UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

¨ 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	¨	Non-accelerated filer	¨
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 November 2, 2011 was 10,035,241.

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	30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	53
Item 4. Controls and Procedures	53
Part II     OTHER INFORMATION
Item 1. Legal Proceedings	53
Item 1A. Risk Factors	54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3. Defaults Upon Senior Securities	55
Item 4. (Removed and Reserved)	55
Item 5. Other Information	55
Item 6. Exhibits	56
SIGNATURES	56

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in 000’s)

(UNAUDITED)

ASSETS
	September 30, 2011			December 31, 2010			September 30, 2010
Cash and cash equivalents:
Cash and due from banks	$	28,551		$	21,716		$	24,274
Federal funds sold		3,180			3,085			87,378
Interest-bearing deposits		34,330			114,173			7,321
Total cash and cash equivalents		66,061			138,974			118,973
Interest-bearing certificates of deposit (original maturities greater than 90 days)		1,500			1,500			1,500
Investments:
Investment securities available-for-sale, at fair value		298,617			183,683			163,881
Investment securities held-to-maturity, at amortized cost (fair value of $29,615 at 12/31/2010, and $28,779 at 9/30/2010)		—			29,133			27,516
Investment securities - Community Reinvestment Act		2,000			2,000			2,000
Restricted equity securities		3,310			3,474			3,530
Total investments		303,927			218,290			196,927
Mortgage loans held-for-sale		963			929			132
Loans, net of deferred loan fees		851,838			976,795			1,034,558
Allowance for loan losses		(26,975	)		(35,582	)		(42,120	)
Loans, net		824,863			941,213			992,438
Premises and equipment, net of accumulated depreciation and amortization		46,863			47,924			47,197
Core deposit intangibles, net of amortization		2,106			2,489			2,729
Other real estate owned and foreclosed assets		28,127			32,009			29,902
Accrued interest and other assets		26,701			27,892			34,881
TOTAL ASSETS	$	1,301,111		$	1,411,220		$	1,424,679
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand	$	283,323		$	242,631		$	247,016
Interest-bearing demand and savings		423,005			469,897			463,154
Time deposits		454,704			553,721			567,455
Total deposits		1,161,032			1,266,249			1,277,625
Federal Home Loan Bank borrowings		—			22			23
Securities sold under agreements to repurchase		2,873			—			—
Junior subordinated debentures		30,928			30,928			30,928
Accrued interest and other liabilities		17,938			17,013			16,401
Total liabilities		1,212,771			1,314,212			1,324,977
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 12/31/2010 and 9/30/2010)		40,234			39,946			39,849
Common stock - no par value; 150,000,000 shares authorized; 10,035,241 shares issued and outstanding (10,034,830 at 12/31/2010 and 10,034,830 at 9/30/2010)		208,431			208,324			208,247
Accumulated deficit		(165,752	)		(152,202	)		(151,496	)
Accumulated other comprehensive income		5,427			940			3,102
Total shareholders’ equity		88,340			97,008			99,702
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,301,111		$	1,411,220		$	1,424,679

See accompanying notes.

2

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in 000’s, Except for Loss per Share Data)

(UNAUDITED)

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	13,335		$	16,035		$	40,887		$	49,246
Interest on investments:
Taxable		1,656			1,116			4,627			3,481
Nontaxable		5			49			76			151
Interest on federal funds sold		2			53			6			126
Other interest and dividends		38			16			169			114
Total interest and dividend income		15,036			17,269			45,765			53,118
INTEREST EXPENSE
Deposits:
Interest-bearing demand and savings		149			540			794			1,908
Time		1,885			2,811			6,318			6,949
Interest on securities sold under agreements to repurchase		4			—			12			—
Federal Home Loan Bank advances		—			—			—			1
Junior subordinated debentures		149			285			465			957
Total interest expense		2,187			3,636			7,589			9,815
Net interest income		12,849			13,633			38,176			43,303
LOAN LOSS PROVISION		5,050			1,600			11,350			10,050
Net interest income after loan loss provision		7,799			12,033			26,826			33,253
NON-INTEREST INCOME
Service charges on deposits accounts		946			1,092			2,822			3,187
Other commissions and fees		724			716			2,040			2,156
Net gain on sale of securities, available for sale		227			84			1,000			380
Investment brokerage and annuity fees		468			340			1,394			1,047
Mortgage banking fees		61			110			270			291
Other non-interest income		241			386			936			781
Total non-interest income		2,667			2,728			8,462			7,842
NON-INTEREST EXPENSE
Salaries and employee benefits		6,395			7,578			20,534			21,540
Net cost of operations of other real estate owned and foreclosed assets		644			1,385			7,174			4,350
Net occupancy and equipment		2,140			1,904			5,959			5,902
FDIC and state assessments		800			1,166			2,721			3,530
Professional fees		613			731			2,246			2,061
Communications		488			484			1,443			1,503
Advertising		241			172			693			568
Third-party loan costs		196			406			923			1,090
Professional liability insurance		202			187			577			499
Problem loan expense		263			34			453			267
Other non-interest expense		1,316			1,515			4,188			4,704
Total non-interest expense		13,298			15,562			46,911			46,014
LOSS BEFORE PROVISION FOR INCOME TAXES		(2,832	)		(801	)		(11,623	)		(4,919	)
PROVISION FOR INCOME TAXES		23			—			44			—
NET LOSS		(2,855	)		(801	)		(11,667	)		(4,919	)
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		614			620			1,883			1,867
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(3,469	)	$	(1,421	)	$	(13,550	)	$	(6,786	)
LOSS PER COMMON SHARE:
BASIC	$	(0.35	)	$	(0.14	)	$	(1.35	)	$	(0.88	)
DILUTED	$	(0.35	)	$	(0.14	)	$	(1.35	)	$	(0.88	)

See accompanying notes.

3

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE LOSS

(Dollars in 000’s, Except Share Amounts)

(UNAUDITED)

	Preferred Stock				Common Stock						Accumulated Deficit			Accumulated Other Comprehensive Income			Total Shareholders’ Equity			Comprehensive Loss
	Shares		Amount		Shares			Amount
BALANCE - December 31, 2009		41,400	$	39,561		2,477,193		$	175,449		$	(144,710	)	$	1,235		$	71,535
Comprehensive loss:
Net loss		—		—		—			—			(4,959	)		—			(4,959	)	$	(4,959	)
Other comprehensive loss -
Change in fair value of securities available-for-sale		—		—		—			—			—			(431	)		(431	)		(431	)
Adjustment for realized gains, net of $98 tax		—		—		—			—			—			146			146			146
Amortization of unrealized gains for investment securities transferred to held-to-maturity		—		—		—			—			—			(10	)		(10	)		(10	)
Comprehensive loss																				$	(5,254	)
Preferred stock dividend accrued		—		—		—			—			(2,148	)		—			(2,148	)
Stock offering		—		—		7,557,637			32,503			—			—			32,503
Stock-based compensation expense		—		—		—			372			—			—			372
Accretion of discount from Series B preferred stock		—		385		—			—			(385	)		—			—
BALANCE - December 31, 2010		41,400		39,946		10,034,830			208,324			(152,202	)		940			97,008
Comprehensive loss:
Net loss		—		—		—			—			(11,667	)		—			(11,667	)	$	(11,667	)
Other comprehensive loss -
Change in fair value of securities available-for-sale		—		—		—			—			—			4,531			4,531			4,531
Adjustment for realized gains, net of $400 tax		—		—		—			—			—			(600	)		(600	)		(600	)
Amortization of unrealized loss for investment securities transferred to held-to-maturity		—		—		—			—			—			(12	)		(12	)		(12	)
Unrealized holding gain resulting from transfer of securities from held-to-maturity to available-for- sale, net of $379 tax		—		—		—			—			—			568			568			568
Comprehensive loss																				$	(7,180	)
Preferred stock dividend accrued		—		—		—			—			(1,595	)		—			(1,595	)
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		—		—		—			108			—			—			108
Accretion of discount from Series B preferred stock		—		288		—			—			(288	)		—			—
BALANCE - September 30, 2011		41,400	$	40,234		10,035,241		$	208,431		$	(165,752	)	$	5,427		$	88,340

See accompanying notes.

4

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in 000’s)

(UNAUDITED)

	For The Nine Months Ended
	September 30, 2011			September 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(11,667	)	$	(4,919	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization		2,506			2,916
Loan loss provision		11,350			10,050
Amortization of premiums and accretion of discounts on investment securities, net		2,675			1,696
Gain on sale of investment securities		(1,000	)		(380	)
Funding of loans held-for-sale		(13,295	)		(13,392	)
Sale of loans held-for-sale		13,532			15,282
Gain on sale of loans held-for-sale		(271	)		(291	)
Change in BOLI value (net of benefit obligations)		(149	)		(416	)
Stock-based compensation expense		108			296
Loss on sales of premises and equipment		817			396
Gain on sale of other real estate owned and foreclosed assets		(1,293	)		(1,610	)
Write down of other real estate owned due to impairment		7,683			3,824
Write down of low income housing tax credit investment		158			133
Changes in accrued interest receivable/payable and other assets/liabilities		1,221			4,195
Net cash provided by operating activities		12,375			17,780
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from interest-bearing certificates of deposit		—			49,150
Purchase of investment securities available-for-sale		(242,390	)		(130,389	)
Purchase of investment securities held-to-maturitiy		—			(1,525	)
Proceeds from principal payments received on securities available-for-sale		26,742			18,357
Proceeds from sale of securities available-for-sale		129,766			63,668
Proceeds from principal payments received on securities held-to-maturity		—			670
Proceeds from maturities and calls of investment securities held-to-maturity		2,893			18,610
Proceeds from FHLB stock redemption		164			113
Loan payments, net		91,897			77,368
Purchase of premises and equipment		(1,944	)		(3,285	)
Proceeds from disposal of premises and equipment		65			1,268
Purchase of low income housing tax credit investment		(709	)		(287	)
Purchase of improvements for other real estate owned and foreclosed assets		(10	)		(419	)
Proceeds from sale of other real estate owned and foreclosed assets		10,605			15,419
Net cash provided by investing activities		17,079			108,718
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(105,217	)		(143,137	)
Net decrease in Federal Home Loan Bank borrowings		(22	)		(5	)
Net increase in securities sold under agreements to repurchase		2,873			—
Cash paid for fractional shares in connection with 1-for-10 reverse stock split		(1	)		—
Cash received from stock offerings, net of costs		—			32,502
Net cash used in financing activities		(102,367	)		(110,640	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(72,913	)		15,858
CASH AND CASH EQUIVALENTS - Beginning of the period		138,974			103,115
CASH AND CASH EQUIVALENTS - End of the period	$	66,061		$	118,973
SUPPLEMENTAL DISCOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	7,284		$	9,173
Cash paid for taxes	$	40		$	—
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate owned and foreclosed assets	$	13,103		$	22,368
Preferred stock dividend declared and accrued during the period but not yet paid	$	1,595		$	1,579
Trust preferred securities interest accrued during the period but not yet paid	$	465		$	1,465
Accretion of preferred stock discount	$	288		$	288
Transfer of investment securities from held-to-maturity to available-for-sale	$	26,250		$	—

See accompanying notes.

5

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 44 full service branch offices, 37 of which are located along the Interstate 5 freeway corridor between Roseburg, Oregon, and Sacramento, California. Of the 44 full service branch offices, 23 are located in Oregon (Jackson, Josephine, Deschutes, Douglas and Klamath Counties) and 21 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. Premier Finance Company has offices in Medford, Grants Pass, Redmond, Roseburg, Klamath Falls, Eugene and Portland, Oregon and Redding, California and is engaged in the business of consumer lending. 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. In accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 810-10-05, “Consolidation of Variable Interest Entities,” 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.

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, 2010, were derived from audited financial statements and do not include all disclosures contained in the 2010 Annual Report to Shareholders. The interim consolidated financial statements should be read in conjunction with the Company’s 2010 consolidated financial statements, including the notes thereto, included in the 2010 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.

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 September 30, 2011, 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.

Reclassifications – Certain reclassifications have been made to the 2010 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 September 30, 2011.

6

Cash dividends – No cash dividends were declared in the quarter ended September 30, 2011.

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 declare and accrue dividends through the third quarter of 2011. As of September 30, 2011, accrued dividends totaled approximately $4.5 million, of which approximately $2.9 million was accrued through December 31, 2010.

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. In addition to corrective actions described below, the Agreement imposes certain operating restrictions on the Bank related to dividends, compliance with brokered deposit rules and extensions of credit to certain types of borrowers.

Among the corrective actions required are for the Bank to retain qualified management, reduce adversely-classified loans, maintain an adequate allowance for loan losses, revise the strategic plan and various policies, and maintain elevated capital levels. In addition, the Agreement provides timelines and thresholds from the date of issuance to achieve the aforementioned corrective actions. The Agreement requires that the Bank:

• 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,

• 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, and

• 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.

As of the date of this report, the Company achieved the first, but not the second or third of these requirements. 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 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 Tier 1 leverage ratio to its September 30, 2011, level of 8.80%. Similarly, the Company has reduced its loans classified “Substandard” to 78.0% of Tier 1 capital plus ALLL as of September 30, 2011, compared to 178.4% as of June 30, 2009. As previously noted, the Company has demonstrated progress toward and is committed to achieving all the requirements of the Agreement.

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 its deferred tax assets. The Bank continues to have loan concentrations in commercial real estate loans 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.

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.

7

On February 1, 2010, in anticipation of regulatory requirements to enhance capital, the Company commenced an offering of up to 8,174,736 shares of common stock, providing that prior to the public offering of the shares, existing shareholders of the Company each received a subscription right to purchase 0.33 shares of the Company’s common stock, for each shared owned, at a subscription price of $4.40 per share. (The effects of the 1-for-10 reverse stock split have been reflected in this footnote and all share disclosures hereafter.)

On April 7, 2010, the Company completed the rights offering and related public offering and issued approximately 7.56 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 September 30, 2011, 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 approved 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 September 30, 2011. With the adoption of the 2011 Plan, no further grants will be made under the 2002 Plan. At September 30, 2011 there were unexercised grants totaling 76,760 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 nine month period ended September 30, 2011, 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, 12/31/2010		85,376		$	91.72
Issued		—			—
Forfeited		(8,616	)		96.57
Stock options outstanding, 9/30/2011		76,760			91.67		4.08	$	—
Stock options exercisable, 9/30/2011		57,529		$	89.94		3.33	$	—

PremierWest Bancorp follows accounting for “Share-Based Payment”. This standard requires companies to measure and recognize 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 third quarter of 2011 or 2010.

As of September 30, 2011, there were 1,250 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 nine months ended September 30, 2011, and September 30, 2010, respectively.

Stock-based compensation expense recognized under the standard was $36,000 with a related tax benefit of $14,400 for the three months ended September 30, 2011, compared to stock-based compensation expense of $96,000, with a related tax benefit of $38,400, for the three months ended September 30, 2010.

Stock-based compensation expense recognized under the standard was $108,000 with a related tax benefit of $43,200 for the nine months ended September 30, 2011, compared to stock-based compensation expense of $296,000, with a related tax benefit of $118,400, for the nine months ended September 30, 2010.

8

At September 30, 2011, unrecognized stock-based compensation expense totaled $360,000 and will be expensed over a weighted-average period of approximately 2.4 years.

NOTE 4 - INVESTMENT SECURITIES

Investment securities at September 30, 2011 and December 31, 2010 consisted of the following:

(Dollars in 000’s)

	September 30, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Available-for-sale:
Collateralized mortgage obligations	$	134,779	$	1,545	$	(273	)	$	136,051
Mortgage-backed securities		60,666		671		—			61,337
U.S. Government and agency securities		49,106		1,211		(10	)		50,307
Obligations of states and political subdivisions		48,640		2,359		(77	)		50,922
Total	$	293,191	$	5,786	$	(360	)	$	298,617
Investment securities -
Other Community Reinvestment Act	$	2,000	$	—	$	—		$	2,000
Restricted equity securities	$	3,310	$	—	$	—		$	3,310
	December 31, 2010
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Available-for-sale:
Collateralized mortgage obligations	$	131,372	$	1,647	$	(802	)	$	132,217
Mortgage-backed securities		9,023		72		(39	)		9,056
U.S. Government and agency securities		36,371		24		(119	)		36,276
Obligations of states and political subdivisions		6,009		125		—			6,134
Total	$	182,775	$	1,868	$	(960	)	$	183,683
Held-to-maturity:
Mortgage-backed securities	$	4,781	$	108	$	—		$	4,889
U.S. Government and agency securities		12,151		378		—			12,529
Obligations of states and political subdivisions		12,201		179		(183	)		12,197
Total	$	29,133	$	665	$	(183	)	$	29,615
Investment securities -
Other Community Reinvestment Act	$	2,000	$	—	$	—		$	2,000
Restricted equity securities	$	3,474	$	—	$	—		$	3,474

During the second quarter of 2011, all investments were transferred from the held-to-maturity category to the available-for-sale category. As a result, investments with an amortized cost of $22.6 million and gross unrealized gains of $984,000 and gross unrealized losses of $37,000 were transferred to the available-for-sale category.

9

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 September 30, 2011 and December 31, 2010. Of these amounts at September 30, 2011, 22 available-for-sale investments comprised the less than 12 months category.

(Dollars in 000’s)
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
At September 30, 2011
Available-for-sale:
Collateralized mortgage obligations	$	48,355	$	(264	)	$	2,091	$	(9	)	$	50,446	$	(273	)
Mortgage-backed securities		2,166		—			—		—			2,166		—
U.S. Government and agency securities		—		—			2,368		(10	)		2,368		(10	)
Obligations of state and political subdivisions		8,907		(77	)		—		—			8,907		(77	)
	$	59,428	$	(341	)	$	4,459	$	(19	)	$	63,887	$	(360	)
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
At December 31, 2010
Available-for-sale:
Collateralized mortgage obligations	$	43,239	$	(802	)	$	2	$	—		$	43,241	$	(802	)
Mortgage-backed securities		2,960		(39	)		—		—			2,960		(39	)
U.S. Government and agency securities		19,974		(119	)		—		—			19,974		(119	)
Held-to-maturity:
Obligations of state and political subdivisions		3,593		(176	)		553		(7	)		4,146		(183	)
	$	69,766	$	(1,136	)	$	555	$	(7	)	$	70,321	$	(1,143	)

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 September 30, 2011, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

At September 30, 2011
(Dollars in 000’s)
	Available-for-sale
	Amortized Cost		Estimated Fair Value
Due in one year or less	$	10,538	$	10,565
Due after one year through five years		43,994		45,185
Due after five years through ten years		27,416		28,660
Due after ten years		211,243		214,207
	$	293,191	$	298,617

At September 30, 2011, investment securities with an estimated fair value of $97.7 million were pledged to secure public deposits.

10

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 and nine months ended September 30, 2011 and 2010:

(Dollars in 000’s)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010
Gross realized gain on sale of securities	$	227	$	84	$	1,229		$	414
Gross realized loss on sale of securities		—		—		(229	)		(34	)
Net realized gain on sale of securities	$	227	$	84	$	1,000		$	380
Proceeds from sale of securities	$	15,471	$	3,430	$	129,766		$	63,668

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. 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 nine month period ended September 30, 2011. 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 September 30, 2011, and believes that it will ultimately recover the par value of its investment in this stock.

NOTE 5 – LOANS

Loans as of September 30, 2011 and December 31, 2010, consisted of the following:

(Dollars in 000’s)	September 30, 2011			December 31, 2010
Construction, Land Dev & Other Land	$	46,730		$	62,666
Commercial & Industrial		98,017			119,077
Commercial Real Estate Loans		559,251			626,387
Secured Multifamily Residential		21,886			24,227
Other Commercial Loans Secured by RE		49,522			59,284
Loans to Individuals, Family & Personal Expense		11,271			12,472
Consumer/Finance		35,222			36,859
Other Loans		31,361			37,255
Overdrafts		297			319
Gross loans		853,557			978,546
Less: allowance for loan losses		(26,975	)		(35,582	)
Less: deferred fees and restructured loan concessions		(1,719	)		(1,751	)
Loans, net	$	824,863		$	941,213

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 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 uses a methodology as described below:

11

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 for Creditors for Impairment of a Loan,” the impaired portion of collateral dependent loans is charged-off. Other 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 a three-year historical experience, more heavily weighted to the most recent loss 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. The loss factors are applied to loan category pools segregated by risk classification through the current period 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 for 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’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.

12

Transactions in the allowance for loan losses for the three months and nine months ended September 30, 2011 were as follows:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(Dollars in 000’s)
	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 September 30, 2011
Allowance for credit losses:
Beginning balance	$	3,577		$	7,037		$	11,008		$	202		$	2,484		$	178		$	3,065		$	882		$	28,433
Charge-offs and concessions		(3,202	)		(37	)		(1,872	)		—			(404	)		(537	)		(487	)		(368	)		(6,907	)
Recoveries		13			142			131			—			7			—			94			12			399
Provision		2,850			(2,790	)		4,628			(28	)		149			851			(502	)		(108	)		5,050
Ending balance	$	3,238		$	4,352		$	13,895		$	174		$	2,236		$	492		$	2,170		$	418		$	26,975
For the nine months ended September 30, 2011
Allowance for credit losses:
Beginning balance	$	4,703		$	8,051		$	14,419		$	126		$	4,623		$	973		$	2,376		$	311		$	35,582
Charge-offs and concessions		(8,757	)		(2,027	)		(10,538	)		(56	)		(2,652	)		(540	)		(1,095	)		(409	)		(26,074	)
Recoveries		67			4,691			851			—			90			1			381			36			6,117
Provision		7,225			(6,363	)		9,163			104			175			58			508			480			11,350
Ending balance	$	3,238		$	4,352		$	13,895		$	174		$	2,236		$	492		$	2,170		$	418		$	26,975
Ending balance: individually evaluated for impairment	$	—		$	88		$	4,908		$	—		$	—		$	347		$	—		$	—		$	5,343
Ending balance: collectively evaluated for impairment	$	3,238		$	4,264		$	8,987		$	174		$	2,236		$	145		$	2,170		$	418		$	21,632
Loans:
Ending balance	$	46,730		$	98,017		$	559,251		$	21,886		$	49,522		$	11,271		$	35,222		$	31,658		$	853,557
Ending balance: individually evaluated for impairment	$	13,670		$	1,580		$	55,629		$	144		$	3,634		$	966		$	86		$	2,501		$	78,210
Ending balance: collectively evaluated for impairment	$	33,060		$	96,437		$	503,622		$	21,742		$	45,888		$	10,305		$	35,136		$	29,157		$	775,347

13

Transactions in the allowance for loan losses for the three months and nine months ended September 30, 2010 were as follows:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(Dollars in 000’s)
	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 September 30, 2010
Allowance for credit losses:
Beginning balance	$	10,880		$	9,783		$	17,598		$	914		$	3,107		$	224		$	1,036		$	375		$	43,917
Charge-offs		(1,556	)		(493	)		(964	)		—			(222	)		(18	)		(459	)		(31	)		(3,743	)
Recoveries		193			32			25			—			(190	)		1			219			66			346
Provision		477			704			(970	)		(607	)		527			(41	)		1,161			349			1,600
Ending balance	$	9,994		$	10,026		$	15,689		$	307		$	3,222		$	166		$	1,957		$	759		$	42,120
For the nine months ended September 30, 2010
Allowance for credit losses:
Beginning balance	$	15,033		$	6,409		$	20,923		$	506		$	531		$	231		$	1,150		$	1,120		$	45,903
Charge-offs		(7,123	)		(1,799	)		(6,540	)		—			(1,146	)		(102	)		(1,349	)		(651	)		(18,710	)
Recoveries		1,899			985			1,107			—			(95	)		5			720			256			4,877
Provision		185			4,431			199			(199	)		3,932			32			1,436			34			10,050
Ending balance	$	9,994		$	10,026		$	15,689		$	307		$	3,222		$	166		$	1,957		$	759		$	42,120
Ending balance: individually evaluated for impairment	$	7,552		$	981		$	10,230		$	—		$	1,343		$	29		$	—		$	—		$	20,135
Ending balance: collectively evaluated for impairment	$	2,442		$	9,045		$	5,459		$	307		$	1,879		$	137		$	1,957		$	759		$	21,985
Loans:
Ending balance	$	75,272		$	128,624		$	653,865		$	24,756		$	61,933		$	12,550		$	37,269		$	41,810		$	1,036,079
Ending balance: individually evaluated for impairment	$	27,166		$	3,408		$	77,784		$	313		$	5,766		$	29		$	113		$	434		$	115,013
Ending balance: collectively evaluated for impairment	$	48,106		$	125,216		$	576,081		$	24,443		$	56,167		$	12,521		$	37,156		$	41,376		$	921,066

14

The following tables summarize the Company’s loans past due, both accruing and nonaccruing, by type as of September 30, 2011 and December 31, 2010:

(Dollars in 000’s)
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days Past Due and Accruing
September 30, 2011
Construction, Land Dev & Other Land	$	1,359	$	1,102	$	10,385	$	12,846	$	33,884	$	46,730	$	—
Commercial & Industrial		—		—		645		645		97,372		98,017		—
Commercial Real Estate Loans		416		—		38,448		38,864		520,387		559,251		—
Secured Multifamily Residential		—		—		144		144		21,742		21,886		—
Other Commercial Loans Secured by RE		—		—		905		905		48,617		49,522		15
Loans to Individuals, Family & Personal Expense		63		668		281		1,012		10,259		11,271		—
Consumer/Finance		828		88		86		1,002		34,220		35,222		86
Other Loans and Overdrafts		—		—		2,501		2,501		29,157		31,658		—
Total	$	2,666	$	1,858	$	53,395	$	57,919	$	795,638	$	853,557	$	101
December 31, 2010
Construction, Land Dev & Other Land	$	133	$	—	$	7,447	$	7,580	$	55,086	$	62,666	$	—
Commercial & Industrial		222		5		1,298		1,525		117,552		119,077		—
Commercial Real Estate Loans		8,011		2,007		36,396		46,414		579,973		626,387		—
Secured Multifamily Residential		—		—		307		307		23,920		24,227		—
Other Commercial Loans Secured by RE		97		224		2,709		3,030		56,254		59,284		—
Loans to Individuals, Family & Personal Expense		10		—		—		10		12,462		12,472		—
Consumer/Finance		603		188		123		914		35,945		36,859		123
Other Loans and Overdrafts		2,104		—		434		2,538		35,036		37,574		—
Total	$	11,180	$	2,424	$	48,714	$	62,318	$	916,228	$	978,546	$	123

15

Impaired loans by type as of September 30, 2011 and interest income recognized for the nine months ended September 30, 2011, were as follows:

(Dollars in 000’s)
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2011
With no Related Allowance
Construction, Land Dev & Other Land	$	29,954	$	13,670	$	—	$	20,711	$	—
Commercial & Industrial		764		645		—		1,191		—
Commercial Real Estate Loans		54,460		40,113		—		57,905		—
Secured Multifamily Residential		200		144		—		131		—
Other Commercial Loans Secured by RE		4,778		3,634		—		3,567		—
Loans to Individuals, Family & Personal Expense		818		299		—		39		—
Consumer/Finance		15		86		—		128		10
Other Loans		2,827		2,501		—		2,507		—
Total	$	93,816	$	61,092	$	—	$	86,179	$	10
With a Related Allowance
Construction, Land Dev & Other Land	$	—	$	—	$	—	$	1,942	$	—
Commercial & Industrial		934		935		88		792		—
Commercial Real Estate Loans		20,882		15,516		4,908		10,299		—
Secured Multifamily Residential		—		—		—		—		—
Other Commercial Loans Secured by RE		—		—		—		2,660		—
Loans to Individuals, Family & Personal Expense		668		667		347		86		—
Consumer/Finance		—		—		—		—		—
Other Loans		—		—		—		—		—
Total	$	22,484	$	17,118	$	5,343	$	15,779	$	—
Total Impaired Loans:
Construction, Land Dev & Other Land	$	29,954	$	13,670	$	—	$	22,653	$	—
Commercial & Industrial		1,698		1,580		88		1,983		—
Commercial Real Estate Loans		75,342		55,629		4,908		68,204		—
Secured Multifamily Residential		200		144		—		131		—
Other Commercial Loans Secured by RE		4,778		3,634		—		6,227		—
Loans to Individuals, Family & Personal Expense		1,486		966		347		125		—
Consumer/Finance		15		86		—		128		10
Other Loans		2,827		2,501		—		2,507		—
Total Impaired Loans	$	116,300	$	78,210	$	5,343	$	101,958	$	10

Included in the table above are $86,000 of Consumer loans and $15,000 of Other Commercial Loans Secured by RE 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 September 30, 2011.

16

Impaired loans by type as of December 31, 2010 and interest income recognized for the twelve months ended December 31, 2010, were as follows:

(Dollars in 000’s)
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2010
With no Related Allowance
Construction, Land Dev & Other Land	$	39,517	$	26,007	$	—	$	25,675	$	—
Commercial & Industrial		2,598		1,682		—		2,654		—
Commercial Real Estate Loans		76,316		66,917		—		57,839		—
Secured Multifamily Residential		307		307		—		183		—
Other Commercial Loans Secured by RE		4,553		3,913		—		4,897		—
Loans to Individuals, Family & Personal Expense		26		26		—		5		—
Consumer/Finance		123		123		—		10		16
Other Loans		2,864		2,538		—		737		—
Total	$	126,304	$	101,513	$	—	$	92,000	$	16
With a Related Allowance
Construction, Land Dev & Other Land	$	8,151	$	6,577	$	2,365	$	11,324	$	—
Commercial & Industrial		1,027		1,027		295		782		—
Commercial Real Estate Loans		19,321		13,687		3,554		8,800		—
Secured Multifamily Residential		—		—		—		—		—
Other Commercial Loans Secured by RE		6,812		6,812		3,440		2,017		—
Loans to Individuals, Family & Personal Expense		—		—		5		9		—
Consumer/Finance		—		—		—		—		—
Other Loans		—		—		—		207		—
Total	$	35,311	$	28,103	$	9,659	$	23,139	$	—
Total Impaired Loans:
Construction, Land Dev & Other Land	$	47,668	$	32,584	$	2,365	$	36,999	$	—
Commercial & Industrial		3,625		2,709		295		3,436		—
Commercial Real Estate Loans		95,637		80,604		3,554		66,639		—
Secured Multifamily Residential		307		307		—		183		—
Other Commercial Loans Secured by RE		11,365		10,725		3,440		6,914		—
Loans to Individuals, Family & Personal Expense		26		26		5		14		—
Consumer/Finance		123		123		—		10		16
Other Loans		2,864		2,538		—		944		—
Total Impaired Loans	$	161,615	$	129,616	$	9,659	$	115,139	$	16

Included in the table above are $123,000 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 were on non-accrual status at December 31, 2010.

The Company’s appraisal update procedures for classified loans and OREO property units result in a significant number of appraisals completed as frequently as every six months with the remaining appraisals updated no less frequently than every twelve months.

17

Loans by type, including a breakdown of classified loans, as of September 30, 2011, and December 31, 2010, were as follows:

(Dollars in 000’s)

Credit quality indicators as of September 30, 2011 and December 31, 2010 were as follows:

September 30, 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	$	16,393	$	50,195	$	316,595	$	7,927	$	37,520	$	10,216	$	24,687	$	463,533
Watch		3,748		5,230		23,500		340		245		—		727		33,790
Special Mention		2,181		4,832		105,413		12,818		1,876		—		1,545		128,665
Substandard		24,408		36,826		107,821		801		9,881		388		4,699		184,824
Doubtful		—		934		5,922		—		—		667		—		7,523
Total	$	46,730	$	98,017	$	559,251	$	21,886	$	49,522	$	11,271	$	31,658		818,335
Total Consumer Credit																35,222
Total loans															$	853,557

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Consumer
Performing	$	35,136
Nonperforming		86
Total	$	35,222

December 31, 2010	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	$	17,261	$	58,567	$	314,878	$	9,215	$	40,293	$	11,620	$	24,792	$	476,626
Watch		—		5,676		31,395		—		2,098		—		3,824		42,993
Special Mention		6,435		12,337		118,287		13,540		2,309		—		3,841		156,749
Substandard		35,893		41,404		147,513		1,472		7,772		826		5,117		239,997
Doubtful		3,077		1,093		14,314		—		6,812		26		—		25,322
Total	$	62,666	$	119,077	$	626,387	$	24,227	$	59,284	$	12,472	$	37,574		941,687
Total Consumer Credit																36,859
Total loans															$	978,546

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Consumer
Performing	$	36,736
Nonperforming		123
Total	$	36,859

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 proven 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.

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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 Bank 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.

Troubled Debt Restructurings (“TDR”) - The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the current period ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year for identification as TDR’s. The Company did not identify as TDR’s any receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology (ASC 450-20).

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.

As of September 30, 2011, no available commitments were outstanding on troubled debt restructurings.

The same factors and methodology used to establish an appropriate reserve for the loan portfolio are applied to TDR’s on accrual status using the risk ratings assigned to them. All TDR’s on nonaccrual status are collateral dependent loans and are carried at fair value based on current appraisals.

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The following tables summarize the Company’s troubled debt restructured loans by type and geographic region as of September 30, 2011:

(Dollars in 000’s)
	September 30, 2011
	Restructured loans
	Southern Oregon		Mid Oregon		Northern California		Sacramento Valley		Totals		Number of Loans
Construction, Land Dev & Other Land	$	—	$	—	$	—	$	7,137	$	7,137		9
Commercial & Industrial		331		—		934		222		1,487		3
Commercial Real Estate Loans		32,733		3,728		2,615		97		39,173		14
Other Commercial Loans Secured by RE		212		—		217		2,083		2,512		5
Total restructured loans	$	33,276	$	3,728	$	3,766	$	9,539	$	50,309		31

Maturities

(Dollars in 000’s)

Year	Amount
2011	$	23,630
2012		19,830
2013		3,121
2014		—
2015		—
Thereafter		3,728
Total	$	50,309

The following table presents troubled debt restructurings by accrual or nonaccrual status as of September 30, 2011 and 2010:

Restructured loans by accrual or nonaccrual status

(Dollars in 000’s)

	September 30, 2011
	Restructured loans
	Accrual Status		Non-accrual Status		Total Modifications
Construction, Land Dev & Other Land	$	1,605	$	5,532	$	7,137
Commercial & Industrial		553		934		1,487
Commercial Real Estate Loans		250		38,923		39,173
Other Commercial Loans Secured by RE		212		2,300		2,512
Total restructured loans	$	2,620	$	47,689	$	50,309
	September 30, 2010
	Restructured loans
	Accrual Status		Non-accrual Status		Total Modifications
Construction, Land Dev & Other Land	$	—	$	6,073	$	6,073
Commercial & Industrial		225		—		225
Commercial Real Estate Loans		—		27,722		27,722
Other Commercial Loans Secured by RE		—		325		325
Total restructured loans	$	225	$	34,120	$	34,345

As of September 30, 2011, borrowers with loans designated as TDR’s and totaling $2.6 million 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 is expected to continue as documented by analysis based on current financial statements and/or tax returns.

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The following tables present newly restructured loans by type of modification that occurred during the three and nine months ended September 30, 2011 and 2010, respectively:

Newly restructured loans by modification type

(Dollars in 000’s)

	Restructured loans
	Three Months Ended September 30, 2011
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	—	$	—	$	—
Commercial & Industrial		—		1,265		—		1,265
Commercial Real Estate Loans		—		2,137		3,728		5,865
Other Commercial Loans Secured by RE		—		212		—		212
Total restructured loans	$	—	$	3,614	$	3,728	$	7,342
	Three Months Ended September 30, 2010
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	—	$	1,605	$	1,605
Commercial & Industrial		—		—		—		—
Commercial Real Estate Loans		—		—		20,769		20,769
Other Commercial Loans Secured by RE		—		—		—		—
Total restructured loans	$	—	$	—	$	22,374	$	22,374
	Restructured loans
	Nine Months Ended September 30, 2011
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	—	$	82	$	82
Commercial & Industrial		—		1,265		—		1,265
Commercial Real Estate Loans		—		2,431		9,080		11,511
Other Commercial Loans Secured by RE		—		212		—		212
Total restructured loans	$	—	$	3,908	$	9,162	$	13,070
	Nine Months Ended September 30, 2010
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	—	$	1,605	$	1,605
Commercial & Industrial		—		—		—		—
Commercial Real Estate Loans		4,032		—		20,770		24,802
Other Commercial Loans Secured by RE		—		—		—		—
Total restructured loans	$	4,032	$	—	$	22,375	$	26,407

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The following table represents financing receivables modified within the last 12 months as TDR’s and had a payment default during the three and nine month periods ended September 30, 2011 and 2010, respectively:

Restructured loans with a payment default occurring within 12 months of the restructure date

(Dollars in 000’s)

	Three Months Ended
	September 30, 2011		September 30, 2010
Construction, Land Dev & Other Land	$	—	$	—
Commercial & Industrial		—		—
Commercial Real Estate Loans		—		—
Other Commercial Loans Secured by RE		—		—
Total restructured loans	$	—	$	—
	Nine Months Ended
	September 30, 2011		September 30, 2010
Construction, Land Dev & Other Land	$	1,956	$	—
Commercial & Industrial		—		—
Commercial Real Estate Loans		20,769		—
Other Commercial Loans Secured by RE		1,196		—
Total restructured loans	$	23,921	$	—

NOTE 7 – FEDERAL HOME LOAN BANK BORROWINGS AND OTHER BORROWINGS

The Bank had long-term borrowings outstanding with the FHLB. This borrowing was paid in full during the second quarter of 2011. The balance was approximately $22,000 as of December 31, 2010. The Bank made monthly principal and interest payments on the long-term borrowing, which was scheduled to mature by 2014 with a fixed interest rate of 6.53%. The Bank also participates in the Cash Management Advance (“CMA”) program with the FHLB. CMA borrowings are short-term borrowings that mature within one year and accrue interest at the variable rate as published by the FHLB. As of September 30, 2011 and December 31, 2010, the Bank had no outstanding CMA borrowings. All outstanding borrowings with the FHLB were 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 September 30, 2011, the Bank maintained a line of credit with the FHLB of Seattle for $49.5 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 $9.8 million available for borrowing from the Federal Reserve discount window.

During the first quarter of 2011, the Company began a program to sell securities under agreements to repurchase. At September 30, 2011, the Bank had $2.9 million securities sold under agreements to repurchase with a maximum balance at any month-end during the quarter of $5.2 million and a weighted average quarterly balance of $3.6 million.

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.

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Following are the terms of the junior subordinated debentures as of September 30, 2011.

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 (0.35% at September 15, 2011) plus 1.75% or 2.10%, 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 (0.35% at September 15, 2011) plus 1.79% or 2.14%, 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 (0.35% at September 15, 2011) plus 1.42% or 1.77%, 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 “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 $2.1 million as of September 30, 2011. At September 30, 2011, the Company had deferred payment of interest for eight 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.

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.

23

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. To date the Preferred Stockholders have not exercised that right. 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, the Company has continued to declare and accrue dividends through the third quarter of 2011. As of September 30, 2011, accrued and unpaid dividends totaled approximately $4.5 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 September 30, 2011, the Company had a total of $86.9 million of unfunded loan commitments consisting of $81.4 million of commitments to extend credit to customers and $5.5 million of standby letters related to extensions of credit. The Company also had approximately $264,000 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 of $98,000 and $85,000 at September 30, 2011, and December 31, 2010, respectively.

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.

The following summarizes the weighted average shares outstanding for computation of basic and diluted shares for the three months and nine months ended September 30, 2011 and 2010.

Three months ended September 30:	2011		2010
Weighted average number of common shares:
Average shares outstanding-basic		10,035,241		10,034,830
Average shares outstanding-diluted		10,035,241		10,034,830
Nine months ended September 30:	2011		2010
Weighted average number of common shares:
Average shares outstanding-basic		10,035,240		7,739,490
Average shares outstanding-diluted		10,035,240		7,739,490

As of September 30, 2011, and 2010, stock options of 76,760 and 90,603, 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.

24

NOTE 12 – INCOME TAXES

At September 30, 2011, December 31, 2010, and September 30, 2010, the Company had no recorded net deferred tax assets. 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 the realizability of the 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 uses Statement of Financial Accounting Standards “Fair Value Measurements” to define fair value which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard 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 in the financial statements:

Investment securities available-for-sale – Securities classified as available-for-sale are reported at fair value 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 000’s)
	Fair Value Measurements At September 30, 2011, Using
Description	Fair Value 9/30/2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Collaterialized mortgage obligations	$	136,051	$	—	$	136,051	$	—
Mortgage-backed securities		61,337		—		61,337		—
U.S. Government and agency securities		50,307		—		50,307		—
Obligations of states and political subdivisions		50,922		—		50,922		—
Total assets measured at fair value	$	298,617	$	—	$	298,617	$	—
	Fair Value Measurements At December 31, 2010, Using
Description	Fair Value 12/31/2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Collaterialized mortgage obligations	$	132,217	$	—	$	132,217	$	—
Mortgage-backed securities		9,056		—		9,056		—
U.S. Government and agency securities		36,276		—		36,276		—
Obligations of states and political subdivisions		6,134		—		6,134		—
Total assets measured at fair value	$	183,683	$	—	$	183,683	$	—

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. Nonperforming 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 the lower of cost, 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 $28.1 million and $32.0 million in OREO at September 30, 2011, and December 31, 2010, respectively.

26

The following table presents the fair value measurement for non-earning assets as of September 30, 2011, and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

(Dollars in 000’s)
	Fair Value Measurements As of September 30, 2011, Using
Description	Fair Value 9/30/2011		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	$	28,127	$	—	$	—	$	28,127	$	(7,683	)
Loans measured for impairment, net of specific reserves		38,109		—		—		38,109		(5,166	)
Total impaired assets measured at fair value	$	66,236	$	—	$	—	$	66,236	$	(12,849	)
	Fair Value Measurements As of December 31, 2010, Using
Description	Fair Value 12/31/2010		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	$	32,009	$	—	$	—	$	32,009	$	(5,347	)
Loans measured for impairment, net of specific reserves		46,863		—		—		46,863		(22,311	)
Total impaired assets measured at fair value	$	78,872	$	—	$	—	$	78,872	$	(27,658	)

As of September 30, 2011, and December 31, 2010, all nonperforming loans were considered impaired and were measured for impairment. The table below shows the detail of the various categories of impaired loans:

(Dollars in 000’s)
	As of September 30, 2011			As of December 31, 2010
	Carrying Value			Carrying Value
Impaired loans with charge-offs loan-to-date (1)	$	26,334		$	28,393
Impaired loans with specific reserves		17,118			27,832
Impaired loans with both specific reserves and charge-offs loan-to-date (1)		—			297
Subtotal impaired loans with specific reserves and/or charge-offs loan-to-date		43,452			56,522
Specific reserves associated with impaired loans		(5,343	)		(9,659	)
Total loans measured for impairment, net of specific reserves	$	38,109		$	46,863
Impaired loans without charge-offs or specific reserves	$	34,758		$	73,094
Loans with specific reserves and/or charge-offs loan-to-date		43,452			56,522
Total impaired loans	$	78,210		$	129,616

(1) Total 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 in accordance with the provisions of Financial Accounting Standards Board, “Disclosures about Fair Value of Financial Instruments” ASC 825-10-50.

Cash and cash equivalents – The carrying amounts of cash and short-term instruments approximate their fair value.

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.

Investment securities held-to-maturity – Fair values for investment securities are based on quoted market prices or the market values for comparable securities.

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.

27

Loans – For variable rate loans that are tied to price and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), credit card loans and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. 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.

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.

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.

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.

Off-balance sheet instruments – The Bank’s off-balance sheet 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.

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 Bank’s significant on-balance sheet financial instruments at September 30, 2011, and December 31, 2010, were as follows:

(Dollars in 000’s)
	As of September 30, 2011				As of December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	66,061	$	66,061	$	138,974	$	138,974
Interest-bearing certificates of deposit (original maturities greater than 90 days)	$	1,500	$	1,500	$	1,500	$	1,500
Investment securities available-for-sale	$	298,617	$	298,617	$	183,683	$	183,683
Investment securities held-to-maturity	$	—	$	—	$	29,133	$	29,615
Investment securities - CRA	$	2,000	$	2,000	$	2,000	$	2,000
Restricted equity investments	$	3,310	$	3,310	$	3,474	$	3,474
Loans held-for-sale	$	963	$	963	$	929	$	929
Loans	$	853,557	$	855,415	$	978,546	$	913,834
Financial liabilities:
Deposits	$	1,161,032	$	1,168,049	$	1,266,249	$	1,275,519
FHLB borrowings	$	—	$	—	$	22	$	22
Securities sold under agreements to repurchase	$	2,873	$	2,873	$	—	$	—
Junior subordinated debentures	$	30,928	$	12,409	$	30,928	$	20,629

NOTE 14 – RECENTLY ISSUED ACCOUNTING STANDARDS

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 is not expected to 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 is not expected to 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 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 is not expected to 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.

29

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, 2010 (“2010 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 Annual 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 2010 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.

30

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

Third Quarter 2011 Financial Overview

PREMIERWEST BANCORP

FINANCIAL HIGHLIGHTS

(All amounts in 000’s, except per share data)

(unaudited)

STATEMENT OF OPERATIONS AND LOSS PER COMMON SHARE DATA

	September 30, 2011			September 30, 2010			Change			% Change			June 30, 2011			Change			% Change
For the Three Months Ended
Interest and dividend income	$	15,036		$	17,269		$	(2,233	)		-12.9	%	$	15,697		$	(661	)		-4.2	%
Interest expense		2,187			3,636			(1,449	)		-39.9	%		2,571			(384	)		-14.9	%
Net interest income		12,849			13,633			(784	)		-5.8	%		13,126			(277	)		-2.1	%
Loan loss provision		5,050			1,600			3,450			215.6	%		—			5,050			nm
Non-interest income		2,667			2,728			(61	)		-2.2	%		2,693			(26	)		-1.0	%
Non-interest expense		13,298			15,562			(2,264	)		-14.5	%		17,872			(4,574	)		-25.6	%
Loss before provision for income taxes		(2,832	)		(801	)		(2,031	)		-253.6	%		(2,053	)		(779	)		-37.9	%
Provision for income taxes		23			—			23			nm			5			18			360.0	%
Net loss	$	(2,855	)	$	(801	)	$	(2,054	)		-256.4	%	$	(2,058	)	$	(797	)		-38.7	%
Less preferred stock dividends and discount accretion		614			620			(6	)		-1.0	%		613			1			0.2	%
Net loss applicable to common shareholders	$	(3,469	)	$	(1,421	)	$	(2,048	)		-144.1	%	$	(2,671	)	$	(798	)		-29.9	%
Basic loss per common share (1)	$	(0.35	)	$	(0.14	)	$	(0.21	)		-150.0	%	$	(0.27	)	$	(0.08	)		-29.6	%
Diluted loss per common share (1)	$	(0.35	)	$	(0.14	)	$	(0.21	)		-150.0	%	$	(0.27	)	$	(0.08	)		-29.6	%
Average common shares outstanding—basic (1)		10,035,241			10,034,830			411			0.0	%		10,034,491			750			0.0	%
Average common shares outstanding—diluted (1)		10,035,241			10,034,830			411			0.0	%		10,034,491			750			0.0	%

	September 30, 2011			September 30, 2010			Change			% Change
For the Nine Months Ended
Interest and dividend income	$	45,765		$	53,118		$	(7,353	)		-13.8	%
Interest expense		7,589			9,815			(2,226	)		-22.7	%
Net interest income		38,176			43,303			(5,127	)		-11.8	%
Loan loss provision		11,350			10,050			1,300			12.9	%
Non-interest income		8,462			7,842			620			7.9	%
Non-interest expense		46,911			46,014			897			1.9	%
Loss before provision for income taxes		(11,623	)		(4,919	)		(6,704	)		-136.3	%
Provision for income taxes		44			—			44			nm
Net loss	$	(11,667	)	$	(4,919	)	$	(6,748	)		-137.2	%
Less preferred stock dividends and discount accretion		1,883			1,867			16			0.9	%
Net loss applicable to common shareholders	$	(13,550	)	$	(6,786	)	$	(6,764	)		-99.7	%
Basic loss per common share (1)	$	(1.35	)	$	(0.88	)	$	(0.47	)		-53.4	%
Diluted loss per common share (1)	$	(1.35	)	$	(0.88	)	$	(0.47	)		-53.4	%
Average common shares outstanding—basic (1)		10,035,240			7,739,490			2,295,750			29.7	%
Average common shares outstanding—diluted (1)		10,035,240			7,739,490			2,295,750			29.7	%

(1) As of September 30, 2011, June 30, 2011, and September 30, 2010, 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.

nm = not meaningful

31

SELECTED FINANCIAL RATIOS

(annualized) (unaudited)

	September 30, 2011			September 30, 2010			Change			June 30, 2011			Change
For the Three Months ended
Yield on average gross loans (1)		6.06	%		5.96	%		0.10			6.18	%		(0.12	)
Yield on average investments (1)		1.99	%		1.74	%		0.25			2.00	%		(0.01	)
Total yield on average earning assets (1)		4.93	%		5.06	%		(0.13	)		5.01	%		(0.08	)
Cost of average interest bearing deposits		0.90	%		1.27	%		(0.37	)		1.02	%		(0.12	)
Cost of average borrowings		1.71	%		3.65	%		(1.94	)		1.73	%		(0.02	)
Cost of average total deposits and borrowings		0.72	%		1.08	%		(0.36	)		0.83	%		(0.11	)
Cost of average interest bearing liabilities		0.93	%		1.33	%		(0.40	)		1.04	%		(0.11	)
Net interest spread		4.00	%		3.73	%		0.27			3.97	%		0.03
Net interest margin (1)		4.21	%		4.00	%		0.21			4.19	%		0.02
Net charge-offs to average gross loans		2.95	%		1.26	%		1.69			2.18	%		0.77
Allowance for loan losses to gross loans		3.16	%		4.07	%		(0.91	)		3.22	%		(0.06	)
Allowance for loan losses to non-performing loans		34.49	%		36.59	%		(2.10	)		30.74	%		3.75
Loans 30-89 days past due and still accruing as a percent of gross loans		0.14	%		1.12	%		(0.98	)		0.32	%		(0.18	)
Non-performing loans to gross loans		9.16	%		11.11	%		(1.95	)		10.48	%		(1.32	)
Non-performing assets to total assets		8.17	%		10.18	%		(2.01	)		9.08	%		(0.91	)
Return on average common equity		-26.94	%		-9.12	%		(17.82	)		-21.35	%		(5.59	)
Return on average assets		-1.04	%		-0.39	%		(0.65	)		-0.79	%		(0.25	)
Efficiency ratio (2)		85.71	%		95.12	%		(9.41	)		112.98	%		(27.27	)

	September 30, 2011			September 30, 2010			Change
For the Nine Months ended
Yield on average gross loans (1)		6.00	%		5.96	%		0.04
Yield on average investments (1)		1.91	%		1.84	%		0.07
Total yield on average earning assets (1)		4.88	%		5.11	%		(0.23	)
Cost of average interest bearing deposits		1.00	%		1.08	%		(0.08	)
Cost of average borrowings		1.85	%		4.14	%		(2.29	)
Cost of average total deposits and borrowings		0.81	%		0.95	%		(0.14	)
Cost of average interest bearing liabilities		1.03	%		1.17	%		(0.14	)
Net interest spread		3.85	%		3.94	%		(0.09	)
Net interest margin (1)		4.08	%		4.17	%		(0.09	)
Net charge-offs to average gross loans		2.92	%		1.67	%		1.25
Allowance for loan losses to gross loans		3.16	%		4.07	%		(0.91	)
Allowance for loan losses to non-performing loans		34.49	%		36.59	%		(2.10	)
Non-performing loans to gross loans		9.16	%		11.11	%		(1.95	)
Non-performing assets to total assets		8.17	%		10.18	%		(2.01	)
Return on average common equity		-34.39	%		-17.14	%		(17.25	)
Return on average assets		-1.33	%		-0.61	%		(0.72	)
Efficiency ratio (2)		100.59	%		89.97	%		10.62

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

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

32

PREMIERWEST BANCORP

FINANCIAL HIGHLIGHTS

(unaudited)

Reconciliation of Non-GAAP Measure:

Tax Equivalent Net Loss Applicable to Common Shareholders

(Dollars in 000’s)

	September 30, 2011			September 30, 2010
For the Three Months ended
Net interest income	$	12,849		$	13,633
Tax equivalent adjustment for municipal loan interest		45			47
Tax equivalent adjustment for municipal bond interest		3			33
Tax equivalent net interest income		12,897			13,713
Provision for loan losses		5,050			1,600
Non-interest income		2,667			2,728
Non-interest expense		13,298			15,562
Provision for income taxes		23			—
Tax equivalent net loss		(2,807	)		(721	)
Preferred stock dividends and discount accretion		614			620
Tax equivalent net income (loss) applicable to common shareholders	$	(3,421	)	$	(1,341	)
	September 30, 2011			September 30, 2010
For the Nine Months ended
Net interest income	$	38,176		$	43,303
Tax equivalent adjustment for municipal loan interest		134			141
Tax equivalent adjustment for municipal bond interest		51			101
Tax equivalent net interest income		38,361			43,545
Provision for loan losses		11,350			10,050
Non-interest income		8,462			7,842
Non-interest expense		46,911			46,014
Provision for income taxes		44			—
Tax equivalent net loss		(11,482	)		(4,677	)
Preferred stock dividends and discount accretion		1,883			1,867
Tax equivalent net loss applicable to common shareholders	$	(13,365	)	$	(6,544	)

33

PREMIERWEST BANCORP

FINANCIAL HIGHLIGHTS

(All amounts in 000’s, except per share data)

(unaudited)

BALANCE SHEET

	September 30, 2011			September 30, 2010			Change			% Change			June 30, 2011			Change			% Change
Cash and cash equivalents	$	66,061		$	118,973		$	(52,912	)		-44.5	%	$	71,003		$	(4,942	)		-7.0	%
Interest-bearing certificates of deposit		1,500			1,500			—			0.0	%		1,500			—			0.0	%
Investment securities		303,927			196,927			107,000			54.3	%		290,816			13,111			4.5	%
Gross loans, net of deferred fees		851,838			1,034,558			(182,720	)		-17.7	%		880,853			(29,015	)		-3.3	%
Allowance for loan losses		(26,975	)		(42,120	)		15,145			-36.0	%		(28,433	)		1,458			-5.1	%
Net loans		824,863			992,438			(167,575	)		-16.9	%		852,420			(27,557	)		-3.2	%
Other assets		104,760			114,841			(10,081	)		-8.8	%		106,300			(1,540	)		-1.4	%
Total assets	$	1,301,111		$	1,424,679		$	(123,568	)		-8.7	%	$	1,322,039		$	(20,928	)		-1.6	%
Total deposits		1,161,032			1,277,625			(116,593	)		-9.1	%		1,177,838			(16,806	)		-1.4	%
Borrowings		33,801			30,951			2,850			9.2	%		37,833			(4,032	)		-10.7	%
Other liabilities		17,938			16,401			1,537			9.4	%		17,963			(25	)		-0.1	%
Stockholders’ equity		88,340			99,702			(11,362	)		-11.4	%		88,405			(65	)		-0.1	%
Total liabilities and stockholders’ equity	$	1,301,111		$	1,424,679		$	(123,568	)		-8.7	%	$	1,322,039		$	(20,928	)		-1.6	%
Period end common shares outstanding		10,035,241			10,034,830			411			0.0	%		10,034,491			750			0.0	%
Book value per common share (1)	$	4.79		$	5.96		$	(1.17	)		-19.6	%	$	4.81		$	(0.02	)		-0.4	%
Tangible book value per common share (2)	$	4.58		$	5.69		$	(1.11	)		-19.5	%	$	4.59		$	(0.01	)		-0.2	%
Adversely classified loans
Rated substandard or worse	$	114,223		$	193,133		$	(78,910	)		-40.9	%	$	114,565		$	(342	)		-0.3	%
Impaired		78,210			115,103			(36,893	)		-32.1	%		92,505			(14,295	)		-15.5	%
Total adversely classified loans (3)	$	192,433		$	308,236		$	(115,803	)		-37.6	%	$	207,070		$	(14,637	)		-7.1	%
Loans 30-89 days past due and still accruing	$	1,208		$	11,129		$	(9,921	)		-89.1	%	$	2,781		$	(1,573	)		-56.6	%
Non-performing assets:
Loans on nonaccrual status	$	78,109		$	114,990		$	(36,881	)		-32.1	%	$	92,266		$	(14,157	)		-15.3	%
90-days past due and accruing		101			113			(12	)		-10.6	%		239			(138	)		-57.7	%
Total non-performing loans		78,210			115,103			(36,893	)		-32.1	%		92,505			(14,295	)		-15.5	%
Other real estate owned and foreclosed assets		28,127			29,902			(1,775	)		-5.9	%		27,579			548			2.0	%
Total non-performing assets	$	106,337		$	145,005		$	(38,668	)		-26.7	%	$	120,084		$	(13,747	)		-11.4	%
Troubled debt restructurings:
On accrual status	$	2,620		$	225		$	2,395			1064.4	%	$	1,827		$	793			43.4	%
On nonaccrual status		47,689			34,120			13,569			39.8	%		43,375			4,314			9.9	%
Total troubled-debt restructurings	$	50,309		$	34,345		$	15,964			46.5	%	$	45,202		$	5,107			11.3	%

(1) 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.

(2) 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.

(3) Includes non-performing loans shown in total below

nm = not meaningful

QUARTERLY ACTIVITY

	September 30, 2011			September 30, 2010			Change			% Change			June 30, 2011			Change			% Change
Allowance for loan losses:
Balance beginning of period	$	28,433		$	43,917		$	(15,484	)		-35.3	%	$	33,366		$	(4,933	)		-14.8	%
Provision for loan losses		5,050			1,600			3,450			215.6	%		—			5,050			nm
Net (charge-offs) recoveries		(6,508	)		(3,397	)		3,111			-91.6	%		(4,933	)		1,575			-31.9	%
Balance end of period	$	26,975		$	42,120		$	(15,145	)		-36.0	%	$	28,433		$	(1,458	)		-5.1	%
Nonperforming loans:
Balance beginning of period	$	92,505		$	129,703		$	(37,198	)		-28.7	%	$	109,844		$	(17,339	)		-15.8	%
Transfers from performing loans		2,391			10,504			(8,113	)		-77.2	%		4,760			2,369			-49.8	%
Loans returned to performing status		(3,068	)		(93	)		(2,975	)		-3198.9	%		(4,428	)		(1,360	)		30.7	%
Transfers to OREO		(4,731	)		(17,259	)		12,528			72.6	%		(4,122	)		609			-14.8	%
Principal reduction from payment		(1,980	)		(4,009	)		2,029			50.6	%		(6,933	)		(4,953	)		71.4	%
Principal reduction from charge-off		(6,907	)		(3,743	)		(3,164	)		-84.5	%		(6,616	)		291			-4.4	%
Total nonperforming loans	$	78,210		$	115,103		$	(36,893	)		-32.1	%	$	92,505		$	(14,295	)		-15.5	%
Other real estate owned (OREO) and foreclosed assets, beginning of period	$	27,579		$	15,084		$	12,495			82.8	%	$	29,757		$	(2,178	)		-7.3	%
Transfers from outstanding loans		4,731			17,259			(12,528	)		-72.6	%		4,122			609			14.8	%
Improvements and other additions		—			95			(95	)		-100.0	%		—			—			nm
Sales, net of gains		(3,310	)		(1,807	)		1,503			83.2	%		(1,566	)		1,744			111.4	%
Impairment charges		(873	)		(729	)		144			-19.8	%		(4,734	)		(3,861	)		81.6	%
Total OREO and foreclosed assets, end of period	$	28,127		$	29,902		$	(1,775	)		-5.9	%	$	27,579		$	548			2.0	%
QUARTERLY AVERAGES
	September 30, 2011			September 30, 2010			Change			% Change			June 30, 2011			Change			% Change
Average fed funds sold and investments	$	338,133		$	288,591		$	49,542			17.2	%	$	353,971		$	(15,838	)		-4.5	%
Average gross loans	$	875,930		$	1,070,369		$	(194,439	)		-18.2	%	$	907,056		$	(31,126	)		-3.4	%
Average mortgages held for sale	$	440		$	625		$	(185	)		-29.6	%	$	603		$	(163	)		-27.0	%
Average interest earning assets	$	1,214,503		$	1,359,585		$	(145,082	)		-10.7	%	$	1,261,630		$	(47,127	)		-3.7	%
Average total assets	$	1,317,351		$	1,449,421		$	(132,070	)		-9.1	%	$	1,357,844		$	(40,493	)		-3.0	%
Average non-interest-bearing deposits	$	273,599		$	250,473		$	23,126			9.2	%	$	259,668		$	13,931			5.4	%
Average interest-bearing deposits	$	898,787		$	1,049,939		$	(151,152	)		-14.4	%	$	953,536		$	(54,749	)		-5.7	%
Average total deposits	$	1,172,386		$	1,300,412		$	(128,026	)		-9.8	%	$	1,213,204		$	(40,818	)		-3.4	%
Average total borrowings	$	35,269		$	30,952		$	4,317			13.9	%	$	36,443		$	(1,174	)		-3.2	%
Average stockholders’ equity	$	91,277		$	101,641		$	(10,364	)		-10.2	%	$	90,269		$	1,008			1.1	%
Average common equity	$	51,085		$	61,833		$	(10,748	)		-17.4	%	$	50,173		$	912			1.8	%

34

PREMIERWEST BANCORP

FINANCIAL HIGHLIGHTS

(All amounts in 000’s, except per share data)

(unaudited)

YEAR-TO-DATE ACTIVITY

	September 30, 2011			September 30, 2010			Change			% Change
Allowance for loan losses:
Balance beginning of period	$	35,582		$	45,903		$	(10,321	)		-22.5	%
Provision for loan losses		11,350			10,050			1,300			12.9	%
Net (charge-offs) recoveries		(19,957	)		(13,833	)		6,124			-44.3	%
Balance end of period	$	26,975		$	42,120		$	(15,145	)		-36.0	%
Nonperforming loans:
Balance beginning of period	$	129,616		$	103,917		$	25,699			24.7	%
Transfers from performing loans		9,874			73,614			(63,740	)		-86.6	%
Loans returned to performing status		(4,428	)		(11,988	)		7,560			63.1	%
Transfers to OREO		(13,103	)		(22,368	)		9,265			41.4	%
Principal reduction from payment		(17,675	)		(9,362	)		(8,313	)		-88.8	%
Principal reduction from charge-off		(26,074	)		(18,710	)		(7,364	)		-39.4	%
Total nonperforming loans	$	78,210		$	115,103		$	(36,893	)		-32.1	%
Other real estate owned (OREO) and foreclosed assets, beginning of period	$	32,009		$	24,748		$	7,261			29.3	%
Transfers from outstanding loans		13,103			22,368			(9,265	)		-41.4	%
Improvements and other additions		10			419			(409	)		-97.6	%
Sales, net of gains		(9,312	)		(13,809	)		(4,497	)		-32.6	%
Impairment charges		(7,683	)		(3,824	)		3,859			-100.9	%
Total OREO and foreclosed assets, end of period	$	28,127		$	29,902		$	(1,775	)		-5.9	%
YEAR-TO-DATE AVERAGES
	September 30, 2011			September 30, 2010			Change			% Change
Average fed funds sold and investments	$	343,674		$	288,509		$	55,165			19.1	%
Average gross loans	$	914,128		$	1,107,243		$	(193,115	)		-17.4	%
Average mortgages held for sale	$	587		$	613		$	(26	)		-4.2	%
Average interest earning assets	$	1,258,389		$	1,396,365		$	(137,976	)		-9.9	%
Average total assets	$	1,357,355		$	1,484,693		$	(127,338	)		-8.6	%
Average non-interest-bearing deposits	$	262,470		$	251,550		$	10,920			4.3	%
Average interest-bearing deposits	$	949,623		$	1,094,300		$	(144,677	)		-13.2	%
Average total deposits	$	1,212,093		$	1,345,850		$	(133,757	)		-9.9	%
Average total borrowings	$	34,505		$	30,953		$	3,552			11.5	%
Average stockholders’ equity	$	92,774		$	92,658		$	116			0.1	%
Average common equity	$	52,677		$	52,946		$	(269	)		-0.5	%

During third quarter 2011, we recorded:

• Net loss applicable to common shareholders of $3.5 million, after $5.1 million in loan loss provision and net OREO and foreclosed asset expenses of $600,000. This compares to a net loss applicable to common shareholders of $1.4 million in third quarter 2010, after $1.6 million in loan loss provision and net OREO and foreclosed asset expenses of $1.4 million;

• Net interest margin of 4.21%, an increase of 21 basis points from 4.00% in third quarter 2010;

• Average rate paid on total deposits and borrowings of 0.72%, a 36 basis point decline from 1.08% the same quarter in 2010;

• Net loan charge-offs of $6.5 million, compared to $3.4 million in third quarter 2010;

• Loans past due 30 – 89 days and still accruing of $1.2 million or 0.14% of total loans, down from $11.1 million or 1.12% at September 30, 2010;

• Allowance for loan losses of $27.0 million, or 3.16% of gross loans, compared to $42.1 million, or 4.07%, at September 30, 2010.

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

• Reducing adversely classified loans by 7%, or $14.6 million, during the quarter, and $115.8 million, or 38% to $192.4 million, compared to $308.2 million at September 30, 2010;

35

• Reducing nonperforming assets by 11%, or $13.7 million, during the quarter and 27%, or $38.7 million over the past twelve months;

• Improvement in the Bank’s total risk-based and leverage capital ratios to 12.71% and 8.80%, respectively, up from 12.14% and 8.69% at September 30, 2010;

• Growth in average non-interest bearing demand deposits of $13.9 million during the quarter to $273.6 million, or 23% of total average deposits, up from $259.7 million, or 21% of total deposits in preceding quarter and $250.5 million, or 19% of total average deposits in third quarter 2010.

On February 10, 2011, Bancorp implemented a 1-for-10 reverse split of its common stock (the “Reverse Stock Split”) pursuant to an amendment to its Restated Articles of Incorporation approved by shareholders on December 16, 2010. All share and per share related amounts in this report have been restated to reflect the Reverse Stock Split.

As a result of the Reverse Stock Split, every ten shares of the Company’s common stock issued and outstanding at the end of the effective date were combined and reclassified into one share of common stock. Bancorp did not issue fractional shares of common stock and paid cash in lieu of fractional shares resulting from the Reverse Stock Split. Cash payments for fractional shares were determined on the basis of the stock’s average closing price on the NASDAQ Global Select Market for the five trading days immediately preceding the effective date, as adjusted for the Reverse Stock Split.

Also as a result of the Reverse Stock Split, the number of outstanding shares of common stock declined from 100,348,303 shares to 10,035,241 shares. The number of authorized shares of common stock was previously established, and remained, at 150,000,000 following the reverse stock split. Proportional adjustments have also been made to the conversion or exercise rights under the Company’s outstanding stock incentive plans, preferred stock, restricted stock, stock options and warrants.

Results of Operations

Three and nine months ended September 30, 2011, and 2010

Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders for the three months ended September 30, 2011 was $3.5 million. Net loss applicable to common shareholders for the nine months ended September 30, 2011 was $13.6 million. This compares to a net loss applicable to common shareholders of $1.4 and $6.8 million for the three and nine months ended September 30, 2010, respectively. Loss per basic and diluted share for the three months and nine months ended September 30, 2011, was $0.35 and $1.35, as compared to a loss per basic and diluted share of $0.14 and $0.88 for the three and nine months ended September 30, 2010. For additional detail regarding calculation of our earnings per diluted share in the current quarter and year to date, see Note 11 “Basic and Diluted Loss Per Common Share” of our interim financial statements included under Item 1 of this report.

Net Interest Income. The following table sets forth, for the periods indicated, information with regard to (1) average balances of assets and liabilities, (2) interest income on interest earning assets and interest expense on interest bearing liabilities, (3) resulting yields and rates, (4) net interest income and (5) net interest spread. Nonaccrual loans have been included in the tables as loans carrying a zero yield. Loan fees are recognized as income using the interest method over the life of the loan.

36

The following table sets forth certain information relating to the Company’s consolidated average interest-earning assets and interest-bearing liabilities and reflect average yield on assets and average cost of liabilities for the periods indicated. The yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans are included in the loan category. The yields and costs include fees, premiums and discounts, which are considered adjustments to yield. The table reflects the effect of income taxes on nontaxable loans and securities.

	For the Three Months Ended
	September 30, 2011								December 31, 2010								September 30, 2010
	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 000’s)
ASSETS:
Interest earning balances due from banks	$	48,987		$	30		0.24	%	$	19,626		$	13		0.26	%	$	21,416		$	15		0.28	%
Federal funds sold		3,149			2		0.25	%		93,016			59		0.25	%		83,607			53		0.25	%
Investments		285,997			1,664		2.31	%		208,916			1,406		2.67	%		183,568			1,199		2.59	%
Gross loans (1)		875,930			13,380		6.06	%		1,013,339			14,515		5.68	%		1,070,369			16,074		5.96	%
Mortgages held for sale		440			8		7.21	%		623			6		3.82	%		625			8		5.08	%
Total interest earning assets		1,214,503			15,084		4.93	%		1,335,520			15,999		4.75	%		1,359,585			17,349		5.06	%
Allowance for loan losses		(27,488	)							(41,673	)							(43,624	)
Other assets		130,336								135,755								133,460
Total assets	$	1,317,351							$	1,429,602							$	1,449,421
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing deposits		898,787			2,034		0.90	%		1,029,168			3,114		1.20	%		1,049,939			3,351		1.27	%
Borrowings		35,269			153		1.72	%		30,950			145		1.86	%		30,951			285		3.65	%
Total interest bearing liabilities		934,056			2,187		0.93	%		1,060,118			3,259		1.22	%		1,080,890			3,636		1.33	%
Non-interest-bearing deposits		273,599								252,028								250,473
Other liabilities		18,402								17,545								16,417
Equity		91,294								99,911								101,641
Total liabilities and shareholders’ equity	$	1,317,351							$	1,429,602							$	1,449,421
Net interest income (3)				$	12,897							$	12,740							$	13,713
Net interest spread							4.00	%							3.53	%							3.73	%
Average yield on earning assets (2) (3)							4.93	%							4.75	%							5.06	%
Interest expense to earning assets							0.71	%							0.97	%							1.06	%
Net interest income to earning assets (2) (3)							4.21	%							3.78	%							4.00	%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income				$	12,849							$	12,665							$	13,633
Tax equivalent adjustment for municipal loan interest					45								45								47
Tax equivalent adjustment for municipal bond interest					3								30								33
Tax equivalent net interest income				$	12,897							$	12,740							$	13,713

Non-GAAP financial mesures have inherent limitations, are not reuired 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 substitue for analyses of results as reported under GAAP.

(1) Non-accrual loans of approximately $78.1 million at 9/30/11, $129.5 million at 12/31/2010, $115.0 million for 9/30/2010 are included in the average loan balances.

(2) Loan interest income includes loan fee income of $198,000, $(23,000) , and $80,000 for 9/30/2011, 12/31/2010, and 09/30/2010, respectively.

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

37

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

(Dollars in 000’s)
	September 30, 2011			September 30, 2010			June 30, 2011			Sequential Quarter % Change			Year over Year % Change
For The Three Months Ended
Net loss applicable to common shareholders	$	(3,469	)	$	(1,421	)	$	(2,671	)		-30	%		-144	%
Provision for loan losses		5,050			1,600			—			nm			216	%
Net cost of operations of other real estate owned and foreclosed assets		644			1,385			4,406			-85	%		-54	%
Provision (benefit) for income taxes		23			—			5			360	%		nm
Preferred stock dividends and discount accretion		614			620			613			0	%		-1	%
Pre-tax, pre-credit cost operating income	$	2,862		$	2,184		$	2,353			22	%		31	%
	September 30, 2011			September 30, 2010
For The Nine Months Ended
Net loss applicable to common shareholders	$	(13,550	)	$	(6,786	)								-100	%
Provision for loan losses		11,350			10,050									13	%
Net cost of operations of other real estate owned and foreclosed assets		7,174			4,350
Provision (benefit) for income taxes		44			—									nm
Preferred stock dividends and discount accretion		1,883			1,867									1	%
Pre-tax, pre-credit cost operating income	$	6,901		$	9,481									-27	%

nm = not meaningful

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 financial 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.

Third quarter 2011 net interest income decreased from the same quarter in 2010 and as compared to the previous calendar quarter. This is primarily due to a decline in average interest earning assets during these periods as part 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, lower yielding investment securities comprise a higher percentage of the Bank’s earning assets.

However, the third quarter 2011 net interest margin increased from third quarter 2010, predominantly due to a lower cost of interest bearing deposits. The spread between the yield earned on loans and rate paid on interest bearing deposits improved year-over-year in the third quarter despite the decline in higher yielding loan balances as a proportion of average earning assets. The improvement in yields on investment securities also contributed to the increase in net interest margin between the periods.

Management currently estimates that the Bank remains slightly asset sensitive over the next twelve month measurement period. As such, earning assets are forecast to mature or re-price more frequently than interest bearing liabilities over this period. Management’s ability to maintain or enhance the Bank’s net interest margin will depend in part on the ability to generate new loans, further reduce nonperforming assets and control the cost of funds. All of these actions will depend on economic conditions, competitive factors and market interest rate trends. For more information see the discussion under the heading “Quantitative and Qualitative Disclosures about Market Risk” in our 2010 Form 10-K.

Provision for Credit Losses. Bancorp recorded a $5.1 million provision for credit losses, for the third quarter of 2011 compared to $1.6 million in the third quarter of 2010. This additional provision included a $3.6 million specific reserve established due to recent uncertainties surrounding the value of collateral supporting a specific borrowing relationship totaling approximately $21 million. While loan net charge-offs in the current quarter increased versus the third quarter of 2010, the overall risk profile of the Company’s loan portfolio continues to improve. The level of adversely classified and non-performing loans has declined significantly during the past year. In addition, the percentage of loans past due 30 – 89 days and still accruing as of September 30, 2011 is down significantly from the same period one year ago. The provision for credit losses was $11.4 million for the nine months ended September 30, 2011, compared to $10.1 million in the same period last year. The provision for credit losses will depend primarily on economic conditions, real estate valuations, and the interest rate environment, as an increase in interest rates could put pressure on the ability of our borrowers to repay loans. For more information, see the discussion under the subheading “Allowance for Credit Losses and Net Loan Charge-offs” below.

38

Non-interest Income. Total non-interest income for the quarter ended September 30, 2011 was virtually unchanged as compared to the third quarter of 2010. Service charge income on deposit accounts in 2011 declined due to a reduction in the amount of non-sufficient check items from the same period in 2010. Also, the third quarter of 2010 contained a one-time recovery of a prior period operating loss of $200,000. Offsetting the above declines were increases in gains on sales of securities achieved as part of a plan to reduce the proportion of lower yielding cash-equivalent investments and increase the proportion of higher-yielding federal government guaranteed and municipal securities. Investment brokerage fee income also grew in 2011 versus 2010 due to increasing sales of higher yield investment products in a period of historically low deposit interest rates. In addition, the Bank continues to experience growth in debit card interchange income due to the increased use of this channel to access deposit services. Non-interest income for the nine months ended September 30, 2011, increased as compared to the same period in 2010. The year-to-date increase in noninterest income was primarily due to gains on sales of securities, growth in investment brokerage fee income, increases in debit card interchange income as noted above and gain in death-benefit from bank-owned life insurance. The increase was partially offset by the decline in deposit account service charge income as previously noted.

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 may adversely affect noninterest income in future periods.

The following table illustrates the components and change in noninterest income for the periods shown:

(Dollars in 000’s)

For The Three Months Ended

	September 30, 2011		September 30, 2010		$ Change			% Change			June 30, 2011		$ Change			% Change
Non-interest income
Service charges on deposit accounts	$	946	$	1,092	$	(146	)		-13.4	%	$	921	$	25			2.7	%
Other commissions and fees		724		716		8			1.1	%		671		53			7.9	%
Net gain on sale of securities, available for sale		227		84		143			170.2	%		424		(197	)		-46.5	%
Investment brokerage and annuity fees		468		340		128			37.6	%		426		42			9.9	%
Mortgage banking fees		61		110		(49	)		-44.5	%		84		(23	)		-27.4	%
Other non-interest income:
Other income		85		12		73			608.3	%		7		78			1114.3	%
Increase in value of BOLI		126		136		(10	)		-7.4	%		135		(9	)		-6.7	%
Other non-interest income		30		238		(208	)		-87.4	%		25		5			20.0	%
Total non-interest income	$	2,667	$	2,728	$	(61	)		-2.2	%	$	2,693	$	(26	)		-1.0	%

For The Nine Months Ended

	September 30, 2011		September 30, 2010		$ Change			% Change
Non-interest income
Service charges on deposit accounts	$	2,822	$	3,187	$	(365	)		-11.5	%
Other commissions and fees		2,040		2,156		(116	)		-5.4	%
Net gain on sale of securities, available for sale		1,000		380		620			163.2	%
Investment brokerage and annuity fees		1,394		1,047		347			33.1	%
Mortgage banking fees		270		291		(21	)		-7.2	%
Other non-interest income:
Other income		137		23		114			495.7	%
Increase in value of BOLI		384		406		(22	)		-5.4	%
Other non-interest income		415		352		63			17.9	%
Total non-interest income	$	8,462	$	7,842	$	620			7.9	%

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 may adversely affect noninterest income in future periods.

Non-interest Expense. Non-interest expense for the three months ended September 30, 2011 declined compared to third quarter 2010. Salaries and employee benefits expense decreased due to a reduction in loan workout personnel to reflect the decline in problem assets. Personnel reductions were also affected in loan production staff in response to soft loan demand currently experienced due to the current economic downturn. Reductions in branch personnel were also made to correspond to the continued growth in use of non-branch channels by customers to access banking services. Costs associated with OREO and related third-party loan expenses declined due to a reduction in the number of such assets reappraised during the period versus the same period in the prior year. In addition, the Company’s FDIC insurance premium expense declined from the third quarter in 2010 as a result of a recent change in assessment methodology and the planned deleveraging of the Bank. Occupancy and equipment expenses were higher in the current period due to one-time costs of $136,000 associated with the termination of a lease versus third quarter 2010.

39

Non-interest expense for the nine months ended September 30, 2011, increased compared to the same period in 2010. The increase was primarily due to larger dollar amounts of OREO write downs to current market value. Occupancy and equipment expenses were higher due to increased repairs and maintenance expenses versus the first nine months of 2010. Reductions in salary and employee benefits and FDIC insurance premium expense were achieved in this period as compared to the same period in 2010 for the same reasons stated above. The Company continues to make progress in lowering its cost structure without negative effects on our customers. We expect our non-interest expenses will continue to be affected by expenses associated with elevated levels of nonperforming assets.

The following table illustrates the components and changes in noninterest expense for the periods shown:

(Dollars in 000’s)

For The Three Months Ended

Non-interest expense	September 30, 2011		September 30, 2010		$ Change			% Change			June 30, 2011		$ Change			% Change
Salaries and employee benefits	$	6,395	$	7,578	$	(1,183	)		-15.6	%	$	7,113	$	(718	)		-10.1	%
Net cost of OREO and foreclosed assets		644		1,385		(741	)		-53.5	%		4,406		(3,762	)		-85.4	%
Net occupancy and equipment		2,140		1,904		236			12.4	%		1,845		295			16.0	%
FDIC and state assessments		800		1,166		(366	)		-31.4	%		798		2			0.3	%
Professional fees		613		731		(118	)		-16.1	%		757		(144	)		-19.0	%
Communications		488		484		4			0.8	%		480		8			1.7	%
Advertising		241		172		69			40.1	%		207		34			16.4	%
Professional liability insurance		202		187		15			8.0	%		175		27			15.4	%
Third-party loan costs		196		406		(210	)		-51.7	%		431		(235	)		-54.5	%
Problem loan expense		263		34		229			673.5	%		102		161			157.8	%
Other non-interest expense:
Director fees		98		101		(3	)		-3.0	%		100		(2	)		-2.0	%
Internet costs		161		104		57			54.8	%		114		47			41.2	%
ATM debit card costs		196		155		41			26.5	%		187		9			4.8	%
Business development		81		116		(35	)		-30.2	%		90		(9	)		-10.0	%
Amortization		116		240		(124	)		-51.7	%		116		—			0.0	%
Supplies		154		157		(3	)		-1.9	%		117		37			31.6	%
Other non-interest expense		510		642		(132	)		-20.6	%		834		(324	)		-38.8	%
Total non-interest expense	$	13,298	$	15,562	$	(2,264	)		-14.5	%	$	17,872	$	(4,574	)		-25.6	%

For The Nine Months Ended

Non-interest expense	September 30, 2011		September 30, 2010		$ Change			% Change
Salaries and employee benefits	$	20,534	$	21,540	$	(1,006	)		-4.7	%
Net cost of OREO and foreclosed assets		7,174		4,350		2,824			64.9	%
Net occupancy and equipment		5,959		5,902		57			1.0	%
FDIC and state assessments		2,721		3,530		(809	)		-22.9	%
Professional fees		2,246		2,061		185			9.0	%
Communications		1,443		1,503		(60	)		-4.0	%
Advertising		693		568		125			22.0	%
Professional liability insurance		577		499		78			15.6	%
Third-party loan costs		923		1,090		(167	)		-15.3	%
Problem loan expense		453		267		186			69.7	%
Other non-interest expense:
Director fees		299		302		(3	)		-1.0	%
Internet costs		387		284		103			36.3	%
ATM debit card costs		502		437		65			14.9	%
Business development		255		320		(65	)		-20.3	%
Amortization		383		719		(336	)		-46.7	%
Supplies		421		470		(49	)		-10.4	%
Other non-interest expense		1,941		2,172		(231	)		-10.6	%
Total non-interest expense	$	46,911	$	46,014	$	897			1.9	%

40

Changing business conditions, increased costs related to employee turnover, lower loan production volumes causing deferred loan origination costs to decline, or a failure to manage operating and control environments could adversely affect our ability to limit expense growth in the future.

Income Taxes. The Company recorded an income tax provision for the three and nine months ended September 30, 2011 compared to no provision for income taxes during the similar periods, respectively, of 2010. The provision was made for minimum state income taxes owed.

As of September 30, 2011, the Company maintained a valuation allowance of $36.2 million against its deferred tax asset balance of $36.2 million, for no net 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.

Balance Sheet Overview

	September 30, 2011		% of Total			December 31, 2010		% of Total			Increase (Decrease)
											9/30/11 – 12/31/10
(Dollars in 000’s)
ASSETS
Federal funds sold	$	3,180		0.2	%	$	3,085		0.2	%	$	95		3.1	%
Investment securities		298,617		23.0	%		212,816		15.1	%		85,801		40.3	%
Other Community Reinvestment Act		2,000		0.2	%		2,000		0.1	%		—		0.0	%
Restricted equity investments		3,310		0.3	%		3,474		0.2	%		(164	)	-4.7	%
Loans, net (1)		824,863		63.4	%		941,213		66.7	%		(116,350	)	-12.4	%
Other assets (2)		169,141		13.0	%		248,632		17.6	%		(79,491	)	-32.0	%
Total assets	$	1,301,111		100.0	%	$	1,411,220		100.0	%	$	(110,109	)	-7.8	%
LIABILITIES
Noninterest-bearing deposits	$	283,323		23.4	%	$	242,631		18.5	%	$	40,692		16.8	%
Interest-bearing deposits		877,709		72.4	%		1,023,618		77.9	%		(145,909	)	-14.3	%
Total deposits		1,161,032		95.7	%		1,266,249		96.4	%		(105,217	)	-8.3	%
Other liabilities (3)		51,739		4.3	%		47,963		3.6	%		3,776		7.9	%
Total liabilities		1,212,771		100.0	%		1,314,212		100.0	%		(101,441	)	-7.7	%
SHAREHOLDERS’ EQUITY		88,340					97,008					(8,668	)	-8.9	%
Total liabilities and share-holders’ equity	$	1,301,111				$	1,411,220				$	(110,109	)	-7.8	%

(1) Net of deferred loan fees and restructured loan concessions and the allowance for loan losses

(2) Includes cash and due from banks, other equity investments, premises and equipment, core deposit intangible, accrued interest receivable, mortgage loans held-for-sale and bank-owned life insurance.

(3) Includes borrowings, accrued interest payable and other liabilities.

Balance sheet highlights as of September 30, 2011 are as follows:

• Total assets were $1.3 billion, down 7.8% from December 31, 2010 primarily as a result of deleveraging activities;

• Total net loans at $824.9 million, declined by 12.4% from the balance at December 31, 2010;

• Total investment securities of $298.6 million increased 40.3% from December 31, 2010; and

• Total deposits of $ 1.16 billion at September 30, 2011, were down 8.3% from year end 2010, due to a continued shift away from time deposits and success in migrating to noninterest-bearing deposits as sources of funding.

41

Our balance sheet management efforts focused on deploying lower-yielding cash equivalents into higher-yielding investment securities, shifting our loan originations away from higher risk transaction-only to targeted relationship focused lending as opportunities arise, limiting loan concentrations within our loan portfolio, enhancing our capital ratios and retaining sufficient liquidity.

Cash and Cash Equivalents

As of September 30, 2011, total cash and cash equivalents decreased from December 31, 2010, as we utilized our cash and cash equivalents more effectively by redeploying these assets into higher-yielding investment securities over the past nine months increasing the portfolio’s duration.

(Dollars in 000’s)	September 30, 2011		% of Total			December 31, 2010		% of Total			September 30, 2010		% of Total
Cash and cash equivalents:
Cash and due from banks	$	28,551		43	%	$	21,716		16	%	$	24,274		20	%
Federal funds sold		3,180		5	%		3,085		2	%		87,378		74	%
Interest-bearing deposits in other banks		34,330		52	%		114,173		82	%		7,321		6	%
Total cash and cash equivalents	$	66,061		100	%	$	138,974		100	%	$	118,973		100	%

Investment Portfolio

The compositions and carrying values of Bancorp’s investment securities portfolio were as follows:

Investment securities at September 30, 2011 and December 31, 2010 consisted of the following:

(Dollars in 000’s)

	September 30, 2011						December 31, 2010						September 30, 2010
	Amortized cost		Fair value		Net unrealized gain/ (loss)		Amortized cost		Fair value		Net unrealized gain/ (loss)		Amortized cost		Fair value		Net unrealized gain/ (loss)
Collateralized mortgage obligations	$	134,779	$	136,051	$	1,272	$	131,372	$	132,217	$	845	$	145,247	$	147,903	$	2,656
Mortgage-backed securities		60,666		61,337		671		13,804		13,945		141		8,184		8,334		150
U.S. Government and agency securities		49,106		50,307		1,201		48,522		48,805		283		18,660		19,101		441
Obligations of states and political subdivisions		48,640		50,922		2,282		18,210		18,331		121		16,236		17,322		1,086
Investment securities -
Other Community Reinvestment Act		2,000		2,000		—		2,000		2,000		—		2,000		2,000		—
Restricted equity securities		3,310		3,310		—		3,474		3,474		—		3,530		3,530		—
Total investment portfolio	$	298,501	$	303,927	$	5,426	$	217,382	$	218,772	$	1,390	$	193,857	$	198,190	$	4,333

At September 30, 2011, the net unrealized gain in the investment portfolio was up as compared to year end 2010. An increase in net unrealized gains in all sectors of the Company’s investment portfolio was due to both declining market interest rates and the overall growth in the portfolio experienced since the beginning of the year.

During the second quarter of 2011, all investments were transferred from the held-to-maturity category to the available-for-sale category to increase flexibility to manage the investment portfolio consistent with the Bank’s current asset and liability strategy. As a result, investments with an amortized cost of $22.6 million and gross unrealized gains of $984,000 and gross unrealized losses of $37,000 were transferred to the available-for-sale category.

Over the past twelve months we purchased primarily U.S. Government agency securities, U.S. Government guaranteed mortgage-backed securities, obligations of states and political subdivisions and U.S. Government agency mortgage backed securities. The expected duration of the investment portfolio was 4.2 years at September 30, 2011, compared to 3.2 years at December 31, 2010, and 2.9 years at September 30, 2010.

For additional detail regarding our investment securities portfolio, see Note 4 “Investment Securities” and Note 13 “Fair Value Measurement and Fair Values of Financial Instruments” of our interim financial statements included under Item 1 of this report.

42

Loan Portfolio

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

Loan commitments

(Dollars in 000’s)

	September 30, 2011												December 31, 2010
	Funded Loan Totals		% of Gross Loans			Unfunded Loan Commitments		% of Gross Loans			Total Loan Commitments		Funded Loan Totals		% of Gross Loans			Unfunded Loan Commitments		% of Gross Loans			Total Loan Commitments		$ Change Total Loans
Construction, Land Dev & Other Land	$	46,730		5	%	$	2,975		3	%	$	49,705	$	62,666		6	%	$	206		0	%	$	62,872	$	(13,167	)
Commercial & Industrial		98,017		11	%		48,060		55	%		146,077		119,077		12	%		51,232		63	%		170,309	$	(24,232	)
Commercial Real Estate Loans		559,251		66	%		2,224		3	%		561,475		626,387		64	%		2,288		3	%		628,675	$	(67,200	)
Secured Multifamily Residential		21,886		3	%		—		0	%		21,886		24,227		3	%		—		0	%		24,227	$	(2,341	)
Other Commercial Loans Secured by RE		49,522		6	%		18,713		22	%		68,235		59,284		6	%		17,534		21	%		76,818	$	(8,583	)
Loans to Individuals, Family & Personal Expense		11,271		1	%		2,050		2	%		13,321		12,472		1	%		2,375		3	%		14,847	$	(1,526	)
Consumer/Finance		35,222		4	%		—		0	%		35,222		36,859		4	%		—		0	%		36,859	$	(1,637	)
Other Loans		31,361		4	%		12,864		15	%		44,225		37,255		4	%		8,388		10	%		45,643	$	(1,418	)
Overdrafts		297		0	%		—		0	%		297		319		0	%		—		0	%		319	$	(22	)
Gross loans	$	853,557		100	%	$	86,886		100	%	$	940,443	$	978,546		100	%	$	82,023		100	%	$	1,060,569	$	(120,126	)

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

(Dollars in 000’s)	September 30, 2011
	Southern Oregon		Mid-Central Oregon		Northern California		Sacramento Valley		Total
Construction, Land Dev & Other Land	$	18,326	$	12,753	$	2,980	$	15,646	$	49,705
Commercial & Industrial		82,935		23,116		23,511		16,515		146,077
Commercial Real Estate Loans		262,838		107,465		60,556		130,616		561,475
Secured Multifamily Residential		12,508		6,157		2,171		1,050		21,886
Other Commercial Loans Secured by RE		33,077		9,218		15,712		10,228		68,235
Loans to Individuals, Family & Personal Expense		9,428		1,865		1,198		830		13,321
Consumer/Finance		10,065		20,585		4,572		—		35,222
Other Loans		13,057		2,701		4,129		24,338		44,225
Subtotal	$	442,234	$	183,860	$	114,829	$	199,223		940,146
Overdrafts										297
Total									$	940,443

The Bank’s total loan portfolio declined from December 31, 2010, reflecting the continued challenges in the local and national economy. As a result, commercial, real estate construction, and commercial & industrial loan balances declined from year end. While loan balances contracted, we have experienced an increase in our unfunded loan commitments. Loan totals have 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 September 30, 2011, the Bank had outstanding loan commitments of $22.9 million to persons serving as directors, executive officers, principal stockholders and their related interests. This compares to $24.3 million and $25.8 million at December 31, 2010 and September 30, 2010, 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.

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.

43

The table provided below summarizes the Bank’s level of concentrations in commercial real estate as of September 30, 2011, December 31, 2010 and September 30, 2010, 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

	September 30, 2011	December 30, 2010	September 30, 2010	Guideline
Total Regulatory CRE1	314%	338%	361%	300%
Construction & Land Development CRE2	76%	88%	99%	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 September 30, 2011, was fairly consistent with our branch presence in our operating markets.

Total CRE by count and geographic region

(Dollars in 000’s) except number of loans

	September 30, 2011
	Southern Oregon		Mid-Central Oregon		Northern California		Sacramento Valley		Total
Commercial Real Estate Loans	$	261,354	$	107,431	$	60,556	$	129,910	$	559,251
Number of loans in region		425		109		105		144		783
Number of branches in region		13		9		15		7		44

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.

Nonperforming Assets and Delinquencies

Nonperforming Assets. Nonperforming assets consist of nonaccrual loans, loans past due more than 90 days and still accruing interest and OREO.

The following table presents information with respect to total nonaccrual loans by category for the periods shown:

(Dollars in 000’s)	September 30, 2011		% of Loan Category			June 30, 2011		$ Change			March 31, 2011		December 31, 2010		September 30, 2010
Construction, Land Dev & Other Land	$	13,670		18	%	$	20,015	$	(6,345	)	$	24,207	$	32,584	$	27,166
Commercial & Industrial		1,580		2	%		1,107		473			2,026		2,709		3,408
Commercial Real Estate Loans		55,629		71	%		64,256		(8,627	)		72,287		80,604		77,784
Secured Multifamily Residential		144		0	%		144		—			—		307		313
Other Commercial Loans Secured by RE		3,634		5	%		4,337		(703	)		8,673		10,725		5,766
Loans to Individuals, Family & Personal Expense		966		1	%		20		946			23		26		29
Consumer/Finance		86		0	%		139		(53	)		91		123		113
Other Loans		2,501		3	%		2,487		14			2,537		2,538		434
Total non-performing loans	$	78,210				$	92,505	$	(14,295	)	$	109,844	$	129,616	$	115,013

44

The following table summarizes the Company’s nonperforming assets as of September 30, 2011, and December 31, 2010:

Non-performing assets

(Dollars in 000’s)

	September 30, 2011			December 31, 2010
	Amount			Amount
Loans on non-accrual status	$	78,109		$	129,493
Loans past due 90 days or more but on accrual status		101			123
Total non-performing loans		78,210			129,616
Other real estate owned and foreclosed assets (“OREO”)		28,127			32,009
Total non-performing assets	$	106,337		$	161,625
Applicable ratios:
Non-performing loans to gross loans		9.16	%		13.25	%
Non-performing assets to total assets		8.16	%		11.45	%

At September 30, 2011, total nonperforming assets were down compared to December 31, 2010. Nonperforming assets and loans have also declined in terms of percentage of total assets and loans, respectively. The amount of additions to nonperforming assets has slowed during 2011 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 September 30, 2011:

(Dollars in 000’s)
	September 30, 2011
	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	$	2,144		$	4,509		$	1,144		$	5,873		$	13,670		$	46,730		29.3	%
Commercial & Industrial		981			599			—			—			1,580			98,017		1.6	%
Commercial Real Estate Loans		42,185			6,655			5,097			1,692			55,629			559,251		9.9	%
Secured Multifamily Residential		144			—			—			—			144			21,886		0.7	%
Other Commercial Loans Secured by RE		390			385			776			2,083			3,634			49,522		7.3	%
Loans to Individuals, Family & Personal Expense		966			—			—			—			966			11,271		8.6	%
Consumer/Finance		2			70			14			—			86			35,222		0.2	%
Other Loans		397			2,104			—			—			2,501			31,361		8.0	%
Overdrafts		—			—			—			—			—			297		0.0	%
Total non-performing loans	$	47,209		$	14,322		$	7,031		$	9,648		$	78,210		$	853,557
Non-performing loans to total funded loans		11.8	%		12.1	%		4.4	%		5.5	%		9.2	%
Total funded loans	$	399,828		$	118,717		$	158,282		$	176,730		$	853,557

45

The balance of non-performing loans has fluctuated during the three months and nine months ended September 30, 2011, as illustrated in the table below:

Nonperforming Loans

(Dollars in 000’s)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Balance beginning of period	$	92,505		$	129,703		$	129,616		$	103,917
Transfers from performing loans		2,391			10,504			9,874			73,614
Loans returned to performing status		(3,068	)		(93	)		(4,428	)		(8,369	)
Transfers to OREO		(4,731	)		(17,259	)		(13,103	)		(22,368	)
Principal reduction from payment		(1,980	)		(4,009	)		(17,675	)		(12,981	)
Principal reduction from charge-off		(6,907	)		(3,743	)		(26,074	)		(18,710	)
Total nonperforming loans	$	78,210		$	115,103		$	78,210		$	115,103

Troubled Debt Restructurings. The following tables summarize the Company’s troubled debt restructured loans by type and geographic region as of September 30, 2011:

(Dollars in 000’s)
	September 30, 2011
	Restructured loans
	Southern Oregon		Mid Oregon		Northern California		Sacramento Valley		Totals		Number of Loans
Construction, Land Dev & Other Land	$	—	$	—	$	—	$	7,137	$	7,137		9
Commercial & Industrial		331		—		934		222		1,487		3
Commercial Real Estate Loans		32,733		3,728		2,615		97		39,173		14
Other Commercial Loans Secured by RE		212		—		217		2,083		2,512		5
Total restructured loans	$	33,276	$	3,728	$	3,766	$	9,539	$	50,309		31

The following table presents the Company’s troubled debt restructured loans by year of maturity, according to the restructured terms, as of September 30, 2011:

(Dollars in 000’s)
Year	Amount
2011	$	23,630
2012		19,830
2013		3,121
2014		—
2015		—
Thereafter		3,728
Total	$	50,309

OREO. The following table presents activity in the total OREO portfolio for the periods shown:

(Dollars in 000’s)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Other real estate owned, beginning of period	$	27,579		$	15,084		$	32,009		$	24,748
Transfers from outstanding loans		4,731			17,259			13,103			22,368
Improvements and other additions		—			95			10			419
Proceeds from sales		(3,476	)		(1,954	)		(10,605	)		(15,419	)
Net gain on sales		166			147			1,293			1,610
Impairment charges		(873	)		(729	)		(7,683	)		(3,824	)
Total other real estate owned	$	28,127		$	29,902		$	28,127		$	29,902

46

The Company has remained focused on OREO property disposition activities. While sales are down year-to-date as compared to the prior year, current period sales were higher than the same period last year. The largest balances in the OREO portfolio at September 30, 2011, were attributable to residential and commercial site development projects, followed by income producing properties, all of which are located in the regions in which we operate. The number of OREO properties have increased during the quarter from the addition of a number of smaller residential and commercial development properties. For more information regarding the Company’s OREO, see the discussion under the subheading “OREO” and “Critical Accounting Policies” included in Item 7 of the Company’s 2010 Form 10-K.

The following table presents segments of the OREO portfolio for the periods shown:

(Dollars in 000’s)	September 30, 2011		# of Properties		December 31, 2010		# of Properties		September 30, 2010		# of Properties
Construction, Land Dev & Other Land	$	12,966		73	$	17,612		60	$	19,404		60
Commercial & Industrial		23		1		1,049		2		287		1
Commercial Real Estate Loans		13,929		36		12,263		31		9,132		24
Other Commercial Loans Secured by RE		1,209		4		1,085		5		996		5
Consumer/Finance		—		—		—		—		83		2
Total OREO by type	$	28,127		114	$	32,009		98	$	29,902		92

Expenses from the acquisition, maintenance and disposition of OREO properties are included in other noninterest expense in the statements of income (loss). Our operating results will be impacted by our ability to dispose of OREO properties at prices that are in line with current valuation expectations. Continued decline in real estate market values in our area would lead to additional OREO valuation adjustments or losses upon final disposal, which would have an adverse effect on our results of operations.

Adversely Classified Loans and Delinquencies. The Company also monitors adversely classified loans and delinquencies, defined as loan balances 30-89 days past due not on nonaccrual status, as an indicator of future nonperforming assets. The Bank continues to experience declines in adversely classified loans, primarily from improvements in credit quality ratings and disposition of impaired loans. Total 30-89 days delinquencies also continue to decline, 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.

The following table summarizes total adversely classified and delinquent loan balances as of the dates shown:

(Dollars in 000’s)

	September 30, 2011			June 30, 2011			March 31, 2011			December 31, 2010			September 30, 2010
Rated substandard or worse	$	114,223		$	114,565		$	139,638		$	135,826		$	193,133
Impaired		78,210			92,505			109,844			129,616			115,103
Total adversely classified loans*	$	192,433		$	207,070		$	249,482		$	265,442		$	308,236
Gross loans	$	853,557		$	882,653		$	922,811		$	978,546		$	1,036,079
Adversely classified loans to gross loans		22.54	%		23.46	%		27.04	%		27.13	%		29.75	%
Loans 30-89 days past due and still accruing as a percent of gross loans		0.14	%		0.32	%		0.77	%		0.43	%		1.12	%
Allowance for loan losses	$	26,975		$	28,433		$	33,366		$	35,582		$	42,120
Allowance for loan losses as a percentage of adversely classified loans		14.02	%		13.73	%		13.37	%		13.40	%		13.66	%
Allowance for loan losses to gross loans		3.16	%		3.22	%		3.62	%		3.64	%		4.07	%
Allowance for loan losses to total non-performing loans		32.57	%		30.74	%		30.38	%		27.45	%		36.59	%

* 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. Note that any loans internally rated worse than substandard are included in the impaired loan totals.

47

Allowance for Credit Losses and Net Loan Charge-offs

Allowance for Credit Losses. An allowance for credit 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 credit 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 2010 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 for 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. The loss factors are 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 for 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.

48

The following table is a summary of activity in the allowance for credit losses for the periods presented:

For the quarter ended:

(Dollars in 000’s)	September 30, 2011			December 31, 2010			September 30, 2010
Gross loans outstanding at end of period	$	853,557		$	978,546		$	1,036,079
Average loans outstanding, gross	$	875,930		$	1,013,339		$	1,070,369
Allowance for loan losses, beginning of period	$	28,433		$	42,120		$	43,917
Loans charged-off:
Commercial		(37	)		(561	)		(493	)
Real estate		(5,478	)		(6,571	)		(2,742	)
Consumer		(487	)		(348	)		(459	)
Other		(905	)		(383	)		(49	)
Total loans charged-off		(6,907	)		(7,863	)		(3,743	)
Recoveries:
Commercial		142			1,034			32
Real estate		151			71			28
Consumer		94			197			219
Other		12			23			67
Total recoveries		399			1,325			346
Net charge-offs		(6,508	)		(6,538	)		(3,397	)
Provision charged to income		5,050			—			1,600
Allowance for loan losses, end of period	$	26,975		$	35,582		$	42,120
Ratio of net loans charged-off to average gross loans outstanding, annualized		2.95	%		2.56	%		1.26	%
Ratio of allowance for loan losses to gross loans outstanding		3.16	%		3.64	%		4.07	%

The Company’s allowance for credit 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 credit losses is adequate to absorb probable losses in the loan portfolio at September 30, 2011, 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 credit losses is critical to our financial results. Please see Item 1A “Risk Factors” in our 2010 Form 10-K.

Net Loan Charge-offs. For the quarter ended September 30, 2011, total net loan charge-offs were down from the quarter ended December 31, 2010, but were up as compared to third quarter 2010. The Bank continued to recognize impairments on collateral dependent loans, primarily commercial real estate. The amount for this period included an $800,000 charge associated with the purchase of a note from the Bank by a third party.

49

Deposits and Borrowings

The following table summarizes the quarterly average dollar amount in, and the interest rate paid on, each of the deposit and borrowing categories during the three months ended September 30, 2011, December 31, 2010, and September 30, 2010:

For the three months ended	September 30, 2011										December 31, 2010										September 30, 2010
(Dollars in 000’s)	Average Balance		Percent of Total			Interest Expense		Rate Paid			Average Balance		Percent of Total			Interest Expense		Rate Paid			Average Balance		Percent of Total			Interest Expense		Rate Paid
NOW and money market	$	343,351		29.3	%	$	133		0.15	%	$	380,756		29.7	%	$	423		0.44	%	$	390,125		30.0	%	$	498		0.51	%
Savings		86,937		7.4	%		16		0.07	%		83,860		6.5	%		41		0.19	%		85,178		6.6	%		42		0.20	%
Time deposits		468,499		40.0	%		1,885		1.60	%		564,552		44.1	%		2,650		1.86	%		574,636		44.2	%		2,811		1.94	%
Total interest-bearing deposits		898,787		76.7	%		2,034		0.90	%		1,029,168		80.3	%		3,114		1.20	%		1,049,939		80.7	%		3,351		1.27	%
Non-interest bearing demand		273,599		23.3	%		—		0.00	%		252,028		19.7	%		—		0.00	%		250,473		19.3	%		—		0.00	%
Total deposits	$	1,172,386		100.0	%	$	2,034		0.69	%	$	1,281,196		100.0	%	$	3,114		0.96	%	$	1,300,412		100.0	%	$	3,351		1.02	%
Short-term borrowings		4,341		12.3	%		4		0.37	%		7		0.0	%		—		0.00	%		7		0.0	%		—		0.00	%
Long-term borrowings		30,928		87.7	%		149		1.91	%		30,943		100.0	%		145		1.86	%		30,945		100.0	%		285		3.65	%
Total borrowings		35,269		100.0	%		153		1.72	%		30,950		100.0	%		145		1.86	%		30,952		100.0	%		285		3.65	%
Total deposits and borrowings	$	1,207,655				$	2,187		0.72	%	$	1,312,146				$	3,259		0.99	%	$	1,331,364				$	3,636		1.08	%

Third quarter 2011 average total deposits declined 9.8% from the same quarter in 2010. This decrease was mainly due to the decision to continue to reduce higher cost time deposit balances, which declined 18.5% from the same quarter last year. Time deposits declined as a percentage of the Company’s average total deposits in the most recent quarter versus the same quarter last year. 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 third quarter 2011, down significantly from the same quarter in 2010. 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.

Total brokered deposits were $516,000, compared to $742,000 at December 31, 2010, and $ 2.1 million at September 30, 2010. Brokered deposits are currently not being replaced as they mature.

At September 30, 2011, the balance of junior subordinated debentures issued in connection with our prior issuances of trust preferred securities was $30.9 million or unchanged from September 30, 2010. 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.

50

Capital Resources

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 2010 Form 10-K. The following table summarizes the capital measures of Bancorp and the Bank, respectively, at the dates listed below:

Bancorp:

	September 30, 2011			December 31, 2010			September 30, 2010			Regulatory Minimum to be “Adequately Capitalized”
										greater than or equal to
Total risk-based capital ratio		12.24	%		12.36	%		11.98	%		8.00	%
Tier 1 risk-based capital ratio		10.73	%		11.09	%		10.70	%		4.00	%
Leverage ratio		8.24	%		8.66	%		8.56	%		4.00	%

Bank:

	September 30, 2011			December 31, 2010			September 30, 2010			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		12.71	%		12.59	%		12.14	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		11.45	%		11.31	%		10.86	%		4.00	%		6.00	%
Leverage ratio		8.80	%		8.85	%		8.69	%		4.00	%		5.00	%

Bancorp’s total and Tier 1 risk-based capital ratios improved at September 30, 2011, from December 31, 2010, and September 30, 2010, while its leverage ratio remained relatively stable during this period. Similarly, all the Bank’s capital ratios strengthened. These improvements were due to management’s strategy to deleverage the Company and restructure the balance sheet to lower its risk-based capital profile. For more information, see discussion under the heading “Regulatory Agreement” below.

The total risk based capital ratios of Bancorp include $30.9 million of junior subordinated debentures, of which $27.6 million qualified as Tier 1 capital at September 30, 2011, under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, which was signed into law on July 21, 2010, Bancorp expects to continue to rely on these junior subordinated debentures as part of its regulatory capital. However, at this point, Bancorp does not expect to issue additional junior subordinated debentures as any future issued junior subordinated debentures would not qualify as Tier 1 total capital under Dodd-Frank.

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 September 30, 2010 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.

51

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 net cash, short-term and marketable assets divided by deposits. 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:

	September 30, 2011			December 31, 2010			September 30, 2010
Primary liquidity		29.0	%		22.4	%		19.4	%
Current ratio		24.2	%		24.8	%		19.4	%
Net non-core funding dependency		-1.0	%		-5.9	%		-4.1	%
Gross loans to deposits		73.5	%		77.3	%		81.1	%

At September 30, 2011, the Bank had $2.9 million in borrowings from securities sold under an agreement to repurchase with various business customers. At this same period, the Bank had no outstanding borrowings against its $49.5 million in established borrowing capacity with the FHLB, as compared to $0.9 million outstanding against its $80.6 million in established borrowing capacity at December 31, 2010 and $ 4.8 million outstanding against its $53.6 million in established borrowing capacity at September 30, 2010. 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 $10.0 million, and $15.0 million from a correspondent bank with no balance outstanding on either facility, both of which are pursuant to collateralized credit arrangements.

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 – Current Regulatory Actions” in our 2010 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 September 30, 2011, the holding company did not have any borrowing arrangements of its own.

Off-Balance Sheet Arrangements

At September 30, 2011, the Bank had commitments to extend credit of $87.2 million compared to $82.3 million at December 31, 2010 and $86.4 million at September 30, 2010. For additional information regarding off balance sheet arrangements and future financial commitments, see Note 7 “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 2010 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,

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• 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, the Company had not yet achieved these requirements. 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 78.0% of Tier 1 capital plus ALLL as of September 30, 2011, compared to 178.4% as of June 30, 2009, in the report of examination. As previously noted, the Company has demonstrated progress and is committed to achieving all the requirements of the Agreement.

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 September 30, 2011, as compared to December 31, 2010.

As stated in the annual report on Form 10-K for 2010, 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 300 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, 2010.

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 September 30, 2011, 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.

In September 2011, PremierWest Bank initiated a legal action to collect debts from Arthur Critchell Galpin, Eagle Point Developments, LLC, ACG Properties, LLC, and Eagle Point Golf Club, LLC, in the Circuit Court of the State of Oregon for Jackson County, Case No. 11-4146-E-9. The Bank’s action sought judgments against those parties and judicial foreclosure upon real estate that served as collateral for the loans. In October 2011, the defendants in the action filed counterclaims against the Bank alleging breach of fiduciary duty and fair dealing regarding the value of underlying collateral in connection with the sale of a Bank loan to an affiliate of one of the defendants and in connection with the negotiation and restructuring of loan transactions with the defendants. The defendants are seeking to have the loan sale transaction and loan documents declared void. They are also seeking compensatory and special damages.

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PremierWest Bank believes the claims of the defendants are meritless, and it plans to vigorously defend against them while pursuing its actions to collect from the defendants.

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, 2010.

Risks Related to Our Company

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 published “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, as previously mentioned. Our Bank leverage ratio as of September 30, 2011, was 8.80%. 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. 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.

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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 and our Form 8-K filed October 28, 2009.

ITEM 4. REMOVED AND RESERVED

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 Doug Biddle (incorporated by reference to Exhibit 99.1 to Form 8-K) filed October 13, 2011.
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 September 30, 2011, 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 Changes in Shareholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text.*

* 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: November 9, 2011

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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