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 September 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

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

As of October 25, 2005 there were 14,993,473 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

			Page
PART I— FINANCIAL INFORMATION			1
	ITEM 1.	Unaudited Condensed Consolidated Financial Statements	1
		Unaudited Condensed Consolidated Balance Sheet	1
		Unaudited Condensed Consolidated Statement of Income	2
		Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income	3
		Unaudited Condensed Consolidated Statement of Cash Flows	4
		Notes to Unaudited Condensed 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	33
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	34
	ITEM 4.	Submission of Matters to a Vote of Security Holders	35
	ITEM 5.	Other Information	35
	ITEM 6.	Exhibits	35
SIGNATURES			36

ii

PART I—FINANCIAL INFORMATION

ITEM 1. Unaudited Condensed Consolidated Financial Statements

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

	September 30, 2005			December 31, 2004
ASSETS
Cash and due from banks	$	57,973		$	39,255
Federal funds sold		18,342			361
Cash and cash equivalents		76,315			39,616
Interest bearing deposits with other banks		125			125
Investment securities available-for-sale, at fair value		229,719			249,916
Federal Reserve Bank and Federal Home Loan Bank stock		14,297			10,430
Loans and leases held for investment, net of allowance for loan and lease losses of $16,236 at September 30, 2005 and $16,200 at December 31, 2004		1,335,615			1,278,064
Premises and equipment, net		27,557			27,645
Cash surrender value of life insurance		43,910			42,390
Other real estate		—			657
Goodwill		101,092			101,329
Other intangible assets		12,225			14,172
Other assets		18,509			14,641
Total assets	$	1,859,364		$	1,778,985
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	496,787		$	485,193
Interest bearing		1,078,960			1,014,866
Total deposits		1,575,747			1,500,059
Short-term borrowings		10,674			16,265
Accrued interest payable and other liabilities		15,183			17,409
Junior subordinated deferrable interest debentures		53,611			53,611
Total liabilities		1,655,215			1,587,344
Commitments and contingencies
Shareholders’ equity:
Preferred stock, 25,000,000 shares authorized; none issued or outstanding at September 30, 2005 or December 31, 2004		—			—
Common stock, no par value, 100,000,000 shares authorized, 14,992,754 and 14,877,056 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively		159,728			157,834
Retained earnings		45,867			33,323
Accumulated other comprehensive (loss) income, net of taxes		(1,446	)		484
Total shareholders’ equity		204,149			191,641
Total liabilities and shareholders’ equity	$	1,859,364		$	1,778,985

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

1

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share data)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005			2004
Interest income:
Interest and fees on loans and leases held for investment	$	22,864		$	15,780	$	65,348		$	45,779
Interest on loans held for sale		—			6		—			9
Interest on deposits with other banks		—			1		2			1
Interest and dividends on investment securities:
Taxable		2,540			1,496		7,493			5,498
Tax-exempt		185			130		535			394
Interest on federal funds sold		264			388		618			586
Total interest income		25,853			17,801		73,996			52,267
Interest expense:
Interest on deposits		3,696			1,930		9,793			5,069
Interest on short-term borrowings		21			25		81			142
Interest on junior subordinated deferrable interest debentures		898			490		2,494			1,382
Total interest expense		4,615			2,445		12,368			6,593
Net interest income		21,238			15,356		61,628			45,674
Provision for the allowance for loan and lease losses		—			—		—			560
Net interest income after provision for the allowance for loan and lease losses		21,238			15,356		61,628			45,114
Non-interest income:
Service charges and fees on deposit accounts		2,070			1,531		5,801			4,710
Referral and other loan-related fees		1,298			808		2,834			2,132
Loan servicing income		102			71		340			242
Gain on sale of loans, net		—			3		—			179
Revenues from sales of non-deposit investment products		204			125		570			497
(Loss) gain on sale of investment securities available-for- sale, net		(1	)		1		(56	)		(3,335	)
Increase in cash surrender value of life insurance		396			291		1,240			918
Other		402			334		1,309			1,999
Total non-interest income		4,471			3,164		12,038			7,342
Non-interest expense:
Salaries and employee benefits		7,471			6,125		22,469			18,789
Occupancy and equipment		2,039			1,747		6,030			5,169
Merger		—			177		—			2,319
Other		5,147			4,199		15,616			12,784
Total non-interest expense		14,657			12,248		44,115			39,061
Income before provision for income taxes		11,052			6,272		29,551			13,395
Provision for income taxes		4,406			2,385		11,634			4,857
Net income	$	6,646		$	3,887	$	17,917		$	8,538
Earnings per share:
Basic	$	0.44		$	0.27	$	1.20		$	0.61
Diluted	$	0.44		$	0.27	$	1.18		$	0.60

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

2

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN

SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands)

	Nine Months Ended September 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							17,917						17,917
Net change in unrealized gain on investment securites available- for-sale, net of tax										(1,930	)		(1,930	)
Total comprehensive income													15,987
Stock options exercised, including tax benefit	115,698			1,894									1,894
Dividend declared ($0.36 per share)							(5,373	)					(5,373	)
Balance, September 30, 2005	14,992,754		$	159,728		$	45,867		$	(1,446	)	$	204,149
	Nine Months Ended September 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							8,538						8,538
Net change in unrealized gain on investment securities available- for-sale, net of tax										(371	)		(371	)
Total comprehensive income													8,167
Stock options exercised, including tax benefit	417,201			4,685									4,685
Initial public offering, net of issuance costs	568,194			7,262									7,262
Stock issued in connection with acquistion of minority interest				92									92
Repurchase of shares of dissenting minority shareholder	(1,746	)		(32	)								(32	)
Stock-based compensation				38									38
Balance, September 30, 2004	14,667,142		$	154,822		$	29,587		$	697		$	185,106

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

3

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

	Nine Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	17,917		$	8,538
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		(120	)		52
Amortization of other intangible assets		1,947			1,461
Increase in deferred loan fees, net		235			1,537
Depreciation and amortization		2,362			2,226
Dividends received on FHLB and FRB stock		(357	)		(92	)
Stock-based compensation		—			38
Loss on sale of investment securities available-for-sale, net		56			3,335
Gain on sale of loans held for sale, net		—			(179	)
Fundings of loans held for sale		—			(4,607	)
Proceeds from sale of loans held for sale		—			4,853
Loss on disposal of premises and equipment		8			17
Gain from life insurance proceeds		—			(397	)
Loss on sale of other real estate		22			—
Write down of other real estate		—			148
Deferred income taxes		(804	)		(594	)
Increase in cash surrender value of life insurance		(1,240	)		(918	)
Net (increase) decrease in accrued interest receivable and other assets		(817	)		1,670
Net decrease in accrued interest payable and other liabilities		(1,279	)		(1,842	)
Net cash provided by operating activities		17,930			15,806
Cash flows from investing activities:
Purchases of investment securities available-for-sale		(33,938	)		(122,852	)
Proceeds from the sale of investment securities available-for-sale		21,473			145,805
Proceeds from calls and maturities of investment securities available-for-sale		29,265			120,195
Proceeds from principal repayments of investment securities available-for-sale		187			121
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		(59,321	)		(101,682	)
Proceeds from recoveries of charged-off loans		1,578			803
Purchases of premises and equipment		(2,314	)		(980	)
Proceeds from sale of premises and equipment		32			10
Proceeds from sale of other real estate		635			—
Investment in limited partnership		(683	)		—
Net cash (used in) provided by investing activities		(47,104	)		39,907
Cash flows from financing activities:
Net increase in demand, interest bearing and savings deposits		25,714			68,092
Net increase in time deposits		49,974			43,702
Net decrease in short-term borrowings		(5,591	)		(27,973	)
Dividends paid		(6,118	)		—
Exercise of stock options		1,894			4,685
Initial public offering proceeds, net		—			7,262
Repurchase of shares of dissenting minority shareholder		—			(32	)
Net cash provided by financing activities		65,873			95,736
Net increase in cash and cash equivalents		36,699			151,449
Cash and cash equivalents, beginning of period		39,616			88,505
Cash and cash equivalents, end of period	$	76,315		$	239,954

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

4

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 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 condensed 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 nine months ended September 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 condensed consolidated balance sheet.

The accompanying unaudited condensed 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 condensed 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 September 30,				For the Nine Months Ended September 30,
	2005		2004		2005		2004
Basic
Net income	$	6,646	$	3,887	$	17,917	$	8,538
Weighted average shares outstanding		14,962,765		14,213,762		14,922,100		13,900,004
Earnings per share - basic	$	0.44	$	0.27	$	1.20	$	0.61
Diluted
Net income	$	6,646	$	3,887	$	17,917	$	8,538
Weighted average shares outstanding		15,262,052		14,544,549		15,235,484		14,143,456
Earnings per share - diluted	$	0.44	$	0.27	$	1.18	$	0.60

For the three and nine months ended September 30, 2005, 75,000 and 135,000, respectively, and for the three and nine months ended September 30, 2004, 59,000 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.

6

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):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
Net income, as reported	$	6,646		$	3,887		$	17,917		$	8,538
Add: Stock-based compensation expense included in reported net income, net of related tax effects		—			—			—			38
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects		(133	)		(10	)		(346	)		(50	)
Pro forma net income	$	6,513		$	3,877		$	17,571		$	8,526
Basic earnings per share – as reported	$	0.44		$	0.27		$	1.20		$	0.61
Diluted earnings per share – as reported	$	0.44		$	0.27		$	1.18		$	0.60
Basic earnings per share – pro forma	$	0.44		$	0.27		$	1.18		$	0.61
Diluted earnings per share – pro forma	$	0.43		$	0.27		$	1.15		$	0.60

The fair value of the options granted during the three and nine months ended September 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 September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
Dividend yield		1.50	%		1.50	%		1.50	%		1.50	%
Expected volatility		25.00	%		25.00	%		25.00	%		25.00	%
Risk-free interest rate		4.15	%		3.47	%		3.89	%		3.47	%
Expected option life		6.25 years			5.00 years			5.06 years			5.00 years
Weighted average fair value of options granted during the period	$	8.06		$	4.19		$	6.41		$	4.04

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

	For the Nine Months Ended September 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	226,500		$	25.54	64,000		$	19.41
Options exercised	(49,271	)	$	9.65	(198,494	)	$	9.00
Options canceled	(23,243	)	$	16.28	(25,834	)	$	9.00
Options outstanding, end of period	745,017		$	16.46	642,943		$	10.04
Options exercisable, end of period	332,107		$	9.66	416,712		$	9.00

7

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

	For the Nine Months Ended September 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	(47,506	)	$	7.82	(216,645	)	$	7.82
Options canceled	(6,552	)	$	7.82	(74,319	)	$	7.82
Options outstanding, end of period	254,918		$	7.82	403,410		$	7.82
Options exercisable, end of period	228,844		$	7.82	326,972		$	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 nine months ended September 30, 2005, 18,921 options related to these grants were exercised and none canceled. During the nine months ended September 30, 2004, 6,327 options were exercised and 4,971 were canceled. At September 30, 2005, no options were outstanding or exercisable related to these grants. At September 30, 2004, a total of 18,921 options were outstanding and exercisable related to these grants.

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. 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.

The Company received notice of appeal from the judgment and satisfaction of judgment filed and entered by the Superior Court of the State of California for the County of Orange in a litigation matter, Bank of Orange County v. Azar. et al. The litigation matter involves Bank of Orange County, a division of PSB. Bank of Orange County v. Azar, et al, was originally filed on November 18, 2003. On June 23, 2005, Bank of Orange County 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. 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.

8

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 notice of appeal from the judgment and satisfaction of judgment was filed on August 12, 2005 by dissenting shareholders that hold a majority of the Cerritos Valley Bank common stock shares involved in the litigation. Shareholders holding the remaining Cerritos Valley Bank common stock shares involved in the litigation are not participating in the appeal. Bank of Orange County intends to continue to vigorously defend 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):

	September 30, 2005		December 31, 2004
Commitments to extend credit	$	452,485	$	373,935
Standby letters of credit	$	11,167	$	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. Home equity lines of credit are secured by deeds of trust, are limited by our loan policy to no more than $500,000 and are generally limited to a combined loan to value of 80%, although borrowers with the highest credit scores can borrow up to 85%. 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 September 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 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 and the components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2005 and 2004 are presented net of taxes in the unaudited condensed consolidated statement of changes in shareholders’ equity and comprehensive income. Total comprehensive income for the three months ended September 30, 2005 and 2004 totaled $5.2 million and $4.6 million, 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 September 30, 2005
Other comprehensive loss:
Unrealized holding losses	$	(2,444	)	$	1,005		$	(1,439	)
Less: reclassification adjustment for net losses included in net income		(1	)		—			(1	)
Total other comprehensive loss	$	(2,443	)	$	1,005		$	(1,438	)
For the Three Months Ended September 30, 2004
Other comprehensive income:
Unrealized holding gains	$	1,216		$	(511	)	$	705
Less: reclassification adjustment for net gains included in net income		1			—			1
Total other comprehensive income	$	1,215		$	(511	)	$	704
For the Nine Months Ended September 30, 2005
Other comprehensive loss:
Unrealized holding losses	$	(3,330	)	$	1,368		$	(1,962	)
Less: reclassification adjustment for net losses included in net income		(56	)		24			(32	)
Total other comprehensive loss	$	(3,274	)	$	1,344		$	(1,930	)
For the Nine Months Ended September 30, 2004
Other comprehensive loss:
Unrealized holding losses	$	(3,975	)	$	1,671		$	(2,304	)
Less: reclassification adjustment for net losses included in net income		(3,335	)		1,402			(1,933	)
Total other comprehensive loss	$	(640	)	$	269		$	(371	)

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. FAS 123 (R) allows for either a modified prospective recognition of compensation expense or a modified retrospective recognition. The Company currently intends to apply the modified prospective recognition method and implement the provisions of FAS 123 (R) beginning in the first quarter of 2006. Management has completed its evaluation of the effect that FAS 123 (R) and believes that the effect of its implementation will be consistent with the pro forma disclosures, see Note 3.

10

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 September 30, 2005, we owned 100% of Placer Sierra Bank and 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 September 30, 2004, we owned 100% of Placer Sierra Bank and 100% of the common stock of Placer Statutory Trust II and Southland Statutory Trust I.

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., which sells 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.

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 other locations in California including loan production offices in Fresno and San Jose and a mortgage center in Quincy.

11

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 and state government and regulatory authorities that govern financial institutions and market interest rates impact our financial condition, results of operations and cash flows.

Our earnings and growth are subject to the influence of certain economic conditions, including inflation, recession and unemployment. Our earnings 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 assets of First Financial Bancorp, with a fair value 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. In addition, 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 strongest growth markets in Northern, Central and Southern California and we plan to position our company to take full advantage of these markets.

12

Despite our position of being in three of the strongest 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, our 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 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 nine months ended September 30, 2005 and 2004. This discussion should be read in conjunction with our unaudited Consolidated Financial Statements and Notes thereto for the three and nine months ended September 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 September 30, 2005, we had total assets of $1.859 billion, total loans and leases held for investment, net of deferred fees and costs, of $1.352 billion, total deposits of $1.576 billion and shareholders’ equity of $204.1 million. For the three months ended September 30, 2005 average earning assets were $1.619 billion, average loans and leases held for investment, net of deferred fees and costs, were $1.341 billion, and average deposits were $1.580 billion. As of September 30, 2005, 14,992,754 shares of our common stock were outstanding, having a book value per share of $13.62.

For the three months ended September 30, 2005, we recorded net income of $6.6 million, or $0.44 per share, on a diluted basis and for the nine months ended September 30, 2005, we recorded net income of $17.9 million, or $1.18 per share on a diluted basis. Our financial results for the three and nine months ended September 30, 2005, as compared to the three and nine months ended September 30, 2004, reflect the successful integration of our acquisitions in 2004 of both Southland Capital Co. and First Financial Bancorp.

13

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
	(Dollars in thousands, except per share data)
Net interest income	$	21,238		$	15,356		$	61,628		$	45,674
Non-interest income		4,471			3,164			12,038			7,342
		25,709			18,520			73,666			53,016
Provision for the allowance for loan and lease losses		—			—			—			560
Non-interest expense		14,657			12,248			44,115			39,061
Provision for income taxes		4,406			2,385			11,634			4,857
Net income	$	6,646		$	3,887		$	17,917		$	8,538
Average assets	$	1,862,842		$	1,473,663		$	1,838,461		$	1,418,867
Average shareholders’ equity	$	200,746		$	176,681		$	196,008		$	171,481
Share Information:
Weighted average shares outstanding – basic		14,962,765			14,213,762			14,922,100			13,900,004
Weighted average shares outstanding – diluted		15,262,052			14,544,549			15,235,484			14,143,456
Profitability Measures:
GAAP earnings per share – basic	$	0.44		$	0.27		$	1.20		$	0.61
GAAP earnings per share – diluted	$	0.44		$	0.27		$	1.18		$	0.60
GAAP return on average assets		1.42	%		1.05	%		1.30	%		0.80	%
GAAP return on average shareholders’ equity		13.13	%		8.75	%		12.22	%		6.65	%
GAAP efficiency ratio		57.01	%		66.13	%		59.89	%		73.68	%

We believe that the presentation of our operating earnings excluding merger related costs and the 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 nine months ended September 30, 2005 and 2004:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
	(Dollars in thousands, except per share data)
Net income	$	6,646		$	3,887		$	17,917		$	8,538
Acquisition related:
Merger expenses, net of tax effect		—			109			—			1,550
Investment security restructuring loss, net of tax effect		—			—			—			2,210
Operating earnings	$	6,646		$	3,996		$	17,917		$	12,298
Profitability Measures:
Operating earnings per share – basic	$	0.44		$	0.28		$	1.20		$	0.88
Operating earnings per share – diluted	$	0.44		$	0.27		$	1.18		$	0.87
Operating return on average assets		1.42	%		1.08	%		1.30	%		1.16	%
Operating return on average shareholders’ equity		13.13	%		9.58	%		12.22	%		9.00	%
Operating efficiency ratio		57.01	%		65.18	%		59.89	%		64.65	%

14

Third Quarter Analysis. Net income for the three months ended September 30, 2005 was $6.6 million, or $0.44 per diluted share. Net income for the three months ended September 30, 2004 was $3.9 million, or $0.27 per diluted share. Return on average assets was 1.42%, compared to 1.05% for the same period of 2004. Return on average equity was 13.13%, compared to 8.75% for the same period of 2004.

Net income for the quarter ended September 30, 2004 was impacted by merger expenses of $177,000 ($109,000 after tax) related to the merger with Bank of Orange County, by the Company’s liquidity strategy put in place to facilitate the acquisition of First Financial Bancorp, and by the liquidity created by selling Bank of Orange County’s long-term investment securities portfolio.

Net interest income for the three months ended September 30, 2005 was $21.2 million, an increase of 38.3% over net interest income of $15.4 million in the same period of 2004. The increase in net interest income is primarily the result of the acquisition of First Financial Bancorp, the investment of excess liquidity created by the acquisition of Southland Capital Co. into higher yielding items, such as loans and investment securities, and the beneficial impact of a rising interest rate environment on our asset sensitive balance sheet.

Total non-interest income for the three months ended September 30, 2005 was $4.5 million, compared to $3.2 million for the same period of 2004. The increase in non-interest income is the result of: 1) the acquisition of First Financial Bancorp, 2) an increase in service charges and fees on deposit accounts, principally attributable to a revised fee structure and 3) an increase in referral and other loan-related fees, principally attributable to an increase in commercial real estate loans referred to third parties.

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 September 30, 2005 was 57.01%, compared to 66.13% for the same period of 2004. Excluding merger related costs associated with the acquisition of Southland Capital Co., the operating efficiency ratio for the three months ended September 30, 2004 was 65.18%.

Nine Month Analysis. Net income for the nine months ended September 30, 2005 was $17.9 million, or $1.18 per diluted share. Net income for the nine months ended September 30, 2004 was $8.5 million, or $0.60 per diluted share. Return on average assets was 1.30%, compared to 0.80% for the same period of 2004. Return on average equity was 12.22%, compared to 6.65% for the same period of 2004.

Net income for the nine months ended September 30, 2004 was impacted by the following items related to the acquisition of Southland Capital Co: $2.3 million ($1.6 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 nine months ended September 30, 2004 was $12.3 million, or $0.87 per diluted share.

Net interest income for the nine months ended September 30, 2005 was $61.6 million, an increase of 34.9% over net interest income of $45.7 million in the same period of 2004. The increase is primarily the result of the acquisition of First Financial Bancorp, the investment of excess liquidity created by the acquisition of Southland Capital Co. into higher yielding items, such as loans and investment securities, and the beneficial impact of a rising interest rate environment on our asset sensitive balance sheet.

Total non-interest income for the nine months ended September 30, 2005 was $12.0 million, compared to $7.3 million for the same period of 2004. During the nine months ended September 30, 2004, we recorded an investment portfolio restructuring loss of $3.8 million, a $397,000 gain from life insurance proceeds and a $528,000 recovery of an operational charge-off. The remaining increase in non-interest income is the result of: 1) the acquisition of First Financial Bancorp, 2) an increase in service charges and fees on deposit accounts, principally attributable to a revised fee structure and 3) an increase in referral and other loan-related fees, principally attributable to an increase in commercial real estate loans referred to third parties.

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 nine months ended September 30, 2005 was 59.89%, compared to 73.68% for the same period of 2004. Excluding the merger related costs and investment portfolio restructuring loss associated with the acquisition of Southland Capital Co., the operating efficiency ratio for the nine months ended September 30, 2004 was 64.65%.

15

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.

16

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 September 30, 2005						For the Three Months Ended September 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	%	$	536	$	6	4.45	%
Loans and leases held for investment (1) (2) (3)		1,340,592		22,864	6.77	%		1,022,290		15,780	6.14	%
Investment securities -
Taxable		213,956		2,361	4.38	%		113,492		1,367	4.79	%
Tax-exempt (1)		18,090		185	4.06	%		11,765		130	4.40	%
Federal funds sold		31,806		264	3.29	%		118,066		388	1.31	%
Interest bearing deposits with other banks		125		—	0.00	%		125		1	3.18	%
Other earning assets (4)		14,250		179	4.98	%		9,317		129	5.51	%
Total interest earning assets		1,618,819		25,853	6.34	%		1,275,591		17,801	5.55	%
Non-interest earning assets:
Cash and due from banks		59,187						72,080
Other assets		184,836						125,992
Total assets	$	1,862,842					$	1,473,663
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits -
Interest bearing demand	$	254,133		273	0.43	%	$	195,766		182	0.37	%
Money market		279,585		670	0.95	%		214,957		394	0.73	%
Savings		174,249		151	0.34	%		135,624		118	0.35	%
Time certificates of deposit		369,605		2,602	2.79	%		260,651		1,236	1.89	%
Total interest bearing deposits		1,077,572		3,696	1.36	%		806,998		1,930	0.95	%
Short-term borrowings		11,030		21	0.76	%		14,696		25	0.68	%
Long-term debt		53,611		898	6.65	%		38,146		490	5.11	%
Total interest bearing liabilities		1,142,213		4,615	1.60	%		859,840		2,445	1.13	%
Non-interest bearing liabilities:
Demand deposits		502,631						423,639
Other liabilities		17,252						13,503
Total liabilities		1,662,096						1,296,982
Shareholders’ equity		200,746						176,681
Total liabilities and shareholders’ equity	$	1,862,842					$	1,473,663
Net interest income			$	21,238					$	15,356
Net interest margin (5)					5.20	%					4.79	%

(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 $2.8 million for the three months ended September 30, 2005 and 2004, are included in the yield computations.

(3) Interest income includes net deferred loan and lease fees and costs of $353,000 and $430,000 for the three months ended September 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.

17

	For the Nine Months Ended September 30, 2005						For the Nine Months Ended September 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	%	$	267	$	9	4.50	%
Loans and leases held for investment (1) (2) (3)		1,311,779		65,348	6.66	%		991,294		45,778	6.17	%
Investment securities -
Taxable		214,373		7,008	4.37	%		141,862		5,156	4.85	%
Tax-exempt (1)		18,300		535	3.91	%		11,965		394	4.40	%
Federal funds sold		28,431		618	2.91	%		70,052		586	1.12	%
Interest bearing deposits with other banks		125		2	2.14	%		42		1	3.18	%
Other earning assets (4)		12,723		485	5.10	%		8,633		343	5.31	%
Total interest earning assets		1,585,731		73,996	6.24	%		1,224,115		52,267	5.70	%
Non-interest earning assets:
Cash and due from banks		67,113						68,304
Other assets		185,617						126,448
Total assets	$	1,838,461					$	1,418,867
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits -
Interest bearing demand	$	254,651		729	0.38	%	$	192,757		508	0.35	%
Money market		275,789		1,942	0.94	%		208,454		1,007	0.65	%
Savings		177,551		459	0.35	%		132,774		344	0.35	%
Time certificates of deposit		353,282		6,663	2.52	%		243,474		3,210	1.76	%
Total interest bearing deposits		1,061,273		9,793	1.23	%		777,459		5,069	0.87	%
Short-term borrowings		13,305		81	0.81	%		21,780		142	0.87	%
Long-term debt		53,611		2,494	6.22	%		38,146		1,382	4.84	%
Total interest bearing liabilities		1,128,189		12,368	1.47	%		837,385		6,593	1.05	%
Non-interest bearing liabilities:
Demand deposits		494,363						395,235
Other liabilities		19,901						14,766
Total liabilities		1,642,453						1,247,386
Shareholders’ equity		196,008						171,481
Total liabilities and shareholders’ equity	$	1,838,461					$	1,418,867
Net interest income			$	61,628					$	45,674
Net interest margin (5)					5.20	%					4.98	%

(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 $3.1 million and $2.5 million for the nine months ended September 30, 2005 and 2004, respectively, are included in the yield computations.

(3) Interest income includes net deferred loan and lease fees and costs of $1.2 million and $830,000 for the nine months ended September 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.

18

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 September 30, 2005 Compared to Three Months Ended September 30, 2004
	Net Change			Rate			Volume			Mix
	(Dollars in thousands)
Interest income:
Loans held for sale	$	(6	)	$	(6	)	$	(6	)	$	6
Loans and leases held for investment		7,084			1,608			4,913			563
Investment securities available-for-sale:
Taxable		994			(118	)		1,210			(98	)
Tax-exempt		55			(10	)		70			(5	)
Federal funds sold		(124	)		589			(283	)		(430	)
Interest bearing deposits with other banks		(1	)		(1	)		—			—
Other earning assets		50			(12	)		68			(6	)
Total interest income		8,052			2,050			5,972			30
Interest expense:
Interest bearing demand		91			28			54			9
Money market		276			120			118			38
Savings		33			(1	)		34			—
Time certificates of deposit		1,366			594			517			255
Short-term borrowings		(4	)		3			(6	)		(1	)
Long-term debt		408			147			199			62
Total interest expense		2,170			891			916			363
Net interest income	$	5,882		$	1,159		$	5,056		$	(333	)
	Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
	Net Change			Rate			Volume			Mix
	(Dollars in thousands)
Interest income:
Loans held for sale	$	(9	)	$	(9	)	$	(9	)	$	9
Loans and leases held for investment		19,570			3,650			14,800			1,120
Investment securities available-for-sale:
Taxable		1,852			(514	)		2,635			(269	)
Tax-exempt		141			(44	)		209			(24	)
Federal funds sold		32			938			(348	)		(558	)
Interest bearing deposits with other banks		1			—			2			(1	)
Other earning assets		142			(14	)		163			(7	)
Total interest income		21,729			4,007			17,452			270
Interest expense:
Interest bearing demand		221			44			163			14
Money market		935			462			325			148
Savings		115			—			116			(1	)
Time certificates of deposit		3,453			1,386			1,448			619
Short-term borrowings		(61	)		(9	)		(55	)		3
Long-term debt		1,112			394			560			158
Total interest expense		5,775			2,277			2,557			941
Net interest income	$	15,954		$	1,730		$	14,895		$	(671	)

19

Third Quarter Analysis. Net interest income increased 38.3%, or $5.9 million, to $21.2 million for the third quarter of 2005, from $15.4 million for the same period of 2004. Average earning assets increased 26.9%, or $343.2 million, to $1.619 billion for the third quarter of 2005, from $1.276 billion for the same period of 2004. Average loans and leases held for investment, net of deferred fees and costs, increased by 31.1%, or $318.3 million, to $1.341 billion for the third quarter of 2005, from $1.022 billion 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 24.8%, or $240.6 million, to $1.211 billion for the third quarter of 2005, from $970.0 million for the same period of 2004. Excluding average core deposits of $190.4 million held in our First Financial Bancorp branches during the third quarter of 2005, average core deposits grew 5.2%, or $50.3 million from the same period of 2004.

The net interest margin for the third quarter of 2005 increased to 5.20% from 4.79% for the same period of 2004, primarily attributable to an increase in yields on total interest earning assets to 6.34% for the third quarter of 2005, from 5.55% for the same period of 2004, which was greater than the increase in the cost of total interest bearing liabilities to 1.60% for the third quarter of 2005, from 1.13% for the same period of 2004. Partially 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 141.7% for the third quarter of 2005, from 148.4% for the third quarter of 2004.

Interest income increased 45.2%, or $8.1 million, to $25.9 million for the third quarter of 2005, from $17.8 million for the same period of 2004. Average loans and leases, including loans held for investment and for sale, increased 31.1%, or $317.8 million, to $1.341 billion for the third quarter of 2005, from $1.023 billion for the same period of 2004, primarily reflecting our acquisition of First Financial Bancorp. Average loans and leases, including loans held for investment and for sale, yielded 6.77% for the third quarter of 2005, compared to 6.14% 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 4.35% for the third quarter of 2005, from 4.75% for the same period of 2004. Between October 1, 2004 and September 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 88.8%, or $2.2 million, to $4.6 million for the third quarter of 2005, from $2.4 million in the same period of 2004. Total average interest bearing liabilities increased 32.8%, or $282.4 million, to $1.142 billion for the third quarter of 2005, from $859.8 million for the same period of 2004. The increase is primarily attributable to our acquisition of First Financial Bancorp. The cost of our interest bearing liabilities increased to 1.60% for the third quarter of 2005, from 1.13% 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 91.5%, or $1.8 million, to $3.7 million for the third quarter of 2005, from $1.9 million for the same period of 2004. The increase is primarily attributable to our acquisition of First Financial Bancorp. In the first and second quarters of 2005, we focused on attracting longer-duration time certificates of deposit through new product offerings, which we believe has helped mitigate net interest margin compression and will continue to do so over the next 12 to 24 months. Another contributing factor to the increase in interest expense on interest bearing deposits was the alignment of the Bank of Orange County and Placer Sierra Bank deposit rate schedules after the merger of the two banks in the third quarter of 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 third quarter of 2005, a decrease from 34.4% 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 0.93% for the third quarter of 2005, from 0.62% for the same period of 2004. As a percentage of average total deposits, time certificates of deposit increased to 23.4% for the third quarter of 2005, from 21.2% for the same period of 2004.

20

Nine Month Analysis. Net interest income increased 34.9%, or $16.0 million, to $61.6 million for the nine months ended September 30, 2005, from $45.7 million for the same period of 2004. Average earning assets increased 29.5%, or $361.6 million, to $1.586 billion for the nine months ended September 30, 2005, from $1.224 billion for the same period of 2004. Average loans and leases held for investment, net of deferred fees and costs, increased by 32.3%, or $320.5 million, to $1.312 billion for the nine months ended September 30, 2005, from $991.3 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 29.4%, or $273.1 million, to $1.202 billion for the nine months ended September 30, 2005, from $929.2 million for the same period of 2004. Excluding average core deposits of $196.2 million held in our First Financial Bancorp branches during the nine months ended September 30, 2005, average core deposits grew 8.3%, or $76.9 million, from the same period of 2004.

The net interest margin for the nine months ended September 30, 2005 increased to 5.20%, from 4.98% for the same period of 2004, primarily attributable to an increase in yields on total interest earning assets to 6.24% for the nine months ended September 30, 2005, from 5.70% for the same period of 2004, which was greater than the increase in the cost of total interest bearing liabilities to 1.47% for the nine months ended September 30, 2005, from 1.05% for the same period of 2004. Partially 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 140.6% for the nine months ended September 30, 2005, from 146.2% for the same period of 2004.

Interest income increased 41.6%, or $21.7 million, to $74.0 million for the nine months ended September 30, 2005, from $52.3 million for the same period of 2004. Average loans and leases, including loans held for investment and for sale, increased 32.3%, or $320.2 million, to $1.312 billion for the nine months ended September 30, 2005, from $991.6 million for the same period of 2004, primarily reflecting our acquisition of First Financial Bancorp. Average loans and leases, including loans held for investment and for sale, yielded 6.66% for the nine months ended September 30, 2005, compared to 6.17% 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 4.33% for the nine months ended September 30, 2005, from 4.82% for the same period of 2004. Between October 1, 2004 and September 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 87.6%, or $5.8 million, to $12.4 million for the nine months ended September 30, 2005, from $6.6 million in the same period of 2004. Total average interest bearing liabilities increased 34.7%, or $290.8 million, to $1.128 billion for the nine months ended September 30, 2005, from $837.4 million for the same period of 2004. The increase is primarily attributable to our acquisition of First Financial Bancorp. The cost of our interest bearing liabilities increased to 1.47% for the nine months ended September 30, 2005, from 1.05% 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 93.2%, or $4.7 million, to $9.8 million for the nine months ended September 30, 2005, from $5.1 million for the same period of 2004. The increase is primarily attributable to our acquisition of First Financial Bancorp. In the first and second quarters of 2005, we focused on attracting longer-duration time certificates of deposit through new product offerings, which we believe has helped mitigate net interest margin compression and will continue to do so over the next 12 to 24 months. Another contributing factor to the increase in interest expense on interest bearing deposits was the alignment of the Bank of Orange County and Placer Sierra Bank deposit rate schedules after the merger of the two banks in the third quarter of 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 nine months ended September 30, 2005, a decrease from 33.7% 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 0.84% for the nine months ended September 30, 2005, from 0.58% for the same period of 2004. As a percentage of average total deposits, time certificates of deposit increased to 22.7% for the nine months ended September 30, 2005, from 20.8% for the same period of 2004.

21

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 nine months ended September 30, 2005 given the quality of the loan portfolio combined with loan recoveries exceeding loan charge-offs by $36,000. In the nine months ended September 30, 2005, we experienced loan and lease charge-offs of $1.5 million and recoveries of $1.6 million, compared to loan and lease charge-offs of $1.9 million and recoveries of $803,000 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 0.13% at September 30, 2005, 0.22% at December 31, 2004 and 0.21% at September 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 September 30,					For the Nine Months Ended September 30,
	2005			2004		2005			2004
	(Dollars in thousands)
Service charges and fees on deposit accounts	$	2,070		$	1,531	$	5,801		$	4,710
Referral and other loan-related fees		1,298			808		2,834			2,132
Loan servicing income		102			71		340			242
Gain on sale of loans, net		—			3		—			179
Revenues from sales of non-deposit investment products		204			125		570			497
(Loss) gain on sale of investment securities, net		(1	)		1		(56	)		(3,335	)
Increase in cash surrender value of life insurance		396			291		1,240			918
Other		402			334		1,309			1,999
Total non-interest income	$	4,471		$	3,164	$	12,038		$	7,342

Third Quarter Analysis. Non-interest income increased 41.3%, or $1.3 million, to $4.5 million for the third quarter of 2005, from $3.2 million for the same period of 2004.

Service charges and fees on deposit accounts increased 35.2%, or $539,000, to $2.1 million for the third quarter of 2005, from $1.5 million for the same period of 2004, primarily due to the acquisition of First Financial Bancorp and a revised deposit fee structure initiated in May 2005. Referral and other loan related fees increased 60.6%, or $490,000, to $1.3 million for the third quarter of 2005, from $808,000 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. Loan servicing income, increase in cash surrender value of life insurance and other non-interest income increased from the third quarter of 2004 due to the acquisition of First Financial Bancorp.

Nine Month Analysis. Non-interest income increased 64.0%, or $4.7 million, to $12.0 million for the nine months ended September 30, 2005, from $7.3 million for the same period of 2004. During the third 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 it into Placer Sierra Bank and in contemplation of aligning their interest rate risk and liquidity profiles. Excluding this loss, non-interest income increased 7.9% for the nine months ended September 30, 2005, or $882,000, from the same period in the prior year.

22

Service charges and fees on deposit accounts increased 23.2%, or $1.1 million, to $5.8 million for the nine months ended September 30, 2005, from $4.7 million for the same period of 2004, primarily due to the acquisition of First Financial Bancorp and a revised deposit fee structure initiated in May 2005. Referral and other loan related fees increased 32.9%, or $702,000, to $2.8 million for the nine months ended September 30, 2005, from $2.1 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 nine months ended September 30, 2005 as compared to $179,000 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 nine months ended September 30, 2004 due to the acquisition of First Financial Bancorp.

Other non-interest income decreased 34.5%, or $690,000, to $1.3 million for the nine months ended September 30, 2005, from $2.0 million for the same period in 2004. The decrease is primarily the result of a $397,000 gain from life insurance proceeds and a $528,000 recovery of an operational charge-off recorded in the nine months ended September 30, 2004, offset by growth in other income in 2005 from expanded operations as a result of the acquisition of First Financial Bancorp.

Non-Interest Expense

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2005		2004		2005		2004
	(Dollars in thousands)
Salaries and employee benefits	$	7,471	$	6,125	$	22,469	$	18,789
Occupancy and equipment		2,039		1,747		6,030		5,169
Data and item processing		1,258		1,129		3,905		3,523
Amortization of core deposit intangible and favorable lease rights		648		487		1,946		1,461
Communication and postage		566		424		1,728		1,269
Professional fees		624		421		1,877		1,612
Administration		496		352		1,504		1,288
Loan-related costs		343		226		852		393
Advertising and business development		252		167		847		657
Stationery and supplies		251		220		881		642
Merger expenses		—		177		—		2,319
Other		709		773		2,076		1,939
Total non-interest expense	$	14,657	$	12,248	$	44,115	$	39,061

Third Quarter Analysis. Non-interest expense increased 19.7%, or $2.4 million, to $14.7 million for the third quarter of 2005, from $12.2 million for the same period of 2004. During the third quarter of 2004, we recorded merger related expenses of $177,000 ($109,000 after tax) associated with the acquisition by Placer Sierra Bancshares of Southland Capital Co. and its subsidiary Bank of Orange County. Excluding these merger related costs, non-interest expense increased 21.4% for the third quarter of 2005, or $2.6 million. This $2.6 million increase is primarily attributable to expanded operations resulting from the acquisition of First Financial Bancorp in the fourth quarter of 2004.

Salaries and employee benefits expense increased 22.0%, or $1.3 million, to $7.5 million for the third quarter of 2005, from $6.1 million for the same period of 2004 due to an increase in personnel associated with the acquisition of First Financial Bancorp, 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 third quarter of 2004 as a result of the integration of additional branches acquired from First Financial Bancorp.

Other non-interest expense decreased 8.3%, or $64,000, to $709,000 for the third quarter of 2005, from $773,000 for the same period of 2004. The decrease is primarily the result of a $120,000 loss from a check kiting fraud and a $145,000 write-down of the Company’s only OREO property to fair value in the third quarter of 2004, offset by growth in other non-interest expense as a result of an increase in third party payments made by us for banking related services on behalf of business customers and an increase in staff travel and recruiting efforts which are principally the result of the First Financial Bancorp acquisition.

23

Nine Month Analysis. Non-interest expense increased 12.9%, or $5.1 million, to $44.1 million for the nine months ended September 30, 2005, from $39.1 million for the same period of 2004. During the first nine months of 2004, we recorded merger related expenses of $2.3 million ($1.6 million after tax) associated with the acquisition by Placer Sierra Bancshares of Southland Capital Co. and its subsidiary Bank of Orange County. Excluding these merger related costs, non-interest expense increased 20.1% for the nine months ended September 30, 2005, or $7.4 million. This $7.4 million increase is primarily attributable to expanded operations resulting from the acquisition of First Financial Bancorp in the fourth quarter of 2004.

Salaries and employee benefits expense increased 19.6%, or $3.7 million, to $22.5 million for the nine months ended September 30, 2005, from $18.8 million for the same period of 2004 due to an increase in personnel associated with the acquisition of First Financial Bancorp, 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 nine months ended September 30, 2004 as a result of the integration of the additional branches acquired from First Financial Bancorp.

Other non-interest expense increased 7.1%, or $137,000, to $2.1 million for the nine months ended September 30, 2005, from $1.9 million for the same period of 2004. The increase in other non-interest expense is a result of an increase in third party payments made by us for banking related services on behalf of business customers and an increase in staff travel and recruiting efforts which are principally the result of the First Financial Bancorp acquisition. Additionally, in 2004 we incurred a $120,000 loss from a check kiting fraud, a $145,000 write-down of the Company’s only OREO property to fair value, and a $245,000 contingency reserve associated with a potential environmental liability which was subsequently reversed in the fourth quarter of 2004.

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 39.9% and 38.0% for the three months ended September 30, 2005 and 2004, respectively, and 39.4% and 36.3% for the nine months ended September 30, 2005 and 2004, respectively.

Financial Condition

Our total assets at September 30, 2005 were $1.859 billion, compared to $1.779 billion at December 31, 2004. Our earning assets at September 30, 2005 totaled $1.614 billion, compared to $1.555 billion at December 31, 2004. Total deposits at September 30, 2005 were $1.576 billion, compared to $1.500 billion at December 31, 2004.

24

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 September 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	$	966,523		71.4	%	$	892,136		68.8	%
Real estate – construction		197,975		14.6			184,317		14.2
Commercial		153,172		11.3			167,035		12.9
Agricultural		8,363		0.6			17,423		1.3
Consumer		10,910		0.8			11,110		0.9
Leases receivable and other		17,475		1.3			24,575		1.9
Total gross loans and leases held for investment		1,354,418		100.0	%		1,296,596		100.0	%
Less: allowance for loan and lease losses		(16,236	)				(16,200	)
Deferred loan and lease fees, net		(2,567	)				(2,332	)
Total net loans and leases held for investment	$	1,335,615				$	1,278,064

Gross loans and leases held for investment increased 4.5%, or $57.8 million, to $1.354 billion at September 30, 2005, from $1.297 billion at December 31, 2004. We experienced increases of $74.4 million in mortgages and $13.7 million in construction partially offset by decreases of $13.9 million, $9.1 million and $200,000 in commercial, agricultural and consumer loans, respectively. Leases receivable and other loans also decreased by $7.1 million. While we recorded $568.1 million of new loan commitments during the nine months ended September 30, 2005, we also experienced loan payoffs of $254.8 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 September 30, 2005 totaled $966.5 million and was comprised 65.0% of loans collateralized by commercial real estate and 35.0% 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%.

During the third quarter of 2005, we 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 202%. After shocking the portfolio for a 200 basis point rate increase, the debt service coverage ratio of the tested loans decreased to 189%. 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 173%. Combining both events caused the ratio to decrease to 162%. The tested loans had a weighted average loan to value of 57.85%. 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 55.6% of loans supported by first liens and 44.4% of loans supported by junior liens (primarily home equity lines of credit, or “HELOCs”). First lien loans are generally underwritten in accordance with FNMA/FHLMC guidelines for loans eligible for sale in the secondary mortgage market. The majority of HELOCs are limited to a combined loan to value of 80%, although borrowers with the highest credit scores can borrow up to 85%. Individual HELOCs are generally limited by our loan policy to no more than $500,000.

25

Real Estate – Construction

The category of real estate—construction at September 30, 2005 totaled $198.0 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 September 30, 2005			As of December 31, 2004
	(Dollars in thousands)
Non-accrual loans and leases, not restructured	$	1,712		$	2,899
Accruing loans and leases past due 90 days or more		—			—
Restructured loans and leases		—			—
Total non-performing loans and leases (NPLs)		1,712			2,899
OREO		—			657
Total non-performing assets (NPAs)	$	1,712		$	3,556
Selected ratios:
NPLs to total loans and leases held for investment		0.13	%		0.22	%
NPAs to total assets		0.09	%		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.

26

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.

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.

27

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 September 30,						As of or for the Nine Months Ended September 30,
	2005			2004			2005			2004
	(Dollars in thousands)
Balance at beginning of period	$	16,475		$	13,164		$	16,200		$	13,343
Charge-offs:
Real estate – mortgage		—			143			40			143
Real estate – construction		—			—			—			—
Commercial		94			340			390			1,732
Agricultural		—			—			—			—
Consumer		68			42			144			69
Leases receivable and other		330			—			968			—
Total		492			525			1,542			1,944
Recoveries:
Real estate – mortgage		230			1			315			92
Real estate – construction		—			—			—			—
Commercial		9			114			1,214			411
Agricultural		—			—			—			—
Consumer		14			7			26			83
Leases receivable and other		—			1			23			217
Total		253			123			1,578			803
Net loan and lease (charge-offs) recoveries		(239	)		(402	)		36			(1,141	)
Provision for the allowance for loan and lease losses		—			—			—			560
Balance at end of period	$	16,236		$	12,762		$	16,236		$	12,762
Loans and leases held for investment, net of deferred fees and costs	$	1,351,851		$	1,050,999		$	1,351,851		$	1,050,999
Average loans and leases held for investment	$	1,340,592		$	1,022,290		$	1,311,779		$	991,294
Non-performing loans and leases	$	1,712		$	2,199		$	1,712		$	2,199
Selected ratios:
Net (charge-offs) recoveries to average loans and leases held for investment		(0.07	)%		(0.16	)%		0.00	%		(0.15	)%
Provision for the allowance for loan and lease losses to average loans and leases held for investment		0.00	%		0.00	%		0.00	%		0.08	%
Allowance for loan and lease losses to loans and leases held for investment at end of period		1.20	%		1.21	%		1.20	%		1.21	%
Allowance for loan and lease losses to non- performing loans and leases at end of period		948.36	%		580.35	%		948.36	%		580.35	%

Investment Securities Available-for-Sale

The carrying value of our investment securities available-for-sale decreased 8.1%, or $20.2 million, to $229.7 million, from $249.9 million at December 31, 2004. The decline primarily resulted from the maturity of $29.0 million of U.S. Treasury securities and the sale of $20.0 million U.S. Government agency securities, offset by the purchase of $30.0 million of U.S. Government agency securities. Our portfolio of investment securities consists primarily of U.S. Government agency securities and obligations of states and political subdivisions.

28

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.

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

	Fair Value
	As of September 30, 2005		As of December 31, 2004
	(Dollars in thousands)
U.S. Treasury securities	$	1,977	$	26,986
U.S. Government agencies		205,871		198,732
Obligations of states and political subdivisions		17,903		18,783
Other securities		3,968		5,415
Total available-for-sale investment securities	$	229,719	$	249,916

Deposits

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

	As of September 30, 2005				As of December 31, 2004
	Amount		% of Deposits		Amount		% of Deposits
	(Dollars in thousands)
Non-interest bearing deposits	$	496,787	31.5	%	$	485,193	32.3	%
Interest bearing deposits:
Interest bearing demand		248,013	15.7			256,650	17.1
Money market		292,154	18.6			262,957	17.5
Savings		173,138	11.0			179,578	12.0
Time, under $100		197,177	12.5			176,026	11.8
Time, $100 or more		168,478	10.7			139,655	9.3
Total interest bearing deposits		1,078,960	68.5			1,014,866	67.7
Total deposits	$	1,575,747	100.0	%	$	1,500,059	100.0	%

Non-interest bearing deposits increased 2.4%, or $11.6 million, to $496.8 million, while total deposits increased 5.0%, or $75.7 million, to $1.576 billion as of September 30, 2005 from December 31, 2004. The growth primarily occurred in time certificates of deposits, which reflects our focus on attracting longer-duration deposits, and money market accounts. The increase in time deposits is attributable to a successful deposit initiative in the first and second quarters 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 34.4%, or $5.6 million, to $10.7 million as of September 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.

29

Capital Resources

Our primary source of capital has been the retention of net income. 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 September 30, 2005 increased to $204.1 million from $191.6 million at December 31, 2004. The holding company declared dividends of $0.12 per common share per quarter or $0.36 per common share during the nine months ended September 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 September 30, 2005 are as follows:

Leverage Ratio
Placer Sierra Bancshares and Subsidiaries	8.5	%
Minimum regulatory requirement	4.0	%
Placer Sierra Bank	8.0	%
Minimum requirement for “Well-Capitalized” institution	5.0	%
Minimum regulatory requirement	4.0	%
Tier 1 Risk-Based Capital Ratio
Placer Sierra Bancshares and Subsidiaries	10.1	%
Minimum regulatory requirement	4.0	%
Placer Sierra Bank	9.4	%
Minimum requirement for “Well-Capitalized” institution	6.0	%
Minimum regulatory requirement	4.0	%
Total Risk-Based Capital Ratio
Placer Sierra Bancshares and Subsidiaries	11.2	%
Minimum regulatory requirement	8.0	%
Placer Sierra Bank	10.5	%
Minimum requirement for “Well-Capitalized” institution	10.0	%
Minimum regulatory requirement	8.0	%

As of September 30, 2005, we exceeded each of the minimum capital requirements and the bank exceeded each of the capital requirements to be considered “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 Leverage, Tier 1 and Total Risk-Based capital ratios. Beginning 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 September 30, 2005. 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.”

30

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 $452.5 million and our standby letters of credit have increased from $5.7 million to $11.2 million. For more information see Note 4 to our Unaudited Condensed Consolidated Financial Statements in this quarterly report.

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 $13.8 million at September 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 the holding company by the bank for the bank to remain “well capitalized” immediately thereafter totaled $8.2 million at September 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 85.70% at September 30, 2005 and 86.10% at December 31, 2004. The liquidity ratio was 16.26% as of September 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 13.78% of total assets at September 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 $228.1 million under a line of credit with the Federal Home Loan Bank of San Francisco at September 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.

31

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. Economic 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.

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 holding company 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 September 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 September 30, 2005, our interest-sensitive assets totaled approximately $1.614 billion while interest-sensitive liabilities totaled approximately $1.143 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 nine months ended September 30, 2005 was 6.24% and 1.47%, respectively, compared to 5.70% and 1.05%, respectively, for the nine months ended September 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 certificates of deposit 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 $1.647 billion and $1.072 billion, respectively, at September 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 September 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.

32

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.

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 September 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 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	$	90,531	7.16	%	5.61	%	37
Up 100 basis points	$	87,640	3.73	%	5.43	%	20
BASE CASE	$	84,484	0.00	%	5.23	%	—
Down 100 basis points	$	80,216	(5.05	)%	4.97	%	(26	)
Down 200 basis points	$	74,807	(11.46	)%	4.63	%	(60	)

Our simulation results as of September 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 a 7.16% 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 an 11.46% 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 37 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 60 basis point decrease in our net interest margin.

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.

ITEM 4. Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, as of the quarter ended September 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.

33

During the quarter ended September 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.

We received notice of appeal from the judgment and satisfaction of judgment filed and entered by the Superior Court of the State of California for the County of Orange in a litigation matter, Bank of Orange County v. Azar. et al. The litigation matter involves Bank of Orange County, a division of our bank. Bank of Orange County v. Azar et al, was originally filed on November 18, 2003. On June 23, 2005, Bank of Orange County 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. 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 notice of appeal from the judgment and satisfaction of judgment was filed on August 12, 2005 by dissenting shareholders that hold a majority of the Cerritos Valley Bank common stock shares involved in the litigation. Shareholders holding the remaining Cerritos Valley Bank common stock shares involved in the litigation are not participating in the appeal. Bank of Orange County intends to continue to vigorously defend this action.

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

None.

ITEM 3. Defaults Upon Senior Securities

None.

34

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

None.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

(a) Exhibits.

Exhibit Number	Description
10.1	Addendum Number 23 dated September 2, 2005, to Agreement for Information Technology Services, dated December 21, 2000, between Aurum Technology, Inc. d/b/a Fidelity Integrated Financial Solutions and Placer Sierra Bank. †
10.2	Information Technology Services Agreement between Fidelity Information Services and Placer Sierra Bank dated September 2, 2005, with addendums and schedules. †
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.

† Filed in redacted form pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission.

35

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: October 28, 2005	/s/ David E. Hooston
	David E. Hooston Chief Financial Officer

36