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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from                      to                     

Commission File Number:

PLACER SIERRA BANCSHARES

(Exact name of registrant as specified in its charter)

(916) 554-4750

(Registrant’s telephone number, including area code)

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

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

As of November 1, 2004 there were 14,736,760 shares of the registrant’s common stock outstanding.

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PART I—FINANCIAL INFORMATION

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEET

September 30, 2004 and December 31, 2003

(Dollars in thousands)

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

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PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF INCOME

For the Three Months and Nine Months Ended September 30, 2004 and 2003

(Dollars in thousands, except per share data)

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

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PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN

SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

For the Nine Months Ended September 30, 2004 and 2003

(Dollars in thousands)

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

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PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2004 and 2003

(Dollars in thousands)

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

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PLACER SIERRA BANCSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months and Nine Months Ended September 30, 2004 and 2003

NOTE 1 — BASIS OF PRESENTATION

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Placer Sierra Bancshares (the Company) and the consolidated accounts of its wholly-owned subsidiary, Placer Sierra Bank (“PSB”). All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. 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 consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for the nine months ended September 30, 2004 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 II and Southland Statutory Trust I are accounted for under the equity method and are included in other assets on the unaudited consolidated balance sheet. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by the trusts are reflected on the Company’s consolidated balance sheet in accordance with provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities.

The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2003.

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

Material estimates that are particularly susceptible to significant changes in the near-term relate 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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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 and nine months ended September 30, 2004 and 2003, certain shares of common stock issuable under stock options and stock purchase agreements were not included in the computation of diluted earnings per share because the exercise and purchase prices were equal to or greater than the stock’s fair value and their effect would be antidilutive.

NOTE 3 — STOCK OPTIONS

The Company currently has two stock option plans, the Placer Sierra Bancshares 2002 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. 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 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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Pro forma adjustments to the Company’s consolidated net income and earnings per share are disclosed during the years 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):

The fair value of the options granted and stock purchase agreements entered into during the three months and nine months ended September 30, 2004 and 2003 are noted below and were based on an option-pricing model with the following assumptions and prices:

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

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

Notwithstanding the two stock option plans, an additional 47,897 stock options were granted to past directors of CCB and a former executive officer of the bank during 2002. No additional options have been granted during 2003 or 2004. For the nine months ended September 30, 2004, 6,327 options were exercised and 4,971 options were canceled. At September 30, 2004, a total of 18,921 options were outstanding with a weighted average remaining life of 7.76 years. At September 30, 2004 and 2003, a total of 18,921 and 46,897 options were exercisable, respectively.

NOTE 4 — COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We have settled, in principle, a lawsuit involving the Reed Slatkin Investment Club, in which Bank of Orange County, a division of Placer Sierra Bank, was one of four named defendants. The complaint was filed on September 5, 2002 in the United States District Court, Central District of California by the trustee of the bankruptcy estate of Reed Slatkin and a group of individuals and entities, naming Bank of Orange County, Union Bank of California, Comerica Bank-California and Imperial Management Incorporated as defendants and alleging, among other things, aiding and abetting fraud, breach of fiduciary duty, fraud and negligence. The initial complaint sought damages of $250 million plus interest and punitive damages as well as compensatory damages on behalf of the subclass plaintiffs of $25 million plus punitive damages. The banks were named in the suit based on the various banks’ alleged support of and participation in Mr. Slatkin’s fraudulent activities discovered in 2001, and the banks’ alleged role as administrator for investors’ custodial accounts. Bank of Orange County was being sued as the direct successor-in-interest to Pacific Inland Bank, or PIB, which was acquired by Bank of Orange County in 1999. PIB sold its trust assets to another bank that is also a defendant in the case in October 1993. The claims against Bank of Orange County were based on alleged acts and omissions of PIB that occurred on or before the sale of the trust assets. Upon execution and delivery of definitive settlement documents and approval of the settlement by the court, we expect the action to be dismissed. Pursuant to the settlement, we will contribute $200,000. This amount is included in accrued interest payable and other liabilities as of September 30, 2004.

We may, from time to time, be involved in other legal proceedings in the ordinary course of business. We do not believe that any of the other pending legal proceedings in which we are currently involved are reasonably likely, either individually or taken as a whole, to materially harm our business, financial condition, results of operations or cash flows.

Environmental Compliance

In the process of selling a property owned by a subsidiary of PSB, we learned that a small parcel of the property was used as a gasoline station in the early 1970s. We retained an environmental consulting company to conduct both Phase I and Phase II environmental studies, the results of which have been reviewed and accepted

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by the California Regional Water Quality Control Board (“Control Board”). We believe it is likely that the Control Board will require soil abatement. The cost of soil abatement was originally estimated to be between $450,000 and $570,000, and we recorded a reserve in the first quarter of 2004 of $450,000. In the second quarter of 2004, $205,000 of this reserve was reversed due to revised remediation cost estimates. Pursuant to legal investigation of potentially responsible former gas station operators, PSB made demand upon ConocoPhillips and ChevronTexaco to investigate and remediate the site. In the third quarter of 2004, ChevronTexaco responded that it would take the lead on behalf of both oil companies, and that its operating company Texaco Downstream Properties Inc. is willing to take responsibility for remediation of contamination arising from operations under the lease between former owners of the site and Tidewater Oil Company. However, agreement regarding ChevronTexaco’s commitment has not yet been reached and ChevronTexaco has indicated it wishes to first conclude determination of whether additional parties are responsible for the contamination. Although we cannot be certain, we do not expect our expenditures for the monitoring and the cost of soil abatement to have a material adverse effect on our business, financial condition, results of operations and cash flows.

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):

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

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party and are accounted for under Financial Accounting Standards Board Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others (FIN 45). FIN 45 requires that the guarantor recognize a liability for the guarantee equal to its fair value represented by the fees received for issuing the guarantee. Such fees were not considered to be material for recognition as a liability at September 30, 2004 or December 31, 2003. 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 (loss) income that historically has not been recognized in the calculation of net income. Unrealized gains and losses on the Company’s available-for-sale investment securities are included in other

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comprehensive (loss) income. Total comprehensive income and the components of accumulated other comprehensive (loss) income for the nine months ended September 30, 2004 and 2003 are presented in the consolidated statement of changes in shareholders’ equity and comprehensive income. Total comprehensive income for the three months ended September 30, 2004 and 2003 totaled $4.6 million and $3.3 million, respectively.

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