UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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

Commission File Number: 000-50332

PREMIERWEST BANCORP

(Exact name of registrant as specified in its charter)

Oregon	93-1282171
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

503 Airport Road – Suite 101

Medford, Oregon 97504

(Address of principal executive offices) (Zip Code)

(541) 618-6003

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller Reporting Company	x

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

The number of shares outstanding of Registrant’s common stock as of August 2, 2012 was 10,034,741.

Form 10-Q

Table of Contents

Part I FINANCIAL INFORMATION
Item 1. Financial Statements	2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3. Quantitative and Qualitative Disclosures About Market Risk	60
Item 4. Controls and Procedures	60
Part II OTHER INFORMATION
Item 1. Legal Proceedings	60
Item 1A. Risk Factors	60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3. Defaults Upon Senior Securities	61
Item 4. Mine Safety Disclosures	61
Item 5. Other Information	62
Item 6. Exhibits	63
SIGNATURES	63

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	June 30, 2012			December 31, 2011			June 30, 2011
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	26,522		$	40,179		$	29,535
Federal funds sold		8,940			4,030			3,000
Interest-bearing deposits		52,406			27,140			38,468
Total cash and cash equivalents		87,868			71,349			71,003
Interest-bearing certificates of deposit (original maturities greater than 90 days)		1,500			1,500			1,500
Investment securities:
Investment securities available-for-sale, at fair market value		299,909			314,160			285,451
Investment securities - Community Reinvestment Act		2,975			2,000			2,000
Restricted equity securities		3,148			3,255			3,365
Total investment securities		306,032			319,415			290,816
Mortgage loans held-for-sale		1,199			810			1,220
Loans, net of deferred loan fees		710,465			797,416			880,853
Allowance for loan losses		(19,518	)		(22,683	)		(28,433	)
Loans, net		690,947			774,733			852,420
Premises and equipment, net of accumulated depreciation and amortization		41,728			46,272			47,318
Core deposit intangibles, net of amortization		1,758			1,990			2,222
Other real estate owned and foreclosed assets		33,895			22,829			27,579
Accrued interest and other assets		30,547			27,149			27,961
TOTAL ASSETS	$	1,195,474		$	1,266,047		$	1,322,039
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand	$	273,984		$	281,519		$	260,940
Interest-bearing demand and savings		403,176			414,477			426,366
Time deposits		368,442			431,753			490,532
Total deposits		1,045,602			1,127,749			1,177,838
Securities sold under agreements to repurchase		3,568			4,241			6,905
Junior subordinated debentures		30,928			30,928			30,928
Accrued interest and other liabilities		36,087			18,764			17,963
Total liabilities		1,116,185			1,181,682			1,233,634
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS’ EQUITY
Preferred Stock, net of unamortized discount, no par value 1,000,000 shares authorized, 41,400 shares issued and outstanding, liquidation preference $1,000 per share (41,400 at 12/31/2011 and 6/30/2011)		40,626			40,399			40,138
Common stock - no par value; 150,000,000 shares authorized; 10,034,741 shares issued and outstanding (10,035,241 at 12/31/2011 and 10,035,741 at 6/30/11)		208,527			208,469			208,395
Accumulated deficit		(176,600	)		(169,818	)		(162,283	)
Accumulated other comprehensive income		6,736			5,315			2,155
Total shareholders’ equity		79,289			84,365			88,405
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,195,474		$	1,266,047		$	1,322,039

See accompanying notes.

2

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except for Loss per Share Data)

	For the Three Months Ended						For the Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	11,412		$	13,941		$	22,592		$	27,552
Interest on investments:
Taxable		1,692			1,680			3,576			2,971
Nontaxable		11			26			25			71
Interest on federal funds sold		2			2			4			4
Other interest and dividends		60			48			98			131
Total interest and dividend income		13,177			15,697			26,295			30,729
INTEREST EXPENSE
Deposits:
Interest-bearing demand and savings		98			278			201			645
Time		1,277			2,136			2,746			4,433
Interest on securities sold under agreements to repurchase		3			7			7			8
Junior subordinated debentures		165			150			333			316
Total interest expense		1,543			2,571			3,287			5,402
Net interest income		11,634			13,126			23,008			25,327
LOAN LOSS PROVISION		1,275			—			4,775			6,300
Net interest income after loan loss provision		10,359			13,126			18,233			19,027
NON-INTEREST INCOME
Service charges on deposit accounts		888			921			1,753			1,876
Other commissions and fees		697			671			1,346			1,316
Net gain on sale of securities, available-for-sale		227			423			2,395			772
Investment brokerage and annuity fees		370			426			808			926
Mortgage banking fees		105			84			220			209
Other non-interest income		307			168			555			695
Total non-interest income		2,594			2,693			7,077			5,794
NON-INTEREST EXPENSE
Salaries and employee benefits		6,277			7,113			13,087			14,139
Net cost of operations of other real estate owned and foreclosed assets		1,223			4,406			3,647			6,530
Net occupancy and equipment		1,761			1,845			3,573			3,723
FDIC and state assessments		711			798			1,382			1,921
Professional fees		629			757			1,037			1,633
Communications		453			480			921			955
Advertising		193			207			391			452
Third-party loan costs		314			431			569			727
Professional liability insurance		213			175			426			401
Problem loan expense		789			102			2,077			190
Other non-interest expense		1,684			1,558			3,673			2,941
Total non-interest expense		14,247			17,872			30,783			33,612
LOSS BEFORE PROVISION FOR INCOME TAXES		(1,294	)		(2,053	)		(5,473	)		(8,791	)
PROVISION FOR INCOME TAXES		37			5			47			21
NET LOSS		(1,331	)		(2,058	)		(5,520	)		(8,812	)
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		634			613			1,262			1,269
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(1,965	)	$	(2,671	)	$	(6,782	)	$	(10,081	)
LOSS PER COMMON SHARE:
BASIC	$	(0.20	)	$	(0.27	)	$	(0.68	)	$	(1.00	)
DILUTED	$	(0.20	)	$	(0.27	)	$	(0.68	)	$	(1.00	)

See accompanying notes.

3

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in Thousands)

	For the Three Months Ended						For the Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
NET LOSS	$	(1,331	)	$	(2,058	)	$	(5,520	)	$	(8,812	)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gain on available-for-sale securities		1,352			4,427			4,763			2,817
Tax on adjustment for unrealized gain		(541	)		(1,771	)		(1,905	)		(1,127	)
Adjustment for realized gain included in net loss		(227	)		(423	)		(2,395	)		(772	)
Tax on adjustment for realized gain		91			169			958			309
Amortization of unrealized loss for investment securities transferred to held-to-maturity (net of tax benefit of $1 and $8 at 6/30/2011)		—			1			—			(12	)
Total other comprehensive income, net of tax		675			2,403			1,421			1,215
COMPREHENSIVE INCOME (LOSS)	$	(656	)	$	345		$	(4,099	)	$	(7,597	)

See accompanying notes.

4

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands, Except Share Amounts)

	Preferred Stock				Common Stock						Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income		Total Shareholders’ Equity
	Shares		Amount		Shares			Amount
BALANCE - December 31, 2010		41,400	$	39,946		10,034,830		$	208,324		$	(152,202	)	$	940	$	97,008
Net loss		—		—		—			—			(15,051	)		—		(15,051	)
Total other comprehensive income, net of tax		—		—		—			—			—			4,375		4,375
Preferred stock dividend accrued		—		—		—			—			(2,112	)		—		(2,112	)
Restricted stock issued		—		—		750			—			—			—		—
Cash paid for fractional shares in connection with 1-for-10 reverse stock split		—		—		(339	)		(1	)		—			—		(1	)
Stock-based compensation expense		—		—		—			146			—			—		146
Accretion of discount from Series B preferred stock		—		453		—			—			(453	)		—		—
BALANCE - December 31, 2011		41,400	$	40,399		10,035,241		$	208,469		$	(169,818	)	$	5,315	$	84,365
Net loss		—		—		—			—			(5,520	)		—		(5,520	)
Total other comprehensive income, net of tax		—		—		—			—			—			1,421		1,421
Preferred stock dividend accrued		—		—		—			—			(1,035	)		—		(1,035	)
Restricted stock forfeited		—		—		(500	)		—			—			—		—
Stock-based compensation expense		—		—		—			58			—			—		58
Accretion of discount from Series B preferred stock		—		227		—			—			(227	)		—		—
BALANCE - June 30, 2012		41,400	$	40,626		10,034,741		$	208,527		$	(176,600	)	$	6,736	$	79,289

See accompanying notes.

5

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	For The Six Months Ended
	June 30, 2012			June 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,520	)	$	(8,812	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization		1,406			1,698
Loan loss provision		4,775			6,300
Deferred income taxes		—			(15	)
Amortization of premiums and accretion of discounts on investment securities, net		2,738			1,477
Gain on sale of investment securities		(2,395	)		(772	)
Funding of loans held-for-sale		(12,893	)		(10,128	)
Proceeds from sale of loans held-for-sale		12,724			10,046
Mortgage banking fees		(220	)		(209	)
Change in BOLI value		(248	)		(23	)
Stock-based compensation expense		58			72
Loss on sales of premises and equipment		78			164
Impairment of premises and equipment		719			—
Loss (gain) on sale of other real estate owned and foreclosed assets, net		280			(1,127	)
Write down of other real estate owned due to impairment		3,164			6,810
Write down of low income housing tax credit investment		107			105
Cash due to other financial institution for branch sale		15,433			—
Changes in accrued interest receivable/payable and other assets/liabilities		(642	)		400
Net cash provided by operating activities		19,564			5,986
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available-for-sale		(79,888	)		(209,968	)
Proceeds from principal payments received on securities available-for-sale		18,892			20,655
Proceeds from sale of securities available-for-sale		71,850			114,295
Proceeds from maturities and calls of investment securities available-for-sale		3,500			—
Proceeds from maturities and calls of investment securities held-to-maturity		—			2,893
Proceeds from FHLB stock redemption		107			109
Loan payments, net		57,006			74,121
Purchase of premises and equipment		(88	)		(1,011	)
Proceeds from disposal of premises and equipment		997			22
Purchase of low income housing tax credit investments		(96	)		(663	)
Purchase of improvements for other real estate owned and foreclosed assets		—			(10	)
Proceeds from sale of other real estate owned and foreclosed assets		7,495			7,129
Net cash provided by investing activities		79,775			7,572
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(82,147	)		(88,411	)
Net decrease in Federal Home Loan Bank borrowings		—			(22	)
Net (decrease) increase in securities sold under agreements to repurchase		(673	)		6,905
Cash paid for fractional shares in connection with 1-for-10 reverse stock split		—			(1	)
Net cash used in financing activities		(82,820	)		(81,529	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		16,519			(67,971	)
CASH AND CASH EQUIVALENTS - Beginning of the period		71,349			138,974
CASH AND CASH EQUIVALENTS - End of the period	$	87,868		$	71,003
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	2,932		$	5,180
Cash paid for taxes	$	3		$	40
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate owned and foreclosed assets	$	22,005		$	8,372
Preferred stock dividend declared and accrued during the period but not yet paid	$	1,035		$	1,077
Trust preferred securities interest accrued during the period but not yet paid	$	333		$	316
Accretion of preferred stock discount	$	227		$	192

See accompanying notes.

6

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization – The accompanying consolidated financial statements include the accounts of PremierWest Bancorp (the “Company” or “PremierWest”) and its wholly-owned subsidiary, PremierWest Bank (the “Bank”).

The Bank offers a full range of financial products and services through a network of 32 full service branch offices, 26 of which are located along the Interstate 5 freeway corridor between Roseburg, Oregon, and Sacramento, California. Of the 32 full service branch offices, 17 are located in Oregon (Jackson, Josephine, Deschutes, Douglas and Klamath Counties) and 15 are located in California (Siskiyou, Shasta, Butte, Tehama, Sacramento, Nevada, Placer, and Yolo Counties). The Bank’s activities include commercial, real estate, installment and mortgage loans; checking, time deposit and savings accounts; mortgage loan brokerage services; and automated teller machines (“ATM”) and safe deposit facilities. The Bank has three subsidiaries: Premier Finance Company, PremierWest Investment Services, Inc. and Blue Star Properties, Inc. During the second quarter of 2012, the Bank closed the offices of Premier Finance Company and consolidated its operations into the Bank. PremierWest Investment Services, Inc. operates throughout the Bank’s market area providing brokerage services for investment products including stocks, bonds, mutual funds and annuities. Blue Star Properties, Inc. serves solely to hold real estate properties for the Company but is currently inactive.

In December 2004, the Company established PremierWest Statutory Trust I and II (the “Trusts”), as wholly-owned Delaware statutory business trusts, for the purpose of issuing guaranteed individual beneficial interests in junior subordinated debentures (“Trust Preferred Securities”). The Trusts issued $15.5 million in Trust Preferred Securities for the purpose of providing additional funding for operations and enhancing the Company’s consolidated regulatory capital. A third trust, the Stockmans Financial Trust I, in the amount of $15.5 million, was added in 2008 pursuant to the acquisition of Stockmans Financial Group. The Company has not included the Trusts in its consolidated financial statements; however, the junior subordinated debentures issued by the Company to the Trusts are reflected in the Company’s consolidated balance sheets.

During the second quarter of 2012, the Company consolidated nine of its branches into existing nearby branches and sold two branches. Five of the consolidated branches were located in Oregon, and the other four consolidated branches were located in California. The two branches sold were located in California. The decision to consolidate these branches and the projected reduction in expense followed an extensive branch network analysis with a focus on reducing expense, improving efficiency, and positively impacting the overall value of the Company. These branches represented less than 10% of the total bank-wide deposits. Branch consolidation is projected to result in expense savings of approximately $1.9 million annually. The Company has incurred branch consolidation costs of approximately $1.0 million as of June 30, 2012.

Basis of presentation – The consolidated financial statements include the accounts of PremierWest Bancorp and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.

The interim consolidated financial statements are not audited, but include all adjustments that Management considers necessary for a fair presentation of consolidated financial condition and results of operations for the interim periods presented.

The balance sheet data as of December 31, 2011, was derived from audited financial statements and do not include all disclosures contained in the 2011 Annual Report to Shareholders. The interim consolidated financial statements should be read in conjunction with the Company’s 2011 consolidated financial statements, including the notes thereto, included in the 2011 Annual Report to Shareholders as filed with the Securities and Exchange Commission on Form 10-K. The reader should keep in mind that the results of operations for the interim periods shown in the accompanying consolidated financial statements are not necessarily indicative of results for any future interim periods or the entire fiscal year.

The Company filed an amendment to its Articles of Incorporation to complete a 1-for-10 reverse stock split effective February 10, 2011. The effects of the reverse stock split have been reflected in the financial statements and the footnotes.

Method of accounting and use of estimates – The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. This requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates made by Management involve the calculation of the allowance for loan losses, impaired loans, the fair value of available-for-sale investment securities, deferred tax assets, and the value of other real estate owned and foreclosed assets, and impairment of branches.

The Company utilizes the accrual method of accounting, which recognizes income when earned and expenses when incurred.

In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2012, for potential recognition or disclosure in the financial statements. In Management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation

.

7

Reclassifications – Certain reclassifications have been made to the 2011 consolidated financial statements to conform to current quarter presentations. These reclassifications have no effect on previously reported shareholders’ equity, net loss or loss per share.

Stock dividends – Share and per share data in the accompanying consolidated financial statements reflect all previously declared and paid stock dividends. The Company did not declare a stock dividend in the quarter ended June 30, 2012.

Cash dividends – No cash dividends on common stock were declared in the quarter ended June 30, 2012.

On August 17, 2009, a cash dividend of $517,500 was paid to the United States Department of the Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program for the 41,400 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, with cumulative dividends at a rate of 5.0% per annum for the first five years and 9.0% per annum thereafter. Payments have not been made since the third quarter of 2009; however, the Company has continued to accrue dividends through the second quarter of 2012. As of June 30, 2012, accrued dividends totaled approximately $6.1 million, of which approximately $5.0 million was accrued through December 31, 2011.

NOTE 2 – REGULATORY AGREEMENT, ECONOMIC CONDITIONS AND MANAGEMENT’S PLAN

Based on the results of an examination completed during the third quarter of 2009, effective April 6, 2010, the Bank stipulated to the issuance of a formal regulatory Consent Order (the “Agreement”) with the Federal Deposit and Insurance Corporation (“FDIC”) and the Oregon Division of Finance and Corporate Securities (the “DFCS”), the Bank’s principal regulators, primarily as a result of recent significant operating losses and increasing levels of adversely-classified loans. The Agreement imposes certain operating restrictions on the Bank, all of which we believe have been implemented by the Bank.

In addition, among the corrective actions required under the Consent Order, the Bank must retain qualified management, restrict dividends, reduce adversely-classified loans, maintain an adequate allowance for loan losses, revise the strategic plan and various policies, as well as, maintain elevated capital levels. The Agreement also provides timelines and thresholds from the date of issuance to achieve the aforementioned corrective actions. We believe the Bank has achieved compliance with all the requirements with the exception of the one relating to capital levels.

In order to proactively respond to the current regulatory environment and the Bank’s credit issues, Management initiated measures intended to increase regulatory capital ratios prior to entering into the Agreement. Among the measures taken were the following:

• Completion of equity issuances sufficient to raise the Company’s regulatory capital ratios to levels in excess of those required by the Agreement except for the 10.0% leverage ratio set by the Agreement.

• Deleveraging the balance sheet with emphasis on reducing (1) non-performing loans through unfavorable renewal pricings, charge-offs, and foreclosures as appropriate, (2) other real estate owned through sales, (3) higher-cost time deposits and public funds by lowering interest rates offered at renewal.

• Evaluation of all business lines within the organization for possible gains upon disposition or significant cost-savings opportunities, as evidenced by the Company’s recently announced consolidation of eleven of its branches (see Note 1).

We continue to focus on improving capital ratios and credit quality.

On June 4, 2010, the Company entered into a Written Agreement (the “Written Agreement”) with the Federal Reserve Bank of San Francisco and the DFCS, which routinely accompanies or follows an FDIC Consent Order, and is comparable to the Agreement described above. The Written Agreement provides that the Company will:

• Provide quarterly progress reports as well as other reports and plans,

• Take steps to ensure the Bank complies with the Agreement,

• Obtain regulatory approval to pay dividends or to incur indebtedness, and

• Obtain approvals for a variety of other routine items.

The Bank’s regulatory capital ratios were adversely affected by losses that occurred as a result of credit losses associated with the adverse state of the economy, and depressed real estate valuations on our commercial real estate concentrations. Also, as a result of the Bank’s operating results and financial condition, the Bank recognized an impairment to goodwill and established a valuation allowance against deferred tax assets. The Bank continues to have high loan concentrations in commercial real estate and in construction and development loans. If economic conditions were to worsen for these industry segments, our financial condition could suffer significant deterioration. These circumstances led to Management’s implementation of the measures summarized above.

8

There are no assurances Management’s plan, as developed and implemented to date, will successfully improve the Bank’s results of operation or financial condition or result in the termination of the Agreement and the Written Agreement. The economic environment in the market areas and the duration of the downturn in the real estate market will have a significant impact on the implementation of the Bank’s business plans.

In anticipation of the requirements of the Agreement, on January 29, 2010, the Company filed an amendment to the Form S-1 Registration Statement with the United States Securities and Exchange Commission announcing a proposed offering of up to 81,747,362 shares of the Company’s common stock. A prospectus was filed on February 1, 2010, providing that prior to a public offering of the shares, existing shareholders of the Company each received a subscription right to purchase 3.3 shares of the Company’s common stock at a subscription price of $0.44 per share.

On April 7, 2010, the Company concluded its rights offering and the related public offering and issued approximately 75.6 million shares with net proceeds of approximately $32.5 million, net of estimated offering costs of approximately $700,000.

NOTE 3 – STOCK-BASED COMPENSATION

At June 30, 2012, PremierWest Bancorp had one active equity incentive plan – the 2011 Stock Incentive Plan (“2011 Plan”). Upon the recommendation of the Compensation Committee, the Board of Directors adopted the PremierWest Bancorp 2011 Plan effective February 24, 2011, subject to shareholder approval, which was received at the Annual Shareholder Meeting on May 26, 2011. The 2011 Plan authorizes the issuance of up to 500,000 shares of stock, all of which were available for issuance at December 31, 2011. With the adoption of the 2011 Plan, no further grants will be made under the 2002 Plan. At June 30, 2012 there were unexercised grants totaling 67,287 shares, all of which had been made under the 1992 Plan or the 2002 Plan.

The 2011 Plan allows for stock options to be granted at an exercise price of not less than the fair value of PremierWest Bancorp stock on the date of issuance, for a term not to exceed ten years. The Compensation Committee establishes the vesting schedule for each grant; historically the Committee has utilized graded vesting schedules over two, five and seven year periods. Upon exercise of stock options or issuance of restricted stock grants, it is the Company’s policy to issue new shares of common stock.

During the six month period ended June 30, 2012, stock option activity was as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Stock options outstanding, 12/31/2011		74,743		$	91.75
Issued		—			—
Forfeited		—			—
Expired		(7,456	)		51.57
Stock options outstanding, 6/30/2012		67,287			96.20		3.69	$	—
Stock options exercisable, 6/30/2012		51,978		$	96.48		3.12	$	—

PremierWest Bancorp measures and recognizes as compensation expense the grant date fair market value for all share-based awards. That portion of the grant date fair market value that is ultimately expected to vest is recognized as expense over the requisite service period, typically the vesting period, utilizing the straight-line attribution method. This standard requires companies to estimate the fair market value of stock-based payment awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model to value its stock options. The Black-Scholes model requires the use of assumptions regarding the historical volatility of the Company’s stock price, its expected dividend yield, the risk-free interest rate and the weighted average expected life of the options.

There were no stock options granted or restricted stock grants during the second quarter of 2012. During the six months ended June 30, 2011, there were 750 restricted stock grants issued. There were 500 restricted stock grants forfeited during the six months ended June 30, 2012.

As of June 30, 2012, there were 750 restricted stock grants outstanding, all expected to fully vest between 2016 and 2018.

Accounting for “Share-Based Payment” requires that the cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for stock options (excess tax benefits) be reported as financing cash flows. There were no excess tax benefits classified as financing cash inflows for the six months ended June 30, 2012, and June 30, 2011, respectively.

9

Stock-based compensation expense recognized under the standard was $58,000 with a related tax benefit of $23,200 for the six months ended June 30, 2012, compared to stock-based compensation expense of $72,000, with a related tax benefit of $28,800, for the six months ended June 30, 2011.

At June 30, 2012, unrecognized stock-based compensation expense was $242,000 and $2,000 for stock options and restricted stock grants; respectively, and will be expensed over a weighted-average period of approximately 1.4 years and 3.1 years respectively.

NOTE 4 – INVESTMENT SECURITIES

Investment securities at June 30, 2012 and December 31, 2011 consisted of the following:

(Dollars in Thousands)
	June 30, 2012
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Available-for-sale:
Collateralized mortgage obligations	$	139,860	$	1,416	$	(479	)	$	140,797
Mortgage-backed securities		89,403		2,664		(75	)		91,992
U.S. Government and agency securities		1,776		23		—			1,799
Obligations of states and political subdivisions		62,134		3,297		(110	)		65,321
Total available-for-sale	$	293,173	$	7,400	$	(664	)	$	299,909
Investment securities -
Other Community Reinvestment Act	$	2,975	$	—	$	—		$	2,975
Restricted equity securities	$	3,148	$	—	$	—		$	3,148

	December 31, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Available-for-sale:
Collateralized mortgage obligations	$	134,074	$	1,036	$	(694	)	$	134,416
Mortgage-backed securities		70,449		1,344		(20	)		71,773
U.S. Government and agency securities		39,899		1,194		—			41,093
Obligations of states and political subdivisions		64,423		2,652		(197	)		66,878
Total available-for-sale	$	308,845	$	6,226	$	(911	)	$	314,160
Investment securities -
Other Community Reinvestment Act	$	2,000	$	—	$	—		$	2,000
Restricted equity securities	$	3,255	$	—	$	—		$	3,255

10

The table below presents the gross unrealized losses and fair value of the Bank’s investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011. Of these amounts at June 30, 2012, 28 available-for-sale investments comprised the less than 12 months category and one available-for-sale investment comprised the 12 months or more category.

(Dollars in Thousands)
	Less than 12 months					12 months or more					Total
At June 30, 2012	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale:
Collateralized mortgage obligations	$	67,941	$	(476	)	$	752	$	(3	)	$	68,693	$	(479	)
Mortgage-backed securities		22,373		(75	)		—		—			22,373		(75	)
Obligations of states and political subdivisions		10,140		(110	)		—		—			10,140		(110	)
Total	$	100,454	$	(661	)	$	752	$	(3	)	$	101,206	$	(664	)

	Less than 12 months					12 months or more					Total
At December 31, 2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale:
Collateralized mortgage obligations	$	76,461	$	(688	)	$	1,728	$	(6	)	$	78,189	$	(694	)
Mortgage-backed securities		7,318		(20	)		—		—			7,318		(20	)
U.S. Government and agency securities		15,747		(197	)		—		—			15,747		(197	)
Total	$	99,526	$	(905	)	$	1,728	$	(6	)	$	101,254	$	(911	)

Substantially all unrealized losses reflected above were the result of changes in interest rates subsequent to the purchase of the securities. The investments with unrealized losses are not considered other-than-temporarily impaired because the decline in fair value is primarily attributable to the changes in interest rates rather than credit quality. The Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost bases, which may include holding each security until maturity.

The amortized cost and estimated fair value of investment securities at June 30, 2012, by maturity are shown below. The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay underlying loans without prepayment penalties.

At June 30, 2012
(Dollars in Thousands)
	Available-for-sale
	Amortized Cost		Estimated Fair Value
Due in one year or less	$	26,285	$	26,107
Due after one year through five years		194,015		197,482
Due after five years through ten years		55,098		57,348
Due after ten years		17,775		18,972
Total investment securities	$	293,173	$	299,909

At June 30, 2012, investment securities with an estimated fair value of $158.1 million were pledged to secure public deposits, certain nonpublic deposits and borrowings.

11

The following table presents the cash proceeds from the sales of securities and their associated gross realized gains and gross realized losses that are in earnings for the three months and six months ended June 30, 2012 and 2011:

(Dollars in Thousands)	For the Three Months Ended						For the Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Gross realized gain on sale of securities	$	274		$	595		$	2,442		$	1,002
Gross realized loss on sale of securities		(47	)		(172	)		(47	)		(230	)
Net realized gain on sale of securities	$	227		$	423		$	2,395		$	772
Proceeds from sale of securities	$	22,835		$	74,472		$	71,850		$	114,295

As required of all members of the Federal Home Loan Bank (“FHLB”) system, the Company maintains an investment in the capital stock of the FHLB in an amount equal to the greater of $500 or 0.5% of home mortgage loans and pass-through securities plus 5.0% of the outstanding balance of mortgage home loans sold to FHLB under the Mortgage Purchase Program. The FHLB system, the largest government sponsored entity in the United States, is made up of 12 regional banks, including the FHLB of Seattle and the FHLB of San Francisco. Participating banks record the value of FHLB stock equal to its par value at $100 per share. At June 30, 2012, the Company held approximately $2.1 million in FHLB stock. The Company is required to hold FHLB’s stock in order to receive advances and views this investment as long-term. Thus, when evaluating it for impairment, the value is determined based on the recovery of the par value through redemption by the FHLB or from the sale to another member, rather than by recognizing temporary declines in value. The FHLB of Seattle disclosed that it reported net income for the six month period ended June 30, 2012. On October 25, 2010, the FHLB of Seattle entered into a Stipulation and Consent to the Issuance of a Consent Order with the Federal Housing Finance Agency (“Finance Agency”). The Finance Agency continues to deem the FHLB of Seattle “undercapitalized” under the Finance Agency’s Prompt Corrective Action rule. The Company has concluded that its investment in FHLB is not impaired as of June 30, 2012, and believes that it will ultimately recover the par value of its investment in this stock.

NOTE 5 – LOANS

Loans as of June 30, 2012 and December 31, 2011, consisted of the following:

(Dollars in Thousands)	June 30, 2012			December 31, 2011
Construction, Land Dev & Other Land	$	47,968		$	81,241
Commercial & Industrial		116,457			124,422
Commercial Real Estate Loans		423,569			449,347
Secured Multifamily Residential		20,604			21,792
Other Commercial Loans Secured by RE		44,026			47,912
Loans to Individuals, Family & Personal Expense		9,334			9,784
Consumer/Finance		36,606			35,522
Other Loans		12,037			27,594
Overdrafts		227			264
Gross loans		710,828			797,878
Less: allowance for loan losses		(19,518	)		(22,683	)
Less: deferred fees and restructured loan concessions		(363	)		(462	)
Loans, net	$	690,947		$	774,733

12

NOTE 6 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The allowance for loan losses represents the Company’s estimate as to the probable credit losses inherent in its loan portfolio. The allowance for loan losses is increased through periodic charges to earnings through provision for loan losses and represents the aggregate amount, net of loans charged-off and recoveries on previously charged-off loans, that is needed to establish an appropriate reserve for credit losses. The allowance is estimated based on a variety of factors and using a methodology as described below:

• The Company classifies loans into relatively homogeneous pools by loan type in accordance with regulatory guidelines for regulatory reporting purposes. The Company regularly reviews all loans within each loan category to establish risk ratings for them that include Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Pursuant to “Accounting by Creditors for Impairment of a Loan”, the impaired portion of collateral dependent loans is charged-off. Other risk-related loans not considered impaired have loss factors applied to the various loan pool balances to establish loss potential for provisioning purposes.

• Analyses are performed to establish the loss factors based on historical experience, as well as expected losses based on qualitative evaluations of such factors as the economic trends and conditions, industry conditions, levels and trends in delinquencies and impaired loans, levels and trends in charge-offs and recoveries, among others. Minimum loss factors are then established based on a weighted average of historical loss experience by risk classification within each loan category pool. The minimum or historical loss factor, whichever is larger, is applied to loan category pools segregated by risk classification to estimate the loss inherent in the Company’s loan portfolio pursuant to “Accounting for Contingencies.”

• Additionally, impaired loans are evaluated for loss potential on an individual basis in accordance with “Accounting by Creditors for Impairment of a Loan,” and specific reserves are established based on thorough analysis of collateral values where loss potential exists. When an impaired loan is collateral dependent and a deficiency exists in the fair value of real estate collateralizing the loan in comparison to the associated loan balance, the deficiency is charged-off at that time. Impaired loans are reviewed no less frequently than quarterly.

• In the event that a current appraisal to support the fair value of the real estate collateral underlying an impaired loan has not yet been received, but the Company believes that the collateral value is insufficient to support the loan amount, an impairment reserve is recorded. In these instances, the receipt of a current appraisal triggers an updated review of the collateral support for the loan and any deficiency is charged-off or reserved at that time. In those instances where a current appraisal is not available in a timely manner in relation to a financial reporting cut-off date, the Company discounts the most recent third-party appraisal depending on a number of factors including, but not limited to, property location, local price volatility, local economic conditions, and recent comparable sales. In all cases, the costs to sell the subject property are deducted in arriving at the fair value of the collateral. Any unpaid property taxes or similar expenses are expensed at the time the property is acquired by the Company.

In prior quarters, loss factors used to estimate loss potential within the loan portfolio were solely based on actual historical experience. Beginning in this quarter, minimum loss factors are also developed based on a weighted average of historical loss experience by risk classification within each loan category pool. The minimum or historical loss factor, whichever is larger, is now applied to loan category pools segregated by risk classification to estimate the loss inherent in the Company’s loan portfolio pursuant to “Accounting for Contingencies.” This change in methodology had no material impact on the Company’s total allowance for loan losses.

13

Transactions in the allowance for loan losses for the three months and six months ended June 30, 2012 and 2011, were as follows:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

	Construction, Land Dev			Comm & Industrial			Comm Real Estate			Comm Real Estate Multi			Comm Real Estate - Other			Loans to Individuals			Consumer Finance			Other Loans, Concessions, and Overdrafts			Total
For the three months ended June 30, 2012
Allowance for credit losses:
Beginning balance	$	3,973		$	4,407		$	7,162		$	233		$	1,295		$	447		$	2,596		$	211		$	20,324
Charge-offs and concessions		(1,913	)		(4	)		(276	)		—			(378	)		(3	)		(229	)		(1,325	)		(4,128	)
Recoveries		719			1,028			91			—			12			6			163			28			2,047
Provision		1,634			(1,381	)		(195	)		(71	)		306			(283	)		(948	)		2,213			1,275
Ending balance	$	4,413		$	4,050		$	6,782		$	162		$	1,235		$	167		$	1,582		$	1,127		$	19,518
For the six months ended June 30, 2012
Allowance for credit losses:
Beginning balance	$	4,473		$	4,678		$	8,582		$	242		$	1,425		$	487		$	2,502		$	294		$	22,683
Charge-offs and concessions		(5,858	)		(357	)		(1,239	)		—			(651	)		(271	)		(722	)		(1,350	)		(10,448	)
Recoveries		740			1,116			211			—			18			26			356			41			2,508
Provision		5,058			(1,387	)		(772	)		(80	)		443			(75	)		(554	)		2,142			4,775
Ending balance	$	4,413		$	4,050		$	6,782		$	162		$	1,235		$	167		$	1,582		$	1,127		$	19,518
Ending balance: individually evaluated for impairment	$	147		$	62		$	43		$	44		$	—		$	—		$	—		$	—		$	296
Ending balance: collectively evaluated for impairment	$	4,266		$	3,988		$	6,739		$	118		$	1,235		$	167		$	1,582		$	1,127		$	19,222
Loans:
Ending balance	$	47,968		$	116,457		$	423,569		$	20,604		$	44,026		$	9,334		$	36,606		$	12,264		$	710,828
Ending balance: individually evaluated for impairment	$	11,567		$	4,381		$	16,317		$	226		$	4,114		$	271		$	146		$	1,431		$	38,453
Ending balance: collectively evaluated for impairment	$	36,401		$	112,076		$	407,252		$	20,378		$	39,912		$	9,063		$	36,460		$	10,833		$	672,375

Allowance for Credit Losses and Recorded Investment in Financing Receivables

	Construction, Land Dev			Comm & Industrial			Comm Real Estate			Comm Real Estate Multi			Comm Real Estate - Other			Loans to Individuals			Consumer Finance			Other Loans, Concessions, and Overdrafts			Total
For the three months ended June 30, 2011
Allowance for credit losses:
Beginning balance	$	8,694		$	6,077		$	9,611		$	446		$	4,611		$	1,072		$	2,253		$	602		$	33,366
Charge-offs		(3,177	)		(1,027	)		(1,404	)		(56	)		(588	)		(3	)		(342	)		(19	)		(6,616	)
Recoveries		33			1,329			114			—			(9	)		—			204			12			1,683
Provision		(26	)		2,100			(452	)		(196	)		(1,621	)		(898	)		838			255			—
Ending balance	$	5,524		$	8,479		$	7,869		$	194		$	2,393		$	171		$	2,953		$	850		$	28,433
For the six months ended June 30, 2011
Allowance for credit losses:
Beginning balance	$	7,335		$	9,831		$	10,146		$	122		$	4,498		$	946		$	2,401		$	303		$	35,582
Charge-offs		(9,060	)		(2,618	)		(4,533	)		(56	)		(2,248	)		(3	)		(608	)		(41	)		(19,167	)
Recoveries		61			4,710			552			—			83			—			288			24			5,718
Provision		7,188			(3,444	)		1,704			128			60			(772	)		872			564			6,300
Ending balance	$	5,524		$	8,479		$	7,869		$	194		$	2,393		$	171		$	2,953		$	850		$	28,433
Ending balance: individually evaluated for impairment	$	—		$	23		$	1,062		$	—		$	282		$	—		$	—		$	—		$	1,367
Ending balance: collectively evaluated for impairment	$	5,524		$	8,456		$	6,807		$	194		$	2,111		$	171		$	2,953		$	850		$	27,066
Loans:
Ending balance	$	107,624		$	133,356		$	494,599		$	22,791		$	50,641		$	12,203		$	35,561		$	25,878		$	882,653
Ending balance: individually evaluated for impairment	$	49,636		$	1,740		$	34,004		$	144		$	4,335		$	20		$	139		$	2,487		$	92,505
Ending balance: collectively evaluated for impairment	$	57,988		$	131,616		$	460,595		$	22,647		$	46,306		$	12,183		$	35,422		$	23,391		$	790,148

14

The following tables summarize the Company’s loans past due, both accruing and non-accruing, by type as of June 30, 2012 and December 31, 2011:

(Dollars in Thousands)													Recorded
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Investment > 90 Days Past Due and Accruing
June 30, 2012:
Construction, Land Dev & Other Land	$	—	$	1,319	$	8,929	$	10,248	$	37,720	$	47,968	$	—
Commercial & Industrial		297		648		220		1,165		115,292		116,457		—
Commercial Real Estate Loans		—		176		8,926		9,102		414,467		423,569		—
Secured Multifamily Residential		—		—		—		—		20,604		20,604		—
Other Commercial Loans Secured by RE		386		485		2,941		3,812		40,214		44,026		—
Loans to Individuals, Family & Personal Expense		6		—		261		267		9,067		9,334		—
Consumer/Finance		1,187		325		146		1,658		34,948		36,606		146
Other Loans and Overdrafts		—		—		1,431		1,431		10,833		12,264		—
Total	$	1,876	$	2,953	$	22,854	$	27,683	$	683,145	$	710,828	$	146
December 31, 2011:
Construction, Land Dev & Other Land	$	2,296	$	81	$	19,532	$	21,909	$	59,332	$	81,241	$	62
Commercial & Industrial		128		—		2,778		2,906		121,516		124,422		—
Commercial Real Estate Loans		967		—		14,845		15,812		433,535		449,347		—
Secured Multifamily Residential		242		—		—		242		21,550		21,792		—
Other Commercial Loans Secured by RE		302		230		1,019		1,551		46,361		47,912		—
Loans to Individuals, Family & Personal Expense		108		—		618		726		9,058		9,784		1
Consumer/Finance		1,005		275		81		1,361		34,161		35,522		81
Other Loans and Overdrafts		250		1,228		1,697		3,175		24,683		27,858		—
Total	$	5,298	$	1,814	$	40,570	$	47,682	$	750,196	$	797,878	$	144

15

Impaired loans by type as of June 30, 2012, and interest income recognized for the six months ended June 30, 2012, were as follows:

(Dollars in Thousands)	Unpaid						Average		Interest
	Principal Balance		Recorded Investment		Related Allowance		Recorded Investment		Income Recognized
June 30, 2012
With no Related Allowance:
Construction, Land Dev & Other Land	$	23,747	$	10,610	$	—	$	14,226	$	—
Commercial & Industrial		3,977		3,977		—		2,641		—
Commercial Real Estate Loans		18,217		15,876		—		20,931		—
Other Commercial Loans Secured by RE		5,458		4,114		—		3,988		—
Loans to Individuals, Family & Personal Expense		810		271		—		402		—
Consumer/Finance		—		146		—		213		5
Other Loans		1,623		1,431		—		2,545		—
Total	$	53,832	$	36,425	$	—	$	44,946	$	5
With a Related Allowance:
Construction, Land Dev & Other Land	$	957	$	957	$	147	$	765	$	—
Commercial & Industrial		404		404		62		1,037		—
Commercial Real Estate Loans		441		441		43		5,429		—
Secured Multifamily Residential		226		226		44		234		—
Other Loans		—		—		—		122		—
Total	$	2,028	$	2,028	$	296	$	7,587	$	—
Total Impaired Loans:
Construction, Land Dev & Other Land	$	24,704	$	11,567	$	147	$	14,991	$	—
Commercial & Industrial		4,381		4,381		62		3,678		—
Commercial Real Estate Loans		18,658		16,317		43		26,360		—
Secured Multifamily Residential		226		226		44		234		—
Other Commercial Loans Secured by RE		5,458		4,114		—		3,988		—
Loans to Individuals, Family & Personal Expense		810		271		—		402		—
Consumer/Finance		—		146		—		213		5
Other Loans		1,623		1,431		—		2,667		—
Total Impaired Loans	$	55,860	$	38,453	$	296	$	52,533	$	5

Included in the table above are $146,000 of Consumer loans that are 90 days past due and still accruing interest. These loans are charged-off according to policy after 120 days. The remaining loans are on non-accrual status at June 30, 2012.

16

Impaired loans by type as of December 31, 2011 and interest income recognized for the twelve months ended December 31, 2011, were as follows:

(Dollars in Thousands)	Unpaid						Average		Interest
	Principal Balance		Recorded Investment		Related Allowance		Recorded Investment		Income Recognized
December 31, 2011
With no Related Allowance:
Construction, Land Dev & Other Land	$	55,821	$	35,952	$	—	$	40,510	$	5
Commercial & Industrial		4,668		3,545		—		1,766		—
Commercial Real Estate Loans		27,377		18,031		—		30,981		—
Secured Multifamily Residential		—		—		—		98		—
Other Commercial Loans Secured by RE		4,661		3,536		—		3,566		—
Loans to Individuals, Family & Personal Expense		1,483		633		—		189		—
Consumer/Finance		81		81		—		140		15
Other Loans		3,367		3,175		—		2,535		—
Total	$	97,458	$	64,953	$	—	$	79,785	$	20
With a Related Allowance:
Construction, Land Dev & Other Land	$	—	$	—	$	—	$	3,760	$	—
Commercial & Industrial		1,662		1,662		202		994		—
Commercial Real Estate Loans		15,131		9,626		1,885		9,012		—
Other Commercial Loans Secured by RE		—		—		—		1,990		—
Loans to Individuals, Family & Personal Expense		—		—		—		64		—
Total	$	16,793	$	11,288	$	2,087	$	15,820	$	—
Total Impaired Loans:
Construction, Land Dev & Other Land	$	55,821	$	35,952	$	—	$	44,270	$	5
Commercial & Industrial		6,330		5,207		202		2,760		—
Commercial Real Estate Loans		42,508		27,657		1,885		39,993		—
Secured Multifamily Residential		—		—		—		98		—
Other Commercial Loans Secured by RE		4,661		3,536		—		5,556		—
Loans to Individuals, Family & Personal Expense		1,483		633		—		253		—
Consumer/Finance		81		81		—		140		15
Other Loans		3,367		3,175		—		2,535		—
Total Impaired Loans	$	114,251	$	76,241	$	2,087	$	95,605	$	20

Included in the table above are $81,000 of consumer loans that are 90 days past due and still accruing interest. These loans are charged-off according to policy after 120 days. There are also $62,000 of construction, land development loans and a $1,000 loan in the individuals, family and personal expense category that are 90 days past due and still accruing interest. The remaining loans are on non-accrual status at December 31, 2011.

17

Loans by type, including a breakdown of classified loans, as of June 30, 2012, and December 31, 2011, were as follows:

(Dollars in Thousands)

Credit quality indicators as of June 30, 2012 and December 31, 2011 were as follows:

June 30, 2012	Construction, Land Dev		Comm & Industrial		Comm Real Estate		Comm Real Estate Multi		Comm Real Estate - Other		Loans to Individuals		Other Loans and Overdraft		Total
Pass	$	21,206	$	77,029	$	269,700	$	8,521	$	36,577	$	9,041	$	9,865	$	431,939
Watch		425		8,309		41,941		5,465		290		—		685		57,115
Special Mention		9,475		5,023		44,809		6,392		1,495		—		25		67,219
Substandard		16,862		26,096		67,119		226		5,664		293		1,689		117,949
Total	$	47,968	$	116,457	$	423,569	$	20,604	$	44,026	$	9,334	$	12,264		674,222
Total Consumer Credit																36,606
Total loans															$	710,828

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Consumer
Performing	$	36,460
Nonperforming		146
Total	$	36,606

December 31, 2011	Construction, Land Dev		Comm & Industrial		Comm Real Estate		Comm Real Estate Multi		Comm Real Estate - Other		Loans to Individuals		Other Loans and Overdraft		Total
Pass	$	23,558	$	73,312	$	273,068	$	9,246	$	37,145	$	9,063	$	22,822	$	448,214
Watch		303		7,832		55,246		5,740		490		—		725		70,336
Special Mention		17,232		6,098		51,243		6,564		2,926		—		—		84,063
Substandard		40,148		37,180		69,790		242		7,351		721		4,311		159,743
Total	$	81,241	$	124,422	$	449,347	$	21,792	$	47,912	$	9,784	$	27,858		762,356
Total Consumer Credit																35,522
Total loans															$	797,878

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Consumer
Performing	$	35,441
Nonperforming		81
Total	$	35,522

The Company assigns risk ratings to loans based on internal review. These risk ratings are grouped and defined as follows:

Pass – The borrower is considered creditworthy and has the ability to repay the debt in the normal course of business.

Watch – This rating indicates that according to current information, the borrower has the capacity to perform according to terms; however, elements of uncertainty (an uncharacteristic negative financial or other risk factor event) exist. Margins of debt service coverage are or have narrowed, and historical patterns of financial performance may be erratic although the overall trends are positive. If secured, collateral value and adequate sources of repayment currently protect the loan. Material adverse trends have not developed at this time. Loans in this category can be to new and/or thinly capitalized companies with limited proved performance history.

Special Mention – A Special Mention asset has potential weaknesses that deserve Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This rating is not a transitional grade by definition; however, an appropriate action plan is required to ensure timely risk rating change as circumstances warrant.

18

Substandard – The loan is inadequately protected by the current worth and/or paying capacity of the obligor or of the collateral pledged, if any. There are well-defined weaknesses that jeopardize the repayment of the debt. Although loss may not be imminent, if the weaknesses are not corrected, there is a good possibility that the Company will sustain a loss. Loss potential, while existing in the aggregate amount of Substandard assets, does not have to exist in individual assets classified Substandard.

Doubtful – The loan has the weaknesses of those in the classification of Substandard, one or more of which make collection or liquidation in full, on the basis of currently ascertainable facts, conditions and values, highly questionable or improbable. The possibility of loss is extremely high, but certain identifiable contingencies that are reasonably likely to materialize may work to the advantage and strengthening of the loan, such that it is reasonable to defer its classification as a Loss until its more exact status may be determined. Contingencies that may call for deferral of Loss classification include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. Loans in this classification are carried on nonaccrual and are considered impaired. Credits rated Doubtful are to be reviewed frequently to determine if event(s) that might require a change in rating upward or downward have taken place.

Loss – Loans classified as loss, are considered uncollectible and of such little value that the continuance as an active Company asset is not warranted. This rating does not mean that the loan has no recovery or salvage value, but rather that the loan should be charged off now, even though partial or full recovery may be possible in the future.

Consumer finance loans are not risk rated; however, loans greater than 90 days past due are reported as non-performing loans. These loans are charged off when they are 120 days past due; however, if these loans are secured by real estate, the Company may choose to write these loans down to the fair value of the collateral.

Troubled Debt Restructurings (“TDR”) – At June 30, 2012 and December 31, 2011, loans of $27.9 million and $51.7 million, respectively, were classified as restructured loans. The restructurings were granted in response to borrower financial difficulty, and provide for a modification of loan repayment terms. As of June 30, 2012 and December 31, 2011, no available commitments were outstanding on troubled debt restructurings.

Modification Categories

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

Rate Modification – A modification in which the interest rate is changed.

Term Modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification – Any other type of modification, including the use of multiple categories above.

All TDR’s on accrual and nonaccrual status are evaluated for loss potential on an individual basis in accordance with Company policy for impaired loans. The loans determined to be collateral dependent are carried at fair value based on current appraisals. Given our ALLL methodology, TDR modifications and defaults have no additional effect on the reserve.

19

The following tables summarize the Company’s troubled debt restructured loans by type, geographic region, and maturities as of June 30, 2012:

(Dollars in Thousands)
	June 30, 2012 Restructured loans
	Southern Oregon		Mid Oregon		Northern California		Sacramento Valley		Totals		Number of Loans
Construction, Land Dev & Other Land	$	331	$	5,355	$	135	$	3,721	$	9,542		16
Commercial & Industrial		3,517		—		598		216		4,331		9
Commercial Real Estate Loans		6,517		4,769		176		—		11,462		8
Other Commercial Loans Secured by RE		579		—		318		1,661		2,558		9
Total restructured loans	$	10,944	$	10,124	$	1,227	$	5,598	$	27,893		42

(Dollars in Thousands)
Year	Amount
2012	$	13,781
2013		6,005
2014		3,506
2015		116
2016		873
Thereafter		3,612
Total	$	27,893

The following table presents troubled debt restructurings by accrual or non-accrual status as of June 30, 2012 and December 31, 2011:

(Dollars in Thousands)
	June 30, 2012
	Restructured loans
	Accrual Status		Non-accrual Status		Total Modifications
Construction, Land Dev & Other Land	$	984	$	8,558	$	9,542
Commercial & Industrial		860		3,471		4,331
Commercial Real Estate Loans		6,456		5,006		11,462
Other Commercial Loans Secured by RE		209		2,349		2,558
Total restructured loans	$	8,509	$	19,384	$	27,893

	December 31, 2011
	Restructured loans
	Accrual Status		Non-accrual Status		Total Modifications
Construction, Land Dev & Other Land	$	1,452	$	28,361	$	29,813
Commercial & Industrial		1,289		3,740		5,029
Commercial Real Estate Loans		1,118		13,258		14,376
Other Commercial Loans Secured by RE		211		2,239		2,450
Total restructured loans	$	4,070	$	47,598	$	51,668

20

As of June 30, 2012, there were 13 borrowers with loans designated as TDR’s that met the criteria for placement back on accrual status. This criteria is a minimum of six months of continuous satisfactory (less than 30 days past-due) payment performance under existing or modified terms, and this payment performance would be expected to continue as documented by analysis based on current financial statements and/or tax returns.

The following tables present newly restructured loans by type of modification that occurred during the three months and six months ended June 30, 2012 and 2011, respectively. No modification terms included principal forgiveness in the newly restructured loans that occurred during these periods:

(Dollars in Thousands)
	Three Months Ended June 30, 2012
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	107	$	—	$	107
Commercial & Industrial		—		48		—		48
Commercial Real Estate Loans		—		—		1,625		1,625
Other Commercial Loans Secured by RE		—		486		—		486
Total restructured loans	$	—	$	641	$	1,625	$	2,266

	Three Months Ended June 30, 2012
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	—	$	—	$	—
Commercial & Industrial		—		—		—		—
Commercial Real Estate Loans		—		314		5,626		5,940
Other Commercial Loans Secured by RE		—		—		—		—
Total restructured loans	$	—	$	314	$	5,626	$	5,940

	Six Months Ended June 30, 2011
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	1,282	$	359	$	1,641
Commercial & Industrial		—		48		825		873
Commercial Real Estate Loans		—		196		1,882		2,078
Other Commercial Loans Secured by RE		—		486		—		486
Total restructured loans	$	—	$	2,012	$	3,066	$	5,078

	Six Months Ended June 30, 2011
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	—	$	—	$	—
Commercial & Industrial		—		—		—		—
Commercial Real Estate Loans		—		314		5,626		5,940
Other Commercial Loans Secured by RE		—		—		—		—
Total restructured loans	$	—	$	314	$	5,626	$	5,940

21

The following table represents financing receivables modified within the last 12 months as TDR’s and had a payment default during the three months and six months ended June 30, 2012 and 2011, respectively:

(Dollars in Thousands)
	Three Months Ended
	June 30, 2012		June 30, 2011
Construction, Land Dev & Other Land	$	7,024	$	—
Commercial & Industrial		—		—
Commercial Real Estate Loans		—		5,741
Other Commercial Loans Secured by RE		1,661		—
Total restructured loans	$	8,685	$	5,741

	Six Months Ended
	June 30, 2012		June 30, 2011
Construction, Land Dev & Other Land	$	7,024	$	—
Commercial & Industrial		—		—
Commercial Real Estate Loans		—		5,741
Other Commercial Loans Secured by RE		1,661		—
Total restructured loans	$	8,685	$	5,741

NOTE 7 – FEDERAL HOME LOAN BANK BORROWINGS AND OTHER BORROWINGS

The Bank had no long-term borrowings outstanding with the FHLB at June 30, 2012 and December 31, 2011. The Bank also participates in the Cash Management Advance (“CMA”) program with the FHLB. CMA borrowings are short-term borrowings that mature within one day and accrue interest at the variable rate as published by the FHLB. As of June 30, 2012 and December 31, 2011, the Bank had no outstanding CMA borrowings. When borrowings with the FHLB occur, they are collateralized as provided for under the Advances, Security and Deposit Agreement between the Bank and the FHLB and include the Bank’s FHLB stock and any funds or investment securities held by the FHLB that are not otherwise pledged for the benefit of others. At June 30, 2012, the Bank maintained a line of credit with the FHLB of Seattle for $50.9 million and was in compliance with its related collateral requirements.

The Bank also had $15.0 million available for additional borrowing from a correspondent bank; and $3,000 available for borrowing from the Federal Reserve discount window. On June 29, 2012 collateral was inadvertently transferred from the Federal Reserve discount window reducing the Company’s borrowing capacity as of June 30, 2012. The collateral was transferred back on July 2, 2012, restoring the Company’s borrowing capacity to $7.5 million on July 11, 2012.

During the first quarter of 2011, the Company began a program to sell securities under agreements to repurchase. At June 30, 2012, the Bank had $3.6 million securities sold under agreements to repurchase with a maximum balance at any month-end during the quarter of $3.8 million and a weighted average quarterly balance of $4.1 million, and an interest rate of 0.30% during the quarter. At December 31, 2011, the Bank had $4.2 million securities sold under agreements to repurchase with a maximum balance at any month end during the year of $6.9 million, a weighted average yearly balance of $3.8 million, and an interest range of 0.30% to 0.50% during the year.

NOTE 8 – JUNIOR SUBORDINATED DEBENTURES

On December 30, 2004, the Company established two wholly-owned statutory business trusts (“PremierWest Statutory Trust I and II”) that were formed to issue junior subordinated debentures and related common securities. On August 25, 2005, Stockmans Financial Group established a wholly-owned statutory business trust (“Stockmans Financial Trust I”) to issue junior subordinated debentures and related common securities. Following the acquisition of Stockmans Financial Group, the Company became the successor-in-interest to Stockmans Financial Trust I. Common stock issued by each of the Trusts and held as an investment by the Company is recorded in other assets in the consolidated balance sheets.

22

Following are the terms of the junior subordinated debentures as of June 30, 2012.

(Dollars in Thousands)
Trust Name	Issue Date	Issued Amount		Rate			Maturity Date	Redemption Date
PremierWest Statutory Trust I	December 2004	$	7,732,000		LIBOR + 1.75	% (1)	December 2034	December 2009
PremierWest Statutory Trust II	December 2004		7,732,000		LIBOR +  1.79	% (2)	March 2035	March 2010
Stockmans Financial Trust I	August 2005		15,464,000		LIBOR +  1.42	% (3)	September 2035	September 2010
		$	30,928,000

⁽¹⁾ PremierWest Statutory Trust I was bearing interest at the fixed rate of 5.65% until mid-December 2009, at which time it changed to a variable rate of 3-month LIBOR (0.470% at June 15, 2012) plus 1.75% or 2.220%, adjusted quarterly, through the final maturity date in December 2034.

⁽²⁾ PremierWest Statutory Trust II was bearing interest at the fixed rate of 5.65% until March 2010, at which time it changed to the variable rate of 3-month LIBOR (0.470% at June 15, 2012) plus 1.79% or 2.260%, adjusted quarterly, through the final maturity date in March 2035.

⁽³⁾ Stockmans Financial Trust I was bearing interest at the fixed rate of 5.93% until September 2010, at which time it changed to the variable rate of 3-month LIBOR (0.470% at June 15, 2012) plus 1.42% or 1.890%, adjusted quarterly, through the final maturity date in September 2035.

The Oregon Department of Consumer and Business Services, which supervises banks and bank holding companies through its Division of Finance and Corporate Securities, and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by banks and bank holding companies, respectively. The Company does not expect to be in a position to pay interest payments on trust preferred securities without regulatory approval or until the Bank is considered “well-capitalized” and has satisfied conditions in its regulatory agreement (see Note 2). The Company is permitted to defer such interest payments for up to 20 consecutive quarters, but during a deferral period it is prohibited from making dividend payments on its capital stock. The amount of accrued and unpaid interest was approximately $2.6 million as of June 30, 2012. At June 30, 2012, the Company had deferred payment of interest for eleven consecutive quarters.

NOTE 9 – PREFERRED STOCK

On February 13, 2009, in exchange for an aggregate purchase price of $41.4 million, the Company issued and sold to the United States Department of the Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program (“TARP”) the following: (i) 41,400 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, no par value per share, and liquidation preference of $1,000 per share and (ii) a Warrant to purchase up to 109,039 shares of the Company’s common stock, no par value per share, at an exercise price of $57.00 per share, subject to certain anti-dilution and other adjustments. The Warrant may be exercised for up to ten years after it is issued.

In connection with the issuance and sale of the Company’s securities, the Company entered into a Letter Agreement including the Securities Purchase Agreement-Standard Terms, dated February 13, 2009, with the United States Department of the Treasury (the “TARP Agreement”). The TARP Agreement contains limitations on the payment of quarterly cash dividends on the Company’s common stock in excess of $0.057 per share and on the Company’s ability to repurchase its common stock. The TARP Agreement also grants the holders of the Series B Preferred Stock, the Warrant and the common stock to be issued under the Warrant registration rights, and subjects the Company to executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 as amended by the American Recovery and Reinvestment Act of 2009. Participants in the TARP Capital Purchase Program are required to have in place limitations on the compensation of Senior Executive Officers and other employees.

The Series B Preferred Stock (“Preferred Stock”) will bear cumulative dividends at a rate of 5.0% per annum for the first five years and 9.0% per annum thereafter, in each case, applied to the $1,000 per share liquidation preference, but will only be paid when, as and if declared by the Company’s Board of Directors out of funds legally available. The Preferred Stock has no maturity date and ranks senior to the Company’s common stock with respect to the payment of dividends and distributions and amounts payable in the event of liquidation, dissolution and winding up of the Company.

23

In February 2009, following passage of the American Recovery and Reinvestment Act of 2009, the program terms were changed and the Company is no longer required to conduct a qualified equity offering prior to retirement of the Series B Preferred Stock; however, prior approval of the Company’s primary federal regulator is required.

The Preferred Stock is not subject to any contractual restrictions on transfer. The holders of the Preferred Stock have no general voting rights, and have only limited class voting rights including authorization or issuance of shares ranking senior to the Preferred Stock, any amendment to the rights of the Preferred Stock, or any merger, exchange or similar transaction which would adversely affect the rights of the Preferred Stock. If dividends on the Preferred Stock are not paid in full for six dividend periods, whether or not consecutive, the Preferred Stock holders will have the right to elect two directors. The right to elect directors will end when full dividends have been paid for four consecutive dividend periods. The Preferred Stock is not subject to sinking fund requirements and has no participation rights.

While payments have not been made since the third quarter of 2009, or the last eleven quarters, the Company has continued to accrue dividends through the second quarter of 2012. As of June 30, 2012, accrued and unpaid dividends totaled approximately $6.1 million.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve various levels and elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. As of June 30, 2012, the Company had a total of $71.1 million of unfunded loan commitments consisting of $65.4 million of commitments to extend credit to customers and $5.4 million of standby letters related to extensions of credit. The Company also had approximately $252,000 of other unsecured lines of credit related to overdraft protection for demand deposit accounts.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held, if required, varies as specified above.

The Bank also maintains a reserve against these off-balance sheet financial instruments. The amount of the reserve was $311,000 at June 30, 2012 which was an increase of $213,000 from December 31, 2011. This increase was incurred to enhance our provision for off-balance sheet credit risk as part of a revision of the Company’s allowance for loan and lease losses methodology.

In the ordinary course of business, the Bank may become involved in litigation arising from normal banking activities. In the opinion of Management, the ultimate disposition of current actions will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

NOTE 11 – BASIC AND DILUTED LOSS PER COMMON SHARE

The Company’s basic loss per common share is computed by dividing net loss available to common shareholders (net loss less dividends declared and accretion of discount on preferred stock) by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock dividends and splits. The Company’s diluted loss per common share is computed similar to basic loss per common share except that the numerator is equal to net loss and the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. Included in the denominator is the dilutive effect of stock options computed under the treasury stock method and the dilutive effect of the U.S. Treasury Warrant as if converted to common stock.

24

The following summarizes the weighted average shares outstanding for computation of basic and diluted shares for the three months and six months ended June 30, 2012 and 2011.

Three months ended June 30:	2012		2011
Weighted average number of common shares:
Average shares outstanding-basic		10,034,741		10,034,491
Average shares outstanding-diluted		10,034,741		10,034,491

Six months ended June 30:	2012		2011
Weighted average number of common shares:
Average shares outstanding-basic		10,034,741		10,034,656
Average shares outstanding-diluted		10,034,741		10,034,656

As of June 30, 2012, and 2011, stock options of 67,287 and 77,593, respectively, were not included in the computation of diluted earnings per share, as well as the U.S. Treasury Warrant to purchase 109,039 shares of common stock, as their inclusion would have been anti-dilutive.

NOTE 12 – INCOME TAXES

At June 30, 2012, December 31, 2011, and June 30, 2011, the Company’s deferred tax assets were fully offset by a valuation allowance. Under generally accepted accounting principles, a valuation analysis is required to be established if it is “more likely than not” that the deferred tax asset will not be realized. The determination of realizing deferred tax assets is highly subjective and dependent upon judgment concerning Management’s evaluation of both positive and negative evidence, including forecasts of future income, applicable tax planning strategies and assessments of current and future economic and business conditions. Positive evidence includes the ability to implement tax planning strategies to accelerate taxable income recognition and the probability that taxable income will be generated in future periods. Negative evidence includes the Company’s cumulative loss in the prior three year period and the current general business and economic environment.

NOTE 13 – FAIR VALUE MEASUREMENTS

The Company bases fair value on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the Company establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

The fair value hierarchy is as follows:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The Company used the following methods and significant assumptions to estimate fair value for its assets measured and carried at fair value on a recurring basis in the financial statements:

Investment securities available-for-sale – Securities classified as available-for-sale are reported at fair value utilizing Level 1 and 2 inputs. However, as practically expedient, all securities are reported as utilizing Level 2 inputs. Fair values for investment securities are based on quoted market prices or the market values for comparable securities. The Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Available-for-sale securities are the only balance sheet category the Company accounts for at fair value on a recurring basis.

25

The following table presents information about these securities and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

(Dollars in Thousands)	Fair Value Measurements
	At June 30, 2012, Using
Description	Fair Value 6/30/2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Collateralized mortgage obligations	$	140,797	$	—	$	140,797	$	—
Mortgage-backed securities		91,992		—		91,992		—
U.S. Government and agency securities		1,799		—		1,799		—
Obligations of states and political subdivisions		65,321		—		65,321		—
Total assets measured at fair value	$	299,909	$	—	$	299,909	$	—

	Fair Value Measurements At December 31, 2011, Using
Description	Fair Value 12/31/2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Collateralized mortgage obligations	$	134,416	$	—	$	134,416	$	—
Mortgage-backed securities		71,773		—		71,773		—
U.S. Government and agency securities		41,093		—		41,093		—
Obligations of states and political subdivisions		66,878		—		66,878		—
Total assets measured at fair value	$	314,160	$	—	$	314,160	$	—

Impaired Loans – A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Non-performing loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value less selling costs (“net realizable value”). As a practical expedient, fair value may be measured based on a loan’s observable market price or the underlying collateral securing the loan. Collateral may be real estate or business assets including equipment. The value of collateral is generally determined based on independent appraisals.

Other Real Estate and Foreclosed Assets – Other real estate and foreclosed assets (“OREO”) acquired through foreclosure or deeds in lieu of foreclosure are carried at fair value, less costs to sell, or estimated net realizable value utilizing current property appraisal valuations. When property is acquired, any excess of the loan balance over the estimated net realizable value is charged to the allowance for loan losses. Holding costs, subsequent write-downs to net realizable value, if any, or any disposition gains or losses are included in non-interest expense. The Bank had $33.9 million and $22.8 million in OREO at June 30, 2012, and December 31, 2011, respectively.

26

The following table presents the fair value measurement for non-earning assets as of June 30, 2012, and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value on a non-recurring basis:

(Dollars in Thousands)	Fair Value Measurements
	As of June 30, 2012, Using
Description	Fair Value         6/30/2012		Quoted Prices in Active Markets for Identical Assets         (Level 1)		Other Observable Inputs         (Level 2)		Significant Unobservable Inputs         (Level 3)		Total period losses included in         earnings
Other real estate owned and foreclosed assets	$	33,895	$	—	$	—	$	33,895	$	(1,553	)
Loans measured for impairment, net of specific reserves		18,781		—		—		18,781		(6,869	)
Total impaired assets measured at fair value	$	52,676	$	—	$	—	$	52,676	$	(8,422	)

	Fair Value Measurements As of December 31, 2011, Using
Description	Fair Value         12/31/2011		Quoted Prices in Active Markets for Identical Assets         (Level 1)		Other Observable Inputs         (Level 2)		Significant Unobservable Inputs         (Level 3)		Total period losses included in         earnings
Other real estate owned and foreclosed assets	$	22,829	$	—	$	—	$	22,829	$	(8,950	)
Loans measured for impairment, net of specific reserves		36,525		—		—		36,525		(19,677	)
Total impaired assets measured at fair value	$	59,354	$	—	$	—	$	59,354	$	(28,627	)

As of June 30, 2012, and December 31, 2011, all non-performing loans were considered impaired and were measured for impairment. The table below shows the detail of the various categories of impaired loans:

(Dollars in Thousands)	As of June 30, 2012			As of December 31, 2011
	Carrying Value			Carrying Value
Impaired loans with charge-offs loan-to-date (1)	$	17,049		$	27,324
Impaired loans with specific reserves		2,028			7,600
Impaired loans with both specific reserves and charge-offs loan-to-date (1)		—			3,688
Subtotal impaired loans with specific reserves and/or charge-offs loan-to-date		19,077			38,612
Specific reserves associated with impaired loans		(296	)		(2,087	)
Total loans measured for impairment, net of specific reserves	$	18,781		$	36,525
Impaired loans without charge-offs or specific reserves	$	19,376		$	37,629
Loans with specific reserves and/or charge-offs loan-to-date		19,077			38,612
Total impaired loans	$	38,453		$	76,241

(1) Represents loans reduced for charge-offs incurred from inception of the loans

The following methods and assumptions were used by the Bank in estimating fair values of assets and liabilities:

Cash and cash equivalents – The carrying amounts of cash and short-term instruments approximate their fair value. Therefore, the company believes the measurement of fair value of cash and cash equivalents is derived from Level 1 inputs.

Interest-bearing deposits with the Federal Home Loan Bank of Seattle (“FHLB”) and restricted equity securities – The carrying amount approximates the estimated fair value and expected redemption values, and the Company uses these inputs to determine fair value. The Company has determined this is a Level 2 input.

27

Mortgage loans held-for-sale – Mortgage loans held-for-sale are reported at the lower of cost or market value. Cost generally approximates market value, given the short duration of these assets. Gains or losses on the sale of loans held-for-sale are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights. The Company uses these inputs to determine fair value. Therefore, the Company has determined this is a Level 2 input.

Loans – Fair values for variable-rate commercial loans, certain mortgage loans (for example, commercial and one-to-four family residential), and other consumer loans are based on carrying values. For fixed rate loans, projected cash flows are discounted back to their present value based on spreads derived from the current relationship between industry observed benchmark rates and corresponding market indexes. Each pool of loans is then discounted to the Swap/LIBOR curve plus/minus this spread. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values based on current market appraisals, less costs to sell, where applicable. The ALLL is considered to be a reasonable estimate of loan discount for credit quality concerns. Using these inputs, the Company has determined this is a Level 3 input.

Deposit liabilities – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts, savings accounts and interest checking accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The Company utilized a third-party provider to calculate fair value using these inputs, and has therefore determined this is a Level 2 input.

Short-term borrowings and securities sold under agreements to repurchase – The carrying amounts of federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rate for similar types of borrowing arrangements. Using these inputs, the Company has determined this is a Level 2 input.

Long-term debt – The fair values of the Bank’s long-term debt is estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rate for similar types of borrowing arrangements. The Company has determined this is a Level 2 input.

Off-balance sheet financial instruments – The Bank’s off-balance sheet financial instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. Given the uncertainty of a commitment being drawn upon, it is not reasonable to estimate the fair value of these commitments; therefore, the Company has not made any disclosure on the fair value of off-balance sheet financial instruments.

The following disclosures are made in accordance with the provisions of “Disclosures About Fair Value of Financial Instruments,” which requires the disclosure of fair value information about financial instruments where it is practicable to estimate that value. In cases where quoted market values are not available, the Bank primarily uses present value techniques to estimate the fair values of its financial instruments. Valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts that could be realized in a current market exchange.

In addition, as the Bank normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments but have significant value. These include such off-balance sheet items as core deposit intangibles on acquired deposits. The Bank does not believe that it would be practicable to estimate a representational fair value for these types of items as of the periods presented.

As this standard excludes certain financial instruments and all non-financial instruments from its disclosure requirements, any aggregation of the fair value amounts presented in the following table would not represent the underlying value of the Bank.

28

The estimated fair values of the Company’s significant on-balance sheet financial instruments at June 30, 2012, and December 31, 2011, were as follows:

(Dollars in Thousands)	As of June 30, 2012				As of December 31, 2011
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	87,868	$	87,868	$	71,349	$	71,349
Interest-bearing certificates of deposit (original maturities greater than 90 days)	$	1,500	$	1,500	$	1,500	$	1,500
Investment securities available-for-sale	$	299,909	$	299,909	$	314,160	$	314,160
Investment securities - CRA	$	2,975	$	2,975	$	2,000	$	2,000
Restricted equity investments	$	3,148	$	3,148	$	3,255	$	3,255
Loans held-for-sale	$	1,199	$	1,199	$	810	$	810
Loans	$	710,828	$	714,294	$	797,878	$	799,218
Accrued interest receivable	$	4,028	$	4,028	$	4,567	$	4,567
Financial liabilities:
Deposits	$	1,045,602	$	1,050,296	$	1,127,749	$	1,133,695
Securities sold under agreements to repurchase	$	3,568	$	3,568	$	4,241	$	4,241
Junior subordinated debentures	$	30,928	$	11,437	$	30,928	$	12,999
Accrued interest payable	$	2,761	$	2,761	$	2,536	$	2,536

The following tables present information about the level in the fair value hierarchy for the Company’s assets and liabilities that are not measured on a recurring basis as of June 30, 2012 and December 31, 2011.

(Dollars in Thousands)	Fair Value at June 30, 2012
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	87,868	$	87,868	$	—	$	—
Interest-bearing certificates of deposit (original maturities greater than 90 days)		1,500		1,500		—		—
Investment securities - CRA		2,975		—		2,975		—
Restricted equity investments		3,148		—		3,148		—
Loans held-for-sale		1,199		—		1,199		—
Loans		714,294		—		—		714,294
Accrued interest receivable		4,028		4,028		—		—
Financial liabilities:
Deposits	$	1,050,296	$	—	$	1,050,296	$	—
Securities sold under agreements to repurchase		3,568		—		3,568		—
Junior subordinated debentures		11,437		—		—		11,437
Accrued interest payable		2,761		2,761		—		—
(Dollars in Thousands)	Fair Value at December 31, 2011
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	71,349	$	71,349	$	—	$	—
Interest-bearing certificates of deposit (original maturities greater than 90 days)		1,500		1,500		—		—
Investment securities - CRA		2,000		—		2,000		—
Restricted equity investments		3,255		—		3,255		—
Loans held-for-sale		810		—		810		—
Loans		799,218		—		—		799,218
Accrued interest receivable		4,567		4,567		—		—
Financial liabilities:
Deposits	$	1,133,695	$	—	$	1,133,695	$	—
Securities sold under agreements to repurchase		4,241		—		4,241		—
Junior subordinated debentures		12,999		—		—		12,999
Accrued interest payable		2,536		2,536		—		—

NOTE 14 – RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2011, the FASB issued Accounting Standards Update ASU No. 2011-12 “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This Standard defers only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments. This standard is effective for public companies for fiscal years, and interim period within those years, beginning after December 15, 2011. The adoption of ASU No. 2011-12 is not expected to have a material impact on the consolidated financial statements.

In September 2011, the FASB issued Accounting Standards Update ASU No. 2011-08 “Intangibles – Goodwill and Other (Topic 350): Testing for Goodwill Impairment.” This Standard is intended to simplify how entities test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU No. 2011-08 is not expected to have a material impact on the consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update ASU No. 2011-05 “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” This Standard is intended to improve the overall quality of financial reporting by increasing the prominence of items reported in other comprehensive income (“OCI”), and additionally align the presentation of OCI in financial statements prepared in accordance with U.S. GAAP with those prepared in accordance with IFRSs. This standard is effective for public companies for fiscal years, and interim period within those years, beginning after December 15, 2011, and should be applied retrospectively. The adoption of ASU No. 2011-05 did not have a material impact on the consolidated financial statements.

In May 2011, the FASB issued Accounting Standards Update ASU No. 2011-04 “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This Standard is intended to permit the use of a premium or discount to an instrument’s market value when such a step is a standard practice. In some instances, the amendments permit instruments to be valued based on a business’s net risk to the market or a trading partner. The amendments are to be applied prospectively, and will be effective for public companies for fiscal years and quarters that start after December 15, 2011. The adoption of ASU No. 2011-04 did not have a material impact on the consolidated financial statements.

In April 2011, the FASB issued Accounting Standards Update ASU No. 2011-03 “Transfers and servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” This Standard is intended to improve the manner in which repo

29

and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity are reported in the financial statements by modifying Topic 860. This standard is effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date, with early adoption disallowed. The adoption of ASU No. 2011-03 did not have a material impact on the consolidated financial statements.

In April 2011, the FASB issued Accounting Standards Update ASU No. 2011-02 “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is A Troubled Debt Restructuring.” This Standard clarifies the accounting principles applied to loan modifications. ASU No. 2011-02 was issued to address the recording of an impairment loss in FASB ASC 310, Receivables. The changes apply to a lender that modifies a receivable covered by Subtopic 310-40 Receivables – Troubled Debt Restructurings by Creditors. This standard is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively. The adoption of ASU No. 2011-02 did not have a material impact on the consolidated financial statements.

30

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the audited consolidated financial statements and related notes to those statements of PremierWest Bancorp (“Bancorp” or the “Company”) that appear under the heading “Financial Statements and Supplementary Data” in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 10-K”), as well as the unaudited consolidated financial statements for the current quarter found under Item 1 above.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Statements in this Quarterly Report of PremierWest Bancorp (“Bancorp” or the “Company”) regarding future events or performance are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) and are made pursuant to the safe harbors of the PSLRA. The Company’s actual results could be quite different from those expressed or implied by the forward-looking statements. Words such as “could,” “may,” “should,” “plan,” “believes,” “anticipates,” “estimates,” “predicts,” “expects,” “projects,” “potential,” “likely,” or “continue,” or words of similar import, often help identify “forward-looking statements,” which include any statements that expressly or implicitly predict future events, results, or performance. Factors that could cause events, results or performance to differ from those expressed or implied by our forward-looking statements include, among others, risks discussed in Item 1A, “Risk Factors” of the 2011 10-K, risks discussed elsewhere in the text of this report and in our filings with the SEC, as well as the following specific factors:

• General economic conditions, whether national or regional, and conditions in real estate markets, that may affect the demand for our loan and other products, lead to declines in credit quality and increase in loan losses, negatively affect the value and salability of the real estate that we own or that is the collateral for many of our loans, and hinder our ability to increase lending activities;

• Changing bank regulatory conditions, policies, or programs, whether arising as new legislation or regulatory initiatives or changes in our regulatory classifications, that could lead to restrictions on activities of banks generally or PremierWest Bank (the “Bank”) in particular, increased costs, including higher deposit insurance premiums, price controls on debit card interchange, regulation or prohibition of certain income producing activities, or changes in the secondary market for bank loan and other products;

• Competitive factors, including competition with community, regional and national financial institutions, that may lead to pricing pressures that reduce yields the Bank earns on loans or increase rates the Bank pays on deposits, the loss of our most valued customers, defection of key employees or groups of employees, or other losses;

• Increasing or decreasing interest rate environments, including the slope and level of the yield curve, that could lead to decreases in net interest margin, lower net interest and fee income, including lower gains on sales of loans, and changes in the value of the Company’s investment securities; and

• Changes or failures in technology or third party vendor relationships in important revenue production or service areas or increases in required investments in technology that could reduce our revenues, increase our costs, or lead to disruptions in our business.

Furthermore, forward-looking statements are subject to risks and uncertainties related to the Company’s ability to, among other things: dispose of properties or other assets obtained through foreclosures at expected prices and within a reasonable period of time; attract and retain key personnel; generate loan and deposit balances at projected spreads; sustain fee generation including gains on sales of loans; maintain asset quality and control risk; limit the amount of net loan charge-offs; manage its interest rate sensitivity position in periods of changing market interest rates; adapt to changing customer deposit, investment and borrowing behaviors; control expense growth; and monitor and manage the Company’s financial reporting, operating and disclosure control environments.

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect Management’s analysis only as of the date of the statements. The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report.

Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission (“SEC”).

31

Second Quarter 2012 Financial Overview

During second quarter 2012, we recorded:

• Net loss applicable to common shareholders of $2.0 million, compared to a $4.8 million net loss in first quarter 2012 and a $2.7 million net loss in second quarter 2011;

• Loan loss provision expense of $1.3 million versus $3.5 million in first quarter 2012 and none in second quarter 2011;

• Net loan charge-offs of $2.1 million compared to net loan charge-offs of $5.9 million in first quarter 2012 and $4.9 million in second quarter 2011;

• Net OREO and foreclosed asset expenses of $1.2 million, a reduction from $2.4 million in first quarter 2012 and $4.4 million in second quarter 2011;

• Net interest margin of 4.34%, an increase from 4.10% in first quarter 2012 and 4.19% in second quarter 2011.

• Average rate paid on total deposits and borrowings of 0.56%, a decline from 0.62% in the first quarter in 2012 and 0.83% in second quarter 2012.

Management continued to execute strategies that have resulted in further strengthening of the Company, including:

• Reducing adversely classified loans to $118.1 million, down from $140.0 million at March 31, 2012 and $207.1 million at June 30, 2011;

• Reducing non-performing assets to $72.3 million, a decline from $91.3 million at March 31, 2012 and $120.1 million at June 30, 2011;

• Completed the consolidation of nine branches into existing nearby offices and sale of two branches to reduce expenses and improve efficiency with only modest losses in deposits. These branches represented approximately $102.0 million, or less than 10% of total Bank wide deposits as of December 31, 2011. As of June 30, 2012, only $29.1 million in deposits have been lost as a result of this initiative, including $16.3 million located in the two branches sold to another financial institution. This action is projected to result in expense savings of approximately $1.9 million annually;

• Initiated additional expense control initiatives including a restructuring of staff and processes that are projected to result in annualized savings of approximately $2.5 million. As a result of these changes, some staff positions were eliminated and other vacant positions were not filled in order to create a more efficient organization.

• Strengthening the Bank’s total risk-based and leverage capital ratios to 13.64% and 9.01%, respectively, as compared to 13.23% and 8.78% at March 31, 2012 and 12.65% and 8.71% at June 30, 2011;

• Maintaining non-interest bearing demand deposits at 26% of total deposits, as compared to 26% in first quarter 2012 and 22% in second quarter 2011.

OPERATING RESULTS

Net Interest Income

Net interest income for the quarter and six months ended June 30, 2012 declined from the three and six months ended June 30, 2011. This is primarily due to a decline in average interest earning assets during these periods as a result of the Company’s deleveraging strategy. Correspondingly, average interest bearing liabilities decreased during these same periods. Changes in the balance sheet mix also contributed to declines in net interest income during these periods. Loan balances have declined through payoffs and charge-offs. Investment securities have grown as a proportion of the balance sheet with loan demand continuing to be weak due to the economic slowdown. As such, investment securities, which typically generate a lower yield than loans, comprise a higher percentage of the Bank’s earning assets.

Net interest income for the current quarter increased from the quarter ended March 31, 2012 despite the decline in earning assets between the periods. Interest income increased due to the collection of approximately $500,000 in loan interest from the sale of a note and the return of a loan to accruing status. Interest expense continued to decline due to the reduction in the balances of and rates paid on certificates of deposit.

32

Certain reclassifications have been made to the following financial table presentations to conform to current period presentations. These reclassifications have no effect on previously reported net loss per share.

STATEMENT OF OPERATIONS OVERVIEW

(Dollars in Thousands, Except for Loss per Share Data)
	For the Three Months Ended June 30, 2012			For the Three Months Ended March 31, 2012			$ Change			% Change			For the Three Months Ended June 30, 2011			$ Change			% Change
Interest and dividend income	$	13,177		$	13,118		$	59			0	%	$	15,697		$	(2,520	)		-16	%
Interest expense		1,543			1,744			(201	)		-12	%		2,571			(1,028	)		-40	%
Net interest income		11,634			11,374			260			2	%		13,126			(1,492	)		-11	%
Loan loss provision		1,275			3,500			(2,225	)		-64	%		—			1,275			nm
Non-interest income		2,594			4,483			(1,889	)		-42	%		2,693			(99	)		-4	%
Non-interest expense		14,247			16,536			(2,289	)		-14	%		17,872			(3,625	)		-20	%
LOSS BEFORE PROVISION FOR INCOME TAXES		(1,294	)		(4,179	)		2,885			69	%		(2,053	)		759			37	%
PROVISION FOR INCOME TAXES		37			10			27			270	%		5			32			640	%
NET LOSS		(1,331	)		(4,189	)		2,858			68	%		(2,058	)		727			35	%
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		634			628			6			1	%		613			21			3	%
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(1,965	)	$	(4,817	)	$	2,852			59	%	$	(2,671	)	$	706			26	%
LOSS PER COMMON SHARE:
BASIC (1)	$	(0.20	)	$	(0.48	)	$	0.28			58	%	$	(0.27	)	$	0.07			26	%
DILUTED (1)	$	(0.20	)	$	(0.48	)	$	0.28			58	%	$	(0.27	)	$	0.07			26	%
Average common shares outstanding - basic (1)		10,034,741			10,034,741			—			0	%		10,034,491			250			0	%
Average common shares outstanding - diluted (1)		10,034,741			10,034,741			—			0	%		10,034,491			250			0	%

nm=not meaningful

	For the Six Months Ended June 30, 2012			For the Six Months Ended June 30, 2011			$ Change			% Change
Interest and dividend income	$	26,295		$	30,729		$	(4,434	)		-14	%
Interest expense		3,287			5,402			(2,115	)		-39	%
Net interest income		23,008			25,327			(2,319	)		-9	%
Loan loss provision		4,775			6,300			(1,525	)		-24	%
Non-interest income		7,077			5,794			1,283			22	%
Non-interest expense		30,783			33,612			(2,829	)		-8	%
LOSS BEFORE PROVISION FOR INCOME TAXES		(5,473	)		(8,791	)		3,318			38	%
PROVISION FOR INCOME TAXES		47			21			26			124	%
NET LOSS		(5,520	)		(8,812	)		3,292			37	%
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		1,262			1,269			(7	)		-1	%
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(6,782	)	$	(10,081	)	$	3,299			33	%
LOSS PER COMMON SHARE:
BASIC (1)	$	(0.68	)	$	(1.00	)	$	0.32			32	%
DILUTED (1)	$	(0.68	)	$	(1.00	)	$	0.32			32	%
Average common shares outstanding - basic (1)		10,034,741			10,034,656			85			0	%
Average common shares outstanding - diluted (1)		10,034,741			10,034,656			85			0	%

(1) As of June 30, 2012, June 30, 2011, and March 31, 2012, 109,039 common shares related to the potential exercise of the warrant issued to the U.S. Treasury pursuant to the Troubled Asset Relief Program (TARP) Capital Purchase Program were not included in the computation of diluted earnings per share as their inclusion would have been anti-dilutive.

33

The following table provides the reconciliation of net loss applicable to common shareholders to pre-tax, pre-credit operating income (non-GAAP) for the periods presented:

Reconciliation of Non-GAAP Measure:

Non-GAAP Operating Income

(Dollars in Thousands)
For The Three Months Ended	June 30, 2012			March 31, 2012			$ Change			% Change			June 30, 2011			$ Change			% Change
Net loss applicable to common shareholders	$	(1,965	)	$	(4,817	)	$	2,852			59	%	$	(2,671	)	$	706			26	%
Provision for loan losses		1,275			3,500			(2,225	)		-64	%		—			1,275			nm
Net cost of operations of other real estate owned and foreclosed assets		1,223			2,424			(1,201	)		-50	%		4,406			(3,183	)		-72	%
Provision for income taxes		37			10			27			270	%		5			32			640	%
Preferred stock dividends and discount accretion		634			628			6			1	%		613			21			3	%
Pre-tax, pre-credit cost operating income	$	1,204		$	1,745		$	(541	)		-31	%	$	2,353		$	(1,149	)		-49	%

nm=not meaningful

For The Six Months Ended	June 30, 2012			June 30, 2011			$ Change			% Change
Net loss applicable to common shareholders	$	(6,782	)	$	(10,081	)	$	3,299			33	%
Provision for loan losses		4,775			6,300			(1,525	)		-24	%
Net cost of operations of other real estate owned and foreclosed assets		3,647			6,530			(2,883	)		-44	%
Provision for income taxes		47			21			26			124	%
Preferred stock dividends and discount accretion		1,262			1,269			(7	)		-1	%
Pre-tax, pre-credit cost operating income	$	2,949		$	4,039		$	(1,090	)		-27	%

Reconciliation of Non-GAAP Measure:

Tax Equivalent Net Loss Applicable to Common Shareholders

(Dollars in Thousands)
For the Three Months ended	June 30, 2012			March 31, 2012			$ Change			% Change			June 30, 2011			$ Change			% Change
Net interest income	$	11,634		$	11,374		$	260			2	%	$	13,126		$	(1,492	)		-11	%
Tax equivalent adjustment for municipal loan interest		42			42			—			0	%		45			(3	)		-7	%
Tax equivalent adjustment for municipal bond interest		8			9			(1	)		-11	%		17			(9	)		-53	%
Tax equivalent net interest income		11,684			11,425			259			2	%		13,188			(1,504	)		-11	%
Provision for loan losses		1,275			3,500			(2,225	)		-64	%		—			1,275			nm
Non-interest income		2,594			4,483			(1,889	)		-42	%		2,693			(99	)		-4	%
Non-interest expense		14,247			16,536			(2,289	)		-14	%		17,872			(3,625	)		-20	%
Provision for income taxes		37			10			27			270	%		5			32			640	%
Tax equivalent net loss		(1,281	)		(4,138	)		2,857			69	%		(1,996	)		715			36	%
Preferred stock dividends and discount accretion		634			628			6			1	%		613			21			3	%
Tax equivalent net loss applicable to common shareholders	$	(1,915	)	$	(4,766	)	$	2,851			60	%	$	(2,609	)	$	694			27	%

nm=not meaningful

For the Six Months ended	June 30, 2012			June 30, 2011			$ Change			% Change
Net interest income	$	23,008		$	25,327		$	(2,319	)		-9	%
Tax equivalent adjustment for municipal loan interest		84			89			(5	)		-6	%
Tax equivalent adjustment for municipal bond interest		17			47			(30	)		-64	%
Tax equivalent net interest income		23,109			25,463			(2,354	)		-9	%
Provision for loan losses		4,775			6,300			(1,525	)		-24	%
Non-interest income		7,077			5,794			1,283			22	%
Non-interest expense		30,783			33,612			(2,829	)		-8	%
Provision for income taxes		47			21			26			124	%
Tax equivalent net loss		(5,419	)		(8,676	)		3,257			38	%
Preferred stock dividends and discount accretion		1,262			1,269			(7	)		-1	%
Tax equivalent net loss applicable to common shareholders	$	(6,681	)	$	(9,945	)	$	3,264			33	%

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Management believes that presentation of these non-GAAP financial measures provide useful information frequently used by shareholders in the evaluation of a company. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

Net Interest Margin

Net interest margin for the three and six months ended June 30, 2012 increased as compared to the same periods in 2011, despite the decline in higher yielding loan balances during 2012. This was primarily due to the collection of approximately $500,000 in loan

34

interest from the sale of a note in second quarter 2012. This additional interest income resulted in a 20 and 10 basis points increase in net interest margin for the three and six months ended June 30, 2012, respectively, as compared to similar periods in 2011. Margins were also positively impacted by the continued decline in costs of interest-bearing liabilities caused by the Company’s on-going efforts to reduce higher-cost certificates of deposits as a source of funding. The yields on investment securities have remained relatively stable throughout these periods, however declined slightly in second quarter 2012. This was due primarily to an increase in premium amortization on collateralized mortgage obligations as a result of a drop in interest rates to historically low levels during the period. Net interest margin for second quarter 2012 increased as compared to first quarter 2012 for similar reasons noted above.

	For the Three Months Ended
	June 30, 2012								March 31, 2012								June 30, 2011
	Average Balance			Interest Income or Expense		Average Yields or Rates			Average Balance			Interest Income or Expense		Average Yields or Rates			Average Balance			Interest Income or Expense		Average Yields or Rates
(Dollars in Thousands)
ASSETS:
Interest earning balances due from banks	$	43,897		$	28		0.26	%	$	38,722		$	19		0.20	%	$	60,236 $			41		0.27	%
Federal funds sold		3,310			2		0.24	%		3,033			2		0.27	%		3,159			2		0.25	%
Investments - taxable		301,681			1,692		2.26	%		305,829			1,884		2.48	%		285,007			1,680		2.36	%
Investments - nontaxable		1,351			19		5.66	%		1,068			23		8.66	%		2,176			43		7.93	%
Investments - equity securities		3,174			17		2.15	%		3,252			3		0.37	%		3,393			1		0.12	%
Gross loans (1)		729,203			11,454		6.32	%		766,868			11,222		5.89	%		907,055			13,986		6.18	%
Mortgages held for sale		1,100			15		5.48	%		686			16		9.38	%		603			6		3.99	%
Total interest earning assets		1,083,716			13,227		4.91	%		1,119,458			13,169		4.73	%		1,261,629			15,759		5.01	%
Allowance for loan losses		(20,635	)							(21,868	)							(33,229	)
Other assets		138,948								145,106								129,444
Total assets	$	1,202,029							$	1,242,696							$	1,357,844
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing deposits		402,738			98		0.10	%		411,249			103		0.10	%		447,650			278		0.25	%
Time deposits		384,744			1,277		1.33	%		412,135			1,469		1.43	%		505,887			2,136		1.69	%
Short-term borrowings		4,107			3		0.29	%		4,548			4		0.35	%		5,503			7		0.51	%
Long-term borrowings		30,928			165		2.15	%		30,928			168		2.18	%		30,940			150		1.94	%
Total interest bearing liabilities		822,517			1,543		0.75	%		858,860			1,744		0.82	%		989,980			2,571		1.04	%
Non-interest-bearing deposits		277,983								279,400								259,668
Other liabilities		19,922								18,943								17,927
Equity		81,607								85,493								90,269
Total liabilities and shareholders’ equity	$	1,202,029							$	1,242,696							$	1,357,844
Net interest income (3)				$	11,684							$	11,425							$	13,188
Net interest spread							4.16	%							3.91	%							3.97	%
Average yield on earning assets (2) (3)							4.91	%							4.73	%							5.01	%
Interest expense to earning assets							0.57	%							0.63	%							0.82	%
Net interest income to earning assets (2) (3)							4.34	%							4.10	%							4.19	%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income				$	11,634							$	11,374							$	13,126
Tax equivalent adjustment for municipal loan interest					42								42								45
Tax equivalent adjustment for municipal bond interest					8								9								17
Tax equivalent net interest income				$	11,684							$	11,425							$	13,188

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.

Management believes that presentation of this non-GAAP measure provides useful information frequently used by shareholders in the evaluation of a company.

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

(1) Non-performing loans of approximately $38.5 million at 6/30/2012, $55.9 million at 3/31/2012, $92.5 million for 6/30/2011 are included in the average loan balances.

(2) Loan interest income includes loan fee income of $22,000, $25,000, and $61,000 for the three months ended 06/30/2012, 3/31/2012, and 6/30/2011, respectively.

(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 40% effective rate. The amount of such adjustment was an increase to recorded pre-tax income of $50,000, $51,000, and $62,000 for the three months ended June 30, 2012, March 31, 2012, and June 30, 2011, respectively.

35

	For the Six Months Ended
	June 30, 2012								June 30, 2011
	Average Balance			Interest Income or Expense		Average Yields or Rates			Average Balance			Interest Income or Expense		Average Yields or Rates
(Dollars in Thousands)
ASSETS:
Interest earning balances due from banks	$	41,310 $			47		0.23	%	$	89,708		$	115		0.26	%
Federal funds sold		3,171			4		0.25	%		3,180			4		0.25	%
Investments - taxable		303,755			3,576		2.37	%		246,643			2,971		2.43	%
Investments - nontaxable		1,209			42		6.99	%		3,528			118		6.74	%
Investments - equity securities		3,213			20		1.25	%		3,431			2		0.12	%
Gross loans (1)		748,036			22,676		6.10	%		933,544			27,641		5.97	%
Mortgages held for sale		893			31		6.98	%		662			14		4.26	%
Total interest earning assets		1,101,587			26,396		4.82	%		1,280,696			30,865		4.86	%
Allowance for loan losses		(21,252	)							(34,065	)
Other assets		142,027								131,058
Total assets	$	1,222,362							$	1,377,689
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing deposits		406,994			201		0.10	%		455,779			645		0.29	%
Time deposits		398,440			2,746		1.39	%		519,683			4,433		1.72	%
Short-term borrowings		4,328			7		0.33	%		3,173			8		0.51	%
Long-term borrowings		30,928			333		2.17	%		30,944			316		2.06	%
Total interest bearing liabilities		840,690			3,287		0.79	%		1,009,579			5,402		1.08	%
Non-interest-bearing deposits		278,691								256,814
Other liabilities		19,431								17,762
Equity		83,550								93,534
Total liabilities and shareholders’ equity	$	1,222,362							$	1,377,689
Net interest income (3)				$	23,109							$	25,463
Net interest spread							4.03	%							3.78	%
Average yield on earning assets (2) (3)							4.82	%							4.86	%
Interest expense to earning assets							0.60	%							0.85	%
Net interest income to earning assets (2) (3)							4.22	%							4.01	%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income				$	23,008							$	25,327
Tax equivalent adjustment for municipal loan interest					84								89
Tax equivalent adjustment for municipal bond interest					17								47
Tax equivalent net interest income				$	23,109							$	25,463

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.

Management believes that presentation of this non-GAAP measure provides useful information frequently used by shareholders in the evaluation of a company.

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

(1) Non-performing loans of approximately $38.5 million at 6/30/2012, $92.5 million for 6/30/2011 are included in the average loan balances.

(2) Loan interest income includes loan fee income of $47,000, and $135,000 for the six months ended 06/30/2012, and 6/30/2011, respectively.

(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 40% effective rate. The amount of such adjustment was an increase to recorded pre-tax income of $101,000, $137,000 for the six months ended June 30, 2012, and June 30, 2011, respectively.

36

The following table shows the period to period changes in net interest income due to rate or volume. The continued reduction in higher-cost time deposits has resulted in a decline in interest expense, from both a reduction in volume and rates paid on these deposits. In addition, rates paid on other interest-bearing deposits have declined in the current period as compared to rates paid in the prior year. Deleveraging on the asset side of the balance sheet has been through the reduction of loan balances. This has resulted in a decrease in loan interest income primarily due to a decline in loan volume, rather than any changes in yields. The increase in net interest income in second quarter 2012 is primarily due to collection of interest from the sale of and placement back on accrual of loans in non-accrual status, as previously mentioned. An increase in premium amortization contributed to a decrease in investment securities interest income in second quarter 2012, as noted above. This was partially mitigated by the contribution due to increased volume of investment securities as compared to the previous year.

	For the Three Months Ended June 30, 2012 vs. March 31, 2012 Increase (Decrease) Due To									For the Three Months Ended June 30, 2012 vs. June 30, 2011 Increase (Decrease) Due To									For the Six Months Ended June 30, 2012 vs. June 30, 2011 Increase (Decrease) Due To
(Dollars in Thousands)	Volume			Rate			Net Change			Volume			Rate			Net Change			Volume			Rate			Net Change
ASSETS:
Interest earning balances due from banks	$	3		$	6		$	9		$	(11	)	$	(2	)	$	(13	)	$	(63	)		(5	)	$	(68	)
Federal funds sold		—			—			—			—			—			—			—			—			—
Investments - taxable		(26	)		(166	)		(192	)		98			(86	)		12			690			(85	)		605
Investments - nontaxable		6			(10	)		(4	)		(16	)		(8	)		(24	)		(78	)		2			(76	)
Investments - equity securities		—			14			14			—			16			16			—			18			18
Gross loans		(552	)		784			232			(2,734	)		202			(2,532	)		(5,510	)		545			(4,965	)
Mortgages held for sale		10			(11	)		(1	)		5			4			9			5			12			17
Total interest earning assets		(559	)		617			58			(2,658	)		126			(2,532	)		(4,956	)		487			(4,469	)
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing deposits		(2	)		(3	)		(5	)		(28	)		(152	)		(180	)		(70	)		(374	)		(444	)
Time deposits		(97	)		(95	)		(192	)		(509	)		(350	)		(859	)		(1,038	)		(649	)		(1,687	)
Short-term borrowings		—			(1	)		(1	)		(2	)		(2	)		(4	)		3			(4	)		(1	)
Long-term borrowings		—			(3	)		(3	)		—			15			15			—			17			17
Total interest bearing liabilities		(99	)		(102	)		(201	)		(539	)		(489	)		(1,028	)		(1,105	)		(1,010	)		(2,115	)
Net increase (decrease) in net interest income	$	(460	)	$	719		$	259		$	(2,119	)	$	615		$	(1,504	)	$	(3,851	)	$	1,497		$	(2,354	)

37

As show in the table below, the planned deleveraging of the Bank has resulted in the decline of loan and deposit balances:

(Dollars in Thousands)
Averages for the Three Months Ended	June 30, 2012			March 31, 2012			$ Change			% Change			June 30, 2011			$ Change			% Change
Assets:
Cash and due from banks	$	30,830		$	37,881		$	(7,051	)		-19	%	$	26,664		$	4,166			16	%
Interest-bearing due from banks		43,897			38,722			5,175			13	%		60,236			(16,339	)		-27	%
Federal funds sold		3,310			3,033			277			9	%		3,159			151			5	%
Investment securities		306,206			310,149			(3,943	)		-1	%		290,576			15,630			5	%
Loans, net of deferred loan fees		728,810			766,428			(37,618	)		-5	%		905,253			(176,443	)		-19	%
Allowance for loan losses		(20,635	)		(21,868	)		1,233			6	%		(33,229	)		12,594			38	%
Net loans		708,175			744,560			(36,385	)		-5	%		872,024			(163,849	)		-19	%
Other assets		109,611			108,351			1,260			1	%		105,185			4,426			4	%
Total assets	$	1,202,029		$	1,242,696		$	(40,667	)		-3	%	$	1,357,844		$	(155,815	)		-11	%
Liabilities:
Total deposits	$	1,065,465		$	1,102,784		$	(37,319	)		-3	%	$	1,213,205		$	(147,740	)		-12	%
Borrowings		35,035			35,476			(441	)		-1	%		36,443			(1,408	)		-4	%
Other liabilities		19,922			18,943			979			5	%		17,927			1,995			11	%
Total liabilities		1,120,422			1,157,203			(36,781	)		-3	%		1,267,575			(147,153	)		-12	%
Equity:
Preferred equity		40,575			40,461			114			0	%		40,096			479			1	%
Common equity		41,032			45,032			(4,000	)		-9	%		50,173			(9,141	)		-18	%
Total equity		81,607			85,493			(3,886	)		-5	%		90,269			(8,662	)		-10	%
Total liabilities and stockholders’ equity	$	1,202,029		$	1,242,696		$	(40,667	)		-3	%	$	1,357,844		$	(155,815	)		-11	%

Averages for the Six Months Ended	June 30, 2012			June 30, 2011			$ Change			% Change
Assets:
Cash and due from banks	$	34,356		$	26,057		$	8,299			32	%
Interest-bearing due from banks		41,310			89,708			(48,398	)		-54	%
Federal funds sold		3,171			3,180			(9	)		0	%
Investment securities		308,177			253,602			54,575			22	%
Loans, net of deferred loan fees		747,619			931,769			(184,150	)		-20	%
Allowance for loan losses		(21,252	)		(34,065	)		12,813			38	%
Net loans		726,367			897,704			(171,337	)		-19	%
Other assets		108,981			107,438			1,543			1	%
Total assets	$	1,222,362		$	1,377,689		$	(155,327	)		-11	%
Liabilities:
Total deposits	$	1,084,125		$	1,232,276		$	(148,151	)		-12	%
Borrowings		35,256			34,117			1,139			3	%
Other liabilities		19,431			17,762			1,669			9	%
Total liabilities		1,138,812			1,284,155			(145,343	)		-11	%
Equity:
Preferred equity		40,518			40,048			470			1	%
Common equity		43,032			53,486			(10,454	)		-20	%
Total equity		83,550			93,534			(9,984	)		-11	%
Total liabilities and stockholders’ equity	$	1,222,362		$	1,377,689		$	(155,327	)		-11	%

38

AVERAGE INTEREST EARNING ASSETS

(Dollars in Thousands) Averages for the Three Months Ended	June 30, 2012		% of Total			March 31, 2012		% of Total			$ Change			% Change			June 30, 2011		% of Total			$ Change			% Change
Interest-bearing deposits	$	42,397		4	%	$	37,222		3	%	$	5,175			14	%	$	58,736		5	%	$	(16,339	)		-28	%
Interest-bearing certificate of deposits		1,500		0	%		1,500		0	%		—			0	%		1,500		0	%		—			0	%
Fed funds sold		3,310		0	%		3,033		0	%		277			9	%		3,159		0	%		151			5	%
Investments		306,206		28	%		310,149		28	%		(3,943	)		-1	%		290,576		23	%		15,630			5	%
Gross loans		729,203		68	%		766,868		69	%		(37,665	)		-5	%		907,055		72	%		(177,852	)		-20	%
Loans held for sale		1,100		0	%		686		0	%		414			60	%		603		0	%		497			82	%
Total average interest-earning assets	$	1,083,716		100	%	$	1,119,458		100	%	$	(35,742	)		-3	%	$	1,261,629		100	%	$	(177,913	)		-14	%

Averages for the Six Months Ended	June 30, 2012		% of Total			June 30, 2011		% of Total			$ Change			% Change
Interest-bearing deposits	$	39,810		4	%	$	88,208		7	%	$	(48,398	)		-55	%
Interest-bearing certificate of deposits		1,500		0	%		1,500		0	%		—			0	%
Fed funds sold		3,171		0	%		3,180		0	%		(9	)		0	%
Investments		308,177		28	%		253,602		20	%		54,575			22	%
Gross loans		748,036		68	%		933,544		73	%		(185,508	)		-20	%
Loans held for sale		893		0	%		662		0	%		231			35	%
Total average interest-earning assets	$	1,101,587		100	%	$	1,280,696		100	%	$	(179,109	)		-14	%

Noninterest Income

Non-interest income for the quarter ended June 30, 2012 was little changed as compared to the quarter ended June 30, 2011. Service charge income on deposit accounts declined due to a reduction in the amount of non-sufficient check items. Decline in investment brokerage fees due to a drop in sales volume was partially offset by growth in income from increased mortgage banking activity. Less repositioning activity of the investment securities portfolio occurred during the current quarter, resulting in lower gains on sale of securities. Other non-interest income increased due to gains from sale of fixed assets associated with the sale of two branches to another financial institution.

Non-interest income for the six months ended June 30, 2012 grew as compared to the six months ended June 30, 2011 due to an increase in gains on sales of securities, which were used to offset increased OREO and related third-party expenses and one-time costs associated with a branch consolidation initiative completed during second quarter 2012. Mortgage banking income increased and service charge income on deposits and investment brokerage fee income decreased during the six-month period consistent with the second quarter results.

Non-interest income for the current quarter decreased from the quarter ended March 31, 2012 primarily due to the decrease in gains on sales of securities, as explained above.

In November 2010, the Federal Deposit Insurance Corporation (“FDIC”) issued mandates on overdraft payment programs applicable to its supervised institutions, including the Bank. These restrictions were effective July 1, 2011. The Bank began implementing changes to its overdraft payment program in the second quarter of 2011 to comply with the FDIC’s mandates. The Company believes these mandates have continued to adversely affect non-interest income.

39

Noninterest income

(Dollars in Thousands)
For The Three Months Ended
	June 30, 2012		March 31, 2012		$ Change			% Change			June 30, 2011		$ Change			% Change
Service charges on deposit accounts	$	888	$	865	$	23			3	%	$	921	$	(33	)		-4	%
Other commissions and fees		697		649		48			7	%		671		26			4	%
Net gain on sale of securities, available for sale		227		2,168		(1,941	)		-90	%		423		(196	)		-46	%
Investment brokerage and annuity fees		370		438		(68	)		-16	%		426		(56	)		-13	%
Mortgage banking fees		105		115		(10	)		-9	%		84		21			25	%
Other non-interest income:
Increase in value of BOLI		118		124		(6	)		-5	%		135		(17	)		-13	%
Other non-interest income		189		124		65			52	%		33		156			473	%
Total non-interest income	$	2,594	$	4,483	$	(1,889	)		-42	%	$	2,693	$	(99	)		-4	%

For The Six Months Ended
	June 30, 2012		June 30, 2011		$ Change			% Change
Service charges on deposit accounts	$	1,753	$	1,876	$	(123	)		-7	%
Other commissions and fees		1,346		1,316		30			2	%
Net gain on sale of securities, available for sale		2,395		772		1,623			210	%
Investment brokerage and annuity fees		808		926		(118	)		-13	%
Mortgage banking fees		220		209		11			5	%
Other non-interest income:
Increase in value of BOLI		243		257		(14	)		-5	%
Other non-interest income		312		438		(126	)		-29	%
Total non-interest income	$	7,077	$	5,794	$	1,283			22	%

Noninterest Expense

Non-interest expense for the three and six months ended June 30, 2012 declined compared to the three and six months ended June 30, 2011. Salaries and employee benefits expense fell primarily due to branch consolidation, branch sales and administrative restructuring initiatives completed during first and second quarter 2012. This was achieved despite the Company incurring one-time severance costs of approximately $400,000 as part of the restructuring. In addition, net cost of OREO dropped primarily due to a decline in impairment charges taken on OREO assets. A number of expense categories experienced declines due to company-wide efforts to reduce expenses. FDIC assessments dropped commensurate with the decline in total assets over the period, including a one-time reduction of approximately $50,000 in first quarter 2012 to better match assessment amounts going forward. In the first and second quarter of 2012, problem loan expenses increased by approximately $800,000 and $500,000 respectively, for a total increase of approximately $1.3 million. The increase is primarily due to payment of delinquent property taxes incurred to acquire OREO properties in first and second quarter 2012. Other non-interest expenses increased due to one-time costs of approximately $600,000 and $900,000 for the three and six months ended June 30, 2012, respectively, to retire assets as a result of the branch consolidation and branch sales initiative referenced above. In addition, a cost of $200,000 was incurred in second quarter 2012 to enhance our provision for off-balance sheet credit risk. The Company revised its allowance for loan and lease losses methodology for off-balance sheet credit risk based on historical loss factors for within each loan category pool.

Non-interest expense for the current quarter decreased from the quarter ended March 31, 2012 primarily due to declines in costs of salaries and employee benefits, impairment charges and losses on sale of OREO, and delinquent property taxes to acquire OREO. In the first quarter of 2012, we incurred one-time costs related to the retirement of fixed assets due to branch consolidation or sale.

40

Noninterest expense

(Dollars in Thousands)
For The Three Months Ended
	June 30, 2012		March 31, 2012		$ Change			% Change			June 30, 2011		$ Change			% Change
Salaries and employee benefits	$	6,277	$	6,810	$	(533	)		-8	%	$	7,113	$	(836	)		-12	%
Net cost of operations of other real estate owned and foreclosed assets		1,223		2,424		(1,201	)		-50	%		4,406		(3,183	)		-72	%
Net occupancy and equipment		1,761		1,812		(51	)		-3	%		1,845		(84	)		-5	%
FDIC and state assessments		711		671		40			6	%		798		(87	)		-11	%
Professional fees		629		408		221			54	%		757		(128	)		-17	%
Communications		453		468		(15	)		-3	%		480		(27	)		-6	%
Advertising		193		198		(5	)		-3	%		207		(14	)		-7	%
Third-party loan costs		314		255		59			23	%		431		(117	)		-27	%
Professional liability insurance		213		213		—			0	%		175		38			22	%
Problem loan expense		789		1,288		(499	)		-39	%		102		687			674	%
Other non-interest expense:
Director fees		120		109		11			10	%		101		19			19	%
Internet costs		114		143		(29	)		-20	%		114		—			0	%
ATM debit card costs		196		140		56			40	%		187		9			5	%
Business development		71		70		1			1	%		90		(19	)		-21	%
Amortization		116		116		—			0	%		116		—			0	%
Supplies		97		136		(39	)		-29	%		117		(20	)		-17	%
Other non-interest expense		970		1,275		(305	)		-24	%		833		137			16	%
Total non-interest expense	$	14,247	$	16,536	$	(2,289	)		-14	%	$	17,872	$	(3,625	)		-20	%

For The Six Months Ended
	June 30, 2012		June 30, 2011		$ Change			% Change
Salaries and employee benefits	$	13,087	$	14,139	$	(1,052	)		-7	%
Net cost of operations of other real estate owned and foreclosed assets		3,647		6,530		(2,883	)		-44	%
Net occupancy and equipment		3,573		3,723		(150	)		-4	%
FDIC and state assessments		1,382		1,921		(539	)		-28	%
Professional fees		1,037		1,633		(596	)		-36	%
Communications		921		955		(34	)		-4	%
Advertising		391		452		(61	)		-13	%
Third-party loan costs		569		727		(158	)		-22	%
Professional liability insurance		426		401		25			6	%
Problem loan expense		2,077		190		1,887			993	%
Other non-interest expense:
Director fees		229		201		28			14	%
Internet costs		257		226		31			14	%
ATM debit card costs		335		306		29			9	%
Business development		142		174		(32	)		-18	%
Amortization		232		237		(5	)		-2	%
Supplies		233		266		(33	)		-12	%
Other non-interest expense		2,245		1,531		714			47	%
Total non-interest expense	$	30,783	$	33,612	$	(2,829	)		-8	%

Income Taxes

The Company recorded an income tax provision for the three months ended June 30, 2012, March 31, 2012, and June 30, 2011. The provision was made for minimum state income taxes owed.

As of June 30, 2012, the Company maintained a full valuation allowance of $39.4 million against its deferred tax asset. If the Company returns to sustained profitability, all or a portion of the deferred tax asset valuation allowance would be reversed. A reversal of the deferred tax asset valuation allowance would decrease the Company’s income tax expense and increase net income. Currently, the only tax expense the Company is recognizing relates to Oregon minimum tax.

41

BALANCE SHEET OVERVIEW

(Dollars in Thousands)
	June 30, 2012			March 31, 2012			$ Change			% Change			June 30, 2011			$ Change			% Change
Assets:
Cash and cash equivalents	$	87,868		$	102,180		$	(14,312	)		-14	%	$	71,003		$	16,865			24	%
Interest-bearing certificates of deposit		1,500			1,500			—			0	%		1,500			—			0	%
Investment securities		306,032			289,589			16,443			6	%		290,816			15,216			5	%
Gross loans, net of deferred fees		710,465			743,259			(32,794	)		-4	%		880,853			(170,388	)		-19	%
Allowance for loan losses		(19,518	)		(20,324	)		806			4	%		(28,433	)		8,915			31	%
Net loans		690,947			722,935			(31,988	)		-4	%		852,420			(161,473	)		-19	%
Other assets		109,127			110,720			(1,593	)		-1	%		106,300			2,827			3	%
Total assets	$	1,195,474		$	1,226,924		$	(31,450	)		-3	%	$	1,322,039		$	(126,565	)		-10	%
Liabilities and stockholders’ equity
Total deposits	$	1,045,602		$	1,083,033		$	(37,431	)		-3	%	$	1,177,838		$	(132,236	)		-11	%
Borrowings		34,496			35,861			(1,365	)		-4	%		37,833			(3,337	)		-9	%
Other liabilities		36,087			27,596			8,491			31	%		17,963			18,124			101	%
Stockholders’ equity		79,289			80,434			(1,145	)		-1	%		88,405			(9,116	)		-10	%
Total liabilities and stockholders’ equity	$	1,195,474		$	1,226,924		$	(31,450	)		-3	%	$	1,322,039		$	(126,565	)		-10	%

The Company’s liquidity position remains strong as evidenced by its current level of combined cash and cash equivalents and investment securities. In an effort to support its net interest income and margin, the Company reduced its cash equivalents balances while increasing its investment securities portfolio since March 31, 2011. Cash equivalents as of June 30, 2012 included $15.4 million to be transferred to another financial institution as part of the sale of two branches. Cash equivalents included a temporary increase as of March 31, 2012, due to the sale of investment securities during the quarter. These funds have since been redeployed into higher yielding investment securities. Over the past year, the Company increased its government guaranteed collateralized mortgage obligations, mortgage-backed securities, and municipal securities portfolios. Municipal securities rated AA or better with maturities generally ranging from 5 to 15 years were also purchased during this period. The expected duration of the investment portfolio was 3.7 years at June 30, 2012, compared to 4.1 years at June 30, 2011 and 3.9 years at March 31, 2012.

(Dollars in Thousands)
	June 30, 2012		% of Total			March 31, 2012		% of Total			$ Change			% Change			June 30, 2011		% of Total			$ Change			% Change
Cash and due from banks	$	26,522		7	%	$	38,399		10	%	$	(11,877	)		-31	%	$	29,535		8	%	$	(3,013	)		-10	%
Cash equivalents:
Federal fund sold		8,940		2	%		3,005		1	%		5,935			198	%		3,000		1	%		5,940			198	%
Interest-bearing deposits		52,406		13	%		60,776		15	%		(8,370	)		-14	%		38,468		11	%		13,938			36	%
Total cash equivalents		87,868		22	%		102,180		26	%		(14,312	)		-14	%		71,003		20	%		16,865			24	%
Interest-bearing certificates of deposit		1,500		0	%		1,500		0	%		—			0	%		1,500		0	%		—			0	%
Investment securities:
Collateralized mortgage obligations		140,797		36	%		126,488		32	%		14,309			11	%		124,360		34	%		16,437			13	%
Mortgage-backed securities		91,992		23	%		80,936		21	%		11,056			14	%		58,919		16	%		33,073			56	%
U.S. Government and agency securities		1,799		0	%		11,219		3	%		(9,420	)		-84	%		65,593		18	%		(63,794	)		-97	%
Obligations of states and political subdivisions		65,321		17	%		65,745		16	%		(424	)		-1	%		36,579		10	%		28,742			79	%
Investment securities - Other Community Reinvestment Act		2,975		1	%		2,000		1	%		975			49	%		2,000		1	%		975			49	%
Restricted equity securities		3,148		1	%		3,201		1	%		(53	)		-2	%		3,365		1	%		(217	)		-6	%
Total investment securities		306,032		78	%		289,589		74	%		16,443			6	%		290,816		80	%		15,216			5	%
Total cash and cash equivalents and investments	$	395,400		100	%	$	393,269		100	%	$	2,131			1	%	$	363,319		100	%	$	32,081			9	%
Total cash and cash equivalents and investments as a % of total assets				33	%				32	%										27	%

42

INVESTMENT SECURITIES

The following table shows the changes in the investment portfolio for the periods presented:

(Dollars in Thousands)
For the Three Months Ended	June 30, 2012			March 31, 2012			$ Change			June 30, 2011			$ Change
Balance beginning of period	$	289,589		$	319,415		$	(29,826	)	$	233,326		$	56,263
Principal purchases		52,921			26,967			25,954			141,660			(88,739	)
Proceeds from sales		(22,835	)		(49,015	)		26,180			(74,472	)		51,637
Principal paydowns, maturities, and calls		(13,026	)		(9,473	)		(3,553	)		(11,624	)		(1,402	)
Gains on sales of securities		274			2,168			(1,894	)		595			(321	)
Losses on sales of securities		(47	)		—			(47	)		(172	)		125
Change in unrealized gains (loss) before tax		675			746			(71	)		2,403			(1,728	)
Amortization and accretion of discounts and premiums		(1,519	)		(1,219	)		(300	)		(900	)		(619	)
Total investment portfolio	$	306,032		$	289,589		$	16,443		$	290,816		$	15,216

For the Six Months Ended	June 30, 2012			June 30, 2011			$ Change
Balance beginning of period	$	319,415		$	218,290		$	101,125
Principal purchases		79,888			209,968			(130,080	)
Proceeds from sales		(71,850	)		(114,295	)		42,445
Principal paydowns, maturities, and calls		(22,499	)		(23,657	)		1,158
Gains on sales of securities		2,442			1,002			1,440
Losses on sales of securities		(47	)		(230	)		183
Change in unrealized gains (loss) before tax		1,421			1,215			206
Amortization and accretion of discounts and premiums		(2,738	)		(1,477	)		(1,261	)
Total investment portfolio	$	306,032		$	290,816		$	15,216

43

LOANS

The Bank’s total loan portfolio continues to decline, reflecting the Company’s efforts to reduce adversely classified loans. These declines are accentuated by soft loan demand due to continued weakness in the local and national economy. As a result, commercial, real estate construction, and commercial & industrial loan balances declined from year end. Loan totals have also declined because the Company exited a number of higher risk rated loan relationships over the past year which contributed to the contraction in the commercial real estate and construction, land development & other land loan categories over the same period. This included a reduction, after charge-offs, of approximately $15 million in loan balances associated with settlement of the largest non-performing lending relationship in first quarter 2012.

Interest and fees earned on our loan portfolio are our primary source of revenue. Our ability to achieve loan growth will be dependent on many factors, including the ability to raise additional capital, effects of competition, economic conditions in our markets, retention of key personnel and valued customers, and our ability to close loans in the pipeline.

The Company manages new commercial, including agricultural, loan origination volume using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography, and single borrower limits. We expect the commercial loan portfolio to be an important contributor to growth in future revenues as we continue to seek to limit our exposure to construction and development and commercial real estate.

Loans by category

(Dollars in Thousands)	June 30, 2012			% of Gross Loans			March 31, 2012			% of Gross Loans			$ Change			% Change			June 30, 2011			% of Gross Loans			$ Change			% Change
Construction, Land Dev & Other Land	$	47,968			7	%	$	57,763			8	%	$	(9,795	)		-17	%	$	107,624			12	%	$	(59,656	)		-55	%
Commercial & Industrial		116,457			16	%		122,023			16	%		(5,566	)		-5	%		133,356			15	%		(16,899	)		-13	%
Commercial Real Estate Loans		423,569			60	%		433,942			58	%		(10,373	)		-2	%		494,599			56	%		(71,030	)		-14	%
Secured Multifamily Residential		20,604			3	%		22,532			3	%		(1,928	)		-9	%		22,791			3	%		(2,187	)		-10	%
Other Commercial Loans Secured by RE		44,026			6	%		45,674			6	%		(1,648	)		-4	%		50,641			6	%		(6,615	)		-13	%
Loans to Individuals, Family & Personal Expense		9,334			1	%		9,325			1	%		9			0	%		12,203			1	%		(2,869	)		-24	%
Consumer/Finance		36,606			5	%		36,077			5	%		529			1	%		35,561			4	%		1,045			3	%
Other Loans		12,037			2	%		16,090			2	%		(4,053	)		-25	%		25,525			3	%		(13,488	)		-53	%
Overdrafts		227			0	%		234			0	%		(7	)		-3	%		353			0	%		(126	)		-36	%
Gross loans		710,828						743,660						(32,832	)		-4	%		882,653						(171,825	)		-19	%
Less: allowance for loan losses		(19,518	)		-3	%		(20,324	)		-3	%		806			4	%		(28,433	)		-3	%		8,915			31	%
Less: deferred fees and restructured loan concessions		(363	)		0	%		(401	)		0	%		38			9	%		(1,800	)		0	%		1,437			80	%
Loans, net	$	690,947					$	722,935					$	(31,988	)		-4	%	$	852,420					$	(161,473	)		-19	%

The composition of the Bank’s loan portfolio was as follows for the periods shown:

(Dollars in Thousands)
	June 30, 2012												December 31, 2011
	Funded Loan Totals		% of Gross Loans			Unfunded Loan Commitments		% of Commitments			Total Loan Commitments		Funded Loan Totals		% of Gross Loans			Unfunded Loan Commitments		% of Commitments			Total Loan Commitments		$ Change Total Loan Commitments
Construction, Land Dev & Other Land	$	47,968		7	%	$	691		1	%	$	48,659	$	81,241		10	%	$	2,203		3	%	$	83,444	$	(34,785	)
Commercial & Industrial		116,457		16	%		45,042		64	%		161,499		124,422		16	%		49,387		63	%		173,809	$	(12,310	)
Commercial Real Estate Loans		423,569		60	%		299		0	%		423,868		449,347		56	%		1,723		2	%		451,070	$	(27,202	)
Secured Multifamily Residential		20,604		3	%		—		0	%		20,604		21,792		3	%		—		0	%		21,792	$	(1,188	)
Other Commercial Loans Secured by RE		44,026		6	%		18,920		27	%		62,946		47,912		6	%		18,355		23	%		66,267	$	(3,321	)
Loans to Individuals, Family & Personal Expense		9,334		1	%		946		1	%		10,280		9,784		1	%		732		1	%		10,516	$	(236	)
Consumer/Finance		36,606		5	%		—		0	%		36,606		35,522		5	%		270		0	%		35,792	$	814
Other Loans		12,037		2	%		5,214		7	%		17,251		27,594		3	%		6,299		8	%		33,893	$	(16,642	)
Overdrafts		227		0	%		—		0	%		227		264		0	%		—		0	%		264	$	(37	)
Gross loans	$	710,828		100	%	$	71,112		100	%	$	781,940	$	797,878		100	%	$	78,969		100	%	$	876,847	$	(94,907	)

44

The total loan commitments (funded and unfunded) by loan type and geographic region were as follows for the periods shown:

(Dollars in Thousands)
	June 30, 2012
	Southern Oregon		Mid-Central Oregon		Northern California		Sacramento Valley		Total
Construction, Land Dev & Other Land	$	20,491	$	14,894	$	2,889	$	9,694	$	47,968
Commercial & Industrial		68,407		15,863		10,121		22,066		116,457
Commercial Real Estate Loans		187,904		83,729		33,828		118,108		423,569
Secured Multifamily Residential		12,012		6,197		1,345		1,050		20,604
Other Commercial Loans Secured by RE		21,241		5,551		8,759		8,475		44,026
Loans to Individuals, Family & Personal Expense		6,238		653		1,221		1,222		9,334
Consumer/Finance		10,248		20,621		5,737		—		36,606
Other Loans		3,290		296		2,038		6,413		12,037
Subtotal	$	329,831	$	147,804	$	65,938	$	167,028		710,601
Overdrafts										227
Total									$	710,828

The Bank’s total loan portfolio continues to decline, reflecting the reduction in adversely classified loans and soft loan demand due to continued weakness in the local and national economy. As a result, commercial, real estate construction, and commercial & industrial loan balances declined from year end. Commensurate with the contraction of loan balances, we have experienced a decrease in our unfunded loan commitments. Loan totals have also declined due to borrower deleveraging. The Company also exited a number of higher risk rated loan relationships over the past year which contributed to the contraction in the commercial real estate loan category over the same period.

Interest and fees earned on our loan portfolio are our primary source of revenue. Our ability to achieve loan growth will be dependent on many factors, including the effects of competition, economic conditions in our markets, retention and attraction of key personnel and valued customers, and our ability to close loans in the pipeline.

At June 30, 2012, the Bank had outstanding loan commitments of $20.3 million to persons serving as directors, executive officers, principal stockholders and their related interests. This compares to $20.6 million and $23.2 million at March 31, 2012 and June 30, 2011, respectively. These loans, when made, were made in the ordinary course of business on substantially the same terms, including interest rates, maturities and collateral, as comparable loans made to customers not related to the Bank.

One director who is also a borrower of the Bank has a fixed rate commercial real estate secured loan with an outstanding balance of approximately $665,000. During 2011, the loan rating was moved to “substandard.” At June 30, 2012, the loan was on accrual status and reported as a TDR. The loan was subsequently paid off on July 20, 2012.

The Company manages new commercial, including agricultural, loan origination volume using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography, and single borrower limits. We expect the commercial loan portfolio to be an important contributor to growth in future revenues.

45

The table provided below summarizes the Bank’s level of concentrations in commercial real estate as of June 30, 2012, March 31, 2012 and June 30, 2011, respectively, as defined in the Interagency Guidelines for Real Estate Lending and the Commercial Real Estate Lending Joint Guidance policy. The results displayed document the Bank’s successful efforts to reduce CRE concentrations in the loan portfolio. Management anticipates that its continued efforts to reduce adversely classified assets will result in further reductions in concentrations of commercial real estate.

Commercial Real Estate (“CRE”)
Portfolio Policy Concentrations
	June 30, 2012			March 31, 2012			June 30, 2011			Guideline
Total Regulatory CRE1		261	%		278	%		321	%		300	%
Construction & Land Development CRE2		40	%		48	%		81	%		100	%
As a percent of total risk based capital (“TRBC”)

¹ Consists of CRE Const, CRE Residential SFR 1-4 Const, CRE Land Dev & Other Land, CRE NOO Term, C&I Loans not RE Secured to Finance CRE Activities

²  Consists of CRE Const, CRE Residential SFR 1-4 Const, CRE Land Dev & Other Land

As shown in the table below, the distribution of our commercial real estate loan portfolio at June 30, 2012, was fairly consistent with our branch presence in our operating markets.

Total CRE by count and geographic region
(Dollars in Thousands) except number of loans
	June 30, 2012
	Southern Oregon		Mid-Central Oregon		Northern California		Sacramento Valley		Total
Commercial Real Estate Loans	$	187,904	$	83,729	$	33,828	$	118,108	$	423,569
Number of loans in region		303		82		73		119		577
Number of branches in region		11		6		8		7		32

Commercial real estate markets continue to be vulnerable to financial and valuation pressures that may limit refinance options and negatively impact borrowers’ ability to perform under existing loan agreements. Declining values of commercial real estate or higher market interest rates may have a further adverse impact on the ability of borrowers with maturing loans to satisfy loan to value ratios required to renew such loans.

DEPOSITS AND BORROWINGS

The trend in the decline in total deposits continues from recent quarters. This decrease was mainly due to the decision to continue to reduce higher cost time deposit balances. Time deposits declined as a percentage of the Company’s total deposits in the most recent quarter versus the previous quarter and the same quarter last year. In addition, deposits have declined as a result of the branch consolidation and sale of two branches during the second quarter 2012. These branches represented approximately $102.0 million, or less than 10% of total Bank wide deposits as of December 31, 2011. As of June 30, 2012, only $29.1 million in deposits have been lost as a result of this initiative, including $16.3 million located in the two branches sold to another financial institution. This represents a loss of 28.5% of branch deposits prior to consolidation and sale, or 2.6% of total deposits as of December 31, 2011.

The combination of the Company’s efforts to reduce higher-cost time deposits and recent deposit pricing strategies to lower interest rates in concert with market conditions has reduced the average rate paid on total deposits in second quarter 2012 from both the previous quarter and the same quarter in 2011. It has also increased the proportion of the Company’s funding from non-interest bearing and lower-cost non maturity deposits over this period.

Total brokered deposits were $241,000 at June 30, 2012 and December 31, 2011. These deposits are currently not being replaced as they mature.

46

(Dollars in Thousands)	June 30, 2012		Percent of Total			March 31, 2012		Percent of Total			$ Change			June 30, 2011		Percent of Total			$ Change
Interest-bearing demand and money market	$	313,750		30	%	$	316,235		29	%	$	(2,485	)	$	340,538		29	%	$	(26,788	)
Savings		89,426		9	%		90,035		8	%		(609	)		85,828		7	%		3,598
Time deposits		368,442		35	%		396,830		37	%		(28,388	)		490,532		42	%		(122,090	)
Total interest-bearing deposits		771,618		74	%		803,100		74	%		(31,482	)		916,898		78	%		(145,280	)
Non-interest bearing demand		273,984		26	%		279,933		26	%		(5,949	)		260,940		22	%		13,044
Total deposits	$	1,045,602		100	%	$	1,083,033		100	%	$	(37,431	)	$	1,177,838		100	%	$	(132,236	)

The following table summarizes the quarterly average dollar amount in each of the deposit and borrowing categories during the three months ended June 30, 2012, March 31, 2012 and June 30, 2012 and the six months ended June 30, 2012 and June 30, 2011:

(Dollars in Thousands)
Averages for the Three Months Ended	June 30, 2012		% of Total			March 31, 2012		% of Total			$ Change			% Change			June 30, 2011		% of Total			$ Change			% Change
Non-interest bearing demand deposits	$	277,983		26	%	$	279,400		26	%	$	(1,417	)		-1	%	$	259,668		21	%	$	18,315			7	%
Interest bearing demand		311,997		29	%		322,809		29	%		(10,812	)		-3	%		361,687		30	%		(49,690	)		-14	%
Savings		90,741		9	%		88,440		8	%		2,301			3	%		85,963		7	%		4,778			6	%
Time deposits		384,744		36	%		412,135		37	%		(27,391	)		-7	%		505,887		42	%		(121,143	)		-24	%
Total average interest bearing deposits		787,482		74	%		823,384		74	%		(35,902	)		-4	%		953,537		79	%		(166,055	)		-17	%
Total average deposits	$	1,065,465				$	1,102,784				$	(37,319	)		-3	%	$	1,213,205				$	(147,740	)		-12	%
Securities sold under agreements to repurchase	$	4,107		0	%	$	4,548		1	%	$	(441	)		-10	%	$	5,503		1	%	$	(1,396	)		-25	%
Federal Home Loan Bank borrowings		—		0	%		—		0	%		—			nm			12		0	%		(12	)		nm
Junior subordinated debentures		30,928		4	%		30,928		4	%		—			0	%		30,928		3	%		—			0	%
Total average borrowings	$	35,035		4	%	$	35,476		4	%	$	(441	)		-1	%	$	36,443		4	%	$	(1,408	)		-4	%
Total average interest-bearing liabilities	$	822,517				$	858,860				$	(36,343	)		-4	%	$	989,980				$	(167,463	)		-17	%
Total average deposits and borrowings	$	1,100,500				$	1,138,260				$	(37,760	)		-3	%	$	1,249,648				$	(149,148	)		-12	%

Averages for the Six Months Ended	June 30, 2012		% of Total			June 30, 2011		% of Total			$ Change			% Change
Non-interest bearing demand deposits	$	278,691		26	%	$	256,814		21	%	$	21,877			9	%
Interest bearing demand		317,404		29	%		370,926		30	%		(53,522	)		-14	%
Savings		89,590		8	%		84,853		7	%		4,737			6	%
Time deposits		398,440		37	%		519,683		42	%		(121,243	)		-23	%
Total average interest bearing deposits		805,434		74	%		975,462		79	%		(170,028	)		-17	%
Total average deposits	$	1,084,125				$	1,232,276				$	(148,151	)		-12	%
Securities sold under agreements to repurchase	$	4,328		1	%	$	3,173		0	%	$	1,155			36	%
Federal Home Loan Bank borrowings		—		0	%		16		0	%		(16	)		-100	%
Junior subordinated debentures		30,928		4	%		30,928		3	%		—			0	%
Total average borrowings	$	35,256		4	%	$	34,117		3	%	$	1,139			3	%
Total average interest-bearing liabilities	$	840,690				$	1,009,579				$	(168,889	)		-17	%
Total average deposits and borrowings	$	1,119,381				$	1,266,393				$	(147,012	)		-12	%

nm=not meaningful

Three and six month ended June 30, 2012 average total deposits declined 12% from the same periods in 2011. This decrease was mainly due to the decision to continue to reduce higher cost time deposit balances, which declined 24% from the same quarter last year. Time deposits also declined as a percentage of the Company’s average total deposits versus first quarter 2012. The combination of the Company’s efforts to reduce higher-cost time deposits and recent deposit pricing strategies to lower interest rates in concert with market conditions has helped reduce the average rate paid on total deposits in 2012, down significantly from 2011. Whether we will continue to be successful maintaining or growing our low cost deposit base will depend on various factors, including deposit pricing strategies, market interest rates, the effects of competition, client behavior, and regulatory changes and requirements.

47

At June 30, 2012, the balance of junior subordinated debentures issued in connection with our prior issuances of trust preferred securities was $30.9 million or unchanged from March 31, 2011. Under the December 2009 Written Agreement with the Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities (“DFCS”) and the Federal Reserve Bank (“Reserve Bank”), we must request regulatory approval prior to making payments on our trust preferred securities. For additional detail regarding Bancorp’s outstanding debentures, see Note 8 in the financial statements included under Item 1 of this report.

CAPITAL

Capital ratios at the Bank have improved as compared to December 31, 2011, and June 30, 2011, primarily due to the Company’s deleveraging strategy and shift in the balance sheet mix to less risk-weighted assets, such as investment securities. PremierWest Bank has met the quantitative thresholds to be considered “Well-Capitalized” under published regulatory standards for total risk-based capital and Tier 1 risk-based capital at June 30, 2012. However, we continue to be subject to the terms of the Consent Order with the FDIC and have not yet reached the 10.00 percent leverage ratio required by the Consent Order, as the Bank’s leverage ratio as of June 30, 2012 was 9.01 percent. As such, we are not considered “Well-Capitalized” under all applicable regulatory requirements.

The Board of Governors of the Federal Reserve System (“Federal Reserve”) and the FDIC have established minimum requirements for capital adequacy for bank holding companies and state non-member banks. For more information on these topics, see the discussions under the subheadings “Capital Adequacy Requirements” in the section “Supervision and Regulation” included in Item 1 of the Company’s 2011 Form 10-K. The following table summarizes the capital measures of Bancorp and the Bank, respectively, at the dates listed below:

Bancorp:

	June 30, 2012			December 31, 2011			June 30, 2011			Regulatory Minimum to be “Adequately Capitalized”
										greater than or equal to
Total risk-based capital ratio		12.80	%		12.45	%		12.26	%		8.00	%
Tier 1 risk-based capital ratio		10.87	%		10.80	%		10.87	%		4.00	%
Leverage ratio		7.91	%		8.01	%		8.32	%		4.00	%

Bank:

	June 30, 2012			December 31, 2011			June 30, 2011			Regulatory Minimum to be “Adequately Capitalized”			Regulatory Minimum to be “Well- Capitalized”
										greater than or equal to			greater than or equal to
Total risk-based capital ratio		13.64	%		13.03	%		12.65	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		12.37	%		11.77	%		11.38	%		4.00	%		6.00	%
Leverage ratio		9.01	%		8.72	%		8.71	%		4.00	%		5.00	%

The total risk based capital ratios of Bancorp include $30.9 million of junior subordinated debentures, of which $24.2 million qualified as Tier 1 capital at June 30, 2012, under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, which was signed into law on July 21, 2010, Bancorp currently expects to continue to rely on these junior subordinated debentures as part of its regulatory capital. However, Bancorp also expects that future regulations related to Basel III capital standards could adversely impact continued reliance on junior subordinated debentures.

48

The table below shows the quarter over quarter change in the Company’s capital ratios for the periods presented:

	June 30, 2012			March 31, 2012			Change		June 30, 2011			Change
PremierWest Bancorp
Total risk-based capital ratio		12.80	%		12.52	%		0.28		12.26	%		0.54
Tier 1 risk-based capital ratio		10.87	%		10.69	%		0.18		10.87	%		—
Leverage ratio		7.91	%		7.84	%		0.07		8.32	%		(0.41	)
PremierWest Bank
Total risk-based capital ratio		13.64	%		13.23	%		0.41		12.65	%		0.99
Tier 1 risk-based capital ratio		12.37	%		11.96	%		0.41		11.38	%		0.99
Leverage ratio		9.01	%		8.78	%		0.23		8.71	%		0.30

FINANCIAL PERFORMANCE OVERVIEW

For The Three Months Ended	June 30, 2012			March 31, 2012			Change			June 30, 2011			Change
Selective quarterly performance ratios
Return on average assets, annualized		-0.66	%		-1.56	%		0.90			-0.79	%		0.13
Return on average common equity, annualized		-19.26	%		-43.02	%		23.76			-21.35	%		2.09
Efficiency ratio (1)		100.13	%		104.28	%		(4.15	)		112.98	%		(12.85	)
Share and per share information
Average common shares outstanding - basic		10,034,741			10,034,741			—			10,034,491			250
Average common shares outstanding - diluted		10,034,741			10,034,741			—			10,034,491			250
Basic loss per common share	$	(0.20	)	$	(0.48	)	$	0.28		$	(0.27	)	$	0.07
Diluted loss per common share	$	(0.20	)	$	(0.48	)	$	0.28		$	(0.27	)	$	0.07
Book value per common share (2)	$	3.85		$	3.98		$	(0.13	)	$	4.81		$	(0.96	)
Tangible book value per common share (3)	$	3.68		$	3.79		$	(0.11	)	$	4.59		$	(0.91	)

For The Six Months Ended	June 30, 2012			June 30, 2011			Change
Selective quarterly performance ratios
Return on average assets, annualized		-1.12	%		-1.48	%		0.36
Return on average common equity, annualized		-31.69	%		-38.01	%		6.32
Efficiency ratio (1)		102.32	%		108.00	%		(5.68	)
Share and per share information
Average common shares outstanding - basic		10,034,741			10,034,656			85
Average common shares outstanding - diluted		10,034,741			10,034,656			85
Basic loss per common share	$	(0.68	)	$	(1.00	)	$	0.32
Diluted loss per common share	$	(0.68	)	$	(1.00	)	$	0.32

(1) Non-interest expense divided by net interest income plus non-interest income.

(2) Book value is calculated as the total common equity (less preferred stock and the discount on preferred stock) divided by the period ending number of common shares outstanding.

(3) Tangible book value is calculated as the total common equity (less preferred stock and the discount on preferred stock) less core deposit intangibles divided by the period ending number of common shares outstanding.

49

(Annualized, tax-equivalent basis)

For The Three Months Ended
	June 30, 2012			March 31, 2012			Change			June 30, 2011			Change
Selective quarterly performance ratios
Yield on average gross loans (1)		6.32	%		5.89	%		0.43			6.18	%		0.14
Yield on average investment securities (1)(2)		2.02	%		2.22	%		(0.20	)		2.01	%		0.01
Cost of average interest bearing deposits		0.70	%		0.77	%		(0.07	)		1.02	%		(0.32	)
Cost of average borrowings		1.93	%		1.95	%		(0.02	)		1.73	%		0.20
Cost of average total deposits and borrowings		0.56	%		0.62	%		(0.06	)		0.83	%		(0.27	)
Yield on average interest-earning assets		4.91	%		4.73	%		0.18			5.01	%		(0.10	)
Cost of average interest-bearing liabilities		0.75	%		0.82	%		(0.07	)		1.04	%		(0.29	)
Net interest spread		4.16	%		3.91	%		0.25			3.97	%		0.19
Net interest margin (1)		4.34	%		4.10	%		0.24			4.19	%		0.15

For The Six Months Ended
	June 30, 2012			June 30, 2011			Change
Selective quarterly performance ratios
Yield on average gross loans (1)		6.10	%		5.97	%		0.13
Yield on average investment securities (1)(2)		2.12	%		1.87	%		0.25
Cost of average interest bearing deposits		0.74	%		1.05	%		(0.31	)
Cost of average borrowings		1.94	%		1.92	%		0.02
Cost of average total deposits and borrowings		0.59	%		0.86	%		(0.27	)
Yield on average interest-earning assets		4.82	%		4.86	%		(0.04	)
Cost of average interest-bearing liabilities		0.79	%		1.08	%		(0.29	)
Net interest spread		4.03	%		3.78	%		0.25
Net interest margin (1)		4.22	%		4.01	%		0.21

⁽¹⁾ Tax-exempt income has been adjusted to a tax equivalent basis at a 40% rate.

⁽²⁾ Includes interest-bearing cash equivalents.

50

ASSET QUALITY

At June 30, 2012, the Company experienced a continued decrease in adversely classified loans, largely due to a decline in non-performing loans. Non-performing loans have continued to decline primarily in the construction and land development loan category, as a result of improvements in credit quality ratings, transfers to OREO, pay offs, and charge-offs of impaired loans. Of those loans currently designated as non-performing, approximately $13.0 million, or 33.7%, are current as to payment of principal and interest.

The Company monitors delinquencies, defined as loans on accruing status 30-89 days past due, as an indicator of future non-performing assets. Total 30-89 days delinquencies remain below 1.00%, mirroring the improvement in overall credit quality noted previously. While the local and national economy continues to languish, more borrowers are demonstrating the ability to adjust to current economic conditions.

At June 30, 2012, total non-performing assets were down compared to March 31, 2012 and June 30, 2011. Non-performing assets and non-performing loans also declined during this period in terms of percentage of total assets and loans, respectively. The amount of additions to non-performing loans declined in the current quarter as compared to the previous quarter and the same quarter in 2011.

Adversely classified loans

(Dollars in Thousands)
	June 30, 2012			March 31, 2012			$ Change			% Change			June 30, 2011			$ Change			% Change
Rated substandard or worse - not impaired	$	79,643		$	84,124		$	(4,481	)		-5	%	$	114,565		$	(34,922	)		-30	%
Impaired		38,453			55,880			(17,427	)		-31	%		92,505			(54,052	)		-58	%
Total adversely classified loans*	$	118,096		$	140,004		$	(21,908	)		-16	%	$	207,070		$	(88,974	)		-43	%
Gross loans	$	710,828		$	743,660		$	(32,832	)		-4	%	$	882,653		$	(171,825	)		-19	%
Adversely classified loans to gross loans		16.61	%		18.83	%		-2.22	%					23.46	%		-6.85	%
Allowance for loan losses	$	19,518		$	20,324		$	806			4	%	$	28,433		$	8,915			31	%

* Adversely classified loans are defined as loans having a well-defined weakness or weaknesses related to the borrower’s financial capacity or to pledged collateral that may jeopardize the repayment of the debt. They are characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard classification are not corrected.

30-89 Days Past Due by type

(Dollars in Thousands)	June 30, 2012			% of Category			March 31, 2012			% of Category			$ Change			June 30, 2011			% of Category			$ Change
Construction, Land Dev & Other Land	$	—			0	%	$	—			0	%	$	—		$	39			1	%	$	(39	)
Commercial & Industrial		297			13	%		—			0	%		297			173			6	%		124
Commercial Real Estate Loans		—			0	%		1,040			34	%		(1,040	)		740			27	%		(740	)
Secured Multifamily Residential		—			0	%		—			0	%		—			—			0	%		—
Other Commercial Loans Secured by RE		386			18	%		657			21	%		(271	)		145			5	%		241
Loans to Individuals, Family & Personal Expense		6			0	%		16			1	%		(10	)		19			1	%		(13	)
Consumer/Finance		1,512			69	%		1,337			44	%		175			823			30	%		689
Other Loans		—			0	%		—			0	%		—			843			30	%		(843	)
Accruing loans 30-89 days past due		2,201						3,050						(849	)		2,782						(581	)
Nonaccruing loans 30-89 days past due		2,628						8,893						(6,265	)		7,514						(4,886	)
Total loans 30-89 days past due	$	4,829					$	11,943					$	(7,114	)	$	10,296					$	(5,467	)
Accruing Loans 30-89 days past due to total accruing loans		0.33	%					0.44	%								0.35	%

51

Non-performing Loans

(Dollars in Thousands)
For the Three Months Ended	June 30, 2012			March 31, 2012			$ Change			June 30, 2011			$ Change
Balance beginning of period	$	55,880		$	76,241		$	(20,361	)		109,844		$	(53,964	)
Transfers from performing loans		831			13,835			(13,004	)		4,760			(3,929	)
Loans returned to performing status		(5,508	)		—			(5,508	)		(4,428	)		(1,080	)
Transfers to OREO		(2,760	)		(19,245	)		16,485			(4,122	)		1,362
Principal reduction from payment		(5,862	)		(8,631	)		2,769			(6,933	)		1,071
Principal reduction from charge-off		(4,128	)		(6,320	)		2,192			(6,616	)		2,488
Total non-performing loans	$	38,453		$	55,880		$	(17,427	)	$	92,505		$	(54,052	)
Percentage of non-performing loans to total gross loans		5.41	%		7.51	%					10.48	%

For the Six Months Ended	June 30, 2012			June 30, 2011			$ Change
Balance beginning of period	$	76,241		$	129,616		$	(53,375	)
Transfers from performing loans		14,666			7,483			7,183
Loans returned to performing status		(5,508	)		(4,428	)		(1,080	)
Transfers to OREO		(22,005	)		(8,372	)		(13,633	)
Principal reduction from payment		(14,493	)		(12,627	)		(1,866	)
Principal reduction from charge-off		(10,448	)		(19,167	)		8,719
Total non-performing loans	$	38,453		$	92,505		$	(54,052	)

nm = not meaningful

52

The following table summarizes the Company’s non-performing assets as of the periods shown:

(Dollars in Thousands)	June 30, 2012			March 31, 2012			$ Change			June 30, 2011			$ Change
Loans on nonaccrual status	$	38,307		$	55,356		$	(17,049	)	$	92,266		$	(53,959	)
Loans past due greater than 90 days but not on nonaccrual status		146			524			(378	)		239			(93	)
Total non-performing loans		38,453			55,880			(17,427	)		92,505			(54,052	)
Other real estate owned and foreclosed assets		33,895			35,434			(1,539	)		27,579			6,316
Total non-performing assets	$	72,348		$	91,314		$	(18,966	)	$	120,084		$	(47,736	)
Percentage of non-performing assets to total assets		6.05	%		7.44	%					9.08	%

At June 30, 2012, total non-performing assets were down compared to March 31, 2012. Non-performing assets and loans have also declined in terms of percentage of total assets and loans, respectively. The amount of additions to non-performing assets has slowed during 2012 versus the prior year. This is due to the positive impact of business improvement plans implemented by a number of borrowers in response to the current economic downturn.

Reductions in non-performing loans were largely due to the Company taking ownership of additional residential and commercial properties related to loans which previously were on nonaccrual status, nonaccrual loan payoffs, charge-offs, and the return of loans to performing status.

The following table summarizes the Company’s non-performing loans by loan type and geographic region as of June 30, 2012:

(Dollars in Thousands)
	June 30, 2012
	Non-performing Loans
	Southern Oregon			Mid-Central Oregon			Northern California			Sacramento Valley			Totals			Funded Loan Totals		Percent NPL to Funded Loan Totals by Category
Construction, Land Dev & Other Land	$	957		$	5,796		$	1,300		$	3,514		$	11,567		$	47,968		24.1	%
Commercial & Industrial		3,757			220			404			—			4,381			116,457		3.8	%
Commercial Real Estate Loans		4,725			8,372			1,541			1,679			16,317			423,569		3.9	%
Secured Multifamily Residential		226			—			—			—			226			20,604		1.1	%
Other Commercial Loans Secured by RE		1,053			354			1,046			1,661			4,114			44,026		9.3	%
Loans to Individuals, Family & Personal Expense		271			—			—			—			271			9,334		2.9	%
Consumer/Finance		28			115			3			—			146			36,606		0.4	%
Other Loans		1,384			—			—			47			1,431			12,037		11.9	%
Overdrafts		—			—			—			—			—			227		0.0	%
Total non-performing loans	$	12,401		$	14,857		$	4,294		$	6,901		$	38,453		$	710,828
Non-performing loans to total funded loans		3.8	%		10.0	%		6.5	%		4.1	%		5.4	%
Total funded loans	$	329,937		$	147,851		$	65,959		$	167,081		$	710,828

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The following tables summarize the Company’s troubled debt restructured loans by type and geographic region as of June 30, 2012:

(Dollars in Thousands)
	June 30, 2012 Restructured loans
	Southern Oregon		Mid Oregon		Northern California		Sacramento Valley		Totals		Number of Loans
Construction, Land Dev & Other Land	$	331	$	5,355	$	135	$	3,721	$	9,542		16
Commercial & Industrial		3,517		—		598		216		4,331		9
Commercial Real Estate Loans		6,517		4,769		176		—		11,462		8
Other Commercial Loans Secured by RE		579		—		318		1,661		2,558		9
Total restructured loans	$	10,944	$	10,124	$	1,227	$	5,598	$	27,893		42

The following table presents the Company’s troubled debt restructured loans by year of maturity, according to the restructured terms, as of June 30, 2012:

(Dollars in Thousands)
Year	Amount
2012	$	13,781
2013		6,005
2014		3,506
2015		116
2016		873
Thereafter		3,612
Total	$	27,893

The Company’s OREO property disposition activities continued at a steady pace in the second quarter of 2012. The level of additional real estate properties taken into the OREO portfolio decreased from prior periods, in which approximately $15 million in additional OREO was associated with settlement of the Company’s largest non-performing lending relationship in first quarter 2012. During the six months ended June 30, 2012, the Company disposed of 31 OREO properties with a book value of $7.7 million while acquiring 32 properties with a book value of $22.0 million. OREO valuation adjustments declined as compared to both first quarter 2012 and second quarter 2011, corresponding to a modest improvement in real estate valuations over the period. At June 30, 2012, the OREO portfolio consisted of 83 properties. The largest balances in the OREO portfolio at the end of the quarter were attributable to income-producing properties followed by homes and residential site development projects, all of which are located within our footprint.

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Other real estate owned and foreclosed assets

(Dollars in Thousands)
For the Three Months Ended	June 30, 2012			March 31, 2012			$ Change			June 30, 2011			$ Change
Other real estate owned, beginning of period	$	35,434		$	22,829		$	12,605		$	29,757		$	5,677
Transfers from outstanding loans		2,760			19,245			(16,485	)		4,122			(1,362	)
Improvements and other additions		—			—			—			—			—
Proceeds from sales		(3,217	)		(4,278	)		1,061			(2,037	)		(1,180	)
Net gain (loss) on sales		383			(663	)		1,046			471			(88	)
Impairment charges		(1,465	)		(1,699	)		234			(4,734	)		3,269
Total other real estate owned	$	33,895		$	35,434		$	(1,539	)	$	27,579		$	6,316

For the Six Months Ended	June 30, 2012			June 30, 2011			$ Change
Other real estate owned, beginning of period	$	22,829		$	32,009		$	(9,180	)
Transfers from outstanding loans		22,005			8,372			13,633
Improvements and other additions		—			10			(10	)
Proceeds from sales		(7,495	)		(7,129	)		(366	)
Net gain (loss) on sales		(280	)		1,127			(1,407	)
Impairment charges		(3,164	)		(6,810	)		3,646
Total other real estate owned	$	33,895		$	27,579		$	6,316

Other real estate owned and foreclosed assets by type

(Dollars in Thousands)
	June 30, 2012		# of Properties		March 31, 2012		# of Properties		$ Change			June 30, 2011		# of Properties		$ Change
Construction, Land Dev & Other Land	$	13,236		43	$	15,838		43	$	(2,602	)	$	12,296		51	$	940
Farmland		4,043		2		4,045		5		(2	)		—		—		4,043
1-4 Family Residential Properties		612		11		2,518		11		(1,906	)		1,210		5		(598	)
Nonfarm Nonresidential Properties		16,004		27		13,033		24		2,971			14,073		34		1,931
Total OREO by type	$	33,895		83	$	35,434		83		(1,539	)	$	27,579		90		6,316

ALLOWANCE FOR LOAN LOSSES

The Company’s allowance for loan losses continues to decline in concert with the reduction in adversely classified loans, loan delinquencies and other relevant credit metrics. With the reduction in net charge-offs and change in the loan portfolio composition over the past several years, loss factors used in Management’s estimates to establish reserve levels have declined commensurately. As a result, amounts provided to the allowance for loan losses declined for the six months ended June 30, 2012, as compared to the same period in 2011. The amount provided in the quarter ended June 30, 2012 was up versus the same period in 2011 due to a significant reduction in adversely-classified loans in second quarter 2011. The amount provided in the current period also declined from the first quarter 2012 due to the loan portfolio quality improvements noted above.

For the quarter ended June 30, 2012, total gross and net loan charge-offs were down compared to the quarter ended March 31, 2012, and the quarter ended June 30, 2011. Recoveries in second quarter 2012 were up compared to the other periods due primarily to a $900,000 recovery of a charge-off through the settlement of bankruptcy proceedings. The net charge-offs in the current period were concentrated in the construction and land development and non-owner occupied commercial real estate loan categories. The ratio of net loan charge-offs to average gross loans (annualized) for the current quarter was down compared to the previous quarter and the same quarter one year ago.

The overall risk profile of the Company’s loan portfolio continues to improve, as stated above. However, the trend of future provision for loan losses will depend primarily on economic conditions, level of adversely-classified assets, and changes in collateral values.

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Allowance for Loan Losses

(Dollars in Thousands)
For the Three Months Ended	June 30, 2012			March 31, 2012			$ Change			% Change			June 30, 2011			$ Change			% Change
Gross loans outstanding at end of period	$	710,828		$	743,660		$	(32,832	)		-4	%	$	882,653		$	(171,825	)		-19	%
Average loans outstanding, gross	$	729,203		$	766,868		$	(37,665	)		-5	%	$	907,055		$	(177,852	)		-20	%
Allowance for loan losses, beginning of period	$	20,324		$	22,683		$	(2,359	)		-10	%	$	33,366		$	(13,042	)		-39	%
Charge-offs:
Commercial		(4	)		(353	)		349						(1,027	)		1,023
Real Estate		(2,567	)		(5,181	)		2,614						(5,225	)		2,658
Consumer		(229	)		(493	)		264						(342	)		113
Other		(1,328	)		(293	)		(1,035	)					(22	)		(1,306	)
Total charge-offs		(4,128	)		(6,320	)		2,192			35	%		(6,616	)		2,488			38	%
Recoveries:
Commercial		1,028			88			940						1,329			(301	)
Real Estate		822			147			675						138			684
Consumer		163			193			(30	)					204			(41	)
Other		34			33			1						12			22
Total recoveries		2,047			461			1,586			344	%		1,683			364			22	%
Net charge-offs		(2,081	)		(5,859	)		3,778			64	%		(4,933	)		2,852			58	%
Provision charged to income		1,275			3,500			(2,225	)		-64	%		—			1,275			nm
Allowance for loan losses, end of period	$	19,518		$	20,324		$	(806	)		-4	%	$	28,433		$	(8,915	)		-31	%
Ratio of net loans charged-off to average gross loans outstanding, annualized		1.15	%		3.07	%		(1.92	)					2.19	%		(1.04	)
Ratio of allowance for loan losses to gross loans outstanding		2.75	%		2.73	%		0.02						3.22	%		(0.47	)
Allowance for loan losses as a percentage of adversely classified loans		16.53	%		14.52	%		2.01						13.73	%		2.80
Allowance for loan losses to total non-performing loans		50.76	%		36.37	%		14.39						30.74	%		20.02

For the Six Months Ended	June 30, 2012			June 30, 2011			$ Change			% Change
Gross loans outstanding at end of period	$	710,828		$	882,653		$	(171,825	)		-19	%
Average loans outstanding, gross	$	748,036		$	933,544		$	(185,508	)		-20	%
Allowance for loan losses, beginning of period	$	22,683		$	35,582		$	(12,899	)		-36	%
Charge-offs:
Commercial		(357	)		(2,618	)		2,261
Real Estate		(7,748	)		(15,897	)		8,149
Consumer		(722	)		(608	)		(114	)
Other		(1,621	)		(44	)		(1,577	)
Total charge-offs		(10,448	)		(19,167	)		8,719			45	%
Recoveries:
Commercial		1,116			4,710			(3,594	)
Real Estate		969			696			273
Consumer		356			288			68
Other		67			24			43
Total recoveries		2,508			5,718			(3,210	)		-56	%
Net charge-offs		(7,940	)		(13,449	)		5,509			41	%
Provision charged to income		4,775			6,300			(1,525	)		-24	%
Allowance for loan losses, end of period	$	19,518		$	28,433		$	(8,915	)		-31	%
Ratio of net loans charged-off to average gross loans outstanding, annualized		2.13	%		2.91	%		(0.78	)
Ratio of allowance for loan losses to gross loans outstanding		2.75	%		3.22	%		(0.47	)
Allowance for loan losses as a percentage of adversely classified loans		16.53	%		13.73	%		2.80
Allowance for loan losses to total non-performing loans		50.76	%		30.74	%		20.02

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An allowance for loan losses has been established based on management’s best estimate, as of the balance sheet date, of probable losses inherent in the loan portfolio. For more information regarding the Company’s allowance for loan losses and net loan charge-offs, see the discussion under the subheadings “Credit Management”, “Allowance for Credit Losses and Net Loan Charge-offs” and “Critical Accounting Policies” included in Item 7 of the Company’s 2011 Form10-K.

The allowance for loan losses represents the Company’s estimate as to the probable credit losses inherent in its loan portfolio. The allowance for loan losses is increased through periodic charges to earnings through provision for loan losses and represents the aggregate amount, net of loans charged-off and recoveries on previously charged-off loans, that is needed to establish an appropriate reserve for credit losses. The allowance is estimated based on a variety of factors and using a methodology as described below:

• The Company classifies loans into relatively homogeneous pools by loan type in accordance with regulatory guidelines for regulatory reporting purposes. The Company regularly reviews all loans within each loan category to establish risk ratings for them that include Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Pursuant to “Accounting by Creditors for Impairment of a Loan,” the impaired portion of collateral dependent loans is charged-off. Other risk-related loans not considered impaired have loss factors applied to the various loan pool balances to establish loss potential for provisioning purposes.

• Analyses are performed to establish the loss factors based on historical experience, as well as expected losses based on qualitative evaluations of such factors as the economic trends and conditions, industry conditions, levels and trends in delinquencies and impaired loans, levels and trends in charge-offs and recoveries, among others. Minimum loss factors are then established based on a weighted average of historical loss experience by risk classification within each loan category pool. The minimum or historical loss factor, whichever is larger, is applied to loan category pools segregated by risk classification to estimate the loss inherent in the Company’s loan portfolio pursuant to “Accounting for Contingencies.”

• Additionally, impaired loans are evaluated for loss potential on an individual basis in accordance with “Accounting by Creditors for Impairment of a Loan,” and specific reserves are established based on thorough analysis of collateral values where loss potential exists. When an impaired loan is collateral dependent and a deficiency exists in the fair value of real estate collateralizing the loan in comparison to the associated loan balance, the deficiency is charged-off at that time. Impaired loans are reviewed no less frequently than quarterly.

• Generally, external appraisals on all adversely classified loans are updated every six to twelve months. We obtain appraisals from a pre-approved list of independent, third party appraisal firms. Approval is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser: (a) is currently licensed in the state in which the property is located, (b) is experienced in the appraisal of properties similar to the property being appraised, (c) is actively engaged in the appraisal work, (d) has knowledge of the current real estate market conditions and financing trends, (e) is reputable, and (f) is not on the Bank’s exclusionary list of appraisers. Our Appraisal Review Department will either conduct a review of the appraisal, or will outsource the review to a qualified approved third party appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment. Our impairment analysis documents the date of the appraisal used in the analysis, whether the preparer deems the appraisal to be current, and if not, allows for an internal valuation adjustments with justification. Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis and reflected in the allowance for loan losses, as appropriate. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated on a quarterly basis. Based on these processes, we do not believe there are significant time lapses for the recognition of additional loan loss provisions or charge-offs from the date they become known.

• In the event that a current appraisal to support the fair value of the real estate collateral underlying an impaired loan has not yet been received but the Company believes that the collateral value is insufficient to support the loan amount, an impairment reserve is recorded. In these instances, the receipt of a current appraisal triggers an updated review of the collateral support for the loan and any deficiency is charged-off or reserved at that time. In those instances where a current appraisal is not available in a timely manner in relation to a financial reporting cut-off date, the Company’s internal appraisal review department prepares or reviews a collateral valuation based on a number of factors including, but not limited to, property location, local price volatility, local economic conditions, and recent comparable sales. In all cases, the costs to sell the subject property are deducted in arriving at the fair value of the collateral. Any unpaid property taxes or similar expenses are expensed at the time the property is acquired by the Bank.

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In prior quarters, loss factors used to estimate loss potential within the loan portfolio were solely based on actual historical experience. Beginning in this quarter, minimum loss factors are also developed based on a weighted average of historical loss experience by risk classification within each loan category pool. The minimum or historical loss factor, whichever is larger, is now applied to loan category pools segregated by risk classification to estimate the loss inherent in the Company’s loan portfolio pursuant to “Accounting for Contingencies.” This change in methodology had no material impact on the Company’s total allowance for loan losses.

The Company’s allowance for loan losses continues to decline in concert with the reduction in adversely classified assets and continued reduction in loan delinquencies and other relevant credit metrics. With the reduction in net charge-offs over the past several years, loss factors used in Management’s estimates have declined commensurately.

Overall, we believe that the allowance for loan losses is adequate to absorb probable losses in the loan portfolio at June 30, 2012, although there can be no assurance that future loan losses will not exceed our current estimates. The process for determining the adequacy of the allowance for loan losses is critical to our financial results. Please see Item 1A “Risk Factors” in our 2011 Form 10-K and Item 1A “Risk Factors” in this report.

LIQUIDITY AND SOURCES OF FUNDS

The Bank’s sources of funds include customer deposits, loan repayments, advances from the FHLB, maturities of investment securities, sales of “Available-for-Sale” securities, loan and OREO sales, net income, if any, loans taken out at the Reserve Bank discount window, and the use of Federal Funds markets. Stated maturities of investment securities, loan repayments from maturities and core deposits are a relatively stable source of funds, while brokered deposit inflows, unscheduled loan prepayments, and loan and OREO sales are not. Deposit inflows, sales of securities, loan and OREO properties, and unscheduled loan prepayments may, amongst other factors, be influenced by general interest rate levels, interest rates available on other investments, competition, pricing consideration, and general economic conditions.

Deposits are our primary source of funds. Our loan to deposit ratio has declined since December 31, 2011 as a result of weak loan demand due to the current economic downturn and the Bank’s planned initiatives to reduce the level of higher risk loans. The decline in loan balances has resulted in an increase in the more liquid, but lower yielding investment securities portfolio. In light of our substantial liquidity position, we continued to reduce higher cost time deposits during the most recent quarter.

The following table summarizes the primary liquidity, current ratio, net non-core funding dependency, and loan to deposit ratios of the Company. The primary liquidity ratio represents the sum of net cash, short-term and marketable assets and available borrowing lines divided by deposits. The current ratio consists of the sum of fed funds sold and interest-bearing deposits divided by total assets. The net non-core funding dependency ratio is non-core liabilities less short-term investments divided by long-term assets. The Company’s primary liquidity, current ratio, and net non-core funding dependency ratios remained strong at quarter end:

	June 30, 2012			March 31, 2012			June 30, 2011
Primary liquidity		33.42	%		32.05	%		25.33	%
Fed funds sold and interest-bearing deposits/total assets (current ratio)		5.26	%		5.32	%		3.25	%
Net non-core funding dependency		-5.20	%		-4.10	%		-0.42	%
Gross loans to deposits		67.98	%		68.66	%		74.94	%

An analysis of liquidity should encompass a review of the changes that appear in the consolidated statements of cash flow for the six months ended June 30, 2012 and 2011. The statement of cash flows includes operating, investing, and financing categories.

Cash flows provided by operating activities were $19.6 million with the difference between cash provided by operating activities and a net loss of $5.5 million consisting primarily of noncash items of $4.8 million in the loan loss provision and $1.4 million in depreciation and amortization, and $3.2 million of OREO impairment. Also, included in cash flows from operating activities were $15.4 million for sale of two branches, $280,000 loss on sales of OREO and other foreclosed assets, and $2.4 million gain on sale of investment securities.

Cash flows provided by investing activities of $79.8 million consisted primarily of $94.2 million proceeds from sales, calls, pay downs, and maturities of securities, $57.0 million in net loan pay downs, $7.5 million in proceeds from the sale of OREO, offset by $79.9 million used for purchases of securities.

Cash flows used in financing activities of $82.8 million consisted primarily of $82.1 million net decrease in deposits and $673,000 in net decrease in securities sold under agreements to repurchase.

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At June 30, 2012, the Bank had $3.6 million in borrowings from securities sold under an agreement to repurchase with various business customers. At June 30, 2012, the Bank had no outstanding borrowings against its $50.9 million in established borrowing capacity with the FHLB. The Bank had no outstanding borrowings at June 30, 2012 and December 31, 2011. The borrowing capacity at the FHLB declined from year end as the Company elected to hold a higher balance of unpledged securities. The Bank’s borrowing facility is subject to collateral and stock ownership requirements. The Bank also had an available discount window primary credit line with the Federal Reserve Bank of San Francisco of approximately $3,000, and $15.0 million from a correspondent bank with no balance outstanding on either facility, both of which are pursuant to collateralized credit arrangements. On June 29, 2012 collateral was inadvertently transferred from the Federal Reserve discount window reducing the Company’s borrowing capacity as of June 30, 2012. The collateral was transferred back on July 2, 2012 restoring the Company’s borrowing capacity to $7.5 million on July 11, 2012.

In June 2010, Bancorp entered into a Written Agreement with the Federal Reserve Bank of San Francisco and DFCS. For detailed discussion of the Written Agreement, see Item 1, “Business – Supervision and Regulation” in our 2011 10-K. Under the Written Agreement, Bancorp may not directly or indirectly take dividends or other forms of payment representing a reduction in capital from the Bank without the prior written approval of the Reserve Bank and the DFCS. Also, under our Memorandum of Understanding, the Bank may not pay dividends to the holding company without the consent of the FDIC and the DFCS. At June 30, 2012, the holding company did not have any borrowing arrangements of its own.

Off-Balance Sheet Arrangements

At June 30, 2012, the Bank had off-balance sheet financial instruments of $71.2 million compared to $76.9 million at March 31, 2012 and $93.4 million at June 30, 2011. For additional information regarding off balance sheet arrangements and future financial commitments, see Note 10 “Commitments and Contingent Liabilities” in the financial statements included under Item 1 of this report.

Critical Accounting Policies

Management has identified the calculation of our allowance for credit losses, valuation of OREO, and estimates relating to income taxes as critical accounting policies. Each of these policies are discussed in our 2011 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Critical Accounting Policies.”

REGULATORY AGREEMENT

In April 2010, the Company stipulated to the issuance of a Consent Order (“the Agreement”) with the FDIC and the DFCS, the Bank’s principal regulators, directing the Bank to take actions intended to strengthen its overall condition, many of which were already or in the process of being implemented by the Bank. In June 2010, the Company entered into a Written Agreement with the Federal Reserve Bank of San Francisco and the DFCS, which routinely accompanies or follows a Consent Order from the FDIC and provides for similar restrictions and requirements at the holding company level. For a more detailed discussion, please reference the Company’s Forms 8-K filed April 8, 2010 and June 4, 2010.

The Agreement required, among other things, that the Bank:

• Increase and maintain its Tier 1 Capital in such an amount to ensure that the Bank’s leverage ratio equals or exceeds 10% by October 3, 2010,

• Reduce assets classified “Substandard” in the report of examination to not more than 100% of the Bank’s Tier 1 capital and allowance for loan and lease loss reserve (ALLL) by November 2, 2010, and

• Reduce assets classified “Substandard” in the report of examination to not more than 70% of the Bank’s Tier 1 capital plus ALLL by April 1, 2011.

As of the date of this report, we believe that the Company and the Bank had achieved all of these requirements with the exception of the leverage ratio requirement. Prior to completing the Agreement with the FDIC in April 2010, we completed a common stock offering that raised $33.2 million in gross proceeds, which raised the Bank’s Tier 1 leverage ratio from 5.70% at December 31, 2009, to 8.21% at March 31, 2010. Subsequently the Bank has engaged in balance sheet management activities, including loan and deposit reductions which have further increased its capital ratios as noted above. Similarly, the Company has reduced its assets classified “Substandard” to 61.6% of Tier 1 capital plus ALLL as of June 30, 2012. As previously noted, the Company has demonstrated progress and is committed to achieving all the requirements of the Agreement.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks, such as credit quality and liquidity risk, in the normal course of business, Management considers interest rate risk to be a significant market risk, which could have a material effect on the Company’s financial condition and results of operations. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities. The Company did not experience a significant change in market risk at June 30, 2012, as compared to March 31, 2012 or December 31, 2011.

As stated in the annual report on Form 10-K for 2011, the Company attempts to monitor interest rate risk from the perspective of changes in the economic value of equity, also referred to as net portfolio value (NPV), and changes in net interest income. Changes to the NPV and net interest income are simulated using instant and permanent rate shocks of plus and minus 200 basis points, in increments of 100 basis points. It is the Company’s policy to manage interest rate risk to maximize long-term profitability under the range of likely interest-rate scenarios. For additional information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s annual report on Form 10-K for the year ended December 31, 2011.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, PremierWest Bancorp’s Management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, Management, including our President & Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were effective, including in timely alerting them to information relating to us that is required to be included in our periodic SEC filings.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, in the normal course of business, PremierWest may become party to various legal actions. Management is unaware of any existing legal actions against the Company or its subsidiaries that Management believes will have a materially adverse impact on our business, financial condition or results of operations.

ITEM 1A. RISK FACTORS

The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties not presently known to us or that we currently deem immaterial, materialize, then our business, results of operations and financial condition could be materially adversely affected and could cause our actual results to differ materially from our historical results or the forward-looking statements contained in this report. You should carefully consider the Risk Factors section of our Form 10-K.

Other than the following risk factors, there were no material changes in the risk factors presented in the Company’s Form 10-K for the year ended December 31, 2011.

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During the second quarter of 2012, we completed the previously announced branch sales, consolidations and closures, as well as expense control initiatives, which are intended to provide annualized savings.

PremierWest Bank completed previously announced expense control initiatives including a restructuring of staff and processes that, when combined with the closure of nine branches and sale of two branches, is expected to result in annualized savings of approximately $4.4 million. As a result of the initiatives, staff positions were eliminated and vacant positions were not filled. The projected cost savings may not materialize at such levels or during the projected time period. In addition, consolidation of branches and reduction in staff levels could result in the loss of customers and higher than anticipated consolidation expenses. No assurance is given that we will be able to realize cost savings, maintain customer relationships or control consolidation expenses.

We may be required to raise additional capital or sell assets in the future, but that capital or the opportunity to sell assets may not be available, or may only be available on unfavorable terms.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. The proceeds of our completed rights offering returned our status to “Well-Capitalized” levels, including exceeding the 10.0% risk-based capital level. We are, however, subject to a Consent Order that requires higher capital levels. Our Bank leverage ratio as of June 30, 2012, was 9.01%. If we are unable to increase our capital levels to the Consent Order requirements, we may be subject to penalties or further restrictions on our operations. In addition, future losses could reduce our capital levels. We may need to raise additional capital to maintain or improve our capital position or to support our operations. Until we raise additional capital, our loan growth will be limited. In addition, the Federal Reserve Board recently announced proposed rules to implement Basel III capital reforms and we anticipate the rules could require us to raise additional capital through the sale of common equity. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may not be able to raise additional capital on terms acceptable to us. Alternatively, we may be required to improve our capital ratios through the sale of assets. Market conditions for the sale of assets may not be favorable and we may not be able to lower asset levels sufficiently to meet the requirements of the Consent Order or to maintain existing capital levels. If we cannot raise additional capital or improve capital ratios through other options, our financial condition, and our ability to maintain or improve our capital position to support our operations and to continue as a going concern, could be materially impaired.

We are subject to regulatory agreements, which place limits on our operations and could result in penalties or further restrictions if we fail to comply with their terms.

In light of the current challenging operating environment, along with our elevated level of non-performing assets, delinquencies and adversely classified assets, the Bank is subject to a Consent Order with the FDIC and the DFCS and an agreement with the Federal Reserve Bank of San Francisco and the DFCS. Both agreements place limitations on our business and could adversely affect our ability to implement our business plans, including potential growth strategies that we might otherwise pursue. We have limitations on our lending activities and on the rates paid by the Bank to attract retail deposits in its local markets. We are required to reduce our levels of non-performing assets within specified time frames. These time frames could result in our inability to maximize the price that might otherwise be received for underlying properties. In addition, if such restrictions were also imposed upon other institutions that operate in the Bank’s markets, multiple institutions disposing of properties at the same time could further diminish the potential proceeds received from the sale of these properties. We are restricted from paying dividends from the Bank to the Holding Company during the life of the Consent Order, which restricts our ability to issue preferred stock dividends and make junior subordinated debenture interest payments. If we fail to comply with the provisions of these agreements, we could be subject to additional restrictions or penalties.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) [Not applicable.]

(b) [Not applicable.]

(c) None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

(a) [Not applicable.]

(b) For a discussion of preferred stock dividend payments, which are being declared and accrued but not paid, please see Note 9 of the Notes to Financial Statements in Part I, Item  1 of this report.

ITEM 4. MINE SAFETY DISCLOSURES

(a) [Not applicable.]

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ITEM 5. OTHER INFORMATION

[None.]

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ITEM 6. EXHIBITS

	Exhibits
3.1	Articles of Incorporation of PremierWest Bancorp (incorporated by reference to Exhibit 3.1 to Form 10-K filed March 16, 2011)
3.2	Amended and Restated Bylaws of PremierWest Bancorp (incorporated by reference to Exhibit 3.2 to Form 10-K filed March 16, 2010)
10.1	Employment Agreement with Steve Erb (incorporated by reference to Exhibit 99.1 to Form 8-K) filed April 6, 2012.
31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer (Principal Accounting and Principal Financial Officer) required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer (Principal Accounting and Principal Financial Officer) required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
101	The following financial information from the Quarterly Report on Form 10-Q for the period ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Other Comprehensive Income; (iv) the Consolidated Statements of Changes in Shareholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements.*

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections.

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.

DATED: August 7, 2012

PREMIERWEST BANCORP

/s/ James M. Ford

James M. Ford, President and Chief Executive Officer

/s/ Douglas N. Biddle

Douglas N. Biddle, Chief Financial Officer and Principal Accounting Officer

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