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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|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



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PLACER SIERRA BANCSHARES

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|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)



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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.



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##### Table of Contents

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



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##### Table of Contents

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



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##### Table of Contents

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share data)



|                                                                                |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | - | ------ | - |  | - | ------ | -
|                                                                                |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 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



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##### Table of Contents

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                         |   |  | RetainedEarnings |         |   | Accumulated OtherComprehensiveIncome (Loss) |   |        | TotalShareholders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                         |   |  | RetainedEarnings |         |   | AccumulatedOtherComprehensiveIncome (Loss)  |   |        | TotalShareholders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



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##### Table of Contents

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)



|                                                                               |  |                                |         |   |      |   |          |  
|------------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | -------- | -
|                                                                               |  | Nine Months EndedSeptember 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



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##### Table of Contents

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.



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##### Table of Contents

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.



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##### Table of Contents

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 MonthsEnded September 30, |       |   | For the Nine MonthsEnded 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 MonthsEnded September 30, |            |   | For the Nine MonthsEnded 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                                  |   |      | WeightedAverageExercisePrice |       | Shares |          |   | WeightedAverageExercisePrice
|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



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##### Table of Contents

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                                  |   |      | WeightedAverageExercisePrice |      | Shares |          |   | WeightedAverageExercisePrice
|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



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##### Table of Contents

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



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##### Table of Contents

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



|                                                                        |  |           |        |   |                     |   |       |          |  |   |        |  
|----------------------------------------------------------------------- |  | --------- | ------ | - | ------------------- | - | ----- | -------- |  | - | ------ | -
|                                                                        |  | BeforeTax |        |   | TaxBenefit(Expense) |   |       | AfterTax | 
|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.



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##### Table of Contents

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.



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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.



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##### Table of Contents

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.



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##### Table of Contents

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 MonthsEnded 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  | %



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##### Table of Contents

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%.



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##### Table of Contents

Net Interest Income



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



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##### Table of Contents

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 EndedSeptember 30, 2005 |           |                          | For the Three Months EndedSeptember 30, 2004 |                    
|                                                 |  | AverageBalance                               |           | InterestIncome orExpense |                                              | AverageYield orCost |  |      | AverageBalance |  | InterestIncome orExpense |           | AverageYield orCost |  
|                                                 |  | (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



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##### Table of Contents

|                                                 |  |                                             |           |                          |                                             |                     |  |      |                |  |                          |           |                     |   |        |  |      |  
|------------------------------------------------ |  | ------------------------------------------- | --------- | ------------------------ | ------------------------------------------- | ------------------- |  | ---- | -------------- |  | ------------------------ | --------- | ------------------- | - | ------ |  | ---- | -
|                                                 |  | For the Nine Months EndedSeptember 30, 2005 |           |                          | For the Nine Months EndedSeptember 30, 2004 |                    
|                                                 |  | AverageBalance                              |           | InterestIncome orExpense |                                             | AverageYield orCost |  |      | AverageBalance |  | InterestIncome orExpense |           | AverageYield orCost |  
|                                                 |  | (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



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##### Table of Contents

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, 2005Compared 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



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##### Table of Contents

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.



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##### Table of Contents

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.



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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 MonthsEnded 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.



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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 MonthsEnded 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.



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##### Table of Contents

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.



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##### Table of Contents

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.



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##### Table of Contents

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 ofSeptember 30,2005 |       |   | As ofDecember 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.



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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.



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



|                                                                                                      |  |                                                   |           |    |                                                  |   |           |      |  |   |           |   |  |   |           |   
|----------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | --------- | -- | ------------------------------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | --
|                                                                                                      |  | As of or for the Three Months Ended 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.



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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 ofSeptember 30, 2005 |         | As ofDecember 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                   |           | % ofDeposits |                         |   | Amount |   | % ofDeposits | 
|                                |  | (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.



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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.



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Contractual Obligations



Our significant contractual obligations and significant commitments at December 31, 2004 are included in our Annual Report on Form 10-K for the
year ended December 31, 2004. Since December 31, 2004, our commitments to extend credit have increased from $373.9 million to $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.



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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.



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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 |                        | AdjustedNet InterestIncome |        | PercentageChangefrom Base |        |    | Net InterestMarginPercent |      |   | Net InterestMarginChange (in basispoints) |    
|                       | (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.



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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.



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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.
|- | -------------------------------------------------------------------------------------------------------------------------------------



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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



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