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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 March 31, 2007

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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer ̈Accelerated filer   x    Non
accelerated filer ̈

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 April 27, 2007 there were
22,626,633 shares of the registrants common stock outstanding.



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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                  |  | 12
|                             |  |                                                                                                       
|ITEM 3.                      |  | Quantitative and Qualitative Disclosures about Market Risk                                             |  | 31
|                             |  |                                                                                                       
|ITEM 4.                      |  | Controls and Procedures                                                                                |  | 31
|                             | 
|PART IIOTHER INFORMATION    |  | 31                                                                                                    
|                             |  |                                                                                                       
|ITEM 1.                      |  | Legal Proceedings                                                                                      |  | 31
|                             |  |                                                                                                       
|ITEM 1A.                     |  | Risk Factors                                                                                           |  | 32
|                             |  |                                                                                                       
|ITEM 2.                      |  | Unregistered Sales of Equity Securities and Use of Proceeds                                            |  | 33
|                             |  |                                                                                                       
|ITEM 3.                      |  | Defaults Upon Senior Securities                                                                        |  | 33
|                             |  |                                                                                                       
|ITEM 4.                      |  | Submission of Matters to a Vote of Security Holders                                                    |  | 33
|                             |  |                                                                                                       
|ITEM 5.                      |  | Other Information                                                                                      |  | 33
|                             |  |                                                                                                       
|ITEM 6.                      |  | Exhibits                                                                                               |  | 33
|                             | 
|SIGNATURES                   |  | 35                                                                                                    



ii



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PART IFINANCIAL INFORMATION



|ITEM 1. | Unaudited Condensed Consolidated Financial Statements
|------- | -----------------------------------------------------

PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)



|                                                                                                                                                                         |  |           |           |   |              |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | --------- | - | ------------ | - | --------- | -
|                                                                                                                                                                         |  | March 31, |           |   | December 31, |  
|                                                                                                                                                                         |  | 2007      |           |   | 2006         |  
|ASSETS                                                                                                                                                                   |  |           |           |   |              |   |           |  
|Cash and due from banks                                                                                                                                                  |  | $         | 85,315    |   |              | $ | 183,709   |  
|Federal funds sold                                                                                                                                                       |  |           | 4,816     |   |              |   | 111,434   |  
|                                                                                                                                                                         |  |           |           |   |              |   |           |  
|Cash and cash equivalents                                                                                                                                                |  |           | 90,131    |   |              |   | 295,143   |  
|Time deposits with other banks                                                                                                                                           |  |           | 100       |   |              |   | 100       |  
|Investment securities available-for-sale, at fair value                                                                                                                  |  |           | 151,228   |   |              |   | 151,167   |  
|Federal Reserve Bank and Federal Home Loan Bank stock                                                                                                                    |  |           | 21,640    |   |              |   | 21,497    |  
|Loans held for sale, at lower of cost or market value                                                                                                                    |  |           | 3,534     |   |              |   | 3,115     |  
|Loans and leases held for investment, net of allowance for loan and lease losses of $22,133 at March 31, 2007 and $22,328 at
December 31, 2006                           |  |           | 1,794,917 |   |              |   | 1,824,401 |  
|Premises and equipment, net                                                                                                                                              |  |           | 21,290    |   |              |   | 21,705    |  
|Cash surrender value of life insurance                                                                                                                                   |  |           | 56,081    |   |              |   | 55,581    |  
|Goodwill                                                                                                                                                                 |  |           | 216,180   |   |              |   | 215,957   |  
|Other intangible assets, net                                                                                                                                             |  |           | 21,657    |   |              |   | 22,375    |  
|Accrued interest receivable and other assets                                                                                                                             |  |           | 35,920    |   |              |   | 37,927    |  
|                                                                                                                                                                         |  |           |           |   |              |   |           |  
|Total assets                                                                                                                                                             |  | $         | 2,412,678 |   |              | $ | 2,648,968 |  
|                                                                                                                                                                         |  |           |           |   |              |   |           |  
|                                                                                                                                                                         |  |          
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  |           |           |   |              |   |           |  
|Deposits:                                                                                                                                                                |  |           |           |   |              |   |           |  
|Non-interest bearing                                                                                                                                                     |  | $         | 682,616   |   |              | $ | 904,530   |  
|Interest bearing                                                                                                                                                         |  |           | 1,199,818 |   |              |   | 1,254,541 |  
|                                                                                                                                                                         |  |           |           |   |              |   |           |  
|Total deposits                                                                                                                                                           |  |           | 1,882,434 |   |              |   | 2,159,071 |  
|Short-term borrowings                                                                                                                                                    |  |           | 48,715    |   |              |   | 11,518    |  
|Accrued interest payable and other liabilities                                                                                                                           |  |           | 20,991    |   |              |   | 23,125    |  
|Junior subordinated deferrable interest debentures                                                                                                                       |  |           | 51,137    |   |              |   | 51,167    |  
|                                                                                                                                                                         |  |           |           |   |              |   |           |  
|Total liabilities                                                                                                                                                        |  |           | 2,003,277 |   |              |   | 2,244,881 |  
|Commitments and contingencies                                                                                                                                            |  |           |           |   |              |   |           |  
|Shareholders equity:                                                                                                                                                    |  |           |           |   |              |   |           |  
|Preferred stock, 25,000,000 shares authorized; none issued or outstanding at March 31, 2007 or December 31, 2006                                                         |  |           |          |   |              |   |          |  
|Common stock, no par value, 100,000,000 shares authorized, 22,601,533 and 22,492,188 shares issued and outstanding at March 31, 2007
and December 31, 2006, respectively |  |           | 343,608   |   |              |   | 341,510   |  
|Retained earnings                                                                                                                                                        |  |           | 66,265    |   |              |   | 63,175    |  
|Accumulated other comprehensive loss, net of taxes                                                                                                                       |  |           | (472      | ) |              |   | (598      | )
|                                                                                                                                                                         |  |           |           |   |              |   |           |  
|Total shareholders equity                                                                                                                                               |  |           | 409,401   |   |              |   | 404,087   |  
|                                                                                                                                                                         |  |           |           |   |              |   |           |  
|Total liabilities and shareholders equity                                                                                                                               |  | $         | 2,412,678 |   |              | $ | 2,648,968 |  
|                                                                                                                                                                         |  |           |           |   |              |   |           |  

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



1



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PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share data)



|                                                                                |  |                    |        |      |   |       
|------------------------------------------------------------------------------- |  | ------------------ | ------ | ---- | - | ------
|                                                                                |  | Three Months Ended
|                                                                                |  | March 31,         
|                                                                                |  | 2007               |        | 2006
|Interest income:                                                                |  |                    |        |      |   |       
|Interest and fees on loans and leases held for investment                       |  | $                  | 34,415 |      | $ | 24,622
|Interest on loans held for sale                                                 |  |                    | 101    |      |   |      
|Interest and dividends on investment securities:                                |  |                    |        |      |   |       
|Taxable                                                                         |  |                    | 1,676  |      |   | 2,527 
|Tax-exempt                                                                      |  |                    | 398    |      |   | 183   
|Interest on federal funds sold                                                  |  |                    | 418    |      |   | 301   
|                                                                                |  |                    |        |      |   |       
|Total interest income                                                           |  |                    | 37,008 |      |   | 27,633
|                                                                                |  |                    |        |      |   |       
|Interest expense:                                                               |  |                    |        |      |   |       
|Interest on deposits                                                            |  |                    | 8,178  |      |   | 5,662 
|Interest on short-term borrowings                                               |  |                    | 255    |      |   | 102   
|Interest on junior subordinated deferrable interest debentures                  |  |                    | 870    |      |   | 1,036 
|                                                                                |  |                    |        |      |   |       
|Total interest expense                                                          |  |                    | 9,303  |      |   | 6,800 
|                                                                                |  |                    |        |      |   |       
|Net interest income                                                             |  |                    | 27,705 |      |   | 20,833
|Provision for the allowance for loan and lease losses                           |  |                    |       |      |   |      
|                                                                                |  |                    |        |      |   |       
|Net interest income after provision for the allowance for loan and lease losses |  |                    | 27,705 |      |   | 20,833
|                                                                                |  |                    |        |      |   |       
|Non-interest income:                                                            |  |                    |        |      |   |       
|Service charges and fees on deposit accounts                                    |  |                    | 2,277  |      |   | 1,830 
|Referral and other loan-related fees                                            |  |                    | 1,092  |      |   | 732   
|Increase in cash surrender value of life insurance                              |  |                    | 500    |      |   | 406   
|Debit card and merchant discount fees                                           |  |                    | 391    |      |   | 300   
|Revenues from sales of non-deposit investment products                          |  |                    | 299    |      |   | 196   
|Gain on sale of loans held for sale, net                                        |  |                    | 246    |      |   |      
|Loan servicing income                                                           |  |                    | 175    |      |   | 100   
|Other                                                                           |  |                    | 140    |      |   | 126   
|                                                                                |  |                    |        |      |   |       
|Total non-interest income                                                       |  |                    | 5,120  |      |   | 3,690 
|                                                                                |  |                    |        |      |   |       
|Non-interest expense:                                                           |  |                    |        |      |   |       
|Salaries and employee benefits                                                  |  |                    | 11,752 |      |   | 8,301 
|Occupancy and equipment                                                         |  |                    | 2,786  |      |   | 2,063 
|Merger                                                                          |  |                    | 760    |      |   |      
|Other                                                                           |  |                    | 6,359  |      |   | 5,082 
|                                                                                |  |                    |        |      |   |       
|Total non-interest expense                                                      |  |                    | 21,657 |      |   | 15,446
|                                                                                |  |                    |        |      |   |       
|Income before provision for income taxes                                        |  |                    | 11,168 |      |   | 9,077 
|Provision for income taxes                                                      |  |                    | 4,696  |      |   | 3,550 
|                                                                                |  |                    |        |      |   |       
|Net income                                                                      |  | $                  | 6,472  |      | $ | 5,527 
|                                                                                |  |                    |        |      |   |       
|Earnings per share:                                                             |  |                    |        |      |   |       
|Basic                                                                           |  | $                  | 0.29   |      | $ | 0.37  
|                                                                                |  |                    |        |      |   |       
|Diluted                                                                         |  | $                  | 0.28   |      | $ | 0.36  
|                                                                                |  |                    |        |      |   |       

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



2



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PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN

SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands)



|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|------------------------------------------------------------------------------------- |  | --------------------------------- | - |  | ---------------- | ------- | - | ---------------------------------- | - | ------ | ------------------------------------ |  | - | -------------------------- | - |  | - | ------- | -
|                                                                                      |  | Three Months Ended March 31, 2007 |  
|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        | Accumulated Other Comprehensive Loss |  |   | Total Shareholders' Equity |  
|                                                                                      |  | Common Stock                      |   |  | Retained         |         |   |                                   
|                                                                                      |  | Shares                            |   |  | Amount           |         |   | Earnings                           |   |        |                                     
|Balance, December 31, 2006                                                            |  | 22,492,188                        |   |  | $                | 341,510 |   |                                    | $ | 63,175 |                                      |  | $ | (598                       | ) |  | $ | 404,087 |  
|Comprehensive income:                                                                 |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|Net income                                                                            |  |                                   |   |  |                  |         |   |                                    |   | 6,472  |                                      |  |   |                            |   |  |   | 6,472   |  
|Net change in unrealized loss on investment securities available-for-sale, net of tax |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   | 126                        |   |  |   | 126     |  
|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|Total comprehensive income                                                            |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   | 6,598   |  
|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|Stock options exercised, including tax benefit                                        |  | 35,183                            |   |  |                  | 620     |   |                                    |   |        |                                      |  |   | 620                        |   |  |   |         |  
|Stock option compensation expense                                                     |  |                                   |   |  |                  | 289     |   |                                    |   |        |                                      |  |   |                            |   |  |   | 289     |  
|Restricted common stock award compensation expense                                    |  |                                   |   |  |                  | 101     |   |                                    |   |        |                                      |  |   |                            |   |  |   | 101     |  
|Shares withheld on vesting of restricted common stock                                 |  | (2,508                            | ) |  |                  | (67     | ) |                                    |   |        |                                      |  |   |                            |   |  |   | (67     | )
|Additional tax expense on vesting of restricted common stock awarded                  |  |                                   |   |  |                  | (6      | ) |                                    |   |        |                                      |  |   |                            |   |  |   | (6      | )
|Warrants exercised, including tax benefit                                             |  | 76,670                            |   |  |                  | 1,134   |   |                                    |   |        |                                      |  |   |                            |   |  |   | 1,134   |  
|Tax benefit on disqualifying disposition of incentive stock option exercises          |  |                                   |   |  |                  | 27      |   |                                    |   |        |                                      |  |   |                            |   |  |   | 27      |  
|Cash dividends declared ($0.15 per share)                                             |  |                                   |   |  |                  |         |   |                                    |   | (3,382 | )                                    |  |   |                            |   |  |   | (3,382  | )
|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|Balance, March 31, 2007                                                               |  | 22,601,533                        |   |  | $                | 343,608 |   |                                    | $ | 66,265 |                                      |  | $ | (472                       | ) |  | $ | 409,401 |  
|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|                                                                                      | 
|                                                                                      |  | Three Months Ended March 31, 2006 |  
|                                                                                      |  | Common Stock                      |   |  | RetainedEarnings |         |   | AccumulatedOther ComprehensiveLoss |   |        | TotalShareholders'Equity             | 
|                                                                                      |  | Shares                            |   |  | Amount           |         |   |                                    |  
|Balance, December 31, 2005                                                            |  | 15,042,981                        |   |  | $                | 160,596 |   |                                    | $ | 50,948 |                                      |  | $ | (2,263                     | ) |  | $ | 209,281 |  
|Comprehensive income:                                                                 |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|Net income                                                                            |  |                                   |   |  |                  |         |   |                                    |   | 5,527  |                                      |  |   |                            |   |  |   | 5,527   |  
|Net change in unrealized loss on investment securities available-for-sale, net of tax |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   | (367                       | ) |  |   | (367    | )
|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|Total comprehensive income                                                            |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   | 5,160   |  
|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|Stock options exercised, including tax benefit                                        |  | 9,538                             |   |  |                  | 151     |   |                                    |   |        |                                      |  |   | 151                        |   |  |   |         |  
|Stock option compensation expense                                                     |  |                                   |   |  |                  | 140     |   |                                    |   |        |                                      |  |   |                            |   |  |   | 140     |  
|Restricted common stock awarded                                                       |  | 29,135                            |   |  |                  |        |   |                                    |   |        |                                      |  |   |                            |   |  |   |        |  
|Restricted common stock award compensation expense                                    |  |                                   |   |  |                  | 34      |   |                                    |   |        |                                      |  |   |                            |   |  |   | 34      |  
|Cash dividends declared ($0.12 per share)                                             |  |                                   |   |  |                  |         |   |                                    |   | (1,805 | )                                    |  |   |                            |   |  |   | (1,805  | )
|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  
|Balance, March 31, 2006                                                               |  | 15,081,654                        |   |  | $                | 160,921 |   |                                    | $ | 54,670 |                                      |  | $ | (2,630                     | ) |  | $ | 212,961 |  
|                                                                                      |  |                                   |   |  |                  |         |   |                                    |   |        |                                      |  |   |                            |   |  |   |         |  

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



3



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PLACER SIERRA BANCSHARES AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)



|                                                                               |  |                             |          |   |      |   |         |  
|------------------------------------------------------------------------------ |  | --------------------------- | -------- | - | ---- | - | ------- | -
|                                                                               |  | Three Months EndedMarch 31, |         
|                                                                               |  | 2007                        |          |   | 2006 |  
|Cash flows from operating activities:                                          |  |                             |          |   |      |   |         |  
|Net income                                                                     |  | $                           | 6,472    |   |      | $ | 5,527   |  
|Adjustments to reconcile net income to net cash provided by operations:        |  |                             |          |   |      |   |         |  
|Amortization (accretion) of investment security discounts/premiums, net        |  |                             | 19       |   |      |   | (35     | )
|Accretion of fair value adjustment of loans acquired                           |  |                             | (230     | ) |      |   |        |  
|Amortization of other intangible assets                                        |  |                             | 718      |   |      |   | 470     |  
|Amortization of fair value adjustment of trust preferred securities acquired   |  |                             | (30      | ) |      |   |        |  
|Decrease in deferred loan fees, net                                            |  |                             | (10      | ) |      |   | (354    | )
|Depreciation and amortization                                                  |  |                             | 1,020    |   |      |   | 796     |  
|Dividends received on FHLB and FRB stock                                       |  |                             | (143     | ) |      |   | (91     | )
|Gain on sale of loans held for sale, net                                       |  |                             | (246     | ) |      |   |        |  
|Originations of loans held for sale                                            |  |                             | (9,099   | ) |      |   |        |  
|Proceeds from sale of loans held for sale, net                                 |  |                             | 6,962    |   |      |   |        |  
|Stock-based compensation                                                       |  |                             | 390      |   |      |   | 174     |  
|Deferred tax benefit on stock based compensation                               |  |                             | (159     | ) |      |   | (73     | )
|Provision for deferred income taxes                                            |  |                             | (459     | ) |      |   | (271    | )
|Increase in cash surrender value of life insurance                             |  |                             | (500     | ) |      |   | (406    | )
|Net decrease (increase) in accrued interest receivable and other assets        |  |                             | 2,504    |   |      |   | (613    | )
|Net (decrease) increase in accrued interest payable and other liabilities      |  |                             | (2,169   | ) |      |   | 196     |  
|                                                                               |  |                             |          |   |      |   |         |  
|Net cash provided by operating activities                                      |  |                             | 5,040    |   |      |   | 5,320   |  
|                                                                               |  |                             |          |   |      |   |         |  
|Cash flows from investing activities:                                          |  |                             |          |   |      |   |         |  
|Purchases of investment securities available-for-sale                          |  |                             | (489     | ) |      |   | (493    | )
|Proceeds from calls and maturities of investment securities available-for-sale |  |                             | 625      |   |      |   | 2,000   |  
|Net decrease (increase) in loans and leases held for investment                |  |                             | 31,200   |   |      |   | (41,358 | )
|Proceeds from recoveries of charged-off loans                                  |  |                             | 587      |   |      |   | 856     |  
|Purchases of premises and equipment                                            |  |                             | (674     | ) |      |   | (117    | )
|Investment in real estate investment companies                                 |  |                             | (136     | ) |      |   | (83     | )
|Net cash paid relating to Southwest Community Bancorp acquisition              |  |                             | (380     | ) |      |   |        |  
|                                                                               |  |                             |          |   |      |   |         |  
|Net cash provided by (used in) investing activities                            |  |                             | 30,733   |   |      |   | (39,195 | )
|                                                                               |  |                             |          |   |      |   |         |  
|Cash flows from financing activities:                                          |  |                             |          |   |      |   |         |  
|Net (decrease) increase in demand, interest bearing and savings deposits       |  |                             | (230,603 | ) |      |   | 46,760  |  
|Net (decrease) increase in time deposits                                       |  |                             | (46,034  | ) |      |   | 7,152   |  
|Net increase in short-term borrowings                                          |  |                             | 37,197   |   |      |   | 3,799   |  
|Dividends paid                                                                 |  |                             | (3,382   | ) |      |   | (1,805  | )
|Exercise of stock options, including tax benefit                               |  |                             | 620      |   |      |   | 151     |  
|Deferred tax benefit on stock based compensation                               |  |                             | 159      |   |      |   | 73      |  
|Tax benefit on disqualifying disposition of incentive stock option exercises   |  |                             | 27       |   |      |   |        |  
|Exercise of warrants, including tax benefit                                    |  |                             | 1,134    |   |      |   |        |  
|Tax benefit on vesting of restricted common stock                              |  |                             | 164      |   |      |   |        |  
|Withholding of shares on vesting of restricted common stock                    |  |                             | (67      | ) |      |   |        |  
|                                                                               |  |                             |          |   |      |   |         |  
|Net cash (used in) provided by financing activities                            |  |                             | (240,785 | ) |      |   | 56,130  |  
|                                                                               |  |                             |          |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                           |  |                             | (205,012 | ) |      |   | 22,255  |  
|Cash and cash equivalents, beginning of period                                 |  |                             | 295,143  |   |      |   | 57,268  |  
|                                                                               |  |                             |          |   |      |   |         |  
|Cash and cash equivalents, end of period                                       |  | $                           | 90,131   |   |      | $ | 79,523  |  
|                                                                               |  |                             |          |   |      |   |         |  

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



4



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PLACER SIERRA BANCSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2007 and 2006

NOTE 1BASIS OF PRESENTATION

Consolidation and Basis of Presentation

The interim condensed 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. 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 pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. 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. The results of operations for the three months
ended March 31, 2007 are not necessarily indicative of the results of operations to be expected for the remainder of the year. These unaudited condensed consolidated financial statements should be read in conjunction with the financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.

For
financial reporting purposes, the Companys investments in First Financial Bancorp Statutory Trust I, Southwest Community Statutory Trust I, Placer Statutory Trust III and Placer Statutory Trust IV are accounted for under the equity method and
are included in other assets in the unaudited condensed 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 unaudited
condensed consolidated balance sheet.

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 banking center of the bank, all banking centers are located within the state of California, the out-of-state loan
production offices do not account for a significant amount of the Companys revenues or expenses and management does not allocate resources based on the performance of different transaction activities, it is appropriate to aggregate the banking
centers and loan production offices and report them as a single operating segment. No single customer accounts for more than 10% of the revenues of the Company or PSB.

Material estimates that are particularly susceptible to significant changes in the near-term, among other things, include the determination of the allowance for loan and lease losses, the determination of the carrying
values of goodwill and other intangible assets, the valuation of stock-based compensation, the impairment of long-lived assets and the realization of deferred tax assets. 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.

Pending Merger

On January 9, 2007, the Company and Wells Fargo & Company (Wells
Fargo) entered into a definitive agreement for Wells Fargo to acquire the Company in a stock-for-stock merger. The transaction is expected to be completed by mid-year 2007.

Under the terms of the agreement, the Companys shareholders will receive shares of Wells Fargo common stock for their shares of the Companys
common stock. The exchange ratio (number of Wells Fargo shares to be exchanged for each Placer Sierra Bancshares share) will be based on a Wells Fargo measurement price defined as the volume-weighted average of the daily volume-weighted average
price of a share of Wells Fargo common stock for each of the 20 consecutive trading days ending on the fifth trading day immediately before the closing date of the transaction.

If the Wells Fargo measurement price is between $32.5783 and $39.8179, the exchange ratio will be determined by dividing $28 by the measurement price. If
the Wells Fargo measurement price is equal to or less than $32.5783, then the exchange ratio will be 0.8595. If the Wells Fargo measurement price is equal to or more than $39.8179, then the exchange ratio will be 0.7032.



5



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The completion of the merger is subject to various customary conditions, including the approval of our
shareholders. All regulatory approvals have been received.

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, restricted stock and warrants, result in the issuance of common
stock which share in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options, restricted stock and warrants in computing diluted EPS.

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 March 31,
|                                                                                 |  | 2007                                 |            | 2006
|Basic                                                                            |  |                                      |            |      |   |           
|Net income                                                                       |  | $                                    | 6,472      |      | $ | 5,527     
|Weighted average shares outstanding                                              |  |                                      | 22,521,155 |      |   | 15,047,255
|Earnings per share  basic                                                       |  | $                                    | 0.29       |      | $ | 0.37      
|                                                                                 |  |                                     
|Diluted                                                                          |  |                                      |            |      |   |           
|Net income                                                                       |  | $                                    | 6,472      |      | $ | 5,527     
|Weighted average shares of common stock and common stock equivalents outstanding |  |                                      | 22,805,604 |      |   | 15,292,683
|Earnings per sharediluted                                                       |  | $                                    | 0.28       |      | $ | 0.36      

Nonvested restricted stock is not included in the computation of basic earnings per share. For the
three months ended March 31, 2007 and 2006, 14,568 and 29,135 shares of nonvested restricted stock, respectively, are not included in the computation of basic earnings per share.

For the three months ended March 31, 2007 and 2006, 363,440 and 166,250 shares of common stock issuable under stock option agreements, respectively,
were not included in the computation of diluted earnings per share because their effect would be anti-dilutive. In addition, 29,135 shares of common stock issuable under restricted stock agreements were not included in the computation of diluted
earnings per share for the three months ended March 31, 2006 because their effect would be anti-dilutive.

NOTE 3  STOCK-BASED COMPENSATION

Stock Option Plans

The
Company 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. The Placer Sierra Bancshares 2002 Amended and Restated Stock Option Plan permits the grant of nonstatutory stock options, incentive stock options, stock appreciation
rights and restricted stock awards. The Company has granted both nonstatutory stock options and restricted stock awards. At March 31, 2007, grants outstanding combined with shares available for future grants totaled 1,914,030 shares under these
plans. The shares available for grant may be granted to anyone eligible to participate in the plan. The plan requires that the price may not be less than the fair market value of the Companys common stock at the date of grant. The options
under the plans expire on dates determined by the Board of Directors or a committee of the Board of Directors, but not later than ten years from the date of grant. The vesting period is generally four or five years; however, the vesting period can
be modified at the discretion of the Board of Directors or a committee of the Board of Directors. Outstanding options under the plans are exercisable until their expiration. In the event of a change in control, under certain conditions, all options,
stock appreciation rights and restricted stock awards become immediately vested. In addition, participants holding restricted stock awards may be granted the right to exercise full voting rights with respect to those shares and may be credited with
dividends paid with respect to the underlying shares, if the Board of Directors or a committee of the Board of Directors so determines. The Company issues new shares of common stock upon exercise of stock options, issuance of stock appreciation
rights paid in stock and issuance of restricted stock.



6



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Stock Option Compensation Expense

The compensation cost that has been charged against income for stock options was $289,000 and $140,000 for the three months ended March 31, 2007 and
2006, respectively. The total income tax benefit recognized in the income statement for stock options was $116,000 and $59,000 for the three months ended March 31, 2007 and 2006, respectively.

Management estimated that forfeitures would not be significant and is recognizing compensation costs for all equity awards.

At March 31, 2007, the total compensation cost related to nonvested stock option awards granted to employees under the Companys stock option
plans but not yet recognized was $2.5 million. Stock option compensation expense is recognized on a straight-line basis over the vesting period of the option. This cost is expected to be recognized over a weighted average remaining period of 1.6
years and will be adjusted for subsequent changes in estimated forfeitures.

Stock Option Activity

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



|                                         |  |                                                 |   |  |                              |       |                                               |     |                         |   |           
|---------------------------------------- |  | ----------------------------------------------- | - |  | ---------------------------- | ----- | --------------------------------------------- | --- | ----------------------- | - | ----------
|                                         |  | At or For the Three Months Ended March 31, 2007
|                                         |  | Shares                                          |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm (Yrs) |     | AggregateIntrinsicValue
|Options outstanding, beginning of period |  | 1,189,412                                       |   |  | $                            | 20.16 |                                               | 6.0 |                         | $ | 5,191,000 
|Options granted                          |  |                                                |   |  | $                            |      |                                               |     |                         |   |           
|Options exercised                        |  | (25,324                                         | ) |  | $                            | 12.05 |                                               |     |                         | $ | 386,000   
|Options forfeited/expired                |  | (13,160                                         | ) |  | $                            | 23.61 |                                               |     |                         |   |           
|                                         |  |                                                 |   |  |                              |       |                                               |     |                         |   |           
|Options outstanding, end of period       |  | 1,150,928                                       |   |  | $                            | 20.29 |                                               | 5.7 |                         | $ | 16,438,000
|                                         |  |                                                 |   |  |                              |       |                                               |     |                         |   |           
|Options exercisable, end of period       |  | 658,209                                         |   |  | $                            | 17.81 |                                               | 5.4 |                         | $ | 6,128,000 
|                                         |  |                                                 |   |  |                              |       |                                               |     |                         |   |           

The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying awards and the quoted price of the Companys common stock for options that were in-the-money at March 31, 2007.

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



|                                         |  |                                                 |   |  |                              |      |                                               |     |                         |   |          
|---------------------------------------- |  | ----------------------------------------------- | - |  | ---------------------------- | ---- | --------------------------------------------- | --- | ----------------------- | - | ---------
|                                         |  | At or For the Three Months Ended March 31, 2007
|                                         |  | Shares                                          |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm (Yrs) |     | AggregateIntrinsicValue
|Options outstanding, beginning of period |  | 145,325                                         |   |  | $                            | 7.82 |                                               | 5.5 |                         | $ | 2,318,000
|Options granted                          |  |                                                |   |  | $                            |     |                                               |     |                         |   |          
|Options exercised                        |  | (9,859                                          | ) |  | $                            | 7.82 |                                               |     |                         | $ | 192,000  
|Options forfeited/expired                |  | (143                                            | ) |  | $                            | 7.82 |                                               |     |                         |   |          
|                                         |  |                                                 |   |  |                              |      |                                               |     |                         |   |          
|Options outstanding, end of period       |  | 135,323                                         |   |  | $                            | 7.82 |                                               | 5.3 |                         | $ | 2,604,000
|                                         |  |                                                 |   |  |                              |      |                                               |     |                         |   |          
|Options exercisable, end of period       |  | 134,535                                         |   |  | $                            | 7.82 |                                               | 5.3 |                         | $ | 2,588,000
|                                         |  |                                                 |   |  |                              |      |                                               |     |                         |   |          



7



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Restricted Common Stock Awards

On March 14, 2006, the Company granted 29,135 shares of restricted common stock to selected executive officers, which had a fair market value of
$27.78 per share on the date of grant. On March 14, 2007, 14,567 of these restricted common stock awards vested. Certain of these executives chose to have a total of 2,508 shares withheld by us to pay for taxes. These shares were retired to
common stock and are considered authorized but unissued. The remaining 14,568 shares vest on March 14, 2008 or earlier upon a change in control of the Company.

On May 15, 2006, the Company granted 7,000 shares of restricted common stock to the non-employee directors, which had a fair market value of $24.43 per share on the date of grant. These restricted common stock
awards vested on December 31, 2006.

The participants granted these restricted common stock awards were granted the right to dividend
payments with respect to the underlying shares but were not granted voting rights on nonvested shares. The Company retains voting rights on the nonvested restricted stock. As of March 31, 2007, 14,568 shares of restricted stock are outstanding,
nonvested and expected to vest.

The compensation cost that has been charged against income for restricted stock awards was $101,000 and
$34,000 for the three months ended March 31, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for restricted stock awards was $43,000 and $14,000 for the three months ended March 31, 2007 and
2006, respectively.

At March 31, 2007, the total compensation cost related to nonvested restricted common stock but not yet
recognized was $371,000. Restricted common stock compensation expense is recognized on a straight-line basis over the vesting period. This cost is expected to be recognized over a weighted average remaining period of approximately 0.5 years and will
be adjusted for subsequent changes to estimated forfeitures. The intrinsic value of restricted common stock outstanding was $394,000 as of March 31, 2007.

Warrants

In connection with the acquisition of Southwest, the Company assumed all outstanding warrants which were
convertible into a total of 153,346 shares of common stock at an exercise price of approximately $5.75 per share and were valued at $2.7 million, net of issuance costs, on the date of acquisition. Upon exercise, each warrant is convertible into
4.977 shares of common stock and can be exercised at any time through April 30, 2007. During the three months ended March 31, 2007, the exercise of warrants resulted in the issuance of 76,670 shares of common stock, net of fractional
shares paid. At March 31, 2007, there were warrants outstanding to purchase 40,901 shares of common stock at the exercise price of approximately $5.75 per share.

NOTE 4COMMITMENTS AND CONTINGENCIES

Legal Proceedings

In the ordinary course of 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. 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.

Cerritos Valley Dissenters

On February 21, 2007 the California Court of Appeal, Fourth Appellate District,
Division Three reversed and remanded for further consideration by the trial court, the judgment and satisfaction of judgment entered by the Superior Court of the State of California for the County of Orange in a litigation matter, Bank of Orange
County v. Azar. et al. The litigation matter involves Bank of Orange County, a division of PSB. Bank of Orange County v. Azar et al, was originally filed on November 18, 2003. On June 23, 2005, Bank of Orange County received a
notice of entry of judgment and satisfaction of judgment with respect to this matter. The litigation relates to a number of Cerritos Valley Bank shareholders who exercised their statutory right pursuant to Chapter 13 of the California
Corporations Code to dissent from the 2002 merger of Cerritos Valley Bank with and into Bank of Orange County. Rather than accept the merger consideration of $9.79 per share of common stock paid to Cerritos Valley Bank shareholders who did not
dissent from the merger, the dissenting shareholders claimed that the fair market value of their shares of common stock was $25.76 per share. Prior to consummation of the merger, Bank of Orange County deposited the sum of approximately $3.8 million
with the exchange agent for the merger, representing $9.79 per share multiplied by the number of shares held by dissenting shareholders.



8



---

In January 2004, Bank of Orange County and the dissenting shareholders entered into a settlement
agreement, which provided that the fair market value of the shares would be determined by an appraisal process. Under the terms of the agreement, each partys appraiser valued the shares. After conducting the appraisal, each appraiser reached a
different dollar amount. Because the difference between the two amounts exceeded a specified range, the settlement agreement provided that a third appraiser be selected by the two other appraisers, to determine the fair market value of the Cerritos
Valley Bank common stock. The third appraiser determined that the fair market value of the shares held by the dissenting shareholders was $5.95. Based on the $5.95 valuation, the bank paid the dissenting shareholders approximately $2.2 million. On
June 20, 2005, the Superior Court of the State of California in Orange County entered judgment stating that the amount the Bank paid to the dissenting shareholders represented full satisfaction of both the settlement agreement and all amounts
owed by Bank of Orange County pursuant to Chapter 13 of the California Corporations Code. This is the judgment that has been reversed by the California Court of Appeal as of February 21, 2007. The judgment was originally appealed in
February 2006 by certain dissenting shareholders that hold a majority of the Cerritos Valley Bank common stock involved in the litigation. Shareholders holding the remaining Cerritos Valley Bank common stock involved in the litigation did not
participate in the appeal.

In the appeal decision, the Court of Appeal decided that the settlement agreement, in fact, set up an
arbitration procedure and decided that the case should be remanded to the trial court to confirm, vacate or modify the arbitration award of the third appraiser pursuant to the procedures set forth in the California Arbitration Act. The trial
court will have the discretion to confirm, vacate or modify the arbitration award by the third appraiser. Bank of Orange County intends to continue to vigorously prosecute this action.

ALC Bankruptcy Case

On October 27, 2005, the
bankruptcy trustee of ALC Building Corporation filed an adversary action in the United States Bankruptcy Court, Central District of California against Bank of Orange County, a division of PSB, in a matter entitled Peter C. Anderson, Trustee of
ALC v. Bank of Orange County. ALC was a former vendor of Bank of Orange County that was retained to provide construction funding services. Creditors of ALC filed an involuntary Chapter 7 bankruptcy petition against ALC on March 5,
2004. The bankruptcy trustee sought damages in the amount of $578,000 from Bank of Orange County for all funds Bank of Orange County received from ALC in the 90-day period prior to the date the involuntary bankruptcy petition was filed against ALC,
plus interest and costs. Bank of Orange County vigorously defended the action. However, the bankruptcy trustee filed a motion for summary judgment, which was granted on June 12, 2006 and judgment was entered against Bank of Orange
County in the amount of $578,000, plus interest and costs. Bank of Orange County tendered a check in the amount of $613,000 at the beginning of August 2006 to satisfy the judgment. Bank of Orange County filed a proof of claim as an unsecured
creditor in the Chapter 7 bankruptcy on September 19, 2006 for the amount tendered in the judgment and estimates that it will recover $75,000 and its net loss will be approximately $538,000.

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 condensed 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 in the condensed consolidated balance sheet.

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



|                             |  |               |         |                  |   |        
|---------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                             |  | March 31,2007 |         | December 31,2006
|Commitments to extend credit |  | $             | 569,866 |                  | $ | 598,253
|Standby letters of credit    |  | $             | 8,358   |                  | $ | 6,570  

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 generally 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 ever being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements.



9



---

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 considered to be material for recognition as a liability as of
March 31, 2007 or December 31, 2006. 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.

Deposit Concentrations

In the fourth quarter of 2006, the Company was notified by its largest deposit customer that the customer intended to withdraw all of its deposit balances
by mid-year 2007. The depositor is consolidating all of its operations into its Midwest headquarters. As of December 31, 2006, this depositor represented 12.3% of total deposits and 29.4% of non-interest bearing deposits. As of March 31,
2007, this depositor represented 2.1% of total deposits and 5.8% of non-interest bearing deposits. There were no other single depositors representing more than 5% of deposits at March 31, 2007 or December 31, 2006.

NOTE 5SHORT TERM BORROWING ARRANGEMENTS

At
March 31, 2007 and December 31, 2006, the Company could borrow up to $594.8 million and $584.6 million, respectively, from the Federal Home Loan Bank, secured by qualifying first mortgage loans. At March 31, 2007, there was $31.7
million in borrowings outstanding from the Federal Home Loan Bank on an overnight basis at prevailing interest rates. There were no borrowings from the Federal Home Loan Bank at December 31, 2006.

The Company enters into sales of securities under agreements to repurchase which are short term in nature. At March 31, 2007 and December 31,
2006, the Company had $17.0 million and $11.5 million outstanding in repurchase agreements using a tiered interest rate structure.

NOTE
6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 three months ended March 31, 2007 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 March 31, 2007 and 2006 was $6.6 million and $5.2 million, respectively.

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



|                                                                        |  |           |      |   |                     |   |     |          |  |   |      |  
|----------------------------------------------------------------------- |  | --------- | ---- | - | ------------------- | - | --- | -------- |  | - | ---- | -
|                                                                        |  | BeforeTax |      |   | Tax(Expense)Benefit |   |     | AfterTax | 
|For the Three Months Ended March 31, 2007                               |  |           |      |   |                     |   |     |          |  |   |      |  
|Other comprehensive income:                                             |  |           |      |   |                     |   |     |          |  |   |      |  
|Unrealized holding gains                                                |  | $         | 216  |   |                     | $ | (90 | )        |  | $ | 126  |  
|Less: reclassification adjustment for net gains included in net income  |  |           |     |   |                     |   |    |          |  |   |     |  
|                                                                        |  |           |      |   |                     |   |     |          |  |   |      |  
|Total other comprehensive income                                        |  | $         | 216  |   |                     | $ | (90 | )        |  | $ | 126  |  
|                                                                        |  |           |      |   |                     |   |     |          |  |   |      |  
|For the Three Months Ended March 31, 2006                               |  |           |      |   |                     |   |     |          |  |   |      |  
|Other comprehensive loss:                                               |  |           |      |   |                     |   |     |          |  |   |      |  
|Unrealized holding losses                                               |  | $         | (694 | ) |                     | $ | 327 |          |  | $ | (367 | )
|Less: reclassification adjustment for net losses included in net income |  |           |     |   |                     |   |    |          |  |   |     |  
|                                                                        |  |           |      |   |                     |   |     |          |  |   |      |  
|Total other comprehensive loss                                          |  | $         | (694 | ) |                     | $ | 327 |          |  | $ | (367 | )
|                                                                        |  |           |      |   |                     |   |     |          |  |   |      |  



10



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NOTE 7INCOME TAXES

In July 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan Interpretation of FASB
statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also
prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosures and transitions. The Company has adopted FIN 48 as of January 1, 2007.

The Company previously recognized income tax positions based on managements estimate of whether it is reasonably possible that a liability has been incurred for unrecognized income tax benefits by applying FASB
Statement No. 5, Accounting for Contingencies.

The provisions of FIN 48 have been applied to all tax positions of the Company
as of January 1, 2007. There was no cumulative effect of applying the provisions of FIN 48 and there was no material effect on the Companys provision for income taxes for the three months ended March 31, 2007.

NOTE 8RECENT ACCOUNTING DEVELOPMENTS

Fair Value Option for
Financial Assets and Financial Liabilities

In February 2007, the FASB issued Statement No. 159 (SFAS 159), The Fair Value
Option for Financial Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value at
specified election dates. The entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by
instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments.
The provisions of SFAS 159 are effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. Management did not elect to early adopt SFAS 159 and has not yet completed its evaluation of the impact that
SFAS 159 will have.

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance
Arrangements

In March 2007, the Emerging Issues Task Force (EITF) reached a final consensus on Issue No. 06-10 (EITF 06-10),
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements. EITF 06-10 requires employers to recognize a liability for the post-retirement benefit related to
collateral assignment split-dollar life insurance arrangements in accordance with SFAS No. 106 or APB Opinion No. 12. EITF 06-10 also requires employers to recognize and measure an asset based on the nature and substance of the collateral
assignment split-dollar life insurance arrangement. The provisions of EITF 06-10 are effective for the Company on January 1, 2008, with earlier application permitted, and are to be applied as a change in accounting principle either through
a cumulative-effect adjustment to retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption; or as a change in accounting principle through retrospective
application to all prior periods. Management did not elect to early adopt EITF 06-10 and has not yet completed it evaluation of the impact that EITF 06-10 will have.

NOTE 9SUBSEQUENT EVENT

On April 25, 2007 the Board of Directors declared a common stock
cash dividend of $0.15 per share for the second quarter of 2007. The dividend will be payable on or about May 23, 2007 to its shareholders of record on May 10, 2007.



11



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|ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Discussions of certain matters contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the Exchange Act), and as such, may involve risks and uncertainties including, but not limited to, statements
relating to the effect of the proposed merger between Wells Fargo & Company and Placer Sierra Bancshares (Placer or the Company). 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. The Company cautions readers that a number of important factors
could cause actual results, performance and achievements to 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 1A in our Annual Report on Form 10-K for the year ended December 31, 2006, and under Part II, Item IA in this quarterly report on Form 10-Q. Factors that might cause such a difference include, but are not limited to:
our shareholders may fail to provide the required approvals to consummate the acquisition of the Company by Wells Fargo & Company; factors may occur which result in a condition to the acquisition of the Company by Wells Fargo &
Company not being satisfied; growth may be inhibited if we cannot attract deposits; revenues are lower than expected; or expenses are higher than expected; competitive pressure among depository institutions increases significantly; the cost of
additional capital is more than expected; changes in the interest rate environment reduces interest margins; general economic conditions, either nationally or in the market areas in which we conduct business, are less favorable than expected;
changes may occur in the securities markets; we may suffer an interruption of services from third-party service providers that could adversely affect our business; we may not be able to maintain an effective system of internal and disclosure
controls; revenues following the merger with Southwest are lower than expected; potential or actual litigation occurs; legislation or change in the regulatory requirements adversely affect the businesses in which the Company is engaged; and other
factors discussed under Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2006, and under Part II, Item 1A in this quarterly report on Form 10-Q and our other current and periodic filings with the Securities
and Exchange Commission and the registration statement, which contains a proxy statement-prospectus with respect to the merger as filed by Wells Fargo & Company with the SEC. 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 except as required by law.

Overview

Who We Are

We are the bank holding company for Placer Sierra Bank (the 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, Bank of Orange County and Southwest Community Bank. The bank has one active subsidiary, Central Square Company, Inc., a provider of non-deposit investment
products.

We own 100% of Placer Sierra Bank and 100% of the common stock of First Financial Bancorp Statutory Trust I, Southwest Community
Statutory Trust I, Placer Statutory Trust III and Placer Statutory Trust IV. The trusts were formed for the exclusive purpose of issuing and selling trust preferred securities. For financial reporting purposes our investments in the trusts are
accounted for under the equity method and are included in other assets on the consolidated balance sheet.

Pending Merger

On January 9, 2007, the Company and Wells Fargo & Company (Wells Fargo) entered into a definitive agreement for Wells Fargo to acquire us in
a stock-for-stock merger. The transaction is expected to be completed by mid-year 2007.

Under the terms of the agreement, our shareholders
will receive shares of Wells Fargo common stock for their shares of the our common stock. The exchange ratio (number of Wells Fargo shares to be exchanged for each Placer Sierra Bancshares share) will be based on a Wells Fargo measurement price
defined as the volume-weighted average of the daily volume-weighted average price of a share of Wells Fargo common stock for each of the 20 consecutive trading days ending on the fifth trading day immediately before the closing date of the
transaction.

If the Wells Fargo measurement price is between $32.5783 and $39.8179, the exchange ratio will be determined by dividing $28
by the measurement price. If the Wells Fargo measurement price is equal to or less than $32.5783, then the exchange ratio will be 0.8595. If the Wells Fargo measurement price is equal to or more than $39.8179, then the exchange ratio will be 0.7032.

The completion of the merger is subject to various customary conditions, including the approval of our shareholders. All regulatory
approvals have been received.



12



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Southwest Community Bancorp and Southwest Community Bank Acquisition

On June 9, 2006, the Company completed the acquisition of Southwest Community Bancorp (Southwest) and its subsidiary Southwest Community Bank, a
community bank with nine branches located in Southern California. With the completion of this acquisition, Southwest Community Bank merged into Placer Sierra Bank. The fair value of assets acquired, including goodwill, totaled $756.5 million. The
fair value of the liabilities assumed totaled $581.4 million. Southwest Community Bancorp shareholders received 7,228,910 shares of Placer Sierra Bancshares common stock valued at $172.4 million, net of issuance costs. We assumed all outstanding
warrants which are convertible into a total of 153,346 shares of common stock valued at $2.7 million, net of issuance costs, on the date of acquisition.

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.

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 Opportunities, Challenges and Risks

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



13



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

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
appropriate and consistently applied from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. We have identified our estimate of the fair
value of financial instruments, our policy for loans held for sale and related servicing, our policy for the allowance for loan and lease losses, our valuation of the impairment of long-lived assets, our valuation of goodwill and other intangible
assets, our policy for deferred income taxes and our valuation of stock-based compensation as critical accounting policies. Our critical accounting policies have not changed significantly from those discussed in Item 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Critical Accounting Policies. of our Annual Report on Form 10-K for the year ended December 31, 2006 (Annual Report). 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, 2006. Please see the section below entitled Allowance for Loan and
Lease Losses for a discussion related to this policy.

Results of Operations

Key Performance Indicators

The
following sections contain tables and data setting forth certain statistical information about us for the three months ended March 31, 2007 and 2006. This discussion should be read in conjunction with our unaudited condensed consolidated
financial statements and notes thereto for the three months ended March 31, 2007 and 2006 included herein, and our audited consolidated financial statements and notes thereto for the year ended December 31, 2006 and the related discussion
therein, included in our Annual Report on Form 10-K.

As of March 31, 2007, we had total assets of $2.413 billion, total loans and
leases held for investment, net of deferred fees and costs, of $1.817 billion, total deposits of $1.882 billion and shareholders equity of $409.4 million. For the three months ended March 31, 2007, average earning assets were $2.033
billion, average loans and leases held for investment, net of deferred fees and costs, were $1.824 billion, and average deposits were $1.969 billion. As of March 31, 2007, 22,601,533 shares of our common stock were outstanding (including 14,568
shares of nonvested restricted stock), having a book value per share of $18.11.

Net income for the three months ended March 31, 2007
was $6.5 million, or $0.28 per diluted share, compared with net income of $5.5 million, or $0.36 per diluted share, for the same period of 2006.

The change in financial position, operating results and earnings per share for the three months ended March 31, 2007 as compared to the same period of 2006 reflect the increase in net assets and earnings attributable to the acquisition
of Southwest Community Bancorp (Southwest) on June 9, 2006. Earnings per share for the three months ended March 31, 2007 was also impacted by the increase in the number of shares outstanding resulting from the issuance of new shares of
common stock in connection with this all-stock acquisition.



14



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The following table presents our key performance indicators for the three months ended March 31,
2007 and 2006:



|                                                      |  |                                              |            |   |      |   |            |  
|----------------------------------------------------- |  | -------------------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                      |  | For the Three Months Ended March 31,         |           
|                                                      |  | 2007                                         |            |   | 2006 |  
|                                                      |  | (Dollars in thousands, except pershare data) |           
|Net interest income                                   |  | $                                            | 27,705     |   |      | $ | 20,833     |  
|Non-interest income                                   |  |                                              | 5,120      |   |      |   | 3,690      |  
|                                                      |  |                                              |            |   |      |   |            |  
|                                                      |  |                                              | 32,825     |   |      |   | 24,523     |  
|Provision for the allowance for loan and lease losses |  |                                              |           |   |      |   |           |  
|Non-interest expense                                  |  |                                              | 21,657     |   |      |   | 15,446     |  
|Provision for income taxes                            |  |                                              | 4,696      |   |      |   | 3,550      |  
|                                                      |  |                                              |            |   |      |   |            |  
|Net income                                            |  | $                                            | 6,472      |   |      | $ | 5,527      |  
|                                                      |  |                                              |            |   |      |   |            |  
|Average assets                                        |  | $                                            | 2,475,793  |   |      | $ | 1,896,540  |  
|Average shareholders equity                          |  | $                                            | 406,627    |   |      | $ | 211,261    |  
|Share Information:                                    |  |                                              |            |   |      |   |            |  
|Weighted average shares outstanding  basic           |  |                                              | 22,521,155 |   |      |   | 15,047,255 |  
|Weighted average shares outstanding  diluted         |  |                                              | 22,805,604 |   |      |   | 15,292,683 |  
|Profitability Measures:                               |  |                                              |            |   |      |   |            |  
|Earnings per share  basic                            |  | $                                            | 0.29       |   |      | $ | 0.37       |  
|Earnings per share  diluted                          |  | $                                            | 0.28       |   |      | $ | 0.36       |  
|Return on average assets                              |  |                                              | 1.06       | % |      |   | 1.18       | %
|Return on average shareholders equity                |  |                                              | 6.45       | % |      |   | 10.61      | %
|Efficiency ratio                                      |  |                                              | 65.98      | % |      |   | 62.99      | %

Income Statement

Net income for the three months ended March 31, 2007 was $6.5 million, or $0.28 per diluted share. Net income for the three months ended
March 31, 2006 was $5.5 million, or $0.36 per diluted share. Return on average assets for the three months ended March 31, 2007 was 1.06%, compared to 1.18% for the same period of 2006. Return on average equity for the three months ended
March 31, 2007 was 6.45%, compared to 10.61% for the same period of 2006. For further information on these trends, see net interest income, non-interest income and non-interest expense discussions as follows.

Net interest income for the three months ended March 31, 2007 was $27.7 million, compared to $20.8 million for the same period of 2006. The increase
in net interest income is attributable to the benefit of the merger with Southwest and reflects the growth in average interest earning asset balances of 23.1% for the three months ended March 31, 2007 compared to the same period of 2006. The
increase in net interest income is also attributable to an increase in the Companys net interest margin.

Net interest margin for the
three months ended March 31, 2007 was 5.53%, an increase of 42 basis points from the same period of 2006. The increase in net interest margin is primarily attributable to the benefit of the addition of Southwests low-cost deposit base, an
increase in the yield earned on average earning assets and a decrease in the cost of the junior subordinated deferrable interest debentures, partially offset by increased funding costs throughout the remainder of the Banks operations.

Total non-interest income for the three months ended March 31, 2007 was $5.1 million, compared with $3.7 million for the same period
of 2006. Non-interest income increased primarily due to an increase in service charges and fees on deposit accounts as a result of the increase in the number of deposit accounts associated with the acquisition of Southwest, an increase in referral
and other loan related fees as a result of the increase in the number of real estate loans referred to third parties and the gains recorded on the sale of loans held for sale during the three months ended March 31, 2007. There were no loans
sold in 2006.

Total non-interest expense for the three months ended March 31, 2007 was $21.7 million, compared with $15.4 million for
the same period of 2006. The increase was primarily centered in salaries and benefits costs, occupancy and equipment, administration and third party payments which increased principally due to the acquisition of Southwest. In addition, we recorded
$760,000 of merger expenses related to the pending merger with Wells Fargo during the three months ended March 31, 2007.

The
Companys efficiency ratio for the three months ended March 31, 2007 was 65.98%, compared to 62.99% for the same period of 2006. The increase in the efficiency ratio during 2007 is primarily due to a 33.9% growth in total net interest
income plus non-interest income when compared to a 40.2% rate of growth in total non-interest expense for the three months ended March 31, 2007 compared to the same period of 2006.



15



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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 on an annualized basis. Our balance sheet is asset sensitive in an environment where the yield curve moves in a parallel fashion to changes in short term interest rates, 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, typically reprice more slowly and usually incorporate only a portion of the movement in market rates.

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. Average balances are based on daily averages. 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.



16



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|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|------------------------------------------------ |  | ---------------------------------------- | --------- | ------------------------ | ---------------------------------------- | ------------------- |  | ----- | -------------- |  | ------------------------ | --------- | ------------------- | - | ------ |  | ---- | -
|                                                 |  | For the Three Months EndedMarch 31, 2007 |           |                          | For the Three Months EndedMarch 31, 2006 |                    
|                                                 |  | AverageBalance                           |           | InterestIncome orExpense |                                          | AverageYield orCost |  |       | AverageBalance |  | InterestIncome orExpense |           | AverageYield orCost |  
|                                                 |  | (Dollars in thousands)                   |          
|ASSETS                                           |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Interest earning assets:                         |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Loans held for sale                              |  | $                                        | 4,066     |                          | $                                        | 101                 |  | 10.07 | %              |  | $                        |          |                     | $ |       |  | 0.00 | %
|Loans and leases held for investment (1) (2) (3) |  |                                          | 1,823,830 |                          |                                          | 34,415              |  | 7.65  | %              |  |                          | 1,383,375 |                     |   | 24,622 |  | 7.22 | %
|Investment securities:                           |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Taxable                                          |  |                                          | 111,915   |                          |                                          | 1,350               |  | 4.89  | %              |  |                          | 208,919   |                     |   | 2,338  |  | 4.54 | %
|Tax-exempt (1)                                   |  |                                          | 38,914    |                          |                                          | 398                 |  | 4.15  | %              |  |                          | 17,729    |                     |   | 183    |  | 4.19 | %
|Federal funds sold                               |  |                                          | 32,416    |                          |                                          | 418                 |  | 5.23  | %              |  |                          | 27,414    |                     |   | 301    |  | 4.45 | %
|Time deposits with other banks                   |  |                                          | 100       |                          |                                          |                    |  | 0.00  | %              |  |                          |          |                     |   |       |  | 0.00 | %
|Other earning assets (4)                         |  |                                          | 21,567    |                          |                                          | 326                 |  | 6.13  | %              |  |                          | 14,400    |                     |   | 189    |  | 5.32 | %
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Total interest earning assets                    |  |                                          | 2,032,808 |                          |                                          | 37,008              |  | 7.38  | %              |  |                          | 1,651,837 |                     |   | 27,633 |  | 6.78 | %
|Non-interest earning assets:                     |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Cash and due from banks                          |  |                                          | 116,379   |                          |                                          |                     |  |       |                |  |                          | 60,432    |                     |   |        |  |      |  
|Other assets                                     |  |                                          | 326,606   |                          |                                          |                     |  |       |                |  |                          | 184,271   |                     |   |        |  |      |  
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Total assets                                     |  | $                                        | 2,475,793 |                          |                                          |                     |  |       |                |  | $                        | 1,896,540 |                     |   |        |  |      |  
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY             |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Interest bearing liabilities:                    |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Deposits:                                        |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Interest bearing demand                          |  | $                                        | 233,516   |                          |                                          | 311                 |  | 0.54  | %              |  | $                        | 228,702   |                     |   | 298    |  | 0.53 | %
|Money market                                     |  |                                          | 477,263   |                          |                                          | 3,802               |  | 3.23  | %              |  |                          | 328,075   |                     |   | 2,036  |  | 2.52 | %
|Savings                                          |  |                                          | 127,490   |                          |                                          | 140                 |  | 0.45  | %              |  |                          | 157,460   |                     |   | 172    |  | 0.44 | %
|Time certificates of deposit                     |  |                                          | 395,331   |                          |                                          | 3,925               |  | 4.03  | %              |  |                          | 389,023   |                     |   | 3,156  |  | 3.29 | %
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Total interest bearing deposits                  |  |                                          | 1,233,600 |                          |                                          | 8,178               |  | 2.69  | %              |  |                          | 1,103,260 |                     |   | 5,662  |  | 2.08 | %
|FHLB borrowings                                  |  |                                          | 10,696    |                          |                                          | 142                 |  | 5.38  | %              |  |                          |          |                     |   |       |  | 0.00 | %
|Repurchase agreements                            |  |                                          | 14,362    |                          |                                          | 113                 |  | 3.19  | %              |  |                          | 21,011    |                     |   | 102    |  | 1.97 | %
|Long-term debt                                   |  |                                          | 51,151    |                          |                                          | 870                 |  | 6.90  | %              |  |                          | 53,611    |                     |   | 1,036  |  | 7.84 | %
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Total interest bearing liabilities               |  |                                          | 1,309,809 |                          |                                          | 9,303               |  | 2.88  | %              |  |                          | 1,177,882 |                     |   | 6,800  |  | 2.34 | %
|Non-interest bearing liabilities:                |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Demand deposits                                  |  |                                          | 735,371   |                          |                                          |                     |  |       |                |  |                          | 490,687   |                     |   |        |  |      |  
|Other liabilities                                |  |                                          | 23,986    |                          |                                          |                     |  |       |                |  |                          | 16,710    |                     |   |        |  |      |  
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Total liabilities                                |  |                                          | 2,069,166 |                          |                                          |                     |  |       |                |  |                          | 1,685,279 |                     |   |        |  |      |  
|Shareholders equity                             |  |                                          | 406,627   |                          |                                          |                     |  |       |                |  |                          | 211,261   |                     |   |        |  |      |  
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Total liabilities and shareholders' equity       |  | $                                        | 2,475,793 |                          |                                          |                     |  |       |                |  | $                        | 1,896,540 |                     |   |        |  |      |  
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Net interest income                              |  |                                          |           |                          | $                                        | 27,705              |  |       |                |  |                          |           |                     | $ | 20,833 |  |      |  
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  
|Net interest margin (5)                          |  |                                          |           |                          |                                          |                     |  | 5.53  | %              |  |                          |           |                     |   |        |  | 5.11 | %
|                                                 |  |                                          |           |                          |                                          |                     |  |       |                |  |                          |           |                     |   |        |  |      |  

---

|(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 $12.1 million and $2.5 million for the three months March 31, 2007 and 2006, respectively, are included in the yield computations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Interest income includes net deferred loan and lease fees and costs of $310,000 and $356,000 for the three months ended March 31, 2007 and 2006, 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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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 March 31, 2007 Compared to Three Months Ended March 31,2006 |      
|                                          |  | Net Change                                                                     |       |   | Rate |   |       | Volume |  |   | Mix    |  
|                                          |  | (Dollars in thousands)                                                         |      
|Interest income:                          |  |                                                                                |       |  
|Loans held for sale                       |  | $                                                                              | 101   |   |      | $ |      |        |  | $ | 101    |   |  | $ |    |  
|Loans and leases held for investment      |  |                                                                                | 9,793 |   |      |   | 1,482 |        |  |   | 7,839  |   |  |   | 472 |  
|Investment securities available-for-sale: |  |                                                                                |       |   |      |   |       |        |  |   |        |   |  |   |     |  
|Taxable                                   |  |                                                                                | (988  | ) |      |   | 182   |        |  |   | (1,086 | ) |  |   | (84 | )
|Tax-exempt                                |  |                                                                                | 215   |   |      |   | (2    | )      |  |   | 219    |   |  |   | (2  | )
|Federal funds sold                        |  |                                                                                | 117   |   |      |   | 52    |        |  |   | 55     |   |  |   | 10  |  
|Time deposits with other banks            |  |                                                                                |      |   |      |   |      |        |  |   |       |   |  |   |    |  
|Other earning assets                      |  |                                                                                | 137   |   |      |   | 29    |        |  |   | 94     |   |  |   | 14  |  
|                                          |  |                                                                                |       |   |      |   |       |        |  |   |        |   |  |   |     |  
|Total interest income                     |  |                                                                                | 9,375 |   |      |   | 1,743 |        |  |   | 7,222  |   |  |   | 410 |  
|                                          |  |                                                                                |       |   |      |   |       |        |  |   |        |   |  |   |     |  
|Interest expense:                         |  |                                                                                |       |  
|Interest bearing demand                   |  |                                                                                | 13    |   |      |   | 7     |        |  |   | 6      |   |  |   |    |  
|Money market                              |  |                                                                                | 1,766 |   |      |   | 578   |        |  |   | 926    |   |  |   | 262 |  
|Savings                                   |  |                                                                                | (32   | ) |      |   | 1     |        |  |   | (33    | ) |  |   |    |  
|Time certificates of deposit              |  |                                                                                | 769   |   |      |   | 706   |        |  |   | 51     |   |  |   | 12  |  
|FHLB borrowings                           |  |                                                                                | 63    |   |      |   | 17    |        |  |   | 38     |   |  |   | 8   |  
|Repurchase agreements                     |  |                                                                                | 90    |   |      |   | 86    |        |  |   | 1      |   |  |   | 3   |  
|Long-term debt                            |  |                                                                                | (166  | ) |      |   | (124  | )      |  |   | (48    | ) |  |   | 6   |  
|                                          |  |                                                                                |       |   |      |   |       |        |  |   |        |   |  |   |     |  
|Total interest expense                    |  |                                                                                | 2,503 |   |      |   | 1,271 |        |  |   | 941    |   |  |   | 291 |  
|                                          |  |                                                                                |       |   |      |   |       |        |  |   |        |   |  |   |     |  
|Net interest income                       |  | $                                                                              | 6,872 |   |      | $ | 472   |        |  | $ | 6,281  |   |  | $ | 119 |  
|                                          |  |                                                                                |       |   |      |   |       |        |  |   |        |   |  |   |     |  

Net interest income increased 33.0%, or $6.9 million, to $27.7 million for the three months ended
March 31, 2007, from $20.8 million for the same period of 2006. Average earning assets increased 23.1%, or $381.0 million, to $2.033 billion for the three months ended March 31, 2007, from $1.652 billion for the same period of 2006.
Average loans and leases held for investment, net of deferred fees and costs, increased by 31.8%, or $440.5 million, to $1.824 billion for the three months ended March 31, 2007, from $1.383 billion for the same period of 2006. Average loans and
leases held for investment, net of deferred fees and costs, increased as a result of the acquisition of Southwest along with our organic loan growth. Average core deposits (all deposit categories other than time certificates of deposit) increased
30.6%, or $368.7 million, to $1.574 billion for the three months ended March 31, 2007, from $1.205 billion for the same period of 2006. Average core deposits increased primarily as a result of the acquisition of Southwest.

The net interest margin for the three months ended March 31, 2007 increased to 5.53% from 5.11% for the same period in 2006. The increase is
primarily attributable to the addition of Southwests low-cost deposit base, an increase in the yield earned on average earning assets and a decrease in the cost of the junior subordinated deferrable interest debentures, partially offset by
increased funding costs throughout the remainder of the Banks operations.

Interest income increased 33.9%, or $9.4 million, to $37.0
million for the three months ended March 31, 2007, from $27.6 million for the same period of 2006. Average loans and leases held for investment, net of deferred fees and costs, increased by 31.8% or $440.5 million, to $1.824 billion and yielded
7.65% for the three months ended March 31, 2007, compared to 7.22% for the same period of 2006. The increase in the yields on average loans and leases primarily reflects the benefit of loans that re-priced during a period of rising short-term
interest rates. The yield on investment securities increased to 4.70% for the three months ended March 31, 2007, from 4.51% for the same period of 2006.

Interest expense on all interest bearing liabilities increased 36.8%, or $2.5 million, to $9.3 million for the three months ended March 31, 2007, from $6.8 million in the same period of 2006. Total average
interest bearing liabilities increased 11.2%, or $131.9 million, to $1.310 billion for the three months ended March 31, 2007, from $1.178 billion for the same period of 2006. The cost of interest bearing liabilities increased to 2.88% for the
three months ended March 31, 2007, from 2.34% for the same period of 2006. This increase was the result of an increase in deposit rates paid on all deposit types in response to market conditions and to provide funding for loan growth, as well
as higher rates paid on short-term borrowings, offset by a decrease in rates paid on junior



18



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subordinated deferrable interest debentures. The cost of junior subordinated debentures decreased due to the redemption of $38.1 million in debentures and
the issuance of $25.8 million in new debentures in the fourth quarter of 2006 at rates 198 basis points lower than the debentures redeemed.

Interest expense on interest bearing deposits increased 44.4%, or $2.5 million, to $8.2 million for the three months ended March 31, 2007, from $5.7 million for the same period of 2006. The increase is primarily attributable to an
increase in deposit rates paid on all deposit types and a migration of deposits into higher rate accounts such as time deposit accounts and optimum money market accounts. The overall cost of deposits, including non-interest bearing demand deposits,
increased to 1.68% for the three months ended March 31, 2007, from 1.44% for the same period of 2006.

A substantial percentage of our
funding sources are non-interest bearing demand deposits, which represented approximately 37.3% of average total deposits for the three months ended March 31, 2007, an increase from 30.8% for the same period of 2006. This increase is primarily
the result of the acquisition of Southwest. The Companys largest depositor, as of December 31, 2006, has consolidated its operations into its Midwest headquarters. As of December 31, 2006, this depositor represented 12.3% of total
deposits and 29.4% of non-interest bearing deposits, while as of March 31, 2007, this customer represented only 2.1% of total deposits and 5.8% of non-interest bearing deposits. As this customer continues to withdraw its deposits, we expect the
percentage of average non-interest bearing demand deposit to average total deposits to decline.

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.

The Companys overall credit quality remained strong during the three months ended March 31, 2007. Non-performing loans to total loans and
leases held for investment, net of deferred fees and costs, decreased to 0.62% at March 31, 2007 from 0.75% at December 31, 2006. During the three months ended March 31, 2007, we experienced loan and lease charge-offs of $782,000 and
recoveries of $587,000 compared to loan and lease charge-offs of $1.0 million and recoveries of $856,000 for the same period of 2006. Based on the above, management determined that no provision for loan and lease losses was required for the three
months ended March 31, 2007.

The allowance for loan and lease losses decreased to $22.1 million as of March 31, 2007 compared to
$22.3 million at December 31, 2006. This decrease relates to the net charge-offs discussed above.

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 March 31, |      
|                                                              |  | 2007                                 |       |   | 2006 |  
|                                                              |  | (Dollars in thousands)               |      
|Service charges and fees on deposit accounts                  |  | $                                    | 2,277 |   |      | $ | 1,830 |  
|Referral and other loan-related fees                          |  |                                      | 1,092 |   |      |   | 732   |  
|Increase in cash surrender value of life insurance            |  |                                      | 500   |   |      |   | 406   |  
|Debit card and merchant discount fees                         |  |                                      | 391   |   |      |   | 300   |  
|Revenues from sales of non-deposit investment products        |  |                                      | 299   |   |      |   | 196   |  
|Gain on sale of loans held for sale, net                      |  |                                      | 246   |   |      |   |      |  
|Loan servicing income                                         |  |                                      | 175   |   |      |   | 100   |  
|Other                                                         |  |                                      | 140   |   |      |   | 126   |  
|                                                              |  |                                      |       |   |      |   |       |  
|Total non-interest income                                     |  | $                                    | 5,120 |   |      | $ | 3,690 |  
|                                                              |  |                                      |       |   |      |   |       |  
|Total non-interest income to average total assets, annualized |  |                                      | 0.84  | % |      |   | 0.79  | %



19



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Non-interest income increased 38.8%, or $1.4 million, to $5.1 million for the three months ended
March 31, 2007, from $3.7 million for the same period of 2006.

Service charges and fees on deposit accounts increased 24.4%, or
$447,000, to $2.3 million for the three months ended March 31, 2007, from $1.8 million for the same period of 2006. This increase is primarily due to the increase in the number of deposit accounts associated with the acquisition of Southwest.

Referral and other loan-related fees increased 49.2%, or $360,000, to $1.1 million for the three months ended March 31, 2007, from
$732,000 for the same period of 2006 primarily due to an increase in real estate loans referred to third parties. Referral fees are highly dependent on a small number of transactions and are subject to significant fluctuation from period to period.

The revenue generated from the increase in the cash surrender value of life insurance increased 23.2%, or $94,000, to $500,000 for the
three months ended March 31, 2007, from $406,000 for the same period of 2006 primarily due to the addition of bank owned life insurance as a result of the acquisition of Southwest.

Debit card and merchant discount fees increased 30.3 %, or $91,000, to $391,000 for the three months ended March 31, 2007, from $300,000 for
the same period of 2006 primarily due to the increase in the number of debit card users as a result of the acquisition of Southwest.

Revenues from sales of non-deposit investment products increased 52.6%, or $103,000, to $299,000 for the three months ended March 31, 2007, from $196,000 for the same period of 2006. Sales of non-deposit investment products are highly
dependent on a small sales force and are subject to significant fluctuation from period to period based on the number of sales representatives at the Company.

In the three months ended March 31, 2007, the Company recorded a $246,000 gain on sale of loans held for sale due to the addition of Southwests SBA group. There were no loans sold during the same period of
2006.

Non-Interest Expense

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



|                                                               |  |                                     |        |   |      |   |        |  
|-------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ---- | - | ------ | -
|                                                               |  | For the Three MonthsEnded March 31, |       
|                                                               |  | 2007                                |        |   | 2006 |  
|                                                               |  | (Dollars in thousands)              |       
|Salaries and employee benefits                                 |  | $                                   | 11,752 |   |      | $ | 8,301  |  
|Occupancy and equipment                                        |  |                                     | 2,786  |   |      |   | 2,063  |  
|Data and item processing                                       |  |                                     | 1,503  |   |      |   | 1,330  |  
|Administration                                                 |  |                                     | 861    |   |      |   | 491    |  
|Third party payments                                           |  |                                     | 851    |   |      |   | 233    |  
|Merger                                                         |  |                                     | 760    |   |      |   |       |  
|Amortization of core deposit intangible                        |  |                                     | 718    |   |      |   | 470    |  
|Communication and postage                                      |  |                                     | 681    |   |      |   | 567    |  
|Professional fees                                              |  |                                     | 607    |   |      |   | 663    |  
|Advertising and business development                           |  |                                     | 313    |   |      |   | 343    |  
|Stationery and supplies                                        |  |                                     | 203    |   |      |   | 198    |  
|Loan-related costs                                             |  |                                     | 68     |   |      |   | 246    |  
|Other                                                          |  |                                     | 554    |   |      |   | 541    |  
|                                                               |  |                                     |        |   |      |   |        |  
|Total non-interest expense                                     |  | $                                   | 21,657 |   |      | $ | 15,446 |  
|                                                               |  |                                     |        |   |      |   |        |  
|Total non-interest expense to average total assets, annualized |  |                                     | 3.47   | % |      |   | 3.30   | %

Non-interest expense increased 40.2%, or $6.2 million, to $21.7 million for the three months ended
March 31, 2007, from $15.4 million for the same period of 2006.

Salaries and employee benefits expense increased 41.6%, or $3.5
million, to $11.8 million for the three months ended March 31, 2007, from $8.3 million for the same period in 2003. Salaries and employee benefits expense increased as a result of:



| |  |  | an increase in the number of employees as a result of the acquisition of Southwest,
| | - |  | -----------------------------------------------------------------------------------



20



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| |  |  | $431,000 in costs associated with the liquidation of the First Financial Bancorp 401k and ESOP plans,
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | a $149,000 increase in stock option compensation expense as a result of options granted throughout 2006,
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | a $67,000 increase in restricted common stock compensation expense related to the amortization of restricted common stock granted in March of 2006,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $88,000 in retention incentives to Southwest employees, and
| | - |  | -----------------------------------------------------------



| |  |  | a $360,000 decrease in deferred loan origination costs primarily due to a decrease in the number of loans boarded during 2007 compared to 2006. Deferred loan
origination costs reduce salaries expense in the period which a loan is boarded.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Occupancy and equipment expense
increased 35.1%, or $723,000, to $2.8 million for the three months ended March 31, 2007 from $2.1 million for the same period in 2006 principally due to the acquisition of Southwest.

Data and item processing expense increased 13.0%, or $173,000, to $1.5 million for the three months ended March 31, 2007 from $1.3 million for the
same period of 2006 principally due to the acquisition of Southwest.

Administration expense increased 75.4%, or $370,000, to $861,000 for
the three months ended March 31, 2007 from $491,000 for the same period of 2006 principally due to an increase in the volume of cash letter activity and cash ordering of commercial customers resulting in an increase in correspondent banking
charges attributable to the acquisition of Southwest along with $174,000 in penalties assessed by the U.S. Department of Labor relating to the 2004 First Financial Bancorp 401k and ESOP plans. First Financial Bancorp was acquired by the Company in
December 2004.

Third party payments for banking related services paid on behalf of business customers increased 265.2%, or $618,000, to
$851,000 for the three months ended March 31, 2007, from $233,000 for 2006 principally due to the acquisition of Southwest.

During
the three months ended March 31, 2007, the Company recorded $760,000 in merger expenses related to the pending merger with Wells Fargo. There were no such costs in 2006.

Amortization of core deposit intangible increased 52.8%, or $248,000, to $718,000 for the three months ended March 31, 2007, from $470,000 for the
same period of 2006 due to the amortization of the core deposit intangible related to Southwest.

Communication and postage expense
increased 20.1%, or $114,000, to $681,000 for the three months ended March 31, 2007 from $567,000 for the same period of 2006 primarily due to an increase in armored car and internal courier services related to the acquisition of Southwest.

Loan related expenses decreased 72.4%, or $178,000, to $68,000 for the three months ended March 31, 2007, from $246,000 for the same
period of 2006, primarily due to the collection of appraisal fees from borrowers in excess of historical amounts.

Stock-Based
Compensation

At March 31, 2007, the total compensation cost related to nonvested stock option awards granted to employees
under the Companys stock option plans but not yet recognized was $2.5 million. This cost will be amortized on a straight-line basis over a weighted average period of approximately 1.6 years and will be adjusted for subsequent changes in
estimated forfeitures.

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, interest on loans in designated enterprise zones, bank owned life insurance, the benefit of deductions for the exercise of stock options and warrants and vesting of
restricted common stock, the benefit of housing tax credits and the nondeductible nature of certain merger related costs and penalties assessed by the U.S. Department of Labor relating to the 2004 First Financial Bancorp 401k and ESOP plans, our
actual effective income tax rate was 42.0% and 39.1% for the three months ended March 31, 2007 and 2006, respectively.

Financial Condition

Our total assets at March 31, 2007 were $2.413 billion, a decrease of 8.9%, compared to $2.649 billion at December 31, 2006.
Our earning assets at March 31, 2007 totaled $1.998 billion, a decrease of 11.3%, compared to $2.134 billion at December 31, 2006. Total deposits at March 31, 2007 were $1.882 billion, a decrease of 12.8%, compared to $2.159 billion
at December 31, 2006. The decrease in total assets and earning assets is centered primarily in federal funds sold as a consequence of the decrease in deposits.



21



---

Total deposits decreased as a result of the withdrawal of balances of the Companys largest depositor, a seasonal decline in other customer deposit
balances and challenges in maintaining existing relationships and acquiring new relationships as a result of the pending merger with Wells Fargo. The Companys largest depositor as of December 31, 2006, a nationwide mortgage servicing
company, consolidated its operations into its Midwest headquarters. As of December 31, 2006, this depositor represented 12.3% of total deposits and 29.4% of non-interest bearing deposits. As of March 31, 2007, this depositor only
represented 2.1% of total deposits and 5.8% of non-interest bearing deposits.

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 March 31, 2007   |           |   | As of December 31, 2006 |      
|                                                 |  | Amount                 |           |   | % of Loans              |       |   | Amount |   |           | % of Loans | 
|                                                 |  | (Dollars in thousands) |          
|Loans and leases held for investment             |  |                        |           |   |                         |       |   |        |   |           |            |  |       |  
|Real estate  mortgage                           |  | $                      | 1,317,097 |   |                         | 72.4  | % |        | $ | 1,323,114 |            |  | 71.5  | %
|Real estate  construction                       |  |                        | 312,798   |   |                         | 17.2  |   |        |   | 328,135   |            |  | 17.7  |  
|Commercial                                       |  |                        | 165,172   |   |                         | 9.1   |   |        |   | 169,409   |            |  | 9.2   |  
|Agricultural                                     |  |                        | 3,024     |   |                         | 0.2   |   |        |   | 4,862     |            |  | 0.3   |  
|Consumer                                         |  |                        | 15,457    |   |                         | 0.8   |   |        |   | 16,053    |            |  | 0.9   |  
|Leases receivable and other                      |  |                        | 6,037     |   |                         | 0.3   |   |        |   | 7,701     |            |  | 0.4   |  
|                                                 |  |                        |           |   |                         |       |   |        |   |           |            |  |       |  
|Total gross loans and leases held for investment |  |                        | 1,819,585 |   |                         | 100.0 | % |        |   | 1,849,274 |            |  | 100.0 | %
|                                                 |  |                        |           |   |                         |       |   |        |   |           |            |  |       |  
|Less: allowance for loan and lease losses        |  |                        | (22,133   | ) |                         |       |   |        |   | (22,328   | )          |  |       |  
|Deferred loan and lease fees, net                |  |                        | (2,535    | ) |                         |       |   |        |   | (2,545    | )          |  |       |  
|                                                 |  |                        |           |   |                         |       |   |        |   |           |            |  |       |  
|Total net loans and leases held for investment   |  | $                      | 1,794,917 |   |                         |       |   |        | $ | 1,824,401 |            |  |       |  
|                                                 |  |                        |           |   |                         |       |   |        |   |           |            |  |       |  

Gross loans and leases held for investment decreased 1.6%, or $29.7 million, to $1.820 billion at
March 31, 2007, from $1.849 billion at December 31, 2006, due to slower production in the quarter primarily as a result of the pending merger with Wells Fargo.

We experienced decreases of $6.0 million in real estate mortgages, $15.3 million in real estate construction, $4.2 million in commercial, $1.8 million in agricultural, $596,000 in consumer and $1.7 million in leases
receivable and other loans. While we recorded $164.4 million of new loan commitments during the three months ended March 31, 2007, we also experienced early loan payoffs of $115.9 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. However, a substantial decline in the performance of the economy in general or a significant
decline in real estate values in the banks primary market areas could have an adverse impact on collectibility, increase the level of real estate-related non-performing loans, or have other adverse effects which alone or in the aggregate could
have a material adverse effect on our business, financial condition, results of operations and cash flows. The Company does not participate in subprime lending.

Real Estate  Mortgage

The category of real estate  mortgage at March 31, 2007
totaled $1.317 billion and was comprised 66.9% of loans collateralized by commercial real estate and 33.1% of loans collateralized by 1-4 family real estate.

We set limitations on our exposure in commercial real estate lending activities and employ monitoring tools and reporting consistent with sound industry practices. We segment our commercial real estate mortgage and
construction loan portfolio into low-to-moderate risk and higher risk loan categories and limit the aggregate of higher risk commercial real estate mortgage and construction loans outstanding to no more than 350% of the sum of the banks Tier 1
capital plus the allowance for loan and lease losses; at March 31, 2007, this ratio was 286%. We further limit our total commercial real estate loans to no more than 600% of the sum of the banks Tier 1 capital plus the allowance for loan
and lease losses; at March 31, 2007, this ratio was 530%. Commercial real estate mortgages generally require debt service coverage ratios of 125% or greater and loan to value ratios of not more than 75%.



22



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During the first quarter of 2007, we stress tested all non-owner occupied commercial real estate mortgage
term 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 194%. 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 166%.
Combining both events caused the ratio to decrease to 162%. The tested loans had a weighted average loan to value of 58.53%. 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
64.0% of loans supported by first liens and 36.0% 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.

Real Estate  Construction

The category of real estateconstruction at March 31, 2007 totaled $312.8 million, approximately 20% 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 80% of real estate  construction was comprised of residential and commercial loans for a variety of property types to owner occupants, investors and developers. Our underwriting
guidelines for these construction loans set minimum borrower equity and pre-leasing requirements for commercial projects and generally limit the number of units ahead of sales for residential projects.

Non-Performing Assets

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



|                                                   |  |                        |        |   |                         |   |        |  
|-------------------------------------------------- |  | ---------------------- | ------ | - | ----------------------- | - | ------ | -
|                                                   |  | As of March 31, 2007   |        |   | As of December 31, 2006 |  
|                                                   |  | (Dollars in thousands) |       
|Non-accrual loans and leases, not restructured     |  | $                      | 11,286 |   |                         | $ | 13,837 |  
|Accruing loans and leases past due 90 days or more |  |                        |       |   |                         |   |       |  
|Restructured loans and leases                      |  |                        |       |   |                         |   |       |  
|                                                   |  |                        |        |   |                         |   |        |  
|Total non-performing loans and leases (NPLs)       |  |                        | 11,286 |   |                         |   | 13,837 |  
|OREO                                               |  |                        |       |   |                         |   |       |  
|                                                   |  |                        |        |   |                         |   |        |  
|Total non-performing assets (NPAs)                 |  | $                      | 11,286 |   |                         | $ | 13,837 |  
|                                                   |  |                        |        |   |                         |   |        |  
|Selected ratios:                                   |  |                        |        |   |                         |   |        |  
|NPLs to total loans and leases held for investment |  |                        | 0.62   | % |                         |   | 0.75   | %
|NPAs to total assets                               |  |                        | 0.47   | % |                         |   | 0.52   | %

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.



23



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

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

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

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 certain 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.



24



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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 March 31, |          
|                                                                                                      |  | 2007                                          |           |    | 2006 |  
|                                                                                                      |  | (Dollars in thousands)                        |          
|Balance at beginning of period                                                                        |  | $                                             | 22,328    |    |      | $ | 16,714    |   
|Charge-offs:                                                                                          |  |                                               |           |    |      |   |           |   
|Real estate  mortgage                                                                                |  |                                               |          |    |      |   |          |   
|Real estate  construction                                                                            |  |                                               | 448       |    |      |   |          |   
|Commercial                                                                                            |  |                                               | 159       |    |      |   | 7         |   
|Agricultural                                                                                          |  |                                               |          |    |      |   |          |   
|Consumer                                                                                              |  |                                               | 175       |    |      |   | 29        |   
|Leases receivable and other                                                                           |  |                                               |          |    |      |   | 969       |   
|                                                                                                      |  |                                               |           |    |      |   |           |   
|Total                                                                                                 |  |                                               | 782       |    |      |   | 1,005     |   
|                                                                                                      |  |                                               |           |    |      |   |           |   
|Recoveries:                                                                                           |  |                                               |           |    |      |   |           |   
|Real estate  mortgage                                                                                |  |                                               | 479       |    |      |   | 2         |   
|Real estate  construction                                                                            |  |                                               | 38        |    |      |   |          |   
|Commercial                                                                                            |  |                                               | 55        |    |      |   | 78        |   
|Agricultural                                                                                          |  |                                               |          |    |      |   |          |   
|Consumer                                                                                              |  |                                               | 15        |    |      |   | 7         |   
|Leases receivable and other                                                                           |  |                                               |          |    |      |   | 769       |   
|                                                                                                      |  |                                               |           |    |      |   |           |   
|Total                                                                                                 |  |                                               | 587       |    |      |   | 856       |   
|                                                                                                      |  |                                               |           |    |      |   |           |   
|Net loan and lease (charge-offs) recoveries                                                           |  |                                               | (195      | )  |      |   | (149      | ) 
|Provision for the allowance for loan and lease losses                                                 |  |                                               |          |    |      |   |          |   
|                                                                                                      |  |                                               |           |    |      |   |           |   
|Balance at end of period                                                                              |  | $                                             | 22,133    |    |      | $ | 16,565    |   
|                                                                                                      |  |                                               |           |    |      |   |           |   
|Loans and leases held for investment, net of deferred fees and costs                                  |  | $                                             | 1,817,050 |    |      | $ | 1,416,193 |   
|Average loans and leases held for investment                                                          |  | $                                             | 1,823,830 |    |      | $ | 1,383,375 |   
|Non-performing loans and leases                                                                       |  | $                                             | 11,286    |    |      | $ | 1,280     |   
|Selected ratios:                                                                                      |  |                                               |           |    |      |   |           |   
|Net charge-offs to average loans and leases held for investment                                       |  |                                               | (0.04     | )% |      |   | (0.04     | )%
|Provision for the allowance for loan and lease losses to average loans and leases held for investment |  |                                               | 0.00      | %  |      |   | 0.00      | % 
|Allowance for loan and lease losses to loans and leases held for investment at end of period          |  |                                               | 1.22      | %  |      |   | 1.17      | % 
|Allowance for loan and lease losses to non-performing loans and leases at end of period               |  |                                               | 196.11    | %  |      |   | 1294.14   | % 

Investment Securities Available-for-Sale

The carrying value of our investment securities available-for-sale remained consistent at $151.2 million at March 31, 2007 and December 31,
2006. Our portfolio of investment securities consists primarily of U.S. Government agency securities and obligations of states and political subdivisions.

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



25



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The carrying value (which represents fair value) of our portfolio of investment securities at
March 31, 2007 and December 31, 2006 was as follows:



|                                                 |  |                        |         |                         |   |        
|------------------------------------------------ |  | ---------------------- | ------- | ----------------------- | - | -------
|                                                 |  | As of March 31, 2007   |         | As of December 31, 2006
|                                                 | 
|                                                 |  | (Dollars in thousands)
|U.S. Treasury securities                         |  | $                      | 492     |                         | $ | 500    
|U.S. Government agencies                         |  |                        | 107,931 |                         |   | 107,663
|Obligations of states and political subdivisions |  |                        | 38,882  |                         |   | 39,092 
|Other securities                                 |  |                        | 3,923   |                         |   | 3,912  
|                                                 |  |                        |         |                         |   |        
|Total available-for-sale investment securities   |  | $                      | 151,228 |                         | $ | 151,167
|                                                 |  |                        |         |                         |   |        

Deposits

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



|                                |  |                      |           |                        |                         |   |        |   |               |  |       |  
|------------------------------- |  | -------------------- | --------- | ---------------------- | ----------------------- | - | ------ | - | ------------- |  | ----- | -
|                                |  | As of March 31, 2007 |           |                        | As of December 31, 2006 |  
|                                |  | Amount               |           | % of Deposits          |                         |   | Amount |   | % of Deposits | 
|                                |  |                      |          
|                                |  |                      |           | (Dollars in thousands) |                         |   |       
|Non-interest bearing deposits   |  | $                    | 682,616   |                        | 36.3                    | % |        | $ | 904,530       |  | 41.9  | %
|Interest bearing deposits:      |  |                      |           |                        |                         |   |        |   |               |  |       |  
|Interest bearing demand         |  |                      | 226,079   |                        | 12.0                    |   |        |   | 240,290       |  | 11.1  |  
|Money market                    |  |                      | 471,875   |                        | 25.1                    |   |        |   | 462,625       |  | 21.5  |  
|Savings                         |  |                      | 125,960   |                        | 6.7                     |   |        |   | 129,688       |  | 6.0   |  
|Time, under $100                |  |                      | 179,118   |                        | 9.5                     |   |        |   | 201,163       |  | 9.3   |  
|Time, $100 or more              |  |                      | 196,786   |                        | 10.4                    |   |        |   | 220,775       |  | 10.2  |  
|                                |  |                      |           |                        |                         |   |        |   |               |  |       |  
|Total interest bearing deposits |  |                      | 1,199,818 |                        | 63.7                    |   |        |   | 1,254,541     |  | 58.1  |  
|                                |  |                      |           |                        |                         |   |        |   |               |  |       |  
|Total deposits                  |  | $                    | 1,882,434 |                        | 100.0                   | % |        | $ | 2,159,071     |  | 100.0 | %
|                                |  |                      |           |                        |                         |   |        |   |               |  |       |  

Non-interest bearing deposits decreased 24.5%, or $221.9 million, to $682.6 million and total
deposits decreased 12.8%, or $276.6 million, to $1.882 billion as of March 31, 2007 from December 31, 2006. The decline in non-interest bearing and total deposits in the first quarter of 2007 was primarily due to the decrease in balances
of our largest depositor discussed below. Deposits tend to be cyclical, with existing customer balances declining at the beginning of each year and recovery of balances of existing customers combined with new customer growth over the balance of the
year. Standard cyclical declines in existing customer balances were experienced in the first quarter of 2007, and the acquisition of new deposit relationships slowed during the quarter due to the pending merger with Wells Fargo.

In the fourth quarter of 2006, we were notified by our largest deposit customer that the customer intended to withdraw all of its deposit balances by
mid-year 2007. As of December 31, 2006, this depositor represented 12.3% of total deposits and 29.4% of non-interest bearing deposits. As of March 31, 2007, this depositor represented 2.1% of total deposits and 5.8% of non-interest bearing
deposits. As of March 31, 2007, the Company does not have any deposit customers that account for more than 5% of total deposits.

Short-Term Borrowings

The Company has unsecured federal funds lines with its correspondent banks which, in the
aggregate, amounted to $65.0 million at both March 31, 2007 and December 31, 2006, at interest rates which vary with market conditions. The Company may borrow funds on a short-term or overnight basis under these lines. There were no
borrowings outstanding under these lines of credit at March 31, 2007 or December 31, 2006. At March 31, 2007 and December 31, 2006, the Company could borrow up to $594.8 million and $584.6 million, respectively, from the Federal
Home Loan Bank, secured by qualifying first mortgage loans. At March 31, 2007, the Company had $31.7 million in borrowings outstanding from the Federal Home Loan Bank on an overnight basis at prevailing interest rates and none at
December 31, 2006.



26



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We enter into sales of securities under agreements to repurchase which are short term in nature. The
balances of these short-term borrowings increased 47.7%, or $5.5 million, to $17.0 million as of March 31, 2007, from $11.5 million at December 31, 2006, primarily due to one new repurchase agreement for $3.0 million as of March 31,
2007.

Junior Subordinated Deferrable Interest Debentures

We own the common stock of four business trusts that have issued $48.0 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, with identical maturity, repricing and payment terms as the
respective issuance of trust preferred securities. The aggregate amount of junior subordinated debentures is $49.5 million, with the maturity dates for the respective debentures ranging from 2031 through 2036. We may redeem the respective junior
subordinated deferrable interest debentures earlier than the maturity date, with the debentures being redeemable in 2007, 2008, 2009 and 2011. 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, 2006.

In connection with
the acquisition of Southwest, we recorded a fair value adjustment of the junior subordinated deferrable interest debentures assumed that increased the carrying value by $1.8 million. This amount will be amortized over the term of the debentures
reducing interest expense. As of March 31, 2007, the remaining amount to be amortized is $1.6 million.

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 March 31, 2007 increased to $409.4 million from $404.1 million at December 31, 2006. The holding
company declared and paid dividends of $0.15 per common share in the first quarter of 2007. Total dividends paid were $3.4 million for the three months ended March 31, 2007. On April 25, 2007 subsequent to the end of the first quarter, the
Board of Directors declared a common stock cash dividend of $0.15 per share for the second quarter of 2007. The dividend will be payable on or about May 23, 2007 to its shareholders of record on May 10, 2007.

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.



27



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The regulatory capital guidelines as well as the actual capital ratios for Placer Sierra Bank and us as
of March 31, 2007 are as follows:



|                                                       |  |      |  
|------------------------------------------------------ |  | ---- | -
|Leverage Ratio                                         |  |      |  
|Placer Sierra Bancshares and Subsidiaries              |  | 10.2 | %
|Minimum regulatory requirement                         |  | 4.0  | %
|                                                       | 
|Placer Sierra Bank                                     |  | 9.1  | %
|Minimum requirement for Well-Capitalized institution |  | 5.0  | %
|Minimum regulatory requirement                         |  | 4.0  | %
|                                                       | 
|Tier 1 Risk-Based Capital Ratio                        |  |      |  
|Placer Sierra Bancshares and Subsidiaries              |  | 11.7 | %
|Minimum regulatory requirement                         |  | 4.0  | %
|                                                       | 
|Placer Sierra Bank                                     |  | 10.5 | %
|Minimum requirement for Well-Capitalized institution |  | 6.0  | %
|Minimum regulatory requirement                         |  | 4.0  | %
|                                                       | 
|Total Risk-Based Capital Ratio                         |  |      |  
|Placer Sierra Bancshares and Subsidiaries              |  | 12.8 | %
|Minimum regulatory requirement                         |  | 8.0  | %
|                                                       | 
|Placer Sierra Bank                                     |  | 11.7 | %
|Minimum requirement for Well-Capitalized institution |  | 10.0 | %
|Minimum regulatory requirement                         |  | 8.0  | %

As of March 31, 2007, 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 $48.0 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 March 31, 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 March 31, 2007. For more information about
the proposed regulations see our Annual Report on Form 10-K for the year ended December 31, 2006 Item 1. BUSINESS. Supervision and Regulation.

Contractual Obligations

Our significant contractual obligations and significant commitments at December 31, 2006 are
included in our Annual Report on Form 10-K for the year ended December 31, 2006. For more information on commitments see Note 5 to our Unaudited Condensed Consolidated Financial Statements in this quarterly report.

Liquidity

Management believes that the level of
primary and secondary sources of liquidity 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



28



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payment of dividends to the holding company totaled $16.2 million at March 31, 2007. However, such amount may be further restricted due to the fact that
the bank must keep a certain amount of capital in order to be well-capitalized. The amount available for payment of dividends to the holding company by the bank for the bank to remain well-capitalized immediately thereafter
totaled $32.8 million at March 31, 2007, which is greater than the statutory and regulatory provisions. Accordingly, the maximum amount available for payment to the holding company is $16.2 million without prior regulatory approval. 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 has historically relied on deposits as the principal source of funds. 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 historically experienced difficulty in dealing with such fluctuations from existing liquidity sources. In the fourth quarter of 2006, we were notified by our largest deposit customer that the customer intended to withdraw all of its deposit
balances by mid-year 2007. As of December 31, 2006, this depositor represented 12.3% of total deposits and 29.4% of non-interest bearing deposits. To manage the liquidity requirements from this withdrawal, in December 2006 we sold investment
securities available-for-sale with a book value of $105.4 million. The depositor, a nationwide mortgage service company, consolidated most of its operations into its Midwest headquarters during the first quarter of 2007. As of March 31, 2007,
this depositor only represented 2.1% of total deposits and 5.8% of non-interest bearing deposits.

As previously noted, non-interest
bearing deposits decreased 24.5% from December 31, 2006 to March 31, 2007 and total deposits decreased 12.8% from December 31, 2006 to March 31, 2007, primarily as a result of the withdrawal of deposits by the banks largest
deposit customer. As these deposits were withdrawn during the first quarter of 2007 we began to regularly borrow funds under a line of credit with the Federal Home Loan Bank of San Francisco (the FHLB). Management has historically attempted to
maintain a loan-to-deposit ratio (total loans held for sale plus total loans and leases held for investment to total deposits) below 95% and a liquidity ratio (liquid assets, including cash and due from banks, Federal funds sold, investment
securities not pledged as collateral less federal funds purchased expressed as a percentage of total deposits) above 10%. However, the loan-to-deposit ratio increased to 95.77% at March 31, 2007 from 85.21% at December 31, 2006 and the
liquidity ratio decreased to 10.19% at March 31, 2007 from 18.90% at December 31, 2006. In view of the pending merger with Wells Fargo, management considers these ratios acceptable.

Management believes that the level of liquid assets and secondary liquidity is sufficient to meet the banks current and presently anticipated
funding needs. Liquid assets of the bank represented approximately 7.72% of total assets at March 31, 2007 and 14.98% at December 31, 2006. When the level of liquid assets (our primary liquidity) does not meet our liquidity needs, other
available sources of liquidity (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 $594.8 million under
a line of credit with the FHLB at March 31, 2007, can be employed to meet those funding needs. As of March 31, 2007, the bank had $31.7 million outstanding under the line of credit with the FHLB.

Our liquidity may also be impacted negatively by several other factors, including expenses associated with unforeseen or pending litigation and
fluctuations of deposits.

Qualitative and Quantitative Disclosures 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 our securities portfolio, 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 four independent board members. 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.



29



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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
March 31, 2007 and December 31, 2006, 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 March 31, 2007, our interest sensitive assets totaled approximately $1.998 billion while interest
sensitive liabilities totaled approximately $1.300 billion. At December 31, 2006, we had approximately $2.134 billion in interest sensitive assets and approximately $1.317 billion in interest sensitive liabilities. The decrease in interest
sensitive assets is primarily a result of a decrease in federal funds sold due to a decrease in deposits. The decrease in interest sensitive liabilities is primarily due to a decrease in interest bearing deposits offset by an increase in FHLB
borrowings.

The yield on interest sensitive assets and the cost of interest sensitive liabilities for the three months ended
March 31, 2007 was 7.38% and 2.88%, respectively, compared to 6.78% and 2.34%, respectively, for the three months ended March 31, 2006. 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, investment securities and federal funds sold increasing. The increase in the cost of our interest sensitive liabilities is primarily the result of higher rates paid on deposit
products, FHLB borrowings and short-term borrowings, offset by a decrease in the rates paid on junior subordinated deferrable interest debentures.

Our interest sensitive assets and interest sensitive liabilities had estimated fair values of $1.937 billion and $1.302 billion, respectively, at March 31, 2007. At December 31, 2006, those amounts were $2.093 billion and $1.257
billion, respectively.

We evaluated the results of our net interest income simulation and market value of equity model prepared as of
March 31, 2007 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 asset sensitive. An asset sensitive
balance sheet in an environment where the yield curve moves in a parallel fashion to changes in short term interest rates suggests that in a rising interest rate environment, our net interest margin would generally increase and during a falling
interest rate environment, our net interest margin would generally decrease.

Net Interest Income Simulation

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

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.



30



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As of March 31, 2007, 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    |  | $                          | 115,043 |                           | 3.32  | %  |                           | 5.76 | % |                                           | 19  |  
|Up 100 basis points    |  | $                          | 113,292 |                           | 1.74  | %  |                           | 5.67 | % |                                           | 10  |  
|BASE CASE              |  | $                          | 111,351 |                           |      | %  |                           | 5.57 | % |                                           |    |  
|Down 100 basis points  |  | $                          | 108,630 |                           | (2.44 | )% |                           | 5.44 | % |                                           | (13 | )
|Down 200 basis points  |  | $                          | 101,799 |                           | (8.58 | )% |                           | 5.09 | % |                                           | (48 | )

Our simulation results as of March 31, 2007 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 3.32% increase in net interest income over the subsequent 12 month period while an immediate downward movement in
interest rates of 200 basis points would result in a 8.58% 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 19 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 48 basis point decrease in our net interest margin.



|ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Please see the section above titled Quantitative and Qualitative Disclosures 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 Disclosures About Market Risk filed with our Annual Report on
Form 10-K for the year ended December 31, 2006. 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 March 31, 2007, 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 as of the end of the period covered in this report.

During the quarter ended
March 31, 2007, 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 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. 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.

Cerritos Valley Dissenters

On February 21, 2007 the California Court of Appeal, Fourth Appellate District, Division Three reversed and remanded for further consideration by the
trial court, the judgment and satisfaction of judgment 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



31



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of Orange County, a division of the 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. This is the
judgment that has been reversed by the California Court of Appeal as of February 21, 2007. The judgment was originally appealed in February 2006 by certain dissenting shareholders that hold a majority of the Cerritos Valley Bank common
stock involved in the litigation. Shareholders holding the remaining Cerritos Valley Bank common stock involved in the litigation did not participate in the appeal.

In the appeal decision, the Court of Appeal decided that the settlement agreement, in fact, set up an arbitration procedure and decided that the case should be remanded to the trial court to confirm, vacate or modify
the arbitration award of the third appraiser pursuant to the procedures set forth in the California Arbitration Act. The trial court will have the discretion to confirm, vacate or modify the arbitration award by the third appraiser. Bank
of Orange County intends to continue to vigorously prosecute this action.

ALC Bankruptcy Case

On October 27, 2005, the bankruptcy trustee of ALC Building Corporation filed an adversary action in the United States Bankruptcy Court, Central
District of California against Bank of Orange County, a division of PSB, in a matter entitled Peter C. Anderson, Trustee of ALC v. Bank of Orange County. ALC was a former vendor of Bank of Orange County that was retained to provide
construction funding services. Creditors of ALC filed an involuntary Chapter 7 bankruptcy petition against ALC on March 5, 2004. The bankruptcy trustee sought damages in the amount of $578,000 from Bank of Orange County for all funds Bank
of Orange County received from ALC in the 90-day period prior to the date the involuntary bankruptcy petition was filed against ALC, plus interest and costs. Bank of Orange County vigorously defended the action. However, the bankruptcy
trustee filed a motion for summary judgment, which was granted on June 12, 2006 and judgment was entered against Bank of Orange County in the amount of $578,000, plus interest and costs. Bank of Orange County tendered a check in the amount of
$613,000 at the beginning of August 2006 to satisfy the judgment. Bank of Orange County filed a proof of claim as an unsecured creditor in the Chapter 7 bankruptcy on September 19, 2006 for the amount tendered in the judgment and estimates
that it will recover $75,000 and its net loss will be approximately $538,000.



|ITEM 1A. | Risk Factors
|-------- | ------------

Our operations and financial results
are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations and trading price of our common stock. Item 1A of our annual report on Form 10-K for fiscal year 2006 includes a
detailed discussion of our risk factors. Other risk factors relating to the pending merger with Wells Fargo are set forth under Risk Factors in the Companys definitive proxy statement filed with the SEC on April 27, 2007.
These risk factors are set forth herein on Exhibit 99.1.



32



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

ISSUER PURCHASE OF EQUITY SECURITIES



|               |  |                                |  |                             |       |                                                                               |   |                                                                               |  
|-------------- |  | ------------------------------ |  | --------------------------- | ----- | ----------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------- | -
|Date           |  | Total Number ofSharesPurchased |  | Average PricePaid per Share |       | Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs |   | Maximum Numberof Shares that MayYet to be PurchasedUnder the Plans
orPrograms
|March 14, 2007 |  | 2,508                          |  | $                           | 26.87 |                                                                               |  |                                                                               | 

On March 14, 2007, 14,567 restricted common stock awards granted to certain executives
vested. Certain of these executives chose to have a total of 2,508 shares withheld by us to pay for taxes. These shares were retired to common stock and are considered authorized but unissued.



|ITEM 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



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

None.



|ITEM 5. | Other Information
|------- | -----------------

None.



|ITEM 6. | Exhibits
|------- | --------

(d) Exhibits.



|              |  |                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                        
|3.2           |  | Amended and Restated Bylaws of the Registrant as of March 29, 2007 (Exhibit 2.1 to Current Report on Form 8-K filed with the SEC on April 3, 2007, and incorporated herein by this
reference).
|              | 
|10.1          |  | Amendment to Employment Agreement dated as of February 21, 2007 by and between the Registrant and David E. Hooston.                                                                          
|              | 
|10.2          |  | Amendment to Employment Agreement dated as of February 21, 2007 by and between the Registrant and Randall E. Reynoso.                                                                        
|              | 
|10.3          |  | Amendment to Employment Agreement dated as of February 21, 2007 by and between the Registrant and Angelee J. Harris.                                                                         
|              | 
|10.4          |  | Amendment to Employment Agreement dated as of February 21, 2007 by and between the Registrant and Kevin J. Barri.                                                                            
|              | 
|10.5          |  | Amendment to Employment Agreement dated as of February 21, 2007 by and among the Registrant, Placer Sierra Bank and Ken E. Johnson.                                                          
|              | 
|10.6          |  | Amendment to Employment Agreement dated as of February 21, 2007 by and between Placer Sierra Bank and Marshall V. Laitsch.                                                                   
|              | 
|10.7          |  | Amendment to Employment Agreement dated as of February 21, 2007 by and between Placer Sierra Bank and Thomas D. Nations.                                                                     



33



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|              |  |                                                                                                                                                                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                
|10.8          |  | Description of reimbursement of certain tax costs for directors William B. Slaton and Dwayne A. Shackelford.                                                                                                                                         
|              | 
|10.9          |  | Settlement Agreement and Global Amendment to Agreement for Information Technology Services and Related Agreements dated as of March 1, 2007 by and between Aurum Technology Inc. d/b/a Fidelity
Integrated Financial Solutions and Placer Sierra Bank.
|              | 
|31.1          |  | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                         
|              | 
|31.2          |  | Certification of the 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.                                                                                                                                                         
|              | 
|99.1          |  | Risk Factor Disclosure from Proxy Statement for Annual Meeting of Shareholders to be held on May 31, 2007.                                                                                                                                            

---

| | Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit.
|- | -------------------------------------------------------------------------------------------------------



34



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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                
|                   |  | 
|Dated: May 8, 2007 |  |  |  | /s/ David E. Hooston                    
|                   |  |  |  | David E. Hooston Chief Financial
Officer



35