##### Table of Contents





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, 2010



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

Commission File Number: 000-50332





LOGO

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   ̈    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 accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.



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

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 5, 2010 was 100,348,303.









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##### Table of Contents



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 |  |  | 22 | 
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 36 | 
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  |  | 36 | 
|                                                                                              | 
|Part II OTHER INFORMATION                                                                     |  |  |    | 
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  |  | 36 | 
|                                                                                              | 
|Item 1A. Risk Factors                                                                         |  |  | 36 | 
|                                                                                              | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  |  | 39 | 
|                                                                                              | 
|Item 3. Defaults Upon Senior Securities                                                       |  |  | 39 | 
|                                                                                              | 
|Item 4. Removed and Reserved                                                                  |  |  | 39 | 
|                                                                                              | 
|Item 5. Other Information                                                                     |  |  | 39 | 
|                                                                                              | 
|Item 6. Exhibits                                                                              |  |  | 40 | 
|                                                                                              | 
|SIGNATURES                                                                                    |  |  | 40 | 



1



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##### Table of Contents



PART I.
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in 000s)

(UNAUDITED)



|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | --------- | - | ---------------- | - | --------- | ----------------- |  | - | --------- | -
|ASSETS                                                                                                                                                                                           | 
|                                                                                                                                                                                                 |  |                   |          
|                                                                                                                                                                                                 |  | September 30,2010 |           |   | December 31,2009 |   |           | September 30,2009 | 
|Cash and cash equivalents:                                                                                                                                                                       |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Cash and due from banks                                                                                                                                                                          |  | $                 | 24,274    |   |                  | $ | 33,092    |                   |  | $ | 30,208    |  
|Federal funds sold                                                                                                                                                                               |  |                   | 87,378    |   |                  |   | 69,855    |                   |  |   | 86,865    |  
|Interest-bearing deposits                                                                                                                                                                        |  |                   | 7,321     |   |                  |   | 168       |                   |  |   | 17,235    |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Total cash and cash equivalents                                                                                                                                                                  |  |                   | 118,973   |   |                  |   | 103,115   |                   |  |   | 134,308   |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|                                                                                                                                                                                                 |  |                   |          
|Interest-bearing certificates of deposit (original maturities greater than 90 days)                                                                                                              |  |                   | 1,500     |   |                  |   | 50,650    |                   |  |   | 50,650    |  
|Investments:                                                                                                                                                                                     |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Investment securities available-for-sale, at fair market value                                                                                                                                   |  |                   | 163,881   |   |                  |   | 114,937   |                   |  |   | 113,860   |  
|Investment securities held-to-maturity, at amortized cost (fair value of $28,779 at 9/30/10, $43,536 at 12/31/09, and $53,095 at
9/30/09)                                                        |  |                   | 27,516    |   |                  |   | 43,384    |                   |  |   | 52,845    |  
|Investment securities - Community Reinvestment Act                                                                                                                                               |  |                   | 2,000     |   |                  |   | 4,000     |                   |  |   | 4,000     |  
|Restricted equity securities                                                                                                                                                                     |  |                   | 3,530     |   |                  |   | 3,643     |                   |  |   | 3,643     |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Total investments                                                                                                                                                                                |  |                   | 196,927   |   |                  |   | 165,964   |                   |  |   | 174,348   |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|                                                                                                                                                                                                 |  |                   |          
|Mortgage loans held-for-sale                                                                                                                                                                     |  |                   | 132       |   |                  |   | 1,731     |                   |  |   | 842       |  
|                                                                                                                                                                                                 |  |                   |          
|Loans, net of deferred loan fees                                                                                                                                                                 |  |                   | 1,034,558 |   |                  |   | 1,148,127 |                   |  |   | 1,183,386 |  
|Allowance for loan losses                                                                                                                                                                        |  |                   | (42,120   | ) |                  |   | (45,903   | )                 |  |   | (41,513   | )
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Loans, net                                                                                                                                                                                       |  |                   | 992,438   |   |                  |   | 1,102,224 |                   |  |   | 1,141,873 |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|                                                                                                                                                                                                 |  |                   |          
|Premises and equipment, net of accumulated depreciation and amortization                                                                                                                         |  |                   | 47,197    |   |                  |   | 47,812    |                   |  |   | 47,271    |  
|Core deposit intangibles, net of amortization                                                                                                                                                    |  |                   | 2,729     |   |                  |   | 3,448     |                   |  |   | 3,687     |  
|Goodwill                                                                                                                                                                                         |  |                   |          |   |                  |   |          |                   |  |   | 74,920    |  
|Other real estate owned and foreclosed assets                                                                                                                                                    |  |                   | 29,902    |   |                  |   | 24,748    |                   |  |   | 19,533    |  
|Accrued interest and other assets                                                                                                                                                                |  |                   | 34,881    |   |                  |   | 36,622    |                   |  |   | 68,118    |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|                                                                                                                                                                                                 |  |                   |          
|TOTAL ASSETS                                                                                                                                                                                     |  | $                 | 1,424,679 |   |                  | $ | 1,536,314 |                   |  | $ | 1,715,550 |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|                                                                                                                                                                                                
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                             | 
|LIABILITIES                                                                                                                                                                                      |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Deposits:                                                                                                                                                                                        |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Demand                                                                                                                                                                                           |  | $                 | 247,016   |   |                  | $ | 256,167   |                   |  | $ | 251,752   |  
|Interest-bearing demand and savings                                                                                                                                                              |  |                   | 463,154   |   |                  |   | 520,719   |                   |  |   | 542,433   |  
|Time $100,000 or greater                                                                                                                                                                         |  |                   | 217,565   |   |                  |   | 221,941   |                   |  |   | 233,923   |  
|Time less than $100,000                                                                                                                                                                          |  |                   | 349,890   |   |                  |   | 421,935   |                   |  |   | 462,470   |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Total deposits                                                                                                                                                                                   |  |                   | 1,277,625 |   |                  |   | 1,420,762 |                   |  |   | 1,490,578 |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|                                                                                                                                                                                                 |  |                   |          
|Federal Home Loan Bank borrowings                                                                                                                                                                |  |                   | 23        |   |                  |   | 28        |                   |  |   | 30        |  
|Junior subordinated debentures                                                                                                                                                                   |  |                   | 30,928    |   |                  |   | 30,928    |                   |  |   | 30,928    |  
|Accrued interest and other liabilities                                                                                                                                                           |  |                   | 16,401    |   |                  |   | 13,061    |                   |  |   | 12,931    |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Total liabilities                                                                                                                                                                                |  |                   | 1,324,977 |   |                  |   | 1,464,779 |                   |  |   | 1,534,467 |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|COMMITMENTS AND CONTINGENCIES (Note 12)                                                                                                                                                          |  |                   |           |   |                  |   |           |                   |  |   |           |  
|SHAREHOLDERS EQUITY                                                                                                                                                                             |  |                   |           |   |                  |   |           |                   |  |   |           |  
|                                                                                                                                                                                                 |  |                   |          
|Series B Preferred Stock, net of unamortized discount, no par value (liquidation preference $1,000 per share), 41,400 shares
authorized, issued and outstanding (41,400 at 12/31/09 and 9/30/09) |  |                   | 39,849    |   |                  |   | 39,561    |                   |  |   | 39,465    |  
|Common stock - no par value; 150,000,000 shares authorized; 100,348,303 shares issued and outstanding (24,771,928 at 12/31/09 and
24,766,928 at 9/30/09)                                         |  |                   | 208,247   |   |                  |   | 175,449   |                   |  |   | 175,337   |  
|Accumulated deficit                                                                                                                                                                              |  |                   | (151,496  | ) |                  |   | (144,710  | )                 |  |   | (34,155   | )
|Accumulated other comprehensive income                                                                                                                                                           |  |                   | 3,102     |   |                  |   | 1,235     |                   |  |   | 436       |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|Total shareholders equity                                                                                                                                                                       |  |                   | 99,702    |   |                  |   | 71,535    |                   |  |   | 181,083   |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                       |  | $                 | 1,424,679 |   |                  | $ | 1,536,314 |                   |  | $ | 1,715,550 |  
|                                                                                                                                                                                                 |  |                   |           |   |                  |   |           |                   |  |   |           |  

See accompanying notes.



2



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##### Table of Contents



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 30,2010          |        |   | September 30,2009         |   |        | September 30,2010 |  |   | September 30,2009 |  
|INTEREST AND DIVIDEND INCOME                                            |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|Interest and fees on loans                                              |  | $                          | 16,027 |   |                           | $ | 18,202 |                   |  | $ | 49,224            |   |  | $ | 56,771  |  
|Interest on investments:                                                |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|Taxable                                                                 |  |                            | 1,116  |   |                           |   | 651    |                   |  |   | 3,481             |   |  |   | 1,119   |  
|Nontaxable                                                              |  |                            | 49     |   |                           |   | 49     |                   |  |   | 151               |   |  |   | 201     |  
|Interest on federal funds sold                                          |  |                            | 53     |   |                           |   | 99     |                   |  |   | 126               |   |  |   | 135     |  
|Other interest and dividends                                            |  |                            | 16     |   |                           |   | 154    |                   |  |   | 114               |   |  |   | 190     |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|Total interest and dividend income                                      |  |                            | 17,261 |   |                           |   | 19,155 |                   |  |   | 53,096            |   |  |   | 58,416  |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|INTEREST EXPENSE                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|Deposits:                                                               |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|Interest-bearing demand and savings                                     |  |                            | 540    |   |                           |   | 410    |                   |  |   | 1,908             |   |  |   | 2,484   |  
|Time                                                                    |  |                            | 2,811  |   |                           |   | 4,318  |                   |  |   | 6,949             |   |  |   | 11,900  |  
|Federal funds purchased                                                 |  |                            |       |   |                           |   |       |                   |  |   |                  |   |  |   | 14      |  
|Federal Home Loan Bank advances                                         |  |                            |       |   |                           |   | 1      |                   |  |   | 1                 |   |  |   | 19      |  
|Junior subordinated debentures                                          |  |                            | 285    |   |                           |   | 449    |                   |  |   | 957               |   |  |   | 1,348   |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|Total interest expense                                                  |  |                            | 3,636  |   |                           |   | 5,178  |                   |  |   | 9,815             |   |  |   | 15,765  |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|Net interest income                                                     |  |                            | 13,625 |   |                           |   | 13,977 |                   |  |   | 43,281            |   |  |   | 42,651  |  
|                                                                        |  |                            |        |  
|LOAN LOSS PROVISION                                                     |  |                            | 1,600  |   |                           |   | 10,261 |                   |  |   | 10,050            |   |  |   | 71,351  |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|Net interest income (loss) after loan loss provision                    |  |                            | 12,025 |   |                           |   | 3,716  |                   |  |   | 33,231            |   |  |   | (28,700 | )
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|NON-INTEREST INCOME                                                     |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|Service charges on deposits accounts                                    |  |                            | 1,092  |   |                           |   | 1,396  |                   |  |   | 3,187             |   |  |   | 4,004   |  
|Mortgage banking fees                                                   |  |                            | 110    |   |                           |   | 136    |                   |  |   | 291               |   |  |   | 526     |  
|Investment brokerage and annuity fees                                   |  |                            | 340    |   |                           |   | 345    |                   |  |   | 1,047             |   |  |   | 935     |  
|Other commissions and fees                                              |  |                            | 724    |   |                           |   | 711    |                   |  |   | 2,178             |   |  |   | 1,963   |  
|Other non-interest income                                               |  |                            | 470    |   |                           |   | 135    |                   |  |   | 1,195             |   |  |   | 674     |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|Total non-interest income                                               |  |                            | 2,736  |   |                           |   | 2,723  |                   |  |   | 7,898             |   |  |   | 8,102   |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|NON-INTEREST EXPENSE                                                    |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|Salaries and employee benefits                                          |  |                            | 7,578  |   |                           |   | 7,132  |                   |  |   | 21,540            |   |  |   | 21,256  |  
|Net occupancy and equipment                                             |  |                            | 1,863  |   |                           |   | 1,903  |                   |  |   | 5,789             |   |  |   | 5,600   |  
|FDIC and state assessments                                              |  |                            | 1,166  |   |                           |   | 1,275  |                   |  |   | 3,530             |   |  |   | 3,014   |  
|Communications                                                          |  |                            | 484    |   |                           |   | 542    |                   |  |   | 1,503             |   |  |   | 1,543   |  
|Professional fees                                                       |  |                            | 731    |   |                           |   | 494    |                   |  |   | 2,061             |   |  |   | 1,594   |  
|Advertising                                                             |  |                            | 172    |   |                           |   | 167    |                   |  |   | 568               |   |  |   | 616     |  
|Net cost of operations of other real estate owned and foreclosed assets |  |                            | 1,419  |   |                           |   | 149    |                   |  |   | 4,617             |   |  |   | 768     |  
|Other non-interest expense                                              |  |                            | 2,149  |   |                           |   | 3,033  |                   |  |   | 6,440             |   |  |   | 6,445   |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|Total non-interest expense                                              |  |                            | 15,562 |   |                           |   | 14,695 |                   |  |   | 46,048            |   |  |   | 40,836  |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|LOSS BEFORE BENEFIT FOR INCOME TAXES                                    |  |                            | (801   | ) |                           |   | (8,256 | )                 |  |   | (4,919            | ) |  |   | (61,434 | )
|                                                                        |  |                            |        |  
|BENEFIT FOR INCOME TAXES                                                |  |                            |       |   |                           |   | (3,316 | )                 |  |   |                  |   |  |   | (24,901 | )
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|NET LOSS                                                                |  |                            | (801   | ) |                           |   | (4,940 | )                 |  |   | (4,919            | ) |  |   | (36,533 | )
|                                                                        |  |                            |        |  
|PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION                        |  |                            | 620    |   |                           |   | 614    |                   |  |   | 1,867             |   |  |   | 1,555   |  
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|                                                                        |  |                            |        |  
|NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                              |  | $                          | (1,421 | ) |                           | $ | (5,554 | )                 |  | $ | (6,786            | ) |  | $ | (38,088 | )
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|LOSS PER COMMON SHARE:                                                  |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|BASIC                                                                   |  | $                          | (0.01  | ) |                           | $ | (0.22  | )                 |  | $ | (0.09             | ) |  | $ | (1.54   | )
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  
|DILUTED                                                                 |  | $                          | (0.01  | ) |                           | $ | (0.22  | )                 |  | $ | (0.09             | ) |  | $ | (1.54   | )
|                                                                        |  |                            |        |   |                           |   |        |                   |  |   |                   |   |  |   |         |  

See accompanying notes.



3



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##### Table of Contents



PREMIERWEST BANCORP AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

AND COMPREHENSIVE LOSS

(Dollars in 000s, Except Share Amounts)



|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------ |  | -------------- | ------ |  | ------------ | - | ------ | ------ |  |  | ----------- |  |  | ------------------------------------ | ------- |  | ----------------------------------- | - | -------- | ------------------------ |  | - | ----------------- | - |  | - | -------- | - |  | - | -------- | -
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  | RetainedEarnings(AccumulatedDeficit) |         |  | AccumulatedOtherComprehensiveIncome |   |          | TotalShareholdersEquity |  |   | ComprehensiveLoss |  
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         | 
|                                                                                           |  | PreferredStock |        |  | Common Stock |   |        |        |  | 
|                                                                                           |  | Shares         |        |  | Amount       |   |        | Shares |  |  | Amount      |  |  |                                      |         | 
|BALANCE - DECEMBER 31, 2008                                                                |  |                |       |  |              | $ |       |        |  |  | 23,574,351  |  |  | $                                    | 168,032 |  |                                     | $ | 8,913    |                          |  | $ | 39                |   |  | $ | 176,984  |   |  |   |          |  
|Comprehensive loss:                                                                        |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|Net loss                                                                                   |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   | (146,472 | )                        |  |   |                  |   |  |   | (146,472 | ) |  | $ | (146,472 | )
|Other comprehensive income - Change in fair value of securities available-for-sale         |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   |         |                          |  |   | 787               |   |  |   | 787      |   |  |   | 787      |  
|Amortization of unrealized gains for investment securities transferred to held-to-maturity |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   |         |                          |  |   | 409               |   |  |   | 409      |   |  |   | 409      |  
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                         |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  | $ | (145,276 | )
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|Preferred stock dividend paid                                                              |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   | (1,047   | )                        |  |   |                  |   |  |   | (1,047   | ) |  |   |          |  
|Preferred stock dividend accrued                                                           |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   | (784     | )                        |  |   |                  |   |  |   | (784     | ) |  |   |          |  
|Common stock dividend (5%)                                                                 |  |                |       |  |              |   |       |        |  |  | 1,178,711   |  |  |                                      | 4,741   |  |                                     |   | (4,741   | )                        |  |   |                  |   |  |   |         |   |  |   |          |  
|Common stock cash dividend                                                                 |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   | (236     | )                        |  |   |                  |   |  |   | (236     | ) |  |   |          |  
|Cash paid for fractional shares                                                            |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   | (3       | )                        |  |   |                  |   |  |   | (3       | ) |  |   |          |  
|Stock-based compensation expense                                                           |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      | 448     |  |                                     |   |         |                          |  |   |                  |   |  |   | 448      |   |  |   |          |  
|Stock options exercised and issuance of restricted stock                                   |  |                |       |  |              |   |       |        |  |  | 18,866      |  |  |                                      | 49      |  |                                     |   |         |                          |  |   |                  |   |  |   | 49       |   |  |   |          |  
|Issuance of Series B preferred stock to U.S. Treasury, and accretion of discount           |  |                | 41,400 |  |              |   | 39,561 |        |  |  |            |  |  |                                      |        |  |                                     |   | (340     | )                        |  |   |                  |   |  |   | 39,221   |   |  |   |          |  
|Issuance of warrant to U.S. Treasury                                                       |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      | 2,179   |  |                                     |   |         |                          |  |   |                  |   |  |   | 2,179    |   |  |   |          |  
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|BALANCE - December 31, 2009                                                                |  |                | 41,400 |  |              |   | 39,561 |        |  |  | 24,771,928  |  |  |                                      | 175,449 |  |                                     |   | (144,710 | )                        |  |   | 1,235             |   |  |   | 71,535   |   |  |   |          |  
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|Comprehensive loss:                                                                        |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|Net loss                                                                                   |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   | (4,919   | )                        |  |   |                  |   |  |   | (4,919   | ) |  | $ | (4,919   | )
|Other comprehensive income - Change in fair value of securities available-for-sale         |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   |         |                          |  |   | 1,875             |   |  |   | 1,875    |   |  |   | 1,875    |  
|Amortization of unrealized gains for investment securities transferred to held-to-maturity |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   |         |                          |  |   | (8                | ) |  |   | (8       | ) |  |   | (8       | )
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                                         |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  | $ | (3,052   | )
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|Preferred stock dividend accrued                                                           |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      |        |  |                                     |   | (1,579   | )                        |  |   |                  |   |  |   | (1,579   | ) |  |   |          |  
|Stock offering                                                                             |  |                |       |  |              |   |       |        |  |  | 75,576,375  |  |  |                                      | 32,502  |  |                                     |   |         |                          |  |   |                  |   |  |   | 32,502   |   |  |   |          |  
|Stock-based compensation expense                                                           |  |                |       |  |              |   |       |        |  |  |            |  |  |                                      | 296     |  |                                     |   |         |                          |  |   |                  |   |  |   | 296      |   |  |   |          |  
|Accretion of discount from Series B preferred stock                                        |  |                |       |  |              |   | 288    |        |  |  |            |  |  |                                      |        |  |                                     |   | (288     | )                        |  |   |                  |   |  |   |         |   |  |   |          |  
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  
|BALANCE - September 30, 2010                                                               |  |                | 41,400 |  |              | $ | 39,849 |        |  |  | 100,348,303 |  |  | $                                    | 208,247 |  |                                     | $ | (151,496 | )                        |  | $ | 3,102             |   |  | $ | 99,702   |   |  |   |          |  
|                                                                                           |  |                |        |  |              |   |        |        |  |  |             |  |  |                                      |         |  |                                     |   |          |                          |  |   |                   |   |  |   |          |   |  |   |          |  

See accompanying notes.



4



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##### Table of Contents



PREMIERWEST BANCORP AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in 000s)



|                                                                                  |  |                           |          |   |                   |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                  |  | For The Nine Months Ended |         
|                                                                                  |  | September 30,2010         |          |   | September 30,2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                           |          |   |                   |   |          |  
|                                                                                  |  |                          
|Net loss                                                                          |  | $                         | (4,919   | ) |                   | $ | (36,533  | )
|Adjustments to reconcile net loss to net cash from operating activities:          |  |                           |          |   |                   |   |          |  
|Depreciation and amortization                                                     |  |                           | 2,916    |   |                   |   | 2,864    |  
|Loan loss provision                                                               |  |                           | 10,050   |   |                   |   | 71,351   |  
|Deferred income taxes                                                             |  |                           |         |   |                   |   | (16,258  | )
|Amortization of premiums and accretion of discounts on investment securities, net |  |                           | 1,696    |   |                   |   | 430      |  
|Gain on sale of investments                                                       |  |                           | (296     | ) |                   |   |         |  
|Funding of loans held-for-sale                                                    |  |                           | (13,392  | ) |                   |   | (27,024  | )
|Sale of loans held-for-sale                                                       |  |                           | 15,282   |   |                   |   | 27,015   |  
|Gain on sale of loans held-for-sale                                               |  |                           | (291     | ) |                   |   | (525     | )
|Change in BOLI value (net of benefit obligations)                                 |  |                           | (416     | ) |                   |   | (435     | )
|Stock-based compensation expense                                                  |  |                           | 296      |   |                   |   | 336      |  
|Loss (Gain) on sales of premises and equipment                                    |  |                           | 396      |   |                   |   | (58      | )
|Loss (Gain) on sale of other real estate owned and foreclosed assets              |  |                           | (1,610   | ) |                   |   | 212      |  
|Write down of other real estate owned due to impairment                           |  |                           | 3,824    |   |                   |   | 187      |  
|Write down of low income housing tax credit investment                            |  |                           | 133      |   |                   |   | 114      |  
|Changes in accrued interest receivable/payable and other assets/liabilities       |  |                           | 4,111    |   |                   |   | (8,483   | )
|                                                                                  |  |                           |          |   |                   |   |          |  
|                                                                                  |  |                          
|Net cash provided by operating activities                                         |  |                           | 17,780   |   |                   |   | 13,193   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|                                                                                  |  |                          
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                           |          |   |                   |   |          |  
|Net investment in interest-bearing certificates of deposit                        |  |                           | 49,150   |   |                   |   | (50,452  | )
|Purchase of investment securities available-for-sale                              |  |                           | (130,389 | ) |                   |   | (119,094 | )
|Proceeds from principal payments received on securities available-for-sale        |  |                           | 18,357   |   |                   |   | 1,806    |  
|Proceeds from sale of securities available-for-sale                               |  |                           | 63,668   |   |                   |   | 4,000    |  
|Purchase of investment securities held-to-maturity                                |  |                           | (1,525   | ) |                   |   | (40,752  | )
|Proceeds from principal payments received on securities held-to-maturity          |  |                           | 670      |   |                   |   | 153      |  
|Proceeds from maturities and calls of investment securities held-to-maturity      |  |                           | 18,610   |   |                   |   | 19,765   |  
|Proceeds from FHLB stock redemption                                               |  |                           | 113      |   |                   |   |         |  
|Loan originations, net                                                            |  |                           | 77,368   |   |                   |   | (1,465   | )
|Purchase of premises and equipment                                                |  |                           | (3,285   | ) |                   |   | (925     | )
|Sale or disposal of premises and equipment                                        |  |                           | 1,268    |   |                   |   | 500      |  
|Purchase of low income housing tax credit investment                              |  |                           | (287     | ) |                   |   | (911     | )
|Purchase of improvements for other real estate owned and foreclosed assets        |  |                           | (419     | ) |                   |   | (352     | )
|Proceeds from sale of other real estate owned and foreclosed assets               |  |                           | 15,419   |   |                   |   | 3,299    |  
|Cash received, net of cash paid for acquision of Wachovia branches                |  |                           |         |   |                   |   | 334,718  |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|                                                                                  |  |                          
|Net cash provided by investing activities                                         |  |                           | 108,718  |   |                   |   | 150,290  |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|                                                                                  |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                           |          |   |                   |   |          |  
|Net decrease in deposits                                                          |  |                           | (143,137 | ) |                   |   | (63,075  | )
|Net decrease in Federal Home Loan Bank borrowings                                 |  |                           | (5       | ) |                   |   | (20,012  | )
|Net decrease in Federal Funds purchased                                           |  |                           |         |   |                   |   | (25,003  | )
|Cash received from stock offerings, net of costs                                  |  |                           | 32,502   |   |                   |   |         |  
|Dividends paid on common stock                                                    |  |                           |         |   |                   |   | (236     | )
|Dividends paid on preferred stock                                                 |  |                           |         |   |                   |   | (1,047   | )
|Cash paid for fractional shares relating to stock dividend                        |  |                           |         |   |                   |   | (3       | )
|Stock options exercised                                                           |  |                           |         |   |                   |   | 49       |  
|Proceeds from issuance of preferred stock                                         |  |                           |         |   |                   |   | 41,400   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Net cash used in financing activities                                             |  |                           | (110,640 | ) |                   |   | (67,927  | )
|                                                                                  |  |                           |          |   |                   |   |          |  
|                                                                                  |  |                          
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |                           | 15,858   |   |                   |   | 95,556   |  
|                                                                                  |  |                          
|CASH AND CASH EQUIVALENTS - Beginning of the period                               |  |                           | 103,115  |   |                   |   | 38,752   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|CASH AND CASH EQUIVALENTS - End of the period                                     |  | $                         | 118,973  |   |                   | $ | 134,308  |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|                                                                                  |  |                          
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                  |  |                           |          |   |                   |   |          |  
|Cash paid for interest                                                            |  | $                         | 9,173    |   |                   | $ | 16,324   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Cash paid for taxes                                                               |  | $                         |         |   |                   | $ | 650      |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|                                                                                  |  |                          
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:            |  |                           |          |   |                   |   |          |  
|Transfers of loans to other real estate owned and foreclosed assets               |  | $                         | 22,368   |   |                   | $ | 18,456   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Increase in goodwill resulting from acquisition of Stockmans Financial Group      |  | $                         |         |   |                   | $ | 37       |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Increase in goodwill resulting from acquisition of Wachovia branches              |  | $                         |         |   |                   | $ | 4,483    |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Preferred cash dividend accrued but not yet paid                                  |  | $                         | 1,579    |   |                   | $ | 264      |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Trust preferred securities interest accrued but not yet paid                      |  | $                         | 1,465    |   |                   | $ |         |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Accretion of preferred stock discount                                             |  | $                         | 288      |   |                   | $ | 244      |  
|                                                                                  |  |                           |          |   |                   |   |          |  

See accompanying notes.



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##### Table of Contents



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. This total includes the two acquired Wachovia branches in Davis and Grass Valley, California (refer to Note 3). 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 and Yolo Counties). The Banks activities include the usual lending and deposit functions of a community-oriented
commercial bank: 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.

Effective
April 30, 2010, three existing California branches (Natomas, Roseville and South Chico) and one existing Oregon branch (Roseburg) were closed and consolidated with existing PremierWest branches in close proximity.

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 significant 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, 2009 were derived from audited financial statements and do not include all disclosures contained in the
2009 Annual Report to Shareholders. The interim consolidated financial statements should be read in conjunction with the Companys 2009 consolidated financial statements, including the notes thereto, included in the 2009 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.

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, the fair value of available-for-sale investment securities, deferred tax assets, 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, 2010, 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 2009 consolidated financial statements to conform to current year presentations. These reclassifications have no effect on
previously reported shareholders equity, net loss or loss per share.



6



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##### Table of Contents



Stock
dividends  Share and per share data in the accompanying consolidated financial statements reflect all previously declared and paid stock dividends. A 5% stock dividend was declared on January 8, 2009, and paid on
April 15, 2009. The impact of this stock dividend has been reflected in the statement of operations, statement of shareholders equity and comprehensive loss and all share and per share amounts for all periods presented. The Company did
not declare a stock dividend in the quarter ended September 30, 2010.

Cash dividends  On January 8, 2009,
the Company declared a $0.01 per share quarterly cash dividend on common stock. The dividend was paid on February 17, 2009, to PremierWest Bancorp shareholders of record as of January 30, 2009. No quarterly common stock cash dividend was
declared in the quarter ended September 30, 2010.

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. While payments have not been made since the third quarter of 2009, in order to preserve capital, the Company has continued to accrue dividends through the third quarter
of 2010. As of September 30, 2010, accrued dividends totaled approximately $2.4 million, of which approximately $785,000 was accrued in 2009.

NOTE 2  REGULATORY AGREEMENT, ECONOMIC CONDITIONS AND MANAGEMENTS PLAN

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

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

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



| |  |  | Completion of equity issuances sufficient to raise the Companys regulatory capital ratios to levels in excess of those required to be considered
Well-Capitalized under the regulatory framework for prompt corrective action except the 10.0% leverage ratio set by the Agreement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reduction of assets and liabilities with primary emphasis on reducing non-performing assets through (1) sales of other real estate owned and
foreclosed assets, (2) aggressive out-management of classified loans through unfavorable renewal pricing, charge-offs and foreclosures as appropriate, and (3) reduced emphasis on public funds deposits and corresponding reductions in
collateral investment securities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing reductions in non-interest expense levels.
| | - |  | -----------------------------------------------------



| |  |  | Evaluation of all business lines within the organization for possible gains upon disposition or significant cost-savings opportunities, as evidenced by
the Companys recent consolidation of four of its branches (see Note 1).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

On June 4, 2010, the Company entered into a Written Agreement (the Written Agreement)
with the Federal Reserve Bank of San Francisco and the DFCS, which routinely accompanies or follows an FDIC Consent Order, 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 high 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.



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

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

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

NOTE 3  ACQUISITION OF WACHOVIA BRANCHES

On July 17, 2009, PremierWest Bank acquired two Wachovia Bank branches in Northern California, located in Davis and Grass Valley. By bolstering its presence in Northern California, Management expects
the Company to increase the availability of its services to existing customers throughout Northern California and to bring a community bank competitor to the Davis and Grass Valley communities. Soon after the acquisition date, these offices and
their employees commenced operating as branch offices of PremierWest Bank. The transaction was accounted for as a business combination.

The
following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:



|                                        |  |               |         | 
|--------------------------------------- |  | ------------- | ------- | 
|(Dollars in 000s)                      |  | July 17, 2009 |        
|Fair value of assets acquired:          |  |               |         | 
|Cash                                    |  | $             | 334,718 | 
|Loans                                   |  |               | 799     | 
|Premises and equipment                  |  |               | 928     | 
|Core deposit intangible                 |  |               | 1,812   | 
|Other assets                            |  |               | 5       | 
|                                        |  |               |         | 
|Total fair value of assets acquired     |  | $             | 338,262 | 
|                                        |  |               |         | 
|                                        | 
|Fair value of liabilities assumed:      |  |               |         | 
|Deposits                                |  |               |         | 
|Demand                                  |  | $             | 3,982   | 
|Interest-bearing demand and savings     |  |               | 97,753  | 
|Time certificates                       |  |               | 240,649 | 
|                                        |  |               |         | 
|Total deposits                          |  |               | 342,384 | 
|Accrued interest                        |  |               | 361     | 
|                                        |  |               |         | 
|Total fair value of liabilities assumed |  |               | 342,745 | 
|                                        |  |               |         | 
|Goodwill                                |  | $             | 4,483   | 
|                                        |  |               |         | 

The core deposit intangible asset of $1.8 million represents the value ascribed to the long-term deposit relationships
acquired. This intangible asset is being amortized on a straight-line basis over a weighted average estimated useful life of 7.4 years. The core deposit intangible asset is not estimated to have a significant residual value. There was a negative CD
premium of $4.0 million, or -1.75% of book value. This negative premium was amortized over a weighted average estimated useful life of 11 months. The value is a result of the current all-in cost of the CD portfolio being well above the cost of
similar funding. Goodwill represents the excess of the total purchase price paid for the Wachovia branches over the fair values of the assets acquired, net of the fair value of the liabilities assumed. Goodwill has been evaluated for possible
impairment at least annually, and more frequently, if events and circumstances indicate that the asset might be impaired. Goodwill was evaluated for impairment and reduced to zero through an impairment charge on December 31, 2009.

For tax purposes only, goodwill of approximately $4.5 million from this business combination will be tax deductible and amortized over 15 years.

On October 5, 2009, the Securities and Exchange Commission granted relief to the Company, allowing it to omit certain historical and
pro-forma financial information of the two Wachovia Bank branches acquired, as required by Rule 3-05 of Regulation S-X and certain related pro-forma financial information under Article 11 of Regulation S-X. After making every reasonable effort to do
so, it was determined to be impractical for the Company to provide this information as separate, audited financial statements of the acquired branches were never prepared and the acquired branches were not operated or accounted for as distinct,
stand-alone entities.



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NOTE 4  FAIR VALUE
MEASUREMENTS

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards Fair Value
Measurements. This standard defines fair value, 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. 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:



|                                                 |  |                         |         |  |                                                              |   |   |                                  |  |   |                                         |  |  |   |   | 
|------------------------------------------------ |  | ----------------------- | ------- |  | ------------------------------------------------------------ | - | - | -------------------------------- |  | - | --------------------------------------- |  |  | - | - | 
|                                                 |  | Fair Value Measurements |        
|(Dollars in 000s)                               | 
|                                                 |  | At 9/30/10 Using        |        
|Description                                      |  | Fair Value9/30/2010     |         |  | Quoted Prices inActive 
Markets forIdentical Assets(Level 1) |   |   | Other ObservableInputs (Level 2) |  |   | SignificantUnobservableInputs (Level 3) | 
|Available-for-sale securities:                   |  |                         |         |  |                                                              |   |   |                                  |  |   |                                         |  |  |   |   | 
|Mortgage-backed securities                       |  | $                       | 6,355   |  |                                                              | $ |  |                                  |  | $ | 6,355                                   |  |  | $ |  | 
|Collaterialized mortgage obligations             |  |                         | 144,600 |  |                                                              |   |  |                                  |  |   | 144,600                                 |  |  |   |  | 
|U.S. Government and agency securities            |  |                         | 6,431   |  |                                                              |   |  |                                  |  |   | 6,431                                   |  |  |   |  | 
|Obligations of states and political subdivisions |  |                         | 6,495   |  |                                                              |   |  |                                  |  |   | 6,495                                   |  |  |   |  | 
|                                                 |  |                         |         |  |                                                              |   |   |                                  |  |   |                                         |  |  |   |   | 
|Total assets measured at fair value              |  | $                       | 163,881 |  |                                                              | $ |  |                                  |  | $ | 163,881                                 |  |  | $ |  | 
|                                                 |  |                         |         |  |                                                              |   |   |                                  |  |   |                                         |  |  |   |   | 
|                                                 | 
|(Dollars in 000s)                               |  | Fair Value Measurements |        
|                                                 |  | At 12/31/09 Using       |        
|Description                                      |  | Fair Value12/31/2009    |         |  | Quoted Prices
inActive Markets forIdentical Assets(Level 1)  |   |   | Other ObservableInputs (Level 2) |  |   | SignificantUnobservableInputs (Level 3) | 
|Available-for-sale securities:                   |  |                         |         |  |                                                              |   |   |                                  |  |   |                                         |  |  |   |   | 
|Mortgage-backed securities                       |  | $                       | 4,302   |  |                                                              | $ |  |                                  |  | $ | 4,302                                   |  |  | $ |  | 
|Collaterialized mortgage obligations             |  |                         | 76,956  |  |                                                              |   |  |                                  |  |   | 76,956                                  |  |  |   |  | 
|U.S. Government and agency securities            |  |                         | 27,794  |  |                                                              |   |  |                                  |  |   | 27,794                                  |  |  |   |  | 
|Obligations of states and political subdivisions |  |                         | 5,885   |  |                                                              |   |  |                                  |  |   | 5,885                                   |  |  |   |  | 
|                                                 |  |                         |         |  |                                                              |   |   |                                  |  |   |                                         |  |  |   |   | 
|Total assets measured at fair value              |  | $                       | 114,937 |  |                                                              | $ |  |                                  |  | $ | 114,937                                 |  |  | $ |  | 
|                                                 |  |                         |         |  |                                                              |   |   |                                  |  |   |                                         |  |  |   |   | 



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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. 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 $29.9 million and $24.7 million in OREO at September 30, 2010 and
December 31, 2009, respectively.



10



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The following table presents the fair
value measurement for non-recurring assets as of September 30, 2010 and December 31, 2009, 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                    |       
|                                                        |  | For the Nine Months Ended 9/30/10 Using    |       
|Description                                             |  | Fair Value9/30/2010                        |        |  | Quoted Prices inActive
Marketsfor IdenticalAssets (Level 1) |   |   | Other ObservableInputs (Level 2) |  |   | SignificantUnobservableInputs (Level 3) |  |  | Total periodgains (losses)included inearnings |       
|Other real estate owned and foreclosed assets           |  | $                                          | 29,902 |  |                                                             | $ |  |                                  |  | $ |                                        |  |  | $                                             | 29,902 |  |  | $ | (2,214   | )
|Loans measured for impairment, net of specific reserves |  |                                            | 41,760 |  |                                                             |   |  |                                  |  |   |                                        |  |  |                                               | 41,760 |  |  |   | (13,833  | )
|                                                        |  |                                            |        |  |                                                             |   |   |                                  |  |   |                                         |  |  |                                               |        |  |  |   |          |  
|Total impaired assets measured at fair value            |  | $                                          | 71,662 |  |                                                             |   |  |                                  |  |   |                                        |  |  | $                                             | 71,662 |  |  | $ | (16,047  | )
|                                                        |  |                                            |        |  |                                                             |   |   |                                  |  |   |                                         |  |  |                                               |        |  |  |   |          |  
|                                                        | 
|(Dollars in 000s)                                      |  | Fair Value Measurements                    |       
|                                                        |  | For the Twelve Months Ended 12/31/09 Using |       
|Description                                             |  | Fair Value12/31/2009                       |        |  | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |   |   | Other ObservableInputs (Level 2) |  |   | SignificantUnobservableInputs (Level 3) |  |  | Total periodgains (losses)included inearnings |       
|Goodwill                                                |  | $                                          |       |  |                                                             | $ |  |                                  |  | $ |                                        |  |  | $                                             |       |  |  | $ | (74,920  | )
|Other real estate owned and foreclosed assets           |  |                                            | 24,748 |  |                                                             |   |  |                                  |  |   |                                        |  |  |                                               | 24,748 |  |  |   | (1,507   | )
|Loans measured for impairment, net of specific reserves |  |                                            | 50,561 |  |                                                             |   |  |                                  |  |   |                                        |  |  |                                               | 50,561 |  |  |   | (59,285  | )
|                                                        |  |                                            |        |  |                                                             |   |   |                                  |  |   |                                         |  |  |                                               |        |  |  |   |          |  
|Total impaired assets measured at fair value            |  | $                                          | 75,309 |  |                                                             | $ |  |                                  |  | $ |                                        |  |  | $                                             | 75,309 |  |  | $ | (135,712 | )
|                                                        |  |                                            |        |  |                                                             |   |   |                                  |  |   |                                         |  |  |                                               |        |  |  |   |          |  

When goodwill exists, the Company performs a goodwill impairment analysis on an annual basis as of December 31 and on
an interim basis when events or circumstances suggest impairment may potentially arise. A significant amount of judgment is required in determining if indications of impairment have occurred including, but not limited to, a sustained and significant
decline in the stock price and market capitalization of the Company, a significant decline in the future cash flows expected by the Company, an adverse regulatory action, a significant adverse change in the Companys business operating
environment and other events.

The Company recorded a goodwill impairment charge of $74.9 million at December 31, 2009, reducing goodwill
on the balance sheet to zero.



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As of September 30, 2010 and
December 31, 2009, 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 
30,2010 |        |   | As of December 31,2009 |  
|                                                                               |  | CarryingValue            |        |   | CarryingValue          |  
|Impaired loans with charge-offs loan-to-date (1)                               |  | $                        | 28,818 |   |                        | $ | 36,624 |  
|Impaired loans with specific reserves                                          |  |                          | 18,637 |   |                        |   | 15,568 |  
|Impaired loans with both specific reserves and charge-offs loan-to-date (1)    |  |                          | 1,498  |   |                        |   | 6,088  |  
|                                                                               |  |                          |        |   |                        |   |        |  
|Subtotal impaired loans with specific reserves and/or charge-offs loan-to-date |  |                          | 48,953 |   |                        |   | 58,280 |  
|Specific reserves associated with impaired loans                               |  |                          | (7,193 | ) |                        |   | (7,719 | )
|                                                                               |  |                          |        |   |                        |   |        |  
|Total loans measured for impairment, net of specific reserves                  |  | $                        | 41,760 |   |                        | $ | 50,561 |  
|                                                                               |  |                          |        |   |                        |   |        |  
|                                                                               |  |                         
|Impaired loans without charge-offs or specific reserves                        |  |                          | 66,150 |   |                        |   | 45,637 |  



|(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.

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 The carrying amounts of federal funds purchased, borrowings under repurchase agreements 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.



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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 non-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.

The estimated fair values of the Banks significant on-balance sheet financial instruments at September 30, 2010, and December 31, 2009, were as follows:



|                                                                                    |  |                          |           |  |                         |   |           |               |  |   |                     |  |  |   |           | 
|----------------------------------------------------------------------------------- |  | ------------------------ | --------- |  | ----------------------- | - | --------- | ------------- |  | - | ------------------- |  |  | - | --------- | 
|(Dollars in 000s)                                                                  |  | As of September 30, 2010 |           |  | As of December 31, 2009 |  
|                                                                                    |  | CarryingValue            |           |  | EstimatedFair Value     |   |           | CarryingValue |  |   | EstimatedFair Value | 
|Financial assets:                                                                   |  |                          |           |  |                         |   |           |               |  |   |                     |  |  |   |           | 
|Cash and cash equivalents                                                           |  | $                        | 118,973   |  |                         | $ | 118,973   |               |  | $ | 103,115             |  |  | $ | 103,115   | 
|Interest-bearing certificates of deposit (original maturities greater than 90 days) |  | $                        | 1,500     |  |                         | $ | 1,500     |               |  | $ | 50,650              |  |  | $ | 50,650    | 
|Investment securities available-for-sale                                            |  | $                        | 163,881   |  |                         | $ | 163,881   |               |  | $ | 114,937             |  |  | $ | 114,937   | 
|Investment securities held-to-maturity                                              |  | $                        | 27,516    |  |                         | $ | 28,779    |               |  | $ | 43,384              |  |  | $ | 43,536    | 
|Investment securities - Community Reinvestment Act                                  |  | $                        | 2,000     |  |                         | $ | 2,000     |               |  | $ | 4,000               |  |  | $ | 4,000     | 
|Restricted equity investments                                                       |  | $                        | 3,530     |  |                         | $ | 3,530     |               |  | $ | 3,643               |  |  | $ | 3,643     | 
|Loans held-for-sale                                                                 |  | $                        | 132       |  |                         | $ | 132       |               |  | $ | 1,731               |  |  | $ | 1,731     | 
|Loans, net                                                                          |  | $                        | 992,438   |  |                         | $ | 947,339   |               |  | $ | 1,102,224           |  |  | $ | 1,038,580 | 
|                                                                                    |  |                          |           | 
|Financial liabilities:                                                              |  |                          |           |  |                         |   |           |               |  |   |                     |  |  |   |           | 
|Deposits                                                                            |  | $                        | 1,277,625 |  |                         | $ | 1,287,237 |               |  | $ | 1,420,762           |  |  | $ | 1,429,500 | 
|FHLB borrowings                                                                     |  | $                        | 23        |  |                         | $ | 23        |               |  | $ | 28                  |  |  | $ | 28        | 
|Junior subordinated debentures                                                      |  | $                        | 30,928    |  |                         | $ | 17,122    |               |  | $ | 30,928              |  |  | $ | 7,132     | 

NOTE 5  STOCK-BASED
COMPENSATION

At September 30, 2010, PremierWest Bancorp had one active equity incentive plan  the 2002 Stock Incentive Plan
(2002 Plan). The 2002 Plan was initially established in May 2002 and approved by shareholders. The 2002 Plan was amended and restated in May 2005 to allow for the issuance of restricted stock grants in addition to stock options. The 2002
Plan was also amended and restated in May 2007 to increase the number of shares available for issuance under the plan by 1,000,000 shares. Both amendments were approved by shareholders. The amended and restated 2002 Plan authorizes the issuance of
up to 2,140,123 shares of stock, of which 1,234,098 shares were available for issuance at September 30, 2010.

The amended and restated
2002 Plan allows for stock options to be granted at an exercise price of not less than the fair market 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, 2010, stock option activity was as follows:



|                                      |  |                |         |   |                               |   |      |                                                  |  |  |                                        |  |  |   |   | 
|------------------------------------- |  | -------------- | ------- | - | ----------------------------- | - | ---- | ------------------------------------------------ |  |  | -------------------------------------- |  |  | - | - | 
|                                      |  | NumberofShares |         |   | Weighted AverageExercisePrice |   |      | Weighted AverageRemainingContractual Term(Years) |  |  | AggregateIntrinsic Value(in thousands) | 
|Stock options outstanding, 12/31/2009 |  |                | 934,076 |   |                               | $ | 9.16 |                                                  |  |  |                                        |  |  |   |   | 
|Issued                                |  |                | 2,000   |   |                               | $ | 1.42 |                                                  |  |  |                                        |  |  |   |   | 
|Forfeited                             |  |                | (30,051 | ) |                               | $ | 8.82 |                                                  |  |  |                                        |  |  |   |   | 
|                                      |  |                |         |   |                               |   |      |                                                  |  |  |                                        |  |  |   |   | 
|Stock options outstanding, 9/30/2010  |  |                | 906,025 |   |                               | $ | 9.15 |                                                  |  |  | 5.22                                   |  |  | $ |  | 
|                                      |  |                |         |   |                               |   |      |                                                  |  |  |                                        |  |  |   |   | 
|Stock options exercisable, 9/30/2010  |  |                | 597,553 |   |                               | $ | 8.74 |                                                  |  |  | 4.18                                   |  |  | $ |  | 
|                                      |  |                |         |   |                               |   |      |                                                  |  |  |                                        |  |  |   |   | 



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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 during the third quarter of 2010 or 2009. The weighted-average grant date fair value of options granted during the
nine-month period ended September 30, 2010 was $0.91.

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 three months and nine months ended September 30, 2010 and September 30, 2009, respectively.

Stock-based compensation expense
recognized under the standard was $96,000 with a related tax benefit of $38,400 for the quarter ended September 30, 2010, compared to stock-based compensation expense of $112,000, with a related tax benefit of $44,800, for the quarter ended
September 30, 2009. At September 30, 2010, unrecognized stock-based compensation expense totaled $616,098 and will be expensed over a weighted-average period of approximately 2.5 years.

Stock-based compensation expense recognized under the standard was $296,000 with a related tax benefit of $118,400 for the nine months ended
September 30, 2010, compared to stock-based compensation expense of $336,000 with a related tax benefit of $134,100, for the nine months ended September 30, 2009.



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NOTE 6 - INVESTMENT SECURITIES



|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|--------------------------------------------------------------------------------------------- |  | ------------------ | ------- |  | -------------------- | - | ----- | --------------------- |  | - | ------------------ | - |  | - | ------- | 
|Investment securities at September 30, 2010 and December 31, 2009 consisted of the following: | 
|(Dollars in 000s)                                                                            | 
|                                                                                              |  | September 30, 2010 |        
|                                                                                              |  | Amortizedcost      |         |  | Grossunrealizedgains |   |       | Grossunrealizedlosses |  |   | Estimatedfairvalue |  
|Available-for-sale:                                                                           |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|Mortgage-backed securities and collateralized mortgage obligations                            |  | $                  | 148,308 |  |                      | $ | 2,773 |                       |  | $ | (126               | ) |  | $ | 150,955 | 
|U.S. Government and agency securities                                                         |  |                    | 6,485   |  |                      |   | 13    |                       |  |   | (67                | ) |  |   | 6,431   | 
|Obligations of states and political subdivisions                                              |  |                    | 6,018   |  |                      |   | 477   |                       |  |   |                   |   |  |   | 6,495   | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              |  |                    |         | 
|Total                                                                                         |  | $                  | 160,811 |  |                      | $ | 3,263 |                       |  | $ | (193               | ) |  | $ | 163,881 | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              |  |                    |         | 
|Held-to-maturity:                                                                             |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|Mortgage-backed securities and collateralized mortgage obligations                            |  | $                  | 5,123   |  |                      | $ | 159   |                       |  | $ |                   |   |  | $ | 5,282   | 
|U.S. Government and agency securities                                                         |  |                    | 12,175  |  |                      |   | 495   |                       |  |   |                   |   |  |   | 12,670  | 
|Obligations of states and political subdivisions                                              |  |                    | 10,218  |  |                      |   | 616   |                       |  |   | (7                 | ) |  |   | 10,827  | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              |  |                    |         | 
|Total                                                                                         |  | $                  | 27,516  |  |                      | $ | 1,270 |                       |  | $ | (7                 | ) |  | $ | 28,779  | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              |  |                    |         | 
|Investment securities - Other Community Reinvestment Act                                      |  | $                  | 2,000   |  |                      | $ |      |                       |  | $ |                   |   |  | $ | 2,000   | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|Restricted equity securities                                                                  |  | $                  | 3,530   |  |                      | $ |      |                       |  | $ |                   |   |  | $ | 3,530   | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              | 
|                                                                                              |  | December 31, 2009  |        
|                                                                                              |  | Amortizedcost      |         |  | Grossunrealizedgains |   |       | Grossunrealizedlosses |  |   | Estimatedfairvalue |  
|Available-for-sale:                                                                           |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|Mortgage-backed securities and collateralized mortgage obligations                            |  | $                  | 80,039  |  |                      | $ | 1,248 |                       |  | $ | (29                | ) |  | $ | 81,258  | 
|U.S. Government and agency securities                                                         |  |                    | 27,661  |  |                      |   | 133   |                       |  |   |                   |   |  |   | 27,794  | 
|Obligations of states and political subdivisions                                              |  |                    | 6,044   |  |                      |   |      |                       |  |   | (159               | ) |  |   | 5,885   | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              |  |                    |         | 
|Total                                                                                         |  | $                  | 113,744 |  |                      | $ | 1,381 |                       |  | $ | (188               | ) |  | $ | 114,937 | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              |  |                    |         | 
|Held-to-maturity:                                                                             |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|Mortgage-backed securities and collateralized mortgage obligations                            |  | $                  | 5,807   |  |                      | $ | 90    |                       |  | $ | (64                | ) |  | $ | 5,833   | 
|U.S. Government and agency securities                                                         |  |                    | 28,238  |  |                      |   | 208   |                       |  |   | (47                | ) |  |   | 28,399  | 
|Obligations of states and political subdivisions                                              |  |                    | 9,339   |  |                      |   | 111   |                       |  |   | (146               | ) |  |   | 9,304   | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              |  |                    |         | 
|Total                                                                                         |  | $                  | 43,384  |  |                      | $ | 409   |                       |  | $ | (257               | ) |  | $ | 43,536  | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              |  |                    |         | 
|Investment securities - Other Community Reinvestment Act                                      |  | $                  | 4,000   |  |                      | $ |      |                       |  | $ |                   |   |  | $ | 4,000   | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 
|                                                                                              |  |                    |         | 
|Restricted equity securities                                                                  |  | $                  | 3,643   |  |                      | $ |      |                       |  | $ |                   |   |  | $ | 3,643   | 
|                                                                                              |  |                    |         |  |                      |   |       |                       |  |   |                    |   |  |   |         | 



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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, 2010. Of these
amounts, 11 available-for-sale comprised the less than 12 months category, and 4 held-to-maturity investments comprised the 12 months or more category.



|                                                                 |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |     |   |                  |   |        |  |  |   |      |  
|---------------------------------------------------------------- |  | ------------------- | ------ |  | ----------------- | - | ---- | --------- |  | - | ---------------- |  |  | --------- | --- | - | ---------------- | - | ------ |  |  | - | ---- | -
|(Dollars in 000s)                                               | 
|                                                                 |  | Less than 12 months |        |  | 12 months or more |   |      | Total     | 
|At September 30, 2010                                            |  | FairValue           |        |  | UnrealizedLosses  |   |      | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |   | UnrealizedLosses |  
|Available-for-sale:                                              |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |     |   |                  |   |        |  |  |   |      |  
|Mortgage-back securities and collateralized mortgage obligations |  | $                   | 20,342 |  |                   | $ | (126 | )         |  | $ | 2                |  |  | $         |    |   |                  | $ | 20,344 |  |  | $ | (126 | )
|U.S. Government and agency securities                            |  |                     | 3,414  |  |                   |   | (67  | )         |  |   |                 |  |  |           |    |   |                  |   | 3,414  |  |  |   | (67  | )
|Held-to-maturity:                                                |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |     |   |                  |   |        |  |  |   |      |  
|Obligations of state and political subdivisions                  |  |                     |       |  |                   |   |     |           |  |   | 553              |  |  |           | (7  | ) |                  |   | 553    |  |  |   | (7   | )
|                                                                 |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |     |   |                  |   |        |  |  |   |      |  
|                                                                 |  |                     |        |  |                   |  
|                                                                 |  | $                   | 23,756 |  |                   | $ | (193 | )         |  | $ | 555              |  |  | $         | (7  | ) |                  | $ | 24,311 |  |  | $ | (200 | )
|                                                                 |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |     |   |                  |   |        |  |  |   |      |  
|                                                                 |  |                     |       
|                                                                 |  | Less than 12 months |        |  | 12 months or more |   |      | Total     | 
|At December 31, 2009                                             |  | FairValue           |        |  | UnrealizedLosses  |   |      | FairValue |  |   | UnrealizedLosses |  |  | FairValue |     |   | UnrealizedLosses |  
|Available-for-sale:                                              |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |     |   |                  |   |        |  |  |   |      |  
|Mortgage-back securities and collateralized mortgage obligations |  | $                   | 6,938  |  |                   | $ | (29  | )         |  | $ |                 |  |  | $         |    |   |                  | $ | 6,938  |  |  | $ | (29  | )
|Obligations of state and political subdivisions                  |  |                     | 4,830  |  |                   |   | (159 | )         |  |   |                 |  |  |           |    |   |                  |   | 4,830  |  |  |   | (159 | )
|Held-to-maturity:                                                |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |     |   |                  |   |        |  |  |   |      |  
|Mortgage-back securities and collateralized mortgage obligations |  | $                   | 4,103  |  |                   | $ | (64  | )         |  | $ |                 |  |  | $         |    |   |                  | $ | 4,103  |  |  | $ | (64  | )
|U.S. Government and agency securities                            |  |                     | 7,953  |  |                   |   | (47  | )         |  |   |                 |  |  |           |    |   |                  |   | 7,953  |  |  |   | (47  | )
|Obligations of state and political subdivisions                  |  |                     | 3,421  |  |                   |   | (132 | )         |  |   | 802              |  |  |           | (14 | ) |                  |   | 4,223  |  |  |   | (146 | )
|                                                                 |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |     |   |                  |   |        |  |  |   |      |  
|                                                                 |  |                     |        |  |                   |  
|                                                                 |  | $                   | 27,245 |  |                   | $ | (431 | )         |  | $ | 802              |  |  | $         | (14 | ) |                  | $ | 28,047 |  |  | $ | (445 | )
|                                                                 |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |     |   |                  |   |        |  |  |   |      |  

Substantially all unrealized losses reflected above were the result of changes in interest rates subsequent to the purchase
of the securities. The unrealized losses on these investments 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, 2010, 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, 2010                  | 
|(Dollars in 000s)                     | 
|                                       |  | Available-for-sale |         |  | Held-to-maturity    |  
|                                       |  | AmortizedCost      |         |  | EstimatedFair Value |   |         | AmortizedCost |  |   | EstimatedFair Value | 
|Due in one year or less                |  | $                  | 1,040   |  |                     | $ | 1,065   |               |  | $ | 2,104               |  |  | $ | 2,124  | 
|Due after one year through five years  |  |                    | 6,485   |  |                     |   | 6,431   |               |  |   | 12,194              |  |  |   | 12,705 | 
|Due after five years through ten years |  |                    | 3,847   |  |                     |   | 4,009   |               |  |   | 2,696               |  |  |   | 2,847  | 
|Due after ten years                    |  |                    | 149,439 |  |                     |   | 152,376 |               |  |   | 10,522              |  |  |   | 11,103 | 
|                                       |  |                    |         |  |                     |   |         |               |  |   |                     |  |  |   |        | 
|                                       |  |                    |         | 
|                                       |  | $                  | 160,811 |  |                     | $ | 163,881 |               |  | $ | 27,516              |  |  | $ | 28,779 | 
|                                       |  |                    |         |  |                     |   |         |               |  |   |                     |  |  |   |        | 

At September 30, 2010, investment securities with an estimated fair market value of $191.1 million were pledged to
secure public deposits, certain nonpublic deposits and borrowings.

As required of all members of the FHLB system, the Company maintains
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



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entity in the United States, is made up of 12 regional banks, including the FHLB of Seattle. 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 three and nine month periods ended September 30, 2010. 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, 2010, and believes that it will ultimately recover the par value of its investment in this
stock.

NOTE 7  LOANS, NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES

Loans as of September 30, 2010 and December 31, 2009 consisted of the following:



|                                                      |  |                    |           |   |                   |   |           |  
|----------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | -
|(Dollars in 000s)                                    |  | September 30, 2010 |           |   | December 31, 2009 |  
|Real estate-commercial                                |  | $                  | 574,657   |   |                   | $ | 564,016   |  
|Real estate-construction                              |  |                    | 138,685   |   |                   |   | 211,732   |  
|Real estate-residential                               |  |                    | 31,141    |   |                   |   | 31,991    |  
|Commercial                                            |  |                    | 167,627   |   |                   |   | 209,538   |  
|Agricultural                                          |  |                    | 41,309    |   |                   |   | 43,418    |  
|Consumer                                              |  |                    | 80,740    |   |                   |   | 81,575    |  
|Overdrafts                                            |  |                    | 325       |   |                   |   | 4,929     |  
|Other                                                 |  |                    | 1,595     |   |                   |   | 1,828     |  
|                                                      |  |                    |           |   |                   |   |           |  
|Gross loans                                           |  |                    | 1,036,079 |   |                   |   | 1,149,027 |  
|                                                      |  |                   
|Less: allowance for loan losses                       |  |                    | (42,120   | ) |                   |   | (45,903   | )
|Less: deferred fees and restructured loan concessions |  |                    | (1,521    | ) |                   |   | (900      | )
|                                                      |  |                    |           |   |                   |   |           |  
|Loans, net                                            |  | $                  | 992,438   |   |                   | $ | 1,102,224 |  
|                                                      |  |                    |           |   |                   |   |           |  

Transactions in the allowance for loan losses for the nine months
ended September 30, 2010 and September 30, 2009 were as follows:



|                                 |  |                    |         |   |                    |   |         |  
|-------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | -
|(Dollars in 000s)               |  | September 30, 2010 |         |   | September 30, 2009 |  
|BALANCE, beginning of the period |  | $                  | 45,903  |   |                    | $ | 17,157  |  
|Loans charged-off                |  |                    | (17,791 | ) |                    |   | (47,969 | )
|Loan recoveries                  |  |                    | 4,877   |   |                    |   | 974     |  
|Restructured loan concessions    |  |                    | (919    | ) |                    |   |        |  
|Loan loss provision              |  |                    | 10,050  |   |                    |   | 71,351  |  
|                                 |  |                    |         |   |                    |   |         |  
|                                 |  |                   
|BALANCE, end of the period       |  | $                  | 42,120  |   |                    | $ | 41,513  |  
|                                 |  |                    |         |   |                    |   |         |  

The following table summarizes non-performing assets as of
September 30, 2010 and December 31, 2009:



|                                                      |  |                    |         |   |                   |   |         |  
|----------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|(Dollars in 000s)                                    |  | September 30, 2010 |         |   | December 31, 2009 |  
|Non-accrual loans                                     |  | $                  | 114,990 |   |                   | $ | 98,497  |  
|Loans past due greater than 90 days on accrual status |  |                    | 113     |   |                   |   | 5,420   |  
|                                                      |  |                    |         |   |                   |   |         |  
|Total non-performing loans                            |  |                    | 115,103 |   |                   |   | 103,917 |  
|                                                      |  |                   
|Other real estate owned and foreclosed assets         |  |                    | 29,902  |   |                   |   | 24,748  |  
|                                                      |  |                    |         |   |                   |   |         |  
|Total non-performing assets                           |  | $                  | 145,005 |   |                   | $ | 128,665 |  
|                                                      |  |                    |         |   |                   |   |         |  
|Non-performing loans to gross loans                   |  |                    | 11.11   | % |                   |   | 9.04    | %
|                                                      |  |                    |         |   |                   |   |         |  
|Non-performing assets to total assets                 |  |                    | 10.18   | % |                   |   | 8.37    | %
|                                                      |  |                    |         |   |                   |   |         |  

In some instances the Company has modified or restructured loans to amend the interest rate and/or extend the maturity.
Through September 30, 2010, any such amendments have generally been consistent with the terms of newly booked loans reflecting current standards for amortization and interest rate and do not represent concessions to such borrowers. In those
instances where concessions have been granted meeting the criteria for a troubled debt restructuring (TDR), the related loans have been recorded as TDRs and placed on non-accrual status. TDRs recorded by the Company at
September 30, 2010, totaled approximately $34.3 million and were comprised of 18 loans.

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. During the nine months ended
September 30, 2010, the Company complied with the mandated five percent annual write-down of



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other real estate owned values in response to regulatory interpretation by the state banking regulators. Subsequent to September 30, 2010 the State of Oregon issued a proposal that
would effectively permit financial institutions subject to oversight by the State of Oregon to initiate the five percent annual write-down of other real estate owned at any time during the initial year as well as each subsequent twelve month period
following the foreclosure date. This proposal represents a return to the procedures generally utilized by Oregon-based banks prior to the re-interpretation and remains subject to legislative approval.

The weighted average recorded investment in impaired loans was $117.2 million and $99.7 million for the three months ended September 30, 2010, and
September 30, 2009, respectively; and $112.4 million and $90.8 million for the nine months ended September 30, 2010 and September 30, 2009, respectively.

NOTE 8  GOODWILL

When goodwill exists, the Company performs a goodwill impairment
analysis on an annual basis as of December 31 and on an interim basis when events or circumstances suggest impairment may potentially arise. A significant amount of judgment is required in determining if indications of impairment have occurred
including, but not limited to, a sustained and significant decline in the stock price and market capitalization of the Company, a significant decline in the future cash flows expected by the Company, an adverse regulatory action, a significant
adverse change in the Companys business operating environment and other events.

At December 31, 2009, the Company determined that
a number of factors suggested that goodwill impairment might exist and, accordingly engaged an independent third-party valuation consultant to assist management in performing an impairment analysis as had been done as of September 30,
2009, June 30, 2009, March 31, 2009 and December 31, 2008.

The Company recorded a goodwill impairment charge of
$74.9 million at December 31, 2009, reducing goodwill on the balance sheet to zero. The goodwill impairment charge had no effect on the Companys cash balances, liquidity or regulatory capital ratios.

NOTE 9  LINE OF CREDIT AND OTHER BORROWINGS

The Bank had long-term borrowings outstanding with the FHLB totaling approximately $23,000 and $28,000 as of September 30, 2010 and December 31, 2009, respectively. The Bank makes monthly
principal and interest payments on the long-term borrowing, which matures by 2014 and bears a fixed interest rate of 6.53%. The Bank has the ability to participate 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, 2010 and December 31, 2009, the Bank had no outstanding CMA borrowings. All outstanding
borrowings with the FHLB are collateralized as provided for under the Advances, Security and Deposit Agreement between the Bank and the FHLB and include the Banks FHLB stock and any funds or investment securities held by the FHLB that are not
otherwise pledged for the benefit of others. In addition, certain qualifying loans totaling approximately $30.5 million were pledged with the Federal Reserve Bank to support the Banks outstanding advances and provided for an additional
available borrowing capacity of approximately $13.1 million as of September 30, 2010.

NOTE 10  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. Following are the terms of the junior subordinated debentures as of September 30, 2010.



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|                               |  |            |              |  |              |   |            |      |  |  |              |       |  |                |               |  |  |  |               | 
|------------------------------ |  | ---------- | ------------ |  | ------------ | - | ---------- | ---- |  |  | ------------ | ----- |  | -------------- | ------------- |  |  |  | ------------- | 
|Trust Name                     |  | Issue Date |              |  | IssuedAmount |   |            | Rate |  |  | MaturityDate |       |  | RedemptionDate |              
|PremierWest Statutory Trust I  |  |            | December2004 |  |              | $ | 7,732,000  |      |  |  | LIBOR + 1.75 | % (1) |  |                | December2034  |  |  |  | December2009  | 
|                               |  |            |              |  |             
|PremierWest Statutory Trust II |  |            | December2004 |  |              |   | 7,732,000  |      |  |  | LIBOR + 1.79 | % (2) |  |                | March2035     |  |  |  | March2010     | 
|                               |  |            |              |  |             
|Stockmans Financial Trust I    |  |            | August2005   |  |              |   | 15,464,000 |      |  |  | LIBOR + 1.42 | % (3) |  |                | September2035 |  |  |  | September2010 | 
|                               |  |            |              |  |              |   |            |      |  |  |              |       |  |                |               |  |  |  |               | 
|                               |  |            |              |  |              | $ | 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 LIBOR plus 1.75%,
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 LIBOR plus 1.79%,
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 LIBOR plus 1.42%,
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 recent 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 $1.5 million as of September 30, 2010.

NOTE 11  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 1,090,385 shares of the Companys common stock, no par
value per share, at an exercise price of $5.70 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 Agreement). The 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 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.

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



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While payments have not been made for
four dividend periods (since the third quarter of 2009), in order to preserve capital, the Company has continued to accrue dividends through the third quarter of 2010. As of September 30, 2010, accrued and unpaid dividends totaled approximately
$2.4 million.

NOTE 12  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, 2010, the Company had a total of $86.4 million of unfunded loan commitments consisting of $83.0
million of commitments to extend credit to customers and $3.1 million of standby letters related to extensions of credit. The Company also had approximately $290,000 of other unsecured lines of credit related to overdraft protection for demand
deposit accounts.

The Company has been named as a defendant in a suit filed in California that alleges lender liability. Management believes
that the suit lacks merit and has begun the process of contesting the action. Accordingly, no reserve for loss has been established.

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 13  BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE

The Companys basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders (net
income (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 earnings (loss) per common share is computed similar to basic earnings (loss) per common share except that the numerator is equal to net income (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, 2010 and 2009.



|                                          |  |      |             |  |      |  |            | 
|----------------------------------------- |  | ---- | ----------- |  | ---- |  | ---------- | 
|Three months ended September 30:          |  | 2010 |             |  | 2009 | 
|Weighted average number of common shares: |  |      |             |  |      |  |            | 
|Average shares outstanding-basic          |  |      | 100,348,303 |  |      |  | 24,766,928 | 
|Average shares outstanding-diluted        |  |      | 100,348,303 |  |      |  | 24,766,928 | 
|                                          |  |     
|Nine months ended September 30:           |  | 2010 |             |  | 2009 | 
|Weighted average number of common shares: |  |      |             |  |      |  |            | 
|Average shares outstanding-basic          |  |      | 77,394,902  |  |      |  | 24,736,473 | 
|Average shares outstanding-diluted        |  |      | 77,394,902  |  |      |  | 24,736,473 | 

As of September 30, 2010 and
2009, stock options of 906,025 and 987,093, respectively, were not included in the computation of diluted earnings per share, as well as the U.S. Treasury Warrant to purchase 1,090,385 shares of common stock, as their inclusion would also have been
anti-dilutive. No common stock equivalents are considered when the Company reports a net loss, as their inclusion would also be anti-dilutive.

NOTE 14  INCOME TAXES

As of
September 30, 2010 and December 31, 2009, the Company had no recorded net deferred tax assets. As of September 30, 2009, the Company had recorded a net deferred tax asset of $22.4 million, (which is included in the accompanying
condensed consolidated balance sheets). 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. The Company considers both positive and negative evidence regarding the ultimate realizability of deferred tax assets. 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.



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Management determined after analysis
of available evidence at December 31, 2009, that based on the Banks expected performance, the deferred tax assets would not be recognized in the normal course of operations within the next business cycle and, accordingly, reduced the
entire net deferred tax asset by a corresponding valuation allowance at that time.

NOTE 15  RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2010, the FASB issued Accounting Standards Update ASU No. 2010-20 Receivables (Topic 310) - Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses to improve the quality of financial reports by lowering the threshold for disclosure of an entitys allowance for credit losses and the credit quality of its
financing receivables, the FASB says an entity should provide disclosures disaggregated into two levels: portfolio segment and class of financing receivable. Users of financial statements should be able to readily evaluate the nature of credit risk
inherent in an entitys portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. Numerous
additional disclosures relating to financing receivables are also being required, in order to shed further light on an entitys financial position. For public entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.
This update requires a significant expansion of credit related disclosures, but the Company does not otherwise expect the adoption of ASU No. 2010- 20 to have a material impact on the consolidated financial statements.

In April 2010, the FASB issued Accounting Standards Update ASU No. 2010-18 Receivables (Topic 310)  Effect of a Loan Modification
When the Loan is Part of the Pool that is Accounted for as a Single Asset to clarify the guidance for loans acquired in a pool of assets with evidence of declining credit quality. FASB ASC 310-20, Receivables  Loans and Debt
Securities Acquired with Deteriorated Credit Quality,is amended to clarify the criteria by which an acquired loan can be removed from an asset pool. Modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result
in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is
included is impaired if expected cash flows for the pool change. The amendments will be effective for loans that are part of an asset pool and are modified during financial reporting periods that end on or after July 15, 2010. The Company does
not expect the adoption of ASU No. 2010-18 to have a material impact on the consolidated financial statements.

In April 2010, the FASB
issued Accounting Standards Update ASU No. 2010-12 Income Taxes (Topic 740) to address changes in accounting for income taxes resulting from recently issued Health Care and Education Reconciliation Act of 2010 and the Patient
Protection and Affordable Care Act. The update explains that even though the bills were signed seven days apart, they should be considered together for accounting purposes. If a registrants reporting period ends after the signing of the first
bill, but before the signing of the second, they should take the effects of both bills into consideration when measuring current and deferred tax liabilities and assets. The Company does not expect the adoption of ASU No. 2010-12 to have a
material impact on the consolidated financial statements.

In March 2010, the FASB issued Accounting Standards Update ASU No. 2010-09
Amendments to Subsequent Events Requirements for SEC Issuers to amend FASB ASC Topic 855 to exclude SEC reporting entities from the requirement to disclose the date on which subsequent events have been evaluated. In addition, it
modifies the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively. The
adoption of ASU No. 2010-09 did not have a material impact on the consolidated financial statements.

In January 2010, the FASB issued
Accounting Standards Update ASU No. 2010-06 Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair Value Measurements to improve disclosures about fair value measurements. For each class of
assets and liabilities, reporting entities will have to provide additional disclosures describing the reasons for transfers of assets in and out of Levels 1 and 2 of the three-tier fair value hierarchy in accordance with FASB ASC Topic 820. For
assets valued with the Level 3 method, the entity will have to separately present purchases, sales, issuances, and settlements in the reconciliation for fair value measurements. This update also states that an entity should provide fair value
measurements for each class of asset or liability, and explain the inputs and techniques used in calculating Levels 2 and 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the effective portion of ASU No. 2010-06 did not have a material impact on the consolidated financial statements.

The Company does not expect the adoption of the remaining portion of ASU No. 2010-06 to have a material impact on the consolidated financial
statements.



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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of the safe-harbor provisions of Sections 21D and 21E of the Securities Exchange Act of 1934, as amended. Other
than statements of historical fact, all statements about our financial position and results of operations, business strategy and Managements plans and objectives for future operations are forward-looking statements. When used in this report,
the words anticipate, believe, estimate, expect, and intend, and words or phrases of similar meaning, as they relate to the Company or Management, are intended in part to help identify
forward-looking statements. Examples of forward-looking statements include, but are not limited to: statements that include projections or Managements expectations for revenues, income or expenses, earnings per share, capital expenditures,
dividends, capital structure and other financial items; statements of the plans and objectives of the Company, its Management or its Board of Directors, including the introduction of new products or services, plans for expansion, acquisitions or
future growth and estimates or predictions of actions by customers, vendors, competitors or regulatory authorities; statements about future economic performance; statements of assumptions underlying other statements about the Company and its
business; statements regarding the adequacy of the allowance for loan losses; statements regarding regulatory compliance; and descriptions of assumptions underlying or relating to any of the foregoing. Although Management believes that the
expectations reflected in forward-looking statements are reasonable, we can make no assurance that such expectations will prove correct. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to
differ materially from those indicated by the forward-looking statements. For a more comprehensive discussion of the risk factors impacting our business refer to Item 1A Risk Factors in the Companys filed Form 10-K for the year
ended December 31, 2009, as updated and supplemented by this Form 10-Q and other filings with the Securities and Exchange Commission. These risks and uncertainties include the effect of competition and our ability to compete on price and other
factors; deterioration in credit quality, or in the value of the collateral securing our loans, due to higher interest rates, increased unemployment, further or continued disruptions in the credit markets, or other economic factors; customer
acceptance of new products and services; economic conditions and events that disproportionately affect our business due to regional concentration; general business and economic conditions, including the residential and commercial real estate
markets; interest rate changes; regulatory and legislative changes; changes in the demand for loans and changes in consumer spending, borrowing and savings habits; changes in accounting policies; our ability to maintain or expand our market share or
our net interest margin; factors that could limit or delay implementation of our marketing and growth strategies; our ability to integrate acquired branches or banks; and our ability to achieve compliance with regulatory agreements. You should not
unduly rely on forward-looking statements. They give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made, and we do not undertake to update them to reflect changes that occur
after the date they are made. This report includes information about our historical financial performance, and this information should not be considered as an indication or projection of future results.

OVERVIEW The following includes Managements discussion of the financial condition and results of operations for PremierWest Bancorp
and its wholly-owned subsidiary, PremierWest Bank, including the Banks wholly-owned subsidiaries, Premier Finance Company and PremierWest Investment Services, Inc., for the three and nine month periods ended September 30, 2010. This
discussion should be read in conjunction with the consolidated financial statements and accompanying notes contained in this report as well as the Companys Form 10-K for the year ended December 31, 2009. For discussion purposes,
Management has made comparisons, as it deems appropriate, to comparable interim periods in 2009 and the fiscal year period ended December 31, 2009.

HIGHLIGHTS For the third quarter ended September 30, 2010, the Companys net loss applicable to common shareholders was $1.4 million or $0.01 per basic and fully diluted common
share, compared to net loss applicable to common shareholders of $5.6 million or $0.22 per basic and fully diluted common share for the quarter ended September 30, 2009. Annualized return on average common shareholders equity was -9.12%
and annualized return on average assets was -0.39% for the quarter ended September 30, 2010, as compared to an annualized return on average common shareholders equity and return on average assets of -15.07% and -1.28%, respectively, for
the quarter ended September 30, 2009.

During the second quarter of 2009, federal and state bank regulators initiated their annual
regulatory examination and completed the examination during the third quarter of 2009. 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.



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In addition to the items that the
Company and the Bank began to address in 2009, the Agreement requires, among other things, that the Bank:



| |  |  | By October 3, 2010, increase and maintain its Tier 1 Capital in such an amount to ensure that the Banks leverage ratio equals or exceeds
10%,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | By November 2, 2010, reduce assets classified Substandard in the report of examination to not more than 100% of the Banks Tier 1
capital and allowance for loan and lease loss reserve (ALLL), and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | By April 1, 2011, reduce assets classified Substandard in the report of examination to not more than 70% of the Banks Tier 1
capital plus ALLL.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

As of the date of this report the Company had not yet achieved the requirements to be completed by
October 3 and November 2, 2010. Prior to the 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,
2010 level of 8.69%.

Similarly, the Company has reduced its loans classified Substandard to 122.83% of Tier 1 capital plus ALLL
as of September 30, 2010, compared to 178.44% as of June 30, 2009.

The Company has demonstrated progress and is committed to
reaching the requirements of the Agreement. We continue to work toward achieving all requirements contained the regulatory agreements in as expeditious a manner as possible.

At September 30, 2010, loans, net of deferred fees and restructured loan concessions, decreased $56.3 million or 5% compared to June 30, 2010 as a result of normal principal repayments,
foreclosures and credit charge-offs. New loans funded during the most recent quarter totaled approximately $7.5 million. At September 30, 2010, deposits decreased $35.9 million or 3% from June 30, 2010. The principal decline included $15.7
million in public-entity deposits and non-core deposits, and was a planned reduction of deposits that do not represent strategic relationships.

The Companys overall loss applicable to common shareholders declined $4.1 million or 74% over the three month period ending September 30,
2010, in comparison to the same period a year ago, principally due to reduced loan loss provision expense of $8.7 million.

At
September 30, 2010, the Companys allowance for loan losses totaled $42.1 million, representing 4.07% of gross loans. The $3.8 million decrease in the allowance from December 31, 2009, was comprised of a $10.1 million increase from
provision charged against earnings offset by $18.7 million in charge-offs and loan concessions netted against $4.9 million in recoveries of previously charged-off loans. Non-performing loans increased from $103.9 million at December 31, 2009,
to $115.1 million at September 30, 2010 of which $54.2 million, or 47% was current as to principal and interest.

Non-performing assets
totaled $145.0 million at September 30, 2010, an increase of $16.3 million when compared to $128.7 million in non-performing assets at December 31, 2009. The September 30, 2010 balance includes $29.9 million in OREO compared to $24.7
million at December 31, 2009.

The Banks gross loan to deposit ratio was 81.09% and 80.87% as of September 30, 2010 and
December 31, 2009, respectively. The increase is a result of the $143.1 million decline in deposits principally due to a $67.9 million decline in public-entity deposits and other non-core deposits over the nine-month period.

The Company continues to have excess liquidity and a substantial and stable core deposit base. Core deposits are the lowest cost and preferred source of
funds and when loan volume exceeds the level of core deposits, the Bank must rely on higher cost borrowings and/or brokered deposits as a secondary source of funding to bridge the gap between deposit and loan volumes. Management will continue to
emphasize core deposits as the preferred source of funding as part of the Banks overall funding strategy to support liquidity needs as well as continue to implement relationship-oriented strategies for attracting additional core deposits.
While the competitive environment for attracting deposits remains keen, PremierWest has been successful over time at retaining its core deposit base and continues to seek these local relationship-based deposits.

The Banks year-over-year loan volume changes and ongoing pipeline of new loan production is in line with Managements internal expectations at
September 30, 2010, in light of general economic and credit quality considerations. Managements broader business plan and strategy is to remain focused on reducing nonperforming assets and limiting new loan commitments to new borrowers
who bring strategic relationship value to the Bank.



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FINANCIAL HIGHLIGHTS

The following table presents information regarding yields on interest-earning assets, rates paid on interest-bearing liabilities, net
interest spreads, net yields on average interest-earning assets, and returns on average assets and returns on average equity for the periods indicated.



|                                                                                    |  |                    |           |   |                    |   |           |                    |  |   |          |   |  |  |        |  
|----------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ------------------ | - | --------- | ------------------ |  | - | -------- | - |  |  | ------ | -
|(Dollars in 000s) Analysis for the three-month period ended:                       |  | September 30, 2010 |           |   | September 30, 2009 |   |           | Increase(Decrease) |  |   | % Change |  
|Average fed funds sold and investments                                              |  | $                  | 212,852   |   |                    | $ | 326,996   |                    |  | $ | (114,144 | ) |  |  | -34.91 | %
|Average gross loans                                                                 |  |                    | 1,070,369 |   |                    |   | 1,203,973 |                    |  |   | (133,604 | ) |  |  | -11.10 | %
|Average mortgages held-for-sale                                                     |  |                    | 625       |   |                    |   | 711       |                    |  |   | (86      | ) |  |  | -12.10 | %
|Average interest-earning assets                                                     |  |                    | 1,283,846 |   |                    |   | 1,531,680 |                    |  |   | (247,834 | ) |  |  | -16.18 | %
|Average interest-bearing liabilities                                                |  |                    | 1,080,890 |   |                    |   | 1,260,126 |                    |  |   | (179,236 | ) |  |  | -14.22 | %
|Average total assets                                                                |  |                    | 1,449,421 |   |                    |   | 1,721,385 |                    |  |   | (271,964 | ) |  |  | -15.80 | %
|Average stockholders equity                                                        |  |                    | 101,641   |   |                    |   | 185,604   |                    |  |   | (83,963  | ) |  |  | -45.24 | %
|Average common equity                                                               |  |                    | 61,833    |   |                    |   | 146,181   |                    |  |   | (84,348  | ) |  |  | -57.70 | %
|                                                                                    |  |                    |           |  
|Average yield earned (1)                                                            |  |                    | 5.36      | % |                    |   | 4.98      | %                  |  |   | 0.38     |   |  |  | 7.63   | %
|Average rate paid                                                                   |  |                    | 1.33      | % |                    |   | 1.63      | %                  |  |   | (0.30    | ) |  |  | -18.40 | %
|Net interest spread                                                                 |  |                    | 4.03      | % |                    |   | 3.35      | %                  |  |   | 0.68     |   |  |  | 20.30  | %
|                                                                                    |  |                    |           |  
|Net interest income to average interest-earning assets (net interest margin) (1)    |  |                    | 4.23      | % |                    |   | 3.64      | %                  |  |   | 0.59     |   |  |  | 16.21  | %
|Annualized return on average assets                                                 |  |                    | -0.39     | % |                    |   | -1.28     | %                  |  |   | 0.89     |   |  |  | 69.53  | %
|Annualized return on average common equity                                          |  |                    | -9.12     | % |                    |   | -15.07    | %                  |  |   | 5.95     |   |  |  | 39.48  | %
|Efficiency ratio (2)                                                                |  |                    | 95.12     | % |                    |   | 87.99     | %                  |  |   | 7.13     |   |  |  | 8.10   | %
|                                                                                    |  |                    |           |  
|(Dollars in 000s) Analysis for the nine-month period ended:                        |  | September 30, 2010 |           |   | September 30, 2009 |   |           | Increase(Decrease) |  |   | % Change |  
|Average fed funds sold and investments                                              |  | $                  | 245,185   |   |                    | $ | 160,399   |                    |  | $ | 84,786   |   |  |  | 52.86  | %
|Average gross loans                                                                 |  |                    | 1,107,243 |   |                    |   | 1,236,626 |                    |  |   | (129,383 | ) |  |  | -10.46 | %
|Average mortgages held-for-sale                                                     |  |                    | 613       |   |                    |   | 1,100     |                    |  |   | (487     | ) |  |  | -44.27 | %
|Average interest-earning assets                                                     |  |                    | 1,353,041 |   |                    |   | 1,398,125 |                    |  |   | (45,084  | ) |  |  | -3.22  | %
|Average interest-bearing liabilities                                                |  |                    | 1,125,253 |   |                    |   | 1,116,801 |                    |  |   | 8,452    |   |  |  | 0.76   | %
|Average total assets                                                                |  |                    | 1,484,693 |   |                    |   | 1,573,232 |                    |  |   | (88,539  | ) |  |  | -5.63  | %
|Average stockholders equity                                                        |  |                    | 92,658    |   |                    |   | 199,146   |                    |  |   | (106,488 | ) |  |  | -53.47 | %
|Average common equity                                                               |  |                    | 52,946    |   |                    |   | 165,992   |                    |  |   | (113,046 | ) |  |  | -68.10 | %
|                                                                                    |  |                    |           |  
|Average yield earned (1)                                                            |  |                    | 5.27      | % |                    |   | 5.61      | %                  |  |   | (0.34    | ) |  |  | -6.06  | %
|Average rate paid                                                                   |  |                    | 1.17      | % |                    |   | 1.89      | %                  |  |   | (0.72    | ) |  |  | -38.10 | %
|Net interest spread                                                                 |  |                    | 4.10      | % |                    |   | 3.72      | %                  |  |   | 0.38     |   |  |  | 10.22  | %
|                                                                                    |  |                    |           |  
|Net interest income to average interest-earning assets (net interest margin) (1)    |  |                    | 4.30      | % |                    |   | 4.10      | %                  |  |   | 0.20     |   |  |  | 4.88   | %
|Annualized return on average assets                                                 |  |                    | -0.61     | % |                    |   | -3.24     | %                  |  |   | 2.63     |   |  |  | 81.17  | %
|Annualized return on average common equity                                          |  |                    | -17.14    | % |                    |   | -30.68    | %                  |  |   | 13.54    |   |  |  | 44.13  | %
|Efficiency ratio (2)                                                                |  |                    | 89.97     | % |                    |   | 80.46     | %                  |  |   | 9.51     |   |  |  | 11.82  | %
|                                                                                    |  |                    |           |  
|Notes:                                                                              |  |                    |           |   |                    |   |           |                    |  |   |          |   |  |  |        |  
|(1)    Tax equivalent                                                               | 
|(2)    Non-interest expense divided by net interest income plus non-interest income | 
|                                                                                    |  |                    |           |  
|Reconciliation of Non-GAAP Measure:                                                 |  |                    |           |   |                    |   |           |                    |  |   |          |   |  |  |        |  
|Tax Equivalent Net Interest Income                                                  |  |                    |           |   |                    |   |           |                    |  |   |          |   |  |  |        |  
|(Dollars in 000s)                                                                  |  |                    |           |   |                    |   |           |                    |  |   |          |   |  |  |        |  
|For the three months ended                                                          |  | September 30, 2010 |           |   | September 30, 2009 |   |           |                    |  |   |          |  
|Net interest income                                                                 |  | $                  | 13,625    |   |                    | $ | 13,977    |                    |  |   |          |   |  |  |        |  
|Tax equivalent adjustment for municipal loan interest                               |  |                    | 47        |   |                    |   | 49        |                    |  |   |          |   |  |  |        |  
|Tax equivalent adjustment for municipal bond interest                               |  |                    | 33        |   |                    |   | 21        |                    |  |   |          |   |  |  |        |  
|                                                                                    |  |                    |           |   |                    |   |           |                    |  |   |          |   |  |  |        |  
|Tax equivalent net interest income                                                  |  | $                  | 13,705    |   |                    | $ | 14,047    |                    |  |   |          |   |  |  |        |  
|                                                                                    |  |                    |           |   |                    |   |           |                    |  |   |          |   |  |  |        |  
|                                                                                    |  |                    |           |  
|For the nine months ended                                                           |  | September 30, 2010 |           |   | September 30, 2009 |   |           |                    |  |   |          |  
|Net interest income                                                                 |  | $                  | 43,281    |   |                    | $ | 42,651    |                    |  |   |          |   |  |  |        |  
|Tax equivalent adjustment for municipal loan interest                               |  |                    | 141       |   |                    |   | 137       |                    |  |   |          |   |  |  |        |  
|Tax equivalent adjustment for municipal bond interest                               |  |                    | 101       |   |                    |   | 59        |                    |  |   |          |   |  |  |        |  
|                                                                                    |  |                    |           |   |                    |   |           |                    |  |   |          |   |  |  |        |  
|Tax equivalent net interest income                                                  |  | $                  | 43,523    |   |                    | $ | 42,847    |                    |  |   |          |   |  |  |        |  
|                                                                                    |  |                    |           |   |                    |   |           |                    |  |   |          |   |  |  |        |  

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 should not
be considered in isolation or as a substitute for analyses of results as reported under GAAP.



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RESULTS OF OPERATIONS

QUARTER ENDED SEPTEMBER 30, 2010

NET INTEREST INCOME  Net interest income, the Banks primary source of revenue, is the difference between the interest income generated from earning assets (loans and investments) and
the interest expense paid on interest-bearing liabilities (interest-bearing deposits and borrowed funds). Net interest income for the quarter ended September 30, 2010 decreased $352,000 or down 3% from the same quarter one year earlier as a
result of declining loan volumes and increased lower yielding investments offset by deposit interest expense reductions. Market interest rates have been held at low levels during recent years by the Federal Reserve in an attempt to help stimulate
the economy. This interest rate environment has affected both our yield on earning assets and our cost of interest-bearing deposits and was a principal factor in reducing our yields on investment securities and rates on deposit volumes during the
most recent quarter. Also affecting our yields were the increase in non-performing loans that resulted in interest reversals when these loans were placed on non-accrual status as well as the ongoing burden of including these non-performing loans in
earning assets without the corresponding yield from accruing interest. A key metric of our profitability is our net interest margin (net interest income divided by average interest-earning assets), which relates to the relative stability in our net
interest income over time, all other things being equal. Both our net interest income and net interest margin are affected by variables such as the volume and mix of our earning assets; the volume and mix of both our interest-bearing and
non-interest-bearing liabilities; the credit quality of our loan portfolio; and the general movement in the market rates of interest.

An
overall year-over-year $439,000 or 71% decline in interest reversals and a $1.5 million decline in interest expense were the principal factors that caused the increase in the third quarter net interest margin from 3.64% in 2009 to 4.23% in the most
recently completed quarter, an increase of 59 basis points. A realignment of the components of our earning assets (i.e., the relative amounts of loans, investment securities and short-term investments), and declining deposit costs is expected to
continue absent more significant economic growth on a national scale.

Our yield on earning assets averaged 5.36%, up 38 basis points from the
same quarter a year ago due largely to reduced interest reversals, while our cost of average interest-bearing liabilities fell 30 basis points from 1.63% in the same quarter a year ago to 1.33% in the most recent quarter. The changes resulted in an
interest spread of 4.03% during the current quarter ended September 30, 2010, up 68 basis points from 3.35% recorded during the same period a year ago.

LOAN LOSS PROVISION  Charges made to the provision for loan losses that translate to increases in our allowance for loan losses were $1.6 million and $10.3 million for the three month periods
ended September 30, 2010 and September 30, 2009, respectively. The Company had net charge-offs of $3.4 million during the third quarter of 2010 compared to net charge-offs of $9.0 million for the corresponding period in 2009. Management
believes that the September 30, 2010 balance in the allowance for loan losses is reasonable and appropriate to support inherent potential losses in the Companys loan portfolio. (Also see Allowance for Loan Losses and Reserve for
Unfunded Commitments.)

NON-INTEREST INCOME  Non-interest income represents service charges, fees, commissions and other
income derived principally from general banking services, residential mortgage activity, sales of investment and insurance products and gains from the sales of other assets. During the third quarter of 2010, the Company had non-interest income of
$2.7 million, an increase of $13,000 from the corresponding period in 2009. On a summary basis, a general increase in other non-interest income components was largely offset by a $304,000 or 22% decrease in service charges on deposit accounts, and a
$26,000 or 19% decrease in mortgage banking fees. We have seen a general decrease in service charges as customers are more closely managing their account activity, especially relative to overdraft charges.

NON-INTEREST EXPENSE  Non-interest expense increased approximately $867,000 or 6% for the three months ended September 30, 2010, as
compared to the corresponding period in 2009. On a summary basis, there was a $1.3 million or 852% increase in OREO write downs and expenses partially offset by gains on sales of OREO; a $446,000 or 6% increase in salaries and employee benefits; a
$237,000 or 48% increase in professional fees; offset by a $109,000 or 9% decrease in FDIC and state assessments; a $58,000 or 11% decrease in communication costs; a $40,000 or 2% decrease in net occupancy costs; and a $879,000 decrease in all other
non-interest expense accounts primarily due to higher expenses for merger related costs in the same quarter a year ago. The increase in salaries and employee benefits for the current quarter is predominately associated with a revision to the expense
accrual rate for long-standing deferred compensation arrangements that are inversely related to the general interest rate environment.

EFFICIENCY RATIO  The Companys efficiency ratio, defined as non-interest expense divided by the sum of net interest income and
non-interest income, was 95.12% during the third quarter of 2010 compared to 87.99% for the third quarter of 2009. Given recent increases in problem loan expenses, increasing reserves, and third-party appraisals; Management believes that once the
wide-spread credit issues affecting the banking industry in general and the Company specifically are resolved, a ratio in the 60% to 65% range is a reasonable and sustainable target given the Banks longer-term strategies for both growth and
customer service. Management has implemented actions to carefully manage controllable costs and to minimize uncontrollable costs related to problem loans and OREO.



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NINE MONTHS ENDED SEPTEMBER 30,
2010

NET INTEREST INCOME  For the nine months ended September 30, 2010, net interest income increased $630,000 or 1%
compared to the same period in 2009. During the first nine months of 2010, our interest income declined $5.3 million compared to the same period in 2009 while our interest expense declined $5.9 million or 38% compared to the same period in 2009.
Interest income declined largely due to the year-over-year decline in loan volumes and the continuing low interest rate environment that also resulted in reduced deposit interest rates and expense. The principal reasons behind the year-over-year
increase in our net interest margin from 4.10% for the nine months ended September 30, 2009 to 4.30% for the most recently completed nine month period was the decline in deposit interest costs as well as a $554,000 or 38% reduction in interest
reversals for the period. Our yield on average earning assets was 5.27% down 34 basis points from the same period last year, while our cost of average interest-bearing liabilities fell 72 basis points to 1.17% in 2010 from 1.89% in 2009. These
changes resulted in a net interest spread of 4.10% for the nine months ended September 30, 2010, up 38 basis points from 3.72% recorded as of September 30, 2009.

LOAN LOSS PROVISION  Charges made to the provision for loan losses that translate to increases in our allowance for loan losses were $10.1 million and $71.4 million for the nine month periods
ended September 30, 2010 and September 30, 2009, respectively. The Company had net charge-offs and loan concessions of $13.8 million during the first nine months of 2010 compared to net charge-offs of $47.0 million for the corresponding
period in 2009. Management believes that the September 30, 2010 balance in the allowance for loan losses is reasonable and appropriate to support inherent potential losses in the Companys loan portfolio. (Also see Allowance for Loan
Losses and Reserve for Unfunded Commitments.)

NON-INTEREST INCOME  During the first nine months of 2010, the Company had
non-interest income of $7.9 million, a decrease of $204,000 or 3% from the corresponding period in 2009. Services charges on deposit accounts declined $817,000 or 20% and mortgage banking fees fell $235,000 or 45% with a number of other noninterest
income categories partially offsetting the declines. We have seen a general decrease in service charges as customers are more closely managing their account activity, especially relative to overdraft charges.

NON-INTEREST EXPENSE  Non-interest expense increased approximately $5.2 million or 13% for the nine months ended September 30, 2010, as
compared to the corresponding period in 2009. On a summary basis, there was a $3.8 million or 501% increase in OREO write downs and expenses partially offset by gains on OREO sales; a $516,000 or 17% increase in FDIC and state assessments; a
$467,000 or 29% increase in professional fees; a $284,000 or 1% increase in salaries and employee benefits; a $189,000 or 3% increase in net occupancy and equipment costs; partially offset by a $40,000 or 3% decrease in communication costs; a
$48,000 or 8% decrease in advertising costs; and $5,000 decrease in other non-interest expense. The vast majority of the increased costs during the nine months of 2010 relate to problem loan/OREO expenses ranging from OREO write-downs to legal fees,
and one-time costs associated with branch closure efforts that will yield cost savings in the future.

EFFICIENCY RATIO  The
Companys efficiency ratio was 89.97% during the first nine months of 2010 compared to 80.46% for the first nine months of 2009. Given recent increases in regulatory assessment costs over historic levels, Management believes that once the
wide-spread credit issues affecting the banking industry in general, and the Company specifically, are resolved, a ratio in the 60% to 65% range is a reasonable and sustainable target given the Banks strategies for both growth and customer
service. Management has implemented actions to manage controllable costs and to minimize uncontrollable costs related to problem loans and OREO.

FINANCIAL CONDITION  Total assets of $1.42 billion at September 30, 2010, decreased $111.6 million or 7% compared to total assets of $1.54 billion at December 31, 2009. This
decrease occurred primarily as a result of loan balance reductions and our planned reduction in brokered deposits and public-entity deposits as well as lower loan balances during the first nine months of 2010. On a consolidated basis, comparing
September 30, 2010 to December 31, 2009, gross loans declined $112.9 million; the Allowance for Loan Losses decreased $3.8 million; cash and other earning assets decreased $2.3 million; and all other assets increased $480,000.

Gross loans accounted for 72.72% of total assets at September 30, 2010, compared to 74.79% at December 31, 2009. As of September 30, 2010,
the allowance for loan losses decreased to $42.1 million from $45.9 million at December 31, 2009. The allowance for loan losses was increased by $10.1 million in provision charged against earnings and decreased by $13.8 million in net
charge-offs and loan concessions.

During the quarter ending September 30, 2010, we continued to maintain our allowance for loan loss to
reserve against loan portfolio losses primarily associated with commercial real estate lending concentrations. The loan loss reserve as a percentage of gross loans was increased from 3.99% at December 31, 2009, to 4.07% at the end of the
currently completed period. The ratio of loan loss reserve to non-performing loans declined from 44.17% at year end 2009, to 36.59% at September 30, 2010.

Our credit teams continue to work diligently with borrowers to improve the general credit quality of the loan portfolio.

Total non-performing assets were $145.0 million at September 30, 2010, up from $128.7 million as of December 31, 2009, and represent 10.18% of total assets. A single borrower whose relationship
is comprised of four commercial real estate loans and two construction loans, with aggregate principal of $23.4 million at June 30, 2010, indicated during the second quarter his unwillingness or



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inability to continue to service the debt obligations, thereby requiring the Company to classify his loans as impaired and transfer them to non-performing status. This was the most significant
factor affecting the increase in non-performing loans and non-performing assets during the first nine months of 2010. During the third quarter these loans were restructured; and although the loans are still on nonaccrual status, the borrower is
performing in accordance with the restructure terms.

The September 30, 2010 non-performing asset total includes $54.2 million in
non-accrual loans that were current as to principal and interest payments and were less than 30 days past due. The non-performing assets also include $29.9 million in OREO as of September 30, 2010, up $5.2 million from December 31, 2009.
For additional information regarding non-performing loans, see Asset Quality and Non-performing Assets below.

Management maintains an
excess liquidity position and the ability to borrow from the FHLB of Seattle, a correspondent bank and the Federal Reserve Bank of San Francisco. For more information about liquidity refer to the Liquidity and Capital Resources section below.

The table below sets forth certain summary balance sheet information for September 30, 2010, and December 31, 2009:



|                                            |  |                   |           |                    |                  |   |           |                     |  |   |          |   |  |  |        |  
|------------------------------------------- |  | ----------------- | --------- | ------------------ | ---------------- | - | --------- | ------------------- |  | - | -------- | - |  |  | ------ | -
|                                            |  | September 30,2010 |           |                    | December 31,2009 |   |           | Increase (Decrease) | 
|                                            |  |                   |           | 9/30/10  12/31/09 |                 
|(Dollars in 000s)                          |  |                   |           |                    |                  |   |           |                     |  |   |          |  
|                                            |  |                   |           |                   
|ASSETS                                      |  |                   |           |                    |                  |   |           |                     |  |   |          |   |  |  |        |  
|Federal funds sold                          |  | $                 | 87,378    |                    |                  | $ | 69,855    |                     |  | $ | 17,523   |   |  |  | 25.08  | %
|Securities available-for-sale               |  |                   | 163,881   |                    |                  |   | 114,937   |                     |  |   | 48,944   |   |  |  | 42.58  | %
|Securities held-to-maturity                 |  |                   | 29,516    |                    |                  |   | 47,384    |                     |  |   | (17,868  | ) |  |  | -37.71 | %
|Restricted equity investments               |  |                   | 3,530     |                    |                  |   | 3,643     |                     |  |   | (113     | ) |  |  | -3.10  | %
|Loans, net (1)                              |  |                   | 992,438   |                    |                  |   | 1,102,224 |                     |  |   | (109,786 | ) |  |  | -9.96  | %
|Other assets (2)                            |  |                   | 147,936   |                    |                  |   | 198,271   |                     |  |   | (50,335  | ) |  |  | -25.39 | %
|                                            |  |                   |           |                    |                  |   |           |                     |  |   |          |   |  |  |        |  
|                                            |  |                   |           |                   
|Total assets                                |  | $                 | 1,424,679 |                    |                  | $ | 1,536,314 |                     |  | $ | (111,635 | ) |  |  | -7.27  | %
|                                            |  |                   |           |                    |                  |   |           |                     |  |   |          |   |  |  |        |  
|LIABILITIES                                 |  |                   |           |                    |                  |   |           |                     |  |   |          |   |  |  |        |  
|Noninterest-bearing deposits                |  | $                 | 247,016   |                    |                  | $ | 256,167   |                     |  | $ | (9,151   | ) |  |  | -3.57  | %
|Interest-bearing deposits                   |  |                   | 1,030,609 |                    |                  |   | 1,164,595 |                     |  |   | (133,986 | ) |  |  | -11.50 | %
|                                            |  |                   |           |                    |                  |   |           |                     |  |   |          |   |  |  |        |  
|                                            |  |                   |           |                   
|Total deposits                              |  |                   | 1,277,625 |                    |                  |   | 1,420,762 |                     |  |   | (143,137 | ) |  |  | -10.07 | %
|                                            |  |                   |           |                   
|Other liabilities (3)                       |  |                   | 47,352    |                    |                  |   | 44,017    |                     |  |   | 3,335    |   |  |  | 7.58   | %
|                                            |  |                   |           |                    |                  |   |           |                     |  |   |          |   |  |  |        |  
|                                            |  |                   |           |                   
|Total liabilities                           |  |                   | 1,324,977 |                    |                  |   | 1,464,779 |                     |  |   | (139,802 | ) |  |  | -9.54  | %
|                                            |  |                   |           |                   
|SHAREHOLDERS EQUITY                        |  |                   | 99,702    |                    |                  |   | 71,535    |                     |  |   | 28,167   |   |  |  | 39.38  | %
|                                            |  |                   |           |                    |                  |   |           |                     |  |   |          |   |  |  |        |  
|Total liabilities and share-holders equity |  | $                 | 1,424,679 |                    |                  | $ | 1,536,314 |                     |  | $ | (111,635 | ) |  |  | -7.27  | %
|                                            |  |                   |           |                    |                  |   |           |                     |  |   |          |   |  |  |        |  



|(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.
|--- | --------------------------------------------------------------------

Loans

Our portfolio of loans, shown as gross loans below, at September 30, 2010 was
$1.04 billion, a decrease of $112.9 million from the December 31, 2009 balance and a decrease of $148.4 million from September 30, 2009. The decrease occurred as paydowns, foreclosures and charge-offs on non-performing loans outpaced new
loan production, which has remained soft due to economic conditions. The table below presents the distribution of our loan portfolio by loan type at September 30, 2010 and December 31, 2009. Note that the loan concentration
classifications described below are categorized differently than as described in Note 7. The classifications shown below are consistent with our regulatory reporting presentation.



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|                            |  |                    |           |  |                          |   |        |                       |  |   |                   |  |  |                          |           |  |                       |   |         |  |  |   |           | 
|--------------------------- |  | ------------------ | --------- |  | ------------------------ | - | ------ | --------------------- |  | - | ----------------- |  |  | ------------------------ | --------- |  | --------------------- | - | ------- |  |  | - | --------- | 
|Loan commitments            |  |                    |           |  |                          |   |        |                       |  |   |                   |  |  |                          |           |  |                       |  
|(Dollars in 000s)          |  |                    |           |  |                          |   |        |                       |  |   |                   |  |  |                          |           |  |                       |  
|                            |  | September 30, 2010 |           |  | December 31, 2009        |  
|                            |  | Funded LoanTotals  |           |  | Unfunded LoanCommitments |   |        | Total LoanCommitments |  |   | Funded LoanTotals |  |  | Unfunded LoanCommitments |           |  | Total LoanCommitments |  
|Agricultural/Farm           |  | $                  | 41,309    |  |                          | $ | 7,223  |                       |  | $ | 48,532            |  |  | $                        | 43,418    |  |                       | $ | 6,084   |  |  | $ | 49,502    | 
|C&I                         |  |                    | 168,218   |  |                          |   | 56,228 |                       |  |   | 224,446           |  |  |                          | 210,392   |  |                       |   | 82,076  |  |  |   | 292,468   | 
|CRE                         |  |                    | 690,961   |  |                          |   | 2,378  |                       |  |   | 693,339           |  |  |                          | 746,159   |  |                       |   | 12,761  |  |  |   | 758,920   | 
|Residential RE construction |  |                    | 21,346    |  |                          |   | 479    |                       |  |   | 21,825            |  |  |                          | 28,223    |  |                       |   | 3,179   |  |  |   | 31,402    | 
|Residential RE              |  |                    | 31,141    |  |                          |   | 335    |                       |  |   | 31,476            |  |  |                          | 31,991    |  |                       |   | 195     |  |  |   | 32,186    | 
|Consumer RE                 |  |                    | 32,785    |  |                          |   | 16,904 |                       |  |   | 49,689            |  |  |                          | 33,979    |  |                       |   | 17,758  |  |  |   | 51,737    | 
|Consumer                    |  |                    | 49,909    |  |                          |   | 2,556  |                       |  |   | 52,465            |  |  |                          | 50,134    |  |                       |   | 3,510   |  |  |   | 53,644    | 
|                            |  |                    |           |  |                          |   |        |                       |  |   |                   |  |  |                          |           |  |                       |   |         |  |  |   |           | 
|                            |  |                    | 1,035,669 |  |                          |   | 86,103 |                       |  |   | 1,121,772         |  |  |                          | 1,144,296 |  |                       |   | 125,563 |  |  |   | 1,269,859 | 
|Other*                      |  |                    | 410       |  |                          |   | 290    |                       |  |   | 700               |  |  |                          | 4,731     |  |                       |   | 300     |  |  |   | 5,031     | 
|                            |  |                    |           |  |                          |   |        |                       |  |   |                   |  |  |                          |           |  |                       |   |         |  |  |   |           | 
|Gross loans                 |  | $                  | 1,036,079 |  |                          | $ | 86,393 |                       |  | $ | 1,122,472         |  |  | $                        | 1,149,027 |  |                       | $ | 125,863 |  |  | $ | 1,274,890 | 
|                            |  |                    |           |  |                          |   |        |                       |  |   |                   |  |  |                          |           |  |                       |   |         |  |  |   |           | 



|* | Includes overdrafts, leases, credit cards and other adjustments such as loan premium outstanding.
|- | -------------------------------------------------------------------------------------------------

As indicated above, the Companys loan portfolio is and has been concentrated in commercial real estate loans during recent years. Management has
taken actions to reduce higher risk commercial real estate loan volume by minimizing emphasis on new commercial real estate loan production and by reducing related concentration limits.

Economic conditions have also produced significant reductions in real estate values, and the economic slowdown has resulted in business failures that have also adversely affected commercial real estate
valuations. Consequently, Management continues to mitigate credit risk and develop appropriate exit strategies for commercial real estate loans. These efforts have resulted in a decline in commercial real estate loans outstanding during the first
nine months of 2010 totaling $55.2 million.

The table above also summarizes funded and unfunded loan commitments by loan type for the periods
ending September 30, 2010 and December 31, 2009. Funded loan totals, excluding the Other category, declined by $108.6 million or 9% during the first nine months of 2010, primarily as a result of $13.8 million in net loan
charge-offs and loan concessions and $22.4 million in the net activity in foreclosure transfers to OREO. During the nine months ended September 30, 2010, unfunded loan commitments declined $39.5 million while loan disbursements and loan payoffs
totaled $40.3 million and $112.7 million, respectively.

The table below shows total funded and unfunded loan commitments by loan type and
geographic region at September 30, 2010:



|                                                     |  |                    |         |  |                   |   |         |                    |  |   |                  |  |  |   |         | 
|---------------------------------------------------- |  | ------------------ | ------- |  | ----------------- | - | ------- | ------------------ |  | - | ---------------- |  |  | - | ------- | 
|Total loan commitments by type and geographic region | 
|(Dollars in 000s)                                   |  |                    |         |  |                   |   |         |                    |  |   |                  | 
|                                                     |  | September 30, 2010 |        
|                                                     |  | SouthernOregon     |         |  | Mid-CentralOregon |   |         | NorthernCalifornia |  |   | SacramentoValley | 
|Agricultural/Farm                                    |  | $                  | 13,825  |  |                   | $ | 3,264   |                    |  | $ | 2,271            |  |  | $ | 29,172  | 
|C&I                                                  |  |                    | 120,021 |  |                   |   | 41,032  |                    |  |   | 28,755           |  |  |   | 34,638  | 
|CRE                                                  |  |                    | 309,434 |  |                   |   | 151,147 |                    |  |   | 74,447           |  |  |   | 158,311 | 
|Residential RE construction                          |  |                    | 5,687   |  |                   |   | 3,023   |                    |  |   | 3,082            |  |  |   | 10,033  | 
|Residential RE                                       |  |                    | 9,032   |  |                   |   | 3,127   |                    |  |   | 7,607            |  |  |   | 11,710  | 
|Consumer RE                                          |  |                    | 27,837  |  |                   |   | 8,488   |                    |  |   | 11,278           |  |  |   | 2,086   | 
|Consumer                                             |  |                    | 21,703  |  |                   |   | 23,976  |                    |  |   | 5,792            |  |  |   | 994     | 
|                                                     |  |                    |         |  |                   |   |         |                    |  |   |                  |  |  |   |         | 
|Total*                                               |  | $                  | 507,539 |  |                   | $ | 234,057 |                    |  | $ | 133,232          |  |  | $ | 246,944 | 
|                                                     |  |                    |         |  |                   |   |         |                    |  |   |                  |  |  |   |         | 



|* | Excludes Other category comprised of overdrafts, leases, credit cards and other adjustments such as loan premium oustanding, in the amount of $700,000.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------

Asset Quality and Non-Performing Assets

Non-performing loans, which include non-accrual loans and accruing loans past due over 90 days, totaled $115.1 million, or 11.11% of gross loans at September 30, 2010, as compared to $103.9 million,
or 9.04% of gross loans at December 31, 2009. At September 30, 2010, the nonperforming loan total included $54.2 million, or 47% that was current as to payment of contractual principal and interest and was less than 30 days past due.

As of September 30, 2010, non-performing assets, which include non-performing loans and OREO, totaled $145.0 million or 10.18% of total
assets as compared to $128.7 million, or 8.37% of total assets as of December 31, 2009. A single borrower whose relationship is comprised of four commercial real estate loans and two construction loans, with aggregate principal of $23.4 million
at June 30, 2010, indicated his unwillingness or inability to continue to service the debt obligations, thereby requiring the Company to classify his loans as impaired and transfer them to non-performing status. This was the most significant
factor affecting the increase in non-performing loans and non-performing assets during the nine months ended September 30, 2010. During the most current quarter these loans were restructured; and although the loan is still on nonaccrual status,
the borrower is performing in accordance with the restructure terms.



28



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Loans are classified as non-accrual
when full collection of principal or interest is uncertain if (1) they are past due as to maturity or payment of contractual principal or interest by 90 days or more, and (2) other circumstances create uncertainty as to such payment. In
certain instances where the loans are well secured and in the process of collection, such loans will not be placed on non-accrual status. In addition, loans that are impaired pursuant to ASC 310-10-35, Accounting by Creditors for the
Impairment of a Loan, are classified as non-accrual consistent with regulatory guidance. Loans placed on non-accrual status typically remain so until all principal and interest payments are brought current, and the potential for future
payments, in accordance with associated loan agreements, appears reasonably certain. Interest lost on non-accrual loans for the nine months ended September 30, 2010 totaled $7.6 million.

Foreclosed properties included as OREO are recorded at the net realizable value, which becomes the propertys new basis. Any write-downs based on
the assets fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair
value, net of estimated costs to sell. Fair value adjustments on OREO are recorded as a net loss or gain, as appropriate. These losses represent impairments on OREO for fair value adjustments based on the fair value of the real estate. OREO totaled
$29.9 million at September 30, 2010 and was comprised of 83 property units. Approximately 68% of the dollar volume of OREO held by the Company is located in Oregon with the remaining balance located in California.

The balance of OREO has fluctuated during the quarter and nine months ended September 30, 2010, as illustrated in the table below:



|                                                                   |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|Other real estate owned and foreclosed assets (OREO)             | 
|(Dollars in 000s)                                                 |  |                                 |        |   |                                |   |        |      |  |   |         |  
|                                                                   |  | Three Months EndedSeptember
30, |        |   | Nine Months EndedSeptember
30, |  
|                                                                   |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Other real estate owned and foreclosed assets, beginning of period |  | $                               | 15,084 |   |                                | $ | 14,588 |      |  | $ | 24,748  |   |  | $ | 4,423  |  
|Transfers from outstanding loans                                   |  |                                 | 17,259 |   |                                |   | 6,403  |      |  |   | 22,368  |   |  |   | 18,456 |  
|Improvements and other additions                                   |  |                                 | 95     |   |                                |   | 119    |      |  |   | 419     |   |  |   | 352    |  
|Sales                                                              |  |                                 | (1,954 | ) |                                |   | (1,506 | )    |  |   | (15,419 | ) |  |   | (3,299 | )
|Net gain (loss) on sales                                           |  |                                 | 147    |   |                                |   | (71    | )    |  |   | 1,610   |   |  |   | (212   | )
|Impairment charges                                                 |  |                                 | (729   | ) |                                |   |       |      |  |   | (3,824  | ) |  |   | (187   | )
|                                                                   |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total other real estate owned and foreclosed assets                |  | $                               | 29,902 |   |                                | $ | 19,533 |      |  | $ | 29,902  |   |  | $ | 19,533 |  
|                                                                   |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  

The Company has written down impaired, non-accrual loans at September 30, 2010, to their net realizable value or has
established impairment reserves as appropriate. Procedures to establish the fair value of collateral securing impaired, collateral-dependent loans rely primarily on third-party appraisals. When independent appraisals are not available on a timely
basis, other supporting evidence is used to estimate the net recoverable values pending receipt of the preferred third-party appraisal.

The
following table summarizes the Companys non-performing assets as of September 30, 2010 and December 31, 2009:



|                                                        |  |                    |         |   |                   |   |         |  
|------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|Non-performing assets                                   |  |                    |         |   |                   |  
|(Dollars in 000s)                                      |  |                    |         |   |                   |  
|                                                        |  | September 30, 2010 |         |   | December 31, 2009 |  
|                                                        |  | Amount             |         |   | Amount            |  
|Loans on non-accrual status                             |  | $                  | 114,990 |   |                   | $ | 98,497  |  
|Loans past due 90 days or more but on accrual status    |  |                    | 113     |   |                   |   | 5,420   |  
|                                                        |  |                    |         |   |                   |   |         |  
|Total non-performing loans                              |  |                    | 115,103 |   |                   |   | 103,917 |  
|Other real estate owned and foreclosed assets (OREO)  |  |                    | 29,902  |   |                   |   | 24,748  |  
|                                                        |  |                    |         |   |                   |   |         |  
|Total non-performing assets                             |  | $                  | 145,005 |   |                   | $ | 128,665 |  
|                                                        |  |                    |         |   |                   |   |         |  
|                                                        |  |                   
|Applicable ratios:                                      |  |                    |         |   |                   |   |         |  
|Allowance for loan losses to gross loans                |  |                    | 4.07    | % |                   |   | 3.99    | %
|Allowance for loan losses to total non-performing loans |  |                    | 36.59   | % |                   |   | 44.17   | %
|Non-performing loans to gross loans                     |  |                    | 11.11   | % |                   |   | 9.04    | %
|Non-performing assets to total assets                   |  |                    | 10.18   | % |                   |   | 8.37    | %



29



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The following table summarizes the
Companys non-performing loans by loan type and geographic region as of September 30, 2010:



|                                                         |  |                      |         |   |                   |   |         |                    |  |   |                  |   |  |        |         |   |                    |   |           |                                            |  |   |           |  |  |  |       | 
|-------------------------------------------------------- |  | -------------------- | ------- | - | ----------------- | - | ------- | ------------------ |  | - | ---------------- | - |  | ------ | ------- | - | ------------------ | - | --------- | ------------------------------------------ |  | - | --------- |  |  |  | ----- | 
|Total non-performing loans by type and geographic region | 
|(Dollars in 000s)                                       |  |                      |         |   |                   |   |         |                    |  |   |                  |   |  |        |         |   |                    |   |           |                                            | 
|                                                         |  | September 30, 2010   |        
|                                                         |  | Non-performing Loans |         |   |                   |   |         |                    | 
|                                                         |  | SouthernOregon       |         |   | Mid-CentralOregon |   |         | NorthernCalifornia |  |   | SacramentoValley |   |  | Totals |         |   | Funded LoanTotals* |   |           | Percent NPLto FundedLoan Totalsby Category | 
|Agricultural/Farm                                        |  | $                    | 383     |   |                   | $ |        |                    |  | $ | 50               |   |  | $      |        |   |                    | $ | 433       |                                            |  | $ | 41,309    |  |  |  | 1.0%  | 
|C&I                                                      |  |                      | 2,018   |   |                   |   | 1,323   |                    |  |   | 1,370            |   |  |        | 770     |   |                    |   | 5,481     |                                            |  | $ | 168,218   |  |  |  | 3.3%  | 
|CRE                                                      |  |                      | 50,395  |   |                   |   | 16,080  |                    |  |   | 7,219            |   |  |        | 16,142  |   |                    |   | 89,836    |                                            |  | $ | 690,961   |  |  |  | 13.0% | 
|Residential RE construction                              |  |                      | 166     |   |                   |   | 2,763   |                    |  |   | 2,673            |   |  |        | 7,534   |   |                    |   | 13,136    |                                            |  | $ | 21,346    |  |  |  | 61.5% | 
|Residential RE                                           |  |                      | 544     |   |                   |   | 1,367   |                    |  |   | 1,450            |   |  |        | 1,804   |   |                    |   | 5,165     |                                            |  | $ | 31,141    |  |  |  | 16.6% | 
|Consumer RE                                              |  |                      | 700     |   |                   |   |        |                    |  |   | 120              |   |  |        |        |   |                    |   | 820       |                                            |  | $ | 32,785    |  |  |  | 2.5%  | 
|Consumer                                                 |  |                      | 87      |   |                   |   | 140     |                    |  |   | 5                |   |  |        |        |   |                    |   | 232       |                                            |  | $ | 49,909    |  |  |  | 0.5%  | 
|                                                         |  |                      |         |   |                   |   |         |                    |  |   |                  |   |  |        |         |   |                    |   |           |                                            |  |   |           |  |  |  |       | 
|                                                         |  |                      | 54,293  |   |                   |   | 21,673  |                    |  |   | 12,887           |   |  |        | 26,250  |   |                    |   | 115,103   |                                            |  |   | 1,035,669 |  |  |  |       | 
|                                                         |  |                      |         |   |                   |   |        
|Other*                                                   |  |                      |        |   |                   |   |        |                    |  |   |                 |   |  |        |        |   |                    |   |          |                                            |  |   | 410       |  |  |  |       | 
|                                                         |  |                      |         |   |                   |   |         |                    |  |   |                  |   |  |        |         |   |                    |   |           |                                            |  |   |           |  |  |  |       | 
|Total non-performing loans                               |  | $                    | 54,293  |   |                   | $ | 21,673  |                    |  | $ | 12,887           |   |  | $      | 26,250  |   |                    | $ | 115,103   |                                            |  | $ | 1,036,079 |  |  |  |       | 
|                                                         |  |                      |         |   |                   |   |         |                    |  |   |                  |   |  |        |         |   |                    |   |           |                                            |  |   |           |  |  |  |       | 
|                                                         |  |                      |         |   |                   |   |        
|Non-performing loans to total funded loans               |  |                      | 11.8    | % |                   |   | 9.8     | %                  |  |   | 10.3             | % |  |        | 11.4    | % |                    |   | 11.1      | %                                          |  |   |           |  |  |  |       | 
|                                                         |  |                      |         |   |                   |   |        
|Total funded loans                                       |  | $                    | 461,768 |   |                   | $ | 220,175 |                    |  | $ | 124,657          |   |  | $      | 229,479 |   |                    | $ | 1,036,079 |                                            |  |   |           |  |  |  |       | 



|* | Includes overdrafts, leases and other adjustments such as deferred loan fees, etc.
|- | ----------------------------------------------------------------------------------

The balance of non-performing loans has fluctuated during the quarter and nine months ended September 30, 2010, as illustrated in the table below:



|                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|Nonperforming Loans                 | 
|(Dollars in 000s)                  |  |                                 |         |   |                                |   |         |      |  |   |         |  
|                                    |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                    |  | 2010                            |         |   | 2009                           |   |         | 2010 |  |   | 2009    |  
|Balance beginning of period         |  | $                               | 129,703 |   |                                | $ | 103,420 |      |  | $ | 103,917 |   |  | $ | 82,615  |  
|Transfers from performing loans     |  |                                 | 10,504  |   |                                |   | 30,765  |      |  |   | 73,614  |   |  |   | 87,746  |  
|Loans returned to performing status |  |                                 | (93     | ) |                                |   | (7      | )    |  |   | (11,988 | ) |  |   | (1,101  | )
|Transfers to OREO (1)               |  |                                 | (17,210 | ) |                                |   | (6,403  | )    |  |   | (21,857 | ) |  |   | (18,456 | )
|Principal reduction from payment    |  |                                 | (5,925  | ) |                                |   | (10,261 | )    |  |   | (17,712 | ) |  |   | (18,446 | )
|Principal reduction from charge-off |  |                                 | (1,876  | ) |                                |   | (8,133  | )    |  |   | (10,871 | ) |  |   | (22,977 | )
|                                    |  |                                 |         |  
|                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total nonperforming loans           |  | $                               | 115,103 |   |                                | $ | 109,381 |      |  | $ | 115,103 |   |  | $ | 109,381 |  
|                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



|(1) | Represents only those loans in nonperforming status prior to being transferred into OREO and other foreclosed assets during the periods presented
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

The Companys principal source of credit stress is real estate related loans, both commercial and residential. Borrowers
either involved in real estate or having secured loans with real estate have been vulnerable to both the ongoing economic downturn and to declining real estate values. Approximately 94% or $108.1 million of our non-performing loan total of $115.1
million is directly related to real estate in the form of commercial or residential real estate development loans. At September 30, 2010 and December 31, 2009, $51.9 million and $38.4 million, respectively, of our real estate related loans
remain current as to contractual principal and interest payments, but were placed on non-accrual status due to the absence of evidence supporting the borrowers ongoing ability to discharge their loan obligations.



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The following tables summarize the
Companys troubled debt restructured loans by type and geographic region as of September 30, 2010:



|                                                 |  |                    |        |  |                   |   |       |                    |  |   |                  |  |  |        |       |  |  |   |        | 
|------------------------------------------------ |  | ------------------ | ------ |  | ----------------- | - | ----- | ------------------ |  | - | ---------------- |  |  | ------ | ----- |  |  | - | ------ | 
|Restructured loans by type and geographic region | 
|(Dollars in 000s)                               |  |                    |        |  |                   |   |       |                    |  |   |                  |  |  |        |      
|                                                 |  | September 30, 2010 |       
|                                                 |  | Restructured loans |       
|                                                 |  | SouthernOregon     |        |  | Mid-CentralOregon |   |       | NorthernCalifornia |  |   | SacramentoValley |  |  | Totals |      
|C&I                                              |  | $                  |       |  |                   | $ |      |                    |  | $ | 475              |  |  | $      | 225   |  |  | $ | 700    | 
|CRE                                              |  |                    | 27,248 |  |                   |   | 979   |                    |  |   | 432              |  |  |        | 208   |  |  |   | 28,867 | 
|Residential RE construction                      |  |                    |       |  |                   |   | 2,763 |                    |  |   |                 |  |  |        | 1,690 |  |  |   | 4,453  | 
|Residential RE                                   |  |                    |       |  |                   |   |      |                    |  |   | 325              |  |  |        |      |  |  |   | 325    | 
|                                                 |  |                    |        |  |                   |   |       |                    |  |   |                  |  |  |        |       |  |  |   |        | 
|Total restructured loans                         |  | $                  | 27,248 |  |                   | $ | 3,742 |                    |  | $ | 1,232            |  |  | $      | 2,123 |  |  | $ | 34,345 | 
|                                                 |  |                    |        |  |                   |   |       |                    |  |   |                  |  |  |        |       |  |  |   |        | 

The following table presents the Companys troubled debt restructured loans by year of maturity, according to the
restructured terms, as of September 30, 2010:



|                   |  |        |        | 
|------------------ |  | ------ | ------ | 
|(Dollars in 000s) |  |        |       
|Year               |  | Amount |       
|2010               |  | $      | 208    | 
|2011               |  |        | 23,284 | 
|2012               |  |        | 9,163  | 
|2013               |  |        | 1,690  | 
|                   |  |        |        | 
|Total              |  | $      | 34,345 | 
|                   |  |        |        | 

Continuing actions taken to address the credit situation include:



| |  |  | Credit monitoring activities at all levels of the organization are focused on early detection and preemptive action to seek strategies that can lead to
a satisfactory outcome for both the Bank and the borrower. The Companys Asset Recovery Group has been active in this effort interfacing directly with borrowers and with line managers to expedite resolution of existing and potential troubled
credits. These actions have and will continue to facilitate recovery strategies with cooperative borrowers. In those instances where alternatives have been exhausted or determined to be impractical and default under the terms of the loans has
occurred, foreclosure actions are being pursued.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing reviews to confirm the reliability of our internal credit reviews are occurring utilizing an independent firm that has been conducting
similar reviews of segments of our loan portfolio for more than two years.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Senior Management scrutiny of lending activities has continued at a heightened level with direct involvement in significant credit relationships.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

A continued decline in economic conditions in our market areas and nationally, as well as other factors, could adversely
impact individual borrowers or our loan portfolio in general. As a result, we can provide no assurance that additional loans will not become 90 days or more past due, become impaired or placed on non-accrual status, restructured or transferred to
OREO in the future. Additional information regarding our loan portfolio is provided in Note 7 of the Notes to the Condensed Consolidated Financial Statements.

Allowance for Loan Losses and Reserve for Unfunded Commitments

The allowance for loan
losses (ALL) totaled $42.1 million as of September 30, 2010, a decrease of $3.8 million or 8% from the balance at December 31, 2009. This decrease occurred as a result of the overall loan balances declining and
Managements ongoing evaluation of the adequacy of the reserve and the credit quality of the loan portfolio over the nine months ended September 30, 2010. During the quarter just ended, $1.6 million in provision for loan losses was
recorded offset by $3.4 million in net charge-offs. These figures compare with $10.3 million in provision for loan losses and $9.0 million in net charge-offs for the quarter ended September 30, 2009.



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|                                         |  |                    |         |   |                   |   |         |  
|---------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|Allowance for credit losses              | 
|(Dollars in 000s)                       |  |                    |         |   |                   |  
|                                         |  | September 30, 2010 |         |   | December 31, 2009 |  
|ALL beginning balance                    |  | $                  | 45,903  |   |                   | $ | 17,157  |  
|Loans charged-off                        |  |                    | (17,791 | ) |                   |   | (61,067 | )
|Loan recoveries                          |  |                    | 4,877   |   |                   |   | 1,782   |  
|Restructured loan concessions            |  |                    | (919    | ) |                   |   |        |  
|Loan loss provision                      |  |                    | 10,050  |   |                   |   | 88,031  |  
|                                         |  |                    |         |   |                   |   |         |  
|ALL ending balance                       |  |                    | 42,120  |   |                   |   | 45,903  |  
|Reserve for unfunded commitments         |  |                    | 85      |   |                   |   | 130     |  
|                                         |  |                    |         |   |                   |   |         |  
|Total allowance for credit losses        |  | $                  | 42,205  |   |                   | $ | 46,033  |  
|                                         |  |                    |         |   |                   |   |         |  
|                                         |  |                   
|Applicable ratios:                       |  |                    |         |   |                   |   |         |  
|Allowance for loan losses to gross loans |  |                    | 4.07    | % |                   |   | 3.99    | %

The decrease in the allowance for loan
losses as of September 30, 2010 as compared to December 31, 2009 is primarily due to overall loan balances decreasing and managements evaluation of the loss potential inherent in the current loan as compared to a similar evaluation
at the end of 2009. The methodology employed in establishing loss estimates as well as related impairment and general reserves against these estimated losses is discussed 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. 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 the FASBs, Accounting for Contingencies ASC 450-10-05.

Additionally, impaired loans are evaluated for loss potential on an individual basis in accordance with FASBs Accounting for Creditors for
Impairment of a Loan ASC 310-10-35, 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 evaluates the most recent third-party appraisal depending on a number of factors including, but not limited to, property location, local price volatility, local economic conditions, recent comparable sales, etc. In all cases, the
costs to sell the subject property are deducted in arriving at the net realizable value of the collateral. Any unpaid property taxes or similar expenses also reduce the net realizable value of collateral.



32



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The table below summarizes the
Banks defined substandard loan totals, the ASC 310-10-35 defined impaired loan totals (collectively adversely classified loans) and other related data at quarter end since December 31, 2009:



|                                          |  |                    |           |   |               |   |           |                |  |   |                   |   |  |   |           |  
|----------------------------------------- |  | ------------------ | --------- | - | ------------- | - | --------- | -------------- |  | - | ----------------- | - |  | - | --------- | -
|(Dollars in 000s)                        |  |                    |           |   |               |   |           |                |  |   |                   |  
|                                          |  | September 30, 2010 |           |   | June 30, 2010 |   |           | March 31, 2010 |  |   | December 31, 2009 |  
|Rated substandard                         |  | $                  | 193,133   |   |               | $ | 186,627   |                |  | $ | 191,960           |   |  | $ | 181,675   |  
|Impaired                                  |  |                    | 115,103   |   |               |   | 129,703   |                |  |   | 104,372           |   |  |   | 103,917   |  
|                                          |  |                    |           |   |               |   |           |                |  |   |                   |   |  |   |           |  
|Total adversely classified loans*         |  | $                  | 308,236   |   |               | $ | 316,330   |                |  | $ | 296,332           |   |  | $ | 285,592   |  
|                                          |  |                    |           |   |               |   |           |                |  |   |                   |   |  |   |           |  
|                                          |  |                    |           |  
|Gross loans                               |  | $                  | 1,036,079 |   |               | $ | 1,091,860 |                |  | $ | 1,118,964         |   |  | $ | 1,149,027 |  
|Adversely classified loans to gross loans |  |                    | 29.75     | % |               |   | 28.97     | %              |  |   | 26.48             | % |  |   | 24.86     | %



|* | 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As illustrated above, the Company experienced a 3% decrease in
Adversely Classified Loans in the current quarter. Reserves for both loan categories were $30.9 million and $35.6 million at September 30, 2010 and December 31, 2009, respectively. The extended economic downturn has shown its impact in the
increase in loans rated substandard and impaired.

The lapse of time and declining charge off activity have resulted in changing loss factors
each quarter as the rolling 36-month charge-off history used in our allowance methodology is updated. Additionally, the specific reserves associated with our non-performing, collateral-dependent loans vary as payments are received and/or new
appraisals impact the amount of these reserves. The effect of these changes during the nine months ending September 30, 2010 has been a reduction in the overall allowance of approximately $3.8 million or 8% since December 31, 2010.

In some instances the Company has modified or restructured loans to amend the interest rate and/or to extend the maturity. Through
September 30, 2010, loans with amendments that qualify these as troubled debt restructurings totaled $34.3 million.

As of
September 30, 2010, Management believes that the Companys total allowance for credit losses and reserve for unfunded commitments is sufficient to absorb the losses inherent in the loan portfolio, related both to funded loans and unfunded
commitments. This assessment, based on both historical levels of net charge-offs and continuing detailed reviews of the quality of the loan portfolio, involves uncertainty and judgment. As a result, the adequacy of the allowance for loan losses and
the reserve for unfunded commitments cannot be determined with inherent accuracy and may change in future periods. Additionally, bank regulatory authorities may require additional charges to the provision for loan losses as a result of judgments
made during their periodic examinations of the Company.

Goodwill

At September 30, 2010 and December 31, 2009, the Company had no recorded goodwill. The goodwill recorded in connection with acquisitions, principally the Stockmans Financial Group acquisition
completed in 2008 and the Wachovia branch acquisition in 2009, as well as acquisitions prior to 2008, represented the excess of the purchase price over the estimated fair value of the net assets acquired. Goodwill and other intangible assets with
indefinite lives are not amortized but are periodically tested for impairment. When goodwill exists, the Company performs a goodwill impairment analysis on an annual basis as of December 31 and on an interim basis when events or circumstances
suggested impairment may have potentially existed.

For each of the quarters ending December 31, 2009, September 30,
2009, June 30, 2009, and March 31, 2009, the Company engaged a third-party valuation consultant to assist management in conducting an independent impairment analysis and to assist Management in its determination of the existence of
any goodwill impairment.

The Company recorded a goodwill impairment charge of $74.9 million at December 31, 2009, reducing goodwill on
the balance sheet to zero. The goodwill impairment charge had no effect on our cash balances, liquidity or regulatory capital ratios.



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LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY  Liquidity enables the Company to fund loan commitments and meet customer withdrawals of deposits. The Company
maintains its liquidity position through maintenance of cash resources, the stability of and growth in our core deposit base and through our ability to borrow funds from committed sources of credit. The Banks deposits currently exceed loans as
reflected in its loan-to-deposit ratio at September 30, 2010 and December 31, 2009, of 81.09% and 80.87%, respectively.

As of
September 30, 2010, the Companys overall liquidity position improved slightly when compared to December 31, 2009 and September 30, 2009. Liquidity in the form of cash and cash equivalents increased approximately $15.9 million to
$119.0 million. Borrowed funds in the form of federal funds purchased and FHLB advances were zero as of both September 30, 2010 and December 31, 2009. Investment securities increased by $31.0 million. Historically, all of the
Companys investment securities have been pledged for collateralization of public funds on deposit and, therefore, were not available for purposes of liquidity. More recently, we have reduced our public funds deposits thereby reducing our
pledging requirements. The Company anticipates using additional unpledged investment securities to collateralize federal funds lines of credit with its correspondent banks and FHLB.

Management maintains contingency plans for addressing the Companys ongoing liquidity needs and presently believes the Banks stable core deposit base provides for opportunity should Management
decide to attract additional deposits by increasing the rate of interest offered on deposits, particularly certificates of deposit. The Bank is also maintaining a significant balance of cash equivalents until such time as liquidity concerns within
the community banking environment have subsided. Although the current economic environment has impeded significant loan growth, the Company could eliminate loan growth and related cash utilization through various policy changes including increased
pricing. Additionally, selling any unpledged investment securities is a source for additional cash equivalents.

The Company maintains secured
lines-of-credit with the FHLB and with the Federal Reserve Bank of San Francisco. As of September 30, 2010, the Bank had $23,000 of borrowings advanced from the FHLB and an aggregate of $4.8 million in letters of credit issued by the FHLB on
behalf of the Company to meet its excess deposit insurance requests from customers. The Company also had immediate availability to borrow an additional $48.8 million under the Companys credit line with the FHLB. As of September 30, 2010,
the Company also had the capability to draw up to $13.1 million from the Federal Reserve Bank of San Francisco and $20.0 million from a correspondent bank, pursuant to collateralized credit arrangements.

At September 30, 2010, the Company had approximately $86.4 million in outstanding commitments to extend credit for loans. Under the terms of
construction project commitments, completion of specified project benchmarks must be certified before funds may be drawn. Additionally, we anticipate that a portion of these commitments will expire or terminate without funding. Management believes
that the Companys available resources will be sufficient to fund these commitments in the normal course of business.

In addition, as of
September 30, 2010, the Company had $3.1 million of standby letters related to extensions of credit and approximately $290,000 of other unsecured lines of credit related to overdraft protection for demand deposit accounts.

As disclosed in the Consolidated Statements of Cash Flows, net cash provided operating activities totaled $17.8 million during the nine months ended
September 30, 2010 and net cash of $108.7 million provided by investing activities. Cash used in financing activities, totaling $110.6 million, was principally comprised of $143.1 million decrease in deposits offset by $32.5 million net of
expenses received for the Companys common stock offering.

CAPITAL RESOURCES  Federal bank regulatory agencies use
risk-based capital adequacy guidelines in the examination and regulation of banks and bank holding companies that are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding
companies.

Under the guidelines, an institutions capital is divided into Tier 1 capital and Tier 2 capital. Tier 1 capital generally
consists of common stockholders equity, surplus and undivided profits. Tier 2 capital generally consists of the allowance for loan losses, hybrid capital instruments and subordinated debt. The sum of Tier 1 capital and Tier 2 capital
represents total capital.

The adequacy of an institutions capital is determined primarily by analyzing risk-weighted assets. The
guidelines assign risk weightings to assets to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institutions risk-weighted assets are then compared with its Tier 1 capital and
total capital to arrive at a Tier 1 risk-based ratio and a total risk-based ratio, respectively. The guidelines also utilize a leverage ratio, which is Tier 1 capital as a percentage of average total assets, less intangibles.

Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based
capital ratio, and leverage ratio, together with certain subjective factors. The categories range from well capitalized to critically undercapitalized. Institutions that are undercapitalized or lower are subject
to certain mandatory supervisory corrective actions.



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A bank is deemed to be
well-capitalizedif the bank:



| |  |  | has a total risk-based capital ratio of 10.0 percent or greater; and
| | - |  | --------------------------------------------------------------------



| |  |  | has a Tier 1 risk-based capital ratio of 6.0 percent or greater; and
| | - |  | --------------------------------------------------------------------



| |  |  | has a leverage ratio of 5.0 percent or greater; and
| | - |  | ---------------------------------------------------



| |  |  | is not subject to any written agreement or order issued by the FDIC.
| | - |  | --------------------------------------------------------------------

A bank is deemed to be adequately capitalizedif the bank:



| |  |  | has a total risk-based capital ratio of 8.0 percent or greater; and
| | - |  | -------------------------------------------------------------------



| |  |  | has a Tier 1 risk-based capital ratio of 4.0 percent or greater; and
| | - |  | --------------------------------------------------------------------



| |  |  | has a leverage ratio of 4.0 percent or greater (or 3.0 percent in certain circumstances); and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | does not meet the definition of a well capitalized bank.
| | - |  | --------------------------------------------------------

Although the Bank meets the quantitative guidelines set forth above to be deemed well-capitalized, the Bank remains subject to the Agreement with the FDIC and, therefore, is deemed to be
adequately capitalized. Pursuant to the Agreement with the FDIC, discussed earlier, the Bank is required to increase and maintain its Tier 1 capital in such an amount as to ensure a leverage ratio of 10% or more by October 3, 2010,
well in excess of the 5% requirement set forth in regulatory guidelines. As indicated below, the Company and the Bank have increased the leverage ratio significantly as of September 30, 2010. However as of October 3, 2010 the 10% leverage
ratio had not been achieved. Management believes that, while not achieving this target in the timeframe required, the Company has demonstrated progress, taken prudent actions and maintained a good-faith commitment to reaching the requirements of the
Agreement. We continue to work toward achieving all requirements contained in the regulatory agreements in as expeditious a manner as possible.

The following table reflects PremierWest Banks various capital ratios, as compared to regulatory minimums for capital adequacy purposes:



|                                |  |                   |       |   |                  |  |      |                   |  |  |                                                 |   |  |                                           |      |   |  |  |       |  
|------------------------------- |  | ----------------- | ----- | - | ---------------- |  | ---- | ----------------- |  |  | ----------------------------------------------- | - |  | ----------------------------------------- | ---- | - |  |  | ----- | -
|                                |  | September 30,2010 |       |   | December 31,2009 |  |      | September 30,2009 |  |  | RegulatoryMinimum to beAdequately Capitalized |   |  | RegulatoryMinimum to beWell-Capitalized |     
|                                |  |                   |       |   |                  |  |      |                   |  |  | greater than or equal to                        |   |  | greater than or equal to                  |     
|Total risk-based capital ratio  |  |                   | 12.14 | % |                  |  | 8.53 | %                 |  |  | 9.72                                            | % |  |                                           | 8.00 | % |  |  | 10.00 | %
|Tier 1 risk-based capital ratio |  |                   | 10.86 | % |                  |  | 7.25 | %                 |  |  | 8.44                                            | % |  |                                           | 4.00 | % |  |  | 6.00  | %
|Leverage ratio                  |  |                   | 8.69  | % |                  |  | 5.70 | %                 |  |  | 7.20                                            | % |  |                                           | 4.00 | % |  |  | 5.00  | %

Similarly, the table below shows
PremierWest Bancorps capital ratios, as compared to regulatory minimums:



|                                |  |                   |       |   |                  |  |      |                   |  |  |                                                  |   |  |  |      |  
|------------------------------- |  | ----------------- | ----- | - | ---------------- |  | ---- | ----------------- |  |  | ------------------------------------------------ | - |  |  | ---- | -
|                                |  | September 30,2010 |       |   | December 31,2009 |  |      | September 30,2009 |  |  | RegulatoryMinimum to 
beAdequately Capitalized |  
|                                |  |                   |       |   |                  |  |      |                   |  |  | greater than or equal to                         |  
|Total risk-based capital ratio  |  |                   | 11.98 | % |                  |  | 8.62 | %                 |  |  | 9.87                                             | % |  |  | 8.00 | %
|Tier 1 risk-based capital ratio |  |                   | 10.70 | % |                  |  | 6.84 | %                 |  |  | 8.60                                             | % |  |  | 4.00 | %
|Leverage ratio                  |  |                   | 8.56  | % |                  |  | 5.38 | %                 |  |  | 7.32                                             | % |  |  | 4.00 | %



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and rates. The Companys market risk arises principally from interest rate risk
in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks, such as credit quality and liquidity risk, in the normal course of business,
Management considers interest rate risk to be a significant market risk, which could have a material effect on the Companys financial condition and results of operations. Other types of market risks, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Companys business activities. The Company did not experience a significant change in market risk at September 30, 2010, as compared to December 31, 2009.

As stated in the annual report on Form 10-K for 2009, 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, 2009.

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, 2010, 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.

The Company has been
named as a defendant in a suit filed in California that alleges lender liability. Management believes that the suit lacks merit and has begun the process of contesting the action. Accordingly, no reserve for loss has been established.

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, 2009.

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,
including a 10.0% leverage



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ratio. Our Bank leverage ratio as of September 30, 2010, was 8.69%. 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, if needed, 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 when needed, 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 Oregon Department of Finance and Corporate
Securities (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.

The Companys common stock may no longer qualify for listing on The NASDAQ Capital
Market.

NASDAQ Marketplace Rule 5550(a)(2) requires that primary equity securities listed on The NASDAQ Capital Market continue to
have a minimum bid price of at least $1.00 per share. On March 15, 2010, we received notice that we did not meet the requirement for minimum bid price for 30 consecutive business days. In accordance with NASDAQ rules, we received formal notice
from NASDAQ and had a period of 180 calendar days to achieve compliance. Compliance can be achieved by meeting the bid price standard for a minimum of ten consecutive business days, unless NASDAQ staff exercises discretion to extend such period. We
were not deemed in compliance at the end of the 180 day compliance period; but we were afforded an additional 180 day compliance period because on the 180th day of the first compliance period, we demonstrated that we met all applicable standards for
initial listing on The NASDAQ Capital Market (except the bid price requirement) based on our most recent public filings and market information. Our stock price may not increase to the $1.00 level for ten consecutive trading days and, if it does not
during the additional compliance period, our common stock would then be subject to delisting. Should our shares be subject to delisting from the Capital Market, there is no assurance that a liquid and efficient market for our common stock will be
available or develop. Although the shares may be eligible for trading on other exchanges, such as the OTC Bulletin Board, it is possible that the ability of a selling shareholder to realize the best market price will be impeded as the
result of wider bid-ask spreads.

Compliance with the recently enacted financial reform legislation may increase our costs of operations
and adversely impact our earnings.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Reform Act) into law. The Dodd-Frank Reform Act will change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions
and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant
discretion in drafting and implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. Significant changes will include:



| |  |  | The establishment of the Financial Stability Oversight Counsel, which will be responsible for identifying and monitoring systemic risks posed by
financial firms, activities, and practices.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to serve as a dedicated consumer-protection regulatory body
with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including
the authority to prohibit unfair, deceptive or abusive acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or
less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator
compensation, minimum repayment standards, and prepayment considerations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Elimination of federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts.
Depending on competitive responses, this significant change to existing law could have an adverse impact on the Companys interest expense.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Broadened base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets
less tangible equity capital of a financial institution.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Federal Reserve determination of reasonable debit card fees.
| | - |  | ------------------------------------------------------------



| |  |  | Permanent increase to the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive
to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Requirement of publicly traded companies to provide stockholders a non-binding vote on executive compensation and so-called golden
parachute payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a companys proxy materials. The legislation also directs the Federal
Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Many provisions in the Dodd-Frank Reform Act are aimed at financial institutions that are significantly larger than the Company or the Bank. Nonetheless, there are provisions that apply to us and we
must begin to comply with immediately. In addition, federal agencies will promulgate rules and regulations to implement and enforce provisions in the Dodd-Frank Reform Act. We will have to apply resources to ensure that we are in compliance
with all applicable provisions, which may adversely impact our earnings. The precise nature, extent and timing of many of these reforms and the impact on us is still uncertain.



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

(a) [Not applicable.]

(b) [Not applicable.]

(c) None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

(a) [Not applicable.]

(b) For a discussion of preferred stock dividend payments, which are being accrued but not paid, please see Note 11of 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, 2010)                                                                                          
|     | 
|3.2  |  | Amended and Restated Bylaws of PremierWest Bancorp (incorporated by reference to Exhibit 3.2 to Form 10-K filed March 16, 2010)                                                                                        
|     | 
|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.

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, 2010

PREMIERWEST BANCORP



|                                                    
|----------------------------------------------------
|/s/  James M. Ford                                  
|James M. Ford, President and Chief Executive Officer



|                                                                           
|---------------------------------------------------------------------------
|/s/  Michael D. Fowler                                                     
|Michael D. Fowler, Chief Financial Officer and Principal Accounting Officer



40