UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ý Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2004

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 000-25979

WESTERN SIERRA BANCORP

(Exact name of Registrant as specified in its charter)

California		68-0390121
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
4080 Plaza Goldorado Circle, Cameron Park, CA		95682
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (530) 677-5600

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K .

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

The aggregate market value of the Registrant’s common stock held by non-affiliates on June 30, 2004 (based on the closing sale price of the Common Stock of $30.99) was approximately $212,200,000.

As of March 1, 2005 there were 7,631,592 shares outstanding of the Registrant’s common stock.

Documents Incorporated by Reference

Portions of the Company’s Definitive Proxy Statement for the 2005 Annual Shareholders’ Meeting to be filed with the Securities and Exchange Commission pursuant to Regulation 14A are incorporated by reference in Part III, Items 10-13.

TABLE OF CONTENTS


		PART I
Forward-Looking Information
Item 1.		Business
Item 2.		Properties
Item 3.		Legal Proceedings
Item 4.		Submission of Matters to a Vote of Securities Holders

		PART II
Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.		Selected Financial Data
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7a.		Quantitative and Qualitative Disclosures about Market Risk
Item 8.		Financial Statements and Supplementary Data
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A		Controls and Procedures
Item 9B		Other Information

		PART III
Item 10.		Directors and Executive Officers of the Registrant
Item 11.		Executive Compensation
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.		Certain Relationships and Related Transactions
Item 14.		Principal Accountant Fees and Services

		PART IV
Item 15.		Exhibits and Financial Statement Schedules

PART I

Forward-Looking Information

This Annual Report on Form 10-K includes forward-looking statements and information that is covered by the “safe harbor” provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements (which involve Western Sierra Bancorp’s (the “Company’s”) plans, beliefs and goals, refer to estimates or use similar terms) involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors:

• Competitive pressure in the banking industry, competition in the markets the Company operates in and changes in the regulatory environment

• Changes in the interest rate environment and volatility of rate sensitive deposits

• An increase in mortgage interest rates, which would have a negative effect on mortgage refinancing volume

• Declines in the health of the economy, nationally or regionally, which could reduce the demand for loans or reduce the value of real estate collateral securing most of the Company’s loans

• Credit quality deterioration, which could cause an increase in the provision for loan and lease losses

• Devaluation of fixed income securities

• Asset/liability matching risks and liquidity risks

• Loss of key personnel

• Operational interruptions including data processing systems failure and fraud

The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and other information in this Report.

Item 1. Description of Business

General

The Company 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 the purpose of becoming the parent corporation of Western Sierra National Bank, and on December 31, 1996, the reorganization was effected and shares of the Company’s common stock were exchanged for the common shares held by Western Sierra National Bank’s shareholders.

In April 1999, the Company acquired Roseville 1st National Bank and Lake Community Bank in a stock for stock exchange. In May of 2000, the Company acquired Sentinel Community Bank in a stock for stock exchange. Each of these mergers was accounted for as a pooling of interests and, accordingly, all prior period financial statements have been restated to reflect the combined operations of the Company, Roseville 1st National Bank, Lake Community Bank and Sentinel Community Bank. Sentinel Community Bank at the time of its acquisition was immediately merged into Western Sierra National Bank. In May of 2000, Roseville 1st National Bank was also merged into Western Sierra National Bank.

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

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

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

In November 2004, the Company entered into a definitive merger agreement to acquire Gold Country Financial Services, the holding company for Gold Country Bank, headquartered in Marysville, California. Under the terms of the agreement, Gold Country Bank will merge into WSNB in a stock and cash deal valued at approximately $23.1 million. The transaction is expected to close by April 2005. Shareholders of Gold Country on March 7, 2005 approved the merger, and completion of the merger is subject to regulatory approval and satisfaction of certain conditions.

The combination of Gold Country Bank, with over $140 million in assets and five branch locations will result in consolidated assets of over $1.3 billion for the Company, which will then have 35 branch locations.

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

At December 31, 2004 the Company had $1.2 billion in total assets and $1.02 billion in total deposits. The asset and deposit totals for each bank subsidiary at December 31, 2004 were: Western Sierra Bank - $557 million in assets and $503 million in deposits, Lake Community Bank - $117 million in assets and $104 million in deposits, Central California Bank - $396 million in assets and $343 million in deposits, Auburn Community Bank - $128 million in assets and $83 million in deposits.

The Company’s geographic market share and demographic data on counties where the Company has greater than 1% of total deposits are as follows:


County	Rank	Branches	Deposits ($000)	Market Share	Percent of Franchise	Population 2004A	PopChange 00-04	PopChange 04-09	Median HHI 2004A	HHI Change 00-04	HHI Change 04-09
												Jobless Rate
												11/04	11/03
El Dorado	5	5	223,985	11.4%	19.7%	169,940	8.7%	9.9%	$59,653	14.7%	14.2%	4.5%	5.1%
Placer	7	7	185,528	4.2%	16.3%	290,885	17.1%	18.1%	$64,989	11.2%	13.3%	4.1%	4.5%
Tuolumne	3	6	163,514	17.9%	14.4%	56,610	3.9%	4.5%	$43,628	11.2%	14.3%	6.6%	6.5%
Sacramento	19	3	148,104	0.9%	13.0%	1,343,090	9.8%	11.0%	$48,733	9.4%	13.74%	4.9%	5.5%
Lake	3	2	106,453	15.5%	9.4%	62,990	8.0%	9.1%	$33,072	10.4%	16.9%	9.1%	9.8%
Calaveras	2	4	81,747	21.3%	7.2%	43,712	7.8%	8.9%	$46,934	12.9%	17.5%	6.7%	7.4%
Yuba	4	2	63,626	17.2%	5.6%	63,461	5.4%	6.2%	$33,416	8.1%	14.0%	11.9%	13.0%
Sutter	7	2	57,970	6.2%	5.1%	84,640	7.2%	8.3%	$41,380	6.4%	9.6%	13.6%	13.8%
Contra Costa	23	1	35,548	0.2%	3.1%	1,008,177	6.3%	7.2%	$71,905	11.3%	14.7%	4.3%	5.1%
San Joaquin	21	1	23,698	0.1%	2.1%	635,646	12.8%	14.0%	$45,427	8.4%	11.1%	9.4%	10.2%
Stanislaus	19	1	18,336	0.4%	1.6%	497,718	11.4%	12.6%	$43,894	8.3%	9.8%	10.5%	11.2%
Amador	7	1	17,454	2.9%	1.5%	37,208	6.0%	6.9%	$49,057	12.3%	18.2%	4.5%	4.6%
Butte	10	1	12,438	0.5%	1.1%	212,004	4.4%	5.1%	$34,936	7.8%	15.6%	6.9%	7.4%
Weighted Average: California Franchise					100.0%	4,506,081	9.1%	10.1%	$50,404	11.2%	14.2%	6.5%	7.0%
Aggregate: Entire State of California						35,849,123	5.8%	6.8%	$52,614	9.7%	12.6%	5.8%	6.6%
Aggregate: National						292,936,668	4.1%	4.8%	$46,475	8.8%	11.0%	5.4%	5.9%

Source: SNL Data March 2005

The Company was the 48th largest bank holding company in California at December 31, 2004, with less than 1% of the market in California.

Western Sierra National Bank was organized under national banking laws and commenced operations as a national bank on January 4, 1984. Western Sierra National Bank is a member of the Federal Reserve System, and the FDIC insures its deposits to the maximum amount permitted by law. Western Sierra National Bank’s head office is located at 4080 Plaza Goldorado Circle, Cameron Park, and its branch offices are located at 4011 Plaza Goldorado, Cameron Park, CA, 2661 Sanders Drive, Pollock Pines, CA, 3970 J Missouri Flat Road, Placerville, CA, 1450 Broadway, Placerville, CA, 3880 El Dorado Hills Blvd., El Dorado Hills, CA, 571 5th Street, Lincoln, CA, 1545 River Park Dr. #101 & #200, Sacramento, CA, 1801 Douglas Blvd., Roseville, CA, 6951 Douglas Blvd., Granite Bay, CA, 9050 Fairway Drive, Roseville, CA, 2779 East Bidwell, Folsom, CA, 9610 Bruceville Rd. #100, Elk Grove, CA and 2761 Del Paso Road, Sacramento, CA.

Western Sierra National Bank does not have any other subsidiaries other than Sentinel Associates, Inc., an inactive entity formed by Sentinel Bank in 1983 to develop single-family residential real estate.

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

Central California Bank was incorporated under the laws of the State of California on January 13, 1997 and commenced operations on April 24, 1998. Central California Bank is an insured bank under the Federal Deposit Insurance Act and became a member of the Federal Reserve System in January 2003. In July 2003, Central Sierra Bank merged into Central California Bank. Central California Bank engages in the general commercial banking business in Tuolumne and Stanislaus counties from its headquarters banking office located at 13753-A Mono Way, Sonora, CA, and its branches located at 400 E. Olive Ave, Turlock, CA, 3700 Lone Tree Way, Antioch, CA, 229 South Washington Street, Sonora, CA, 18711 Tiffeni Drive, Twain Harte, CA, 22712 Main Street, Columbia, CA, 373 West St. Charles Street, San Andreas, CA, 1239 South Main Street, Angels Camp, CA, 18281 Main Street, Jamestown, CA, 89 Lakewood Mall, Lodi, CA, 11 Ridge Road, Sutter Creek, CA, 87 Highway 26, Valley Springs, CA, 3505 Spangler Lane, Suite 300, Copperopolis, CA and 2525-A McHenry Ave, Modesto, CA and a loan production office located at 1111 Dunbar Road, Arnold, CA. Central California Bank does not have any affiliates or subsidiaries.

Auburn Community Bank, a state non-member bank, was originally operating under the name of Auburn National Bank which was incorporated under the laws of the State of California on July 28, 1997, and commenced operations on February 2, 1998. On July 29, 1999, Auburn National Bank converted from national bank to a state non-member bank and was renamed Auburn Community Bank.

Auburn Community Bank is an insured bank under the Federal Deposit Insurance Act and operates its headquarters banking office located at 412 Auburn-Folsom Road, Auburn, CA and its branch located at 11795 Atwood Road, Auburn, CA. Auburn Community Bank does not have any affiliates or subsidiaries.

Financial Services (Customer products that are not insured by the FDIC)

In August 2003, Western Sierra National Bank announced the addition of a new division, Western Sierra Financial Services. Woodbury Financial Services, a subsidiary of The Hartford Financial Services Group, Inc., acts as the broker-dealer for Western Sierra Financial Services. Bank customers have access to noninsured investments for retirement strategies, college funds, and insurance products through Western Sierra Financial Services. The program may eventually be deployed at Auburn Community Bank, Central California Bank and Lake Community Bank when management feels it is appropriate.

Subordinated Debentures

On July 10, 2001, the Company formed a wholly-owned Connecticut statutory business trust, Western Sierra Statutory Trust I (Western Trust I). On July 31, 2001 the Company issued to Western Trust I Floating Rate Junior Subordinated Deferrable Interest Debentures due 2031 (Subordinated debentures) in the aggregate principal amount of $6,000,000. These debentures qualify as Tier 1 capital, under Federal Reserve Board guidelines. Western Trust I funded its purchase of debentures by issuing $6,000,000 in floating rate capital securities (capital securities), which were then pooled and sold to third parties. Western Trust I secured the capital securities with subordinated debentures issued by the Company. The subordinated debentures are the only asset of Western Trust I. The interest rate on both instruments is the three month LIBOR (London Interbank Offered Rate) plus 3.58%, not to exceed 12.5%, adjustable quarterly. The proceeds from the subordinated debentures were used to retire short-term debt and the related accrued interest ($3,522,000), repurchase stock ($2,076,000) and to partially fund the construction of the Company’s administrative facility.

The subordinated debentures and capital securities accrue and pay distributions quarterly based on the floating rate described above on the stated liquidation value of $1,000 per security. The Company has entered into contractual agreements which, taken collectively, fully and unconditionally guarantee payment of: (1) accrued and unpaid distributions required to be paid on the capital securities; (2) the redemption price with respect to any capital securities called for redemption by Western Trust I, and (3) payments due upon voluntary or involuntary dissolution, winding up, or liquidation of Western Trust I.

The capital securities are mandatorily redeemable upon maturity of the Debentures on July 31, 2031, or upon earlier redemption as provided in the indenture.

On December 18, 2001, the Company formed a wholly owned Connecticut statutory business trust, Western Sierra Statutory Trust II (Western Trust II). On December 18, 2001, the Company issued to Western Trust II subordinated debentures in the aggregate principal amount of $10,000,000. These debentures qualify as Tier 1 capital, subject to limitations, under Federal Reserve Board guidelines. Western Trust II funded its purchase of the subordinated debentures by issuing $10,000,000 in capital securities, which were then pooled and sold to third parties. Western Trust II secured the capital securities with the subordinated debentures issued by the Company. The subordinated debentures are the only asset of Western Trust II. The interest rate on both instruments is three month LIBOR (London Interbank Offered Rate) plus 3.60%, not to exceed 12.5%, adjustable quarterly.

The subordinated debentures and capital securities accrue and pay distributions quarterly based on the floating rate described above on the stated liquidation value of $1,000 per security. The Company has entered into contractual agreements which, taken collectively, fully and unconditionally guarantee payment of: (1) accrued and unpaid distributions required to be paid on the capital securities; (2) the redemption price with respect to any capital securities called for redemption by Western Trust II, and (3) payments due upon voluntary or involuntary dissolution, winding up, or liquidation of Western Trust II.

The capital securities are mandatorily redeemable upon maturity of the subordinated debentures on December 18, 2031, or upon earlier redemption as provided in the indenture. The proceeds were used for the cash portion of bank subsidiaries acquired by the Company, construction of the Company’s administrative facility, and for general corporate purposes.

On September 30, 2003, the Company formed two wholly-owned Delaware statutory business trusts, Western Sierra Statutory Trust III (Western Trust III) and Western Sierra Statutory Trust IV (Western Trust IV). The Company issued to Western Trusts III and IV subordinated debentures in the aggregate principal amount of $10 million to each trust for a total of $20 million. These subordinated debentures, together with its previously issued subordinated debentures qualify as Tier 1 capital up to 25% of total Tier 1 capital, with the excess qualifying as Tier 2 capital up to allowable Tier 2 capital limits. The Trusts funded their purchases of the subordinated debentures by issuing a total of $10 million in capital securities in each trust, which were then pooled and sold. Western Trusts III and IV secured these capital securities with the subordinated debentures issued by the Company. The subordinated debentures are the only assets of Western Trusts III and IV. The interest rate on both instruments is the three-month LIBOR (London Interbank Offered Rate) plus 2.90% and the capital securities are callable at par after five years. The proceeds from the issuance of the subordinated debentures were used to retire $3 million in short term debt and the remainder of the proceeds (approximately $17 million) was used to pay the cash portion of the Auburn Community Bank purchase (approximately $6.5 million) and the remainder will be used for future acquisitions and general corporate purposes (approximately $10.5 million).

The subordinated debentures and capital securities accrue and pay distributions quarterly based on the floating rate described above on the stated liquidation value of $1,000 per security. The Company has entered into contractual agreements which, taken collectively, fully and unconditionally guarantee payment of: (1) accrued and unpaid distributions required to be paid on the capital securities; (2) the redemption price with respect to any capital securities called for redemption by Western Trusts III and IV, and (3) payments due upon voluntary or involuntary dissolution, winding up, or liquidation of Western Trusts III and IV.

The capital securities are mandatorily redeemable upon maturity of the subordinated debentures on July 31, 2033, or upon earlier

redemption as provided in the indenture. For further discussion please see the discussion of subordinated-debt in Footnote 11 of the Consolidated Financial Statements.

Other Information Concerning the Company. The Company holds no material patents, trademarks, licenses, franchises or concessions.

Banking Services. The Company is a locally owned and operated bank holding company, and its primary service area is the Northern California communities of Cameron Park, Pollock Pines, Placerville, El Dorado Hills, Folsom, Lincoln, Sacramento, Elk Grove, Natomas, Roseville, Rocklin, Granite Bay, Sonora, Twain Harte, Columbia, San Andreas, Jamestown, Sutter Creek, Copperopolis, Valley Springs, Lodi, Modesto, Angels Camp, Auburn, Lakeport, Antioch and the surrounding communities. The Company’s primary business is servicing the banking needs of these communities and its marketing strategy stresses its local ownership and commitment to serve the banking needs of individuals living and working in the Company’s primary service areas and local businesses, including retail, professional and real estate-related activities, in those service areas.

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

Most of the Company’s deposits are obtained from commercial businesses, professionals and individuals. At December 31, 2004, there was a customer with $35.2 million or 7.0% of total deposits at Western Sierra Bank, a title company deposit customer with $7.1 million or 6.9% of total deposits at Lake Community Bank and a customer with $8.7 million or 10.5% of total deposits at Auburn Community Bank. There were no other customers with 5% or more of any of the subsidiary banks’ deposits.

Other special services and products include both personal and business economy checking products, business cash management products, mortgage products and financial products (not insured by the FDIC) through Western Sierra Financial Services. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for a detailed discussion of loans and deposits.

Employees. At December 31, 2004, the Company and its subsidiaries employed approximately 353 persons on a full-time equivalent basis. The Company believes its employee relations are excellent.

Supervision and Regulation.

Introduction

Banking is a complex, highly regulated industry. The primary goals of the regulatory scheme are to maintain a safe and sound banking system, protect depositors and the FDIC’s insurance fund, and facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the financial services industry. Consequently, the Company and its banking subsidiaries are subject to the rules and regulations and the policies of various governmental regulatory authorities, including:

• the FRB;

• the FDIC;

• the Office of the Comptroller of the Currency, or OCC; and

• the California Department of Financial Institutions, or DFI.

The system of supervision and regulation applicable to the Company and its banking subsidiaries governs most aspects of their business, including:

• the scope of permissible business;

• investments;

• reserves that must be maintained against deposits;

• capital levels that must be maintained;

• the nature and amount of collateral that may be taken to secure loans;

• the establishment of new branches;

• mergers and consolidations with other financial institutions; and

• the payment of dividends.

General

The Company as a bank holding company registered under the BHCA, is subject to regulation by the FRB. According to FRB policy, the Company is expected to act as a source of financial strength for its banking subsidiaries to commit resources to support them in circumstances where the Company might not otherwise do so. Under the BHCA, the Company and its banking subsidiaries are subject to periodic examination by the FRB. The Company is also required to file periodic reports of its operations and any additional information regarding its activities and those of its banking subsidiaries with the FRB, as may be required.

Bank Dividends to the Company

The Company is entitled to receive dividends, when and as declared by its subsidiary banks’ boards of directors. Those dividends may come from funds legally available for those dividends, as specified and limited by the California Financial Code and the U.S. Code. Under the California Financial Code, funds available for cash dividends by a California-chartered bank are restricted to the lesser of:(i) the bank’s retained earnings; or (ii) the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such period). With the prior approval of the California Department of Financial Institutions (“DFI”) , cash dividends may also be paid out of the greater of: (i) the bank’s retained earnings; (ii) net income for the bank’s last preceding fiscal year; or (iii) net income for the bank’s current fiscal year. If the DFI determines that the shareholders’ equity of the bank paying the dividend is not adequate or that the payment of the dividend would be unsafe or unsound for the bank, the DFI may order the bank not to pay the dividend. Under the U.S. Code, the board of directors of a national bank may declare the payment of dividends from funds legally available, depending upon the earnings, financial condition and cash needs of the bank and general business conditions. A national bank may not pay dividends from its capital, as dividends must be paid out of net profits then on hand, after deducting losses and bad debts. The payment of dividends by a national bank is further restricted by federal law, which prohibits a national bank from declaring a dividend on shares of common stock until its surplus fund equals the amount of capital stock or, if the surplus fund does not equal the amount of the capital stock, until one-tenth of the bank’s net profits of the preceding half-year in the case of quarterly or semi-annual dividends, or the preceding two consecutive half-year periods in the case of an annual dividend, are transferred to the surplus fund. Moreover, the approval of the OCC is required for the payment of dividends if the total of all dividends declared by a national bank in any calendar year would exceed the total of its retained net profits for the year combined with its net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock.

It is also possible, depending upon its financial condition and other factors, that the DFI, FRB, OCC and FDIC could assert that the payment of dividends or other payments might, under some circumstances, constitute an unsafe or unsound practice and thereby prohibit such payments.

Transactions With Affiliates

The Company and any of its subsidiaries and certain related interests are deemed to be affiliates of its subsidiary banks within the meaning of Sections 23A and 23B of the Federal Reserve Act. Under those terms, loans by a subsidiary bank to affiliates, investments by them in affiliates’ stock, and taking affiliates’ stock as collateral for loans to any borrower is limited to 10% of the particular banking subsidiary’s capital, in the case of any one affiliate, and is limited to 20% of the banking subsidiary’s capital, in the case of all affiliates. In addition, such transactions must be on terms and conditions that are consistent with safe and sound banking practices; in particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. The Company and its subsidiary banks are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.

Limitations on Business and Investment Activities

Under the BHCA, a bank holding company must obtain the FRB’s approval before:

• directly or indirectly acquiring more than 5% ownership or control of any voting shares of another bank or bank holding company;

• acquiring all or substantially all of the assets of another bank; or

• merging or consolidating with another bank holding company.

The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB must give effect to applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository institutions or their holding companies, and state laws which require that the target bank have been in existence for a minimum period of time, not to exceed five years, before being acquired by an out-of-state bank holding company.

In addition to owning or managing banks, bank holding companies may own subsidiaries engaged in certain businesses that the FRB has determined to be “so closely related to banking as to be a proper incident thereto.” The Company, therefore, is permitted to engage in a variety of banking-related businesses. Some of the activities that the FRB has determined, pursuant to its Regulation Y, to be related to banking are:

• making or acquiring loans or other extensions of credit for its own account or for the account of others;

• servicing loans and other extensions of credit;

• operating a trust company in the manner authorized by federal or state law under certain circumstances;

• leasing personal and real property or acting as agent, broker, or adviser in leasing such property in accordance with various restrictions imposed by FRB regulations;

• providing financial, banking, or economic data processing and data transmission services;

• owning, controlling, or operating a savings association under certain circumstances;

• selling money orders, travelers’ checks and U.S. Savings Bonds;

• providing securities brokerage services, related securities credit activities pursuant to Regulation T, and other incidental activities; and

• underwriting and dealing in obligations of the U.S., general obligations of states and their political subdivisions, and other obligations authorized for state member banks under federal law.

Under the recently enacted Gramm-Leach-Bliley Act (discussed below) qualifying bank holding companies making an appropriate election to the FRB may engage in a full range of financial activities, including insurance, securities and merchant banking. Generally, the BHCA does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit. Thus, for example, the Company’s banking subsidiaries may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that:

• the customer must obtain or provide some additional credit, property or services from or to a subsidiary bank other than a loan, discount, deposit or trust service;

• the customer must obtain or provide some additional credit, property or service from or to the Company or any of the banking subsidiaries; or

• the customer may not obtain some other credit, property or services from competitors, except reasonable requirements to assure soundness of credit extended.

Capital Adequacy

Bank holding companies must maintain minimum levels of capital under the FRB’s risk-based capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.

The FRB’s risk-based capital adequacy guidelines for bank holding companies and state member banks assign various risk percentages to different categories of assets, and capital is measured as a percentage of risk assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines based both on total risk assets and on total assets, without regard to risk weights.

The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual organizations. For example, the FRB’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities, particularly under the expanded powers under the Gramm-Leach-Bliley Act, would be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.

Limitations on Dividend Payments by the Company

California Corporations Code Section 500 allows the Company to pay a dividend to its shareholders only to the extent that it has retained earnings and, after the dividend, its:

• assets (exclusive of goodwill and other intangible assets) would be 1.25 times its liabilities (exclusive of deferred taxes, deferred income and other deferred credits); and

• current assets would be at least equal to current liabilities.

Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The FRB also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.

Recent Legislation

From time to time legislation is enacted which has the effect of increasing the cost of doing business and changing the competitive balance between banks and other financial and non-financial institutions. Various federal laws enacted over the past several years have provided, among other things, for:

• the maintenance of mandatory reserves with the Federal Reserve Bank on deposits by depository institutions;

• the phasing-out of the restrictions on the amount of interest which financial institutions may pay on certain types of accounts; and

• the authorization of various types of new deposit accounts, such as “NOW” accounts, “Money Market Deposit” accounts and “Super NOW” accounts, designed to be competitive with money market mutual funds and other types of accounts and services offered by various financial and non-financial institutions.

The lending authority and permissible activities of certain nonbank financial institutions such as savings and loan associations and credit unions have been expanded, and federal regulators have been given increased enforcement authority. These laws have generally had the effect of altering competitive relationships existing among financial institutions, reducing the historical distinctions between the services offered by banks, savings and loan associations and other financial institutions, and increasing the cost of funds to banks and other depository institutions.

Amendments to Regulation H and Y for Trust Preferred Securities. The Federal Reserve Board issued a final rule on March 1, 2005 that amends Regulation H and Regulation Y to limit restricted core capital elements (including trust preferred securities) which count as Tier 1 capital to 25 percent of all core capital elements, net of goodwill less any associated deferred tax liability. Internationally active bank holding companies, defined as those with consolidated assets greater than $250 billion or on-balance-sheet foreign exposure greater than $10 billion, will be subject to a 15 percent limit, but they may include qualifying mandatory convertible preferred securities up to the generally applicable 25 percent limit. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009, for application of the quantitative limits.

Sarbanes-Oxley Act. During July, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The purpose of the Sarbanes-Oxley Act is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.

The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a registered public accounting firm from performing specified nonaudit services contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer with responsibility for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services. It requires each committee member to be a member of the board of directors of the issuer, and to

be otherwise independent. The Sarbanes-Oxley Act further requires the chief executive officer and chief financial officer of an issuer to make certain certifications as to each annual or quarterly report.

In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses and profits under certain circumstances. Specifically, if an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer as a result of misconduct with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall be required to reimburse the issuer for (1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the SEC of the financial document embodying such financial reporting requirement; and (2) any profits realized from the sale of securities of the issuer during that 12-month period.

The Sarbanes-Oxley Act also instructs the SEC to require by rule:

• disclosure of all material off-balance sheet transactions and relationships that may have a material effect upon the financial status of an issuer; and

• the presentation of pro forma financial information in a manner that is not misleading, and which is reconcilable with the financial condition of the issuer under generally accepted accounting principles.

The Sarbanes-Oxley Act also prohibits insider transactions in the Company’s stock during lock out periods of Company’s pension plans, and any profits on such insider transactions are to be disgorged. In addition, there is a prohibition of company loans to its executives, except in certain circumstances. The Sarbanes-Oxley Act also provides for mandated internal control report and assessment with the annual report and an attestation and a report on such report by Company’s auditor. The SEC also requires an issuer to institute a code of ethics for senior financial officers of the company. Further, the Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10 years for securities fraud.

Regulation W. The FRB on October 31, 2002 approved a final Regulation W that comprehensively implements sections 23A and 23B of the Federal Reserve Act. Sections 23A and 23B and Regulation W restrict loans by a depository institution to its affiliates, asset purchases by a depository institution from its affiliates, and other transactions between a depository institution and its affiliates. Regulation W unifies in one public document the FRB’s interpretations of sections 23A and 23B.

Regulatory Capital Treatment of Equity Investments. In December of 2001 and January of 2002, the OCC, the FRB and the FDIC on the adopted final rules governing the regulatory capital treatment of equity investments in non-financial companies held by banks, bank holding companies and financial holding companies. The new capital requirements apply symmetrically to equity investments made by banks and their holding companies in non-financial companies under the legal authorities specified in the final rules. Among others, these include the merchant banking authority granted by the Gramm-Leach-Bliley Act and the authority to invest in small business investment companies (“SBICs”) granted by the Small Business Investment Act. Covered equity investments will be subject to a series of marginal Tier 1 capital charges, with the size of the charge increasing as the organization’s level of concentration in equity investments increases. The highest marginal charge specified in the final rules requires a 25 percent deduction from Tier 1 capital for covered investments that aggregate more than 25 percent of an organization’s Tier 1 capital. Equity investments through SBICs will be exempt from the new charges to the extent such investments, in the aggregate, do not exceed 15 percent of the banking organization’s Tier 1 capital. Grandfathered investments made by state banks under section 24(f) of the Federal Deposit Insurance Act also are exempted from coverage.

USA Patriot Act. The terrorist attacks in September, 2001, have impacted the financial services industry and led to federal legislation that attempts to address certain issues involving financial institutions. On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.

Part of the USA Patriot Act is the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLA”). IMLA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies, and/or other financial institutions. These measures may include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions.

Among its other provisions, IMLA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, IMLA contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. IMLA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. IMLA also amends the BHCA and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts.

Merchant Banking Investments. The FRB and the Secretary of the Treasury in January 2001 jointly adopted a final rule governing merchant banking investments made by financial holding companies. The rule implements provisions of the Gramm-Leach-Bliley Act discussed below that permit financial holding companies to make investments as part of a bona fide securities underwriting or merchant or investment banking activity. The rule provides that a financial holding company may not, without FRB approval, directly or indirectly acquire any additional shares, assets or ownership interests or make any additional capital contribution to any company the shares, assets or ownership interests of which are held by the financial holding company subject to the rule if the aggregate carrying value of all merchant banking investments held by the financial holding company exceeds:

• 30 percent of the Tier 1 capital of the financial holding company, or

• after excluding interests in private equity funds, 20 percent of the Tier 1 capital of the financial holding company.

A separate final rule will establish the capital charge of merchant banking investments for the financial holding company.

Risk-Based Capital Guidelines

General. The federal banking agencies have established minimum capital standards known as risk-based capital guidelines. These guidelines are intended to provide a measure of capital that reflects the degree of risk associated with a bank’s operations. The risk-based capital guidelines include both a new definition of capital and a framework for calculating the amount of capital that must be maintained against a bank’s assets and off-balance sheet items. The amount of capital required to be maintained is based upon the credit risks associated with the various types of a bank’s assets and off-balance sheet items. A bank’s assets and off-balance sheet items are classified under several risk categories, with each category assigned a particular risk weighting from 0% to 100%. A bank’s risk-based capital ratio is calculated by dividing its qualifying capital, which is the numerator of the ratio, by the combined risk weights of its assets and off-balance sheet items, which is the denominator of the ratio.

Qualifying Capital. A bank’s total qualifying capital consists of two types of capital components: “core capital elements,” known as Tier 1 capital, and “supplementary capital elements,” known as Tier 2 capital. The Tier 1 component of a bank’s qualifying capital must represent at least 50% of total qualifying capital and may consist of the following items that are defined as core capital elements:

• common stockholders’ equity;

• qualifying noncumulative perpetual preferred stock (including related surplus); and

• minority interests in the equity accounts of consolidated subsidiaries.

Core capital elements are divided between restricted and nonrestricted core capital elements, and the amount of restricted core capital elements that may be included as Tier 1 capital is restricted. The Tier 2 component of a bank’s total qualifying capital may consist of the following items:

• a portion of the allowance for loan and lease losses;

• certain types of perpetual preferred stock and related surplus;

• certain types of hybrid capital instruments and mandatory convertible debt securities; and

• a portion of term subordinated debt and intermediate-term preferred stock, including related surplus.

Risk Weighted Assets and Off-Balance Sheet Items. Assets and credit equivalent amounts of off-balance sheet items are assigned to one of several broad risk classifications, according to the obligor or, if relevant, the guarantor or the nature of the collateral. The aggregate dollar value of the amount in each risk classification is then multiplied by the risk weight associated with that classification. The resulting weighted values from each of the risk classifications are added together. This total is the bank’s total risk weighted assets.

Risk weights for off-balance sheet items, such as unfunded loan commitments, letters of credit and recourse arrangements, are determined by a two-step process. First, the “credit equivalent amount” of the off-balance sheet items is determined, in most cases by multiplying the off-balance sheet item by a credit conversion factor. Second, the credit equivalent amount is treated like any balance sheet asset and is assigned to the appropriate risk category according to the obligor or, if relevant, the guarantor or the nature of the collateral. This result is added to the bank’s risk weighted assets and comprises the denominator of the risk-based capital ratio.

Minimum Capital Standards. The supervisory standards set forth below specify minimum capital ratios based primarily on broad risk considerations. The risk-based ratios do not take explicit account of the quality of individual asset portfolios or the range of other types of risks to which banks may be exposed, such as interest rate, liquidity, market or operational risks. For this reason, banks are generally expected to operate with capital positions above the minimum ratios.

All banks are required to meet a minimum ratio of qualifying total capital to risk weighted assets of 8%. At least 4% must be in the form of Tier 1 capital, net of goodwill. The maximum amount of supplementary capital elements that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill. In addition, the combined maximum amount of subordinated debt and intermediate-term preferred stock that qualifies as Tier 2 capital is limited to 50% of Tier 1 capital. The maximum amount of the allowance for loan and lease losses that qualifies as Tier 2 capital is limited to 1.25% of gross risk weighted assets. The allowance for loan and lease losses in excess of this limit may, of course, be maintained, but would not be included in a bank’s risk-based capital calculation.

The federal banking agencies also require all banks to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a bank rated in the highest of the five categories used by regulators to rate banks, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banks not rated in the highest category, the minimum leverage ratio must be at least 4% to 5%. These uniform risk-based capital guidelines and leverage ratios apply across the industry. Regulators, however, have the discretion to set minimum capital requirements for individual institutions which may be significantly above the minimum guidelines and ratios.

Other Factors Affecting Minimum Capital Standards

The federal banking agencies have established certain benchmark ratios of loan loss reserves to be held against classified assets. The benchmark by federal banking agencies is the sum of:

• 100% of assets classified loss;

• 50% of assets classified doubtful;

• 15% of assets classified substandard; and

• estimated credit losses on other assets over the upcoming twelve months.

The federal banking agencies have recently revised their risk-based capital rules to take account of concentrations of credit and the risks of engaging in non-traditional activities. Concentrations of credit refers to situations where a lender has a relatively large proportion of loans involving a single borrower, industry, geographic location, and collateral or loan type. Nontraditional activities are considered those that have not customarily been part of the banking business, but are conducted by a bank as a result of developments in, for example, technology, financial markets or other additional activities permitted by law or regulation. The regulations require institutions with high or inordinate levels of risk to operate with higher minimum capital standards. The federal banking agencies also are authorized to review an institution’s management of concentrations of credit risk for adequacy and consistency with safety and soundness standards regarding internal controls, credit underwriting or other operational and managerial areas.

The federal banking agencies also limit the amount of deferred tax assets that are allowable in computing a bank’s regulatory capital. Deferred tax assets that can be realized for taxes paid in prior carry back years and from future reversals of existing taxable temporary differences are generally not limited. However, deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of:

• the amount that can be realized within one year of the quarter-end report date; or

• 10% of Tier 1 capital.

The amount of any deferred tax in excess of this limit would be excluded from Tier 1 capital, total assets and regulatory capital calculations.

The federal banking agencies have also adopted a joint agency policy statement which provides that the adequacy and effectiveness of a bank’s interest rate risk management process and the level of its interest rate exposures are critical factors in the evaluation of the bank’s capital adequacy. A bank with material weaknesses in its interest rate risk management process or high levels of interest rate exposure relative to its capital will be directed by the federal banking agencies to take corrective actions. Financial institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities, and who fail to adequately manage these risks, may be required to set aside capital in excess of the regulatory minimums.

Prompt Corrective Action

The federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured banks. Each federal banking agency has issued regulations defining five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under the regulations, a bank shall be deemed to be:

• “well capitalized” if it has a total risk-based capital ratio of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a leverage capital ratio of 5.0% or more, and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure;

• “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more, and a leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized”;

• “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a leverage capital ratio that is less than 4.0% (3.0% under certain circumstances);

• “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a leverage capital ratio that is less than 3.0%; and

• “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.

Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment the bank would be “undercapitalized,” that is, the bank fails to meet the required minimum level for any relevant capital measure. Asset growth and branching restrictions apply to “undercapitalized” banks. Banks classified as “undercapitalized” are required to submit acceptable capital plans guaranteed by its holding company, if any. Broad regulatory authority was granted with respect to “significantly undercapitalized” banks, including forced mergers, growth restrictions, ordering new elections for directors, forcing divestiture by its holding company, if any, requiring management changes, and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to “critically undercapitalized” banks, those with capital at or less than 2%. Restrictions for these banks include the appointment of a receiver or conservator after 90 days, even if the bank is still solvent. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action.

A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. At each successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.

Interstate Banking and Branching

Bank holding companies from any state may generally acquire banks and bank holding companies located in any other state, subject in some cases to nationwide and state-imposed deposit concentration limits and limits on the acquisition of recently established banks. Banks also have the ability, subject to specific restrictions, to acquire by acquisition or merger branches located outside their home state. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to many of the laws of the states in which they are located.

California law authorizes out-of-state banks to enter California by the acquisition of or merger with a California bank that has been in existence for at least five years, unless the California bank is in danger of failing or in certain other emergency situations, but limits interstate branching into California to branching by acquisition of an existing bank.

Enforcement Powers

In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses, or for violation of any law, rule, regulation, condition imposed in writing by the regulatory agency, or term of a written agreement with the regulatory agency. Enforcement actions may include:

• the appointment of a conservator or receiver for the bank;

• the issuance of a cease and desist order that can be judicially enforced;

• the termination of the bank’s deposit insurance;

• the imposition of civil monetary penalties;

• the issuance of directives to increase capital;

• the issuance of formal and informal agreements;

• the issuance of removal and prohibition orders against officers, directors and other institution-affiliated parties; and

• the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the deposit insurance fund or the bank would be harmed if such equitable relief was not granted.

Safety and Soundness Guidelines

The federal banking agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before capital becomes impaired. These guidelines establish operational and managerial standards relating to:

• internal controls, information systems and internal audit systems;

• loan documentation;

• credit underwriting;

• asset growth; and

• compensation, fees and benefits.

Additionally, the federal banking agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action.

The federal banking agencies have issued regulations prescribing uniform guidelines for real estate lending. The regulations require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations.

Consumer Protection Laws and Regulations

The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to carefully monitor compliance with various consumer protection laws and implementing regulations. Banks are subject to many federal consumer protection laws and regulations, including:

• the Community Reinvestment Act, or the CRA;

• the Truth in Lending Act, or the TILA;

• the Fair Housing Act, or the FH Act;

• the Equal Credit Opportunity Act, or the ECOA;

• the Home Mortgage Disclosure Act, or the HMDA; and

• the Real Estate Settlement Procedures Act, or the RESPA.

The CRA is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, completing mergers or acquisitions, or holding company formations.

The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance-based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. The ratings range from “outstanding” to a low of “substantial noncompliance.”

The ECOA prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act. In March, 1994, the Federal

Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination:

• overt evidence of discrimination;

• evidence of disparate treatment; and

• evidence of disparate impact.

This means that if a creditor’s actions have had the effect of discriminating, the creditor may be held liable, even when there is no intent to discriminate.

The FH Act regulates many practices, including making it unlawful for any lender to discriminate against any person in its housing-related lending activities because of race, color, religion, national origin, sex, handicap, or familial status. The FH Act is broadly written and has been broadly interpreted by the courts. A number of lending practices have been found to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself. Among those practices that have been found to be, or may be considered, illegal under the FH Act are:

• declining a loan for the purposes of racial discrimination;

• making excessively low appraisals of property based on racial considerations;

• pressuring, discouraging, or denying applications for credit on a prohibited basis;

• using excessively burdensome qualifications standards for the purpose or with the effect of denying housing to minority applicants;

• imposing on minority loan applicants more onerous interest rates or other terms, conditions or requirements; and

• racial steering, or deliberately guiding potential purchasers to or away from certain areas because of race.

The TILA is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology and expressions of rates, the annual percentage rate, the finance charge, and the amount financed, the total payments and the payment schedule.

HMDA grew out of public concern over credit shortages in certain urban neighborhoods. One purpose of HMDA is to provide public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. HMDA requires institutions to report data regarding applications for one-to-four family real estate loans, home improvement loans, and multifamily loans, as well as information concerning originations and purchases of those types of loans. Federal bank regulators rely, in part, upon data provided under HMDA to determine whether depository institutions engage in discriminatory lending practices.

RESPA requires lenders to provide borrowers with disclosures regarding the nature and costs of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts.

Violations of these various consumer protection laws and regulations can result in civil liability to the aggrieved party, regulatory enforcement including civil money penalties, and even punitive damages.

Other Aspects of Banking Law

The subsidiary banks are also subject to federal and state statutory and regulatory provisions covering, among other things, security procedures, currency and foreign transactions reporting, insider and affiliated party transactions, management interlocks, electronic funds transfers, funds availability, and truth-in-savings. There are also a variety of federal statutes which regulate acquisitions of control and the formation of bank holding companies.

Impact of Monetary Policies

Banking is a business which depends on rate differentials. In general, the difference between the interest rate paid by a bank on its deposits and its other borrowings and the interest rate earned by a bank on its loans, securities and other interest-earning assets comprises the major source of the bank’s earnings. These rates are highly sensitive to many factors which are beyond the bank’s control and, accordingly, the earnings and growth of the bank are subject to the influence of economic conditions generally, both domestic and foreign, including inflation, recession, and unemployment; and also to the influence of monetary and fiscal

policies of the United States and its agencies, particularly the FRB. The FRB implements national monetary policy, such as seeking to curb inflation and combat recession, by:

• its open-market dealings in United States government securities;

• adjusting the required level of reserves for financial institutions subject to reserve requirements;

• placing limitations upon savings and time deposit interest rates; and

• adjustments to the discount rate applicable to borrowings by banks which are members of the Federal Reserve System.

No expenditures were made by the Company since inception on material research activities relating to the development of services or the improvement of existing services. Based upon present business activities, compliance with federal, state and local provisions regulating discharge of materials into the environment will have no material effects upon the capital expenditures, earnings and competitive position of the Company.

Recent Accounting Pronouncements

Other-Than-Temporary Impairment of Certain Investments

In June 2004, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 includes additional guidance for evaluating and recording impairment losses on debt and equity investments, as well as disclosure requirements for investments that are deemed to be temporarily impaired. The proposed guidance indicates that an investor must have the intent and ability to hold an investment until a forecasted recovery of the fair value up to or beyond the cost of the investment in order to determine that any impairment is temporary. In September 2004, the FASB delayed the effective date of the recognition and measurement guidance of EITF 03-1, pending further deliberations. The disclosures for investments that are deemed temporarily impaired are included in Note 4 to the consolidated financial statements. Once the FASB has reached a final decision on the measurement and recognition provisions, the Company will evaluate the impact of the adoption of EITF 03-1.

Share-Based Payments

In December 2004 the FASB issued Statement Number 123 (revised 2004) (FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. The Company is required to apply FAS 123 (R) on a modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, the Company may elect to adopt FAS 123 (R) by restating previously issued financial statements, basing the expense on that previously reported in their pro forma disclosures required by FAS 123. FAS 123 (R) is effective for the first reporting period beginning after June 15, 2005. Management has not completed its evaluation of the effect that FAS 123 (R) will have, but believes that the effect will be consistent with its previous pro forma disclosures.

Accounting for Certain Loans or Debt Securities Acquired in a Transfer

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP). This SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It also includes such loans acquired in purchase business combinations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be accreted and requires that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or valuation allowance.

This SOP prohibits “carrying over” or creation of valuation allowances in the initial accounting for loans acquired in a transfer that are within its scope. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination.

This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. In management’s opinion, the adoption of this pronouncement will not have a material impact on the Company’s financial position or results of operations.

Available Information

The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission. These reports are posted and are available at no cost on the Company’s website, www.westernsierrabancorp.com, through the Investor link, as soon as reasonably practicable after the Company files such documents with the SEC. The Company’s filings are also available through the SEC’s website at www.sec.gov.

Item 2. Properties

The Company owns the properties of nine depository branches and a corporate headquarters building. The Company also leases twenty-six other locations (twenty-two branches and four loan production offices) used in the normal course of business located throughout the Company’s service areas. There are no contingent rental payments, and the Company has two sublease arrangements. Total rental expenses under all leases, including premises and equipment, totaled $1,373,000, $1,072,000 and $675,000 in 2004, 2003 and 2002 respectively. The expiration dates of the leases vary, with the first such lease expiring during 2005 and the last such lease expiring during 2019. The Company maintains insurance coverage on its premises, leaseholds and equipment, including business interruption and record reconstruction coverage.

Management does not believe the cost of any individual lease arrangement has a material impact on its operations. Please see Footnote 10 to the consolidated financial statements for further information regarding the Company’s lease commitments.

Item 3. Legal Proceedings

From time to time, the Company and/or its subsidiary banks are a party to claims and legal proceedings arising in the ordinary course of business. The Company’s management is not aware of any material pending litigation proceedings to which either it or any of its subsidiary banks is a party or has recently been a party, which will have a material adverse effect on the financial condition or results of operations of the Company taken as a whole.

The Company entered into a definitive Agreement and Plan of Reorganization and Merger dated November 18, 2004 with Gold Country Financial Services (“Gold Country”) to acquire Gold Country. Shareholders of Gold Country on March 7, 2005 approved the merger, and completion of the merger is subject to regulatory approval and satisfaction of certain conditions. In the merger, the Company will assume the debts and obligations of Gold Country including two lawsuits relating to an employee and former employee of Gold Country Bank, a wholly-owned subsidiary of Gold Country. The plaintiffs in the lawsuits seek damages for various causes of actions and punitive damages, attorney’s fees and costs. These lawsuits are in the discovery stage, and Gold Country Bank intends to defend the cases vigorously. Management of the Company does not believe these lawsuits will have a material adverse effect on the Company post-merger.

Item 4. Submission Of Matters To A Vote Of Security Holders

No matters were submitted to a vote of the security holders during the fourth quarter of the period covered by this report.

PART II

Item 5. Market Price & Dividends

The Company common stock is publicly traded on the NASDAQ National Market under the symbol “WSBA”. As of December 31, 2004, there were 1,751 shareholders of record of the Company’s common stock.

The following table shows the high and low bid prices for the common stock for each quarter as reported by NASDAQ. The prices have been adjusted to reflect a three-for-two stock split on May 7, 2004 and a 5% stock dividend on August 8, 2003.

Western Sierra Bancorp

Common Stock Prices

	Qtr 1		Qtr 2		Qtr 3		Qtr 4		Qtr 1		Qtr 2		Qtr 3		Qtr 4
	2004		2004		2004		2004		2003		2003		2003		2003
High	$	32.03	$	31.57	$	34.85	$	41.98	$	19.70	$	21.79	$	24.70	$	32.16
Low	$	27.07	$	27.45	$	30.00	$	33.01	$	16.40	$	18.59	$	20.27	$	23.57

Under applicable Federal laws, the Comptroller restricts the total dividend payment of any national banking association in any calendar year to the net income of the year, as defined, combined with the net income for the two preceding years, less distributions made to shareholders during the three-year period. In addition, the California Financial Code restricts the total dividend payment of any California banking corporation in any calendar year to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. The Office of the Comptroller of Currency (“OCC”) the Federal Reserve Bank (“FRB”) and The Federal Deposit Insurance Corporation (“FDIC”) also may limit dividends under their supervising authority. At December 31, 2004, the subsidiaries had $29,808,000 in retained earnings available for dividend payments to the Company.

The Company’ primary source of revenue to pay dividends to its shareholders is dividends from its bank subsidiaries. The Company’s Board of Directors sets the amount and payment of any dividends by the Company. Any dividends will be decided based on a number of factors including results of operations, general business conditions, capital requirements, general financial conditions, and other factors deemed relevant by the Board of Directors. Dividends paid to shareholders by the Company are subject to restrictions set forth in California General Corporation Law, which provides that a corporation may make a distribution to its shareholders if retained earnings immediately prior to the dividend payout are at least equal the amount of the proposed distributions. As a bank holding company without significant assets other than its equity positions in its subsidiary banks, the Company’s ability to pay dividends to its shareholders depends primarily upon dividends it receives from its subsidiary banks.

The Company has historically not paid any cash dividends to shareholders and does not anticipate paying cash dividends in the foreseeable future. The $.05 cash dividend in 2000 reported on the Summary of Consolidated Financial Data and Performance Ratios in Item 6 is a result of the pooling of interest with Sentinel Community Bank.

Equity Compensation Plan Information
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted- average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	583,378	$	14.44	606,430
Equity compensation plans not approved by security holders	N/A	N/A		N/A
Total	583,378	$	14.44	606,430

ISSUER PURCHASES OF EQUITY SECURITIES
Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 2004	3,000	$	28.33	3,000	$	2,000,000
2004 Total	3,000	$	28.33	3,000	$	2,000,000

Item 6. Selected Financial Data

Summary of Consolidated Financial Data and Performance Ratios

	At or for the Year Ended December 31,
	2004		2003		2002		2001		2000
	(dollars in thousands, except per share data)
Statements of Operations:
Interest income	$	63,083	$	47,729	$	38,895	$	35,780	$	34,048
Interest expense	11,336		9,626		9,746		13,752		14,595
Net interest income	51,747		38,103		29,149		22,028		19,453
Provision for loan and lease losses	2,710		2,270		2,026		925		380
Non-interest income	10,756		9,677		7,464		5,447		3,745
Non-interest expense	36,379		28,287		23,146		17,876		16,602
Income before income taxes	23,414		17,223		11,441		8,674		6,216
Provision for income taxes	8,378		7,275		3,437		3,238		2,332
Net income	$	15,036	$	9,948	$	8,004	$	5,436	$	3,884
Financial Ratios:
For the year:
Return on average assets	1.33%		1.21%		1.31%		1.10%		0.91%
Return on average equity	14.95%		15.42%		16.91%		14.47%		12.08%
Net interest margin (1)	5.16%		5.16%		5.34%		5.02%		5.14%
Efficiency ratio (1)	55.2%		56.5%		61.1%		63.2%		69.6%
At December 31:
Average equity to average assets	8.89%		7.83%		7.74%		7.62%		7.51%
Total capital to risk-adjusted assets	12.58%		12.04%		12.68%		14.23%		11.00%
Allowance for loan and lease losses to loans	1.47%		1.40%		1.32%		1.31%		1.33%
Loans and leases to deposits	91.37%		93.88%		92.25%		87.73%		76.68%
Non-performing assets to capital	0.81%		1.66%		2.17%		6.65%		3.10%
Balance Sheet:
Total assets	$	1,198,090	$	1,035,711	$	678,284	$	510,622	$	474,603
Total loans and leases	$	933,505	$	818,789	$	538,785	$	388,434	$	329,251
Allowance for loan and lease losses	$	13,786	$	11,529	$	7,113	$	5,097	$	4,395
Total deposits	$	1,022,966	$	873,138	$	589,373	$	448,631	$	433,771
Shareholders’ equity	$	110,151	$	93,437	$	54,339	$	39,911	$	36,137
Share Data:
Common shares outstanding (in thousands) (2)	7,630		7,439		6,279		5,833		5,988
Book value per share (2)	$	14.44	$	12.56	$	8.65	$	6.84	$	6.03
Basic earnings per share (2)	$	1.99	$	1.51	$	1.31	$	0.91	$	0.65
Diluted earnings per share (2)	$	1.91	$	1.44	$	1.26	$	0.89	$	0.64
Cash dividends per share	$	—	$	—	$	—	$	—	$	0.05

(1) ratio computed on a fully tax equivalent basis using a marginal tax rate of 35% in 2004 and 34% in all prior years

(2) prior years are adjusted for stock dividends and splits

Item 7. Management’s Discussion & Analysis

General. The Board of Directors and Management of Western Sierra Bancorp believe that the Company plays an important role in the economic well being of the communities it serves. Its subsidiary banks have a continuing responsibility to provide a wide range of lending and deposit services to both individuals and businesses. These services are tailored to meet the needs of the communities served by the Company and its subsidiary banks.

Various loan products are offered which promote home ownership and affordable housing, fuel job growth, and support community economic development. Types of loans offered range from personal and commercial loans to real estate, construction, agricultural, and mortgage loans. Banking decisions are made locally and the Company’s primary goals are to maximize shareholder return and maintain customer satisfaction.

Various deposit products are offered which are geared to provide both individual and business customers with a wide range of choices. These products include both high and low volume transaction accounts, savings and money market products, certificate of deposit accounts with a wide range of maturities, and IRA accounts including Roth and Educational IRAs.

The Company also offers certain financial service products not insured by the FDIC through Western Sierra Financial Services, a division of Western Sierra National Bank.

The Company has been listed on the NASDAQ National Market since 1999 and trades on the NASDAQ exchange (symbol “WSBA”). The following discussion is designed to provide a better understanding of significant trends related to the Company’s consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. It pertains to the Company’s financial condition, changes in financial condition and results of operations as of December 31, 2004 and 2003 and for each of the years in the three-year period ended December 31, 2004.

The results of operations for Auburn Community Bank (ACB) from December 12, 2003, Central Sierra Bank (CSB) from July 11, 2003 and Central California Bank (CCB) from April 1, 2002 are included in the consolidated financial statements as a result of applying the purchase method of accounting for these acquisitions. See Footnote 2 to the consolidated financial statements for further information regarding the Company’s acquisition activity.

Application of Critical Accounting Policies

The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A summary of the Company’s most significant accounting policies is contained in Note 1 to the consolidated financial statements. The Company considers its most critical accounting policies to consist of the allowance for loan and lease losses, the estimation of fair value and evaluation of goodwill impairment, which are separately discussed below.

Allowance for Loan and Lease Losses. The allowance for loan and lease losses represents management’s best estimate of inherent losses in the existing loan portfolio. The allowance for loan and lease losses is increased by the provision for losses on loans and leases charged to expense and reduced by loans and leases charged off, net of recoveries. The provision for loan and lease losses is determined based on management’s assessment of several factors: reviews and evaluations of specific loans and leases, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan and lease loss experience, the level of classified and nonperforming loans and the results of regulatory examinations.

The Company’s Audit Committee engages experienced independent loan portfolio review professionals many of which are former bank examiners. The Audit Committee determines the scope of such reviews and provides the report of findings to management and the Board’s Loan Committee after they have accepted it. These reviews are supplemented with periodic reviews by the Company’s credit review function, as well as periodic examination of both selected credits and the credit review process by the applicable regulatory agencies. The information from these reviews assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit represents a probable loss or risk that should be recognized.

Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the conditions of the various markets in which collateral may be sold may all affect the required level of the allowance for loan and lease losses and the associated provision for loan and lease losses.

Estimation of Fair Value. Fair values for the majority of the Company’s available-for-sale investment securities are based on quoted market prices. In instances where quoted market prices are not available, fair values are based on the quoted prices of similar instruments with adjustment for relevant distinctions. For trading account assets, fair value is estimated giving consideration to the contractual interest rates, weighted-average maturities and anticipated prepayment speeds of the underlying instruments and market interest rates. (The fair values of residual interests in loans securitized or sold are estimated through the use of a model based on prepayment speeds, weighted-average life, expected credit losses and an assumed discount rate.) For further discussion of fair values, please see Footnote 19 to the Consolidated Financial Statements.

Goodwill. Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed in transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisition. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment at a reporting unit level at least annually. While the Company believes all assumptions utilized in its assessment of goodwill for impairment are reasonable and appropriate, changes in earnings, the effective tax rate, historical earnings multiples and the cost of capital could all cause different results for the calculation of the present value of future cash flows.

FINANCIAL CONDITION

2004 Compared to 2003

Total assets at December 31, 2004 were $1.2 billion, an increase of $162 million, or 15.7%, over total assets of $1.04 billion at December 31, 2003. The Company has completed six bank acquisitions since 1999 which has had a significant positive impact on its growth rate. While management continues to examine the feasibility and financial benefit of other potential bank acquisitions, there are no assurances that such transactions will occur. If the Company does not complete additional acquisitions, its future balance sheet growth rate will be negatively affected. Since 1999, the Company has grown $899 million in total assets, with historical growth approximately 48% by acquisition and 52% by internal growth.

Included in accrued interest receivable and other assets on the consolidated balance sheet at December 31, 2004, is bank owned life insurance (BOLI) with a cash surrender value of approximately $13,707,000. In 2004, the BOLI earned a rate of return, net of the cost of insurance, of approximately 5.6% from normal policy accretion in addition to a tax-exempt death benefit of $585,000.

At December 31, 2004, loans were $934 million, an increase of $115 million or 14%, over total loans of $819 million at December 31, 2003. Loan growth was the result of continued marketing efforts and strong demand in our market area. During 2004, the Company retained approximately $20 million in selected high quality short-term fixed-rate loans originated by Western Sierra Bank’s mortgage department. These loans would have generated approximately $260,000 in non-interest income had they been sold, which is the Company’s normal practice. Management believes that the excess yield over overnight funds that will be generated by these loans will offset the lost income of $260,000 within one year of origination of these loans.

Loans averaged $880 million in 2004 as compared to $634 million in 2003, a $246 million or 38.9% increase. Excluding Loans acquired in the Auburn acquisition in December 2003, average loans increased $135 million or 25% in 2004 as compared to 2003.

While the Company has benefited from operating in growing economic markets and the resulting strong loan demand, there can be no assurances that such demand will continue. The Company also operates in very competitive markets and competition may result in the loss of key employees that generate revenue as well as negatively effect the pricing of the Company’s products.

Total deposits at December 31, 2004 were $1.02 billion, an increase of $150 million, or 17.2%, over total deposits of $873 million at December 31, 2003. A large portion of the deposit growth occurred in non-interest bearing deposits, which increased 22.7% to $273 million at December 31, 2004. Included in these non-interest bearing deposit totals are certain deposit relationships with title companies which did not have an interest cost but did have an operational cost to the Company of approximately $67,000 for 2004, which resulted in an effective cost of these deposits of approximately 0.19% per annum for 2004. NOW accounts increased 11.1% to $126 million and money market accounts increased 33% to $200 million at December 31, 2004. The majority of the Company’s deposits remain local core deposits. Approximately 3.5% of total deposits have been obtained through institutional or third party sources.

Deposits averaged $958 million in 2004 as compared to $714 million in 2003, a $244 million or 34.2% increase. Excluding deposits acquired in the Auburn acquisition in December 2003, average deposits increased $105 million or 18% in 2004 as compared to 2003.

At December 31, 2004, the Company had a combined total of $21.5 million in outstanding short and long-term borrowings comprised Federal Home Loan Bank (“FHLB”) borrowings. The balance at year-end 2004 represents a $850,000 increase over the borrowings outstanding at December 31, 2003. These funds were borrowed primarily because of strong loan demand at year end as well as management’s desire to take advantage of the historic low rates available which management believes the Company will benefit from in a rising rate environment. At December 31, 2004, the Company had $36.5 million outstanding in variable rate subordinated debentures, resulting in $1,879,000 in interest expense at a cost of 5.15% per annum.

Total shareholders’ equity at December 31, 2004 was $110.2 million, an increase of $16.8 million over total shareholders’ equity of $93.4 million at December 31, 2003. The increase in equity is due to an increase in retained earnings of $15 million, an increase in common stock of $1.7 million from the exercise of stock options by employees and directors, and an increase of $36,000 representing unrealized gains on available-for-sale securities. Please see the consolidated statement of changes in shareholders’ equity in the consolidated financial statements for a detailed analysis of these changes.

2003 Compared to 2002

Total assets at December 31, 2003 were $1.04 billion, an increase of $357 million, or 52.7%, over total assets of $678 million at December 31, 2002. This asset growth of $357 million was comprised of $237 million, or 35.0%, from the acquisition of CSB and ACB, and the remaining 17.7% was attributed to internal growth.

Included in accrued interest receivable and other assets on the consolidated balance sheet at December 31, 2003, is bank owned life insurance (BOLI) with a cash surrender value of $13,841,000. The increase of $9,149,000 over the cash surrender value of $4,692,000 at December 31, 2002 was primarily due to the purchase of $7,790,000 in new policies in connection with an officer supplemental life insurance plan. In 2003, the BOLI earned a rate of return, net of the cost of insurance, of approximately 5.60%.

During 2003, the Company invested $1,706,000 in a limited partnership that operates qualified affordable housing projects to receive tax benefits in the form of tax deductions from operating losses and tax credits. The Company has remaining capital commitments to this partnership at December 31, 2003 in the amount of approximately $3,167,000.

At December 31, 2003, loans were $819 million, an increase of $280 million or 52.0%, over total loans of $539 million at December 31, 2002. Loan growth was the result of the acquisition of CSB and ACB, which contributed a combined $159 million or 57% of the loan growth in 2003, continued marketing efforts and strong demand in our market area. In addition, the Company purchased approximately $19 million in loan pools and individual loans from local banks in order to further diversify the portfolio and maximize profitability. The Company applies the same underwriting standards in loan pool purchases as it does when it originates its own loans.

Total deposits at December 31, 2003 were $873 million, an increase of $284 million, or 48.1%, over total deposits of $589 million at December 31, 2002. Included in the $284 million growth figures is $211 million in deposits acquired in the CSB and ACB acquisitions, which represents 75% of 2003 total deposit growth. A large portion of the deposit growth occurred in non-interest bearing deposits, which increased 37% to $222 million at December 31, 2003. Included in these non-interest bearing deposit totals are certain deposit relationships with title companies which did not have an interest cost but did have an operational cost to the Company of approximately $111,000 for 2003, which resulted in an effective cost of these deposits of approximately 0.52% per annum for 2003. NOW accounts increased 68.7% to $114 million and money market accounts increased 122% to $151 million at December 31, 2003. The majority of the Company’s deposits remain local core deposits.

At December 31, 2003, the Company had a combined total of $20.7 million in outstanding short and long-term borrowings comprised of overnight federal funds advances and longer-term Federal Home Loan Bank (“FHLB”) borrowings. The balance at year-end 2003 represents a $6.2 million increase over the borrowings outstanding at December 31, 2002. These funds were borrowed primarily because of strong loan demand at year end as well as management’s desire to take advantage of the historic low rates available which management believes the Company will benefit from in a rising rate environment. At December 31, 2003, the Company had $36.5 million outstanding in variable rate subordinated debentures, resulting in $1,122,000 in interest expense at a cost of 5.24% per annum.

Total shareholders’ equity at December 31, 2003 was $93.4 million, an increase of $39.1 million over total shareholders’ equity of $54.3 million at December 31, 2002. The increase in equity is due to an increase in retained earnings of $3.4 million, an increase in common stock of $35.5 million from the CSB and ACB acquisitions and the exercise of stock options by employees and directors, and an increase of $212,000 representing unrealized gains on available-for-sale securities. Please see the consolidated statement of changes in shareholders’ equity in the consolidated financial statements for a detailed analysis of these changes.

RESULTS OF OPERATIONS

Net Income. The Company recorded net income of $15.04 million, or $1.91 diluted earnings per share, for the year ended December 31, 2004 compared to net income of $9.95 million, or $1.44 diluted earnings per share, in 2003 and net income of $8.0 million, or $1.26 diluted earnings per share, in 2002.

Included in the 2004 results are after tax charges for amortization of core deposit intangibles of $468,000 or $.06 per diluted share. The Company also recognized tax-exempt income of approximately $585,000 from a life insurance death benefit in 2004.

Included in the 2003 results are after tax charges for merger expense of $123,000 or $.02 per share, amortization of core deposit intangibles of $258,000 or $.04 per share and a one time charge of $940,000 or $.14 per share to fully reserve for all historical REIT benefits and any expected interest, penalties and professional costs to dissolve the REIT structure.

The increase in net income for each of the three years is generally attributed to increases in net interest income driven by an increase in earning assets and growth in non-interest income, partially offset by an increase in the provision for loan and lease losses and operating expenses.

Net Interest Income and Net Interest Margin. Total interest income increased from $38.9 million in 2002 to $47.7 million in 2003, and to $63.1 million in 2004, representing a 22.7% increase in 2003 over 2002 and a 32.2% increase in 2004 over 2003. The total interest income increases in the periods discussed were primarily the result of growth in loans and loan fee income. On a tax equivalent basis, the Company increased interest income by $18.0 million in 2004 as a result of additional loan balances outstanding offset by a $2.6 million reduction as a result of declining yields in the loan portfolio. The net result was an increase of $15.4 million in tax equivalent interest income. In 2003, the Company increased interest income by $13.0 million as a result of additional loan balances outstanding offset by a $4.2 million reduction as a result of declining rates in the loan portfolio. The net result was an increase of $8.8 million in tax equivalent interest income.

The loan-to-deposit ratio averaged 92% for the year 2004 as compared to 89% in 2003 and 88% in 2002. In addition, the Company has benefited from the rate increases in 2004 as evidenced by the percentage of the loan portfolio at rate floors which has dropped to approximately 22% at December 31, 2004 from 46% at December 31, 2003. At December 31, 2004, management believes the Company’s balance sheet was “asset sensitive”, that is, it is expected that interest margin will expand as prevailing interest rates in the marketplace increase.

Total interest expense decreased from $9.7 million in 2002 to $9.6 million in 2003, and increased to $11.3 million in 2004, representing a 1.2% decrease in 2003 from 2002, and a 17.8% increase in 2004 from 2003. The increase in interest expense in 2004 was due to growth in interest-bearing liabilities. The Company experienced an increase in interest costs of approximately $2.7 million in 2004 as a result of increased volume in deposits and borrowings, offset in part by a $973,000 reduction from lower rates. In 2003, the Company saved approximately $3.4 million as a result of declining rates, offset in part by a $3.3 million interest cost increase as a result of increased volume in deposits.

Net interest income for 2004, on a tax equivalent basis, increased by $13.7 million or 35.2% from 2003. The Company’s net interest margin (on a fully tax equivalent basis) has remained relatively stable during the past three years, initially decreasing to 5.16% in 2003 from 5.34% in 2002 and then stabilizing at 5.16% in 2004. This stabilized margin has occurred during a time when some in the Company’s peer group have experienced significant compression of their margins and a resulting negative effect on net income. The primary reasons that the Company was able to stabilize its net interest margin during this challenging rate environment are 1) an increase in the loan to deposit ratio 2) the benefit of fixed rate loans and variable rate loans that have come off their contractual interest rate floors and 3) greater percentage of non-interest deposits to total deposits and 4) NOW, Money Market and Savings rates decreased from .76% per annum in 2003 to .72% per annum in 2004 despite an increase in prevailing rates, such as the Fed Fund Rate and Prime Rate, which increased 1.25% during 2004.

The following table presents, for the years indicated, the distribution of consolidated average assets, liabilities and shareholders’ equity, as well as the total dollar amounts of interest income from average earning assets and the resulting yields and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and in rates. Non-accrual loans, which are not considered material, are included in the calculation of the average balances of loans. Savings deposits include NOW and money market accounts. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent in 2004 and 34 percent in 2003 and 2002 (dollars in thousands).

	2004					2003					2002
	Average				Yield/	Average				Yield/	Average				Yield/
	Balance		Interest		Rate	Balance		Interest		Rate	Balance		Interest		Rate

Earning assets:
Portfolio loans(1)	$	880,156	$	59,096	6.71%	$	633,641	$	44,408	7.01%	$	465,359	$	34,983	7.52%
Taxable investment securities	50,576		1,688		3.34%	40,239		1,438		3.57%	41,565		2,112		5.08%
Tax-exempt investment securities	34,316		2,402		7.00%	31,000		2,137		6.89%	30,354		2,211		7.28%
Federal funds sold	50,604		707		1.40%	47,640		491		1.03%	21,781		338		1.55%
Interest-bearing deposits in banks	3,541		48		1.36%	1,401		46		3.28%	1,963		82		4.18%
Average earning assets	1,019,193		63,941		6.27%	753,921		48,520		6.44%	561,022		39,726		7.08%
Other assets	124,622					78,775					56,426
Less ALLL	(12,637)					(8,884)					(6,229)
Average total assets	$	1,131,179				$	823,812				$	611,219
Interest-bearing liabilities:
Savings deposits	$	364,411	2,627		0.72%	$	237,867	1,809		0.76%	$	173,328	1,731		1.00%
Time deposits	346,831		6,422		1.85%	305,985		6,444		2.11%	232,638		6,813		2.93%
Other borrowings (2)	62,086		2,287		3.68%	38,133		1373		3.60%	27,201		1,203		4.42%
Average interest-bearing liabilities	773,328		11,336		1.47%	581,985		9,626		1.65%	433,167		9,746		2.25%
Non-interest bearing deposits	246,369					169,855					123,870
Other liabilities	10,888					7,471					6,857
Shareholders’ equity	100,594					64,501					47,325
Average liabilities and equity	$	1,131,179				$	823,812				$	611,219
Net interest spread (3)					4.81%					4.79%					4.83%
Net interest income and margin (4)			$	52,605	5.16%			$	38,895	5.16%			$	29,979	5.34%

(1) Included in portfolio loan interest income is loan fee income of $3,951,000, $2,631,000 and $1,404,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

(2) For the purpose of this schedule the Company’s subordinated debentures are included in other borrowings.

(3) Net interest spread is calculated by subtracting the cost of average interest-bearing liabilities from yield on average earning assets.

(4) Net interest margin is calculated by dividing net interest income by average earning assets.

The following table sets forth changes in interest income and interest expense for each major category of earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the years indicated. Changes not solely attributable to rate or volume have been allocated to rate. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent in 2004 and 34 percent in 2003 and 2002 (dollars in thousands).

	2004 over 2003								2003 over 2002
	Change in Net Interest								Change in Net Interest
	Income due to								Income due to
	Volume		Rate			Total			Volume			Rate			Total
Earning assets:
Portfolio loans (1)	$	17,277	$	(2,589	)	$	14,688		$	12,650		$	(3,225	)	$	9,425
Taxable investment securities	369		(113		)	257			(67		)	(607		)	(674		)
Tax exempt investment securities	229		37			266			47			(121		)	(74		)
Federal funds sold	31		185			216			401			(248		)	153
Interest bearing deposits in banks	70		(75		)	(5		)	(23		)	(13		)	(36		)
Average earning assets	17,976		(2,555		)	15,421			13,008			(4,214		)	8,794
Interest-bearing liabilities:
Savings deposits	963		(142		)	819			645			(568		)	77
Time deposits	860		(883		)	(23		)	2,148			(2,517		)	(369		)
Other borrowings (2)	862		52			914			483			(313		)	170
Total interest-bearing liabilities	2,685		(973		)	1,711			3,276			(3,398		)	(122		)
Net interest differential	$	15,291	$	(1,581	)	$	13,710		$	9,732		$	(816	)	$

(1) Included in portfolio loan interest income is the increase in loan fee income of $1,320,000 for 2004 over 2003 and $1,227,000 for 2003 over 2002.

(2) For the purpose of this schedule the interest on the Company’s subordinated debentures is included in other borrowings.

Non-interest income. Non-interest income increased 11.2%, or $1.1 million, to $10.8 million for 2004 as compared to $9.7 million for 2003. Non-interest income for 2003 increased by $2.2 million or 29.6% from the $7.5 million earned during 2002.

The following table describes the components of non-interest income for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands).

	NON-INTEREST INCOME
	> 1% of Gross Revenue
	Year Ended December 31,
	2004				2003			2002
	Income			% of Avg Assets	Income		% of Avg Assets	Income		% of Avg Assets
Service charges and fees	$	4,708		0.42%	$	4,044	0.49%	$	2,812	0.46%
Investment service fee income	621			0.05%	100		0.01%	81		0.01%
Gain on sale and packaging of loans	3,793			0.34%	4,730		0.57%	3,995		0.65%
(Loss) gain on sale and call of investment securities, net	(9		)	0.00%	18		0.00%	49		0.01%
Other income	1,643			0.15%	785		0.10%	527		0.09%
Total	$	10,756		0.95%	$	9,677	1.17%	$	7,464	1.22%

The increase in non-interest income in 2004 from 2003 and 2002 was primarily from increases in service charges and a $585,000 gain on a life insurance death benefit, which is reported in other income for 2004. The Company’s mortgage banking activities contributed approximately $1,073,000, $1,426,000 and $1,329,000 in 2004, 2003 and 2002, respectively, to pretax income after allocation of interest and administrative costs incurred to support the mortgage group’s activities. These amounts represent 4.6%, 8.3% and 11.6%, respectively, of the Company’s consolidated pretax income. While the Company’s mortgage activities have benefited from historically low interest rates, if interest rates where to rise significantly it would have a negative effect on the refinancing activities, which currently comprise 52% of its mortgage business. The Company obtained approximately 48% of its mortgage business from purchase transactions which management expects the volume on purchase transactions to be less effected

by future interest rate increases as the refinance portion.

Service charges and fees increased significantly (16.4%) primarily as a result of adding new accounts both organically and through the acquisition of three banks (CCB, CSB, and ACB) in 2002 and 2003. However service charges as a percentage of average transaction deposits (excludes time deposits) decreased in 2004 to ..77% as compared to .99% in 2003 and .95% in 2002. This decrease is primarily related to a reduction in NSF (non sufficient funds) fees as the Company has placed greater scrutiny on the quality of new accounts as they opened.

Non-interest expense. Non-interest expense amounted to $36.4 million in 2004, $28.3 million in 2003 and $23.1 million in 2002. This represents an increase of $8.1 million, or 28.6%, in 2004 over 2003 and an increase of $5.2 million, or 22.2%, in 2003 when compared to 2002. The primary reason for the increase in operating expenses in 2004 vs. 2003 is the acquisition of two bank subsidiaries and the resulting cost structure that remained after the accounting, loan administration, compliance, data processing and human resource functions were folded into the Company’s holding company structure.

The Company’s primary measure of its cost containment strategies is the “Efficiency ratio” (total operating expense divided by total tax adjusted revenue), which is a standard measure in the banking industry. The efficiency ratio is effectively the cost of generating $1 in net revenue (net interest income plus other income). In 2004, it cost the Company approximately $0.55 to generate $1.00 in net revenue. As the Company leveraged its cost structure and managed expense growth to a rate slower than growth in net interest income, the Company’s efficiency ratio has improved from 61.1% in 2002 to 56.5% in 2003 and 55.2% in 2004.

The Company continues to believe that to be able to compete in the current environment of increased competition (and the related effect on margins), that it is essential to control operating expenses. The consolidation of many administrative functions such as purchasing, human resources, advertising, accounting, treasury and data processing are essential in successfully deploying a multi-bank holding company business model. Management continues to closely monitor this area.

Salaries and benefits have continued to increase due primarily to mortgage commissions, incentives and the addition of ACB, CSB and CCB personnel. Mortgage commissions decreased 6% in 2004 to $1.99 million from $2.11 million in 2003. Incentives paid (primarily for loan production and officer performance) increased 13.7% in 2004 to $2.27 million from $1.99 million in 2003. The increase in related revenues more than compensates for increase in employee incentives.

In 2004, other operating expenses increased $1,387,000 over 2003 due to the acquisition of two banks (CSB and ACB) in 2003. The largest increase within this expense category was amortization of core deposit intangibles, which increased approximately $328,000, or 23.6% of the total increase, over 2003.

The following table describes the components of other non-interest expense as a percentage of average assets for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands).

	NON-INTEREST EXPENSE
	>1% of Gross Revenue
	Year Ended December 31,
	2004			2003			2002
	Expense		% of Avg Assets	Expense		% of Avg Assets	Expense		% of Avg Assets
Salaries and benefits	$	19,915	1.76%	$	15,455	1.88%	$	12,161	1.99%
Occupancy and equipment	5,783		0.51%	4,746		0.58%	3,705		0.61%
Merger expenses	—		0.00%	186		0.02%	—		0.00%
Professional fees	1,312		0.12%	1,096		0.13%	1,593		0.26%
Insurance	1,298		0.11%	696		0.08%	344		0.06%
Data processing	1,293		0.11%	1,084		0.13%	1,083		0.18%
Stationery and supplies	733		0.06%	623		0.08%	517		0.08%
Advertising/promotion	621		0.05%	364		0.04%	258		0.04%
Other operating expense	5,424		0.50%	4,037		0.49%	3,485		0.57%
Total	$	36,379	3.22%	$	28,287	3.43%	$	23,146	3.79%

Provision for Loan and Lease Losses. The provision for loan and lease losses corresponds directly to the level of the allowance that management deems sufficient to offset potential losses. The balance in the allowance reflects the amount which, in management’s judgment, is adequate to provide for these potential losses after weighing the mix of the loan and lease portfolio, current economic conditions, past loan experience and such other factors as deserve recognition in estimating loan and lease losses.

Management allocated $2,710,000 as a provision for loan and lease losses in 2004, $2,270,000 in 2003 and $2,026,000 in 2002. Loan charge-offs, net of recoveries, were $453,000 in 2004, $494,000 in 2003 and $657,000 in 2002. The ratio of net loan charge-offs to average gross loans and leases was 0.05% in 2004, 0.08% in 2003 and 0.14% in 2002. The ratio of the allowance for loan and lease losses to total gross loans and leases was 1.47% in 2004, 1.40% in 2003, and 1.32% in 2002.

In determining the provision for each of the last three years and the resulting loan loss reserve ratio to gross loans and leases, management considered, among other factors, loan and lease loss experience, current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, the existing allowance for loan and lease losses, independent loan and lease reviews, current charges to and recoveries within the allowance for loan and lease losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company.

In management’s opinion, the allowance for loan and lease losses at December 31, 2004 was sufficient to sustain any foreseeable losses in the loan and lease portfolio at that time. However, no assurances can be given that the Company will not sustain substantially higher loan and lease losses.

Income Taxes. Income taxes were $8.4 million in 2004, $7.3 million in 2003 and $3.4 million in 2002, representing effective tax rates of 35.8%, 42.2% and 30.0%, respectively. The Company’s effective tax rate varies with changes in the relative amounts of its non-taxable income and non-deductible expenses. The Company’s tax provision is also affected by increases in the Company’s net income in comparison to the relative amount of tax-exempt income. The Company decreased its effective tax rate in 2002 by deploying a series of tax strategies including the purchase of tax-exempt municipal bonds, the funding of enterprise zone loans and the establishment of a real estate investment trust (“REIT”) at Western Sierra National Bank in the first quarter of 2002. The Company recognized approximately $820,000 in tax benefits, offset in part by approximately $158,000 (on an after tax basis) in professional fees, on its December 31, 2002 financial statements in connection with the REIT.

The Company’s tax rate fell to 35.8% in 2004 largely due a tax exempt death benefit gain of $585,000. Had this gain not been realized the Company’s effective tax rate would have been approximately 36.7% in 2004 as compared to the average rate during 2003 and 2002 of 37.4%.

The Company’s tax rate increased to 42.2% in 2003 vs. 30.0% in 2002 as a $940,000 charge was taken to tax expense in December 2003. Had this charge not been taken, the Company’s tax rate would have been approximately 36.8%. In early 2003, the Company’s management decided not to recognize any additional California state tax benefits associated with the REIT until there was more clarity as to California’s position on the application of state tax laws with respect to the REIT. As a result of management’s decision not to recognize any benefit in 2003, no change to taxes accrued for earnings generated in 2003 was required.

The Chief Counsel of the Franchise Tax Board, in an announcement released on December 31, 2003, declared the position of the Franchise Tax Board with respect to certain REIT transactions. As a result of that announcement, and after conferring with two independent tax experts in 2003, management made the decision to (i) fully reserve for all state tax benefits previously recognized in 2002 in connection with the REIT and (ii) establish appropriate reserves for related potential costs. The accrual for this reserve resulted in a reduction in 2003 earnings of approximately $940,000 or $.14 per share. The Company is not under examination by any taxing authority for this or any other issue.

Liquidity. A Funds Management Policy has been developed by the Company’s management, and approved by the Company’s Board of Directors, which establishes guidelines for the investments and liquidity of the Company. The goals of this policy are to provide liquidity to meet the financial requirements of the customers, maintain adequate reserves as required by regulatory agencies and maximize earnings. Liquidity at December 31, 2004 was 12.7%, at December 31, 2003 was 9.6% and at December 31, 2002 was 10.5% based on liquid assets (consisting of cash and due from banks, investments not pledged, federal funds sold and loans available-for-sale) divided by total liabilities. In addition, the Company substantially increased its borrowing capacity from its correspondent banks in 2004. At December 31, 2004, the aggregate consolidated unused borrowing capacity of each subsidiary bank and of the Company was approximately $256 million. Management believes it maintains adequate liquidity levels.

Investment Portfolio. The Company classifies its investment securities as trading, held to maturity or available for sale. The Company’s intent is to hold all securities classified as held to maturity until maturity and management believes that it has the ability to do so. Securities available for sale may be sold to implement asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors.

The following table summarizes the maturities of investment securities, their carrying value and their weighted average yields at December 31, 2004. Excluded categories are those that are not due at a single maturity date, including government guaranteed mortgage-backed securities, SBA loan pools, and stocks. Yields on tax-exempt securities have not been computed on a tax-equivalent basis (dollars in thousands).

Available -for-Sale	Within One Year			One to Five Years			Five to Ten Years			Over Ten Years				Total
	Amount		Yield	Amount		Yield	Amount		Yield	Amount			Yield	Amount			Yield
U.S. Government agencies	$	—	0.00%	$	12,459	3.68%	$	3,001	4.28%	$	1,318	5.23%		$	16,778		3.91%
Municipal obligations	102		5.11%	1,522		4.06%	7,908		3.90%	25,060		4.72%		34,592			4.51%
Corporate and other bonds	—		0.00%	—		0.00%	—		0.00%	1,101		9.38%		1,101			9.41%
Total	$	102	5.11%	$	13,981	3.72%	$	10,909	4.00%	$	27,479	4.93%		$		52,471	4.42%

Held-to-Maturity	Within One Year			One to Five Years			Five to Ten Years			Over Ten Years			Total
	Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield
Municipal obligations	$	—	0.00%	$	—	0.00%	$	962	5.04%	$	1,419	4.90%	$	2,381	4.96%

The following tables summarize the values of the Company’s investment securities held on the dates indicated (dollars in thousands):

	December 31,
	2004		2003		2002
Available-for-Sale (Amortized Cost)
U.S. Government agencies	$	39,593	$	39,179	$	27,958
Municipal obligations	33,197		32,057		28,236
Corporate and other bonds	993		992		1,994
U.S. Treasury	—		2,606		—
Stock and other investments	7,323		3,321		1,830
Total	$	81,106	$	78,156	$	60,018

Available-for-Sale (Fair Value)
U.S. Government agencies	$	39,505	$	39,136	$	28,231
Municipal obligations	34,592		33,412		28,953
Corporate and other bonds	1,101		1,033		2,023
U.S. Treasury	—		2,600		—
Stock and other investments	7,323		3,321		1,831
Total	$	82,521	$	79,502	$	61,038

Held-to-Maturity (Amortized Cost)
U.S. Government agencies	$	686	$	1,677	$	4,618
Municipal obligations	2,381		2,381		3,383
Total	$	3,067	$	4,058	$	8,001

Held-to-Maturity (Fair Value)
U.S. Government agencies	$	698	$	1,697	$	4,670
Municipal obligations	2,504		2,522		3,533
Total	$	3,202	$	4,219	$	8,203

Loan and Lease Portfolio. The Company experienced an increase of approximately 17.1% in loan production during 2004 over 2003. Non-performing assets totaled $889,000 or .07% of total assets, compared to $1,554,000 or .15% of total assets at December 31, 2003. Management believes that all of the Company’s asset quality ratios compare favorably with its peer group. The allowance for loan and lease losses totaled $13.8 million, equaling 1.47% of loans and leases outstanding, compared to $11.5 million, or 1.40%, a year ago.

The Company’s largest historical lending categories are real estate secured and commercial loans. These categories accounted for approximately 85.3% and 12.8%, respectively, of the total loan portfolio at December 31, 2004, and approximately 84.5% and 13.4%, respectively, of the total loan portfolio at December 31, 2003. Loans are carried at face amount, less payments collected and

the allowance for loan and lease losses. Interest on all loans and leases is accrued monthly on a simple interest basis. Typically, once a loan or lease is placed on non-accrual status, the Company reverses interest accrued through the date of the transfer. Loans and leases are placed on non-accrual status when principal or interest on a loan or lease is past due 90 days or more, unless the loan or lease is both well secured and in the process of collection. Interest actually received for loans and leases on non-accrual status is recognized as income at the time of receipt for loans and leases for which the ultimate collectibility of principal is not in doubt. Problem loans are maintained on accrual status only when management is confident of full repayment within a reasonable period of time.

The rates of interest charged on variable rate loans are set at specific increments in relation to the Company’s published lending rate and vary as the Company’s lending rate varies. At December 31, 2004 and 2003, approximately 56% and 31%, respectively, of the loan portfolio was comprised of variable rate loans that were not at contractual floors. This decrease was due to rates coming off their contractual floors as interest rates increased in 2004.

The following table sets forth the amounts of loans outstanding by category as of the dates indicated (dollars in thousands).

	December 31,
	2004				2003				2002				2001				2000
	Balance			% of Total	Balance			% of Total	Balance			% of Total	Balance			% of Total	Balance			% of Total
Real estate mortgage	$	600,108		64.3%	$	495,948		60.6%	$	311,030		57.7%	$	235,981		60.8%	$	217,095		65.95%
Real estate construction	199,140			21.3%	195,889			23.9%	124,726			23.1%	72,051			18.5%	59,106			18.0%
Commercial	119,823			12.8%	109,685			13.4%	88,084			16.3%	64,931			16.7%	38,854			11.8%
Lease financing	1,768			0.2%	2,016			0.2%	3,325			0.6%	3,496			0.9%	3,982			1.2%
Installment	4,160			0.4%	5,795			0.7%	4,630			0.9%	4,461			1.1%	6,051			1.8%
Agriculture	11,514			1.3%	12,185			1.5%	8,540			1.7%	8,574			2.3%	5,025			1.6%
Less deferred fees	(3,008		)	-0.3%	(2,729		)	-0.3%	(1,551		)	-0.3%	(1,060		)	-0.3%	(862		)	-0.3%
Total loans	933,505			100.0%	818,789			100.0%	538,784			100.0%	388,434				329,251			100.0%
Less provision for loan and lease losses	(13,786		)		(11,529		)		(7,113		)		(5,097		)		(4,395		)
Net loans	$	919,719			$	807,260			$	531,671			$	383,337			$	324,856

Real Estate Loans. Real estate loans are primarily made for the purpose of purchasing, refinancing, improving or constructing family residences as well as commercial and industrial properties.

At December 31, 2004, approximately $86 million of the Company’s commercial real estate construction loans consisted of loans secured by first trust deeds on the construction of speculative commercial buildings and the remaining $14 million consisted of loans secured by first trust deeds on the construction of owner occupied commercial buildings. The minimum loan to appraised value is generally 80% for conforming real estate loans, 75% for construction, 75% for nonconforming real estate and 75% for commercial real estate loans. Commercial construction loans are generally written with terms of 12 to 18 months. The risks associated with speculative construction lending include the borrower’s inability to complete the construction process on time and within budget, the leasing of the project at projected lease rates within projected absorption periods, the economic risks associated with real estate collateral, and the potential of a rising interest rate environment. Management has established underwriting and monitoring criteria to minimize the inherent risks of speculative commercial real estate construction lending. Further, management concentrates lending efforts with developers demonstrating successful performance on marketable projects within the Company’s lending areas. To date, the Company has not suffered any significant losses through its speculative commercial real estate construction loans.

At December 31, 2004, approximately $46 million of the Company’s single family real estate construction loans consisted of loans secured by first trust deeds on the construction of speculative single family dwellings and the remaining $47 million consisted of loans secured by first trust deeds on the construction of owner-occupied single family dwellings. Single family construction loans are generally written with terms of six to twelve months and usually do not exceed a loan to appraised value ratio of 75 to 80%. The risk associated with speculative construction lending includes the borrower’s inability to complete and sell the project, the borrower’s incorrect estimate of necessary construction funds and/or time for completion and economic changes, including depressed real estate values and increased interest rates. Management has established underwriting criteria to minimize losses on speculative construction loans by lending only to experienced developers and contractors with proven track records. To date the Company has not suffered any significant losses through its speculative single-family real estate construction loans.

Commercial Loans. Commercial loans are made for the purpose of providing working capital, financing the purchase of equipment or inventory and for other business purposes. Such loans include loans with maturities ranging from 30 to 360 days and term loans, which are loans with maturities normally ranging from one to five years. Short-term business loans are generally used to finance current transactions and typically provide for periodic interest payments, with principal payable at maturity or periodically. Term loans normally provide for monthly payments of both principal and interest.

The Company extends lines of credit to business customers. On business credit lines, the Company specifies a maximum amount that it stands ready to lend to the customer during a specified period in return for which the customer agrees to maintain its primary

banking relationship with the Company. The purpose for which such loans will be used and the security pledged, if any, are determined before the commitment is extended. Normally the Company does not make credit line commitments in material amounts for periods in excess of one year.

Mortgage Loans. Mortgage loans are generated by the Company’s Mortgage Division for the purpose of resale in the secondary market. The loans are Fannie Mae and Freddie Mac conforming product and are sold by the Company without retaining servicing rights. Purchase transactions accounted for approximately 48% of dollars funded in 2004, with the balance refinance transactions. Management expects rising rates would have a negative effect on the Mortgage Division’s volume, especially in refinance activity. Sales generated $3.8 million in fees to the Company in 2004 and $4.7 million in 2003.

Loan Commitments. In the normal course of business, there are various commitments outstanding to extend credit that are not reflected in the financial statements. Annual review of commercial credit lines and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of December 31, 2004, the Company had $211.7 million in unfunded commercial real estate loan commitments that are secured by real estate and $54.1 million in unfunded commercial commitments that are secured by collateral other than real estate or are unsecured. In addition, the Company had $40.3 million in other unused commitments. The Company’s undisbursed commercial loan commitments represent primarily business lines of credit. The undisbursed construction commitments represent undisbursed funding on construction projects in process. Mortgage loan commitments represent approved but unfunded mortgage loans in connection with the Company’s mortgage banking business.

Based upon prior experience and prevailing economic conditions, it is anticipated that approximately 60% of the commitments at December 31, 2004 will be exercised during 2005.

Maturity Distribution. The following table sets forth the maturity of certain loan categories as of December 31, 2004. Excluded categories are residential mortgages of 1-4 family residences, personal installment loans and lease financing. Also provided with respect to included loans are the amounts due after one year, classified according to sensitivity to changes in interest rates (dollars in thousands).

	Within One Year		After One Through Five Years		After Five Years		Total
Commercial and agricultural	$	60,823	$	42,195	$	28,320	$	131,337
Real Estate—construction	155,862		25,794		17,485		199,140
	$	216,685	$	67,989	$	45,805	$	330,477
Loans maturing after one year with:
Fixed interest rates			12,266		$	1,275	$	13,541
Variable interest rates			55,723		44,530		100,252
			67,989		$	45,805	$	113,793

Real estate construction loans maturing after one year are made up of construction and mini-perm loans. The construction phase of these loans generally runs from 12 to 18 months.

Asset Quality. The Company attempts to minimize credit risk through its underwriting and credit review policies. The Company conducts its own internal credit review processes. The Board of Directors, through the loan committee, reviews the asset quality of new and problem loans and leases on a monthly basis and reports the findings to the full Board of Directors. In management’s opinion, this loan review system facilitates the early identification of potential problem loans and leases.

The Company places loans and leases 90 days or more past due on non-accrual status unless the loan or lease is well secured and in the process of collection. A loan or lease is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a loan or lease is placed on non-accrual status, the Company’s general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans and leases is subsequently recognized only to the extent that cash is received and future collection of principal is deemed by management to be probable. Where the collectibility of the principal or interest on a loan or lease is considered to be doubtful by management, it is placed on non-accrual status prior to becoming 90 days delinquent.

Interest income is recognized on impaired loans and leases in a manner similar to that of the rest of the portfolio. It is the Company’s policy to place impaired loans and leases that are delinquent 90 days or more as to principal or interest on non-accrual status unless secured and in the process of collection and to reverse from current income accrued but uncollected interest. Cash payments subsequently received on non-accrual loans and leases are recognized as income only where the future collection of principal is considered by management to be probable.

The following table sets forth the amount of the Company’s non-performing assets as of the dates indicated (dollars in thousands).

	December 31,
	2004		2003		2002		2001		2000
Nonaccrual loans and leases	$	889	$	1,554	$	692	$	2,656	$	1,121
Accruing loans and leases past due 90 days or more	—		—		—		—		—
Restructured loans and leases (in compliance with modified terms)	—		—		—		—		—
Total nonperforming loans and leases	889		1,554		692		2,656		1,121
Other real estate	—		—		489		—		—
Total nonperforming assets	$	889	$	1,554	$	1,181	$	2,656	$	1,121
Nonperforming loans and leases to total loans and leases	0.10%		0.19%		0.13%		0.68%		0.34%
Nonperforming assets to total assets	0.07%		0.15%		0.17%		0.52%		0.24%
Allowance for loan and lease losses to nonperforming assets	15.51		7.42		6.02		1.92		3.92
Allowance for loan and lease losses to nonperforming loans and leases	15.51		7.42		10.28		1.92		3.92

The following table provides certain information for the years indicated with respect to the Company’s allowance for loan and lease losses as well as charge-off and recovery activity (dollars in thousands).

	Year Ended December 31,
	2004		2003		2002		2001		2000
Balance at beginning of period	$	11,529	$	7,113	$	5,097	$	4,395	$	3,794
Charge-offs:
Commercial	499		562		335		-		116
Real estate mortgage	—		—		89		151		171
Real estate construction	—		—		—		—		—
Lease financing	—		—		—		—		—
Installment	40		50		55		27		62
Agriculture	—		—		257		137		—
Total charge-offs	539		612		736		315		349
Recoveries:
Commercial	79		83		47		36		169
Real estate mortgage	—		15		2		37		382
Real estate construction	—		—		—		—		—
Lease financing	—		—		—		—		—
Installment	7		6		20		19		19
Agriculture	—		14		10		—		—
Total recoveries	86		118		79		92		570
Net charge-offs (recoveries)	453		494		657		223		(221		)
Allowance acquired	—		2,640		647
Provision for loan and lease losses	2,710		2,270		2,026		925		380
Balance at end of period	$	13,786	$	11,529	$	7,113	$	5,097	$	4,395
Net charge-offs (recoveries) during the period to average loans	0.05%		0.08%		0.14%		0.06%		-0.06%
Allowance for loan and lease losses to total loans	1.47%		1.40%		1.32%		1.31%		1.33%

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

The adequacy of the Company’s allowance for loan and lease losses is based on specific and formula allocations to the Company’s

loan and lease portfolio. Specific allocations are made for impaired loans and leases. The specific allocations are increased or decreased through management’s reevaluation of the status of the particular problem loans and leases. Loans and leases which do not receive a specific allocation receive an allowance allocation based on a formula represented by a percentage factor based on underlying collateral, type of loan and lease, historical charge-offs and general economic conditions which is applied against the general portfolio segments.

It is the policy of management to make additions to the allowance for loan and lease losses so that it remains adequate to cover anticipated charge-offs and management believes that the allowance at December 31, 2004 is adequate. However, the determination of the amount of the allowance is judgmental and subject to economic conditions which cannot be predicted with certainty. Accordingly, the Company cannot predict whether charge-offs of loans and leases in excess of the allowance may be required in future periods. The provision for loan and lease losses reflects an accrual sufficient to cover projected potential charge-offs. The table below sets forth the allocation of the allowance for loan and lease losses by loan type as of the dates specified. The allocation of individual categories of loans includes amounts applicable to specifically identified, as well as unidentified, losses inherent in that segment of the loan and lease portfolio and will necessarily change whenever management determines that the risk characteristics of the loan portfolio have changed.

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

The allocation below should not be interpreted as an indication of the specific amounts or loan categories in which future charge-offs may occur (dollars in thousands):

	Year Ended December 31
	2004			2003			2002			2001			2000
	Allowance for Losses		% of Loans	Allowance for Losses		% of Loans	Allowance for Losses		% of Loans	Allowance for Losses		% of Loans	Allowance for Losses		% of Loans
Real estate mortgage	$	6,743	65%	$	6,145	61%	$	3,888	58%	$	2,118	66%	$	1,442	57%
Real estate construction	2,295		21%	1,926		24%	1,187		23%	739		18%	392		15%
Commercial	3,438		13%	2,514		13%	1,513		16%	850		12%	732		19%
Lease financing	26		0%	24		0%	39		1%	35		1%	40		1%
Installment and other	100		0%	103		1%	115		1%	81		2%	90		3%
Agriculture	68		1%	106		1%	49		1%	267		1%	50		5%
Unallocated	1,116		—	711		—	322		—	1,007		—	1,649		—
Total	$	13,786	100%	$	11,529	100%	$	7,113	100%	$	5,097	100%	$	4,395	100%

Deposit Structure. Deposits represent the Company’s primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. The Company has experienced some seasonality, with the slower growth period from November through April and the higher growth period from May through October. In order to assist in meeting any funding demands, the Company maintains unsecured borrowing arrangements with several correspondent banks in addition to a secured borrowing arrangement with the Federal Home Loan Bank for longer more permanent funding needs. The unused borrowing capacity of the Company was approximately $256 million and $83 million at December 31, 2004 and 2003 respectively.

The following chart sets forth the distribution of the Company’s average daily deposits and yields for the periods indicated (dollars in thousands).

		Year Ended December 31,
		2004			2003						2002
	Amount			Yield		Amount			Yield	Amount				Yield
Non-interest bearing	$		246,369	0.00%		$		169,855	0.00%	$		123,870		0.00%
Savings	78,310			0.39%		55,741			0.54%	37,627				0.87%
NOW & money market	286,101			0.79%		182,126			0.82%	135,701				1.04%
Time deposits	346,831			1.85%		305,985			2.11%	232,638				2.93%
Total deposits	$		957,611	0.94%		$	713,707		1.16%	$			529,836	1.61%

The Company’s time deposits of $100,000 or more had the following schedule of maturities at December 31, 2004 (dollars in thousands):

		Amount
Remaining Maturity:
Three months or less		$77,946
Over three months to six months		40,679
Over six months to 12 months		48,344
Over 12 months		18,967
Total		$185,936

Time deposits of $100,000 or more are generally from the Company’s local business and individual customer base. The potential impact on the Company’s liquidity from the withdrawal of these deposits is discussed in the Company’s asset and liability management committee and is considered to be minimal.

Off-Balance Sheet Items

The Company has certain ongoing commitments under operating leases. See Note 10 to the consolidated financial statements at Item 8 of this report for the terms. These commitments do not significantly impact operating results. As of December 31, 2004 commitments to extend credit and sell mortgage loans were the Company’s only financial instruments with off-balance sheet risk. Loan commitments increased to $329 million from $259.8 million at December 31, 2003. The commitments represent 35.2% of the total loans outstanding at December 31, 2004 versus 31.7% at December 31, 2003. Management believes that the available liquid funds are adequate to fund this increase in commitments as they become due.

he following chart summarizes certain contractual obligations, as well as the expected cash payments of such obligations, of the Company as of December 31, 2004:

	Less than 1 year		1-3 years		3-5 years		More than 5 years			Total
FHLB loans	$	19,500	$	2,000	$	—	$		—	$	21,500
Subordinated debt	—		—		—		36,496			36,496
Operating lease obligations	1,725		3,620		2,657		5,972			13,974
Deferred compensation (1)	157		378		441		1,451			2,427
Supplemental retirement plans (1)	50		101		101		136			388
Investment in limited partnership (2)	717		—		—		—			717
Total contractual obligations	$	22,149	$	6,099	$	3,199	$	44,055		$		75,502

(1) These amounts represent known certain payments to participants under the Company’s deferred compensation and supplemental retirement plans. See Note 16 to the consolidated financial statements at Item 8 of this report for additional information related to the Company’s deferred compensation and supplemental retirement plan liabilities.

(2) These amounts represent estimates prepared by the limited partnership. For further discussion see Note 7 to the consolidated financial statements.

Item 7a. Quantitative & Qualitative Disclosure About Market Risk

As a financial institution, the Company’s primary market risk is interest rate volatility. Fluctuation in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities and the market value of all interest earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Since virtually all of the Company’s interest-earning assets and interest bearing liabilities are located at the Bank level, all significant interest rate risk management procedures are performed at this level. Based upon the nature of their operations, the Banks are not subject to foreign currency exchange or commodity price risk. The Banks’ real estate loan portfolios, concentrated primarily within northern California, are subject to risks associated with the local economies.

The fundamental objective of the Company’s management of its assets and liabilities is to maximize the economic value of the Company while maintaining adequate liquidity and an exposure to interest rate risk deemed by management to be acceptable. Management believes an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through maturities, pricing and mix to attempt to neutralize the potential impact of changes in market interest rates. The Banks’ profitability is dependent to a large extent upon their net interest income, which is the difference between their interest income on interest-earning assets, such as loans and securities, and their interest expense on interest-bearing liabilities, such as deposits and borrowings. The Banks, like other financial institutions, are subject to interest rate risk to the degree that their interest-earning assets reprice differently than their interest-bearing liabilities. The Banks manage their mix of assets and liabilities with the goals of limiting their exposure to interest rate risk, ensuring adequate liquidity, and coordinating their sources and uses of funds.

The Banks seek to control their interest rate risk exposure in a manner that will allow for adequate levels of earnings and capital over a range of possible interest rate environments. The Banks have adopted formal policies and practices to monitor and manage interest rate risk exposure.

The Company’s net interest margin (on a fully tax equivalent basis) has remained stable overall during the past three years, initially decreasing to 5.16% in 2003 from 5.34% in 2002 and then stabilizing at 5.16% in 2004. The Company deployed an interest rate risk measurement tool in 2003 that measures the sensitivity of every major asset and liability category on an individual basis to appropriately model the expected effect of changes in interest rates on these financial instruments. The output of this model indicates that the Company’s balance sheet as of December 31, 2004 is “asset sensitive”, that is it will grow net interest income and interest margin as rates move up and will experience a decline in net interest income and margin if rates were to fall.

Management believes that longer term municipal bonds, fixed rate loans, and loans at contractual floors benefited the Company’s interest margin in 2002 and 2003 as market rates of interest fell and the yields on these assets were not as affected as instruments that move freely with changes in interest rates. During 2004, as rates increased the loans at floors did not reprice as quickly, however these loans, which comprised approximately 46% of the portfolio at December 31, 2003 fell to approximately $205 million or 22% of it’s loan portfolio at December 31, 2004, given the increase in prevailing market rates. At December 31, 2004 variable rate loans that have reached a contractual floor (approximately 22%) and fixed rate loans comprised approximately 44% of the loan portfolio with the remaining 56% comprised of variable rate loans that will move freely with changes in the associated index rate.

Management believes that the Company is well positioned given that it has a relatively strong interest margin and is asset sensitive in what management believes is a rising rate environment.

The following tables, in management’s opinion, reflect estimates of the Company’s future net interest income under different interest rate scenarios. The net interest income estimates are one-year projections based on the earning assets and interest bearing liabilities as of December 31, 2004. The estimates are derived from an asset/liability management model deployed in 2003. There are numerous underlying assumptions that management believes are accurate, but if they are inaccurate could have an impact to the results of operations. Under the shock scenarios, the changes to interest rates are assumed to occur immediately (on January 1, 2005). Under the ramp scenarios the changes to interest rates gradually ramp up or down over the course of one year (dollars in thousands).

	Shock Scenario
Change in Interest Rates	Estimated Net Interest Income		Dollar Change from Base			Percentage Change from Base
300 basis point rise	$	61,721	$	7,060		12.92%
200 basis point rise	59,463		4,803			8.79%
100 basis point rise	57,096		2,436			4.46%
50 basis point rise	55,890		1,230			2.25%
Base scenario	54,660		0			0.00%
50 basis point decline	52,905		(1,755		)	-3.21%
100 basis point decline	51,402		(3,257		)	-5.96%
200 basis point decline	48,542		(6,118		)	-11.19%

	Ramp Scenario
Change in Interest Rates	Estimated Net Interest Income		Dollar Change from Base			Percentage Change from Base
300 basis point rise	$	57,056	$	2,396		4.38%
200 basis point rise	56,289		1,629			2.98%
100 basis point rise	55,482		823			1.50%
50 basis point rise	55,075		414			0.76%
Base scenario	54,660		0			0.00%
50 basis point decline	53,931		(729		)	-1.33%
100 basis point decline	53,262		(1,399		)	-2.56%
200 basis point decline	52,088		(2,575		)	-4.71%

The yield on a significant portion of the Company’s loan portfolio did not reprice during the declining rate cycle from 2000 to 2003 because these loans had contractual floors included in the promissory note. While the Company benefited from these loans behaving as fixed rate loans as they reached their contractual floors in the downward rate cycle, as rates began to increase in July 2004, these loans did not reprice as fast as prevailing interest rates because of these contractual floors.

The following table shows management’s estimate how the loan portfolio is broken out between variable, variable at floor, and fixed rate loans. It further identifies when and at what rate increase scenario the variable rate loans at floors will most likely come off their floor and reprice. Loans at floors can generally be refinanced by another financial institution at anytime by the borrower without penalty if the borrower chooses to do so. The Company monitors the rate of these loans relative to prevailing rates and will modify terms of certain loans that are at a significantly higher rate than market directly with the borrower when the relationship dictates it is a prudent business decision (dollars in thousands).

Loans	Balance		% of Total
Variable	$	521,906	56%
Variable at Floor*	205,469		22%
Fixed	209,138		22%
Total Gross Loans	$	936,513	100%

*Variable Loans at Floor
	Coming off Floor			Repricing Schedule
Rate Increase Scenarios	Balance		% of Total	Within 1 year		1-2 years		2-3 years		3-4 years		4+ years		Total
50 bps	$	179,209	87%	$	25,645	$	48,318	$	43,642	$	17,669	$	43,936	$	179,209
100 bps	9,224		4%	5,324		3,297		603		0		0		9,224
>100 bps	17,036		8%	11,948		1,343		1,978		352		1,414		17,036
Total at Floor	$	205,469	100%	$	42,917	$	52,959	$	46,223	$	18,021	$	45,350	$	205,469

Capital Standards. The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance- sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as certain loans.

As of December 31, 2004, the Company’s and its subsidiary banks’ capital ratios exceeded applicable minimum regulatory requirements. The following tables present the capital ratios for the Company and the Banks compared to the standards for bank holding companies and well capitalized depository institutions as of December 31, 2004 (amounts in thousands except percentage amounts).

	The Company
	Actual Capital		Ratio	Minimum Capital Requirement
Leverage	$	113,605	9.5%	4.0%
Tier 1 Risk-Based	$	113,605	11.3%	4.0%
Total Risk-Based	$	126,138	12.6%	8.0%

	The Banks
													Well	Minimum
	WSNB Actual			LCB Actual			CCB Actual			ACB Actual			Capitalized	Capital
	Capital		Ratio	Capital		Ratio	Capital		Ratio	Capital		Ratio	Ratio	Requirement
Leverage	$	48,043	8.6%	$	11,253	9.6%	$	33,570	8.5%	$	9,370	7.3%	5.0%	4.0%
Tier 1 Risk-Based	$	48,043	9.9%	$	11,253	10.5%	$	33,570	11.0%	$	9,370	9.0%	6.0%	4.0%
Total Risk-Based	$	54,084	11.2%	$	12,593	11.8%	$	37,374	12.3%	$	10,670	10.3%	10.0%	8.0%

The current and projected capital positions of the Company and its Banks and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company’s policy is to maintain ratios above the prescribed well-capitalized ratios at all times.

Shareholders’ Equity. The shareholders’ equity of the Company increased from $54.3 million at December 31, 2002 to $93.4 million at December 31, 2003 and to $110.2 million at December 31, 2004. These increases are attributable to retained earnings, the exercise of stock options, stock issued in acquisitions and adjustments for unrealized gains and losses on available-for-sale investment securities offset in part by stock repurchases by the Company. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators regarding components, risk weighting and other factors.

Unaudited Quarterly Statement of Operations Data

(dollars in thousands, except per share data)

	Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1
	2004			2004			2004			2004			2003			2003			2003			2003
Net interest income	$	13,715		$	13,165		$	12,587		$	12,280		$	11,090		$	10,137		$	8,592		$	8,284
Provision for loan and lease losses	(800		)	(600		)	(600		)	(710		)	(615		)	(600		)	(530		)	(525		)
Other operating income	2,927			2,546			2,713			2,570			2,426			2,937			2,259			2,055
Other operating expenses	9,826			8,915			8,910			8,728			7,885			7,789			6,438			6,175
Income before income taxes	6,016			6,196			5,790			5,412			5,016			4,685			3,883			3,639
Provision for income taxes	1,975			2,347			2,109			1,947			2,774		*	1,729			1,421			1,352
Net income	$	4,041		3,849			3,681			3,465			2,242			2,956			2,462			2,287
Per share:
Basic earnings per share	$	0.53		$	0.51		$	0.49		$	0.46		$	0.32		$	0.43		$	0.39		$	0.36
Diluted earnings per share	$	0.51		$	0.49		$	0.47		$	0.44		$	0.30		$	0.41		$	0.37		$	0.35

*The 4^th Quarter 2003 provision for income taxes is significantly higher than other quarters due to a one time charge of $940,000 to fully reserve for all historical REIT benefits and any expected interest, penalties and professional costs to dissolve the REIT structure.

Item 8. Financial Statements & Supplementary Data

Financial Statements. The following consolidated financial statements of the Company and its subsidiaries, and independent auditor’s report are included in the Annual Report of The Company to its shareholders for the years ended December 31, 2004, 2003 and 2002.

Consolidated Financial Statements of Western Sierra Bancorp and Subsidiaries

Consolidated Balance Sheet as of December 31, 2004 and 2003

Consolidated Statement of Income for the years ended December 31, 2004, 2003 and 2002

Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002

Consolidated Statement of Cash Flows for the years ended December 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

WESTERN SIERRA BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 2004 and 2003

(Dollars in thousands)

	2004			2003
ASSETS
Cash and due from banks	$	29,975		$	38,584
Federal funds sold	74,630			17,380
Cash and Cash Equivalents	104,605			55,964
Interest-bearing deposits in banks	1,200			4,198
Loans held for sale	2,685			940
Trading securities (Note 4)	42			28
Available-for-sale investment securities (Notes 4 and 9)	82,521			79,502
Held-to-maturity investment securities (Notes 4 and 9)	3,067			4,058
Loans and leases, less allowance for loan and lease losses of $13,786 in 2004 and $11,529 in 2003 (Notes 5, 9, 10 and 15)	919,719			807,260
Premises and equipment, net (Note 6)	20,808			19,591
Goodwill (Notes 2 and 3)	28,286			28,384
Other intangible assets (Notes 2 and 3)	5,627			6,347
Accrued interest receivable and other assets (Notes 7, 14 and 16)	29,530			29,439
	$	1,198,090		$	1,035,711
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	272,250		$	221,898
Interest bearing (Note 8)	750,716			651,240
Total deposits	1,022,966			873,138
Short-term borrowings (Notes 4, 5 and 9)	19,500			10,500
Long-term debt (Notes 4, 5 and 9)	2,000			10,150
Subordinated debentures (Note 11)	36,496			36,496
Accrued interest payable and other liabilities (Note 7)	6,977			11,990
	1,087,939			942,274
Commitments and contingencies (Note 10)
Shareholders’ equity (Note 12):
Preferred stock—no par value; 15,000,000 shares authorized; none issued	—			—
Common stock—no par value; 15,000,000 shares authorized; issued— 7,629,762 shares in 2004 and 7,439,030 shares in 2003	68,125			66,459
Retained earnings	41,109			26,097
Accumulated other comprehensive income, net of taxes (Notes 4 and 17)	917			881
Total shareholders’ equity	110,151			93,437
	$		1,198,090	$	1,035,711

The accompanying notes are an integral

part of these consolidated financial statements.

WESTERN SIERRA BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

For the Years Ended December 31, 2004, 2003 and 2002

(Dollars in thousands, except per share data)

	2004			2003			2002
Interest income:
Interest and fees on loans and leases	$	59,078		$	44,344		$			34,904
Interest on Federal funds sold	707			491			338
Interest on investment securities:
Taxable	1,688			1,438			2,112
Exempt from Federal income taxes	1,562			1,410			1,459
Interest on deposits in banks	48			46			82
Total interest income	63,083			47,729			38,895
Interest expense:
Interest on deposits (Note 8)	9,049			8,253			8,544
Interest on borrowings (Note 9)	408			251			215
Interest on subordinated debentures (Note 11)	1,879			1,122			987
Total interest expense	11,336			9,626			9,746
Net interest income before provision for loan and lease losses	51,747			38,103			29,149
Provision for loan and lease losses (Note 5)	2,710			2,270			2,026
Net interest income after provision for loan and lease losses	49,037			35,833			27,123
Non-interest income:
Service charges and fees	4,708			4,044			2,812
Investment service fee income	621			100			81
Gain on sale and packaging of residential mortgage and government-guaranteed commercial loans	3,793			4,730			3,995
(Loss) gain on sale and call of investment securities, net (Note 4)	(9		)	18			49
Other income	1,643			785			527
Total non-interest income	10,756			9,677			7,464
Non-interest expenses:
Salaries and employee benefits (Notes 5 and 16)	19,915			15,455			12,161
Occupancy (Notes 6 and 10)	3,112			2,413			1,678
Equipment (Note 6)	2,671			2,333			2,027
Other expenses (Note 13)	10,681			8,086			7,280
Total other expenses	36,379			28,287			23,146
Income before income taxes	23,414			17,223			11,441
Provision for income taxes (Note 14)	8,378			7,275			3,437
Net income	$	15,036		$		9,948	$			8,004
Basic earnings per share (Note 12)	$	1.99		$		1.51	$		1.31
Diluted earnings per share (Note 12)	$	1.91		$		1.44	$	1.26

The accompanying notes are an integral

part of these consolidated financial statements.

WESTERN SIERRA BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2004, 2003 and 2002

(Dollars in thousands)

												Accumulated
												Other
												Compre-
												hensive			Total				Total
						Unearned						Income			Share-				Compre-
	Common Stock					ESOP			Retained			(Loss)			holders’				hensive
	Shares		Amount			Shares			Earnings			(net of taxes)			Equity				Income
Balance, January 1, 2002	5,290,479		$	20,926		$	(400	)	$	19,600		$	(215	)	$	39,911
Comprehensive income (Note 17):
Net income									8,004						8,004			$			8,004
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment securities												884			884			884
Total comprehensive income																		$			8,888
Stock issued in CCB acquisition (Note 2)	378,272		4,998												4,998
Stock options exercised and related tax benefit	35,949		278												278
5% stock dividend	283,176		4,861						(4,861		)
Fractional shares									(31		)				(31		)
Repurchase and retirement of common stock (Note 12)	(7,500	)	(105		)										(105		)
Earned ESOP shares (Note 16)						400									400
Balance, December 31, 2002	5,980,376		30,958			—			22,712			669			54,339
Comprehensive income (Note 17):
Net Income									9,948						9,948			$		9,948
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment securities												212			212			212
Total comprehensive income																		$		10,160
Stock issued in CSB acquisition (Note 2)	606,260		12,702												12,702
Stock issued in ACB acquisition (Note 2)	524,964		15,973												15,973
Stock options exercised and related tax benefit	31,589		296												296
5% stock dividend	295,841		6,530						(6,530		)
Fractional shares									(33		)				(33		)
Balance, December 31, 2003	7,439,030		66,459			$	—		26,097			881			93,437
Comprehensive income (Note 17):
Net income									15,036						15,036			$		15,036
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment securities (Note 4)												36			36			36
Total comprehensive income																		$		15,072
Stock options exercised and related tax benefit	193,732		1,751												1,751
Fractional shares									(24		)				(24		)
Repurchase and retirement of common stock (Note 12)	(3,000	)	(85		)										(85		)
Balance, December 31, 2004	7,629,762		$	68,125		$	—		$	41,109		$	917		$	110,151

	2004			2003		2002
Disclosure of reclassification amount, net of taxes (Note 17):
Unrealized holding gains arising during the year	$	30		$	224	$	916
Less: reclassification adjustment for (loss) gains included in net income	(6		)	12		32
Net unrealized holding gains on available-for-sale investment securities	$	36		$	212	$	884

The accompanying notes are an integral part of these consolidated financial statements.

WESTERN SIERRA BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Years Ended December 31, 2004, 2003 and 2002

(Dollars in thousands)

	2004			2003			2002
Cash flows from operating activities:
Net income	$	15,036		$	9,948		$	8,004
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	2,710			2,270			2,026
Depreciation and amortization	3,080			2,372			1,963
Deferred loan and lease origination fees, net	279			427			326
Amortization of investment security premiums, net of accretion of discount	833			629			290
Loss (gain) on sale and call of available-for-sale investment securities	9			1			(49		)
Gain on called held-to-maturity investment securities	—			(19		)	—
Increase in trading securities	(14		)	(10		)	(2		)
Loss on sale of equipment	—			—			197
Gain on sale of other real estate	—			(1		)	(84		)
Gain on life insurance death benefit	(585		)
Increase in cash surrender value of life insurance policies	(780		)	(483		)	(159		)
Compensation cost associated with the ESOP	150			325			400
Provision for deferred income taxes	935			(2,011		)	(78		)
(Increase) decrease in loans held for sale	(1,745		)	3,986			202
Decrease (increase) in accrued interest receivable and other assets	(602		)	(3,255		)	1,088
(Decrease) increase in accrued interest payable and other liabilities	(5,013		)	6,397			(189		)
Net cash provided by operating activities	14,293			20,576			13,935

Cash flows from investing activities:
Cash acquired in acquisitions	—			41,132			9,234
Proceeds from sale and call of available-for-sale investment securities	2,699			601			2,738
Proceeds from called held-to-maturity investment securities	—			2,670			589
Proceeds from matured available-for-sale investment securities	2,545			23,741			2,045
Proceeds from matured held-to-maturity investment securities	500			500			543
Purchases of available-for-sale investment securities	(22,160		)	(46,420		)	(5,996		)
Purchases of held-to-maturity investment securities	—			—			(507		)
Principal repayments received from available-for-sale SBA loan pools and government- guaranteed mortgage-backed securities	13,149			11,641			8,759
Principal repayments received from held-to-maturity mortgaged-backed securities	485			753			1,569
Net decrease in interest-bearing deposits in banks	2,998			3,284			1,287
Proceeds from sale of other real estate	—			141			1,227
Net increase in loans and leases	(115,448		)	(121,285		)	(105,829		)
Proceeds from the sale of premises and equipment	18			9			37
Purchases of premises and equipment	(3,595		)	(1,498		)	(5,236		)
Proceeds from life insurance death benefit	1,499			—			—
Purchase of cash surrender value life insurance policies	—			(7,790		)	(1,658		)
Net cash used in investing activities	(117,310		)	(92,521		)	(91,198		)

(Continued)

WESTERN SIERRA BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

For the Years Ended December 31, 2004, 2003 and 2002

(Dollars in thousands)

Cash flows from financing activities:
Net increase in demand, interest-bearing and savings deposits	$	115,396		$	74,656		$	61,896
Net increase (decrease) in time deposits	34,432			(2,090		)	17,377
Net increase (decrease) in short-term borrowings	9,000			(4,000		)	12,200
Net (decrease) increase in long-term debt	(8,150		)	2,500			—
Proceeds from ESOP borrowings	150			325			—
Repayment of ESOP borrowings	(150		)	(325		)	(400		)
Purchase of unearned ESOP shares	(150		)	(325		)	—
Issuance of subordinated debentures	—			20,000			—
Repurchase of common stock	(85		)	—			(105		)
Redemption of fractional shares	(24		)	(33		)	(31		)
Proceeds from the exercise of stock options	1,240			237			252
Net cash provided by financing activities	151,659			90,945			91,189
Increase in cash and cash equivalents	48,641			19,000			13,926
Cash and cash equivalents at beginning of year	55,964			36,964			23,038
Cash and cash equivalents at end of year	$	104,605		$	55,964		$	36,964

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense	$	11,156		$	9,465		$	9,769
Income taxes	$	11,042		$	6,945		$	3,215

Non-cash investing activities:
Real estate acquired through foreclosure	$	—		$	—		$	1,632
Net change in unrealized gain on available-for-sale investment securities	$	69		$	326		$	1,346

Supplemental schedules related to acquisitions (Note 2):
Deposits	$	—		$	211,199		$	61,469
Long-term debt	—			7,650			—
Other liabilities	—			2,017			385
Interest-bearing deposits in banks	—			(5,698		)	(2,675		)
Available-for-sale investment securities	—			(8,292		)	—
Held-to-maturity investment securities	—			—			(3,032		)
Loans, net	—			(156,652		)	(46,489		)
Premises and equipment	—			(4,048		)	(280		)
Intangibles	—			(30,759		)	(4,247		)
Other assets	—			(2,960		)	(895		)
Stock issued	—			28,675			4,998
Cash acquired, net of cash paid to shareholders	$	—		$	41,132		$	9,234

The accompanying notes are an integral

part of these consolidated financial statements.

WESTERN SIERRA BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Western Sierra Bancorp (the “Company”) is a bank holding company with four bank subsidiaries: Western Sierra National Bank (WSNB), Lake Community Bank (LCB), Central California Bank (CCB) and Auburn Community Bank (ACB). In addition, Central Sierra Bank (CSB) operates as a division of CCB. The Company provides a wide range of commercial banking services to businesses and individuals in El Dorado, Placer, Sacramento, Lake, Stanislaus, San Joaquin, Calaveras, Amador, Tuolumne and Contra Costa counties.

In addition, the Company established the following wholly-owned subsidiaries for the purpose of issuing trust preferred securities to investors and holding floating rate junior subordinated deferrable interest debentures (the “subordinated debentures”) issued and guaranteed by the Company: Western Sierra Statutory Trust I, Western Sierra Statutory Trust II, Western Sierra Statutory Trust III and Western Sierra Statutory Trust IV (collectively, the “Trusts”). Proceeds from the subordinated debentures were used to facilitate acquisitions, provide regulatory capital for the subsidiary banks and for general corporate purposes.

The Company has completed three acquisitions during the three-year period ended December 31, 2004 as described in Note 2. Each of these acquisitions was accounted for under the purchase method of accounting and accordingly their results of operations have been included in the consolidated financial statements since the date of acquisition.

In August 2003, Western Sierra Financial Services, a division of WSNB, was established to offer customers access to investments for retirement strategies, college funds and insurance products. These products are not deposits insured by the FDIC. Woodbury Financial Services, a subsidiary of The Hartford Financial Services Group, serves as broker-dealer for all transactions processed by Western Sierra Financial Services.

Reclassifications

Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2004.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned bank subsidiaries. All significant inter-company transactions and accounts have been eliminated in consolidation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and prevailing practices within the financial services industry.

For financial reporting purposes, the Company’s investments in the Trusts (see Note 11) are accounted for under the equity method and are included in other assets on the consolidated balance sheet. The subordinated debentures issued and guaranteed by the Company and held by the Trusts are reflected on the Company’s consolidated balance sheet in accordance with provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Cash Equivalents

For the purpose of the consolidated statement of cash flows, cash and due from banks and federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold for one-day periods.

Investment Securities

Investment securities are classified into the following categories:

• Trading securities, reported at fair value, with unrealized gains and losses included in earnings.

• Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity.

• Held-to-maturity securities, which management has the positive intent and ability to hold, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums.

Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value.

Gains or losses on the sale of investment securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums.

Investment securities are evaluated for impairment on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the issues for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Restricted Investment Securities

As a member of the Federal Home Loan Bank and Federal Reserve Bank, the Company is required to maintain an investment in the capital stock of these institutions. The investments are carried at cost and redeemable at par. On the consolidated balance sheet, these investments are included in available-for-sale investment securities.

Loan Sales and Servicing

Mortgage loans are designated for the Bank’s loan portfolio or for sale in the secondary market at the date of origination. Loans held for sale are carried at the lower of cost or market value. Market value is determined by the specific identification method as of the balance sheet date or the date on which investors have committed to purchase the loans. At the time the loans are sold, the related right to service the loans are either retained, earning future servicing income, or released in exchange for a one-time servicing-released premium. Mortgage loans subsequently transferred to the loan portfolio are transferred at the lower of cost or market value at the date of transfer. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method.

The guaranteed portion of certain Small Business Administration (SBA) loans are sold to third parties with the unguaranteed portion retained. A premium in excess of the adjusted carrying value of the loan is generally recognized at the time of sale. A portion of this premium may be required to be refunded if the borrower defaults or the loan prepays within ninety days of the settlement date. However, there were no sales of loans subject to these recourse provisions at December 31, 2004, 2003 or 2002. SBA loans with unpaid balances of $2,793,000 and $4,554,000 were being serviced for others at December 31, 2004 and 2003, respectively.

Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold or securitized with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are recorded at the difference between the contractual servicing fees and adequate compensation for performing the servicing, and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing assets are periodically evaluated for impairment. Servicing rights were not considered material for disclosure purposes.

In addition, participations in commercial loans totaling $12,612,000 and $6,943,000 were serviced for others as of December 31, 2004 and 2003, respectively. These loans were sold without recourse and, therefore, their balances are not included in the consolidated balance sheet.

Loans and Leases

Loans and leases are stated at principal balances outstanding, except for loans transferred from loans held for sale, which are carried at the lower of principal balance or market value at the date of transfer, adjusted for accretion of discounts. Interest is accrued daily based upon outstanding loan and lease balances. However, when, in the opinion of management, loans and leases are considered to be impaired and the future collectibility of interest and principal is in serious doubt, loans and leases are placed on non-accrual status and the accrual of interest income is suspended. Any interest accrued but unpaid is charged against income. Payments received are

applied to reduce principal to the extent necessary to ensure collection. Subsequent payments on these loans and leases, or payments received on non-accrual loans and leases for which the ultimate collectibility of principal is not in doubt, are applied first to earned but unpaid interest and then to principal.

Leases are carried net of unearned income. Income from leases is recognized by a method that approximates a level yield on the outstanding net investment in the leases.

An impaired loan or lease is measured based on the present value of expected future cash flows discounted at the instrument’s effective interest rate or, as a practical matter, at the instrument’s observable market price or the fair value of collateral if the loan or lease is collateral dependent. A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (including both principal and interest) in accordance with the contractual terms of the loan or lease agreement.

Interest income on impaired loans, if applicable, is recognized on a cash basis.

Loan and lease origination fees, commitment fees, direct loan and lease origination costs and purchase premiums and discounts on loans and leases are deferred and recognized as an adjustment of yield, to be amortized to is reported as a component of net loans and leases.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is maintained to provide for probable losses related to impaired loans and leases and other losses on loans and leases identified by management as doubtful, substandard and special mention, as well as losses that can be expected to occur in the normal course of business. The determination of the allowance is based on estimates made by management, to include consideration of the character of the loan and lease portfolio, specifically identified problem loans, potential losses inherent in the portfolio taken as a whole and economic conditions in the Company’s service area.

Loans and leases determined to be impaired or classified are individually evaluated by management for specific risk of loss. In addition, reserve factors are assigned to currently performing loans and leases based on management’s assessment of the following for each identified loan and lease type: (1) inherent credit risk, (2) historical losses and, (3) where the Company has not experienced losses, the loss experience of peer banks. These estimates are particularly susceptible to changes in the economic environment and market conditions.

The Company’s Loan Committee reviews the adequacy of the allowance for loan and lease losses at least quarterly, to include consideration of the relative risks in the portfolio and current economic conditions. The allowance for loan and lease losses is adjusted based on that review if, in the judgment of the Loan Committee and management, changes are warranted.

The allowance is established through a provision for loan and lease losses, which is charged to expense. Additions to the allowance for loan and lease losses are expected to maintain the adequacy of the total allowance for loan and lease losses after credit losses and loan and lease growth. The allowance for loan and lease losses at December 31, 2004 and 2003, respectively, reflects management’s estimate of possible losses in the portfolio.

Other Real Estate

Other real estate includes real estate acquired in full or partial settlement of loan obligations. When property is acquired, any excess of the recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property, net of estimated selling costs, is charged against the allowance for loan and lease losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for losses on other real estate, which is included in other expenses. Subsequent gains or losses on sales or write downs resulting from permanent impairments are recorded in other income or expense as incurred. On the consolidated balance sheet, other real estate is included in accrued interest receivable and other assets. The Company did not hold any other real estate at December 31, 2004 and 2003.

Premises and Equipment

Premises and equipment are carried at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of premises are estimated to be thirty to forty years. The useful lives of furniture, fixtures and equipment are estimated to be one to fifteen years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. The Company evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.

Goodwill

Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise or the assumption of net liabilities in an acquisition of branches constituting a business may give rise to goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed in transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisition. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed for impairment at a reporting unit level at least annually. While the Company believes all assumptions utilized in its assessment of goodwill for impairment are reasonable and appropriate, changes in earnings, the effective tax rate, historical earnings multiples and the cost of capital could all cause different results for the calculation of the present value of future cash flows.

Income Taxes

The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

Earnings Per Share

Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted EPS. Earnings per share is retroactively adjusted for stock dividends and stock splits for all periods presented.

Stock-Based Compensation

At December 31, 2004, the Company has four stock-based employee compensation plans, which are described more fully in Note 12. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB No. 123, Accounting for Stock-Based Compensation, to stock-based compensation. Pro forma adjustments to the Company’s consolidated net earnings per share are disclosed during the years in which the options become vested (dollars in thousands, except per share data).

	December 31,
	2004				2003				2002
Net earnings — as reported	$	15,036			$	9,948			$		8,004
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects	(894			)	(702			)	(654			)
Net earnings — pro forma	$	14,142			$	9,246			$	7,350

Basic earnings per share — as reported	$		1.99		$		1.51		$	1.31
Basic earnings per share — pro forma	$		1.87		$		1.40		$	1.20

Diluted earnings per share — as reported	$		1.91		$		1.44		$	1.26
Diluted earnings per share — pro forma	$		1.80		$		1.35		$	1.18

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

	December 31,
	2004		2003		2002
Dividend yield (not applicable)
Expected volatility	19.81%		23.11%		134.50%
Risk-free interest rate	3.90% - 4.63%		3.95% - 4.50%		4.81% - 5.16%
Expected option life	10 years		10 years		10 years
Weighted average fair value of options granted during the year	$	12.00	$	8.41	$	8.64

Impact of New Financial Accounting Standards

Other-Than-Temporary Impairment of Certain Investments

Share-Based Payments

Accounting for Certain Loans or Debt Securities Acquired in a Transfer

2. MERGERS AND ACQUISITIONS

During 2003, the Company acquired Auburn Community Bank (ACB) and Central Sierra Bank (CSB) each through a merger and tax-free reorganization. ACB became a wholly-owned subsidiary of the Company and CSB was merged into Central California Bank. These acquisitions were completed because management believes that their combined performance exceeds what each entity could accomplish independently and furthers the Company’s expansion throughout Northern California. Total consideration paid to each entity acquired was determined through extensive negotiation supported by internal modeling, which management believes will result in earnings per share accretion to the Company’s shareholders within twelve months of each acquisition date. The funds required to pay the cash portion of the consideration for these mergers was generally obtained through the issuance of trust preferred securities (see Note 11).

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

	ACB		CSB
Date of acquisition	December 13, 2003		July 11, 2003
Common stock issued	524,964		606,260
Value of common stock issued	$	15,900	$	12,700
Cash paid	$	6,500	$	10,700
Total consideration	$	22,400	$	23,400
Goodwill recorded	$	14,500	$	11,600
Core deposit intangible recorded	$	1,800	$	2,900

3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

At December 31, 2004 and 2003, goodwill totaled $28,286,000 and $28,384,000, respectively. No goodwill amounts are deductible for tax purposes because each transaction was a tax-free reorganization. Goodwill is evaluated annually for impairment under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, and the Company determined that no impairment charge was required for the years ended December 31, 2004 and 2003. The balance as of December 31, 2004 has decreased by $98,000 from the prior year-end due to final adjustments made during the allocation period related to the ACB merger in accordance with SFAS No. 141.

Other Intangible Assets

Intangible assets are comprised of core deposit intangibles totaling $7,198,000, net of accumulated amortization of $1,571,000 and $851,000, at December 31, 2004 and 2003, respectively. The remaining balance will be amortized over a weighted average period of 8.2 years. Amortization expense for the next five years is estimated as follows:

Year Ending	Amortization
December 31,	Expense
2005	$	720
2006	720
2007	678
2008	666
2009	665

4. TRADING AND INVESTMENT SECURITIES

Trading Securities

The estimated market value of trading securities at December 31, 2004 and 2003 totaled $42,000 and $28,000, respectively. Net unrealized appreciation on trading securities of $14,000, $10,000 and $2,000 was included in other income for the years ended December 31, 2004, 2003 and 2002, respectively. There were no sales or transfers of trading securities for the years ended December 31, 2004, 2003 and 2002.

Investment Securities

The amortized cost and estimated fair value of investment securities at December 31, 2004 and 2003 consisted of the following (dollars in thousands):

Available-for-Sale:

	2004
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
U.S. Government agencies	$	19,065	$	53		$	(146	)	$	18,972
Obligations of states and political subdivisions	33,197		1,440			(45		)	34,592
Government guaranteed mortgage-backed securities	20,528		114			(109		)	20,533
Corporate debt securities	993		108			—			1,101
Federal Reserve Bank stock	2,372		—			—			2,372
Federal Home Loan Bank stock	3,934		—			—			3,934
Pacific Coast Bankers’ Bank stock	815		—			—			815
Other	202		—			—			202
	$	81,106	$	1,715	)	$	(300		$	82,521

Net unrealized gains on available-for-sale investment securities totaling $1,415,000 were recorded, net of $498,000 in tax expense, as accumulated other comprehensive income within shareholders’ equity at December 31, 2004. Proceeds and gross realized losses from the sale and call of available-for-sale investment securities for the year ended December 31, 2004 totaled $2,699,000 and $9,000, respectively. There were no transfers of available-for-sale investment securities during the year ended December 31, 2004.

	2003
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses			EstimatedFair Value
U.S. Treasury	$	2,606	$	—		$	(6	)	$	2,600
U.S. Government agencies	13,349		32			(96		)	13,285
Obligations of states and political subdivisions	32,057		1,362			(7		)	33,412
Government guaranteed mortgage-backed securities	25,831		207			(187		)	25,851
Corporate debt securities	992		58			(17		)	1,033
Federal Reserve Bank stock	946		—			—			946
Federal Home Loan Bank stock	1,558		—			—			1,558
Pacific Coast Bankers’ Bank stock	815		—			—			815
Other	2		—			—			2
	$	78,156	$	1,659	)	$	(313		$	79,502

Net unrealized gains on available-for-sale investment securities totaling $1,346,000 were recorded, net of $465,000 in tax expense, as accumulated other comprehensive income within shareholders’ equity at December 31, 2003. Proceeds and gross realized losses from the sale and call of available-for-sale investment securities for the year ended December 31, 2003 totaled $601,000 and $1,000, respectively. Proceeds and gross realized gains from the sale and call of available-for-sale investment securities for the year ended

December 31, 2002 totaled $2,738,000 and $49,000, respectively. There were no transfers of available-for-sale investment securities during the years ended December 31, 2003 and 2002.

Held-to-Maturity:

	2004
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Obligations of states and political subdivisions	$	2,381	$	123	$	—		$	2,504
Government guaranteed mortgage-backed securities	686		15		(2		)	698
	$	3,067	$	138	$	(2	)	$	3,202

	2003
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government agencies	$	499	$	1	$	—		$	500
Obligations of states and political subdivisions	2,381		141		—			2,522
Government guaranteed mortgage-backed securities	1,178		22		(3		)	1,197
	$	4,058	$	164	$	(3	)	$	4,219

There were no called held-to-maturity investment securities for the year ended December 31, 2004. Proceeds and gross realized gains from the call of held-to-maturity investment securities for the year ended December 31, 2003 totaled $2,670,000 and $19,000, respectively. There were no gains on called held-to-maturity investment securities for the year ended December 31, 2002. There were no sales or transfers of held-to-maturity investment securities for the years ended December 31, 2004, 2003 and 2002.

The amortized cost and estimated fair value of investment securities at December 31, 2004 by contractual maturity are shown below (dollars in thousands). Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	101	$	102	$	—	$	—
After one year through five years	13,914		13,981		—		—
After five years through ten years	10,690		10,909		962		1,016
After ten years	26,269		27,479		1,419		1,488
	50,974		52,471		2,381		2,504

Investment securities not due at a single maturity date:
Government guaranteed mortgage-backed securities	20,528		20,533		686		698
SBA loan pools	2,281		2,194		—		—
Federal Reserve Bank stock	2,372		2,372		—		—
Federal Home Loan Bank stock	3,934		3,934		—		—
Pacific Coast Bankers’ Bank stock	815		815		—		—
Other	202		202		—		—
	$	81,106	$	82,521	$	3,067	$	3,202

Investment securities with amortized costs totaling $42,485,000 and $43,742,000 and fair values totaling $46,166,000 and $45,475,000 were pledged to secure treasury tax and loan accounts, public deposits and short-term borrowing arrangements (see Note 9) at December 31, 2004 and 2003, respectively.

The following table shows gross unrealized losses and estimated fair values for temporarily impaired investment securities at December 31, 2004, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):

	Less Than One Year		Greater Than One Year		Total
	Estimated Fair Value	Unrealized Losses	Estimated Fair Value	Unrealized Losses	Estimated Fair Value	Unrealized Losses
U.S. Government agencies	$ 7,195	$ 54	$ 4,285	$ 93	$ 11,481	$ 146
Obligations of states and political subdivisions	1,821	40	148	5	1,969	45
Government guaranteed mortgage-backed securities	7,859	74	4,247	37	12,106	111
	$ 16,875	$ 168	$ 8,680	$ 134	$ 25,555	$ 302

In management’s opinion, the credit risk in the investment portfolio remains substantially unchanged from the date of purchase of such securities and the unrealized loses at December 31, 2004 are principally the result of increasing market interest rates that have negatively impacted the fair value of the Company’s investment portfolio.

At December 31, 2004, the Company held 191 investment securities of which 21 were in a loss position for less than twelve months and 24 were in a loss position and had been in a loss position for twelve months or more. Management periodically evaluates each investment security for other than temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities and that the noted decline in fair value is considered temporary and due only to interest rate fluctuations.

5. LOANS AND LEASES

Outstanding loans and leases are summarized as follows (dollars in thousands):

	December 31,
	2004			2003
Commercial	$	119,823		$	109,685
Real estate - mortgage	600,108			495,948
Real estate - construction	199,140			195,889
Agricultural	11,514			12,185
Lease financing	1,768			2,016
Installment	4,160			5,795
	936,513			821,518
Deferred loan and lease origination fees, net	(3,008		)	(2,729		)
Allowance for loan and lease losses	(13,786		)	(11,529		)
	$	919,719		$	807,260

Certain loans have been pledged to secure borrowing arrangements (see Note 9).

Changes in the allowance for loan and lease losses were as follows (dollars in thousands):

	Year Ended December 31,
	2004			2003			2002
Balance, beginning of year	$	11,529		$	7,113		$	5,097
Allowance acquired (Note 2)	—			2,640			647
Provision charged to operations	2,710			2,270			2,026
Losses charged to allowance	(539		)	(612		)	(736		)
Recoveries	86			118			79
Balance, end of year	$	13,786		$	11,529		$	7,113

The recorded investment in loans and leases that were considered to be impaired totaled $700,000 and $1,482,000 at December 31, 2004 and 2003, respectively. The related allowance for loan and lease losses for these loans and leases at December 31, 2004 and 2003 was $217,000 and $44,000, respectively. The average recorded investment in impaired loans and leases for the years ended December 31, 2004, 2003 and 2002 was $925,000, $691,000 and $1,520,000, respectively. The Company recognized $7,000, $54,000 and $22,000 in interest income on impaired loans and leases during these same periods. Interest income recognized was $75,000, $53,000 and $22,000 on a cash basis on impaired loans and leases during these periods.

At December 31, 2004 and 2003, non-accrual loans and leases totaled $889,000 and $1,554,000, respectively. Interest foregone on non-accrual loans and leases totaled $29,000, $30,000 and $55,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Salaries and employee benefits totaling $2,469,000, $2,338,000 and $1,914,000 have been deferred as loan and lease origination costs during 2004, 2003 and 2002, respectively.

6. PREMISES AND EQUIPMENT

Premises and equipment consisted of the following (dollars in thousands):

	December 31,
	2004			2003
Land	$	3,491		$	2,947
Buildings and improvements	12,608			13,067
Furniture, fixtures and equipment	14,521			12,730
Leasehold improvements	1,982			1,550
Construction in progress	1,328			212
	33,930			30,506
Less accumulated depreciation and amortization	(13,122		)	(10,915		)
	$	20,808		$	19,591

Depreciation and amortization included in occupancy and equipment expense totaled $2,360,000, $1,979,000 and $1,764,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

7. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable and other assets consisted of the following (dollars in thousands):

	December 31,
	2004		2003
Accrued interest receivable	$	4,256	$	3,942
Deferred tax assets, net (Note 14)	3,510		4,478
Cash surrender value of life insurance policies (Note 16)	13,707		13,841
Investment in limited partnership	4,649		4,873
Prepaid expenses	1,094		1,073
Other	2,314		1,232
	$	29,530	$	29,439

The Company invested in a limited partnership that operates qualified affordable housing projects to receive tax benefits in the form of tax deductions from operating losses and tax credits. The Company accounts for the investment under the cost method and management analyzes the investment annually for potential impairment. The Company’s remaining capital commitments to this partnership at December 31, 2004 and 2003 were approximately $717,000 and $3,167,000, respectively. Such amounts are included in accrued interest payable and other liabilities on the consolidated balance sheet.

8. INTEREST-BEARING DEPOSITS

Interest-bearing deposits consisted of the following (dollars in thousands):

	December 31,
	2004		2003
Savings	$	79,297	$	76,639
NOW accounts	126,266		113,601
Money market	200,403		150,682
Time, $100,000 or more	185,936		145,608
Other time	158,814		164,710
	$	750,716	$	651,240

Aggregate annual maturities of time deposits are as follows (dollars in thousands):

Year Ending
December 31,
2005	$	302,030
2006	30,234
2007	9,068
2008	2,369
2009	1,049
	$	344,750

Interest expense recognized on interest-bearing deposits consisted of the following (dollars in thousands):

	Year Ended December 31,
	2004		2003		2002
Savings	$	308	$	303	$	326
NOW accounts	362		242		255
Money market	1,957		1,264		1,150
Time, $100,000 or more	3,225		2,903		2,901
Other time	3,197		3,541		3,912
	$	9,049	$	8,253	$	8,544

9. BORROWING ARRANGEMENTS

Short-Term

The Company has $47,000,000 in unsecured borrowing arrangements with three of its correspondent banks. In addition, as of December 31, 2004, the Company could borrow up to $1,500,000 on an overnight basis from the Federal Reserve Bank, secured by investment securities with amortized costs totaling $2,129,000 and estimated fair values totaling $2,149,000. At December 31, 2004 and 2003, there were no borrowings outstanding under these arrangements.

At December 31, 2004, the Company could also borrow up to $229,100,000 from the Federal Home Loan Bank on either a short-term or long-term basis, secured by investment securities with amortized costs totaling $1,647,000 and estimated fair values totaling $1,696,000 and mortgage loans with carrying values totaling approximately $439,523,000. There was $19,500,000 in short-term borrowings under this arrangement aDecember 31, 2004 bearing an average interest rate of 1.84%. There was $10,500,000 in short-term borrowings under this arrangement at December 31, 2003 bearing an average interest rate of 1.39%.

On June 6, 2003, the Company’s Employee Stock Ownership Plan (ESOP) entered into an agreement with a director to establish a $500,000 revolving line of credit with a fixed interest rate of 5.0%, which matured on December 6, 2004.

Long-Term

At December 31, 2004, there was $2,000,000 in long-term borrowings from the Federal Home Loan Bank under the arrangements described above, all of which mature during 2006 and bear an average interest rate of 2.34%. Under these arrangements, there was $10,150,000 outstanding at December 31, 2003.

10. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain of its branch offices under non-cancelable operating leases. These leases expire on various dates through 2019 and have various renewal options ranging from five to ten years. Rental payments include minimum rentals, plus adjustments for changing price indexes. The Company has subleased certain facilities to other companies under non-cancelable agreements that expire in 2007 and 2008. Future minimum lease payments and sublease rental income are as follows (dollars in thousands):

			Minimum
	Minimum		Sublease
Year Ending	Lease		Rental
December 31,	Payments		Income
2005	$	1,725	$	96
2006	1,911		96
2007	1,709		95
2008	1,410		64
2009	1,247		—
Thereafter	5,972		—
	$	13,974	$	351

Rental expense included in occupancy expense totaled $1,373,000, $1,072,000 and $675,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Sublease income included in occupancy expense totaled $96,000, $97,000 and $68,000 for the years ended 2004, 2003 and 2002, respectively.

Financial Instruments With Off-Balance-Sheet Risk

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

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

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

	December 31,
	2004			2003
Commitments to extend credit:
Revolving lines of credit secured by 1-4 family residences	$	33,019		$	21,691
Commercial real estate, construction and land development commitments:
Secured by real estate	211,737			161,107
Not secured by real estate	1,105			—
Other commercial commitments not secured by real estate	53,099			49,949
Agricultural commitments	3,261			4,237
Other commitments	3,872			4,115
	$		306,093	$	241,099
Stand by letters of credit	$	22,866		$		18,752

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on Management’s credit evaluation of the borrower. Collateral held varies, but may include deposits, accounts receivable, inventory, equipment, income-producing commercial properties and residential real estate.

Stand by letters of credit are conditional commitments to guarantee the performance or financial obligation of a customer to a third party. The credit risk involved in issuing stand by letters of credit is essentially the same as that involved in extending loans to customers. The fair value of the liability related to these stand by letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2004 and 2003. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.

Commitments to sell loans are agreements to sell to another party loans originated by the Company. The Company only sells loans to third parties without recourse. The Company is not exposed to credit loss if the borrower fails to perform according to the promissory note as long as the Company has fulfilled its obligations stated in the sales commitment.

Concentrations of Credit Risk

The Company grants real estate mortgage, real estate construction, commercial, agricultural and installment loans and leases to customers throughout El Dorado, Placer, Sacramento, Lake, Stanislaus, San Joaquin, Calaveras, Amador, Tuolumne and Contra Costa counties.

In management’s judgment, a concentration exists in real estate-related loans, which represented approximately 86% and 85% of the Company’s loan portfolio at December 31, 2004 and 2003, respectively. Although management believes such concentrations to have no more than the normal risk of collectibility, a substantial decline in the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectibility of these loans. Personal and business income represent the primary source of repayment for a majority of these loans.

In addition, a substantial portion of the loans and leases in the Lake County area are dependent upon the agribusiness and resort and recreational economic sectors.

Contingencies

The Company is subject to legal proceedings and claims, which arise, in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company.

Correspondent Banking Agreements

The Company maintains funds on deposit with other federally insured institutions under correspondent banking agreements. Uninsured deposits totaled $10,695,000 at December 31, 2004.

11. SUBORDINATED DEBENTURES

Western Sierra Statutory Trust I (Trust I) and Western Sierra Statutory Trust II (Trust II) are Connecticut statutory business trusts. Western Sierra Statutory Trust III (Trust III) and Western Sierra Statutory Trust IV (Trust IV) are Delaware statutory business trusts. All were formed by the Company for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. For financial reporting purposes, the Company’s equity interests in the trusts, totaling $496,000, are accounted for under the equity method and are included in other assets on the accompanying consolidated balance sheet and the junior subordinated deferrable interest debentures (the “subordinated debentures”) held by the trusts and issued and guaranteed by the Company are reflected in the Company’s consolidated balance sheet in accordance with provisions of FIN 46. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to twenty-five percent of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2004, all of the trust preferred securities qualified as Tier 1 capital.

In July and December 2001, the Company issued to Trust I and Trust II subordinated debentures due July 31, 2031 and December 18, 2031, respectively. Simultaneously, Trust I and Trust II issued 6,000 and 10,000 floating rate trust preferred securities, with liquidation values of $1,000 per security, for gross proceeds of $16,000,000. The subordinated debentures represent the sole assets of the Trusts. The subordinated debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Bank (FRB), if then required under applicable capital guidelines or policies of the FRB. The Company may redeem the subordinated debentures held by Trust I on any July 31st on or after July 31, 2006. The Company may redeem the subordinated debentures held by Trust II on any December 18 on or after December 18, 2006. The redemption price shall be par plus accrued and unpaid interest, except in the case of redemption under a special event, which is defined in the debenture. The floating rate trust preferred securities are subject to mandatory redemption to the extent of any early redemption of the subordinated debentures and upon maturity of the subordinated debentures on July 31, 2031 and December 18, 2031.

Holders of the trust preferred securities are entitled to cumulative cash distributions on the liquidation amount of $1,000 per security. Interest rates on each set of trust preferred securities and subordinated debentures are the same and are computed on a 360-day basis. For the $6,000,000 in subordinated debentures and trust preferred securities issued in July 2001, the rate is the three-month London Interbank Offered Rate (LIBOR) plus 3.58%, with a maximum rate of 12.5% annually, adjustable quarterly. For the $10,000,000 in subordinated debentures and trust preferred securities issued in December 2001, the rate is LIBOR plus 3.60%, with a maximum rate of 12.5% annually, adjustable quarterly. The average LIBOR rate for the year ended December 31, 2004 was 1.62%.

In September 2003, the Company formed two wholly-owned Delaware statutory business trusts, Trust III and Trust IV. The Company issued to Trusts III and IV subordinated debentures in the aggregate principal amount of $10,000,000 to each trust for a total of $20,000,000. Trusts III and IV funded their purchase of the subordinated debentures by issuing $10,000,000 in floating rate trust preferred securities in each trust, which were then pooled and sold. Trusts III and IV secured these trust preferred securities with the subordinated debentures issued by the Company. The debentures are the only assets of Trusts III and IV. The interest rate on both instruments is the three-month LIBOR plus 2.90% and the trust preferred securities are callable at par after five years. The proceeds from the issuance of the debentures were used to retire $3,000,000 in short-term debt and pay the cash portion of the ACB acquisition (approximately $6,500,000). The remainder of the proceeds (approximately $10,500,000) will be used for future acquisitions and general corporate purposes.

The subordinated debentures and trust preferred securities accrue and pay distributions quarterly based on the floating rate described above on the stated liquidation value of $1,000 per security. The Company has entered into contractual agreements which, taken collectively, fully and unconditionally guarantee payment of (1) accrued and unpaid distributions required to be paid on the trust preferred securities; (2) the redemption price with respect to any trust preferred securities called for redemption by Trusts III and IV and (3) payments due upon voluntary or involuntary dissolution, winding up, or liquidation of Trusts III and IV. The trust preferred securities are mandatorily redeemable upon maturity of the subordinated debentures on July 31, 2033, or upon earlier redemption as provided in the debenture.

12. SHAREHOLDERS’ EQUITY

Stock Split

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

Dividends

Upon declaration by the Board of Directors of the Company, all shareholders of record will be entitled to receive dividends. Under applicable Federal laws, the Comptroller of the Currency restricts the total dividend payment of any national banking association in any calendar year to the net income of the year, as defined, combined with the net income for the two preceding years, less distributions made to shareholders during the same three-year period. In addition, the California Financial Code restricts the total

dividend payment of any State banking association in any calendar year to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. At December 31, 2004, the subsidiaries had $29,808,000 in retained earnings available for dividend payments to the Company.

Earnings Per Share

A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows (dollars in thousands, except per share data):

For the Year Ended	Net Income		Weighted Average Number of Shares Outstanding	Per Share Amount

December 31, 2004
Basic earnings per share	$	15,036	7,556,708	$	1.99
Effect of dilutive stock options			335,365
Diluted earnings per share	$	15,036	7,892,073	$	1.91

December 31, 2003
Basic earnings per share	$	9,948	6,600,296	$	1.51
Effect of dilutive stock options			323,430
Diluted earnings per share	$	9,948	6,923,726	$	1.44

December 31, 2002
Basic earnings per share	$	8,004	6,118,897	$	1.31
Effect of dilutive stock options			238,803
Diluted earnings per share	$	8,004	6,357,700	$	1.26

Stock Options

In 2004, 1999, 1997 and 1989, the Board of Directors adopted stock option plans for which 1,151,188 shares of common stock were reserved for issuance to employees and Directors under incentive and nonstatutory agreements. In addition, certain ACB options outstanding at the date of the acquisition were converted into options to purchase shares of the Company’s common stock. A total of 38,620 shares remain reserved for issuance in connection with these options. There were 6,430 shares available for grant under the 1999 plan and 600,000 shares available for grant under the 2004 plan at December 31, 2004. The plans require that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. The options expire on a date determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period is determined by the Board of Directors and is generally four years. Outstanding options under the 1997 and 1989 plans are exercisable until their expiration; however, no new options will be granted under these plans.

A summary of the combined activity within the plans follows:

	2004				2003				2002
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Options outstanding beginning of year	687,726		$	10.05	551,781		$	8.01	490,729		$	6.49
Options granted	109,207		$	29.25	180,391		$	15.82	123,315		$	13.90
Options exercised	(202,898	)	$	7.35	(32,481	)	$	7.26	(45,391	)	$	7.61
Options canceled	(10,657	)	$	18.12	(11,965	)	$	10.25	(16,872	)	$	8.08
Options outstanding, end of year	583,378		$	14.44	687,726		$	10.05	551,781		$	8.01
Options exercisable, end of year	396,358		$	11.83	493,209		$	8.54	361,249		$	6.57

A summary of options outstanding at December 31, 2004 follows:

Range of Exercise Prices		Number of Options Outstanding December 31, 2004	Weighted Average Remaining Contractual Life	Number of Options Exercisable December 31, 2004
$	4.17 - $6.66	137,213	3.6 years	137,213
$	7.63 - $11.00	138,759	6.6 years	118,038
$	13.55 - $16.83	107,941	7.5 years	57,759
$	17.61 - $24.14	94,300	8.3 years	45,583
$	28.67 - $36.10	105,165	9.0 years	37,765
		583,378		396,358

Common Stock Repurchase Program

During 2004, the Board of Directors approved a plan to utilize up to $2 million (or approximately 1% of the total outstanding shares) to repurchase the Company’s common stock. During 2004, the Company had purchased 3,000 shares at an average price of approximately $28.27 under this plan.

During 2002 and 2001, the Board of Directors authorized the repurchase of up to 283,500 and 544,083 shares, respectively, of the Company’s common stock. Repurchases were generally made in the open market at market prices. During 2002 and 2001, 7,875 and 274,522 shares, respectively, of the Company’s common stock were repurchased.

Regulatory Capital

The Company and its banking subsidiaries are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). Failure to meet these minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the banking subsidiaries must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and its banking subsidiaries’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and its banking subsidiaries to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets as set forth below. Each of these components is defined in the regulations. Management believes that the Company and its banking subsidiaries meet all their capital adequacy requirements as of December 31, 2004 and 2003.

In addition, the most recent notifications from the OCC and FDIC categorized each of the banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the categories. To be categorized as well capitalized, the banking subsidiaries must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below (dollars in thousands):

	2004			2003
	Amount		Ratio	Amount		Ratio
Leverage Ratio
Western Sierra Bancorp and Subsidiaries	$	113,605	9.5%	$	91,495	8.8%
Minimum regulatory requirement	$	47,923	4.0%	$	41,428	4.0%
Western Sierra National Bank	$	48,043	8.6%	$	37,547	8.3%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	27,843	5.0%	$	22,715	5.0%
Minimum regulatory requirement	$	22,275	4.0%	$	18,172	4.0%
Lake Community Bank	$	11,253	9.6%	$	10,917	9.2%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	5,867	5.0%	$	5,907	5.0%
Minimum regulatory requirement	$	4,693	4.0%	$	4,726	4.0%
Central California Bank	$	33,570	8.5%	$	28,162	7.8%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	19,814	5.0%	$	18,057	5.0%
Minimum regulatory requirement	$	15,851	4.0%	$	14,445	4.0%
Auburn Community Bank	$	9,370	7.3%	$	7,363	7.1%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	6,394	5.0%	$	5,201	5.0%
Minimum regulatory requirement	$	5,115	4.0%	$	4,161	4.0%

Tier 1 Risk-Based Capital Ratio
Western Sierra Bancorp and Subsidiaries	$	113,605	11.3%	$	91,495	10.3%
Minimum regulatory requirement	$	40,103	4.0%	$	35,565	4.0%
Western Sierra National Bank	$	48,043	9.9%	$	37,547	9.0%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	28,998	6.0%	$	24,911	6.0%
Minimum regulatory requirement	$	19,332	4.0%	$	16,607	4.0%
Lake Community Bank	$	11,253	10.5%	$	10,917	9.7%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	6,429	6.0%	$	6,732	6.0%
Minimum regulatory requirement	$	4,286	4.0%	$	4,488	4.0%
Central California Bank	$	33,570	11.0%	$	28,162	9.8%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	18,258	6.0%	$	17,287	6.0%
Minimum regulatory requirement	$	12,172	4.0%	$	11,525	4.0%
Auburn Community Bank	$	9,370	9.0%	$	7,363	9.7%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	6,237	6.0%	$	4,549	6.0%
Minimum regulatory requirement	$	4,158	4.0%	$	3,033	4.0%


Total Risk-Based Capital Ratio
Western Sierra Bancorp and Subsidiaries	$	126,138	12.6%	$		107,757	12.1%
Minimum regulatory requirement	$	80,207	8.0%	$		71,130	8.0%
Western Sierra National Bank	$	54,084	11.2%	$		42,571	10.3%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	48,331	10.0%	$		41,518	10.0%
Minimum regulatory requirement	$	38,665	8.0%	$		33,215	8.0%
Lake Community Bank	$	12,593	11.8%	$		12,320	11.0%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	10,715	10.0%	$		11,220	10.0%
Minimum regulatory requirement	$	8,572	8.0%	$		8,976	8.0%
Central California Bank	$	37,374	12.3%	$	31,764		11.0%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	30,430	10.0%	$	28,812		10.0%
Minimum regulatory requirement	$	24,344	8.0%	$	23,049		8.0%
Auburn Community Bank	$	10,670	10.3%	$	8,310		11.0%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	10,395	10.0%	$	7,582		10.0%
Minimum regulatory requirement	$	8,316	8.0%	$	6,066		8.0%

13. OTHER EXPENSES

Other expenses consisted of the following (dollars in thousands):

	Year Ended December 31,
	2004		2003		2002
Professional fees	$	1,312	$	1,096	$	1,593
Data processing	1,293		1,084		1,083
Insurance	1,298		696		344
Stationery and supplies	733		623		517
Advertising and promotion	621		364		258
Merger and acquisition	—		186		—
Amortization of core deposit intangibles	720		392		199
Other operating expenses	4,704		3,645		3,286
	$	10,681	$	8,086	$	7,280

14. INCOME TAXES

The provision for income taxes for the years ended December 31, 2004, 2003 and 2002 consisted of the following (dollars in thousands):

	Federal			State			Total
2004

Current	$	5,379		$	2,064		$	7,443
Deferred	642			293			935

Provision for income taxes	$	6,021		$	2,357		$	8,378

2003

Current	$	7,388		$	2,716		$	10,104
Deferred	(2,306		)	(523		)	(2,829		)

Provision for income taxes	$	5,082		$	2,193		$	7,275

2002

Current	$	3,141		$	374		$	3,515
Deferred	162			(240		)	(78		)

Provision for income taxes	$	3,303		$	134		$	3,437

Deferred tax assets (liabilities) are comprised of the following at December 31, 2004 and 2003 (dollars in thousands):

	December 31,
	2004			2003

Deferred tax assets:
Allowance for loan and lease losses	$	6,263		$	5,129
Deferred compensation	1,261			1,141
Net operating loss carryforward	—			63
Future benefit of State tax deduction	1,119			1,243
Mark to market	—			365
Other	225			—

Total deferred tax assets	8,868			7,941

Deferred tax liabilities:
Future liability of State deferred tax assets	(297		)	(383		)
Federal Home Loan Bank stock dividends	(181		)	(195		)
Deferred Loan Costs	(821		)	—
Prepaid Assets	(190		)	—
Unrealized gains on available-for-sale investment securities	(498		)	(465		)
Organization costs	(1,993		)	(2,112		)
Premises and equipment	(1,378		)	(308		)

Total deferred tax liabilities	(5,358		)	(3,463		)

Net deferred tax assets	$	3,510		$	4,478

The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate to operating income before income taxes. The items comprising these differences consisted of the following (dollars in thousands):

	Year Ended December 31,
	2004					2003						2002
	Amount			Rate %		Amount				Rate %		Amount				Rate %
Federal income tax expense, at statutory rate	$	8,195		35.0		$		6,028		35.0		$	3,890			34.0
State franchise tax, net of Federal tax effect	1,650			7.1		1,991				11.6		743				6.5
Tax-exempt income from investment securities and loans	(541		)	(2.3	)	(513			)	(3.0	)	(1,337			)	(11.7	)
Affordable housing tax credits	(460		)	(2.0	)	(202			)	(1.2	)	—				—
Tax-exempt income from life insurance policies	(554		)	(2.4	)	(159			)	(0.9	)	(71			)	(0.6	)
Other	88			0.4		130				0.7		212				1.8
Total income tax expense	$	8,378		35.8		$	7,275			42.2		$		3,437		30.0

For the years ended December 31, 2004 and 2003, management made the determination not to recognize any state tax benefits associated with the REIT established by WSNB until there was more clarity as to the State of California position on the application of state laws with respect to the REIT. The Chief Counsel of the California Franchise Tax Board, in an announcement released on December 31, 2003, declared the position of the California Franchise Tax Board with respect to certain REIT transactions. As a result of that announcement, management made the decision to fully reserve for all state tax benefits previously recognized in 2002 in connection with the REIT and establish appropriate reserves for related potential costs. Expense recognized in connection with this reserve totaled $940,000 and is included in the provision for income taxes for the year ended December 31, 2003 on the consolidated statement of income, with the related liability included in accrued interest payable and other liabilities on the consolidated balance sheet. The Company reserves its right to appeal this issue and claim a refund of payments made if the matter is favorably resolved in the future.

15. RELATED PARTY TRANSACTIONS

During the normal course of business, the Company enters into transactions with related parties, including directors. These transactions are on substantially the same terms and conditions as those prevailing for comparable transactions with unrelated parties.

The following is a summary of the aggregate activity involving related parties during 2004 (dollars in thousands):

Borrowings

Balance, January 1, 2004	$	4,817

Disbursements	5,421
Amounts repaid	4,182

Balance, December 31, 2004	$	6,056

Undisbursed commitments to related parties, December 31, 2004	$	5,847

In February 2004, Auburn Community Bank, a subsidiary of the Company, executed a lease for a 5,000 square foot facility to serve as the Bank’s primary headquarters and main branch. The facility is owned by a limited partnership in which a director of the Company has a 30% ownership interest. The terms of lease include a start rent of $1.71 per foot. Prior to executing the agreement, management consulted with an independent third party local real estate advisor and found the terms and conditions to be fair and reasonable.

16. BENEFIT PLANS

Profit Sharing Plan

The Western Sierra Bancorp and Subsidiaries 401KSOP is available to employees meeting certain service requirements. Under the plan, employees may defer a selected percentage of their annual compensation. The Company’s contribution to the plan is discretionary and is allocated as follows:

• A matching contribution to be determined by the Board of Directors each plan year under which a percentage of each participant’s contribution is matched.

• Additional employer contributions to the plan may be made at the discretion of the Board of Directors and shall be allocated in the same ratio as each participant’s contribution bears to total compensation.

Employer contributions totaled $289,000, $271,000 and $159,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Employee Stock Ownership Plan

The Employee Stock Ownership Plan (ESOP) is designed to invest primarily in securities of the Company purchased on the open market. The purchase of shares is funded through contributions to the ESOP by the Company and loans from certain members of the Board of Directors (see Note 9). Contributions to the plan are at the sole discretion of the Board of Directors and are limited on a participant-by-participant basis to the lesser of $30,000 or 25% of the participant’s compensation for the plan year. Compensation is defined as all compensation paid during the plan year which is considered to be W-2 income, to include amounts deferred under the Company’s 401KSOP. Employer contributions vest at a rate of 20% per year after two years of employment. Employee contributions are not permitted. Benefits may be distributed in the form of qualifying Company securities or cash. However, participants have the right to demand that their benefits be distributed in the form of qualifying Company securities.

During 2003, the ESOP purchased 9,975 shares of the Company’s common stock with the proceeds of a $325,000 loan to the ESOP by a member of the Board of Directors. During 2004, the ESOP purchased 4,500 shares of the Company’s common stock with the proceeds of a $150,000 loan to the ESOP by a member of the Board of Directors. An additional 7,800 shares were purchased with the proceeds of a contribution to the ESOP by the Company. Interest expense related to these loans totaled $1,000, $7,000 and $24,000 during the years ended December 31, 2004, 2003 and 2002, respectively. All such loans were repaid at December 31, 2004 and 2003.

The debt of the ESOP is recorded as debt of the Company and the shares purchased with the proceeds are reported as unearned ESOP shares in shareholders’ equity. As the debt is repaid, shares are committed to be released and the Company reports compensation expense equal to the current market price of the shares. Committed to be released shares are subsequently allocated to active employees and are recognized as outstanding for earnings per share and capital ratio computations. Cash dividends on allocated ESOP shares are recorded as a reduction of retained earnings and are allocated to the participants; cash dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. The ESOP had no debt outstanding as of December 31, 2004 and 2003.

Contributions to the ESOP recognized as compensation expense totaled $437,000, $393,000 and $350,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Allocated and committed-to-be-released ESOP shares as of December 31, 2004, 2003 and 2002, adjusted for stock dividends, were as follows:

	2004	2003	2002
Allocated	144,839	132,459	87,924
Committed-to-be-released	12,300	14,962	53,716
Total ESOP shares	157,139	147,421	141,640

Salary Continuation Plans

Under the salary continuation plans, the Company is obligated to provide nine current and four former executives, or their designated beneficiaries, with annual benefits for fifteen years after retirement or death. These benefits are substantially equivalent to those available under split dollar life insurance policies purchased by the Company on the lives of the executives. The estimated present value of these future benefits are accrued over the period from the effective date of the plans until the executives’ expected retirement dates. The expense recognized under these plans totaled $657,000, $256,000 and $267,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Officer Supplemental Life Insurance Plan

The Company invested in single premium life insurance policies on certain officers with a portion of the death benefits available to the officers’ beneficiaries. The cash surrender value of these insurance policies totaled $13,707,000 and $13,841,000 at December 31, 2004 and 2003, respectively, and is included on the consolidated balance sheet in accrued interest receivable and other assets. Income on these policies, net of expense, totaled approximately $780,000, $483,000 and $185,000 for the years ended December 31, 2004 and 2003, respectively.

In 2004, the Company recognized income of $585,000 in non-interest income from the life insurance death benefit proceeds of $1,499,000 received upon the death of a former executive officer of the Company.

Director Retirement Plans

During 2003, the Board of Directors approved a retirement plan for certain directors electing early retirement from the Company. The plan provides for annual payments of $7,200 for ten years to each director and became effective upon their retirement in May 2004. The estimated present value of these future payments, totaling $130,000, was included in other expense in the consolidated statement of income for the year ended December 31, 2003.

17. COMPREHENSIVE INCOME

Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income that historically has not been recognized in the calculation of net income. Unrealized gains and losses on the Company’s available-for-sale investment securities are included in other comprehensive income. Total comprehensive income and the components of accumulated other comprehensive income are presented in the consolidated statement of changes in shareholders’ equity.

At December 31, 2004, 2003 and 2002, the Company held securities classified as available-for-sale which had unrealized gains as follows (dollars in thousands):

	Before			Tax				After
	Tax			Expense				Tax
For the Year Ended December 31, 2004

Other comprehensive income:
Unrealized holding gains	$	60		$		(30	)	$	30
Less: reclassification adjustment for losses included in net income	(9		)	3				(6		)

Net unrealized holding gains	$	69		$		(33	)	$	36

For the Year Ended December 31, 2003

Other comprehensive income:
Unrealized holding gains	$	344		$		(120	)	$	224
Less: reclassification adjustment for gains included in net income	18			(6			)	12

Net unrealized holding gains	$	326		$	(114		)	$	212

For the Year Ended December 31, 2002

Other comprehensive income:
Unrealized holding gains	$	1,395		$	(479		)	$	916
Less: reclassification adjustment for gains included in net income	49			(17			)	32

Net unrealized holding gains	$	1,346		$	(462		)	$	88

18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at December 31, 2004 and 2003:

Cash and cash equivalents: For cash and cash equivalents, the carrying amount is estimated to be fair value.

Interest-bearing deposits in banks: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions.

Trading and investment securities: For trading and investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers.

Loans and leases: For variable-rate loans and leases that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values of loans held for sale are estimated using quoted market prices for similar loans. The fair values for other loans and leases are estimated using discounted cash flow analyses, using interest rates being offered at each reporting date for loans and leases with similar terms to borrowers of comparable creditworthiness. The carrying amount of accrued interest receivable approximates its fair value.

Cash surrender value of life insurance policies: The fair value of life insurance policies are based on cash surrender values at each reporting date as provided by the insurers.

Investment in limited partnership: The fair value of the investment in the limited partnership is estimated using indications of value provided by brokers.

Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow analysis using interest rates offered by the Company at each reporting date for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

Short-term borrowings and long-term debt: The fair value of short-term borrowings and long-term debt is estimated using a discounted cash flow analysis using interest rates currently available for similar debt instruments.

Subordinated debentures: Fair values of subordinated debentures were determined based on the current market value for like-kind instruments of a similar maturity and structure.

Limited partnership capital commitment: The fair value of the capital commitment to the limited partnership is estimated using a discounted cash flow analysis using interest rates currently available for debt instruments of a similar term.

Commitments to extend credit: Commitments to extend credit are primarily for variable rate loans and stand by letters of credit. For these commitments, there is no difference between the commitment amounts and their fair values. Commitments to fund fixed rate loans are at rates which approximate fair value at each reporting date.

The estimated fair value of the Company’s financial instruments are as follows (dollars in thousands):

	December 31, 2004						December 31, 2003
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and due from banks	$	29,975		$	29,975		$		38,584	$	38,584
Fed funds sold	74,630			74,630			17,380			17,380
Interest-bearing deposits in banks	1,200			1,200			4,198			4,198
Loans held for sale	2,685			2,732			940			956
Trading and investment securities	85,630			87,045			83,588			83,749
Loans and leases	919,719			907,040			807,260			821,817
Cash surrender value of life insurance policies	13,707			13,707			13,841			13,841
Investment in limited partnership	4,649			4,649			4,873			4,873
Accrued interest receivable	4,256			4,256			3,942			3,942

Financial liabilities:
Deposits	$	1,022,966		$	1,023,499		$	873,138		$		874,189
Short-term borrowings	19,500			19,464			10,500			10,500
Long-term debt	2,000			1,984			10,150			10,470
Subordinated debentures	36,496			36,496			36,496			36,496
Limited partnership capital commitment	717			717			3,167			3,167
Accrued interest payable	1,324			1,324			1,144			1,144

Off-balance-sheet financial instruments:
Commitments to extend credit	$		—	$		—	$	—		$		—
Letters of credit	$		—	$		—	$	—		$		—

19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS

BALANCE SHEET

December 31, 2004 and 2003

(Dollars in thousands)

	2004			2003
ASSETS
Cash and due from banks	$		8,925	$		10,346
Investment in subsidiaries	134,781			116,784
Trading securities	42			28
Available-for-sale investment securities	201			1
Premises and equipment	5,465			5,392
Other assets	1,597			1,724
Total assets	$	151,011		$			134,275
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Long-term debt to bank subsidiary	$	2,309		$	2,348
Subordinated debentures	36,496			36,496
Accrued expenses and other liabilities	2,055			1,994
Total liabilities	40,860			40,838
Shareholders’ equity:
Common stock	68,125			66,459
Retained earnings	41,109			26,097
Accumulated other comprehensive income	917			881
Total shareholders’ equity	110,151			93,437
Total liabilities and shareholders’ equity	$	151,011		$	134,275

STATEMENT OF INCOME

For the Years Ended December 31, 2004, 2003 and 2002

(Dollars in thousands)

	2004			2003			2002
Income:
Dividends declared by subsidiaries-eliminated in consolidation	$	2,000		$	3,000		$	9,250
Management and service fees from subsidiaries	4,297			3,635			3,115
Interest income	96			89			84
Trading securities income	14			10			2
Gain (loss) on sale of investment securities	—			1			(72		)
Other income	6			18			5
Total income	6,413			6,753			12,384
Expenses:
Salaries and benefits	4,655			4,065			3,154
Occupancy and equipment	1,424			1,346			1,240
Interest expense	2,090			1,302			1,060
Data processing fees	502			419			400
Professional fees	600			515			726
Director fees and retirement expense	41			190			46
Merger costs	—			186			—
Other expenses	1,123			747			982
Total expenses	10,435			8,770			7,608
(Loss) income before equity in undistributed income of subsidiaries	(4,022		)	(2,017		)	4,776
Equity in undistributed income of subsidiaries	16,522			10,850			1,497
Income before income tax benefit	12,500			8,833			6,273
Income tax benefit	2,536			1,115			1,731
Net income	$	15,036		$	9,948		$	8,004

STATEMENT OF CASH FLOWS

For the Years Ended December 31, 2004, 2003 and 2002

(Dollars in thousands)

	2004				2003			2002
Cash flows from operating activities:
Net income	$	15,036			$	9,948		$	8,004
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Undistributed earnings of subsidiaries	(16,522			)	(10,850		)	(1,497		)
Increase in trading securities	(14			)	(10		)	(2		)
(Gain) loss on sale of available-for-sale investment securities	—				(1		)	72
Loss on sale of premises and equipment	(4			)	—			175
Compensation costs associated with the ESOP	150				325			400
Depreciation, amortization and accretion, net	740				725			835
(Increase) decrease in other assets	(297			)	457			450
Increase in other liabilities	61				918			354
Net cash (used in) provided by operating activities	(850			)	1,512			8,791
Cash flows from investing activities:
Purchase of available-for-sale investment securities	(200			)	(14,992		)	-
Proceeds from the sale of available-for-sale investment securities	—				15,000			648
Purchases of premises and equipment	(813			)	(491		)	(3,548		)
Proceeds from sale of equipment	—				—			37
Investment in subsidiaries	(500			)	(17,625		)	(11,273		)
Net cash used in investing activities	(1,513			)	(18,108		)	(14,136		)
Cash flows from financing activities:
Proceeds from long-term debt	—				—			2,400
Repayment of long-term debt	(39			)	(42		)	(10		)
Repurchase of common stock	(85			)	—			(105		)
Proceeds from ESOP borrowings	150				325			—
Repayment of ESOP borrowings	(150			)	(325		)	(400		)
Purchase of unearned ESOP shares	(150			)	(325		)	—
Payments for fractional shares	(24			)	(33		)	(31		)
Proceeds from exercise of stock options	1,240				237			252
Proceeds from issuance of subordinated debt	—				20,000			—
Net cash provided by financing activities	942				19,837			2,106
Net (decrease) increase in cash and cash equivalents	(1,421			)	3,241			(3,239		)
Cash and cash equivalents at beginning of year	10,346				7,105			10,344
Cash and cash equivalents at end of year	$		8,925		$	10,346		$	7,105

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

and Shareholders

Western Sierra Bancorp

We have audited the accompanying consolidated balance sheet of Western Sierra Bancorp and subsidiaries (the “Company”) as of December 31, 2004 and 2003 and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Western Sierra Bancorp and subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Western Sierra Bancorp and subsidiaries’ internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2005 expressed an unqualified opinion thereon.

					/s/ Perry-Smith LLP

Sacramento, California

March 7, 2005

PART III

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Western Sierra Bancorp is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.

The Company’s management, including the chief executive officer and chief financial officer, has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based upon such assessment, management believes that, as of December 31, 2004, the Company’s internal control over financial reporting is effective based upon those criteria.

Perry-Smith LLP, the registered public accounting firm that audited the consolidated financial statements included in this Annual Report under Item 8,”Financial Statements and Supplementary Data,” has issued a report with respect to management’s assessment of the effectiveness of the Company’s internal control over financial reporting. This report follows.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors

Western Sierra Bancorp

We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Western Sierra Bancorp and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Western Sierra Bancorp and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, Western Sierra Bancorp and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Western Sierra Bancorp and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004 and our report dated March 7, 2005 expressed an unqualified opinion thereon.

	/s/ Perry-Smith LLP

Sacramento, California

March 7, 2005

Item 9B. Other Information.

Not applicable.

Item 10. Directors and Executive Officers of the Registrant

The response to this Item required by Item 401 of Regulation S-K, with respect to directors, incorporates by reference the information under the caption “Proposal No. 1 Election of Directors” of the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders (the “Definitive Proxy Statement”) and, with respect to executive officers, is contained in the Proxy Statement under the caption “Executive Officers” and, with respect to the audit committee, incorporates by reference the information under the caption “The Audit Committee” and “Audit Committee Report” of the Proxy Statement.

The response to this Item required by Item 405 of Regulation S-K incorporates by reference the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” of the Definitive Proxy Statement.

The response to this Item also incorporates by reference the information under the caption “Consideration of Director Nominees” of the Definitive Proxy Statement.

The Company has adopted a code of ethics (the “Code”), that applies to all employees, including the Company’s principal executive officer, principal financial officer, principal accounting officer and controller. The Code is posted on the Company’s internet website, www.westernsierrabancorp.com. Any amendment to, or waiver from, the Code will be posted on our internet website.

Item 11. Executive Compensation

The information required by this Item can be found in the Company’s Definitive Proxy Statement under the captions “Director Compensation” and “Executive Officers” and is by this reference incorporated herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item can be found in the Company’s Definitive Proxy Statement under the caption “Shareholdings of Certain Beneficial Owners and Management” , and is by this reference incorporated herein.

Item 13. Certain Relationships and Related Transactions

Some of the directors and executive officers of the Company and their immediate families, as well as the companies with which they are associated, are customers of, or have had banking transactions with, the Company in the ordinary course of the Company’s business, and the Company expects to have banking transactions with such persons in the future. In management’s opinion, all loans and commitments to lend in such transactions were made in compliance with applicable laws and on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons of similar creditworthiness and in the opinion of management did not involve more than a normal risk of collectibility or present other unfavorable features.

Item 14. Principal Accountant Fees and Services

The information required by this Item can be found in the Company’s Definitive Proxy Statement under the caption “Ratification of Appointment of Perry-Smith LLP as the Bancorp’s Independent Certified Public Accountants”, and is by this reference incorporated herein.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Financial Statements:

(1) Listed and included in Part II, Item 8.

(2) Financial Statement Schedules:

In accordance with Regulation S-X, the financial statement schedules have been omitted because they are not applicable to or required of the Company or the required information is included in the financial statements or notes thereto.

(3) Exhibits: The following documents are included or incorporated by reference in this Annual Report on Form 10K.

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		Placerville Branch lease is contained in the Registrant’s Registration Statement on Form S-4, file #333-66675, as Exhibit 10.1 and is incorporated herein by this reference.

10.10		Executive Salary Continuation Agreement dated February 1, 2002, between Mr. Kirk N. Dowdell. (1)

10.11		Severance Benefits Agreement dated July 25, 2002 between Mr. Gary D. Gall and Western Sierra Bancorp.

10.12		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.

10.13		Folsom Western Sierra National Bank branch lease and lease amendment. (1)

10.14		Agreement and Plan of Reorganization by and between the Western and Central Sierra Bank dated as of March 12, 2003 is attached as Appendix A to the proxy statement-prospectus contained in the S-4 Registration Statement file #333-104817 and is incorporated herein by this reference.

10.15		Wells Fargo Note Contract dated April 10, 2003. (1)

10.16		Executive Salary Continuation Agreement dated June 22, 2002, between Mr. Fred Rowden and Central California Bank. (1)

10.17		Executive Salary Continuation Agreement dated June 1, 2002, between Mr. Phillip Wood and Western Sierra National Bank. (1)

10.18		Executive Salary Continuation Agreement dated June 25, 2002, between Mr. Doug Nordell and Roseville 1^st National Bank. (1)

10.19		Agreement and Plan of Reorganization by and between the Western and Auburn Community Bank dated as of August 20, 2003 is attached as Appendix A to the proxy statement-prospectus contained in the S-4 Registration Statement file #333-109833 and is incorporated herein by this reference. (2)

10.20		Contract between Woodbury Financial Services, Inc. and Western Sierra National Bank dated July 22, 2003. (2)

10.21		Summary of financial terms for Western Sierra Statutory Trusts III and IV. (2)

10.22		Severance Benefits Agreement dated February 10, 2004 between Mr. Anthony Gould and Western Sierra Bancorp. (3)

10.23		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.

10.24		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.

11.1		Statement re: Computation of earnings per share is included in Note 12 to the consolidated financial statements.

21.1		Subsidiaries of the Registrant

23.1		Consent of Independent Registered Public Accounting Firm

31.1		Section 302 Certification by Anthony J. Gould

31.2		Section 302 Certification by Gary D. Gall

32.1		Section 906 Certification by Anthony J. Gould

32.2		Section 906 Certification by Gary D. Gall

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

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

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

WESTERN SIERRA BANCORP
By:	/s/ GARY D. GALL	Dated: March 10, 2005
	President and Chief Executive Officer (Principal Executive Officer)
And By:	/s/ ANTHONY J. GOULD	Dated: March 10, 2005
	Executive Vice President Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

/s/ CHARLES W. BACCHI		Dated: March 10, 2005
Charles W. Bacchi, Director and Chairman of the Board

/s/ WILLIAM J. FISHER		Dated: March 10, 2005
William J. Fisher, Director

/s/ LORI WARDEN		Dated: March 10, 2005
Lori Warden, Director

/s/ ALAN J. KLEINERT		Dated: March 10, 2005
Alan J. Kleinert, Director

/s/ HOWARD A. JAHN		Dated: March 10, 2005
Howard A. Jahn, Director

/s/ THOMAS MANZ		Dated: March 10, 2005
Thomas Manz, Director

/s/ LARY A. DAVIS		Dated: March 10, 2005
Lary A. Davis, Director

/s/ DOUGLAS A. NORDELL		Dated: March 10, 2005
Douglas A. Nordell, Director

/s/ WILLIAM EAMES		Dated: March 10, 2005
William Eames, Director

/s/ MATTHEW BRUNO SR.		Dated: March 10, 2005
Matthew Bruno, Sr., Director

/s/ JAN T. HALDEMAN		Dated: March 10, 2005
Jan T. Haldeman, Director