PART I

Forward-Looking Information

Certain statements contained in this Annual Report on Form 10-K that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

	•	Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.

	•	Changes in the level of non-performing assets and charge-offs.

	•	Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

	•	The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.

	•	Inflation, interest rate, securities market and monetary fluctuations.

	•	Political instability.

	•	Acts of war or terrorism.

	•	The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

	•	Changes in consumer spending, borrowings and savings habits.

	•	Changes in the financial performance and/or condition of the Company’s borrowers.

	•	Technological changes.

	•	Acquisitions and integration of acquired businesses.

	•	The ability to increase market share and control expenses.

	•	Changes in the competitive environment among financial holding companies and other financial service providers.

	•	The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and the Banks must comply.

	•	The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

	•	Changes in the Company’s organization, compensation and benefit plans.

	•	The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.

	•	Greater than expected costs or difficulties related to the integration of new products and lines of business.

	•	The Company’s success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Item 1. Description of Business

General

Throughout this document all references to “The Company” shall mean Western Sierra Bancorp on a consolidated basis. All references to “The Banks” shall refer to the Company’s four bank subsidiaries: Western Sierra National Bank (“WSNB”), Central California Bank (“CCB”), Auburn Community Bank (“ACB”), and Lake Community Bank (“LCB”).

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 WSNB, 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 LCB 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. Sentinel Community Bank was immediately merged into WSNB at the time of acquisition. In May of 2000, Roseville 1st National Bank was also merged into WSNB.

In April 2002, the Company acquired CCB for $3.7 million in cash and 378,272 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 WSNB to CCB.

In July 2003, the Company acquired Central Sierra Bank for $10.7 million in cash and 606,260 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 was merged into CCB at the time of the merger.

In December 2003, the Company acquired ACB for $6.5 million in cash and 524,964 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.

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

At December 31, 2005 the Company had $1.29 billion in total assets and $1.05 billion in total deposits. The asset and deposit totals for the bank subsidiaries at December 31, 2004 were approximately: WSNB - $606 million in assets and $501 million in deposits, LCB - $109 million in assets and $96 million in deposits, CCB - $432 million in assets and $367 million in deposits, ACB - $135 million in assets and $94 million in deposits.

The table below shows geographic, economic, demographic and market share on counties that the Company had branch operations as of June 30, 2005:

California	Market	Number of	Company Deposits		Deposit Market	Percent of State	Total Population		Population Change	Projected Population Change	Median HH Income		HH Income Change	Projected HH Income Change
County	Rank	Branches	in Market		Share	Franchise	2005		2000-2005	2005-2010	2005		2000-2005	2005-2010
			($000)		(%)	(%)	(Actual)		(%)	(%)	($)		(%)	(%)
El Dorado	5	5	$	222,838	10.46	21.19	$	174,099	11.39	9.62	$	61,108	18.31	17.90
Placer	8	6	201,376		3.90	19.14	321,518		29.44	29.59	68,132		18.67	17.32
Sacramento	20	5	153,016		0.83	14.55	1,374,087		12.31	11.96	50,901		15.79	15.77
Tuolumne	3	6	151,068		15.38	14.36	56,371		3.43	2.02	44,226		14.16	13.28
Lake	3	2	102,474		13.97	9.74	62,026		6.37	4.43	33,882		14.47	12.40
Calaveras	2	4	89,358		21.96	8.50	44,076		8.68	6.77	47,497		15.52	14.23
Amador	7	1	18,431		2.94	1.75	37,775		7.62	7.21	49,862		16.30	16.63
CA totals:		33	$	1,051,848		100.00	$	4,270,823

Weighted Average: California Franchise									13.13	12.13	54,652		16.75	15.85
Aggregate: Entire State of California							36,529,730		7.85	7.69	56,029		17.65	18.03
Aggregate: National							298,727,898		6.15	6.26	$	49,747	17.98	17.36

Source: SNL Data March 2006

WSNB was organized under national banking laws and commenced operations as a national bank on January 4, 1984. WSNB is a member of the Federal Reserve System, and the FDIC insures its deposits to the maximum amount permitted by law. WSNB’s head office is located at One Capitol Mall, Sacramento CA. 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.

WSNB 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.

LCB 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. LCB is an insured bank under the Federal Deposit Insurance Act and is a member of the Federal Reserve System. LCB 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. LCB does not have any affiliates or subsidiaries.

CCB was incorporated under the laws of the State of California on January 13, 1997 and commenced operations on April 24, 1998. CCB 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 CCB. CCB 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.

ACB, a state 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. ACB 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. ACB does not have any affiliates or subsidiaries.

Recent Events

On February 7, 2006, Western Sierra Bancorp (“Western Sierra”) entered into a Definitive Agreement and Plan of Reorganization (“Agreement”) with Umpqua Holdings Corporation (“Umpqua”). Under the terms of the Agreement, Western Sierra will merge with and into Umpqua, with Umpqua the surviving Company. The Agreement also provides for all of Western Sierra’s subsidiary banks to be merged with and into Umpqua Bank, with Umpqua Bank the surviving entity.

The Agreement provides for each outstanding Western Sierra common share to be exchanged for 1.61 shares of Umpqua common stock and for Western Sierra’s outstanding stock options to be converted at the same conversion rate. Approximately 12.5 million Umpqua common shares are expected to be issued in connection with the merger, which is expected to qualify as a tax-free reorganization.

The transaction is expected to be completed during the second quarter of 2006, subject to the satisfaction of customary conditions, including the favorable vote of Western Sierra and Umpqua shareholders and the receipt of either regulatory approvals or waivers, as the case may be.

Financial Services -Customer products that are not insured by the FDIC

In August 2003 WSNB established 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 ACB, CCB and LCB when management feels it is appropriate.

Subordinated Debentures

See Item 8, “Financial Statements and Supplementary Data, Note 11, Subordinated Debentures”.

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

Banking Services. The Bank’s 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 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 Banks offer a broad range of services to individuals and businesses in their 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 Banks offer 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 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 and installment 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 Bank’s deposits are obtained from commercial businesses, professionals and individuals. There were no customers with 5% or more of the Company’s deposits.

At the subsidiary Bank level there were three customers that represented 5% or more of the total deposits of that subsidiary bank at December 31, 2005. There was a title company deposit customer with $28.1 million or 5.6% of total deposits at WSNB, a title company deposit customer with $5.7 million or 5.9% of total deposits at LCB and a municipality customer with $10.8 million or 11.8% of total deposits at ACB. 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, 2005, the Company and the Bank’s employed approximately 360 persons on a full-time equivalent basis. The Company believes its employee relations are good.

Supervision and Regulation.

Introduction

Banking is a complex, highly regulated industry. The primary goals of the regulatory structure is 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 the Banks are subject to the rules and regulations and the policies of various governmental regulatory authorities, including:

• the Federal Reserve Board of Governors, or “FRB”;

• the Federal Deposit Insurance Corporation, or “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 govern 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 the 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.

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.

At December 31, 2005, the Banks had approximately $17.0 million in retained earnings available for dividend payment to the Company while maintaining “Well-Capitalized” status and compliance with the Company's internal capital policies.

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. 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.

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 Gramm-Leach-Bliley Act (discussed below) qualifying bank holding companies making an appropriate election to the FRB, to be deemed a financial holding company, may engage in a full range of financial activities, including insurance, securities and merchant banking. The Company does not currently have any plans to apply for financial holding company status. 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 the 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 one of the Banks 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 Bank 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 above the minimum levels.

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 non-bank 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 non-audit 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 certain executive 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.

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 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 losses that qualifies as Tier 2 capital is limited to 1.25% of gross risk weighted assets. The allowance for loan 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 refer 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.

Each of the Banks received a satisfactory rating at their last CRA examination.

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 Standards

See Item 8, “Financial Statements and Supplementary Data Footnote 1, Impact of Recently Issued Accounting Standards” .

Available Information

The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”). 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 1A. Risk Factors

Risks Related To The Company’s Business

The Company Is Subject To Interest Rate Risk

The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, of the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s financial assets and liabilities, and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located under Item 7 for further discussion related to the Company’s management of interest rate risk.

The Company Is Subject To Lending Risk

There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates as well as those across the State of California and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company.

The Company Has A High Concentration Of Real Estate Collateral Securing Its Loans

As of December 31, 2005, approximately 90% of the Company’s loan portfolio is directly or indirectly secured by real property. Because the Company’s loan portfolio contains a significant number of land development, construction, commercial and residential real estate loans, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. While the Company generally underwrites loans in a manner that collateral is not viewed as the primary source of repayment, the financial condition of many of the Company’s borrowers is directly or indirectly dependent on the health of the local real estate industry.

Real estate nationwide, and in the Company’s marketplace, has experienced significant appreciation over the last eight years or more. If there is a significant devaluation of the real estate collateral that secures these loans, there may also be related decline in general economic conditions. This may result in increased levels of nonperforming loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located under Item 7 in this report for further discussion related to commercial and industrial, construction and commercial real estate loans.

The Company’s Allowance For Loan Losses May Be Insufficient

The Company maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses; the Company will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Company’s financial condition and results of operations. See “

Management’s Discussion and Analysis of Financial Condition and Results of Operations” located under Item 7 in this report for further discussion related to the Company’s process for determining the appropriate level of the allowance for loan losses.

The Company needs to generate liquidity to fund its loan demand.

In order to support its loan growth, the Company will be required generate liquidity primarily through new deposits. While the Company has sources of borrowings, including the FHLB, deposit growth needs to keep pace with loan growth in the long term to insure that loan growth is not restricted. During the year ended December 31, 2005, deposits increased by 8.3% and loans increased 11.8%. However, the Company’s loan growth continued to outpace deposit growth in 2005 resulting in the average loan to average deposit ratio increasing from 92% in 2004 to 96% in 2005. This continued imbalance in growth has reduced the liquidity levels to the Company’s policy minimums and increased the reliance on borrowings as a source of funding loan growth. If the Company is unable to attract a sufficient amount of deposits to support its loan growth, it may be required to slow loan growth which may have an adverse effect on the Company’s results of operations.

The Company Is Subject To Environmental Liability Risk Associated With Lending Activities

A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s Profitability Depends Significantly On Economic Conditions In the State Of California

The Company’s success depends primarily on the general economic conditions of the State of California and the specific local markets in which the Company operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides banking and financial services to customers primarily Sacramento and the Central Valley. The local economic conditions in these areas have a significant impact on the demand for the Company’s products and services as well as the ability of the Company’s customers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Company’s financial condition and results of operations.

The Company Operates In A Highly Competitive Industry and Market Area

The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and community banks within the various markets the Company operates. Additionally, various out-of-state banks have begun to enter or have announced plans to enter the market areas in which the Company currently operates. The Company also faces competition from many other types of financial institutions, including, (but not limited to) savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can.

The Company’s ability to compete successfully depends on a number of factors, including, among other things:

• The ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets.

• The ability to expand the Company’s market position.

• The scope, relevance and pricing of products and services offered to meet customer needs and demands.

• The rate at which the Company introduces new products and services relative to its competitors.

• Customer satisfaction with the Company’s level of service.

• Industry and general economic trends.

Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could adversely affect the Company’s growth and profitability, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

The Company Is Subject To Extensive Government Regulation and Supervision

The Company, primarily through its subsidiary banks, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See “Supervision and Regulation” in Item 1.

The Company’s Controls and Procedures May Fail or Be Circumvented

Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.

New Lines of Business or New Products and Services May Subject The Company to Additional Risks

From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company May Not Be Able To Attract and Retain Skilled People

The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Company can be intense and the Company may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

The Company’s Information Systems May Experience An Interruption Or Breach In Security

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

The Company Continually Encounters Technological Change

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the

financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

The Company Is Subject To Claims and Litigation Pertaining To Fiduciary Responsibility

From time to time, customers make claims and take legal action pertaining to the Company’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Company’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

Severe Weather, Natural Disasters, Acts Of War Or Terrorism and Other External Events Could Significantly Impact The Company’s Business

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

Risks Associated With The Company’s Common Stock

Possible Price Effects if the Merger With Umpqua Does Not Occur

As previously disclosed, the Company has entered into a definitive agreement to merge with Umpqua Holdings Corporation. Consummation of the merger is subject to certain conditions, including shareholder and regulatory approval. The Company’s common stock currently trades at a level that is primarily based on the expectation that the merger with Umpqua will be completed as expected. If the transaction does not transpire as expected because it fails to be approved by either the Company’s or Umpqua’s shareholders (see anti-takeover effects below) or for any other reason, there will likely be a significant devaluation in the market price of the Company’s common stock.

The Company’s Articles Of Incorporation, By-Laws As Well As Certain Banking Laws May Have An Anti-Takeover Effect

Provisions of the Company’s articles of incorporation and by-laws, federal banking laws, including regulatory approval requirements could make it more difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial to the Company’s shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Company’s common stock.

The Company’s articles of incorporation state: “The stockholder vote required to approve a Business Combination shall be at least 66-2/3% of the corporation’s outstanding shares of voting stock voting together as a single class. The corporation shall not be a party to any Business Combination without the shareholder approval specified herein.”

The Company’s Stock Price Can Be Volatile

Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other things:

• Actual or anticipated variations in quarterly results of operations.

• Recommendations by securities analysts.

• Operating and stock price performance of other companies that investors deem comparable to the Company.

• News reports relating to trends, concerns and other issues in the financial services industry.

• Perceptions in the marketplace regarding the Company and/or its competitors.

• New technology used, or services offered, by competitors.

• Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors.

• Failure to integrate acquisitions or realize anticipated benefits from acquisitions.

• Changes in government regulations.

• Geopolitical conditions such as acts or threats of terrorism or military conflicts.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company’s stock price to decrease regardless of operating results.

The Trading Volume In The Company’s Common Stock Is Less Than That Of Other Larger Financial Services Companies

Although the Company’s common stock is listed for trading on the NASDAQ, the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Company’s common stock, significant sales of the Company’s common stock, or the expectation of these sales, could cause the Company’s stock price to fall.

An Investment In The Company’s Common Stock Is Not An Insured Deposit

The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Company (FDIC), any other deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company’s common stock, you may lose some or all of your investment.

Risks Associated With The Banking Industry

The Earnings Of Banks Are Significantly Affected By General Business And Economic Conditions

The Company’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which the Company operates, all of which are beyond the Company’s control. Any deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for the Company’s products and services, among other things, any of which could have a material adverse impact on the Company’s financial condition and results of operations.

Banks Depend On The Accuracy And Completeness Of Information About Customers And Counterparties

In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

Consumers May Decide Not To Use Banks To Complete Their Financial Transactions

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

The Company owns the properties of eight branches and a corporate headquarters building. The Company also leases 26 other locations (23 branches and 3 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. The expiration dates of the leases vary, with the first such lease expiring during 2006 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. See Item 8,

“Financial Statements and Supplementary Data Footnote 10” 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.

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, 2005, there were approximately 2,100 shareholders of record.

The following table presents the high and low sales prices of our common stock for each period, based on inter-dealer prices that do not include retail mark-ups, mark-downs or commissions: The prices have been adjusted to reflect a three-for-two stock split in May 7, 2004.

Western Sierra Bancorp

Common Stock Prices

	Qtr 1 2005		Qtr 2 2005		Qtr 3 2005		Qtr 4 2005		Qtr 1 2004		Qtr 2 2004		Qtr 3 2004		Qtr 4 2004
High	$	39.99	$	36.15	$	38.73	$	38.31	$	32.03	$	31.57	$	34.85	$	41.98
Low	$	32.50	$	30.50	$	33.37	$	32.58	$	27.07	$	27.45	$	30.00	$	33.01

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. In addition , 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 current liabilities (exclusive of deferred taxes, deferred income and other deferred credits); and

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

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. 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 non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.

The Company’ primary source of revenue to pay dividends to its shareholders is dividends from its bank subsidiaries. See Item 1, “Description Of Business, Bank Dividends To The Company”.

The Company has historically not paid any cash dividends to shareholders. The Company expects to initiate the declaration of dividends beginning in the first quarter of 2006 that will mirror the per share dividend declared by Umpqua (See Item 1, “Description of Business, General, Recent Events”). Given the Company’s capital levels and profitability, it is likely that if the Umpqua transaction is not completed as expected, it is the Company will begin paying cash dividends in 2006.

Item 6. Selected Financial Data

The following table is provided to highlight certain significant trends in the Company’s financial position and results of operations. This information should be read in conjunction with the Company’s consolidated financial statements and “Item 7, Management’s Discussion and Analysis” included elsewhere herein. The Company has completed six acquisitions since 1999- See “Item 1, Description of Business, General”. The first three transactions occurred in 1999 and 2000 and were accounted for as a pooling of interest in which the financial position and results of operations of the Company are retroactively restated as if the transaction had occurred at the beginning of the earliest period presented. The last three transactions occurred in 2002 and 2003 and were accounted for as purchase transactions. In accordance with purchase accounting, the operating results of these entities prior to the purchase transaction are not contained herein and may make comparing data to other periods more difficult.

Summary of Consolidated Financial Data and Performance Ratios

	At or for the Year Ended December 31,
	2005		2004		2003		2002		2001
	(dollars in thousands, except per share data)
Statements of Operations:
Interest income	$	76,729	$	63,083	$	47,729	$	38,895	$	35,780
Interest expense	17,301		11,336		9,626		9,746		13,752
Net interest income	59,428		51,747		38,103		29,149		22,028
Provision for loan losses	2,050		2,710		2,270		2,026		925
Non-interest income	13,198		10,756		9,677		7,464		5,447
Non-interest expense	42,758		36,379		28,287		23,146		17,876
Income before income taxes	27,818		23,414		17,223		11,441		8,674
Provision for income taxes	10,072		8,378		7,275		3,437		3,238
Net income	$	17,746	$	15,036	$	9,948	$	8,004	$	5,436
Financial Ratios:
For the year:
Return on average assets	1.43%		1.33%		1.21%		1.31%		1.10%
Return on average equity	14.82%		14.83%		15.15%		16.69%		14.09%
Return on average tangible equity	21.02%		22.90%		18.45%		18.35%		14.29%
Net interest margin (1)	5.37%		5.15%		5.14%		5.31%		4.97%
Efficiency ratio (1)	55.6%		55.1%		56.5%		61.3%		63.7%
At December 31:
Average equity to average assets	9.64%		8.96%		7.97%		7.84%		7.83%
Total capital to risk-adjusted assets	13.24%		12.58%		12.04%		12.68%		14.23%
Allowance for loan losses to loans	1.48%		1.47%		1.40%		1.32%		1.31%
Loans to deposits	99.85%		91.37%		93.88%		92.25%		87.73%
Net charge-offs to average loans	0.04%		0.05%		0.08%		0.14%		0.06%
Provision for loan losses to average loans	0.21%		0.31%		0.36%		0.44%		0.26%
Non-performing assets to total assets	0.11%		0.12%		0.18%		0.23%		0.58%
Non-performing assets to capital	1.08%		1.34%		2.00%		2.89%		7.47%

(1) Ratio computed on a fully tax equivalent basis.

	At or for the Year Ended December 31,
	2005		2004		2003		2002		2001
	(dollars in thousands, except per share data)
Balance Sheet:
Total assets	$	1,292,573	$	1,198,710	$	1,035,711	$	678,284	$	510,622
Total loans	$	1,043,972	$	933,505	$	818,789	$	538,785	$	388,434
Allowance for loan losses	$	15,505	$	13,786	$	11,529	$	7,113	$	5,097
Total deposits	$	1,048,695	$	1,022,966	$	873,138	$	589,373	$	448,631
Shareholders’ equity	$	130,232	$	110,151	$	93,437	$	54,339	$	39,911
Share Data: (2)
Common shares outstanding (in thousands)	7,782		7,630		7,439		6,279		5,833
Book value per share	$	16.74	$	14.44	$	12.56	$	8.65	$	6.84
Tangible book value per share	$	12.47	$	9.99	$	7.89	$	7.96	$	6.78
Basic earnings per share	$	2.30	$	1.99	$	1.51	$	1.31	$	0.91
Diluted earnings per share	$	2.23	$	1.91	$	1.44	$	1.26	$	0.89
Cash dividends per share	$	—	$	—	$	—	$	—	$	—

(2) Prior years are adjusted for stock dividends and splits.

Application of Critical Accounting Policies and Accounting Estimates

The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Accounting policies related to the allowance for possible loan losses are considered to be critical, as these policies involve considerable subjective judgment and estimation by management. The Company also considers accounting policies related to stock-based compensation to be critical due to the continuously evolving standards, changes to which will materially impact the way the Company accounts for stock options beginning January 1, 2006. Critical accounting policies, and the Company’s procedures related to these policies, are described below. See Item 8, “Financial Statements and Supplementary Data, Note 1, Summary of Significant Accounting Policies”.

Allowance for Possible Loan Losses. The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for possible loan loss methodology is based on guidance provided in SEC Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues” and includes allowance allocations calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS 118, and allowance allocations determined in accordance with SFAS No. 5, “Accounting for Contingencies.” The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. See the section captioned “Provision for Possible Loan Losses” below in this discussion for further details of the risk factors considered by management in estimating the necessary level of the allowance for possible loan losses.

Stock-based Compensation. The Company accounts for stock-based employee compensation plans based on the “intrinsic value method” provided in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the measurement date, which is generally the date of grant, no compensation expense is recognized on options granted. Compensation expense for stock awards is based on the market price of the stock on the measurement date, which is generally the date of grant, and is recognized ratably over the service period of the award.

SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro forma disclosures presented (See Item 8, “Financial Statements and Supplementary Data, Note 1, Stock Base Compensation) use the fair value method of SFAS 123 to measure compensation expense for stock-based employee compensation plans. The fair value of stock options granted was estimated at the measurement date, which is generally the date of grant, using the Black-Scholes option-pricing model. This model was developed for use in estimating the fair value of publicly traded options that have no vesting restrictions and are fully transferable. Additionally, the model requires the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of publicly traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the Black-Scholes option-pricing model does not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, “Share-Based Payment (Revised 2004).” Among other things, SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. SFAS 123R is effective for the Company on January 1, 2006. See Item 8, “Financial Statements and Supplementary Data, Note 1 ,Impact of Recently Issued Accounting Standards.

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

2005 Compared to 2004

Total assets at December 31, 2005 were $1.29 billion, an increase of $94 million, or 7.8%, over total assets of $1.20 billion at December 31, 2004. The Company has completed six bank acquisitions since 1999 which has had a significant positive impact on its asset growth rate. Since 1999, the Company has grown $993 million in total assets, of which approximately 44% was by acquisition and 56% was by internal growth.

Cash, cash equivalents and investments decreased $26.3 million in 2005 to $164 million. Over 75% of the $82.4 million in investments at December 31, 2005 were encumbered as collateral for borrowings or public deposits and thus do not represent additional sources of liquidity to be used for future funding needs.

At December 31, 2005, gross loans were $1.05 billion, an increase of $111 million or 11.9%, over total loans of $937 million at December 31, 2004. Loans averaged $993 million in 2005 as compared to $880 million in 2005, a $113 million or 12.8% increase.

Included in accrued interest receivable and other assets on the consolidated balance sheet at December 31, 2005, is bank owned life insurance (“BOLI”) with a cash surrender value of approximately $23.5 million. In 2005, the BOLI earned a rate of return, net of the cost of insurance, of approximately 4.3% as compared to 5.6% in 2004 (excluding death benefits). The Company purchased $8.8 million additional BOLI in 2005 and none in 2004. There were a death benefits recognized of $0 and $585,000 in 2005 and 2004, respectively

Total deposits at December 31, 2005 were $1.05 billion, an increase of $26 million, or 2.5%, over total deposits of $1.02 billion at December 31, 2004. Included in non-interest bearing deposit totals are certain deposit relationships with title companies totaling $45.8 million which did not have an interest cost but did have an operational cost to the Company , which resulted in an effective cost of these deposits of approximately 0.30% per annum. Time deposits over $100,000 increased $36.6 million or 19.7% which represents the only change in a deposit subcategory greater than 3% in 2005. Approximately 2.7% of total deposits at December 31, 2005 were obtained through institutional or third party sources.

Deposits averaged $1.04 billion in 2005 as compared to $958 million in 2004, a $79 million or 8.3% increase. Loan growth continued to outpace deposit growth in 2005 resulting in the average loan to average deposit ratio increasing from 92% in 2004 to 96% in 2005. This continued imbalance in growth has reduced the liquidity levels to the Company’s policy minimums and increased the reliance on borrowings as a source of funding loan growth.

At December 31, 2005, the Company had a combined total of $66 million in outstanding long term borrowings comprised exclusively of Federal Home Loan Bank of San Francisco (“FHLB”) borrowings with an average cost of 4.05%. During 2005 the average cost of FHLB advances outstanding was 2.79%. The balance at year-end 2005 represents a $44.5 million increase over the borrowings outstanding at December 31, 2004. At December 31, 2005, the Company had $37.1 million outstanding in variable rate subordinated debentures, resulting in $2.6 million in interest expense at a cost of 7.19% per annum.

Total shareholders’ equity at December 31, 2005 was $130.2 million, an increase of $20.1 million over total shareholders’ equity of $110.2 million at December 31, 2004. The increase in equity is due to an increase in retained earnings of $17.8 million, an increase in common stock of $2.9 million from the exercise of stock options by employees and directors offset by a decrease of $582,000 (net of tax) in unrealized gains on available-for-sale securities. See Item 8, “Financial Statements and Supplementary Data, Consolidated Statement of Changes in Shareholders’ Equity”.

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.

Cash, cash equivalents and investments increased $54.7 million in 2004 to $190 million driven by deposit growth that exceeded loan growth in 2004.

At December 31, 2004, gross loans were $937 million, an increase of $115 million or 14%, over total gross 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 WSNB’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.

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 ACB and Central Sierra acquisition in 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 affect the pricing of the Company’s products.

Included in accrued interest receivable and other assets on the consolidated balance sheet at December 31, 2004, is 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% (which excludes a death benefit of $585,000), as compared to 5.9% in 2003. The Company purchased no additional BOLI in 2004 and $8.0 million in 2003.

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 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. Approximately 3.5% of total deposits at December 31, 2004 were 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 ACB and Central Sierra acquisition 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 FHLB borrowings. The balance at year-end 2004 represents an $850,000 increase over the borrowings outstanding at December 31, 2003. At December 31, 2004, the Company had $37.1 million outstanding in variable rate subordinated debentures, resulting in $1.9 million in interest expense at a cost of 5.26% 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, net of tax. See Item 8, “Financial Statements and Supplementary Data, Consolidated Statement of Changes in Shareholders’ Equity”.

RESULTS OF OPERATIONS

Net Income. The Company recorded net income of $17.75 million, or $2.23 earnings per diluted share, for the year ended December 31, 2005 compared to net income of $15.04 million, or $1.91 diluted earnings per share, in 2004 and net income of $9.95 million, or $1.44 earnings per diluted share, in 2003.

Included in the 2005 results are terminated merger expenses of $400,000 ($0.03 per share net of applicable tax) related to the terminated Gold Country Financial Services transaction. There were no merger costs in 2004 and $186,000 in 2003 related to the ACB and Central Sierra Bank acquisitions.

After tax charges for amortization of core deposit intangibles were $416,000 or $.05 per diluted share in 2005 and 2004 and $227,000 or $0.03 in 2003.

Included in 2003 results is a charge of $940,000 or $0.14 per share to reverse tax benefits associated with the Company’s Real Estate Investment Trust (“REIT”) which was dissolved in 2005.

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 operating expenses and the provision for loan losses in 2004 and 2003.

Net Interest Income and Net Interest Margin. Total interest income increased from $47.7 million in 2003 to $63.1 million in 2004, and to $76.7 million in 2005, representing a 32.2% increase in 2004 over 2003 and a 21.6 % increase in 2005 over 2004. The increase in total interest income in the periods discussed was primarily the result of growth in loans as well as an increase in prevailing interest rates that had a positive effect on variable rate interest-bearing assets. On a tax equivalent basis interest income increased in 2005 by $7.5 million as a result of growth in balances of earning assets outstanding and $6.1 million as a result of increasing yields. The net result was an increase of $13.7 million in tax equivalent interest income. In 2004, tax equivalent interest income increased by $18.0 million as a result of growth in earning assets balances outstanding offset by a $2.5 million reduction as a result of declining yields. The net result was an increase of $15.5 million in tax equivalent interest income.

Total interest expense increased from $9.6 million in 2003 to $11.3 million in 2004, and to $17.3 million in 2005, representing a 17.8% increase in 2004 from 2003, and a 52.6% increase in 2005 as compared to 2004. The increase in interest costs in 2005 of $6.0 million was comprised of $4.8 million increase due to rising rates with the remaining $1.2 million increasing as a result of higher volume of average interest bearing liabilities. The Company experienced an increase in interest expense 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.

Net interest income for 2005, on a tax equivalent basis, increased by $7.7 million or 14.8% from 2004. The Company’s net interest margin (on a fully tax equivalent basis) increased to 5.37% in 2005 as compared to 5.15% in 2004 and 5.14% in 2003. The margin expansion in 2005 was primarily a result of an increase in the loan-to-deposit ratio of 4% to 96% and a steady increase in prevailing market interest rates during 2005 with the prime rate increasing from 5.25% at December 31, 2004 to 7.25% at December 31, 2005. Rates paid on Now, Savings and Money Market accounts did not increase in 2005 as much as expected. A review of the correlation of the historical rates paid on these accounts as compared to overnight fed fund rates indicates the rates paid in 2005 were

approximately 100 basis points lower than management’s previous estimates. Management expects that competition and liquidity requirements to meet the funding of loan growth will result in these rates increasing over time to their normal historical relationship to prevailing rates. This is expected to have a negative effect on net interest margin during 2006 and beyond.

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 (dollars in thousands).

	2005						2004						2003
	Average Balance			Interest		Yield/ Rate	Interest Rate			Average Balance		Yield/ Rate	Average Balance			Interest		Yield/ Rate

Earning assets:
Portfolio loans (1)	$	993,219		$	71,798	7.23%	$	880,156		$	59,124	6.72%	$	633,641		$	44,402	7.01%
Taxable investment securities	44,489			1,794		4.06%	50,576			1,688		3.34%	40,239			1,438		3.57%
Tax-exempt investment securities	38,086			2,445		6.42%	34,316			2,297		6.69%	31,000			2,027		6.54%
Federal funds sold	45,869			1,455		3.17%	50,604			707		1.40%	47,640			491		1.03%
Interest-bearing deposits in banks	294			24		3.40%	3,541			48		1.36%	1,401			46		3.28%
Average earning assets	1,121,957			77,516		6.91%	1,019,193			63,864		6.27%	753,921			48,404		6.42%
Other assets	135,381						124,621						78,775
Less ALLL	(14,829		)				(12,637		)				(8,884		)
Average total assets	$	1,242,509					$	1,131,179					$	823,812
Interest-bearing liabilities:
Savings, Now and Money Market deposits	$	375,581		3,344		0.89%	$	364,411		2,627		0.72%	$	237,867		1,808		0.76%
Time deposits	376,704			10,031		2.66%	346,831			6,422		1.85%	305,985			6,445		2.11%
Other borrowings (2)	78,603			3,926		4.99%	62,086			2,287		3.68%	38,133			1,373		3.60%
Average interest-bearing liabilities	830,888			17,301		2.08%	773,328			11,336		1.47%	581,985			9,626		1.65%
Non-interest bearing deposits	284,455						246,369						169,855
Other liabilities	7,446						10,888						7,471
Shareholders’ equity	119,720						100,594						64,501
Average liabilities and equity	$	1,242,509					$	1,131,179					$	823,812
Net interest spread (3)						4.83%						4.80%						4.77%
Net interest income and margin (4)				$	60,215	5.37%				$	52,528	5.15%				$	38,778	5.14%

(1) Included in portfolio loan interest income is loan fee income of $4,178,000, $3,951,000 and $2,631,000 for the years ended December 31, 2005, 2004 and 2003, 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, all amounts are adjusted to pre-tax equivalents based on the marginal corporate federal tax rate of 35 percent. (dollars in thousands).

	2005 over 2004 Change in Net Interest Income due to									2004 over 2003 Change in Net Interest Income due to
	Volume			Rate			Total			Volume		Rate			Total
Earning assets:
Portfolio loans (1)	$	7,595		$	5,079		$	12,674		$	17,275	$	(2,552	)	$	14,722
Taxable investment securities	(203		)	323			120			369		(120		)	250
Tax exempt investment securities	252			(104		)	148			217		53			270
Federal funds sold	(66		)	814			748			31		185			216
Interest bearing deposits in banks	(44		)	6			(38		)	70		(68		)	2
Average earning assets	7,534			6,118			13,652			17,962		(2,502		)	15,460
Interest-bearing liabilities:
Savings, Now and Money Market deposits	81			636			717			961		(142		)	819
Time deposits	553			3,056			3,609			860		(883		)	(23		)
Other borrowings (2)	609			1,030			1,639			862		52			914
Total interest-bearing liabilities	1,243			4,722			5,965			2,683		(973		)	1,710
Net interest differential	$	6,291		$	1,396		$	7,687		$	15,279	$	(1,529	)	$	13,750

(1) Included in portfolio loan interest income is the increase in loan fee income of $227,000 for 2005 over 2004 and $1,320,000 for 2004 over 2003.

(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 22.7%, or $2.4 million, to $13.2 million for 2005 as compared to $10.8 million for 2004. Non-interest income for 2004 increased by $1.1 million or 11.2% from the $9.7 million earned during 2003.

The following table describes the components of non-interest income for the years ended December 31, 2005, 2004 and 2003 (dollars in thousands).

	NON-INTEREST INCOME > 1% of Gross Revenue
	Year Ended December 31,
	2005				2004				2003
	Income			% of Avg Assets	Income			% of Avg Assets	Income		% of Avg Assets
Service charges and fees	$	5,609		0.45%	$	4,708		0.42%	$	4,044	0.49%
Investment service fee income	792			0.06%	621			0.05%	100		0.01%
Gain on sale and packaging of residential loans	4,062			0.33%	3,793			0.34%	4,730		0.57%
Gain on sale of government-guaranteed loans	713			0.06%	—			—	—		—
(Loss) gain on sale and call of investment securities, net	(4		)	0.00%	(9		)	0.00%	18		0.00%
Other income	2,026			0.16%	1,643			0.15%	785		0.10%
Total	$	13,198		1.06%	$	10,756		0.95%	$	9,677	1.17%

The increase in non-interest income in 2005 from 2004 of $2.4 million was primarily a result of increases in service charges and fees of $901,000, gains on the sale of SBA loans of $713,000 and increase in the gain on the sale of residential mortgages of $269,000.

The increase in non-interest income in 2004 from 2003 was primarily a result of increases in service charges of $664,000, and increase in investment service fee income of $521,000 and a $585,000 gain on a life insurance death benefit (reported in other income) offset in part by a decrease in the gain on the sale of residential mortgages of $937,000.

Service charges and fees have increased significantly (19% in 2005 and 16% in 2004) primarily as a result of adding new accounts as well as changes in service charge rates and related policies. The Company began to sell SBA loans in 2005 as a result of market conditions, liquidity needs and continued SBA production that increased the salable inventory.

Gains on the sale of residential loans increased 7.1% in 2005 as compared to 2004, but still 16.5% below 2003 when the Company was benefiting from unprecedented refinancing activity driven by lower market rates.

Non-interest expense. Non-interest expense amounted to $42.8 million in 2005, $36.4 million in 2004 and $28.3 million in 2003. This represents an increase of $6.4 million, or 17.5%, in 2005 over 2004 and an increase of $8.1 million, or 28.6%, in 2004 as compared to 2003. Salaries and benefits, occupancy and equipment and other expenses all increased 15% - 18% in 2005.

Salaries and benefits have continued to increase due primarily to increased incentives and the addition staff at new branch facilities and in corporate administration. Mortgage commissions were $1.99 million in both 2005 and 2004 which represents 49% and 53% of the net gain on the sale and packaging of residential mortgage loans the Company realized in 2005 and 2004 respectively.

The Company opened three branch facilities in the fourth quarter of 2004, a new administrative facility for credit administration in June 2005 as well as a new headquarters for the Company’s largest subsidiary (WSNB) in October 2005. Largely a result of these new facilities, occupancy costs increased 17.4% in 2005 over 2004.

The merger expenses of $400,000 in 2005 relate to costs incurred with respect to the agreement to acquire Gold Country Financial Services which was terminated in June 2005.

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 $1.00 in net revenue (net interest income plus other income). Largely a result of increased salaries and benefits and new facilities, the efficiency ratio regressed in 2005 to 55.6% as compared to 55.1% in 2004 and 56.5% in 2003.

In 2004, other operating expenses increased $8.1 million over 2003 primarily due to the acquisition of two banks (CSB and ACB) in 2003. The largest increases within this expense category were salaries and benefits of $4.5 million, occupancy and equipment of $1.0 million and other expense of $1.1 million.

The following table describes the components of other non-interest expense as a percentage of average assets for the years ended December 31, 2005, 2004 and 2003 (dollars in thousands).

	NON-INTEREST EXPENSE >1% of Gross Revenue
	Year Ended December 31,
	2005			2004			2003
	Expense		% of Avg Assets	Expense		% of Avg Assets	Expense		% of Avg Assets
Salaries and benefits	$	23,412	1.88%	$	19,915	1.76%	$	15,455	1.88%
Occupancy and equipment	6,792		0.55%	5,783		0.51%	4,746		0.58%
Merger expenses	400		0.03%	—		0.00%	186		0.02%
Professional fees	1,821		0.15%	1,312		0.12%	1,096		0.13%
Insurance	1,117		0.09%	1,298		0.11%	696		0.08%
Data processing	1,306		0.11%	1,293		0.11%	1,084		0.13%
Stationery and supplies	729		0.06%	733		0.06%	623		0.08%
Advertising/promotion	742		0.06%	621		0.05%	364		0.04%
Core deposit intangible amortization	720		0.06%	720		0.07%	392		0.04%
Other operating expense	5,719		0.46%	4,704		0.43%	3,645		0.45%
Total	$	42,758	3.44%	$	36,379	3.22%	$	28,287	3.43%

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

	December 31,
	2005		2004		2003
Available-for-Sale (Amortized Cost)
U.S. Government agencies	$	31,734	$	39,593	$	39,179
Municipal obligations	38,210		33,197		32,057
Corporate and other bonds	993		993		992
U.S. Treasury	—		—		2,606
Stock and other investments	8,003		7,323		3,321
Total	$	78,940	$	81,106	$	78,156

Available-for-Sale (Fair Value)
U.S. Government agencies	$	31,311	$	39,505	$	39,136
Municipal obligations	39,152		34,592		33,412
Corporate and other bonds	1,053		1,101		1,033
U.S. Treasury			—		2,600
Stock and other investments	8,003		7,323		3,321
Total	$	79,519	$	82,521	$	79,502

Held-to-Maturity (Amortized Cost)
U.S. Government agencies	$	507	$	686	$	1,677
Municipal obligations	2,381		2,381		2,381
Total	$	2,888	$	3,067	$	4,058

Held-to-Maturity (Fair Value)
U.S. Government agencies	$	512	$	698	$	1,697
Municipal obligations	2,448		2,504		2,522
Total	$	2,960	$	3,202	$	4,219

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

	December 31, 2005
	Amortized Cost			Estimated Fair Value		% Yield
Available-for-Sale
Collateralized mortgage obligations (CMO) and mortgage-backed securities
Within One Year	$		—	$	—	—
One to Five Year	740			722		4.00%
Five to Ten Years	2,103			2,109		4.17%
Over Ten Years	10,495			10,454		4.63%
U.S. Government agencies: *
Within One Year	2,997			2,975		3.99%
One to Five Year	12,640			12,362		3.70%
Five to Ten Years	1,333			1,320		4.60%
Over Ten Years	1,426			1,369		5.21%
Municipal Obligations
Within One Year	—			—		—
One to Five Year	1,957			1,965		3.85%
Five to Ten Years	9,657			9,748		3.94%
Over Ten Years	26,596			27,439		4.61%
Corporate debt
Within One Year	—			—		—
One to Five Year	—			—		—
Five to Ten Years	—			—		—
Over Ten Years	993			1,053		9.40%
Other securities **
Over Ten Years	8,003			8,003		4.60%
Total AFS Securities	$		78,940	$	79,519	4.40%

Held-to-Maturity
Collateralized mortgage obligations (CMO) and mortgage-backed securities
Within One Year	$	—		$	—	—
One to Five Year	4			4		8.64%
Five to Ten Years	—			—
Over Ten Years	503			508		5.82%
Municipal Obligations
Within One Year	—			—		—
One to Five Year	—			—		—
Five to Ten Years	1,471			1,516		4.98%
Over Ten Years	910			932		4.92%
Total HTM Securities	$	2,888		$	2,960	5.11%

Yields on tax-exempt securities have not been computed on tax-equivalent basis

* Includes Agency Bonds and SBA loan pools

** Other securities include FHLB, FRB, and other listed and unlisted securities ($8.04 million) with nomaturities

Loan Portfolio. The Company’s largest historical lending categories are real estate secured and commercial loans. These categories accounted for approximately 90% and 10%, respectively, of the total loan portfolio at December 31, 2005, and approximately 85% and 13%, respectively, of the total loan portfolio at December 31, 2004. Loans are carried at face amount, less payments collected and the allowance for loan losses.

At December 31, 2005 the Company’s twenty largest loan relationships in aggregate constituted $229.8 million in loans outstanding and $67.1 million which represents approximately or 22% of the loan portfolio at December 31, 2005. Management believes that these borrowers are well qualified and the credits have been underwritten in an appropriate manner and structured to minimize the Company’s potential exposure to loss.

The rates of interest charged on variable rate loans are set at specific increments in relation to the various market index rates and vary as the Bank’s lending rate varies. The following table sets forth the amounts of loans outstanding by category as of the dates indicated (dollars in thousands).

	As of December 31,
	2005				2004				2003				2002				2001
	Balance			% of Total	Balance			% of Total	Balance			% of Total	Balance			% of Total	Balance			% of Total
Real estate mortgage	$	547,570		52.5%	$	517,121		55.4%	$	423,778		51.8%	$	278,810		51.7%	$	210,349		54.2%
Real estate construction	244,872			23.6%	199,140			21.4%	195,889			23.9%	124,726			23.2%	72,051			18.6%
Lot and land loans	134,147			12.8%	82,987			8.9%	72,170			8.8%	32,220			6.0%	25,632			6.6%
Commercial	98,152			9.4%	119,823			12.8%	109,685			13.4%	88,084			16.3%	64,931			16.7%
Lease financing	1,456			0.1%	1,768			0.2%	2,016			0.2%	3,325			0.6%	3,496			0.9%
Installment	5,610			0.5%	4,160			0.4%	5,795			0.7%	4,630			0.9%	4,461			1.1%
Agriculture	15,828			1.5%	11,514			1.2%	12,185			1.5%	8,540			1.6%	8,574			2.2%
Less deferred fees	(3,663		)	-0.4%	(3,008		)	-0.3%	(2,729		)	-0.3%	(1,551		)	-0.3%	(1,060		)	-0.3%
Total loans	1,043,972			100.0%	933,505			100.0%	818,789			100.0%	538,784			100.0%	388,434			100.0%
Less provision for loan losses	(15,505		)		(13,786		)		(11,529		)		(7,113		)		(5,097		)

Net loans	$	1,028,467			$	919,719			$	807,260			$	531,671			$	383,337

Real Estate Mortgage Loans. Real estate mortgage loans are primarily made for the purposes of purchasing or refinancing single family residences and commercial properties.

At December 31, 2005, approximately $94.9 million of the Company’s real estate mortgage loans consisted of loans secured by first and second trust deeds on owner occupied single family residences. The single family residences secured by second trust deeds are primarily home equity loans. Pursuant to the Company’s credit policies, the maximum loan-to-appraised value is generally 80%.

At December 31, 2005, approximately $452.8 million of the Company’s real estate mortgage loans consisted of loans secured by first trust deeds on commercial properties. Of this amount, approximately 30% are properties occupied by the borrower and 70% are investment properties. Pursuant to the Company’s credit policies, real estate mortgage loans are generally written with terms of 5 to 10 years and do not exceed loan-to-value ratio of 65 to 75%. The risks associated with real estate mortgage lending include economic changes, including devaluation of real estate values, decreasing rental rates and increased interest rates. Loans are generally made to experienced borrowers and investors with proven track records.

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

At December 31, 2005, approximately $99.4 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 $17.6 million consisted of loans secured by first trust deeds on the construction of owner-occupied commercial buildings. Pursuant to the Company’s credit policies, the minimum loan-to-appraised value is generally 80% for owner occupied single family 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 expected 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 on any commercial real estate construction loans.

At December 31, 2005, approximately $69.6 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 $58.3 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 on the projected time schedule, cost overruns, and economic changes, including real estate devaluation 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 and avoiding the high end the market the Banks serve. To date the Company has not suffered any significant losses through its speculative single-family real estate construction loans.

Lot and Land Loans. Lot and land loans can be subdivided into three categories: loans secured by first trust deeds on finished lots, loans secured by first trust deeds on land parcels under development and loans secured by first trust deeds on land parcels. The Company has a demonstrated history of success of lending on lots and land and has experienced very few nonperforming loans or chargeoff’s date. Management has established underwriting criteria and generally avoids the high end of the markets the Company serves.

At December 31, 2005, loans secured by first trust deeds on finished lots totaled approximately $44.2 million, representing an increase of 10.6% increase over year end 2004. Finished lot loans are generally written with terms of 12 to 24 months and do not exceed a loan-to-appraised value ratio of 75%. Finished lot loans are generally secured by single family lots that will be owner occupied. At December 31, 2005, approximately 93%, of such loans had principal balances of less then $350,000 with an average balance of $159,000. The risks associated with finished lot lending includes the borrower’s inability to convert the loan into an owner-occupied construction loan and economic changes, including devaluation of real estate values and increased interest rates.

At December 31, 2005, loans secured by first trust deeds on land parcels under development totaled approximately $46.7 million. Land development loans are generally written with terms of 12 to 24 months, include interest reserves and do not exceed a loan-to appraised-value ratio of 50 to 60%. Loans are made for development for both single family and commercial finished lots. Total loans in this category increased by $22.5 million or 93% over year-end 2004, primarily due to three land development loans totaling $20.6 million that management believes are well underwritten and located in good markets. The risks associated with land development lending includes the borrower’s inability to complete and sell the project on a timely basis, ability to convert construction financing to permanent financing, cost over runs to complete the project, devaluation of real estate values and increased interest rates. Loans are generally made to experienced developers and contractors with proven track records.

Loans secured by first trust deeds on land parcels total approximately $43.2 million at December 31, 2005, representing a $31.3 million increase over December 31, 2004. Land loans are generally written with terms of 12 to 24 months, include interest reserves and do not exceed a loan-to-appraised-value ratio of 50%. Commitments in this category at December 31, 2005 totaled $47.8 million representing an increase of $22.6 million or 90% over December 31, 2004. At December 31, 2005, the land loan portfolio consisted of 37 loans with an average balance of $1.2 million. The risks associated with lending on land parcels includes failure to obtain appropriate improvement entitlements, inability to convert the loan to development and construction financing, devaluation of real estate and increased interest rates. Management has established underwriting criteria to minimize losses on land loans by lending only to experienced and well capitalized developers with proven track records together with reserves for interest.

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, 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.

Commercial loans outstanding have decreased over the last two years as the Company has experienced significant competitive pricing challenges and the majority of the customer relationship officers the Banks employ have significant real estate expertise and contacts.

Loan Commitments. In the normal course of business, there are various commitments outstanding to extend credits 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, 2005, the Company had $213 million in unfunded

commercial real estate loan commitments and $60 million in unfunded commercial commitments that are secured by collateral other than real estate or are unsecured. In addition, the Company had $40 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 over 50% of the commitments at December 31, 2005 will be exercised during 2006.

Maturity Distribution. The following table sets forth the maturity of certain loan categories as of December 31, 2005. Excluded categories are residential mortgages of 1-4 family residences, personal installment loans 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	$	7,372	$	69,124	$	37,484	$	113,980
Real Estate—construction	223,211		21,651		—		244,872
Lot and land loans	76,544		57,307		296		134,147
	$	307,127	$	148,082	$	37,780	$	492,999
Loans maturing after one year with:
Fixed interest rates			$	82,185	$	3,901	$	86,086
Variable interest rates			189,965		51,875		241,840
			$	272,150	$	55,776	$	327,926

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 Audit Committee engages experienced independent loan portfolio review professionals many of which are former bank examiners to assist in monitoring the accurate measurement of credit risk in the portfolio. The Audit Committee determines the scope of such reviews and provides the report of findings to management and the Board’s Loan Committee and ultimately the Board of Directors. In management’s opinion, this loan review system facilitates the early identification of potential problem loans.

The Company places loans 90 days or more past due on non-accrual status unless the loan is well secured and in the process of collection. A loan 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 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 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 is considered to be doubtful by management, it is placed on non-accrual status prior to becoming 90 days delinquent.

It is the Company’s policy to place impaired loans 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.

Loans considered to be impaired totaled $1.4 million, $1.5 million and $1.9 million at December 31, 2005, 2004 and 2003 respectively. The related allowance for loan losses for these loans at December 31, 2005, 2004 and 2003 was $178,600, $217,000 and $88,000, respectively. The average recorded investment in impaired loans for the years ended December 31, 2005, 2004 and 2003 was approximately $1.4 million and $1.5 million and $1.0 million respectively. The Company recognized $0, $7,000 and $54,000 in interest income on impaired loans during these same periods.

Potential Problem Loans. From time to time, Management has reason to believe that certain borrowers may not be able to repay their loans within the parameters of the contracted repayment terms, even though, in some cases, the loans are current at the time. These loans are regarded as potential problem loans, and a portion of the allowance is assigned and/or allocated, as discussed below, to cover the Company’s exposure to loss should the borrowers indeed fail to perform as agreed. This class of loans does not include loans in a non-accrual status.

At year-end 2005, potential problem loans amounted to $5.3 million or 0.51 % of the portfolio. The corresponding amount for 2004 was $4.0 million or 0.43% of the portfolio.

Management believes that all of the Company’s asset quality ratios compare favorably with its peer group. Nonperforming assets, net

of government guarantees, totaled $912,000 or 0.11% of total assets, compared to $889,000 or 0.12% of total assets at December 31, 2004. The allowance for loan losses at December 31, 2005 totaled $15.5 million or 1.48%, of loans outstanding, compared to $13.8 million, or 1.47%, a year ago.

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

	December 31,
	2005			2004			2003			2002			2001
Gross non accrual loans	$	1,412		1,473			1,868			1,081			2,983
Accruing loans past due 90 days or more	—			—			—			—			—
Restructured loans (in compliance with modified terms)	—			—			—			—			—
Other real estate	—			—			—			489			—
Total gross nonperforming assets	1,412			1,473			1,868			1,570			2,983
Less: government guaranteed portion of non performing loans	(500		)	(584		)	(314		)	(389		)	(327		)
Total net nonperforming assets	$	912		$	889		$	1,554		$	1,181		$	2,656
Gross nonperforming loans to total loans	0.14%			0.16%			0.23%			0.20%			0.77%
Gross nonperforming assets to total assets	0.11%			0.12%			0.18%			0.23%			0.58%
Allowance for loan losses to gross nonperforming assets	10.98			9.36			6.17			4.53			1.71
Allowance for loan losses to gross nonperforming loans	10.98			9.36			6.17			6.58			1.71

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

	Year Ended December 31,
	2005		2004		2003		2002		2001
Balance at beginning of period	$	13,786	$	11,529	$	7,113	$	5,097	$	4,395
Charge-offs:
Commercial	695		499		562		335		—
Real estate mortgage	—		—		—		89		151
Real estate construction	—		—		—		—		—
Lot and land loans	—		—		—		—		—
Lease financing	—		—		—		—		—
Installment	66		40		50		55		27
Agriculture	—		—		—		257		137
Total charge-offs	761		539		612		736		315
Recoveries:
Commercial	387		79		83		47		36
Real estate mortgage	—		—		15		2		37
Real estate construction	—		—		—		—		—
Lot and land loans	—		—		—		—		—
Lease financing	—		—		—		—		—
Installment	43		7		6		20		19
Agriculture	—		—		14		10		—
Total recoveries	430		86		118		79		92
Net charge-offs	331		453		494		657		223
Allowance acquired	—		—		2,640		647		—
Provision for loan losses	2,050		2,710		2,270		2,026		925
Balance at end of period	$	15,505	$	13,786	$	11,529	$	7,113	$	5,097
Net charge-offs during the period to average loans	0.04%		0.05%		0.08%		0.14%		0.06%
Allowance for loan losses to total loans	1.48%		1.47%		1.40%		1.32%		1.31%

The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses. Loan losses are charged to, and recoveries are credited to, the allowance for loan losses. The provision for loan losses is determined after considering various factors such as loan loss experience, current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, the existing allowance for loan losses, independent loan reviews, current charges to and recoveries within the allowance for loan 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 losses is based on specific and formula allocations to the Company’s loan portfolio. Specific allocations are made for impaired loans. The specific allocations are increased or decreased through management’s reevaluation of the status of the particular problem loans. Loans 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 , 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 losses so that it remains adequate to cover anticipated charge-offs and management believes that the allowance at December 31, 2005 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 in excess of the allowance may be required in future periods. The provision for loan losses reflects an accrual sufficient to cover projected potential charge-offs. The table below sets forth the allocation of the allowance for loan 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 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 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.

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
	2005			2004			2003			2002			2001
	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	$	6,012	0.58%	$	5,768	0.62%	$	5,535	0.68%	$	3,482	0.65%	$	1,925	0.50%
Real estate construction	3,278		0.31%	2,295		0.25%	1,926		0.24%	1,187		0.22%	739		0.19%
Lot and land loans	1,762		0.17%	975		0.10%	610		0.07%	406		0.08%	193		0.05%
Commercial	2,873		0.27%	3,438		0.36%	2,514		0.30%	1,513		0.27%	850		0.21%
Lease financing	20		0.00%	26		0.00%	24		0.00%	39		0.01%	35		0.01%
Installment and other	102		0.01%	100		0.01%	103		0.01%	115		0.02%	81		0.02%
Agriculture	470		0.05%	68		0.01%	106		0.01%	49		0.01%	267		0.07%
Unallocated	988		0.09%	1,116		0.12%	711		0.09%	322		0.06%	1,007		0.26%
Total	$	15,505	1.48%	$	13,786	1.47%	$	11,529	1.40%	$	7,113	1.32%	$	5,097	1.31%

Deposits. 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 Banks maintain unsecured borrowing arrangements with several correspondent banks in addition to secured borrowing arrangements with the FHLB for longer more permanent funding needs. The unused borrowing capacity of the Company was approximately $180 million and $256 million at December 31, 2005 and 2004 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,
	2005			2004			2003
	Amount		Yield	Amount		Yield	Amount		Yield
Non-interest bearing	$	284,455	0.00%	$	246,369	0.00%	$	169,855	0.00%
Savings	78,903		0.47%	78,310		0.39%	55,741		0.54%
NOW & money market	296,678		1.00%	286,101		0.79%	182,126		0.82%
Time deposits	376,704		2.66%	346,831		1.85%	305,985		2.11%
Total deposits	$	1,036,740	1.29%	$	957,611	0.94%	$	713,707	1.16%

The Company’s time deposits of $100,000 or more had the following schedule of maturities at December 31, 2005 (dollars in thousands):

	Amount
Remaining Maturity:
Three months or less	$	96,657
Over three months to six months	81,976
Over six months to 12 months	30,731
Over 12 months	13,132
Total	$	222,496

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 Item 8, “Financial Statements and Supplementary Data, Note 10, Commitments and Contingencies”. As of December 31, 2005 commitments to extend credit and sell mortgage loans were the Company’s only financial instruments with off-balance sheet risk. Loan commitments and standby letters of credit increased to $334 million at December 31, 2005 from $329 million at December 31, 2004. The commitments and letters of credit represent 32.0% of the total loans outstanding at December 31, 2005 versus 35.2% at December 31, 2004. Management believes that available liquid funds are adequate to fund this increase in commitments as they are presented.

The following table summarizes certain contractual obligations, as well as the expected cash payments of such obligations, of the Company as of December 31, 2005 (dollars in thousands):

	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
FHLB advances	$	59,500	$	6,500	$	—	$	—	$	66,000
Subordinated debt	—		—		—		37,116		37,116
Operating lease obligations	2,337		3,815		3,013		5,551		14,716
Deferred compensation (1)	62		125		119		387		693
Supplemental retirement plans (1)	178		540		498		8,891		10,107
Investment in limited partnership (2)	1,080		42		—		—		1,122
Total contractual obligations	$	63,157	$	11,022	$	3,630	$	51,945	$	129,754

(1) These amounts represent known certain payments to participants under the Company’s deferred compensation and supplemental retirement plans. The present value of the liability for supplemental retirement plans was $2.8 million at December 31, 2005 (discounted at approximately 6.5%) and is included on the Company’s balance sheet in accrued interest and other liabilities. See Item 8, “Financial Statements and Supplementary Data, Note 16, Benefit Plans”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 partnerships. For further discussion See Item 8, “Financial Statements and Supplementary Data, Note 17, Comprehensive Income”.

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 Company’s 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 Company, like other financial institutions, is subject to interest rate risk to the degree that their interest-earning assets reprice differently than their interest-bearing liabilities. The Company manages its mix of assets and liabilities with the goals of limiting exposure to interest rate risk, ensuring adequate liquidity, and coordinating their sources and uses of funds.

The Company seeks 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 Company has 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 relatively stable overall during the past three years 5.37 % in 2005, 5.15% in 2004 and 5.14% 2003. 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, 2005 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 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 2005 and 2004, as rates increased the loans at floors did not reprice as quickly, however these loans, which comprised approximately 22% of the portfolio at December 31, 2004 fell to approximately $180 million or 17% of it’s loan portfolio at December 31, 2005, given the increase in prevailing market rates. At December 31, 2005 variable rate loans that have reached a contractual floor (approximately 17%) and fixed rate loans comprised approximately 22.5% of the loan portfolio with the remaining 60.5% comprised of variable rate loans that will move freely with changes in the associated index rate.

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, 2005. The estimates are derived from an asset/liability management model deployed in 2003. There are numerous underlying assumptions that management believes are accurate. If these assumptions prove to be incorrect, the estimates generated by the model could be materially different from future results. Under the shock scenarios, the changes to interest rates are assumed to occur immediately (on January 1, 2006). 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	$	65,644	$	5,677		9.47%
200 basis point rise	63,770		3,803			6.34%
100 basis point rise	61,842		1,875			3.13%
50 basis point rise	60,939		972			1.62%
Base scenario	59,967		0			0.00%
50 basis point decline	58,367		(1,600		)	-2.67%
100 basis point decline	56,730		(3,237		)	-5.40%
200 basis point decline	53,279		(6,688		)	-11.15%

	Ramp Scenario
Change in Interest Rates	Estimated Net Interest Income		Dollar Change from Base			Percentage Change from Base
300 basis point rise	$	61,784	$	1,817		3.03%
200 basis point rise	61,180		1,213			2.02%
100 basis point rise	60,553		586			0.98%
50 basis point rise	60,275		308			0.51%
Base scenario	59,967		0			0.00%
50 basis point decline	59,334		(633		)	-1.06%
100 basis point decline	58,675		(1,292		)	-2.15%
200 basis point decline	57,254		(2,713		)	-4.52%

The following table shows management’s estimate of the loan portfolio stratification (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	$	630,662	60.3%
Variable at Floor*	180,206		17.1%
Fixed	236,767		22.5%
Total Gross Loans	$	1,047,635	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	$	175,580	97.4%	$	48,944	$	32,501	$	33,160	$	46,134	$	14,841	$	175,580
100 bps	2,044		1.2%	1,700		0		344		0				2,044
>100 bps	2,582		1.4%	328		1,448				806				2,582
Total at Floor	$	180,206	100%	$	50,972	$	33,949	$	33,504	$	46,940	$	14,841	$	180,206

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, 2005, the Company’s and the 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, 2005 (amounts in thousands except percentage amounts).

	The Company
	Actual Capital		Ratio	Minimum Capital Requirement
Leverage	$	134,714	10.45%	4.0%
Tier 1 Risk-Based	$	134,714	11.99%	4.0%
Total Risk-Based	$	148,767	13.24%	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	$	59,844	9.87%	$	11,555	10.64%	$	37,547	8.68%	$	12,551	9.29%	5.0%	4.0%
Tier 1 Risk-Based	$	59,844	11.11%	$	11,555	12.38%	$	37,547	10.25%	$	12,551	10.61%	6.0%	4.0%
Total Risk-Based	$	66,575	12.36%	$	12,721	13.68%	$	42,125	11.50%	$	14,029	11.86%	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. In addition, the Company modified its internal capital policy in 2005 whereby each of the Bank’s minimum capital levels is increased as the ratio of commercial real estate (“CRE”) loans and commitments to total capital increases. At December 31, 2005, the Company’s CRE as a percentage of total capital was approximately 570% of total capital which results in minimum leverage ratio of 6.50%, minimum Tier 1 Risk Based Ratio of 7.50% and a minimum Total Risk Based Ratio of 10.50%.

Shareholders’ Equity. The shareholders’ equity of the Company increased from $93.4 million at December 31, 2003 to $110.2 million at December 31, 2004 and to $130.2 million at December 31, 2005. 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 (net of tax) 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 2005		Q3 2005		Q2 2005		Q1 2005		Q4 2004		Q3 2004		Q2 2004		Q1 2004
Net interest income	$	15,889	$	15,339	$	14,355	$	13,845	$	13,715	$	13,165	$	12,587	$	12,280
Less : Provision for loan losses	370		540		690		450		800		600		600		710
Other operating income	3,398		3,430		3,761		2,609		2,927		2,546		2,713		2,570
Other operating expenses	11,064		10,813		11,066		9,815		9,826		8,915		8,910		8,728
Income before income taxes	7,853		7,416		6,360		6,189		6,016		6,196		5,790		5,412
Provision for income taxes	2,931		2,706		2,269		2,166		1,975		2,347		2,109		1,947
Net income	$	4,922	$	4,710	$	4,091	$	4,023	$	4,041	$	3,849	$	3,681	$	3,465
Per share:
Basic earnings per share	$	0.64	$	0.61	$	0.53	$	0.53	$	0.53	$	0.51	$	0.49	$	0.46
Diluted earnings per share	$	0.62	$	0.59	$	0.51	$	0.51	$	0.51	$	0.49	$	0.47	$	0.44

Item 8. Financial Statements & Supplementary Data

WESTERN SIERRA BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 2005 and 2004

(Dollars in thousands)

	2005		2004
ASSETS
Cash and due from banks	$	41,972	$	29,975
Federal funds sold	39,535		74,630
Cash and Cash Equivalents	81,507		104,605
Interest-bearing deposits in banks	—		1,200
Loans held for sale	3,190		2,685
Trading securities (Note 4)	41		42
Available-for-sale investment securities (Notes 4 and 9)	79,519		82,521
Held-to-maturity investment securities (Notes 4 and 9)	2,888		3,067
Loans, less allowance for loan losses of $15,505 in 2005 and $13,786 in 2004 (Notes 5, 9, 10 and 15)	1,028,467		919,719
Premises and equipment, net (Note 6)	19,466		20,808
Goodwill (Notes 2 and 3)	28,270		28,286
Other intangible assets (Notes 2 and 3)	4,907		5,627
Accrued interest receivable and other assets (Notes 7, 14 and 16)	44,318		30,150
	$	1,292,573	$	1,198,710
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	276,667	$	272,250
Interest bearing (Note 8)	772,028		750,716
Total deposits	1,048,695		1,022,966
Short-term borrowings (Note 9)	59,500		19,500
Long-term debt (Note 9)	6,500		2,000
Subordinated debentures (Note 11)	37,116		37,116
Accrued interest payable and other liabilities	10,530		6,977
	1,162,341		1,088,559
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—7,782,223 shares in 2005 and 7,629,762 shares in 2004	71,042		68,125
Retained earnings	58,855		41,109
Accumulated other comprehensive income, net of taxes (Notes 4 and 17)	335		917
Total shareholders’ equity	130,232		110,151
	$	1,292,573	$	1,198,710

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, 2005, 2004 and 2003

(Dollars in thousands, except per share data)

	2005			2004			2003
Interest income:
Interest and fees on loans	$	71,761		$	59,078		$	44,344
Interest on Federal funds sold	1,455			707			491
Interest on investment securities:
Taxable	1,794			1,688			1,438
Exempt from Federal income taxes	1,695			1,562			1,410
Interest on deposits in banks	24			48			46
Total interest income	76,729			63,083			47,729
Interest expense:
Interest on deposits (Note 8)	13,375			9,049			8,253
Interest on borrowings (Note 9)	1,365			408			251
Interest on subordinated debentures (Note 11)	2,561			1,879			1,122
Total interest expense	17,301			11,336			9,626
Net interest income before provision for loan losses	59,428			51,747			38,103
Provision for loan losses (Note 5)	2,050			2,710			2,270
Net interest income after provision for loan losses	57,378			49,037			35,833
Non-interest income:
Service charges and fees	5,609			4,708			4,044
Investment service fee income	792			621			100
Gain on sale and packaging of residential mortgage loans	4,062			3,793			4,730
Gain on sale of government-guaranteed loans	713			—			—
(Loss) gain on sale and call of investment securities, net (Note 4)	(4		)	(9		)	18
Other income	2,026			1,643			785
Total non-interest income	13,198			10,756			9,677
Non-interest expenses:
Salaries and employee benefits (Notes 5 and 16)	23,412			19,915			15,455
Occupancy (Notes 6 and 10)	3,903			3,112			2,413
Equipment (Note 6)	2,889			2,671			2,333
Other expenses (Note 13)	12,554			10,681			8,086
Total other expenses	42,758			36,379			28,287
Income before income taxes	27,818			23,414			17,223
Provision for income taxes (Note 14)	10,072			8,378			7,275
Net income	$	17,746		$	15,036		$	9,948
Basic earnings per share (Note 12)	$	2.30		$	1.99		$	1.51
Diluted earnings per share (Note 12)	$	2.23		$	1.91		$	1.44

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, 2005, 2004 and 2003

(Dollars in thousands)

									Accumulated Other Comprehensive			Total			Total
	Common Stock					Retained			Income			Shareholders’			Comprehensive
	Shares		Amount			Earnings			(net of taxes)			Equity			Income
Balance, January 1, 2003	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									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
Comprehensive income (Note 17):
Net income						17,746						17,746			$	17,746
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment securities (Note 4)									(582		)	(582		)	(582		)
Total comprehensive income															$	17,164
Stock options exercised and related tax benefit	152,461		2,917									2,917
Balance, December 31, 2005	7,782,223		$	71,042		$	58,855		$	335		$	130,232

	2005			2004			2003
Disclosure of reclassification amount, net of taxes (Note 17):
Unrealized holding (losses) gains arising during the year	$	(584	)	$	30		$	224
Less: reclassification adjustment for (losses) gains included in net income	(2		)	(6		)	12
Net unrealized (losses) holding gains on available-for-sale investment securities	$	(582	)	$	36		$	212

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, 2005, 2004 and 2003

(Dollars in thousands)

	2005			2004			2003
Cash flows from operating activities:
Net income	$	17,746		$	15,036		$	9,948
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	2,050			2,710			2,270
Depreciation and amortization	3,394			3,080			2,372
Deferred loan origination fees, net	655			279			427
Amortization of investment security premiums, net of accretion of discount	389			833			629
Loss (gain) on sale and call of available-for-sale investment securities	4			9			1
Gain on called held-to-maturity investment securities	—			—			(19		)
Decrease (increase) in trading securities	1			(14		)	(10		)
Gain on sale of premises and equipment	(278		)	—			—
Gain on sale of other real estate	—			—			(1		)
Gain on life insurance death benefit	—			(585		)
Increase in cash surrender value of life insurance policies	(968		)	(780		)	(483		)
Compensation cost associated with the ESOP	—			150			325
Provision for deferred income taxes	(669		)	935			(2,011		)
(Increase) decrease in loans held for sale	(505		)	(1,745		)	3,986
Increase in accrued interest receivable and other assets	(2,128		)	(602		)	(3,255		)
Increase (decrease) in accrued interest payable and other liabilities	3,553			(5,013		)	6,397
Net cash provided by operating activities	23,244			14,293			20,576

Cash flows from investing activities:
Cash acquired in acquisitions, net	—			—			41,132
Proceeds from sale and call of available-for-sale investment securities	5,174			2,699			601
Proceeds from called held-to-maturity investment securities	—			—			2,670
Proceeds from matured available-for-sale investment securities	—			2,545			23,741
Proceeds from matured held-to-maturity investment securities	—			500			500
Purchases of available-for-sale investment securities	(15,711		)	(22,160		)	(46,420		)
Principal repayments received from available-for-sale SBA loan pools and government-guaranteed mortgage-backed securities	12,312			13,149			11,641
Principal repayments received from held-to-maturity mortgage-backed securities	177			485			753
Net decrease in interest-bearing deposits in banks	1,200			2,998			3,284
Proceeds from sale of other real estate	—			—			141
Net increase in loans	(111,453		)	(115,448		)	(121,285		)
Proceeds from the sale of premises and equipment	1,855			18			9
Purchases of premises and equipment	(2,909		)	(3,595		)	(1,498		)
Proceeds from life insurance death benefit	—			1,499			—
Purchase of cash surrender value life insurance policies	(8,800		)	—			(7,790		)
Net cash used in investing activities	(118,155		)	(117,310		)	(92,521		)

	2005			2004			2003
Cash flows from financing activities:
Net (decrease) increase in demand, interest-bearing and savings deposits	$	(6,292	)	$	115,396		$	74,656
Net increase (decrease) in time deposits	32,021			34,432			(2,090		)
Net increase (decrease) in short-term borrowings	40,000			9,000			(4,000		)
Net increase (decrease) in long-term debt	4,500			(8,150		)	2,500
Proceeds from ESOP borrowings	—			150			325
Repayment of ESOP borrowings	—			(150		)	(325		)
Purchase of unearned ESOP shares	—			(150		)	(325		)
Issuance of subordinated debentures	—			—			20,000
Repurchase of common stock	—			(85		)	—
Redemption of fractional shares	—			(24		)	(33		)
Proceeds from the exercise of stock options	1,584			1,240			237
Net cash provided by financing activities	71,813			151,659			90,945
(Decrease) increase in cash and cash equivalents	(23,098		)	48,641			19,000
Cash and cash equivalents at beginning of year	104,605			55,964			36,964
Cash and cash equivalents at end of year	$	81,507		$	104,605		$	55,964

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense	$	16,589		$	11,156		$	9,465
Income taxes	$	9,575		$	11,042		$	6,945

Non-cash investing activities:
Net change in unrealized gain on available-for-sale investment securities	$	(836	)	$	69		$	326

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

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”) collectively “The Banks”. 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 two acquisitions during the three-year period ended December 31, 2005 as described in Note 2. Both of these acquisitions were 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 2005.

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 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 sheets. See Item 8, “Financial Statements and Supplementary Data, Note 11, Subordinated Dentures”

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 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.

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, See Item 8, “Financial Statements and Supplementary Data, Note 18, Disclosure About Fair Value Of Financial Instruments”.

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, 2005, 2004 or 2003. SBA loans with unpaid balances of $12,762,000 and $2,793,000 were being serviced for others at December 31, 2005 and 2004, respectively.

Servicing rights acquired through the purchase or 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 $23,849,000 and $12,612,000 were serviced for others as of December 31, 2005 and 2004, respectively. These loans were sold without recourse and, therefore, their balances are not included in the consolidated balance sheet.

Loans

All references to Loans also include Leases which 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. Total Leases outstanding at December 31, 2005 were approximately $1.5 million or approximately 0.14% of outstanding loans which is deemed immaterial for financial reporting purposes.

Loans 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 balances. However, when, in the opinion of management, loans are considered to be impaired and the future

collectibility of interest and principal is in serious doubt, loans 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 , or payments received on non-accrual loans for which the ultimate collectibility of principal is not in doubt, are applied first to earned but unpaid interest and then to principal.

The Company may acquire loans through a business combination or a purchase for which differences may exist between the contractual cash flows and the cash flows expected to be collected due, at least in part, to credit quality. When the Company acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Company’s estimate of undiscounted cash flows expected to be collected over the Company’s initial investment in the loan. The excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation allowance. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as an impairment. The Company may not “carry over” or create a valuation allowance in the initial accounting for loans acquired under these circumstances. At December 31, 2005, there were no such loans being accounted for under this policy.

An impaired loan 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 is collateral dependent. A loan 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 agreement. Interest income on impaired loans, if applicable, is recognized on a cash basis.

Loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan . The unamortized balance of deferred fees and costs is reported as a component of net loans.

Allowance for Loan Losses

The allowance for loan losses is maintained to provide for probable losses related to impaired loans and other losses on loans 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 portfolio, specifically identified problem loans, potential losses inherent in the portfolio taken as whole and economic conditions in the Company’s service area.

Loans 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 based on management’s assessment of the following for each identified loan 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 Audit Committee engages experienced independent loan portfolio review professionals many of which are former bank examiners to assist in monitoring the accurate measurement of credit risk in the portfolio. 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 also 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 in the consolidated financial statements.

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 losses and the associated provision for loan losses.

The allowance is established through a provision for loan losses, which is charged to expense. Additions to the allowance for loan losses are expected to maintain the adequacy of the total allowance for loan losses after credit losses and loan growth. The allowance for loan losses at December 31, 2005 and 2004, respectively, reflects management’s estimate of probable losses in the portfolio.

Other Real Estate

Other real estate (“OREO”) 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 losses. A valuation allowance for losses on OREO is maintained to provide for temporary declines in value. The allowance is established through a provision for losses on OREO, 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, OREO is included in accrued interest receivable and other assets. The Company did not hold any OREO at December 31, 2005 and 2004.

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,
	2005				2004			2003
Net earnings - as reported	$		17,746		$	15,036		$	9,948
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects	(1,178			)	(676		)	(540		)
Net earnings - pro forma	$	16,568			$	14,360		$	9,408

Basic earnings per share - as reported	$	2.30			$	1.99		$	1.51
Basic earnings per share - pro forma	$	2.15			$	1.90		$	1.43

Diluted earnings per share - as reported	$	2.23			$	1.91		$	1.44
Diluted earnings per share - pro forma	$	2.09			$	1.83		$	1.37

On August 25, 2005, the Company issued a Form 8-K reporting that the Board of Directors approved the acceleration of vesting of certain unvested stock options held by certain directors, executive officers and employees. The board believed that was in the best interest of the shareholders to accelerate the vesting of these options, as it would have a positive impact on the future earnings (under Generally Accepted Accounting Principals, “GAAP”) of the Company. See “Impact of Recently Issued Accounting Standards, SFAS No. 123, and “Share-Based Payment Revised 2004)” below.

The 144,843 stock options (at an average strike price of $26.55) affected by the accelerated vesting represent approximately 24.7% of the outstanding stock options awarded and approximately 1.9% of current shares outstanding. The share acceleration was comprised of 67,293 to executive officers, 22,050 to Directors and 55,500 to certain other officers of the Company.

The effect of acceleration of options on the total pro forma stock-based compensation expense shown above was approximately $402,000.

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

	December 31,
	2005	2004	2003
Dividend yield (not applicable)
Expected volatility	15.0%	19.7%	23.0%
Risk-free interest rate	4.03% - 4.45%	3.90% - 4.63%	3.95% - 4.50%
Weighted average expected option life	5.0 years	5.8 years	5.9 years
Weighted average fair value of options granted during the year	$8.41	$8.53	$	5.87

The tables above reflect expected option lives that are management’s estimate.

Impact of Recently Issued Accounting Standards

SFAS No. 154, “Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. Previously, most changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. Under SFAS 154, retrospective application requires (i) the cumulative effect of the change to the new accounting principle on periods prior to those presented to be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented, (ii) an offsetting adjustment, if any, to be made to the opening balance of retained earnings (or other appropriate components of equity) for that period, and (iii) financial statements for each individual prior period presented to be adjusted to reflect the direct period-specific effects of applying the new accounting principle. Special retroactive application rules apply in situations where it is impracticable to determine either the period-specific effects or the cumulative effect of the change.

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 shares 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

The following supplemental pro forma information discloses selected financial information for the year ended December 31, 2003 as though the ACB and CSB mergers had been completed at the beginning of 2003 (dollars in thousands, except per share data).

	Year Ended 2003
Earnings as reported:
Revenue	$	57,406
Net income	$	9,948
Basic EPS	$	1.51
Diluted EPS	$	1.44
Pro-forma merger adjustments:
Revenue	$	10,246
Net income	$	2,041
Pro-forma earnings after merger adjustments:
Revenue	$	67,652
Net income	$	11,989
Basic EPS	$	1.62
Diluted EPS	$	1.55

Pro forma net income for the year ended December 31, 2003 excludes nonrecurring charges of approximately $1,940,000, on an after-tax basis, representing merger-related expenses and the cost of retiring outstanding stock options.

The results of operations for the Company include ACB and CSB as of their respective acquisition dates as noted in the above table.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

At December 31, 2005 and 2004, goodwill totaled $28.3 million. Goodwill has arisen from the application of purchase accounting to the Company’s last three acquisitions. 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, 2005 and 2004.

Other Intangible Assets

Intangible assets are comprised of core deposit intangibles totaling $7,198,000, net of accumulated amortization of $2,291,000 and $1,571,000 at December 31, 2005 and 2004, respectively. The remaining balance will be amortized over a weighted average period of 7.2 years. Amortization expense for the next five years is estimated as follows:

Year Ending December 31,	Amortization Expense

2006	$	720
2007	678
2008	666
2009	666
2010	665

4. TRADING AND INVESTMENT SECURITIES

Trading Securities

The estimated market value of trading securities at December 31, 2005 and 2004 totaled $41,000 and $42,000, respectively. Net unrealized depreciation on trading securities of $1,000 and appreciation of $14,000 and $10,000 was included in other income for the years ended December 31, 2005, 2004 and 2003, respectively. There were no sales or transfers of trading securities for the years ended December 31, 2005, 2004 and 2003.

Investment Securities

The amortized cost and estimated fair value of investment securities at December 31, 2005 and 2004 consisted of the following (dollars in thousands):

Available-for-Sale:

	2005
	Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government agencies	$		18,396	$	—	$	(370	)	$	18,026
Obligations of states and political subdivisions	38,210			1,118		(176		)	39,152
Government guaranteed mortgage-backed securities	13,338			68		(121		)	13,285
Corporate debt securities	993			60		—			1,053
Federal Reserve Bank stock	2,425			—		—			2,425
Federal Home Loan Bank stock	4,561			—		—			4,561
Other listed and unlisted equity securities	815			—		—			815
Other	202			—		—			202
	$	78,940		$	1,246	$	(667	)	$	79,519

Net unrealized gains on available-for-sale investment securities totaling $579,000 were recorded, net of $244,000 in tax expense, as accumulated other comprehensive income within shareholders’ equity at December 31, 2005. Proceeds and gross realized gains and losses from the sale and call of available-for-sale investment securities for the year ended December 31, 2005 totaled $5,174,000, $6,000 and $10,000, respectively. There were no transfers of available-for-sale investment securities during the year ended December 31, 2005.

	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
Other listed and unlisted equity securities	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. Proceeds and gross realized gains 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. There were no transfers of available-for-sale investment securities during the years ended December 31, 2004 and 2003.

Held-to-Maturity:

	2005
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses						Estimated Fair Value
Obligations of states and political subdivisions	$	2,381	$	67		$		—				$		2,448
Government guaranteed mortgage-backed securities	507		7			(2				)		512
	$	2,888	$	74		$		(2		)		$		2,960

	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				)		699
	$	3,067	$	138	$		(2		)		$		3,203

There were no called held-to-maturity investment securities for the years ended December 31, 2005 and 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 sales or transfers of held-to-maturity investment securities for the years ended December 31, 2005, 2004 and 2003.

The amortized cost and estimated fair value of investment securities at December 31, 2005 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	$	2,997	$	2,975	$	—	$	—
After one year through five years	14,258		13,993		—		—
After five years through ten years	9,656		9,748		1,471		1,516
After ten years	28,798		29,646		910		932
	55,709		56,362		2,381		2,448

Investment securities not due at a single maturity date:
Government guaranteed mortgage-backed securities	13,338		13,285		507		512
SBA loan pools	1,890		1,869		—		—
Federal Reserve Bank stock	2,425		2,425		—		—
Federal Home Loan Bank stock	4,561		4,561		—		—
Other listed and unlisted equity securities	815		815		—		—
Other	202		202		—		—
	$	78,940	$	79,519	$	2,888	$	2,960

Investment securities with amortized costs totaling $53,117,000 and $42,485,000 and fair values totaling $53,905,000 and $46,166,000 were pledged to secure treasury tax and loan accounts, public deposits and short-term borrowing arrangements (See Note 9 ,Borrowings Arrangements) at December 31, 2005 and 2004, respectively.

The following table shows gross unrealized losses and estimated fair values for temporarily impaired investment securities at December 31, 2005, 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	$	7,361	$	(98	)	$	10,640	$	(272	)	$	18,001	$	(370	)
Obligations of states and political subdivisions	9,294		(144		)	1,563		(32		)	10,857		(176		)
Government guaranteed mortgage-backed securities	4,980		(96		)	2,047		(27		)	7,027		(123		)

	$	21,635	$	(338	)	$	14,250	$	(331	)	$	35,885	$	(669	)

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, 2005 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, 2005, the Company held 199 investment securities of which 42 were in a loss position for less than twelve months and 32 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

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

	December 31,
	2005			2004
Commercial	$	98,152		$	119,823
Real estate – mortgage	547,570			517,121
Real estate – construction	244,872			199,140
Lot and land loans	134,147			82,987
Agricultural	15,828			11,514
Other loans	7,066			5,928
	1,047,635			936,513
Deferred loan origination fees, net	(3,663		)	(3,008		)
Allowance for loan losses	(15,505		)	(13,786		)
	$	1,028,467		$	919,719

Certain loans have been pledged to secure borrowing arrangements (See Note 9, Borrowings Arrangements).

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

	Year Ended December 31,
	2005			2004			2003
Balance, beginning of year	$	13,786		$	11,529		$	7,113
Allowance acquired (Note 2)	—			—			2,640
Provision charged to operations	2,050			2,710			2,270
Losses charged to allowance	(761		)	(539		)	(612		)
Recoveries	430			86			118
Balance, end of year	$	15,505		$	13,786		$	11,529

At December 31, 2005 and 2004, non-accrual loans net of the government guaranteed portion totaled $912,000 and $889,000, respectively. Interest foregone on non-accrual loans totaled $134,000, $29,000 and $30,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Salaries and employee benefits totaling $1,934,000, $2,469,000 and $2,338,000 were deferred as loan origination costs during 2005, 2004 and 2003, respectively.

6. PREMISES AND EQUIPMENT

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

	December 31,
	2005			2004
Land	$	3,110		$	3,491
Buildings and improvements	11,582			12,608
Furniture, fixtures and equipment	15,596			14,521
Leasehold improvements	2,926			1,982
Construction in progress	651			1,328
	33,865			33,930
Less accumulated depreciation and amortization	(14,399		)	(13,122		)
	$	19,466		$	20,808

Depreciation and amortization included in occupancy and equipment expense totaled $2,674,000, $2,360,000 and $1,979,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

7. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

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

	December 31,
	2005		2004
Accrued interest receivable	$	5,268	$	4,256
Deferred tax assets, net (Note 14)	4,433		3,510
Cash surrender value of life insurance policies (Note 16)	23,475		13,707
Investment in limited partnership	5,417		4,649
Prepaid expenses	979		1,094
Other	4,746		2,934
	$	44,318	$	30,150

The Company invested in limited partnerships that operate qualified affordable housing projects to receive tax benefits in the form of tax deductions from operating losses and tax credits. The Company accounts for these investments under the cost method and management analyzes the investments annually for potential impairment. The Company’s remaining capital commitments to these partnerships at December 31, 2005 and 2004 were approximately $1,122,000 and $717,000, 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,
	2005		2004
Savings	$	75,196	$	79,297
NOW accounts	116,422		126,266
Money market	203,639		200,403
Time, $100,000 or more	222,496		185,936
Other time	154,275		158,814
	$	772,028	$	750,716

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

Year Ending December 31,
2006	$	345,507
2007	20,601
2008	7,947
2009	1,873
2010	843
	$	376,771

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

	Year Ended December 31,
	2005		2004		2003
Savings	$	370	$	308	$	303
NOW accounts	422		362		242
Money market	2,552		1,957		1,264
Time, $100,000 or more	5,697		3,225		2,903
Other time	4,334		3,197		3,541
	$	13,375	$	9,049	$	8,253

9. BORROWING ARRANGEMENTS

Short-Term

The Company has $47.0 million in unsecured borrowing arrangements with three of its correspondent banks. In addition, as of December 31, 2005, the Company could borrow up to $500,000 on an overnight basis from the Federal Reserve Bank, secured by investment securities with amortized costs totaling $700,000 and estimated fair values totaling $700,000. At December 31, 2005 and 2004, there were no borrowings outstanding under these arrangements.

At December 31, 2005, the Company could also borrow up to $247 million from the Federal Home Loan Bank of San Francisco (“FHLB”) on either a short-term or long-term basis, secured by investment securities with amortized costs totaling $1.2 million and estimated fair values totaling $1.2 million, and mortgage loans with carrying values totaling approximately $415 million. There was $59.5 million in short-term borrowings outstanding under this arrangement at December 31, 2005 bearing an average interest rate of 4.05% leaving $187 million in available FHLB borrowings. There was $19.5 million in short-term borrowings under this arrangement at December 31, 2004 bearing an average interest rate of 1.84%.

Long-Term

At December 31, 2005, there was $6,500,000 in long-term borrowings from the FHLB under the arrangements described above, of which $3,500,000 will mature during 2007 and $3,000,000 during 2008, and bearing an average interest rate of 4.01%. Under these arrangements, there was $2,000,000 outstanding at December 31, 2004 at 2.34%.

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
2006	$	2,337	$	165
2007	2,054		128
2008	1,761		78
2009	1,587		—
2010	1,426		—
Thereafter	5,551		—
	$	14,716	$	371

Rental expense included in occupancy expense totaled $1,987,000, $1,373,000 and $1,072,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Sublease income included in occupancy expense totaled $160,000, $96,000 and $97,000 for the years ended 2005, 2004 and 2003, 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 included on the consolidated balance sheet.

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

	December 31,
	2005		2004
Commitments to extend credit:
Revolving lines of credit secured by 1-4 family residences	$	37,576	$	33,019
Commercial real estate, construction and land development commitments:
Secured by real estate	213,334		211,737
Not secured by real estate	601		1,105
Other commercial commitments not secured by real estate	59,511		53,099
Agricultural commitments	2,690		3,261
Other commitments	—		3,872
	$	313,712	$	306,093
Stand by letters of credit	$	20,303	$	22,866

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

The following table summarizes the terms of each subordinated debenture issuance (dollars in thousands):

Fixed or

Balance at

Date

Redemption

Variable

Rate

Current

December 31,

Series

Issued

Maturity

Date

Rate

Index

Rate

2005

2004

Western Sierra Statutory Trust I

July 2001

July 2031

July 2006

Variable

3-month LIBOR +

7.80

$6,196

3.58%

Western Sierra Statutory Trust II

December 2001

December 2031

December 2006

Variable

3-month LIBOR +

8.10

10,300

3.60%

Western Sierra Statutory Trust III

September 2003

September 2033

September 2008

Variable

3-month LIBOR +

7.05

10,310

2.90%

Western Sierra Statutory Trust IV

September 2003

September 2033

September 2008

Variable

3-month LIBOR +

7.05

10,310

2.90%

Interest expense recognized by the Company for the years ended December 31, 2005, 2004 and 2003 related to the subordinated debentures was $2,561,000, $1,879,000 and $1,122,000, respectively. The amount of deferred costs at December 31, 2005 and 2004 was $270,000 and $155,000, respectively. The amortization of the deferred costs, which was included in related interest expense, was $115,000, $95,000 and $64,000 for the years ended December 31, 2005, 2004 and 2003.

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, 2005, the banks had approximately $17.0 million in retained earnings available for dividend payment to the Company while maintaining “Well-Capitalized” status and compliance with the Company's internal capital policies.

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, 2005
Basic earnings per share	$	17,746	7,706,824	$	2.30
Effect of dilutive stock options			244,140
Diluted earnings per share	$	17,746	7,950,964	$	2.23

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

Stock Options

In 2004, 1999, 1997 and 1989, the Board of Directors adopted stock option plans for which 1,013,586 shares of common stock were reserved for issuance to employees and Directors under incentive and nonstatutory agreements. In addition, certain Sentinel Community Bank and 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 17,901 shares remain reserved for issuance in connection with these plans. There were 444,700 shares available for grant under the 2004 plan at December 31, 2005. 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 exercise price of each option 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 1999, 1997 and 1989 plans are exercisable until their expiration; however, no new options are expected to be granted under these plans.

At December 31, 2005 there were anti-dilutive options for 29,000 shares of common stock that had a weighted average exercise price of $38.27. There were no anti-dilutive options at December 31, 2004 or 2003.

A summary of the combined activity within the plans follows:

	2005				2004				2003
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Options outstanding beginning of year	583,378		$	14.44	687,726		$	10.05	551,781		$	8.01
Options granted	163,300		$	35.14	109,207		$	29.25	180,391		$	15.82
Options exercised	(152,461	)	$	10.40	(202,898	)	$	7.35	(32,481	)	$	7.26
Options canceled	(7,430	)	$	28.68	(10,657	)	$	18.12	(11,965	)	$	10.25
Options outstanding, end of year	586,787		$	21.04	583,378		$	14.44	687,726		$	10.05
Options exercisable, end of year	541,505		$	20.31	396,358		$	11.83	493,209		$	8.54

A summary of options outstanding at December 31, 2005 follows:

Range of Exercise Prices	Number of Options Outstanding December 31, 2005	Weighted Average Remaining Contractual Life (in years)	Number of Options Exercisable December 31, 2005
$ 4.17 - $ 6.66	75,574	2.8	75,574
$ 7.63 - $11.00	93,009	5.8	92,215
$ 13.55 - $16.83	79,840	6.5	75,202
$ 17.61 - $24.14	85,560	7.3	81,510
$ 28.67 - $32.25	96,504	8.2	86,304
$ 34.02 - $38.36	156,300	8.3	130,700
	586,787		541,505

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. No shares were repurchased in 2005. During 2004, the Company had purchased 3,000 shares at an average price of approximately $28.27 under this plan.

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, 2005 and 2004.

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):

	2005			2004
	Amount		Ratio	Amount		Ratio
Leverage Ratio
Western Sierra Bancorp and Subsidiaries	$	134,714	10.4%	$	113,605	9.5%
Minimum regulatory requirement	$	51,618	4.0%	$	47,923	4.0%
Western Sierra National Bank	$	59,844	9.9%	$	48,043	8.6%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	30,301	5.0%	$	27,843	5.0%
Minimum regulatory requirement	$	24,241	4.0%	$	22,275	4.0%
Lake Community Bank	$	11,555	10.6%	$	11,253	9.6%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	5,429	5.0%	$	5,867	5.0%
Minimum regulatory requirement	$	4,343	4.0%	$	4,693	4.0%
Central California Bank	$	37,547	8.7%	$	33,570	8.5%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	21,624	5.0%	$	19,814	5.0%
Minimum regulatory requirement	$	17,299	4.0%	$	15,851	4.0%
Auburn Community Bank	$	12,551	9.3%	$	9,370	7.3%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	6,758	5.0%	$	6,394	5.0%
Minimum regulatory requirement	$	5,406	4.0%	$	5,115	4.0%

Tier 1 Risk-Based Capital Ratio
Western Sierra Bancorp and Subsidiaries	$	134,714	12.0%	$	113,605	11.3%
Minimum regulatory requirement	$	44,971	4.0%	$	40,103	4.0%
Western Sierra National Bank	$	59,844	11.1%	$	48,043	9.9%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	32,308	6.0%	$	28,998	6.0%
Minimum regulatory requirement	$	21,538	4.0%	$	19,332	4.0%
Lake Community Bank	$	11,555	12.4%	$	11,253	10.5%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	5,599	6.0%	$	6,429	6.0%
Minimum regulatory requirement	$	3,733	4.0%	$	4,286	4.0%
Central California Bank	$	37,547	10.3%	$	33,570	11.0%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	21,975	6.0%	$	18,258	6.0%
Minimum regulatory requirement	$	14,650	4.0%	$	12,172	4.0%
Auburn Community Bank	$	12,551	10.6%	$	9,370	9.0%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	7,096	6.0%	$	6,237	6.0%
Minimum regulatory requirement	$	4,730	4.0%	$	4,158	4.0%

Total Risk-Based Capital Ratio
Western Sierra Bancorp and Subsidiaries	$	148,767	13.2%	$	126,138	12.6%
Minimum regulatory requirement	$	89,942	8.0%	$	80,207	8.0%
Western Sierra National Bank	$	66,575	12.4%	$	54,084	11.2%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	53,846	10.0%	$	48,331	10.0%
Minimum regulatory requirement	$	43,077	8.0%	$	38,665	8.0%
Lake Community Bank	$	12,721	13.6%	$	12,593	11.8%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	9,332	10.0%	$	10,715	10.0%
Minimum regulatory requirement	$	7,465	8.0%	$	8,572	8.0%
Central California Bank	$	42,125	11.5%	$	37,374	12.3%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	36,626	10.0%	$	30,430	10.0%
Minimum regulatory requirement	$	29,301	8.0%	$	24,344	8.0%
Auburn Community Bank	$	14,029	11.9%	$	10,670	10.3%
Minimum requirement for “Well-Capitalized” institution under prompt corrective action	$	11,826	10.0%	$	10,395	10.0%
Minimum regulatory requirement	$	9,461	8.0%	$	8,316	8.0%

13. OTHER EXPENSES

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

	Year Ended December 31,
	2005		2004		2003
Professional fees	$	1,821	$	1,312	$	1,096
Insurance	1,117		1,298		696
Data processing	1,306		1,293		1,084
Stationery and supplies	729		733		623
Advertising and promotion	742		621		364
Merger and acquisition	400		—		186
Amortization of core deposit intangibles	720		720		392
Other operating expenses	5,719		4,704		3,645
	$	12,554	$	10,681	$	8,086

14. INCOME TAXES

The provision for income taxes for the years ended December 31, 2005, 2004 and 2003 consisted of the following (dollars in thousands):

	Federal			State			Total

2005

Current	$	8,136		$	2,605		$	10,741
Deferred	(437		)	(232		)	(669		)

Provision for income taxes	$	7,699		$	2,373		$	10,072

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

Deferred tax assets (liabilities) are comprised of the following at December 31, 2005 and 2004 (dollars in thousands):

	December 31,
	2005			2004

Deferred tax assets:
Allowance for loan losses	$	6,656		$	6,263
Deferred compensation	1,697			1,261
Future benefit of State tax deduction	1,142			1,119
Other	28			225

Total deferred tax assets	9,523			8,868

Deferred tax liabilities:
Federal Home Loan Bank stock dividends	(263		)	(181		)
Deferred loans costs	(878		)	(821		)
Prepaid assets	(253		)	(190		)
Unrealized gains on available-for-sale investment securities	(244		)	(498		)
Organization costs	(1,994		)	(1,993		)
Premises and equipment	(1,458		)	(1,378		)
Other	—			(297		)

Total deferred tax liabilities	(5,090		)	(5,358		)
Net deferred tax assets	$	4,433		$	3,510

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,
	2005					2004					2003
	Amount			Rate %		Amount			Rate %		Amount			Rate %
Federal income tax expense, at statutory rate	$	9,736		35.0		$	8,195		35.0		$	6,028		35.0
State franchise tax, net of Federal tax effect	1,593			5.7		1,650			7.1		1,991			11.6
Tax-exempt income from investment securities and loans	(588		)	(2.1	)	(541		)	(2.3	)	(513		)	(3.0	)
Affordable housing tax credits	(677		)	(2.4	)	(460		)	(2.0	)	(202		)	(1.2	)
Tax-exempt income from life insurance policies	(316		)	(1.1	)	(554		)	(2.4	)	(159		)	(0.9	)
Other	324			1.1		88			0.4		130			0.7
Total income tax expense	$	10,072		36.2		$	8,378		35.8		$	7,275		42.2

The effective tax rate in 2003 (42.2%) was effected by a charge of $940,000 taken in the fourth quarter to reverse tax benefits associated with the Company’s Real Estate Investment Trust (“REIT”). Had this charge not been taken, the effective tax rate in 2003 would have been approximately 36.8%.

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 2005 (dollars in thousands):

Borrowings

Balance, January 1, 2005	$	8,373

Disbursements	8,643
Amounts repaid	5,388

Balance, December 31, 2005	$	11,628

Undisbursed commitments to related parties, December 31, 2005	$	5,010

Other Transactions

On December 31, 2005, the Company sold real property in San Andreas California of approximately 13,000 square feet to Matthew Bruno a director of the Company, for $1.82 million resulting in a gain of $260,000, of which $195,000 was recognized and $65,000 was deferred over a ten year period to coincide with the branch lease. This property includes WSB’s San Andreas Branch (3,475 square feet) and an administrative facility (3,200 feet). WSB executed leases with minimum commitments of ten years on the branch and six months on the administrative facility with initial rents of approximately $1.25 per square foot.

In February 2004, Auburn Community Bank, a subsidiary of the Company, executed a ten year minimum term lease for a 5,000 square foot facility to serve as its primary headquarters and main branch. The facility is owned by a limited partnership in which director Jan Haldeman has a 30% ownership interest. The terms of lease include an initial rent of $1.71 per square foot.

Management believes that the terms and conditions of all lease and property sale agreements with affiliates were at fair market value and similar in terms of that would have been negotiated with an unrelated party.

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 $499,000, $225,000 and $164,000 for the years ended December 31, 2005, 2004 and 2003, 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. 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 2005, the ESOP purchased 12,759 shares of the Company’s common stock with the proceeds of a contribution to the ESOP by the Company. 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 and an additional 7,800 shares were purchased with the proceeds of a contribution to the ESOP by the Company. 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. Interest expense related to these loans totaled $1,000 and $7,000 during the years ended December 31, 2004 and 2003, respectively. There were no borrowings outstanding on these loans during the period ending December 31, 2005.

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. The ESOP had no debt outstanding as of December 31, 2005 and 2004.

Contributions to the ESOP recognized as compensation expense totaled $456,000, $437,000 and $393,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Allocated and committed-to-be-released ESOP shares as of December 31, 2005, 2004 and 2003, adjusted for stock dividends, were as follows:

	2005	2004	2003
Allocated	147,680	144,839	132,459
Committed-to-be-released	12,759	12,300	14,962
Total ESOP shares	160,439	157,139	147,421

Salary Continuation Plans

Under the salary continuation plans, the Company is obligated to provide seven current and seven former executives, or their designated beneficiaries, with annual benefits for ten to fifteen years after retirement or death. 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 $594,000, $657,000 and $256,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The present value of the total vested liability of all salary continuation plans for the years ended December 31, 2005, 2004 and 2003, respectively was approximately $2.9 million, $2.4 million and $1.8 million, respectively, and is included in the consolidated balance sheet in accrued interest payable and other liabilities.

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 $23.5 million and $13.7 million at December 31, 2005 and 2004, 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 $904,000, $724,000 and $504,000 for the years ended December 31, 2005, 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 2005, the Board of Directors approved a retirement plan for director Thomas Manz, who elected early retirement from the Company. The plan provides for annual payments of $12,000 for five years to the director and became effective upon their retirement in May 2005. The estimated present value of these future payments, totaling $50,000, was included in other expense in the consolidated statement of income for the year ended December 31, 2005.

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 (losses). Total comprehensive income and the components of accumulated other comprehensive income (losses) are presented in the consolidated statement of changes in shareholders’ equity.

At December 31, 2005, 2004 and 2003, the Company held securities classified as available-for-sale which had changes in unrealized gains as follows (dollars in thousands):

	Before Tax			Tax Benefit (Expense)			After Tax

For the Year Ended December 31, 2005

Other comprehensive losses:
Unrealized holding losses	$	(840	)	$	256		$	(584	)
Less: reclassification adjustment for losses included in net income	(4		)	2			(2		)

Net unrealized holding losses	$	(836	)	$	254		$	(582	)

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

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, 2005 and 2004:

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 : For variable-rate loans 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 are estimated using discounted cash flow analyses, using interest rates being offered at each reporting date for loans 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 partnerships capital commitment: The fair value of the capital commitment to the limited partnerships 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. The fair value of commitments at each reporting date was not significant and not included in the accompanying table.

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

	December 31, 2005				December 31, 2004
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and due from banks	$	41,972	$	41,972	$	29,975	$	29,975
Fed funds sold	39,535		39,535		74,630		74,630
Interest-bearing deposits in banks	—		—		1,200		1,200
Loans held for sale	3,190		3,190		2,685		2,732
Trading and investment securities	82,448		82,520		85,630		85,766
Loans	1,028,467		1,019,656		919,719		907,040
Cash surrender value of life insurance policies	23,475		23,475		13,707		13,707
Investment in limited partnership	5,417		5,417		4,649		4,649
Accrued interest receivable	5,268		5,268		4,256		4,256

Financial liabilities:
Deposits	$	1,048,695	$	1,049,094	$	1,022,966	$	1,023,499
Short-term borrowings	59,500		59,472		19,500		19,464
Long-term debt	6,500		6,424		2,000		1,984
Subordinated debentures	37,116		37,116		37,116		37,116
Limited partnership capital commitment	1,122		1,122		717		717
Accrued interest payable	2,036		2,036		1,324		1,324

19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS

BALANCE SHEET

December 31, 2005 and 2004

(Dollars in thousands)

	2005		2004
ASSETS
Cash and due from banks	$	9,881	$	8,925
Investment in subsidiaries	152,958		134,781
Trading securities	41		42
Available-for-sale investment securities	200		201
Premises and equipment	6,220		5,465
Other assets	3,678		2,217
Total assets	$	172,978	$	151,631
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Long-term debt to bank subsidiary	$	—	$	2,309
Subordinated debentures	37,116		37,116
Accrued expenses and other liabilities	5,630		2,055
Total liabilities	42,746		41,480
Shareholders’ equity:
Common stock	71,042		68,125
Retained earnings	58,855		41,109
Accumulated other comprehensive income	335		917
Total shareholders’ equity	130,232		110,151
Total liabilities and shareholders’ equity	$	172,978	$	151,631

STATEMENT OF INCOME

For the Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands)

	2005			2004			2003
Income:

Dividends from subsidiaries	$	5,500		$	2,000		$	3,000
Management and service fees from subsidiaries	5,219			4,297			3,635
Interest income	102			96			89
Trading securities (loss) income , net	(1		)	14			10
Gain on sale of investment securities	—			—			—
Other income	81			6			18
Total income	10,901			6,413			6,753
Expenses:
Salaries and benefits	6,719			4,655			4,065
Occupancy and equipment	1,765			1,424			1,346
Interest expense	2,756			2,090			1,302
Data processing fees	557			502			419
Professional fees	975			600			515
Director fees and retirement expense	387			41			190
Merger costs	400			—			186
Other expenses	1,231			1,123			747
Total expenses	14,790			10,435			8,770
Loss before equity in undistributed income of subsidiaries	(3,889		)	(4,022		)	(2,017		)
Equity in undistributed income of subsidiaries	17,760			16,522			10,850
Income before income tax benefit	13,871			12,500			8,833
Income tax benefit	3,875			2,536			1,115
Net income	$	17,746		$	15,036		$	9,948

STATEMENT OF CASH FLOWS

For the Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands)

	2005			2004			2003
Cash flows from operating activities:
Net income	$	17,746		$	15,036		$	9,948
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Undistributed earnings of subsidiaries	(17,760		)	(16,522		)	(10,850		)
Decrease (increase) in trading securities	1			(14		)	(10		)
Gain on sale of available-for-sale investment securities	—			—			(1		)
Loss (Gain) on sale of premises and equipment	2			(4		)	—
Compensation costs associated with the ESOP	—			150			325
Depreciation, amortization and accretion, net	856			740			725
(Increase) decrease in other assets	(126		)	(297		)	457
Increase in other liabilities	3,575			61			918
Net cash provided by (used in) operating activities	4,294			(850		)	1,512

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
Purchases of premises and equipment	(1,613		)	(813		)	(491		)
Proceeds from sale of equipment	—			—			—
Investment in subsidiaries	(1,000		)	(500		)	(17,625		)
Net cash used in investing activities	(2,613		)	(1,513		)	(18,108		)

Cash flows from financing activities:
Proceeds from long-term debt	—			—			—
Repayment of long-term debt	(2,309		)	(39		)	(42		)
Repurchase of common stock	—			(85		)	—
Proceeds from ESOP borrowings	—			150			325
Repayment of ESOP borrowings	—			(150		)	(325		)
Purchase of unearned ESOP shares	—			(150		)	(325		)
Payments for fractional shares	—			(24		)	(33		)
Proceeds from exercise of stock options	1,584			1,240			237
Proceeds from issuance of subordinated debt	—			—			20,000
Net cash (used in) provided by financing activities	(725		)	942			19,837
Net increase (decrease) in cash and cash equivalents	956			(1,421		)	3,241
Cash and cash equivalents at beginning of year	8,925			10,346			7,105
Cash and cash equivalents at end of year	$	9,881		$	8,925		$	10,346

Item 9B. Other Information.

Not applicable.

Part III

Item 10. Directors and Executive Officers of the Registrant.

The following table sets forth, as of February 1, 2006, the names of, and certain information concerning, the Company’s directors. All directors served as such during fiscal year 2005.

Name and Title Other than Director	Age	Year First Appointed Director	Principal Occupation During the Past Five Years

Charles W. Bacchi Chairman of the Board	62	1993	Partner in Bacchi Ranch, Brush Creek and E Bar LLC, cattle ranches.

John G. Briner	66	2005	Current CEO of First Mountain Bank since October 2005, Chairman of the Board of Auburn Community Bank since 1997. Executive Vice President and Chief Operating Officer of the Bancorp from May 2004 to June 2005 and Chief Executive Officer of Auburn Community bank from 1997 to June 2005.

Matthew A. Bruno, Sr.	62	2002	President of Turlock Dairy and Refrigeration, an equipment supply and dairy design firm located in Turlock.

Lary A. Davis	52	2000	President of Sonora Regional Medical Center.

William M. Eames	69	2002	President of William M. Eames & Associates (Consulting)

William J. Fisher	58	1993	President/Broker of Pacific States Development Corporation, real estate development and marketing. Mr. Fisher is also an attorney.

Gary D. Gall President and Chief Executive Officer	54	1993	President and Chief Executive Officer of the Company. Mr. Gall has over 30 years of community banking experience.

Name and Title Other than Director	Age	Year First Appointed Director	Principal Occupation During the Past Five Years

Jan T. Haldeman	59	2003	President of Haldeman Homes, Inc.

Howard A. Jahn	60	1999	A Partner with Jackson-Jahn Commercial Real Estate. Former Senior Vice President of CB Commercial, a commercial real estate brokerage firm.

Alan J. Kleinert	61	2000	President of Cutler-Segerstrom Insurance and President of Kleinert & van Savoye Corporation (investments). Former Chairman of the Board of Sentinel Community Bank.

Lori A. Warden	49	2002	President of the CASA El Dorado a local nonprofit working with children in court system. Bank mortgage loan officer with Western Sierra Bank from January 2001 to March 2005. Former Operations Officer with US Bank (1998-2000).

Executive Officers

The following table sets forth information, as of February 1, 2006, concerning executive officers of the Company. All executive officers served as such during fiscal year 2005 except for Mr. Rusnak who was hired on May 3, 2005. Mr. John G. Briner previously served as Executive Vice President and Chief Operating Officer of Company until his resignation June 2005. Mr. Briner still remains as a director.

Name	Age	Position and Principal Occupation For the Past Five Years

Gary D. Gall	54	President and Chief Executive Officer of the Company.

Kirk N. Dowdell	43	President and Chief Executive Officer of the Western Sierra National Bank and Executive Vice President/Chief Banking Officer of Company since April 2002. Served as Executive Vice President and Chief Credit Officer of the Company from May 1999 until April 2002.

Wayne D. Koonce	64	Executive Vice President and Chief Credit Officer since April 2004. Former Senior Vice President and Chief Credit Officer of Western Sierra National Bank since July 2003, and Senior Vice President and Credit Administrator of Western Sierra National Bank since April 2000.

Anthony J. Gould	43	Executive Vice President, Chief Financial Officer and Secretary since May 2002. Former Director of Finance and Accounting of Openwave Systems (2001-2002), former Treasurer of Centraal Corp. (2000-2001). Chief Financial and Chief Operating Officer Of Bay Area Bancshares from 1988-1999.

Patrick Rusnak	42	Executive Vice President and Chief Operating Officer since May 2006. Former Executive Vice President of Umpqua Holdings Corporation (July 2004-Feburary 2005) and Executive Vice President/Chief Financial Officer of Humboldt Bancorp (2000-2004).

None of the directors or executive officers was selected pursuant to any arrangement or understanding other than as directors or directors of Company acting within their capacities as such. There are no family relationships between any of the directors or executive officers of the Company.

Board Independence

The Board has determined that a majority of the directors are “independent” within the meaning of the director independence standards set by the Nasdaq Stock Market, Inc. (“Nasdaq”) and the Securities and Exchange Commission (“SEC”), as currently in effect and as they may be changed from time to time. Furthermore, the Board has determined that each of the current members of the Audit Committee are “independent” within such director independence standards and that each member satisfies the financial literacy requirements set forth under Rule 4350(d)(2) of the Nasdaq Rules.

The Audit Committee

As of February 1, 2006, the Audit Committee consisted of Directors Davis (Chairman), Fisher (Vice Chairman), Bacchi, Eames and Kleinert. Directors Davis and Eames are each deemed by the Company to be an “audit committee financial expert.” Directors Davis and Eames each have an understanding of generally accepted auditing principles (GAAP) and have the ability and experience to prepare, audit, evaluate and analyze financial statements which present the breadth and level of complexity of issues that the Company reasonably expects to be raised by the Company’s financial statements. Director Davis has acquired these attributes as former Treasurer of Adventist Health System-West, a non-profit hospital management corporation, and as former Chief Financial Officer of Sonora Community Hospital. Director Eames has acquired these attributes as a President and CEO of Bill’s Drugs, one of the top 50 drug chains in the United States.

The Audit Committee oversees the Company’s corporate accounting and reporting practices and the quality and integrity of the Company’s financial statements and reports, selects, hires, oversees and terminates the Company’s independent auditors, monitors the Company’s independent auditors’ qualifications, independence and performance, monitors the Company’s and its affiliates’ compliance with legal and regulatory requirements, oversees all internal auditing functions and controls, and oversees the Company’s and its affiliates’ risk management function.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and certain executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities (collectively, the “Reporting Persons”), to file reports of ownership and changes in ownership with the Securities and Exchange Commission. The Reporting Persons are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) forms they file.

To the knowledge of the Company, based solely on its review of the copies of such forms received by it, or written representations from the Reporting Persons, the Reporting Persons complied with the filing requirements during 2005, except for the following individuals inadvertently were late in reporting certain transactions.

Name	Transaction Date	Filing Date
Rusnak, Pat	07/29/05	09/07/05
Gall, Gary	09/02/05	09/07/05
Rowden, Fred	04/01/05	06/15/05
Koonce, Wayne	04/01/05	06/15/05
Dowdell, Kirk	04/01/05	06/15/05
Gould, Anthony	04/01/05	06/15/05
Jahn, Howard	01/01/05	04/05/05
Manz, Tom	01/01/05	04/05/05
Gould, Anthony	03/25/04	03/28/05
Bacchi, Charles	01/01/05	03/28/05
Bacchi, Charles	01/01/05	03/28/05
Warden, Lori	01/01/05	03/28/05
Haldeman, Jan	01/01/05	03/28/05
Fisher, Bill	01/01/05	03/28/05
Eames, William	01/01/05	03/28/05
Davis, Lary	01/01/05	03/28/05
Bruno, Matt	01/01/05	03/28/05
Kleinert, Alan	01/01/05	03/28/05

Item 11. Executive Compensation

Summary Compensation Table

						Long Term Compensation
Annual Compensation						Awards		Payouts
(a)	(b)	c)	(d)	(e)	(f)	(g)	(h)	(i)
				Other	Restricted
Name and				Annual	Stock	Options/	LTIP	All Other
Principal Position	Year	Salary	Bonus(4)	Compensation(1)	Award(s)	SARs(2)	Payouts	Compensation(3)
		($)	($)	($)	($)		($)	($)
Gary D. Gall, President &	2005	346,020	480,076	N/A	—	20,000	—	16,474
Chief Executive Officer of the	2004	299,520	375,275	N/A	—	15,000	—	13,672
Company	2003	284,000	392,311	N/A	—	15,750	—	14,727

Kirk N. Dowdell, President and Chief
Executive Officer of Western Sierra	2005	213,500	222,085	N/A	—	10,000	—	15,079
National Bank and Executive Vice	2004	187,000	179,106	N/A	—	7,500	—	12,420
President of the Company	2003	165,500	194,700	N/A	—	15,750	—	14,043

Anthony J. Gould, Executive Vice	2005	157,500	74,660	N/A	—	4,000	—	14,841
President and Chief Financial Officer.	2004	140,000	66,521	N/A	—	4,500	—	11,044
	2003	142,800	61,200	N/A	—	3,150	—	11,900

Long Term Compensation

Annual Compensation

Awards

Payouts

(a)

(b)

(d)

(e)

(f)

(g)

(h)

(i)

Name and
Principal Position

Year

Salary

Bonus(4)

Other
Annual
Compensation(1)

Restricted
Stock
Award(s)

Options/
SARs(2)

LTIP
Payouts

All Other
Compensation(3)

($)

Wayne D. Koonce, Executive Vice

2005

125,500

81,427

N/A

3,000

14,314

President and Chief Credit Officer

2004

107,625

42,960

N/A

3,750

7,299

of the Company

2003

92,917

40,400

N/A

3,150

7,505

Patrick J. Rusnak, Executive Vice President and Chief Operating
Officer(5)

2005

136,000

126,868

N/A

30,000

—

(1) No named executive officer had perquisites in an amount greater than the lesser of 10% of the total salary and bonus or $50,000.

(2) These amounts are adjusted for stock dividends and splits. The Company has no SARs.

(3) This amount represents the cost of premiums for life insurance and Western Sierra National Bank’s contribution for the 401 KSOP Plan and ESOP.

(4) This bonus amount for 2005 and 2004 represents 90% of the current year bonus and 10% of the prior year bonus for each of the named executive officers. The 10% portion from the prior year bonus is carried forward because that portion is paid with the current year bonus provided the executive officer remained employed throughout the entire current year by the Company or subsidiary, as applicable. The 2003 bonus amount includes 90% of the 2003 bonus and 33% of the 2002 bonus.

(5) Mr. Rusnak joined the Company in May 2005.

Option/SAR Grants Table

Option/SAR Grants in Last Fiscal Year

Individual Grants(1)

	Options/SARs Granted	% of Total Options/SARs Granted to Employees	Exercise or Base Price		Expiration	Potential Realizable Value at Assumed Annual Rate of Stock Price Appreciation For Option Term (10) Years
Name	(#)	in Fiscal Year	($/Share)		Date	5%($)	10%($)
Gary D. Gall	20,000	15.5%	$	34.77	9/2/2012	437,333	1,108,289
Kirk N. Dowdell	10,000	7.7%	$	34.17	4/1/2015	214,893	544,582
Anthony J. Gould	4,000	3.1%	$	34.17	4/1/2015	85,957	217,833
Wayne D. Koonce	3,000	2.3%	$	34.17	4/1/2015	64,468	163,375
Patrick J. Rusnak	30,000	23.2%	$	34.94	7/29/2012	659,207	1,670,561

(1)

The Company has no SARs, and the number of options and exercise price are adjusted for stock dividends and splits.

Option/SAR Exercises and Year End Value Table

Aggregated Option/SAR Exercises in Last Fiscal Year and Year End Option/SAR Value

Name	Shares Acquired on Exercise (#)	Value Realized ($)	Number of Unexercised Options/SARs at Year End (#) Exercisable/ Unexercisable(1)	Value of Unexercised In - the-Money Options/ SARs at Year End ($) Exercisable/ Unexercisable(1)
Gary D. Gall	39,591	1,061,000	114,095 / 0	2,714,753 / 0
Kirk N. Dowdell	4,786	147,002	61,741 / 0	1,142,248 / 0
Anthony J. Gould	18,250	352,582	21,750 / 0	322,421 / 0
Wayne D. Koonce	0	0	16,763 / 0	288,763 / 0
Patrick J. Rusnak	0	0	30,000 / 0	43,500 / 0

(1) The Company has no SARs.

Employment Contracts

On December 4, 1997, Western Sierra National Bank entered into an agreement with Mr. Gall to provide him with severance benefits of up to two years’ worth of his regular compensation at the time of severance of employment in the event of (i) any merger or consolidation where Western Sierra National Bank is (A) not the surviving or resulting corporation or (B) the surviving corporation and the shareholders of Company at the time immediately prior to such merger will own less than 50% of the voting equity interests of the surviving corporation after such merger, (ii) a transfer of all or substantially all of the assets of Western Sierra National Bank, or (iii) a sale of the equity securities of Company representing more than 50% of the aggregate voting power of all outstanding equity securities of Company to any person or entity, or any group of persons or entities acting in concert (any of these events shall be referred to as an “Acquisition”). The severance agreement is for a term of 5 years, and in the event of an Acquisition, if Mr. Gall is not given a new employment agreement that is satisfactory to him in his sole discretion within 15 days prior to the date of consummation of the Acquisition, then Western Sierra National Bank shall pay him the severance payment in a lump sum. The severance agreement was extended for an additional five years in 2002.

Mr. Gall has a salary continuation agreement which provides that Western Sierra National Bank will pay him $165,000 per year for 15 years following his retirement from Western Sierra National Bank at age 60 or later (“Retirement Age”). During 2005 the cost to the Company for benefits vested under this agreement was approximately $80,000. In the event of disability while Mr. Gall is actively employed prior to Retirement Age, he will receive a benefit amount that is a percentage of the $165,000 per year for 15 years based on the vesting schedule below beginning at the earlier of the time when he reaches age 65 or the date on which he is no longer entitled to disability benefits provided by Western Sierra National Bank. In the event of termination with or without cause or voluntary termination, Mr. Gall shall receive a benefit amount that is a percentage of the $165,000 per year based on the vesting schedule below for 15 years beginning with the month following the month in which Mr. Gall attains age 65 or beginning with the month following his death, if earlier. The vesting schedule is 5.0% per year of service for the first seven years beginning January 9, 1995, and increases to an additional 6.5% per year of service for the last ten years. Payment of salary continuation benefits to Mr. Gall is subject to his not working as an employee, independent contractor, or consultant of or for a branch of a financial institution located within a 15 mile radius of any branch of Western Sierra National Bank. In the event there is a change of control of the Company, Mr. Gall shall be entitled to a lump sum payment of the present value (using the Applicable Federal Rate) of $165,000 being paid in 180 monthly installments beginning on the first day of the month following the consummation of the change of control. In the event Mr. Gall is entitled to salary continuation benefits and dies prior to receiving all 180 monthly payments, then no further payments are to be paid pursuant to the salary continuation agreement after his death, but the beneficiaries of Mr. Gall shall be entitled to benefits of a split dollar agreement between Mr. Gall and Western Sierra National Bank. Pursuant to the split dollar agreement, upon Mr. Gall’s death, his properly designated beneficiaries would be entitled to 75% of the difference between the death proceeds of certain life insurance policies with Mr. Gall as the insured and the cash value of such policies. Western Sierra National Bank would be entitled upon the death of Mr. Gall, the remaining 25% of such difference.

On December 4, 1997, Western Sierra National Bank entered into an agreement with Mr. Dowdell to provide him with severance benefits of up to two years’ worth of his regular compensation at the time of severance of employment in the event of an Acquisition. The amount of the severance payment will be calculated as stated in the severance agreement and is determined by the total assets of Western Sierra National Bank at the time of the Acquisition. The severance agreement is for a term of 5 years, and in the event of an Acquisition, if Mr. Dowdell is not retained by the resulting corporation for at least one to two years in a position comparable to that of the highest level senior vice president of the resulting corporation or a position accepted by Mr. Dowdell, or the resulting corporation reduces his base salary from his base salary at the time of the Acquisition during the next one to two years following the Acquisition, then the resulting corporation shall pay him the severance payment in a lump sum. The severance agreement was extended for an additional five years in 2002.

Mr. Dowdell has salary continuation agreements which provides that Western Sierra National Bank will pay him $75,000 per year for 15 years following his retirement from Western Sierra National Bank at age 65 or later (“Retirement Age”). During 2005 the cost to the Company for benefits vested under this agreement was approximately $9,000. In the event of disability while Mr. Dowdell is actively employed prior to Retirement Age, he will receive a benefit amount that is a percentage of the $75,000 per year for 15 years based on the vesting schedule below beginning at the earlier of the time when he reaches age 65 or the date on which he is no longer entitled to disability benefits provided by Western Sierra National Bank. In the event Mr. Dowdell dies after being disabled, his beneficiaries would be entitled to such salary continuation benefits. In the event of termination without cause or voluntary termination, Mr. Dowdell shall receive a benefit amount that is a percentage of the $75,000 per year for 15 years based on the vesting schedule below beginning with the month following the month in which Mr. Dowdell attains age 65 or beginning with the month following his death, if earlier. The vesting schedule is 4% per year of service beginning January 1, 2000. In the event of any (i) merger, consolidation or reorganization of the Company in which (A) the Company does not survive or (B) the Company survives with a resulting change in beneficial ownership of the Company of more than 50% of the voting shares, (ii) sale of more than 50% of the beneficial ownership of the voting shares of the Company to any person or group of persons acting in concert, or (iii) transfer or sale of more than 50% of the total market value of the assets of the Company (any of these events shall be referred to as a “Company Acquisition,” Mr. Dowdell shall receive a lump sum at the time of the consummation of such transaction equal to the present value of the aggregate amount of the $75,000 per year being paid for a period of 15 years in 180 monthly installments beginning on the first day of the month following the consummation of such transaction discounted using the long term monthly Applicable Federal Rate at the time of the consummation of such transaction. The lump sum payment is reduced if such payment when aggregated with all other payments considered for purposes of calculating a parachute payment results in an excess parachute payment as defined under Section 280G of the Code. Payment of salary continuation benefits to Mr. Dowdell is subject to his not working as an employee, independent contractor, or consultant of or for a financial institution located within a 35 mile radius of the head office of Western Sierra National Bank within a period of three years from the date of termination of employment.

In the event Mr. Dowdell dies while employed by Western Sierra National Bank or dies after retirement, then pursuant to a split dollar agreement between Mr. Dowdell and Western Sierra National Bank, his properly designated beneficiaries would be entitled to 75% of the difference between the death proceeds of certain life insurance policies with Mr. Dowdell as the insured and the cash value of such policies, however in the event of Mr. Dowdell dying after retirement, the aggregate amount paid under Mr. Dowdell’s salary continuation agreement and split dollar agreement shall be limited no more than the total of the 180 monthly payments that would have been paid to Mr. Dowdell under his salary continuation agreement as if Mr. Dowdell retired and died after receiving all 180 monthly payments. Western Sierra National Bank would be entitled upon the death of Mr. Dowdell to the remaining difference. Mr. Dowdell would be considered as being employed for purposes of the split dollar agreement in the event Mr. Dowdell has at least 12 years of service with Western Sierra National Bank and is disabled for the entire period between the time of his disability and death or is on a Western Sierra National Bank board approved leave of absence.

During 2004, Mr. Koonce executed a salary continuation agreements which provides that Western Sierra National Bank will pay him $36,000 per year for 10 years following his retirement from Western Sierra National Bank at age 67 or later (“Retirement Age”). During 2005 the cost to the Company for benefits vested under this agreement was approximately $29,000. In the event Mr. Koonce terminates employment due to disability prior to Retirement Age, he will receive a benefit amount commencing after termination of employment and continuing for 10 years that is based on his years of service and in accordance with the contracts vesting schedule. In the event Mr. Koonce dies after disability payments have begun, his beneficiaries would be entitled to such salary continuation benefits. In the event, Mr. Koonce is actively employed by Western Sierra National Bank and dies prior to Retirement Age, his beneficiaries would be entitled to benefits of $36,000 per year for 10 years beginning the month after his death. In the event of early termination of employment with Western Sierra National Bank, Mr. Koonce would receive salary continuation benefits based on his years of service. In the event Mr. Koonce dies after salary continuation benefits for early termination or normal retirement have begun, his beneficiaries would be entitled to the remainder of such benefits as if he had survived to receive the remainder of benefits for the fifteen years. In no event are salary continuation benefits paid under the agreement if Mr. Koonce is terminated for cause. In the event of any change of control of the Western Sierra National Bank, Mr. Koonce shall receive benefits under the agreement of $36,000 per year paid for a period of 10 years in 120 monthly installments beginning on the first day of the month following his termination of employment with Western Sierra National Bank. The

benefit payments upon a change of control to Mr. Koonce are reduced so that the payments to not result in an excess parachute payment as defined under Section 280G of the Code.

On February 10, 2004, the Company entered into an agreement that provides for severance benefits to Mr. Koonce in the event of a Company Acquisition and his termination or constructive termination of employment within 6 months of such Company Acquisition. A Company Acquisition is (i) any merger or consolidation where Company is (A) not the surviving or resulting corporation or (B) the shareholders of Company at the time immediately prior to such merger will own less than 50% of the voting equity interests of the surviving corporation after such merger, (ii) a transfer of all or substantially all of the assets of Company, or (iii) a sale of the equity securities of Company representing more than 50% of the aggregate voting power of all outstanding equity securities of Company to any person or entity, or any group of persons or entities acting in concert. Mr. Koonce would be paid severance benefits of 6 months of his regular monthly base salary based on his monthly base salary for the month immediately prior to such Company Acquisition if following a Company Acquisition he is (i) not retained by the surviving corporation for a period of at least 6 months following the Company Acquisition in (A) a position comparable to that of the highest level executive vice president of the resulting corporation or (B) a position accepted by him, or (ii) the surviving corporation within 6 months following the Company Acquisition reduces his base salary from his base salary at the time immediately prior to the Company Acquisition. The severance benefits would be paid in a lump sum. Mr. Koonce’s severance agreement is for a term expiring on December 31, 2008 and shall apply to any Company Acquisition consummated prior to such termination date provided that Mr. Koonce is employed by the Company as of the date of the public announcement of the Company Acquisition.

On February 10, 2004, the Company entered into an agreement that provides for severance benefits to Mr. Gould in the event of a Company Acquisition and his termination or constructive termination of employment within 18 months of such Company Acquisition. A Company Acquisition is (i) any merger or consolidation where Company is (A) not the surviving or resulting corporation or (B) the shareholders of Company at the time immediately prior to such merger will own less than 50% of the voting equity interests of the surviving corporation after such merger, (ii) a transfer of all or substantially all of the assets of Company, or (iii) a sale of the equity securities of Company representing more than 50% of the aggregate voting power of all outstanding equity securities of Company to any person or entity, or any group of persons or entities acting in concert. Mr. Gould would be paid severance benefits of 18 months of his regular monthly base salary based on his monthly base salary for the month immediately prior to such Company Acquisition if following a Company Acquisition he is (i) not retained by the surviving corporation for a period of at least 18 months following the Company Acquisition in (A) a position comparable to that of the highest level executive vice president of the resulting corporation or (B) a position accepted by him, or (ii) the surviving corporation within 18 months following the Company Acquisition reduces his base salary from his base salary at the time immediately prior to the Company Acquisition. The severance benefits would be paid in a lump sum. Mr. Gould’s severance agreement is for a term expiring on December 31, 2008 and shall apply to any Company Acquisition consummated prior to such termination date provided that Mr. Gould is employed by the Company as of the date of the public announcement of the Company Acquisition.

In connection with his appointment as the Executive Vice President, Chief Operating Officer of the Company, on May 3, 2005, the Company and Patrick J. Rusnak entered into an employment agreement. The employment agreement is for a term of three years and provides for an initial base salary of $16,666 per month that increases to $18,333 per month on November 1, 2005, and if certain performance goals are met increases to $20,000 per month on May 1, 2006. His employment agreement also provides for a contingent signing bonus of $21,000 to be paid after his successfully completing of 90 days of active employment with the Company. Mr. Rusnak is also entitled to participate in the Management Incentive Compensation Plan of the Company. Pursuant to its terms, if Mr. Rusnak’s employment with the Company is terminated without cause prior to the termination of the second anniversary of his employment agreement, he will receive a month of base salary for each month worked up to a maximum of 6 months, and if he is terminated without cause after the second anniversary of his employment agreement, he will receive a month of base salary for each month worked up to a maximum of 12 months. In the event of a change of control Mr. Rusnak will receive a change in control payment of 18 months of base salary. Mr. Rusnak is also entitled to an automobile allowance of $400 per month, a grant of 30,000 stock options within 90 days of employment and with the option price set at the market price of the Company’s stock at the time of grant, medical and dental coverage for him and his dependents.

Mr. Nordell, President of Lake Community Bank and former director of the Company, entered into an agreement with Lake Community Bank, a subsidiary of Company to provide him with severance benefits of up to two years’ worth of his base salary determined as of the month prior to a triggering event if after a triggering event (i) he is not retained by the resulting corporation for a period of two years in a position acceptable to him or a position comparable to that of the highest level vice president of the resulting corporation or (ii) his base salary is reduced at any time during the two years following the triggering event. A triggering event is any (i) merger or consolidation involving Lake Community Bank in which (A) the Lake Community Bank does not survive or (B) the shareholders of Company at the time immediately prior to such merger will own less than 50% of the voting equity interests of the surviving corporation after such merger, (ii) the transfer of all or substantially all of the assets of Lake Community Bank, (iii) a sale of the stock of Lake Community Bank representing more than 50% of the aggregate voting power of all outstanding stock of Lake Community Bank to any person or entity, or group of persons acting in concert. The severance agreement is for a term expiring on April 30, 2004.

Mr. Nordell has salary continuation agreements which provides that Lake Community Bank will pay him $75,000 per year for 15 years following his retirement from Lake Community Bank at age 65 or later (“Retirement Age”). During 2005 the cost to the Company for benefits vested under this agreement was approximately $37,000. In the event Mr. Nordell terminates employment due to disability prior to Retirement Age, he will receive a benefit amount commencing after termination of employment and continuing for 15 years that is based on his years of service and increases yearly beginning with benefits of $1,645 per year after a partial year of service to benefits of $75,000 per year after 15 years of service. In the event Mr. Nordell dies after disability payments have begun, his beneficiaries would be entitled to such salary continuation benefits. In the event, Mr. Nordell is actively employed by Lake Community Bank and dies prior to Retirement Age, his beneficiaries would be entitled to benefits of $75,000 per year for 15 years beginning the month after his death. In the event of early termination of employment with Lake Community Bank, Mr. Nordell would receive salary continuation benefits based on his years of service and receive up to a benefit of $48,355 per year for 15 years based on 14 years of service with benefit payments commencing at age 65. In the event Mr. Nordell dies after salary continuation benefits for early termination or normal retirement have begun, his beneficiaries would be entitled to the remainder of such benefits as if he had survived to receive the remainder of benefits for the fifteen years. In no event are salary continuation benefits paid under the agreement if Mr. Nordell is terminated for cause. In the event of any change of control of the Lake Community Bank, Mr. Nordell shall receive benefits under the agreement of $75,000 per year paid for a period of 15 years in 180 monthly installments beginning on the first day of the month following his termination of employment with Lake Community Bank. The benefit payments upon a change of control to Mr. Nordell are reduced so that the payments to not result in an excess parachute payment as defined under Section 280G of the Code.

As previously mentioned, on February 7, 2006, the Company and its banking subsidiaries entered into a Merger Agreement with Umpqua and Umpqua Bank pursuant to which the Company will merge with and into Umpqua with Umpqua as the surviving corporation, and the Company’s banking subsidiaries will merge with and into Umpqua Bank with Umpqua Bank as the resulting bank. In connection with the Merger Agreement, certain officers of the Company entered into amended and restated severance, employment and/or salary continuation agreements, collectively the “amended agreements.” Pursuant to the amended agreements, the officers will receive, among other benefits, a lump sum upon consummation of a change in control, which includes the proposed merger with Umpqua. In addition, subject to their willingness to remain employed with Umpqua or its subsidiaries for up to 9 months following the merger and subject to compliance with certain non-solicitation covenants, certain officers will receive an additional amount payable in monthly installments over a period of time up to 24 months following termination. For the Company’s executive officers, the amounts payable in these circumstances either under their existing agreements (for those whose agreements were not amended in connection with the Merger Agreement) or under the amended agreements are as follows:

	Payment upon Change in Control			Payment over Period (up to 24 months)
Gary D. Gall	$	1,503,877		$	1,358,090
Kirk Dowdell	$	576,471		$	397,764
Anthony J. Gould	N/A			$	544,536
Wayne D. Koonce	$	360,000	*	$	310,031
Douglas A. Nordell	$	1,125,000	*	$	55,711
Patrick J. Rusnak	N.A.			$	525,267

* Payable in monthly installments over 120 to 180 months.

Director Compensation

The Chairman of the Board of the Company receives $4,000 per month for his services. Outside directors of the Company receive a $1,000 per month retainer and $1,000 for each Board meeting attended. In addition the Chairman of the Compensation, Investment / ALCO and Audit Committee receive $3,000 annually for their service.

Directors of each of the subsidiary bank receive between $300 and $400 per month from the subsidiary banks on which they serve. The Chairman of the Board of each of the Banks receives between $300 and $1,100 per month from the subsidiary banks on which they serve. Loan Committee members of the Banks receive $4,000 annually and the Chairman of the Loan Committee receives up to $7,000 annually.

Directors have the option of deferring all or a portion of their fees. This determination is made on annual basis and deferred fees accrue interest at the prime rate.

Directors also from time to time receive stock option grants as part of their compensation. In May, 1999, each of the directors of the Company who was a director in 1998, other than Mr. Gall, was granted stock options to acquire 3,826 shares of Common

Stock, all at an exercise price of $6.67 per share. The options are for a term of ten years expiring in May, 2009. These options were fully vested upon the grant. During 2000, each of the directors of the Company, other than Mr. Gall participated in Western Sierra Bancorp’s incentive compensation plan and earned a bonus of $7,000 or a stock option grant of 1,736 shares for directors that served the entire year or 1,011 shares for directors that came on the Board during the year from Sentinel Community Bank. The directors that elected stock options grants were Ms. Cook and Messrs. Bacchi and Scariot, who each received a stock option grant of 1,736 shares and Messrs. Davis and Kleinert, who each received a stock option grant of 1,011 shares. These stock options were granted on February 22, 2001 with an exercise price of $6.62 per share.

Each of the directors of the Company that served the entire year in 2001, other than Messrs. Gall and Nordell received a stock option grant of 661 shares in January 2002 with an exercise price of $9.83 per share. The options are for a term of ten years expiring in January 2012, and the options were fully vested at the time of grant. In December 2002, each of the Company’s outside directors received a stock option grant to acquire 630 shares of Common Stock, all at an exercise price of $16.83 per share. The options are for a term of ten years expiring in December 2012, and the options were fully vested at the time of grant. In addition at December 31, 2002, outside directors of the Company had the election to take an additional stock option to acquire 1,071 shares of Common Stock at the exercise price of $16.83 per share in lien of directors’ fees for the first six months of 2003. Messrs. Bacchi, Bruno, Jahn, Davis, Kleinert and Prescott elected to take stock options in lieu of directors’ fees. Mr. Manz elected to take half in stock options and half in fees. The stock options are for a term of ten years expiring in December 2012 and were fully vested at time of grant.

In July 2003, outside directors of the Company had the election to take an additional stock option to acquire 1,728 shares of Common Stock at the exercise price of $20.82 per share in lien of directors’ fees for July 2003 through June 2004. Messrs. Bacchi, Bruno, Jahn, Kleinert, Davis, Manz and Prescott elected to take stock options in lieu of directors’ fees. Mr. Fisher elected to take 40% in stock options and 60% in fees. The stock options are for a term of ten years expiring in July 2013 and were fully vested at time of grant.

In January 2004, each of the Company’s outside directors received a stock option grant to acquire 600 shares of Common Stock, all at an exercise price of $31.33 per share. The options are for a term of ten years expiring in January 2014, and the options were fully vested at the time of grant. In July 2004, outside directors of the Company had the election to take an additional stock option to acquire 1,200 shares of Common Stock at the exercise price of $30.00 per share in lien of directors’ fees for July 2004 through June 2005. Messrs. Bacchi, Bruno, Jahn, Kleinert, Davis, Manz and Haldeman elected to take stock options in lieu of directors’ fees. Mr. Fisher elected to take 40% in stock options and 60% in fees. Mr. Eames elected to take 50% in stock options. The stock options are for a term of ten years expiring in July 2014 and were fully vested at time of grant.

In January 2005, each of the Company’s outside directors received a stock option grant to acquire 3,000 shares of Common Stock, all at an exercise price of $38.36 per share. The options are for a term of ten years expiring in January 2015, and the options were 25% vested at the time of grant and subsequently accelerated to 100% in August 2005. All of the option amounts and prices have been adjusted for stock splits and stock dividends.

Mr. Briner, formerly Chief Executive Officer of Auburn Community Bank and Chief Operating Officer of the Company, retired as a member of management in the second quarter of 2005 and was subsequently appointed to the board of directors. At the time of his retirement, the Board approved the full vesting of his salary continuation agreement. This agreement was originally executed by Auburn Community Bank prior to its acquisition by the Company. The agreement provides for payment s to Mr. Briner, or his heirs upon his death, of $50,000 per year for 15 years at age 67. During 2005 the cost to the Company for benefits vested under this agreement, including the cost of the accelerated vesting was approximately $300,000.

Certain former Directors have been executed Director Emeritus agreements and been awarded compensation ranging from $500 per month for ten years to $1,000 a month for five years.

The Compensation Committee Interlocks and Insider Participation

As of February 1, 2006, the Compensation Committee consisted of Directors Eames (Chairman), Kleinert (Vice Chairman), Bacchi, Bruno and Haldeman served as members of the Compensation Committee during 2005.

In February 2004, Auburn Community Bank, a subsidiary of the Company, executed a lease for a 5,000 square foot facility to serve as its primary headquarters and main branch. The facility is owned by a limited partnership in which director Jan Haldeman has a 30% ownership interest. The terms of lease include an initial rent of $1.71 per square foot.

Management believes that the terms and conditions of all lease and property sale agreements with affiliates were at fair market value and similar to terms of that would have been negotiated with a third party.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Management of the Company knows of one financial institution that owns approximately 5.7% of outstanding shares of Common Stock. Other than this institution, management does not know of any person who owns, beneficially or of record, either individually or together with associates, 5 percent (5%) or more of the outstanding shares of Common Stock, except as set forth in the table below.

The following table sets forth, as of February 15, 2006, the number and percentage of shares of Common Stock beneficially owned, directly or indirectly, by each of the Company’s directors, named executive officers and principal shareholders and by the directors and executive officers of the Company as a group. The shares “beneficially owned” are determined under Securities and Exchange Commission Rules, and do not necessarily indicate ownership for any other purpose. In general, beneficial ownership includes shares over which the director, principal shareholder or executive officer has sole or shared voting or investment power and shares which such person has the right to acquire within 60 days of February 15, 2006. Each person in the table, except as noted has sole voting and investment powers over the shares beneficially owned.

Beneficial Owner	Amount and Nature of Beneficial Ownership		Percent of Class
Directors and Named Executive Officers
Charles W. Bacchi	293,363	(1)	3.75%
Matthew A. Bruno, Sr.	299,927	(2)	3.84%
Lary Davis	54,731	(3)	*
William M. Eames	384,598	(4)	4.93%
William J. Fisher	293,775	(5)	3.76%
Gary D. Gall	274,507	(6)	3.47%
Howard A. Jahn	56,711	(7)	*
Alan J. Kleinert	370,711	(8)	4.74%
Lori A. Warden	218,284	(9)	2.80%
Kirk N. Dowdell	74,425	(10)	*
John G. Briner	21,380	(11)	*
Wayne D. Koonce	23,308	(12)	*
Patrick J. Rusnak	30,000	(13)	*
Anthony J. Gould	43,278	(14)	*
Jan T. Haldeman	297,593	(15)	3.81%

All Directors and Officers as a Group (15 in all)	1,156,503	(16)	14.22%

Principal Shareholder:
Banc Fund V L.P., Banc Fund VI L.P., and Banc Fund VII L.P. (17)	410,222		5.26%
Caxton International Limited (18)	511,367		6.55%

*denotes less 1%

(1) Mr. Bacchi has shared voting and investment powers as to 278,912 shares which includes 160,439 shares and 102,909 shares in his capacity as a co-trustee for the Company’s ESOP and the Company’s 401KSOP, respectively. Mr. Bacchi

disclaims beneficial ownership as to those shares beneficially owned by him as a co-trustee of the ESOP and 401KSOP to the extent of pass-through voting and investment rights exercised by participants of the ESOP and 401KSOP. The total amount also includes 14,451 shares acquirable by exercise of stock options.

(2) Mr. Bruno has shared voting and investment powers as to 291,098 shares which includes 160,439 shares and 102,909 shares in his capacity as a co-trustee for the Company’s ESOP and the Company’s 401KSOP, respectively. Mr. Bruno disclaims beneficial ownership as to those shares beneficially owned by him as a co-trustee of the ESOP and 401KSOP to the extent of pass-through voting and investment rights exercised by participants of the ESOP and 401KSOP. The total amount also includes 8,829 shares acquirable by exercise of stock options.

(3) Mr. Davis has shared voting and investment powers as to 44,530 of these shares, and the total amount includes 10,201 shares acquirable by exercise of stock options.

(4) Mr. Eames has shared voting and investment powers as to 263,348 shares which includes 160,439 shares and 102,909 shares in his capacity as a co-trustee for the Company’s ESOP and the Company’s 401KSOP, respectively. Mr. Eames disclaims beneficial ownership as to those shares beneficially owned by him as a co-trustee of the ESOP and 401KSOP to the extent of pass-through voting and investment rights exercised by participants of the ESOP and 401KSOP. The amount includes 3,000 shares acquirable by exercise of stock options.

(5) Mr. Fisher has shared voting and investment powers as to 274,533 shares which includes 160,439 shares and 102,909 shares in his capacity as a co-trustee for the Company’s ESOP and the Company’s 401KSOP, respectively. Mr. Fisher disclaims beneficial ownership as to those shares beneficially owned by him as a co-trustee of the ESOP and 401KSOP to the extent of pass-through voting and investment rights exercised by participants of the ESOP and 401KSOP. The total amount also includes 19,242 shares acquirable by exercise of stock options.

(6) Includes 35,318 shares held solely by Mr. Gall’s spouse in a separate account to which Mr. Gall disclaims beneficial ownership and the total amount also includes 75,065 shares acquirable by exercise of stock options.

(7) The amount includes 8,890 shares acquirable by exercise of stock options

(8) Mr. Kleinert has shared voting and investment powers as to 263,348 shares which includes 160,439 shares and 102,909 shares in his capacity as a co-trustee for the Company’s ESOP and the Company’s 401KSOP, respectively. Mr. Kleinert disclaims beneficial ownership as to those shares beneficially owned by him as a co-trustee of the ESOP and 401KSOP to the extent of pass-through voting and investment rights exercised by participants of the ESOP and 401KSOP. The total amount also includes 10,441 shares acquirable by exercise of stock options.

(9) Ms. Warden has shared voting and investment powers as to 215,284 of these shares, and the total amount includes 3,000 shares acquirable by exercise of stock options.

(10) The amount includes 61,741 shares acquirable by exercise of stock options.

(11) Mr. Briner has shared voting and investment powers as to 21,380 of these shares.

(12) The amount includes 16,763 shares acquirable by exercise of stock options.

(13) All 30,000 of these shares are acquirable by exercise of stock options.

(14) The amount includes 16,000 shares acquirable by exercise of stock options.

(15) Mr. Haldeman has shared voting and investment powers as to 263,348 shares which includes 160,439 shares and 102,909 shares in his capacity as a co-trustee for the Company’s ESOP and the Company’s 401KSOP, respectively. Mr. Haldeman disclaims beneficial ownership as to those shares beneficially owned by him as a co-trustee of the ESOP and 401KSOP to the extent of pass-through voting and investment rights exercised by participants of the ESOP and 401KSOP. The total amount also includes 10,741 shares acquirable by exercise of stock options.

(16) The amount includes 327,394 shares acquirable by exercise of stock options.

(17) Information based on Schedule 13G filed by Banc Fund V L.P., Banc Fund VI L.P., and Banc Fund VII L.P. (collectively “Banc Funds”) as a group with the SEC. Represents 249,764 shares owned by Banc Fund V L.P., 132,439 shares owned by Banc Fund VI L.P., and 28,019 shares owned by Banc Fund VII L.P. The address given for the Banc Funds is 208 S. LaSalle Street, Chicago, IL 60604.

(18) Information based on Schedule 13G filed by Caxton International Limited as filed with the SEC on February 28, 2006. Caxton Associates, LLC is the trading advisor to Caxton International and has voting and dispositive power with respect to the investment of Caxton International. Caxton Associates is also trading advisor to GDK, Inc. which owns 1,584 shares of the Company and, therefore, Caxton Associates has voting and dispositive power with respect to the investment of GDK. The number of share beneficially owned by Caxton International does not include shares beneficially owned by GDK. The address given by Caxton International is c/o Prime Management Limited, Mechanics Building, 12 Church Street, Hamilton HM11, Bermuda.

Item 13. Certain Relationships and Related Transactions.

Some of the Company’s directors and executive officers and their immediate families as well as the companies with which they are associated are customers of, or have had banking transactions with the Banks in the ordinary course of business, and the Banks expect to have banking transactions with such persons in the future. In management’s opinion, all loans and commitments to lend included in such transactions were made in compliance with applicable laws 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.

Some of the directors and officers of the Company and Banks have spouses that are also officers or employees of the Company or a bank subsidiary of the Company.

Ms. Lesa Gall, the spouse of Gary Gall (President and Chief Executive Officer and Director of the Company) was an Operations System Analyst and officer of the Company in 2004 and terminated employment with the Company effective March 31, 2005. As part of Ms. Gall’s severance package in recognition of her valued employment with the Company and Western Sierra National Bank since 1987 (including a period in which she was Chief Financial Officer) the Company Board of Directors approved the acceleration of the vesting of her unvested stock options and salary continuation benefits (at a cost of approximately $110,000) and approved an 18 month consulting agreement with her. Ms. Gall, under her consulting agreement which commenced on April 1, 2005, agrees to provide consulting services as requested by Company, including, but not limited to, the areas of merger, acquisition and integration issues related to the Company and its subsidiaries in consideration for an earned retainer of $2,000 per month plus $80 per hour for each hour of service that she is requested to provide consulting services. In addition, Ms. Gall’s consulting agreement contains noncompetition and nonsolititation clauses, where Ms. Gall agrees to not compete with the Company and its subsidiaries and not solicit their employees. Ms. Gall earned $37,200 in salary , and $18,000 in consulting fees during 2005 for her services.

Mr. Jeff Gall, son of Gary Gall, is a Vice President/Financial Reporting and Analysis with the Company and earned approximately $67,600 in salary and bonus in 2005. Mr. Jeff Gall reports directly to the Chief Financial Officer of the Company, and he does not live in the same household as Mr. Gary Gall.

Ms. Deborah Nordell, Business Banking Officer is an officer of Lake Community Bank, a wholly-owned subsidiary bank of Company and is the spouse of Douglas Nordell, President and Chief Executive Officer and director of Lake Community Bank and a former director of the Company. In 2005, Ms. Nordell earned $34,700 in salary and a bonus of $3,300.

Ms. Kathleen Rowden is a Mortgage Loan Officer with Central California Bank, a wholly-owned subsidiary of the Company and is the spouse of Fred Rowden, President and Chief Executive Office and director of Central California Bank. Ms. Rowden is paid by Central California Bank on commission basis only and earned commissions of $36,900 in 2005. Each of Ms. Nordell and Rowden reports to an officer other than her spouse.

Item 14. Principal Accounting Fees and Services

The firm of Perry-Smith LLP served as independent certified public accountants for the Company through the year 2005. The Company’s board has determined the firm of Perry-Smith LLP to be fully independent of the operations of Company.

Aggregate fees billed by Perry-Smith LLP to the Company for the years ended 2005 and 2004 are as follows:

	2005		2004
Audit fees	$	289,000	$	245,200
Audit related fees	$	21,000	$	19,400
Tax fees associated with consulting and return preparation	$	89,000	$	69,700
All other fees	$	13,600	$	14,100

The Audit Committee of the Company has considered the provision of non-audit services provided by Perry-Smith LLP to be compatible with maintaining the independence of Perry-Smith LLP.

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor

The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent auditors and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The tax fees and other fees paid in 2005 and 2004 were approved per the Audit Committee’s pre-approval policies.

Item 15. Exhibits, 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 is included as an exhibit to the registrants 10-K for December 31, 2004 and incorporated herein by this reference.

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

10.16		Executive Salary Continuation Agreement dated June 22, 2002, between Mr. Fred Rowden and Central California Bank, included as an exhibit to the Registrant’s 10-Q for March 31, 2003, which is incorporated by this reference herein.

10.17		Executive Salary Continuation Agreement dated June 1, 2002, between Mr. Phillip Wood and Western Sierra National Bank, included as an exhibit to the Registrant’s 10-Q for March 31, 2003, which is incorporated by this reference herein.

10.18		Executive Salary Continuation Agreement dated June 25, 2002, between Mr. Doug Nordell and Roseville 1^st National Bank, included as an exhibit to the Registrant’s 10-Q for March 31, 2003, which is incorporated by this reference herein.

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

10.20		Contract between Woodbury Financial Services, Inc. and Western Sierra National Bank dated July 22, 2003, included as an exhibit to the Registrant’s 10-Q for September 30, 2003, which is incorporated by this reference herein.

10.21		Summary of financial terms for Western Sierra Statutory Trusts III and IV, included as an exhibit to the Registrant’s 10-Q for September 30, 2003, which is incorporated by this reference herein.

10.22		Severance Benefits Agreement dated February 10, 2004 between Mr. Anthony Gould and Western Sierra Bancorp, included as an exhibit to the Registrant’s 10-Q for March 31, 2004, which is incorporated by this reference herein.

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.

10.25		Employment Agreement dated May 3, 2005 between the Company, and Patrick J. Rusnak and is incorporated by reference to Exhibit 10.21 to Form 10-Q for the quarter ended March 31, 2005.

10.26		Termination and Settlement Agreement with Gold Country Financial Services, Inc., and is incorporated by reference to Exhibit 10.1 to Form 8-K for June 24, 2005.

10.27		Retirement, Consulting and Noncompetition Agreement with John G. Briner dated June 30, 2005, and is incorporated by reference to Exhibit 10.1 to Form 8-K dated June 30, 2006.

10.28		Executive Survivor Income Agreement for Anthony J. Gould, and is incorporated by reference to Exhibit 10.1 to Form 8-K dated July 13, 2005.

10.29		Deferred Compensation Agreement for Patrick J. Rusnak, and is incorporated by reference to Exhibit 10.1 to Form 8-K dated July 22, 2005.

10.30		Summary of Options Held by Certain Directors and Executives of Western Sierra Bancorp and is incorporated by reference to Exhibit 99.1 to Form 8-K dated August 30, 2005.

10.31		Agreement and Plan of Reorganization among Western Sierra Bancorp and its Affiliate Bank and Umpqua Bancorp and Umpqua Bank, and is incorporated by reference to Exhibit 99.2 to Form 8-K dated February 7, 2006.

10.32		Gary D. Gall, Amendment to Executive Salary Continuation, and is incorporated by reference to Exhibit 99.3 to Form 8-K dated February 7, 2006.

10.33		Gary D. Gall, Restated Severance Agreement, and is incorporated by reference to Exhibit 99.4 to Form 8-K dated February 7, 2006.

10.34		Patrick J. Rusnak, Restated Employment Agreement, and is incorporated by reference to Exhibit 99.5 to Form 8-K dated February 7, 2006.

10.35		Anthony Gould, Restated Severance Agreement, and is incorporated by reference to Exhibit 99.6 to Form 8-K dated February 7, 2006.

10.36		Wayne Koonce, Restated Severance Agreement, and is incorporated by reference to Exhibit 99.7 to Form 8-K dated February 7, 2006.

10.37		Kirk N. Dowdell, Amendment to Executive Salary Continuation Agreement, and is incorporated by reference to Exhibit 99.8 to Form 8-K dated February 7, 2006.

10.38		Kirk N. Dowdell, Restated Severance Agreement, and is incorporated by reference to Exhibit 99.9 to Form 8-K dated February 7, 2006.

10.39		Douglas A. Nordell, Amendment to Executive Salary Continuation Agreement, and is incorporated by reference to Exhibit 99.10 to Form 8-K dated February 7, 2006.

10.40		Douglas A. Nordell, Restated Severance Agreement, and is incorporated by reference to Exhibit 99.11 to Form 8-K dated February 7, 2006.

10.41		Jeff Birkholz, Amendment to Executive Salary Continuation Agreement, and is incorporated by reference to Exhibit 99.12 to Form 8-K dated February 7, 2006.

10.42		Jeff Birkholz, Restated Employment Agreement, and is incorporated by reference to Exhibit 99.13 to Form 8-K dated February 7, 2006.

10.43		Clyde Frederick Rowden, Amendment to Executive Salary Continuation Agreement, and is incorporated by reference to Exhibit 99.14 to Form 8-K dated February 7, 2006.

10.44		Clyde Frederick Rowden, Restated Employment Agreement, and is incorporated by reference to Exhibit 99.15 to Form 8-K dated February 7, 2006.

10.45		Phillip S. Wood, Amendment to Executive Salary Continuation Agreement, and is incorporated by reference to Exhibit 99.16 to Form 8-K dated February 7, 2006.

10.46		Phillip S. Wood, Restated Severance Agreement, and is incorporated by reference to Exhibit 99.17 to Form 8-K dated February 7, 2006.

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

For the fiscal year ended December 31, 2005

or

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

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)

PART I
Forward-Looking Information
Item 1.	Business
Item 1A	Risk Factors
Item 1B	Unresolved Staff Comments
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

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	586,787	$	21.04	444,700
Equity compensation plans not approved by security holders	N/A	N/A		N/A
Total	586,787	$	21.04	444,700

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

WESTERN SIERRA BANCORP
By:	/s/ GARY D. GALL	Dated: March 10, 2006
	President and Chief Executive Officer (Principal Executive Officer)

And By:	/s/ ANTHONY J. GOULD	Dated: March 10, 2006
	Executive Vice President Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

/s/ CHARLES W. BACCHI		Dated: March 10, 2006
Charles W. Bacchi, Director and Chairman of the Board

/s/ WILLIAM J. FISHER		Dated: March 10, 2006
William J. Fisher, Director

/s/ LORI WARDEN		Dated: March 10, 2006
Lori Warden, Director

/s/ ALAN J. KLEINERT		Dated: March 10, 2006
Alan J. Kleinert, Director

/s/ HOWARD A. JAHN		Dated: March 10, 2006
Howard A. Jahn, Director

/s/ THOMAS MANZ		Dated: March 10, 2006
Thomas Manz, Director

/s/ LARY A. DAVIS		Dated: March 10, 2006
Lary A. Davis, Director

/s/ DOUGLAS A. NORDELL		Dated: March 10, 2006
Douglas A. Nordell, Director

/s/ WILLIAM EAMES		Dated: March 10, 2006
William Eames, Director

/s/ MATTHEW BRUNO SR.		Dated: March 10, 2006
Matthew Bruno, Sr., Director

/s/ JAN T. HALDEMAN		Dated: March 10, 2006
Jan T. Haldeman, Director

Name		Jurisdiction of Incorporation

Western Sierra National Bank		United States
Central California Bank		California
Lake Community Bank		California
Auburn Community Bank		California
Sentinel Associates, Inc.		California

Dated: March 10, 2006	/s/ Anthony J. Gould
	Anthony J. Gould,
	Chief Financial and Chief Accounting Officer
	(Principal Financial and Accounting Officer)

Dated: March 10, 2006	/s/ Gary D. Gall
	Gary D. Gall,
	President and Chief Executive Officer
	(Principal Executive Officer)

Subordinated Debentures

General

Bank Dividends to the Company

At December 31, 2005, the Banks had approximately $17.0 million in retained earnings available for dividend payment to the Company while maintaining “Well-Capitalized” status and compliance with the Company's internal capital policies.

Transactions with Affiliates

Limitations on Business and Investment Activities

Risk-Based Capital Guidelines

Interstate Banking and Branching

Safety and Soundness Guidelines

Consumer Protection Laws and Regulations

Other Aspects of Banking Law

Impact of Monetary Policies

Recent Accounting Standards

Item 2. Properties

Item 3. Legal Proceedings

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

Item 5. Market Price & Dividends

Item 7. Management’s Discussion & Analysis

2005 Compared to 2004

2004 Compared to 2003

WESTERN SIERRA BANCORP AND SUBSIDIARIES

WESTERN SIERRA BANCORP AND SUBSIDIARIES

General

Reclassifications

Principles of Consolidation and Basis of Presentation

Use of Estimates

Cash Equivalents

Investment Securities

Restricted Investment Securities

Loan Sales and Servicing

Loans

Allowance for Loan Losses

Income Taxes

Earnings Per Share

Stock-Based Compensation

Trading Securities

Investment Securities

Short-Term

Long-Term

Leases

Financial Instruments With Off-Balance-Sheet Risk

Concentrations of Credit Risk

Contingencies

Correspondent Banking Agreements

Earnings Per Share

Stock Options

Common Stock Repurchase Program

Regulatory Capital

13. OTHER EXPENSES

Borrowings

Profit Sharing Plan

Employee Stock Ownership Plan

Salary Continuation Plans

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Code of Ethics

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM