10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

OR

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

For the transition period from              to             

Commission File Number 000-50652

PLACER SIERRA BANCSHARES

(Exact name of registrant as specified in its charter)

CALIFORNIA	94-3411134
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

525 J Street, Sacramento, California	95814
(Address of principal executive offices)	(Zip Code)

(916) 554-4750

(Registrant’s telephone number, including area code)

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

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

As of August 8, 2005 there were 14,956,529 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION		1
ITEM 1.	Unaudited Consolidated Financial Statements	1
	Unaudited Consolidated Balance Sheet	1
	Unaudited Consolidated Statement of Income	2
	Unaudited Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income	3
	Unaudited Consolidated Statement of Cash Flows	4
	Notes to Unaudited Consolidated Financial Statements	5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	33
ITEM 4.	Controls and Procedures	34
PART II—OTHER INFORMATION		34
ITEM 1.	Legal Proceedings	34
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
ITEM 3.	Defaults Upon Senior Securities	35
ITEM 4.	Submission of Matters to a Vote of Security Holders	35
ITEM 5.	Other Information	35
ITEM 6.	Exhibits	36
SIGNATURES		37

i

PART I—FINANCIAL INFORMATION

ITEM 1. Unaudited Consolidated Financial Statements

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

	June 30, 2005			December 31, 2004
ASSETS
Cash and due from banks	$	59,729		$	39,255
Federal funds sold		43,623			361
Cash and cash equivalents		103,352			39,616
Interest bearing deposits with other banks		127			125
Investment securities available-for-sale		233,648			249,916
Federal Reserve Bank and Federal Home Loan Bank stock		14,225			10,430
Loans and leases held for investment, net of allowance for loan and lease losses of $16,475 at June 30, 2005 and $16,200 at December 31, 2004		1,309,387			1,278,064
Premises and equipment, net		27,744			27,645
Cash surrender value of life insurance		43,513			42,390
Other real estate		—			657
Goodwill		101,205			101,329
Other intangible assets		12,874			14,172
Other assets		15,645			14,641
Total assets	$	1,861,720		$	1,778,985
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	501,492		$	485,193
Interest bearing		1,081,687			1,014,866
Total deposits		1,583,179			1,500,059
Short-term borrowings		13,448			16,265
Accrued interest payable and other liabilities		11,858			17,409
Junior subordinated deferrable interest debentures		53,611			53,611
Total liabilities		1,662,096			1,587,344
Commitments and contingencies
Shareholders’ equity:
Preferred stock, 25,000,000 shares authorized; none issued or outstanding at June 30, 2005 or December 31, 2004		—			—
Common stock, no par value, 100,000,000 shares authorized, 14,927,789 and 14,877,056 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively		158,615			157,834
Retained earnings		41,017			33,323
Accumulated other comprehensive (loss) income		(8	)		484
Total shareholders’ equity		199,624			191,641
Total liabilities and shareholders’ equity	$	1,861,720		$	1,778,985

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

1

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Interest income:
Interest and fees on loans and leases held for investment	$	21,718		$	14,930		$	42,484		$	29,999
Interest on loans held for sale		—			—			—			3
Interest on deposits with other banks		1			—			2			—
Interest and dividends on investment securities:
Taxable		2,580			1,790			4,953			4,002
Tax-exempt		187			132			350			264
Interest on federal funds sold		228			125			354			198
Total interest income		24,714			16,977			48,143			34,466
Interest expense:
Interest on deposits		3,346			1,616			6,097			3,139
Interest on short-term borrowings		25			28			59			117
Interest on junior subordinated deferrable interest debentures		836			445			1,596			892
Total interest expense		4,207			2,089			7,752			4,148
Net interest income		20,507			14,888			40,391			30,318
Provision for the allowance for loan and lease losses		—			40			—			560
Net interest income after provision for the allowance for loan and lease losses		20,507			14,848			40,391			29,758
Non-interest income:
Service charges and fees on deposit accounts		2,006			1,614			3,731			3,179
Referral and other loan-related fees		1,018			703			1,536			1,324
Loan servicing income		105			78			238			171
Gain on sale of loans, net		—			106			—			176
Revenues from sales of non-deposit investment products		175			154			366			372
Loss on sale of investment securities available-for- sale, net		(55	)		(3,542	)		(55	)		(3,336	)
Increase in cash surrender value of life insurance		430			308			844			627
Other		425			706			907			1,665
Total non-interest income		4,104			127			7,567			4,178
Non-interest expense:
Salaries and employee benefits		7,400			6,236			14,998			12,664
Occupancy and equipment		1,941			1,735			3,991			3,422
Merger		—			2,142			—			2,142
Other		5,193			4,091			10,469			8,585
Total non-interest expense		14,534			14,204			29,458			26,813
Income before provision for income taxes		10,077			771			18,500			7,123
Provision for income taxes		3,976			300			7,229			2,472
Net income	$	6,101		$	471		$	11,271		$	4,651
Earnings per share:
Basic	$	0.41		$	0.03		$	0.76		$	0.34
Diluted	$	0.40		$	0.03		$	0.74		$	0.33

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

2

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN

SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands)

	Six Months Ended June 30, 2005
	Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares	Amount
Balance, December 31, 2004	14,877,056	$	157,834	$	33,323		$	484		$	191,641
Comprehensive income:
Net income					11,271						11,271
Net change in unrealized gain on investment securities available-for-sale, net of tax								(492	)		(492	)
Total comprehensive income											10,779
Stock options exercised, including tax benefit	50,733		781								781
Dividend declared ($0.24 per share)					(3,577	)					(3,577	)
Balance, June 30, 2005	14,927,789	$	158,615	$	41,017		$	(8	)	$	199,624

	Six Months Ended June 30, 2004
	Common Stock					Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares		Amount
Balance, December 31, 2003	13,683,493		$	142,777		$	21,049	$	1,068		$	164,894
Comprehensive income:
Net income							4,651					4,651
Net change in unrealized gain on investment securities available- for-sale, net of tax									(1,075	)		(1,075	)
Total comprehensive income												3,576
Stock options exercised, including tax benefit	144,405			1,206								1,206
Stock issued in connection with acquisition of minority interest				92								92
Repurchase of shares of dissenting minority shareholder	(1,746	)		(32	)							(32	)
Stock-based compensation				38								38
Balance, June 30, 2004	13,826,152		$	144,081		$	25,700	$	(7	)	$	169,774

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

3

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

	Six Months Ended June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	11,271		$	4,651
Adjustments to reconcile net income to net cash provided by operations:
Provision for the allowance for loan and lease losses		—			560
(Accretion) amortization of investment security discounts/premiums, net		(73	)		105
Amortization of other intangible assets		1,298			973
(Decrease) increase in deferred loan fees, net		(160	)		517
Depreciation and amortization		1,570			1,500
Dividends received on FHLB and FRB stock		(285	)		(43	)
Stock-based compensation		—			38
Loss on sale of investment securities available-for-sale, net		55			3,336
Gain on sale of loans held for sale, net		—			(174	)
Fundings of loans held for sale		—			(4,608	)
Proceeds from sale of loans held for sale		—			4,668
Loss on disposal of premises and equipment		—			17
Gain from life insurance proceeds		—			(397	)
Loss on sale of other real estate		22			—
Deferred income taxes		(535	)		32
Increase in cash surrender value of life insurance		(843	)		(627	)
Net decrease in accrued interest receivable and other assets		660			931
Net decrease in accrued interest payable and other liabilities		(5,287	)		(536	)
Net cash provided by operating activities		7,693			10,943
Cash flows from investing activities:
Purchases of investment securities available-for-sale		(31,974	)		(120,870	)
Proceeds from the sale of investment securities available-for-sale		20,281			157,746
Proceeds from calls and maturities of investment securities available-for-sale		27,000			51,000
Proceeds from principal repayments of investment securities available-for-sale		148			60
Purchase of FHLB and FRB stock		(3,707	)		(1,965	)
Deposit on single premium cash surrender value life insurance		(311	)		(306	)
Proceeds from cash surrender value life insurance		—			758
Net increase in loans and leases held for investment		(32,445	)		(53,140	)
Proceeds from recoveries of charged-off loans		1,325			680
Purchases of premises and equipment		(1,669	)		(484	)
Proceeds from sale of premises and equipment		—			9
Proceeds from sale of other real estate		635			—
Net increase in interest bearing deposits with other banks		(2	)		—
Net cash (used in) provided by investing activities		(20,719	)		33,488
Cash flows from financing activities:
Net increase in demand, interest bearing and savings deposits		32,713			33,233
Net increase in time deposits		50,407			29,710
Net decrease in short-term borrowings		(2,817	)		(26,799	)
Dividends paid		(4,322	)		—
Exercise of stock options		781			1,206
Repurchase of shares of dissenting minority shareholder		—			(32	)
Net cash provided by financing activities		76,762			37,318
Net increase in cash and cash equivalents		63,736			81,749
Cash and cash equivalents, beginning of period		39,616			88,505
Cash and cash equivalents, end of period	$	103,352		$	170,254

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

4

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months Ended June 30, 2005 and 2004

NOTE 1—BASIS OF PRESENTATION

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Placer Sierra Bancshares (the Company) and the consolidated accounts of its wholly-owned subsidiary, Placer Sierra Bank (PSB). All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting. The financial statements reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods indicated. Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results of operations to be expected for the remainder of the year.

For financial reporting purposes, the Company’s investments in Placer Statutory Trust III, Placer Statutory Trust II, Southland Statutory Trust I and First Financial Bancorp Trust I are accounted for under the equity method and are included in other assets on the unaudited consolidated balance sheet. The junior subordinated debentures issued and guaranteed by the Company and held by the trusts are reflected on the Company’s unaudited consolidated balance sheet.

The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

The preparation of unaudited 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.

Management has determined that since all of the banking products and services offered by the Company are available in each branch of the bank, all branches are located within the state of California and management does not allocate resources based on the performance of different transaction activities, it is appropriate to aggregate the bank branches and report them as a single operating segment. No single customer accounts for more than 10% of the revenues of the Company or PSB.

A material estimate that is particularly susceptible to significant changes in the near-term relates to the determination of the allowance for loan and lease losses. In connection with the determination of the allowance for loan and lease losses, management obtains independent appraisals for significant properties, evaluates overall loan portfolio characteristics and delinquencies and monitors economic conditions.

NOTE 2 – EARNINGS PER SHARE

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

5

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2005		2004		2005		2004
Basic
Net income	$	6,101	$	471	$	11,271	$	4,651
Weighted average shares outstanding		14,914,983		13,768,719		14,901,431		13,741,402
Earnings per share - basic	$	0.41	$	0.03	$	0.76	$	0.34
Diluted
Net income	$	6,101	$	471	$	11,271	$	4,651
Weighted average shares outstanding		15,209,930		13,980,841		15,206,857		13,911,810
Earnings per share - diluted	$	0.40	$	0.03	$	0.74	$	0.33

For the three and six months ended June 30, 2005, 169,500 shares and for the three and six months ended June 30, 2004, 5,000 shares of common stock issuable under stock option agreements were not included in the computation of diluted earnings per share because the exercise price was equal to or greater than the stock’s average market price and their effect would be antidilutive.

NOTE 3 – STOCK OPTIONS

The Company currently has two stock option plans, the Placer Sierra Bancshares 2002 Amended and Restated Stock Option Plan and the Southland Capital Co. 2002 Stock Option Plan. Options in the Southland Capital Co. plan have been converted into options to purchase shares of the Company and no additional options will be granted under this plan. All options granted to date have been nonstatutory stock options. The shares available for grant may be granted to anyone eligible to participate in the plans. 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. The options under the plans expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period is generally four years; however, the vesting period can be modified at the discretion of the Company’s Board of Directors. Outstanding options under the plans are exercisable until their expiration.

The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. In accordance with APB Opinion No. 25, no stock based compensation cost related to stock option plans is reflected in net income as all options granted under these stock option plans had an exercise price of not less than the fair market value of the underlying common stock on the date of grant.

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

6

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2005			2004			2005			2004
Net income, as reported	$	6,101		$	471		$	11,271		$	4,651
Add: Stock-based compensation expense included in reported net income, net of related tax effects		—			38			—			38
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects		(122	)		(38	)		(216	)		(38	)
Pro forma net income	$	5,979		$	471		$	11,055		$	4,651
Basic earnings per share – as reported	$	0.41		$	0.03		$	0.76		$	0.34
Diluted earnings per share – as reported	$	0.40		$	0.03		$	0.74		$	0.33
Basic earnings per share – pro forma	$	0.40		$	0.03		$	0.74		$	0.34
Diluted earnings per share – pro forma	$	0.39		$	0.03		$	0.73		$	0.33

The fair value of the options granted during the three and six months ended June 30, 2005 and 2004 are noted below and were based on an option-pricing model with the following assumptions and prices:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2005			2004			2005			2004
Dividend yield		1.50	%		n/a			1.50	%		n/a
Expected volatility		25.00	%		n/a			25.00	%		n/a
Risk-free interest rate		3.83	%		3.38	%		3.88	%		3.38
Expected option life		5 years			5 years			5 years			5 years
Weighted average fair value of options granted during the period	$	6.50		$	0.03		$	6.33		$	0.03

A summary of the activity in the Placer Sierra Bancshares 2002 Amended and Restated Stock Option Plan is as follows:

	For the Six Months Ended June 30,
	2005				2004
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Options outstanding, beginning of period	591,031		$	12.40	803,271		$	9.00
Options granted	216,500		$	25.40	7,500		$	15.00
Options exercised	(18,248	)	$	9.00	(65,033	)	$	9.00
Options canceled	(20,243	)	$	14.85	(16,675	)	$	9.00
Options outstanding, end of period	769,040		$	16.08	729,063		$	9.06
Options exercisable, end of period	337,987		$	9.70	522,148		$	9.00

7

A summary of the activity in the Southland Capital Co. 2002 Stock Option Plan is as follows:

	For the Six Months Ended June 30,
	2005				2004
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Options outstanding, beginning of period	308,976		$	7.82	663,114		$	7.82
Options granted	—		$	—	31,260		$	7.82
Options exercised	(25,900	)	$	7.82	(73,050	)	$	7.82
Options canceled	(4,395	)	$	7.82	(13,538	)	$	7.82
Options outstanding, end of period	278,681		$	7.82	607,786		$	7.82
Options exercisable, end of period	234,348		$	7.82	434,319		$	7.82

In addition to the above plans, during 2002 stock options for 47,897 shares were granted to past directors and a former executive officer of PSB. No additional options have subsequently been granted outside the above plans. During the six months ended June 30, 2005, 6,585 options were exercised and none canceled. During the six months ended June 30, 2004, 6,327 options were exercised and 4,971 were canceled. At June 30, 2005, a total of 12,336 options were outstanding related to these grants with a weighted average remaining life of 0.01 years and a weighted average exercise price of $8.54. At June 30, 2005 and 2004, a total of 12,336 and 18,921 options were exercisable, respectively.

NOTE 4—COMMITMENTS AND CONTINGENCIES

Legal Proceedings

In the ordinary course of our business, the Company is party to various legal actions, which the Company believes are incidental to the operation of its business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions to which the Company is currently a party cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to management, any resulting liability is not likely to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Bank of Orange County v. Azar, filed on November 18, 2003, is currently pending in the Superior court of the State of California in Orange County. On June 23, 2005, we received a notice of entry of judgment and satisfaction of judgment with respect to this matter. The litigation relates to a number of Cerritos Valley Bank shareholders who exercised their statutory right pursuant to Chapter 13 of the California Corporations Code to dissent from the 2002 merger of Cerritos Valley Bank with and into Bank of Orange County. Bank of Orange County is currently a division of Placer Sierra Bank. Rather than accept the merger consideration of $9.79 per share of common stock paid to Cerritos Valley Bank shareholders who did not dissent from the merger, the dissenting shareholders claimed that the fair market value of their shares of common stock was $25.76 per share. Prior to consummation of the merger, Bank of Orange County deposited the sum of approximately $3.8 million with the exchange agent for the merger, representing $9.79 per share multiplied by the number of shares held by dissenting shareholders.

In January 2004, Bank of Orange County and the dissenting shareholders entered into a settlement agreement, which provided that the fair market value of the shares would be determined by an appraisal process. Under the terms of the agreement, each party’s appraiser valued the shares. After conducting the appraisal, each appraiser reached a different dollar amount. Because the difference between the two amounts exceeded a specified range, the settlement agreement provided that a third appraiser be selected by the two other appraisers, to determine the fair market value of the Cerritos Valley Bank common stock. The third appraiser determined that the fair market value of the shares held by the dissenting shareholders was $5.95. Based on the $5.95 valuation, the bank paid the dissenting shareholders approximately $2.2 million. On June 20, 2005, the Superior Court of the State of California in Orange County entered judgment stating that the amount the Bank paid to the dissenting shareholders represented full satisfaction of both the settlement agreement and all amounts owed by Bank of Orange County pursuant to Chapter 13 of the California Corporations Code.

8

The defendants have until August 19, 2005 to appeal the judgment. If the judgment is not appealed, then the bank will receive the remaining funds held by the exchange agent totaling approximately $1.6 million. If the judgment is appealed, Bank of Orange County intends to continue to vigorously defend against this action.

Financial Instruments with Off-Balance-Sheet Risk

PSB is 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. These financial instruments consist of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

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

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

	June 30, 2005		December 31, 2004
Commitments to extend credit	$	430,643	$	373,935
Standby letters of credit	$	5,946	$	5,706

Commitments to extend credit consist primarily of unfunded home equity lines of credit, single-family residential and commercial real estate construction loans, and commercial revolving lines of credit. Construction loans are established under standard underwriting guidelines and policies and are secured by deeds of trust, with disbursements made over the course of construction. Commercial revolving lines of credit have a high degree of industry diversification. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by PSB to guarantee the performance of a customer to a third party. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant as of June 30, 2005 or December 31, 2004. The Company recognizes these fees as revenue over the term of the commitment, or when the commitment is used. Standby letters of credit are generally issued for one year or less and secured by certificates of deposit or are issued as sub-features under existing revolving credit commitments.

NOTE 5—COMPREHENSIVE INCOME

Comprehensive income (loss) is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income (loss) 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 (loss). Total comprehensive income (loss) and the components of accumulated other comprehensive income (loss) for the six months ended June 30, 2005 and 2004 are presented net of taxes in the consolidated statement of changes in shareholders’ equity and comprehensive income. Total comprehensive income (loss) for the three months ended June 30, 2005 and 2004 totaled $7.9 million and $(578,000), respectively.

9

The components of other comprehensive income (loss) are as follows (dollars in thousands):

	Before Tax			Tax Benefit (Expense)			After Tax
For the Three Months Ended June 30, 2005
Other comprehensive income:
Unrealized holding gains	$	3,050		$	(1,258	)	$	1,792
Less: reclassification adjustment for net losses included in net income		(55	)		23			(32	)
Total other comprehensive income	$	3,105		$	(1,281	)	$	1,824
For the Three Months Ended June 30, 2004
Other comprehensive loss:
Unrealized holding losses	$	(5,320	)	$	2,181		$	(3,139	)
Less: reclassification adjustment for net losses included in net income		(3,542	)		1,452			(2,090	)
Total other comprehensive loss	$	(1,778	)	$	729		$	(1,049	)
For the Six Months Ended June 30, 2005
Other comprehensive loss:
Unrealized holding losses	$	(886	)	$	362		$	(524	)
Less: reclassification adjustment for net losses included in net income		(55	)		23			(32	)
Total other comprehensive loss	$	(831	)	$	339		$	(492	)
For the Six Months Ended June 30, 2004
Other comprehensive loss:
Unrealized holding losses	$	(5,158	)	$	2,115		$	(3,043	)
Less: reclassification adjustment for net losses included in net income		(3,336	)		1,368			(1,968	)
Total other comprehensive loss	$	(1,822	)	$	747		$	(1,075	)

NOTE 6—RECENT ACCOUNTING DEVELOPMENTS

Stock-Based Payments

In December 2004, the FASB issued Statement Number 123 (revised 2004) (FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. In April 2005, the Securities and Exchange Commission adopted a rule that defers the compliance date of FAS 123 (R) from the first reporting period beginning after June 15, 2005 to the first fiscal year beginning after June 15, 2005, effectively January 1, 2006 for the Company. Management has not completed its evaluation of the effect that FAS 123 (R) will have, but believes that the effect will be consistent with its previous pro forma disclosures.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Discussions of certain matters contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which Placer Sierra Bancshares and its subsidiaries operates, projections of future performance, perceived opportunities in the market and statements regarding our mission and vision. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. For a discussion of some of the factors that might cause such a difference, see “Item 1. BUSINESS. Factors That May Affect Future Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2004 and other factors we discuss in our filings with the Securities and Exchange Commission. We do not undertake and specifically disclaim any obligation to update such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Overview

Who We Are

We are the bank holding company for Placer Sierra Bank, a California state-chartered commercial bank. Our bank conducts a portion of its banking business through the following divisions: Sacramento Commercial Bank, Bank of Lodi and Bank of Orange County. The bank has one active subsidiary, Central Square Company, Inc., which derives its income from a third-party provider of non-deposit investment products.

As of December 31, 2004 and June 30, 2005, we owned 100% of Placer Sierra Bank and also owned 100% of the common stock of Placer Statutory Trust II, Placer Statutory Trust III, Southland Statutory Trust I and First Financial Bancorp Trust I. The trusts were formed for the exclusive purpose of issuing and selling trust preferred securities.

As of June 30, 2004, we owned 100% of two banking subsidiaries, Placer Sierra Bank and Bank of Orange County, and 100% of the common stock of Placer Statutory Trust II and Southland Statutory Trust I. In July 2004, Bank of Orange County was merged into Placer Sierra Bank and is operated as a division of the bank, under the name Bank of Orange County.

How We Generate Revenues

Our bank derives its income primarily from interest on real estate-related loans, commercial loans and leases, consumer loans and interest on investment securities. To a lesser extent, we earn income from fees from the sale and referral of loans, fees received in connection with servicing loans and service charges on deposit accounts. We also earn income through a subsidiary, Central Square Company, Inc., from the sales of non-deposit investment products through a third-party provider. The bank’s major expenses are salaries and benefits, the interest it pays on deposits and borrowings and general operating expenses.

Information about Regulation

We conduct our business through the bank. The bank is subject to the laws of the state of California and federal regulations governing the financial services industry. We are registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Bank holding companies are subject to regulation and supervision by the Board of Governors of the Federal Reserve System.

Our Principal Products and Services and Locations of Operations

We provide banking and other financial services throughout our targeted Northern, Central and Southern California markets to consumers and to small- and medium-sized businesses, including the owners and employees of those businesses. We offer a broad range of banking products and services including many types of commercial and personal checking and savings accounts and other consumer banking products, including electronic banking products. We also originate a variety of loans including secured and unsecured commercial and consumer loans, commercial and residential real estate mortgage loans, SBA loans and construction loans, both commercial and residential.

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We have 31 Northern California branches that serve an eight-county area including Placer, Sacramento and El Dorado, commonly known as the greater Sacramento metropolitan region, and the adjacent counties of Amador, Calaveras, Nevada, Sierra and San Joaquin. We have nine Southern California branches that serve both Los Angeles and Orange counties. We have loan production offices in Fresno and San Jose and a mortgage center in Quincy.

How Economic Factors Impact Us

We are subject to competition from other financial institutions and our operating results, like those of other financial institutions operating in California, are significantly influenced by economic conditions in California, including the strength of the real estate market. In addition, both the fiscal and regulatory policies of the federal government and regulatory authorities that govern financial institutions and market interest rates impact the bank’s financial condition, results of operations and cash flows.

The earnings and growth of the bank are subject to the influence of certain economic conditions, including inflation, recession and unemployment. The earnings of the bank are affected not only by general economic conditions but also by the monetary and fiscal policies of the United States and federal agencies, particularly the Federal Reserve. The Federal Reserve can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States Government securities and by its control of the discount rates applicable to borrowings by banks from the Federal Reserve. The actions of the Federal Reserve in these areas influence the growth of bank loans and leases, investments and deposits and affect the interest rates charged on loans and leases and paid on deposits. The Federal Reserve’s policies have had a significant effect on the operating results of commercial banks and are expected to continue to do so in the future. The nature and timing of any future changes in monetary policies are not predictable.

Our Acquisitions

One of our strategic objectives is to geographically focus our activities in California’s faster growing metropolitan regions. Consistent with this objective, we acquired First Financial Bancorp in December of 2004 and Southland Capital Co. in May of 2004.

We acquired Southland Capital Co. and its subsidiary Bank of Orange County to participate in the high growth Southern California banking market. Bank of Orange County has always been a community-focused commercial bank with core relationship-based depositors and borrowers. In connection with the Southland Capital Co. acquisition, Southland merged into us, and Bank of Orange County became our subsidiary. We merged Bank of Orange County into the bank in July 2004 and operate it as a division of the bank, under the name Bank of Orange County. The Southland merger was a stock-for-stock transaction whereby the shareholders of Southland received 0.5752 of a share of our common stock for each outstanding share of Southland common stock. Immediately prior to the acquisition of Southland, our principal shareholder, California Community Financial Institution Fund Limited Partnership, owned 99.75% of Southland and 93.18% of us. The acquisition was principally accounted for as a combination of companies under common control similar to a pooling of interests. Thus, our historical consolidated financial statements presented herein include the financial results of Southland and its subsidiary, Bank of Orange County, as if the merger occurred on January 1, 2004. Our simultaneous acquisition of the 0.25% minority interest in Southland was accounted for using the purchase method of accounting. The excess of the purchase price over the estimated fair value of the 0.25% minority interest in the net assets acquired was approximately $92,000, which was recorded as goodwill.

We acquired First Financial Bancorp, parent company of Bank of Lodi, to begin our Northern California expansion southward through the high growth California central valley. The fair value of assets of First Financial Bancorp, totaling $345.7 million, were incorporated in our balance sheet on December 10, 2004, upon closing of the acquisition. The acquisition was accounted for under the purchase method of accounting. Bank of Lodi operated nine branches located in Sacramento, El Dorado, San Joaquin, Amador, and Calaveras Counties in Northern California. We operate seven of the acquired branches under the brand name Bank of Lodi, a division of the bank, we rebranded one acquired branch under our bank’s name and we closed one location, consolidating its operations into our Sacramento Commercial Bank location.

Our Opportunities, Challenges and Risks

Our strategy is to be the premier banking company for the long-term benefit of our shareholders, customers and employees. We believe we have opportunities for internal loan and deposit growth, because our primary operations are located in three of the best growth markets in Northern, Central and Southern California and we plan to position our company to take full advantage of these markets.

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Despite our position of being in three of the best growth markets in California, we face the risk of being particularly sensitive to changes in the California economy. In particular, real estate values could be affected by earthquakes, fires and other natural disasters in California. If the economy weakens, it could cause loan demand to decline and also affect our core deposit growth. Geographic distance between our operations may also hinder our consistency and efficiency.

We believe we have additional opportunities for growth by identifying potential acquisition candidates and acting on those opportunities. The ability to successfully identify potential acquisition candidates and marshal our resources to take advantage of those opportunities is another challenge for us. Even if we are able to marshal our resources to take advantage of acquisition opportunities, there can be no assurance that we will be able to effectively manage our growth or successfully integrate acquired institutions. Further, as we attempt to capitalize on our growth opportunities, another challenge will be to attract and retain talented people. Competition for qualified employees and personnel in the banking industry is high and there are a limited number of qualified persons with knowledge of and experience in the California banking community.

Critical Accounting Policies

Our accounting policies are integral to understanding the financial results reported. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and consistently applied from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. We have identified our policy for the allowance for loan and lease losses, our estimate of the fair value of financial instruments and our valuation of goodwill and other intangible assets as critical accounting policies. Please see the section entitled “Allowance for Loan and Lease Losses” for a discussion related to this policy. Our significant and critical accounting policies and practices are described in further detail in Note 2 to our Consolidated Financial Statements filed with our Annual Report on Form 10-K for the year ended December 31, 2004.

Results of Operations

Key Performance Indicators

The following sections contain tables and data setting forth certain statistical information about us for the three and six months ended June 30, 2005 and 2004. This discussion should be read in conjunction with our unaudited Consolidated Financial Statements and Notes thereto for the three and six months ended June 30, 2005 and 2004 included herein, and our audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 2004, filed with our Annual Report on Form 10-K.

As of June 30, 2005, we had total assets of $1.862 billion, total loans and leases held for investment, net of deferred fees and costs, of $1.326 billion, total deposits of $1.583 billion and shareholders’ equity of $199.6 million. For the three months ended June 30, 2005, total deposits increased $28.4 million (a 7.3% growth rate on an annualized basis), while total loans and leases held for investment, net of deferred fees and costs, increased $31.5 million (a 9.8% growth rate on an annualized basis). As of June 30, 2005, 14,927,789 shares of our common stock were outstanding, having a book value per share of $13.37.

For the three months ended June 30, 2005, we recorded net income of $6.1 million, or $0.40 per share, on a diluted basis and for the six months ended June 30, 2005, we recorded net income of $11.3 million, or $0.74 per share on a diluted basis. Our financial results for the three and six months ended June 30, 2005, as compared to the three and six months ended June 30, 2004, reflect strong earnings growth and expense management. Net income for the three and six months ended June 30, 2004 of $471,000 and $4.7 million, respectively, was negatively impacted by after tax merger expenses of $1.4 million associated with the acquisition by Placer Sierra Bancshares of Southland Capital Co. and its subsidiary Bank of Orange County. Net income for the three and six months ended June 30, 2004 was also negatively impacted by a $2.2 million after tax loss from restructuring Bank of Orange County’s investment portfolio in preparation for its merger with and into Placer Sierra Bank in contemplation of aligning their interest rate risk and liquidity profiles. Operating earnings (GAAP net income less the effect of the above transactions) for the three and six months ended June 30, 2004 would have been $4.1 million and $8.3 million, respectively. Our net interest margin was 5.19% and 5.20% for the three and six months ended June 30, 2005, respectively, compared to 4.96% and 5.09% for the three and six months ended June 30, 2004.

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The following table presents our key performance indicators on a GAAP basis for the three and six months ended June 30, 2005 and 2004 and the basis for calculating these indicators:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2005			2004			2005			2004
	(Dollars in thousands, except per share data)
Net interest income	$	20,507		$	14,888		$	40,391		$	30,318
Non-interest income		4,104			127			7,567			4,178
		24,611			15,015			47,958			34,496
Provision for the allowance for loan and lease losses		—			40			—			560
Non-interest expense		14,534			14,204			29,458			26,813
Provision for income taxes		3,976			300			7,229			2,472
Net income	$	6,101		$	471		$	11,271		$	4,651
Average assets	$	1,840,719		$	1,400,763		$	1,826,041		$	1,388,989
Average shareholders’ equity	$	195,303		$	170,576		$	193,581		$	167,773
Share Information:
Weighted average shares outstanding – basic		14,914,983			13,768,719			14,901,431			13,741,402
Weighted average shares outstanding – diluted		15,209,930			13,980,841			15,206,857			13,911,810
Profitability Measures:
GAAP earnings per share – basic	$	0.41		$	0.03		$	0.76		$	0.34
GAAP earnings per share – diluted	$	0.40		$	0.03		$	0.74		$	0.33
GAAP return on average assets		1.33	%		0.14	%		1.24	%		0.67	%
GAAP return on average shareholders’ equity		12.53	%		1.11	%		11.74	%		5.57	%
GAAP efficiency ratio		59.05	%		94.60	%		61.42	%		77.73	%

We believe that the presentation of our operating earnings excluding merger related costs and investment security restructuring loss is important to gaining an understanding of the financial performance of our core banking operations. Accordingly, the following table shows operating earnings, which is a non-GAAP basis presentation of our key performance indicators for the three and six months ended June 30, 2005 and 2004:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2005			2004			2005			2004
	(Dollars in thousands, except per share data)
Net income	$	6,101		$	471		$	11,271		$	4,651
Acquisition related:
Merger expenses, net of tax effect		—			1,441			—			1,441
Investment security restructuring loss, net of tax effect		—			2,210			—			2,210
Operating earnings	$	6,101		$	4,122		$	11,271		$	8,302
Operating earnings per share – basic	$	0.41		$	0.30		$	0.76		$	0.60
Operating earnings per share – diluted	$	0.40		$	0.29		$	0.74		$	0.60
Operating return on average assets		1.33	%		1.18	%		1.24	%		1.20	%
Operating return on average shareholders’ equity		12.53	%		9.72	%		11.74	%		9.95	%
Operating efficiency ratio		59.05	%		64.05	%		61.42	%		64.39	%

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Second Quarter Analysis. Net income for the three months ended June 30, 2005 was $6.1 million, or $0.40 per diluted share. Net income for the three months ended June 30, 2004 was $471,000, or $0.03 per diluted share. Return on average assets was 1.33%, compared to 0.14% for the same period of 2004. Return on average equity was 12.53%, compared to 1.11% for the same period of 2004.

Net income for the quarter ended June 30, 2004 was impacted by items related to the acquisition by Placer Sierra Bancshares of Southland Capital Co: $2.1 million ($1.4 million after tax) of merger related expenses and a $3.8 million ($2.2 million after tax) loss from the sale of $72.0 million of Bank of Orange County’s investment securities portfolio incurred to align our two banks’ interest rate risk and liquidity profiles. Excluding the impact of these items, operating earnings for the three months ended June 30, 2004 was $4.1 million, or $0.29 per diluted share.

Net interest income for the three months ended June 30, 2005 was $20.5 million, an increase of 37.7% over net interest income of $14.9 million in the same period of 2004. The increase in net interest income is primarily the result of the acquisition of First Financial Bancorp.

Total non-interest income for the three months ended June 30, 2005 was $4.1 million, compared to $127,000 for the same period of 2004. Excluding the investment portfolio restructuring loss of $3.8 million, non-interest income for the three months ended June 30, 2005, increased 4.1%, or $163,000, from the same quarter in the prior year.

The efficiency ratio is a measure of how effective we are at managing our non-interest expense dollars. A lower or declining ratio indicates improving efficiency. The efficiency ratio for the three months ended June 30, 2005 was 59.05%, compared to 94.60% for the same period of 2004. Excluding the merger related costs and investment portfolio restructuring loss, the operating efficiency ratio for the three months ended June 30, 2004 was 64.05%.

Six Month Analysis. Net income for the six months ended June 30, 2005 was $11.3 million, or $0.74 per diluted share. Net income for the six months ended June 30, 2004 was $4.7 million, or $0.33 per diluted share. Return on average assets was 1.24%, compared to 0.67% for the same period of 2004. Return on average equity was 11.74%, compared to 5.57% for the same period of 2004.

Net income for the six months ended June 30, 2004 was impacted by items related to the acquisition by Placer Sierra Bancshares of Southland Capital Co: $2.1 million ($1.4 million after tax) of merger related expenses and a $3.8 million ($2.2 million after tax) loss from the sale of $72.0 million of Bank of Orange County’s investment securities portfolio incurred to align our two banks’ interest rate risk and liquidity profiles. Excluding the impact of these items, operating earnings for the six months ended June 30, 2004 was $8.3 million, or $0.60 per diluted share.

Net interest income for the six months ended June 30, 2005 was $40.4 million, an increase of 33.2% over net interest income of $30.3 million in the same period of 2004. The increase is primarily the result of the acquisition of First Financial Bancorp.

Total non-interest income for the six months ended June 30, 2005 was $7.6 million, compared to $4.2 million for the same period of 2004. Excluding the investment portfolio restructuring loss of $3.8 million, non-interest income for the six months ended June 30, 2005, decreased 5.3%, or $425,000, from the same period of 2004.

The efficiency ratio is a measure of how effective we are at managing our non-interest expense dollars. A lower or declining ratio indicates improving efficiency. The efficiency ratio for the six months ended June 30, 2005 was 61.42%, compared to 77.73% for the same period of 2004. Excluding the merger related costs and investment portfolio restructuring loss, the operating efficiency ratio for the six months ended June 30, 2004 was 64.39%.

Net Interest Income

Net interest income is the difference between interest earned on assets and interest paid on liabilities. Net interest margin is net interest income expressed as a percentage of average interest earning assets. Our balance sheet is asset sensitive, and as a result, our net interest margin tends to expand in a rising interest rate environment and decline in a falling interest rate environment. The majority of our earning assets are tied to market rates, such as the prime rate, and therefore rates on our earning assets generally reprice along with a movement in market rates while interest bearing liabilities, mainly deposits, tend to reprice more slowly and usually incorporate only a portion of the movement in market rates.

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The following tables present, for the periods indicated, the distribution of average assets, liabilities and shareholders’ equity, as well as the net interest income from average interest earning assets and the resultant yields expressed in percentages. Non-accrual loans are included in the calculation of average loans and leases while non-accrued interest thereon is excluded from the computation of yields earned.

	For the Three Months Ended June 30, 2005						For the Three Months Ended June 30, 2004
	Average Balance		Interest Income or Expense		Average Yield or Cost		Average Balance		Interest Income or Expense		Average Yield or Cost
	(Dollars in thousands)
ASSETS
Interest earning assets:
Loans held for sale	$	—	$	—	0.00	%	$	20	$	—	0.00	%
Loans and leases held for investment (1) (2) (3)		1,301,172		21,718	6.69	%		987,622		14,930	6.08	%
Investment securities -
Taxable		219,040		2,404	4.40	%		139,152		1,674	4.84	%
Tax-exempt (1)		18,252		187	4.11	%		13,897		132	3.82	%
Federal funds sold		33,490		228	2.73	%		57,202		125	0.88	%
Interest bearing deposits with other banks		126		1	3.18	%		—		—	0.00	%
Other earning assets (4)		13,449		176	5.25	%		9,284		116	5.03	%
Total interest earning assets		1,585,529		24,714	6.25	%		1,207,177		16,977	5.66	%
Non-interest earning assets:
Cash and due from banks		71,476						67,669
Other assets		183,714						125,917
Total assets	$	1,840,719					$	1,400,763
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits -
Interest bearing demand	$	253,331		239	0.38	%	$	191,550		163	0.34	%
Money market		276,904		673	0.97	%		207,420		312	0.60	%
Savings		177,412		153	0.35	%		131,788		111	0.34	%
Time certificates of deposit		358,146		2,281	2.55	%		240,955		1,030	1.72	%
Total interest bearing deposits		1,065,793		3,346	1.26	%		771,713		1,616	0.84	%
Short-term borrowings		13,248		25	0.76	%		13,759		28	0.82	%
Long-term debt		53,611		836	6.25	%		38,146		445	4.69	%
Total interest bearing liabilities		1,132,652		4,207	1.49	%		823,618		2,089	1.02	%
Non-interest bearing liabilities:
Demand deposits		494,825						394,101
Other liabilities		17,939						12,468
Total liabilities		1,645,416						1,230,187
Shareholders’ equity		195,303						170,576
Total liabilities and shareholders’ equity	$	1,840,719					$	1,400,763
Net interest income			$	20,507					$	14,888
Net interest margin (5)					5.19	%					4.96	%

(1) Yields on loans and leases and tax exempt securities have not been adjusted to a tax-equivalent basis because the impact is not material.

(2) Average non-accrual loans and leases of $3.9 million and $1.8 million for the three months ended June 30, 2005 and 2004, respectively, are included in the yield computations.

(3) Interest income includes net deferred loan and lease fees and costs of $528,000 and $194,000 for the three months ended June 30, 2005 and 2004 respectively.

(4) Includes Federal Reserve Bank stock and Federal Home Loan Bank stock.

(5) Net interest margin is computed by dividing annualized net interest income by total average earning assets.

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	For the Six Months Ended June 30, 2005						For the Six Months Ended June 30, 2004
	Average Balance		Interest Income or Expense		Average Yield or Cost		Average Balance		Interest Income or Expense		Average Yield or Cost
	(Dollars in thousands)
ASSETS
Interest earning assets:
Loans held for sale	$	—	$	—	0.00	%	$	131	$	3	4.61	%
Loans and leases held for investment (1) (2) (3)		1,295,031		42,484	6.62	%		975,401		29,999	6.18	%
Investment securities -
Taxable		214,585		4,646	4.37	%		154,204		3,790	4.94	%
Tax-exempt (1)		18,409		350	3.83	%		14,065		264	3.77	%
Federal funds sold		26,715		354	2.67	%		45,782		198	0.87	%
Interest bearing deposits with other banks		126		2	3.20	%		—		—	0.00	%
Other earning assets (4)		11,948		307	5.18	%		8,287		212	5.14	%
Total interest earning assets		1,566,814		48,143	6.20	%		1,197,870		34,466	5.79	%
Non-interest earning assets:
Cash and due from banks		71,116						66,427
Other assets		188,111						124,692
Total assets	$	1,826,041					$	1,388,989
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits -
Interest bearing demand	$	254,914		456	0.36	%	$	191,237		326	0.34	%
Money market		273,858		1,272	0.94	%		205,166		614	0.60	%
Savings		179,229		308	0.35	%		131,334		225	0.34	%
Time certificates of deposit		344,988		4,061	2.37	%		234,791		1,974	1.69	%
Total interest bearing deposits		1,052,989		6,097	1.17	%		762,528		3,139	0.83	%
Short-term borrowings		14,462		59	0.82	%		24,419		117	0.96	%
Long-term debt		53,611		1,596	6.00	%		38,146		892	4.70	%
Total interest bearing liabilities		1,121,062		7,752	1.39	%		825,093		4,148	1.01	%
Non-interest bearing liabilities:
Demand deposits		490,136						382,946
Other liabilities		21,262						13,177
Total liabilities		1,632,460						1,221,216
Shareholders’ equity		193,581						167,773
Total liabilities and shareholders’ equity	$	1,826,041					$	1,388,989
Net interest income			$	40,391					$	30,318
Net interest margin (5)					5.20	%					5.09	%

(1) Yields on loans and leases and tax exempt securities have not been adjusted to a tax-equivalent basis because the impact is not material.

(2) Average non-accrual loans and leases of $3.3 million and $1.6 million for the six months ended June 30, 2005 and 2004, respectively, are included in the yield computations.

(3) Interest income includes net deferred loan and lease fees and costs of $860,000 and $400,000 for the six months ended June 30, 2005 and 2004 respectively.

(4) Includes Federal Reserve Bank stock and Federal Home Loan Bank stock.

(5) Net interest margin is computed by dividing annualized net interest income by total average earning assets.

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The following tables show the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates:

	Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
	Net Change			Rate			Volume			Mix
	(Dollars in thousands)
Interest income:
Loans held for sale	$	—		$	—		$	—		$	—
Loans and leases held for investment		6,788			1,509			4,740			539
Investment securities available-for-sale:
Taxable		730			(151	)		961			(80	)
Tax-exempt		55			10			41			4
Federal funds sold		103			263			(52	)		(108	)
Interest bearing deposits with other banks		1			—			—			1
Other earning assets		60			5			52			3
Total interest income		7,737			1,636			5,742			359
Interest expense:
Interest bearing demand		76			17			53			6
Money market		361			191			105			65
Savings		42			2			38			2
Time certificates of deposit		1,251			500			501			250
Short-term borrowings		(3	)		(2	)		(1	)		—
Long-term debt		391			148			180			63
Total interest expense		2,118			856			876			386
Net interest income	$	5,619		$	780		$	4,866		$	(27	)

	Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
	Net Change			Rate			Volume			Mix
	(Dollars in thousands)
Interest income:
Loans held for sale	$	(3	)	$	(3	)	$	(3	)	$	3
Loans and leases held for investment		12,485			2,088			9,830			567
Investment securities available-for-sale:
Taxable		856			(442	)		1,484			(186	)
Tax-exempt		86			4			82			—
Federal funds sold		156			410			(82	)		(172	)
Interest bearing deposits with other banks		2			—			—			2
Other earning assets		95			2			94			(1	)
Total interest income		13,677			2,059			11,405			213
Interest expense:
Interest bearing demand		130			17			109			4
Money market		658			342			206			110
Savings		83			1			82			—
Time certificates of deposit		2,087			798			926			363
Short-term borrowings		(58	)		(17	)		(48	)		7
Long-term debt		704			247			362			95
Total interest expense		3,604			1,388			1,637			579
Net interest income	$	10,073		$	671		$	9,768		$	(366	)

18

Second Quarter Analysis. Net interest income increased 37.7%, or $5.6 million, to $20.5 million for the second quarter of 2005, from $14.9 million for the same period of 2004. Average earning assets increased 31.3%, or $378.4 million, to $1.586 billion for the second quarter of 2005, from $1.207 billion for the same period of 2004. Average loans and leases held for investment, net of deferred fees and costs, increased by 31.7%, or $313.6 million, to $1.301 billion for the second quarter of 2005, from $987.6 million for the same period of 2004. These increases are primarily attributable to the acquisition of First Financial Bancorp. Average core deposits (all deposit categories other than time certificates of deposit) increased 30.0%, or $277.6 million, to $1.202 billion for the second quarter of 2005, from $924.9 million for the same period of 2004. Excluding average core deposits of $195.5 million held in our First Financial Bancorp branches during the second quarter of 2005, average core deposits grew 8.9%, or $82.1 million from the same period of 2004.

The net interest margin for the second quarter of 2005 increased to 5.19% from 4.96% for the same period of 2004, primarily attributable to an increase in yields on total interest earning assets to 6.25% for the second quarter of 2005, from 5.66% for the same period of 2004, which was greater than the increase in the cost of total interest bearing liabilities to 1.49% for the second quarter of 2005, from 1.02% for the same period of 2004. Offsetting this increase in the spread on interest earning assets to interest bearing liabilities was a decline in the ratio of interest earning assets to interest bearing liabilities to 140.0% for the second quarter of 2005, from 146.6% for the second quarter of 2004.

Interest income increased 45.6%, or $7.7 million, to $24.7 million, for the second quarter of 2005, from $17.0 million, for the same period of 2004, primarily reflecting our acquisition of First Financial Bancorp. Average loans and leases, including loans held for sale, increased 31.7%, or $313.5 million, to $1.301 billion for the second quarter of 2005, from $987.6 million for the same period of 2004. Average loans and leases, including loans held for sale, yielded 6.69% for the second quarter of 2005, compared to 6.08% for the same period of 2004. The increase in the yields on average loans and leases primarily reflects the impact of loans that re-priced during a period of rising short-term interest rates. While the yield on average total loans and leases increased between comparable periods, the yield on investment securities decreased to 4.38% for the second quarter of 2005, from 4.75% for the same period of 2004. Between July 1, 2004 and June 30, 2005, the majority of the investment portfolio was either sold, matured or was called as a consequence of a rising interest rate environment. The decline in the yield of the investment portfolio between 2004 and 2005 reflects the shorter duration and correspondingly lower yields associated with preparing for a rising rate environment.

Interest expense on all interest bearing liabilities increased 101.4%, or $2.1 million, to $4.2 million for the second quarter of 2005, from $2.1 million in the same period of 2004. The increase is primarily attributable to our acquisition of First Financial Bancorp. Total average interest bearing liabilities increased 37.5%, or $309.0 million, to $1.133 billion for the second quarter of 2005, from $823.6 million for the same period of 2004. The cost of our interest bearing liabilities increased to 1.49% for the second quarter of 2005, from 1.02% for the same period of 2004. This increase was the result of the higher cost of time certificates of deposit and money market deposits, as well as higher rates paid on junior subordinated deferrable interest debentures. Junior subordinated deferrable interest debentures reprice quarterly and are tied to the 90-day LIBOR.

Interest expense on interest bearing deposits increased 107.1%, or $1.7 million, to $3.3 million for the second quarter of 2005, from $1.6 million for the same period of 2004. The increase is primarily attributable to our acquisition of First Financial Bancorp. For the second quarter of 2005, we also focused on attracting longer-duration time certificates of deposit, through new product offerings, which we believe should help mitigate net interest margin compression over the next 12 to 24 months. Another contributing factor to the increase in interest expense was the alignment of the Bank of Orange County and Placer Sierra Bank deposit rate schedules after the merger of the two banks on July 23, 2004, which resulted in an increase in the average rate paid on our Southern California money market deposits. A substantial percentage of our funding sources are non-interest bearing demand deposits, which represented approximately 31.7% of average total deposits for the second quarter of 2005, a decrease from 33.8% for the same period of 2004. The decrease in the percentage of non-interest bearing demand deposits to total deposits along with higher rates paid on both time certificates of deposit and money market deposits increased our overall cost of deposits to 0.86% for the second quarter of 2005, from 0.56% for the same period of 2004. As a percentage of average total deposits, time deposits increased to 22.9% for the second quarter of 2005, from 20.7% for the same period of 2004.

19

Six Month Analysis. Net interest income increased 33.2%, or $10.1 million, to $40.4 million for the six months ended June 30, 2005, from $30.3 million for the same period of 2004. Average earning assets increased 30.8%, or $368.9 million, to $1.567 billion for the six months ended June 30, 2005, from $1.198 billion for the same period of 2004. Average loans and leases held for investment, net of deferred fees and costs, increased by 32.8%, or $319.6 million, to $1.295 billion for the six months ended June 30, 2005, from $975.4 million for the same period of 2004. These increases are primarily attributable to the acquisition of First Financial Bancorp. Average core deposits (all deposit categories other than time certificates of deposit) increased 31.6%, or $287.5 million, to $1.198 billion for the six months ended June 30, 2005, from $910.7 million for the same period of 2004. Excluding average core deposits of $199.2 million held in our First Financial Bancorp branches during the six months ended June 30, 2005, average core deposits grew 9.7%, or $88.3 million, from the same period of 2004.

The net interest margin for the six months ended June 30, 2005 increased to 5.20%, from 5.09% for the same period of 2004, primarily attributable to an increase in yields on total interest earning assets to 6.20% for the six months ended June 30, 2005, from 5.79% for the same period of 2004, which was greater than the increase in the cost of total interest bearing liabilities to 1.39% for the six months ended June 30, 2005, from 1.01% for the same period of 2004. Offsetting this increase in the spread on interest earning assets to interest bearing liabilities was a decline in the ratio of interest earning assets to interest bearing liabilities to 139.8% for the six months ended June 30, 2005, from 145.2% for the same period of 2004.

Interest income increased 39.7%, or $13.7 million, to $48.1 million for the six months ended June 20, 2005, from $34.5 million for the same period of 2004, primarily reflecting our acquisition of First Financial Bancorp. Average loans and leases, including loans held for sale, increased 32.8%, or $319.5 million, to $1.295 billion for the six months ended June 30, 2005, from $975.5 million for the same period of 2004. Average loans and leases, including loans held for sale, yielded 6.62% for the six months ended June 30, 2005, compared to 6.18% for the same period of 2004. The increase in the yields on average loans and leases primarily reflects the impact of loans that re-priced during a period of rising short-term interest rates. While the yield on average total loans and leases increased between comparable periods, the yield on investment securities decreased to 4.32%, for the six months ended June 30, 2005, from 4.84% for the same period of 2004. Between July 1, 2004 and June 30, 2005, the majority of the investment portfolio was either sold, matured or was called as a consequence of a rising interest rate environment. The decline in the yield of the investment portfolio between 2004 and 2005 reflects the shorter duration and correspondingly lower yields associated with preparing for a rising rate environment.

Interest expense on all interest bearing liabilities increased 86.9%, or $3.6 million, to $7.8 million for the six months ended June 30, 2005, from $4.1 million in the same period of 2004. The increase is primarily attributable to our acquisition of First Financial Bancorp. Total average interest bearing liabilities increased 35.9%, or $296.0 million, to $1.121 billion for the six months ended June 30, 2005, from $825.1 million for the same period of 2004. The cost of our interest bearing liabilities increased to 1.39% for the six months ended June 30, 2005, from 1.01% for the same period of 2004. This increase was the result of the higher cost of time certificates of deposit and money market deposits, as well as higher rates paid on junior subordinated deferrable interest debentures. Junior subordinated deferrable interest debentures reprice quarterly and are tied to the 90-day LIBOR.

Interest expense on interest bearing deposits increased 94.2%, or $3.0 million, to $6.1 million for the six months ended June 30, 2005, from $3.1 million for the same period of 2004. The increase is primarily attributable to our acquisition of First Financial Bancorp. For the six months ended June 30, 2005, we also focused on attracting longer-duration time certificates of deposit, through new product offerings, which we believe should help mitigate net interest margin compression over the next 12 to 24 months. Another contributing factor to the increase in interest expense was the alignment of the Bank of Orange County and Placer Sierra Bank deposit rate schedules after the merger of the two banks on July 23, 2004, which resulted in an increase in the average rate paid on our Southern California money market deposits. A substantial percentage of our funding sources are non-interest bearing demand deposits, which represented approximately 31.8% of average total deposits for the six months ended June 30, 2005, a decrease from 33.4% for the same period of 2004. The decrease in the percentage of non-interest bearing demand deposits to total deposits along with higher rates paid on both time certificates of deposit and money market deposits increased our overall cost of deposits to 0.80% for the six months ended June 30, 2005, from 0.55% for the same period of 2004. As a percentage of average total deposits, time deposits increased to 22.4% for the six months ended June 30, 2005, from 20.5% for the same period of 2004.

20

Provision for Loan and Lease Losses

The provision for loan and lease losses is a charge against earnings of the period. The provision is that amount required to maintain the allowance for loan and lease losses at a level which, in management’s judgment, is appropriate based on loan and lease losses inherent in the loan and lease portfolio.

Management determined there was no provision for loan and lease losses required for the six months ended June 30, 2005 given the quality of the loan portfolio combined with loan recoveries exceeding loan charge-offs by $275,000. In the six months ended June 30, 2005, we experienced loan and lease charge-offs of $1.1 million and recoveries of $1.3 million, compared to loan and lease charge-offs of $1.4 million and recoveries of $680,000 for the same period of 2004, when we recorded a provision for loan and lease losses of $560,000. Non-performing loans and leases as a percentage of total loans and leases held for investment were 0.24% at June 30, 2005, 0.22% at December 31, 2004 and 0.35% at June 30, 2004.

There were no other changes in loan and lease concentrations or terms during the periods indicated which significantly affected the provision or allowance for loan and lease losses.

Non-Interest Income

The following table summarizes non-interest income by category for the periods indicated:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2005			2004			2005			2004
	(Dollars in thousands)
Service charges and fees on deposit accounts	$	2,006		$	1,614		$	3,731		$	3,179
Referral and other loan-related fees		1,018			703			1,536			1,324
Loan servicing income		105			78			238			171
Gain on sale of loans, net		—			106			—			176
Revenues from sales of non-deposit investment products		175			154			366			372
Loss on sale of investment securities, net		(55	)		(3,542	)		(55	)		(3,336	)
Increase in cash surrender value of life insurance		430			308			844			627
Other		425			706			907			1,665
Total non-interest income	$	4,104		$	127		$	7,567		$	4,178

Second Quarter Analysis. Total non-interest income increased 3,131%, or $4.0 million, to $4.1 million for the second quarter of 2005, from $127,000 for the same period of 2004. During the second quarter of 2004, we recorded a $3.8 million ($2.2 million after tax) loss from restructuring Bank of Orange County’s investment securities portfolio in preparation for the merger of the banks and in contemplation of aligning their interest rate risk and liquidity profiles. Excluding this loss, non-interest income increased 4.1% for the second quarter of 2005, or $163,000, from the same quarter in the prior year.

Service charges and fees on deposit accounts increased 24.3%, or $392,000, to $2.0 million for the second quarter of 2005, from $1.6 million for the same period of 2004, primarily due to a revised deposit fee structure initiated in May 2005. Referral and other loan related fees increased 44.8%, or $315,000, to $1.0 million for the second quarter of 2005, from $703,000 for the same period of 2004, primarily due to an increase in commercial real estate loans referred to third parties. Referral fees are highly transactional in nature and subject to volatility from period to period based on the number of loans referred in a given period. There were no gains on the sale of loans for the second quarter of 2005 as compared to $106,000 for the same period of 2004, reflecting our decision to retain 1-4 family home loans for our portfolio as compared to selling them as in prior periods. Loan servicing income and the increase in cash surrender value of life insurance increased from the second quarter of 2004 due to the acquisition of First Financial Bancorp.

Other non-interest income decreased 39.8%, or $281,000, to $425,000 for the second quarter of 2005, from $706,000 for the same quarter in 2004, primarily due to a $253,000 recovery of an operational charge-off in the second quarter of 2004. Excluding this transaction, other non-interest income decreased 6.2%, or $28,000, from the same quarter in the prior year.

21

Six Month Analysis. Total non-interest income increased 81.1%, or $3.4 million, to $7.6 million for the six months ended June 30, 2005, from $4.2 million for the same period of 2004. During the second quarter of 2004, we recorded a $3.8 million ($2.2 million after tax) loss from restructuring Bank of Orange County’s investment securities portfolio in preparation for the merger of the banks and in contemplation of aligning their interest rate risk and liquidity profiles. Excluding this loss, non-interest income decreased 5.3% for the six months ended June 30, 2005, or $425,000, from the same period in the prior year.

Service charges and fees on deposit accounts increased 17.4%, or $552,000, to $3.7 million for the six months ended June 30, 2005, from $3.2 million for the same period of 2004, primarily due to a revised deposit fee structure initiated in May 2005. Referral and other loan related fees increased 16.0%, or $212,000, to $1.5 million for the six months ended June 30, 2005, from $1.3 million for the same period of 2004, primarily due to an increase in commercial real estate loans referred to third parties. Referral fees are highly transactional in nature and subject to volatility from period to period based on the number of loans referred in a given period. There were no gains on the sale of loans for the six months ended June 30, 2005 as compared to $176,000 for the same period of 2004, reflecting our decision to retain 1-4 family home loans for our portfolio, compared to selling them as in prior periods. Loan servicing income and the increase in cash surrender value of life insurance increased from the six months ended June 30, 2004 due to the acquisition of First Financial Bancorp.

Other non-interest income decreased 45.5%, or $758,000, to $907,000 for the six months ended June 30, 2005, from $1.7 million for the same period in 2004, largely due to a gain of $397,000 from life insurance proceeds and a $528,000 recovery of an operational charge-off in the first six months of 2004. Other non-interest income in the six months ended June 30, 2005 includes a $63,000 reimbursement of prior year legal expenses. Excluding these transactions, other non-interest income increased 14.1%, or $104,000, from the same period in the prior year.

Non-Interest Expense

The following table summarizes non-interest expense by category for the periods indicated:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2005		2004		2005		2004
	(Dollars in thousands)
Salaries and employee benefits	$	7,400	$	6,236	$	14,998	$	12,664
Occupancy and equipment		1,941		1,735		3,991		3,422
Data and item processing		1,266		1,199		2,647		2,394
Amortization of core deposit intangible and favorable lease rights		649		487		1,298		974
Communication and postage		529		407		1,162		845
Professional fees		667		644		1,253		1,191
Administration		478		450		1,008		936
Loan-related costs		272		170		509		167
Advertising and business development		309		224		595		490
Stationery and supplies		276		204		630		422
Merger expenses		—		2,142		—		2,142
Other		747		306		1,367		1,166
Total non-interest expense	$	14,534	$	14,204	$	29,458	$	26,813

Second Quarter Analysis. Non-interest expense increased 2.3%, or $330,000, to $14.5 million for the second quarter of 2005, from $14.2 million for the same period of 2004. During the second quarter of 2004, we recorded merger related expenses of $2.1 million ($1.4 million after tax) associated with the acquisition by Placer Sierra Bancshares of Southland Capital Co. and its subsidiary Bank of Orange County. Excluding merger related costs, non-interest expense increased 20.5% for the second quarter of 2005, or $2.5 million. This $2.5 million increase is primarily attributable to the expanded operation resulting from our acquisition of First Financial Bancorp in the fourth quarter of 2004.

22

Salaries and employee benefits expense increased 18.7%, or $1.2 million, to $7.4 million for the second quarter of 2005, from $6.2 million for the same period of 2004 due to an increase in personnel associated with our increased size, complexity, revenue growth goals and an increase in the cost of employee benefits and insurance. Occupancy and equipment, data and item processing, amortization of core deposit intangible, communication and postage and stationery and supplies all increased from the second quarter of 2004 due to the integration of additional branches acquired from First Financial Bancorp.

Other non-interest expense increased 144.1%, or $441,000, to $747,000 for the second quarter of 2005, from $306,000 for the same period of 2004. In the first quarter of 2004, a $450,000 contingency reserve was recorded in connection with estimated environmental remediation costs associated with an unimproved piece of property. In the second quarter of 2004, $205,000 of this reserve was reversed due to revised remediation cost estimates. Pursuant to legal investigation of potentially responsible former gas station operators, PSB made a demand upon ConocoPhillips and ChevronTexaco to investigate and remediate the site. In the fourth quarter of 2004, based upon our pending settlement agreement that ConocoPhillips and ChevronTexaco would assume responsibility for site remediation, which we later signed in the first quarter of 2005, the remaining $245,000 was reversed. Excluding this transaction, other non-interest expense increased 46.2%, or $236,000, as a result of an increase in third party payments made on behalf of business customers, as well as an increase in staff travel and recruiting efforts, all of which are the result of our First Financial Bancorp acquisition and our increased size.

Six Month Analysis. Non-interest expense increased 9.9%, or $2.6 million, to $29.5 million for the six months ended June 30, 2005, from $26.8 million for the same period of 2004. During the first six months of 2004, we recorded merger related expenses of $2.1 million ($1.4 million after tax) associated with the acquisition by Placer Sierra Bancshares of Southland Capital Co. and its subsidiary Bank of Orange County. Excluding merger related costs, non-interest expense increased 19.4% for the six months ended June 30, 2005, or $4.8 million. This $4.8 million increase is primarily attributable to the expanded operation resulting from our acquisition of First Financial Bancorp in the fourth quarter of 2004.

Salaries and employee benefits expense increased 18.4%, or $2.3 million, to $15.0 million for the six months ended June 30, 2005, from $12.7 million for the same period of 2004 due to an increase in personnel associated with our increased size, complexity, revenue growth goals and an increase in the cost of employee benefits and insurance. Occupancy and equipment, data and item processing, amortization of core deposit intangible, communication and postage and stationery and supplies all increased from the six months ended June 30, 2004 due to the integration of the additional branches acquired from First Financial Bancorp.

Other non-interest expense increased 17.2%, or $201,000, to $1.4 million for the six months ended June 30, 2005, from $1.2 million for the same period of 2004. The 2004 expense includes a $245,000 contingency reserve established in connection with estimated environmental remediation costs associated with an unimproved piece of property. Pursuant to legal investigation of potentially responsible former gas station operators, PSB made a demand upon ConocoPhillips and ChevronTexaco to investigate and remediate the site. In the fourth quarter of 2004, based upon our pending settlement agreement that ConocoPhillips and ChevronTexaco would assume responsibility for site remediation, which we later signed in the first quarter of 2005, this amount was reversed. Excluding this transaction, other non-interest expense increased 48.4%, or $446,000 as a result of an increase in third party payments made on behalf of business customers, as well as an increase in staff travel and recruiting efforts, all of which are the result of our First Financial Bancorp acquisition and our increased size.

Provision for Income Taxes

Our statutory income tax rate is approximately 42.1%, representing a blend of the statutory Federal income tax rate of 35.0% and the California income tax rate of 10.8%. Due to the nontaxable nature of income from municipal securities, enterprise zone interest and bank owned life insurance, our actual effective income tax rate was 39.5% and 38.9% for the three months ended June 30, 2005 and 2004, respectively, and 39.1% and 34.7% for the six months ended June 30, 2005 and 2004 respectively.

Financial Condition

Our total assets at June 30, 2005 were $1.862 billion, compared to $1.779 billion at December 31, 2004. Our earning assets at June 30, 2005 totaled $1.617 billion, compared to $1.555 billion at December 31, 2004. Total deposits at June 30, 2005 and December 31, 2004 were $1.583 billion and $1.500 billion, respectively.

23

Loans and Leases Held for Investment

The following table presents the balance of each major category of loans and leases held for investment at the end of each of the periods indicated:

	As of June 30, 2005					As of December 31, 2004
	Amount			% of Loans		Amount			% of Loans
	(Dollars in thousands)
Loans and leases held for investment
Real estate – mortgage	$	949,131		71.5	%	$	892,136		68.8	%
Real estate – construction		183,886		13.9			184,317		14.2
Commercial		155,938		11.7			167,035		12.9
Agricultural		7,652		0.6			17,423		1.3
Consumer		10,950		0.8			11,110		0.9
Leases receivable and other		20,477		1.5			24,575		1.9
Total gross loans and leases held for investment		1,328,034		100.0	%		1,296,596		100.0	%
Less: allowance for loan and lease losses		(16,475	)				(16,200	)
Deferred loan and lease fees, net		(2,172	)				(2,332	)
Total net loans and leases held for investment	$	1,309,387				$	1,278,064

Gross loans and leases held for investment increased 2.4%, or $31.4 million, to $1.328 billion at June 30, 2005, from $1.297 billion at December 31, 2004. We experienced increases of $57.0 million in mortgages off-set by decreases of $431,000, $11.1 million, $9.8 million, and $160,000 in construction, commercial, agricultural, and consumer loans, respectively. Leases receivable and other loans also decreased by $4.1 million. While we recorded $369.3 million of new loan commitments during the six months ended June 30, 2005, we also experienced an unusually large amount of loan prepayments of $174.0 million.

Our loan portfolio has a high concentration of loans that are collateralized by real estate. Management believes that this concentration does not create undue risk as our credit policies and underwriting standards have been adopted with the recognition that we rely heavily on real estate related loans.

Real Estate – Mortgage

The category of real estate – mortgage at June 30, 2005 totaled $949.1 million and was comprised 66.8% of loans collateralized by commercial real estate and 33.2% of loans collateralized by 1-4 family real estate.

Commercial real estate mortgages generally require debt service coverage ratios of 120% or greater and loan to value ratios of not more than 75%.

We have stress tested all commercial real estate mortgage loans with outstanding balances of $750,000 or greater. Prior to stress testing, the tested loans had a current weighted average debt service coverage ratio of 211%. After shocking the portfolio for a 200 basis point rate increase, the debt service coverage ratio of the tested loans decreased to 196%. Alternatively, an assumed 15% decrease in net operating income (falling rents and/or rising vacancies) caused the debt service coverage ratio of the tested loans to decrease to 181%. Combining both events caused the ratio to decrease to 168%. Based on this stress testing, management has concluded that the bank’s commercial real estate mortgage loan portfolio could withstand such shocks reasonably well.

The portfolio of loans collateralized by 1-4 family residential real estate is comprised 53% of loans supported by first liens and 47% of loans supported by junior liens (primarily home equity lines of credit “HELOC”). First lien loans are generally underwritten in accordance with FNMA/FHLMC guidelines for loans eligible for sale in the secondary mortgage market. HELOCs are generally limited to a combined loan to value of 80%, although borrowers with the highest credit scores can borrow up to 85%. Individual HELOCs are limited by our loan policy to no more than $500,000.

24

Real Estate – Construction

The category of real estate - construction at June 30, 2005 totaled $183.9 million, approximately 40% of which was comprised of loans to owner-occupants constructing their own residences. These loans are generally 30 year loans which include an interest only period during construction. Underwriting of these loans is generally done in accordance with FNMA/FHLMC guidelines for loans eligible for sale in the secondary mortgage market. The remaining 60% of real estate – construction was comprised of residential and commercial loans for a variety of property types to owner occupants, investors and developers. Our underwriting guidelines for these construction loans set minimum borrower equity and pre-leasing requirements for commercial projects and generally limit the number of units ahead of sales for residential projects.

Non-Performing Assets

Generally, loans and leases are placed on non-accrual status when they become 90 days or more past due or at such earlier time as management determines timely recognition of interest to be in doubt. Accrual of interest is discontinued on a loan or lease when management believes, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that collection of interest is doubtful. The following table summarizes the loans and leases for which the accrual of interest has been discontinued and loans and leases more than 90 days past due and still accruing interest, including those loans and leases that have been restructured, and other real estate owned, which we refer to as OREO:

	As of June 30, 2005			As of December 31, 2004
	(Dollars in thousands)
Non-accrual loans and leases, not restructured	$	3,125		$	2,899
Accruing loans and leases past due 90 days or more		—			—
Restructured loans and leases		—			—
Total non-performing loans (NPLs)		3,125			2,899
OREO		—			657
Total non-performing assets (NPAs)	$	3,125		$	3,556
Selected ratios:
NPLs to total loans and leases held for investment		0.24	%		0.22	%
NPAs to total assets		0.17	%		0.20	%

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is maintained at a level which, in management’s judgment, is based on loan and lease losses inherent in the loan and lease portfolio. The amount of the allowance is based on management’s evaluation of the collectibility of the loan and lease portfolio, historical loss experience, and other significant factors affecting loan and lease portfolio collectibility. These other significant factors include the level and trends in delinquent, non-accrual and adversely classified loans and leases, trends in volume and terms of loans and leases, levels and trends in credit concentrations, effects of changes in underwriting standards, policies, procedures and practices, national and local economic trends and conditions, changes in capabilities and experience of lending management and staff and other external factors including industry conditions, competition and regulatory requirements.

Our methodology for evaluating the adequacy of the allowance for loan and lease losses has two basic elements: first the identification of impaired loans and leases and the measurement of impairment for each individual loan identified; and second, a method for estimating an allowance for all other loans and leases.

A loan or lease is considered impaired when it is probable that we will be unable to collect all contractual principal and interest payments due in accordance with terms of the loan or lease agreement. Losses on individually identified impaired loans or leases that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan or lease. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs.

In estimating the general allowance for loan and lease losses, we group the balance of the loan and lease portfolio into segments that have common characteristics, such as loan or lease type, collateral type or risk rating. Loans typically segregated by risk rating are those that have been assigned risk ratings using regulatory definitions of “special mention,” “substandard,” and “doubtful.” Loans graded “loss” are generally charged off immediately.

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For each general allowance portfolio segment, we apply loss factors to calculate the required allowance. These loss factors are based upon three years of historical loss rates, adjusted for qualitative factors affecting loan and lease portfolio collectibility as described above. Qualitative adjustment factors are expressed in basis points and adjust historical loss factors downward up to 40 basis points and upward up to 75 basis points.

The specific allowance for impaired loans and leases and the general allowance are combined to determine the required allowance for loan and lease losses. The amount calculated is compared to the actual allowance for loan and lease losses at each quarter end and any shortfall is covered by an additional provision for loan and lease losses. As a practical matter, our allowance methodology may show that an unallocated allowance exists at quarter end. Any such amounts exceeding a minor percentage of the allowance will be removed from the allowance for loan and lease losses by a reduction of the allowance for loan and lease losses as of quarter end.

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The following table presents the changes in our allowance for loan and lease losses for the periods indicated:

	As of or For the Three Months Ended June 30,						As of or For the Six Months Ended June 30,
	2005			2004			2005			2004
	(Dollars in thousands)
Balance at beginning of period	$	16,738		$	12,805		$	16,200		$	13,343
Charge-offs:
Real estate – mortgage		—			—			40			—
Real estate – construction		—			—			—			—
Commercial		207			—			296			1,392
Agricultural		—			—			—
Consumer		21			17			76			27
Leases receivable and other		638			—			638			—
Total		866			17			1,050			1,419
Recoveries:
Real estate – mortgage		11			53			85			91
Real estate – construction		—			—			—			—
Commercial		570			7			1,205			297
Agricultural		—			—			—			—
Consumer		9			72			12			76
Leases receivable and other		13			204			23			216
Total		603			336			1,325			680
Net loan and lease (charge-offs) recoveries		(263	)		319			275			(739	)
Provision for the allowance for loan and lease losses		—			40			—			560
Balance at end of period	$	16,475		$	13,164		$	16,475		$	13,164
Loans and leases held for investment, net of deferred fees and costs	$	1,325,862		$	1,004,002		$	1,325,862		$	1,004,002
Average loans and leases held for investment	$	1,301,172		$	987,622		$	1,295,031		$	975,401
Non-performing loans and leases	$	3,125		$	3,551		$	3,125		$	3,551
Selected ratios:
Net (charge-offs) recoveries to average loans and leases held for investment		(0.08	)%		0.13	%		0.04	%		(0.15	)%
Provision for the allowance for loan and lease losses to average loans and leases held for investment		0.00	%		0.02	%		0.00	%		0.12	%
Allowance for loan and lease losses to loans and leases held for investment at end of period		1.24	%		1.31	%		1.24	%		1.31	%
Allowance for loan and lease losses to non-performing loans and leases at end of period		527.20	%		370.71	%		527.20	%		370.71	%

Investment Securities Available for Sale

The carrying value of our investment securities available for sale decreased 6.5%, or $16.3 million, to $233.6 million, from $249.9 million at December 31, 2004. The decline resulted from the maturity of $27.0 million of U.S. Treasury securities. Our portfolio of investment securities consists primarily of U.S. Government agency securities and obligations of states and political subdivisions.

We manage our investment portfolio principally to provide liquidity and balance our overall interest rate risk. To a lesser extent, we manage our investment portfolio to provide earnings with a view to minimizing credit risk.

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The carrying value of our portfolio of investment securities at June 30, 2005 and December 31, 2004 was as follows:

	Fair Value
	As of June 30, 2005		As of December 31, 2004
	(Dollars in thousands)
U.S. Treasury securities	$	1,995	$	26,986
U.S. Government agencies		208,019		198,732
Obligations of states and political subdivisions		18,338		18,783
Other securities		5,296		5,415
Total available-for-sale investment securities	$	233,648	$	249,916

Deposits

The following table presents the balance of each major category of deposits at the dates indicated:

	As of June 30, 2005				As of December 31, 2004
	Amount		% of Deposits		Amount		% of Deposits
	(Dollars in thousands)
Non-interest bearing deposits	$	501,492	31.7	%	$	485,193	32.3	%
Interest bearing deposits:
Interest bearing demand		248,653	15.7			256,650	17.1
Money market		285,149	18.0			262,957	17.5
Savings		181,797	11.5			179,578	12.0
Time, under $100		196,076	12.4			176,026	11.8
Time, $100 or more		170,012	10.7			139,655	9.3
Total interest bearing deposits		1,081,687	68.3			1,014,866	67.7
Total deposits	$	1,583,179	100.0	%	$	1,500,059	100.0	%

Non-interest bearing deposits increased 3.4%, or $16.3 million, to $501.5 million and total deposits increased 5.5%, or $83.1 million, to $1.583 billion as of June 30, 2005 from December 31, 2004. The growth primarily occurred in time certificates of deposits, which reflects our focus on attracting longer-duration deposits. The increase in time deposits is attributable to a successful deposit initiative in the first six months of 2005 that offered customers both a favorable interest rate and interest rate flexibility. Depending on the maturity period selected, the new “Advantage Certificate of Deposit” gives customers the option to re-set their interest rate one or two times prior to maturity.

Short-Term Borrowings

We enter into sales of securities under agreements to repurchase which are short term in nature. Short-term borrowings decreased 17.3%, or $2.8 million, to $13.4 million as of June 30, 2005, from $16.3 million at December 31, 2004.

Junior Subordinated Deferrable Interest Debentures

We own the common stock of four business trusts that have issued an aggregate of $52.0 million in trust preferred securities fully and unconditionally guaranteed by us. The entire proceeds of each respective issuance of trust preferred securities were invested by the separate business trusts into junior subordinated deferrable interest debentures issued by us, with identical maturity, repricing and payment terms as the respective issuance of trust preferred securities. The aggregate amount of junior subordinated debentures issued by us is $53.6 million, with the maturity dates for the respective debentures ranging from 2031 through 2034. We may redeem the respective junior subordinated deferrable interest debentures earlier than the maturity date, with certain of the debentures being redeemable beginning in 2006 and others being redeemable beginning in 2007 and 2009. For more information about the trust preferred securities and the debentures see Note 11 to our Notes to Consolidated Financial Statements filed with our Annual Report on Form 10-K for the year ended December 31, 2004.

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Capital Resources

Our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with projected increases in assets and the level of risk. Shareholders’ equity at June 30, 2005 increased to $199.6 million from $191.6 million at December 31, 2004. The holding company declared dividends of $0.12 per common share per quarter or $0.24 per common share during the six months ended June 30, 2005.

Current risk-based regulatory capital standards generally require banks and bank holding companies to maintain a ratio of “core” or “Tier 1” capital (consisting principally of common equity and, for bank holding companies, a specified percentage of trust preferred securities) to risk-weighted assets of at least 4%, a ratio of Tier 1 capital to adjusted average assets (leverage ratio) of at least 4% and a ratio of total capital (which includes Tier 1 capital plus certain forms of subordinated debt, a portion of the allowance for loan and lease losses and preferred stock) to risk-weighted assets of at least 8%. Risk-weighted assets are calculated by multiplying the balance in each category of assets by a risk factor, which ranges from zero for cash assets and certain government obligations to 100% for some types of loans, and adding the products together.

The regulatory capital guidelines as well as the actual capital ratios for Placer Sierra Bank and us as of June 30, 2005 are as follows:

Leverage Ratio
Placer Sierra Bancshares and Subsidiaries	8.3	%
Minimum regulatory requirement	4.0	%
Placer Sierra Bank	7.7	%
Minimum requirement for “Well-Capitalized” institution	5.0	%
Minimum regulatory requirement	4.0	%
Tier 1 Risk-Based Capital Ratio
Placer Sierra Bancshares and Subsidiaries	9.8	%
Minimum regulatory requirement	4.0	%
Placer Sierra Bank	9.2	%
Minimum requirement for “Well-Capitalized” institution	6.0	%
Minimum regulatory requirement	4.0	%
Total Risk-Based Capital Ratio
Placer Sierra Bancshares and Subsidiaries	11.0	%
Minimum regulatory requirement	8.0	%
Placer Sierra Bank	10.4	%
Minimum requirement for “Well-Capitalized” institution	10.0	%
Minimum regulatory requirement	8.0	%

As of June 30, 2005, we exceeded each of the minimum capital requirements and the bank exceeded each of the capital requirements to be deemed “well-capitalized.” We own the common stock of four trusts that have issued $52.0 million of trust preferred securities. These securities are currently included in our Tier 1 capital for purposes of determining our Tier 1 and Total Risk-Based capital ratios. Effective June 30, 2009, we will be required to use a more restrictive formula to determine the amount of trust preferred securities that may be included in regulatory Tier 1 capital. At that time, we will be allowed to include in Tier 1 capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which generally is defined as shareholders’ equity, less goodwill and any related deferred income tax liability. The regulations currently in effect only limit the amount of trust preferred securities that may be included in Tier 1 capital to 25% of the sum of core capital elements without a deduction for goodwill. We have determined that our Tier 1 capital ratios would remain above the regulatory minimum had the modification of the capital regulations been in effect at June 30, 2005. We expect that our Tier 1 capital ratios will be at or above the existing well-capitalized levels on June 30, 2009, the first date on which the modified capital regulations must be applied. For more information about the proposed regulations see our Annual Report on Form 10-K for the year ended December 31, 2004 “Item 1. BUSINESS. Supervision and Regulation.”

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Contractual Obligations

Our significant contractual obligations and significant commitments at December 31, 2004 are included in our Annual Report on Form 10-K for the year ended December 31, 2004. Since December 31, 2004, our commitments to extend credit have increased from $373.9 million to $430.6 million and our standby letters of credit have increased from $5.7 million to $5.9 million. For more information see Note 4 to our Notes to Unaudited Consolidated Financial Statements in this Quarterly Report for the period ended June 30, 2005.

Liquidity

Management believes that the level of liquid assets is sufficient to meet our current and presently anticipated funding needs on a consolidated basis.

Placer Sierra Bancshares

On a stand-alone basis, we rely on dividends from the bank as our main source of liquidity. There are statutory and regulatory provisions that limit the ability of the bank to pay dividends to the holding company. Under such restrictions, the amount available for payment of dividends to the holding company totaled $10.9 million at June 30, 2005. However, such amount is further restricted due to the fact that the bank must keep a certain amount of capital in order to be “well capitalized.” Accordingly, the amount available for payment of dividends to us by the bank for the bank to remain “well capitalized” immediately thereafter totaled $5.7 million at June 30, 2005. We do not believe these restrictions will adversely impact the holding company’s ability to meet its ongoing cash obligations.

Placer Sierra Bank

The bank relies on deposits as the principal source of funds and, therefore, must be in a position to service depositors’ needs as they arise. Management attempts to maintain a loan-to-deposit ratio (total loans held for sale plus total loans and leases held for investment to total deposits) below 90% and a liquidity ratio (liquid assets, including cash and due from banks, Federal funds sold, investment securities not pledged as collateral less funds purchased from the Federal Home Loan Bank of San Francisco expressed as a percentage of total deposits) above 15%. The loan-to-deposit ratio was 83.53% at June 30, 2005 and 86.10% at December 31, 2004. The liquidity ratio was 17.92% as of June 30, 2005 and 15.63% at December 31, 2004.

Our deposits tend to be cyclical, with slower growth at the beginning of each year and increasing growth over the balance of the year. In addition, while occasional fluctuations in the balances of a few large depositors may cause temporary increases and decreases in liquidity, we have not experienced difficulty in dealing with such fluctuations from existing liquidity sources.

Based upon our existing business plan, management believes that the level of liquid assets is sufficient to meet the bank’s current and presently anticipated funding needs. Liquid assets of the bank represented approximately 15.26% of total assets at June 30, 2005 and 13.14% at December 31, 2004. If the level of liquid assets (our primary liquidity) does not meet our liquidity needs, other available sources of liquid assets (our secondary liquidity), including the purchase of Federal funds, sales of securities under agreements to repurchase, sales of loans, discount window borrowings from the Federal Reserve Bank and $106.1 million under a line of credit with the Federal Home Loan Bank of San Francisco at June 30, 2005, could be employed to meet those current and presently anticipated funding needs.

Our liquidity may be impacted negatively, however, by several other factors, including expenses associated with unforeseen or pending litigation.

Qualitative and Quantitative Disclosure About Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. To that end, management actively monitors and manages our interest rate risk exposure. We do not have any market risk sensitive instruments entered into for trading purposes. We manage our interest rate sensitivity by matching the re-pricing opportunities on our earning assets to those on our funding liabilities. Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits and managing the deployment of our securities are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.

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Interest rate risk is addressed by our Asset Liability Management Committee, or the ALCO, which is comprised of certain members of our senior management and a board member. The ALCO monitors interest rate risk by analyzing the potential impact on the net portfolio of equity value and net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages our balance sheet in part to maintain the potential impact on net portfolio of equity value and net interest income within acceptable ranges despite changes in interest rates.

Our exposure to interest rate risk is reviewed on at least a quarterly basis by the ALCO and our board of directors. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net portfolio of equity value and net interest income in the event of hypothetical changes in interest rates. If potential changes to net portfolio of equity value and net interest income resulting from hypothetical interest rate changes are not within board-approved limits, the board may direct management to adjust the asset and liability mix to bring interest rate risk within board-approved limits.

Market risk sensitive instruments are generally defined as derivatives and other financial instruments. At June 30, 2005 and December 31, 2004, we had not used any derivatives to alter our interest rate risk profile. Our financial instruments include loans receivable, Federal funds sold, Federal Reserve Bank and Federal Home Loan Bank stock, investment securities, bank-owned life insurance, deposits, short term borrowings and junior subordinated deferrable interest debentures. At June 30, 2005, our interest-sensitive assets totaled approximately $1.617 billion while interest-sensitive liabilities totaled approximately $1.149 billion. At December 31, 2004, we had approximately $1.555 billion in interest-sensitive assets and approximately $1.085 billion in interest-sensitive liabilities.

The yield on interest-sensitive assets and the cost of interest-sensitive liabilities for the six months ended June 30, 2005 was 6.20% and 1.39%, respectively, compared to 5.79% and 1.01%, respectively, for the six months ended June 30, 2004. The increase in the yield on interest-sensitive assets is the result of the rising interest rate environment with yields on loans and leases held for investment and federal funds sold increasing. The increase in the cost of our interest sensitive liabilities is the result of higher rates paid on money market deposits and time certificates of deposit, as well as higher interest paid on junior subordinated deferrable interest debentures. We believe the focus on longer-duration time deposits will help mitigate the risk of net interest margin compression over the next 12 to 24 months.

Our interest sensitive assets and interest sensitive liabilities had estimated fair values of $1.634 billion and $1.084 billion, respectively, at June 30, 2005. At December 31, 2004, those amounts were $1.563 billion and $1.023 billion, respectively.

We evaluated the results of our net interest income simulation and market value of equity model prepared as of June 30, 2005 for interest rate risk management purposes. Overall, the model results indicate that our interest rate risk sensitivity is within limits set by the Board of Directors and our balance sheet is slightly asset sensitive. An asset sensitive balance sheet suggests that in a rising interest rate environment, our net interest margin would increase and during a falling interest rate environment, our net interest margin would decrease.

Net Interest Income Simulation

In order to measure interest rate risk, we use a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index. Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses national indexes to estimate these prepayments and reinvest their proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.

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This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes no growth in the balance sheet and that its structure will remain similar to the structure at year end. It does not account for all factors that impact this analysis, including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change. Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.

As of June 30, 2005, the following table presents forecasted net interest income and net interest margin using a base market rate and the estimated change to the base scenario given an immediate and sustained upward and downward movement in interest rates of 100 basis points and 200 basis points:

Interest Rate Scenario	Adjusted Net Interest Income		Percentage Change from Base		Net Interest Margin Percent		Net Interest Margin Change (in basis points)
	(Dollars in thousands)
Up 200 basis points	$	87,716	8.24	%	5.42	%	41
Up 100 basis points	$	84,568	4.35	%	5.23	%	22
BASE CASE	$	81,039	0.00	%	5.01	%	—
Down 100 basis points	$	75,791	(6.48	)%	4.69	%	(32	)
Down 200 basis points	$	70,342	(13.20	)%	4.25	%	(66	)

Our simulation results as of June 30, 2005 indicate our interest rate risk position was asset sensitive as the simulated impact of an immediate upward movement in interest rates of 200 basis points would result in an 8.24% increase in net interest income over the subsequent 12 month period while an immediate downward movement in interest rates of 200 basis points would result in a 13.20% decrease in net interest income over the next 12 months. The simulation results indicate that a 200 basis point upward shift in interest rates would result in a 41 basis point increase in our net interest margin, assuming all other variables remained unchanged. Conversely, a 200 basis point decline in interest rates would cause a 66 basis point decrease in our net interest margin.

Gap Analysis

As part of the interest rate management process, we use a gap analysis. A gap analysis provides information about the volume and re-pricing characteristics and relationship between the amounts of interest-sensitive assets and interest-sensitive liabilities at a particular point in time. An effective interest rate strategy attempts to match the volume of interest-sensitive assets and interest-sensitive liabilities re-pricing over different time intervals. The main focus of this interest rate management tool is the gap sensitivity identified as the one year cumulative gap.

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	As of June 30, 2005 Amounts Maturing or Re-pricing in
	3 Months or Less			Over 3 Months to 12 Months			Over 1 Year to 5 Years			Over 5 Years			Non-Sensitive			Total
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	—		$	—		$	—		$	—		$	59,729		$	59,729
Federal funds sold		43,623			—			—			—			—			43,623
Investment securities		21,643			265			121,369			104,723			—			248,000
Loans and leases, net of deferred fees and costs		550,989			78,654			224,414			471,805			—			1,325,862
Other assets		—			—			—			—			184,506			184,506
Total assets	$	616,255		$	78,919		$	345,783		$	576,528		$	244,235		$	1,861,720
LIABILITIES AND SHAREHOLDERS’ EQUITY
Non-interest bearing deposits	$	—		$	—		$	—		$	—		$	501,492		$	501,492
Savings, money market, NOW accounts		715,599			—			—			—			—			715,599
Time deposits		158,926			153,179			53,983			—			—			366,088
Short term debt		13,448			—			—			—			—			13,448
Long term debt		53,611			—			—			—			—			53,611
Other liabilities		—			—			—			—			11,858			11,858
Shareholders’ equity		—			—			—			—			199,624			199,624
Total liabilities and shareholders’ equity	$	941,584		$	153,179		$	53,983		$	—		$	712,974		$	1,861,720
Period gap	$	(325,329	)	$	(74,260	)	$	291,800		$	576,528		$	(468,739	)
Cumulative interest rate- sensitive assets	$	616,255		$	695,174		$	1,040,957		$	1,617,485
Cumulative interest rate- sensitive liabilities	$	941,584		$	1,094,763		$	1,148,746		$	1,148,746
Cumulative gap	$	(325,329	)	$	(399,589	)	$	(107,789	)	$	468,739
Cumulative gap as a percent of:
Total assets		(17.5	)%		(21.5	)%		(5.8	)%		25.2	%
Interest earning assets		(20.1	)%		(24.7	)%		(6.7	)%		29.0	%

The preceding table indicates that as of June 30, 2005, we had a negative one year cumulative gap of $399.6 million, or 21.5% of total assets. This one year gap means more liabilities than assets would re-price if there were a change in interest rates over the next year. This gap position suggests that if interest rates were to increase, our net interest margin would most likely decrease. However, because in total there are more rate sensitive assets than liabilities and deposit liabilities tend to re-price more slowly and because asset and liability rates do not adjust on a one-to-one relationship, more sophisticated modeling indicates that our net interest margin would increase if interest rates were to rise.

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

Please see the section above titled “Quantitative and Qualitative Disclosure About Market Risk” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” which provides an update to our quantitative and qualitative disclosure about market risk. This analysis should be read in conjunction with text under the caption “Quantitative and Qualitative Disclosure About Market Risk” filed with our Annual Report on Form 10-K for the year ended December 31, 2004. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 of this report regarding such forward-looking information.

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ITEM 4. Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, as of the quarter ended June 30, 2005, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

During the quarter ended June 30, 2005, there have been no changes in our internal controls over financial reporting that has materially affected, or are reasonably likely to materially affect, these controls.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions to which we are currently a party cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, any resulting liability is not likely to have a material adverse effect on our consolidated financial position, results of operations or cash flows. This statement represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s opinion based on a variety of factors, including the uncertainties involved in the proof of legal and factual matters in legal proceedings.

Bank of Orange County v. Azar, filed on November 18, 2003, is currently pending in the Superior court of the State of California in Orange County. On June 23, 2005, we received a notice of entry of judgment and satisfaction of judgment with respect to this matter. The litigation relates to a number of Cerritos Valley Bank shareholders who exercised their statutory right pursuant to Chapter 13 of the California Corporations Code to dissent from the 2002 merger of Cerritos Valley Bank with and into Bank of Orange County. Bank of Orange County is currently a division of Placer Sierra Bank. Rather than accept the merger consideration of $9.79 per share of common stock paid to Cerritos Valley Bank shareholders who did not dissent from the merger, the dissenting shareholders claimed that the fair market value of their shares of common stock was $25.76 per share. Prior to consummation of the merger, Bank of Orange County deposited the sum of approximately $3.8 million with the exchange agent for the merger, representing $9.79 per share multiplied by the number of shares held by dissenting shareholders.

In January 2004, Bank of Orange County and the dissenting shareholders entered into a settlement agreement, which provided that the fair market value of the shares would be determined by an appraisal process. Under the terms of the agreement, each party’s appraiser valued the shares. After conducting the appraisal, each appraiser reached a different dollar amount. Because the difference between the two amounts exceeded a specified range, the settlement agreement provided that a third appraiser be selected by the two other appraisers, to determine the fair market value of the Cerritos Valley Bank common stock. The third appraiser determined that the fair market value of the shares held by the dissenting shareholders was $5.95. Based on the $5.95 valuation, the bank paid the dissenting shareholders approximately $2.2 million. On June 20, 2005, the Superior Court of the State of California in Orange County entered judgment stating that the amount the Bank paid to the dissenting shareholders represented full satisfaction of both the settlement agreement and all amounts owed by Bank of Orange County pursuant to Chapter 13 of the California Corporations Code.

The defendants have until August 19, 2005 to appeal the judgment. If the judgment is not appealed, then the bank will receive the remaining funds held by the exchange agent totaling approximately $1.6 million. If the judgment is appealed, Bank of Orange County intends to continue to vigorously defend against this action.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

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ITEM 3. Defaults Upon Senior Securities

None.

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

(a) We held our annual meeting of shareholders on May 31, 2005.

(b) The following directors were elected at the annual meeting to serve for a one-year term:

Ronald W. Bachli

Christi Black

Robert J. Kushner

Larry D. Mitchell

Dwayne A. Shackelford

William J. Slaton

Robert H. Smiley

Sandra R. Smoley

(c) At the annual meeting, the shareholders (1) approved the election of our directors; and (2) approved the ratification of the appointment of Perry-Smith LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2005. The results of the voting were as follows:

Matter	Votes For	Votes Against	Withheld	Abstentions	Broker Non-Votes
Election of Directors
Ronald W. Bachli	14,086,178	—	8,806	—	—
Christi Black	14,094,084	—	900	—	—
Robert J. Kushner	14,094,084	—	900	—	—
Larry D. Mitchell	13,985,767	—	109,217	—	—
Dwayne A. Shackelford	14,094,084	—	900	—	—
William J. Slaton	14,094,084	—	900	—	—
Robert H. Smiley	14,094,084	—	900	—	—
Sandra R. Smoley	14,094,084	—	900	—	—
Independent Public Accountants	14,078,859	15,800	—	325	—

(d) Not applicable.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

(a) Exhibits.

Exhibit Number	Description
31.1	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

36

SIGNATURES

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

	PLACER SIERRA BANCSHARES
Date: August 11, 2005	/s/ David E. Hooston
	David E. Hooston Chief Financial Officer

37

EX-31.1

Exhibit 31.1

Rule 13a-14(a)/15d-14(a) Certification

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Ronald W. Bachli, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2005 of Placer Sierra Bancshares;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involve management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2005

PLACER SIERRA BANCSHARES

/s/ Ronald W. Bachli

Ronald W. Bachli

Chief Executive Officer

EX-31.2

Exhibit 31.2

Rule 13a-14(a)/15d-14(a) Certification

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, David E. Hooston, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2005 of Placer Sierra Bancshares;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involve management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2005

PLACER SIERRA BANCSHARES

/s/ David E. Hooston

David E. Hooston

Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification

Pursuant to the requirement set forth in Section 906 of the Sarbanes-Oxley Act of 2002, Ronald W. Bachli hereby certifies as follows:

1. He is the duly appointed Chief Executive Officer of Placer Sierra Bancshares, a California corporation (the “Company”).

2. Based on his knowledge, the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, and to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of section 13(a) or section 15(d), of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned has set his hand hereto as of this 11th day of August 2005.

PLACER SIERRA BANCSHARES

/s/ Ronald W. Bachli

Ronald W. Bachli

Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification

Pursuant to the requirement set forth in Section 906 of the Sarbanes-Oxley Act of 2002, David E. Hooston hereby certifies as follows:

1. He is the duly appointed Chief Financial Officer of Placer Sierra Bancshares, a California corporation (the “Company”).

2. Based on his knowledge, the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, and to which this Certification is attached as Exhibit 32.2 (the “Periodic Report”), fully complies with the requirements of section 13(a) or section 15(d), of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned has set his hand hereto as of this 11^th day of August 2005.

PLACER SIERRA BANCSHARES

/s/ David E. Hooston

David E. Hooston

Chief Financial Officer