 2004 and is incorporated herein by this reference.                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                           |
| 10.20                |       | Form of the nonqualified and incentive  agreements for the Western Sierra Bancorp 2004 stock option plan is included  as an exhibit in the Registrant’s September 30, 2004 10-Q and is  incorporated herein by this reference.                                                                  |

 

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| 10.21  |   | Employment Agreement dated May 3,  2005, between Western Sierra Bancorp and Patrick J. Rusnak is included in the  Registrant’s March 31, 2005 10-Q and is incorporated herein by this  reference.                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                             |
| 10.22  |   | Retirement, Consulting and Noncompetition Agreement dated September 30,  2005 between Western Sierra Bancorp and John G. Briner was filed on Form 8-K,  file #000-25979, and is incorporated herein by this reference. |
|   |   |                                                                                                                                                                                                                             |
| 10.23  |   | Executive Survivor Income Agreement dated July 13, 2005 between  Western Sierra Bank and Anthony J. Gould was filed on Form 8-K, file #000-25979,  and is incorporated herein by this reference.                       |
|   |   |                                                                                                                                                                                                                             |
| 10.24  |   | Deferred Compensation Agreement dated July 22, 2005 between  Western Sierra Bancorp and Patrick J. Rusnak was filed on Form 8-K, file  #000-25979, and is incorporated herein by this reference.                       |
|   |   |                                                                                                                                                                                                                             |
| 11.1   |   | Statement re: Computation of earnings per  share is included in Note 12 to the consolidated 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                                                                                                                                                                                  |

 

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

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

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

 

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**SIGNATURES**

 

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

 

 
| **WESTERN SIERRA BANCORP**   |     |                                                               |                 |
|------------------------------|----------|--------------------------------------------------------------------|----------------------|
| (Registrant)                 |     |                                                               |                 |
|                         |     |                                                               |                 |
| Date:  November 7, 2005 |     |                                                               |                 |
|                         |     |                                                               |                 |
|                         |     |                                                               |                 |
|                         |     |                                                               | /s/ GARY D. GALL     |   |   |
|                         |     | Gary D. Gall                                                       |                 |
| * *                     | * * | *President/Chief Executive Officer*                                |                 |
|                         |     |                                                               |                 |
|                         |     |                                                               |                 |
|                         |     |                                                               | /s/ ANTHONY J. GOULD |   |   |
|                         |     | Anthony J. Gould                                                   | * *             |
|                         |     | *Executive Vice President/Chief Financial and  Accounting Officer* | * *             |
|                              |          |                                                                    |                      |  |  |  |  |

 

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