UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

# FORM 10-K

| |  | [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended: December 31, 2002
| |  | --- | ---------------------------------------------------------------------------------------------------------------------------------

or

| |  | [   ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from _____ to _____
| |  | ----- | ---------------------------------------------------------------------------------------------------------------------------------

Commission file number:
333-96209

PREMIERWEST BANCORP(Exact name of
registrant as specified in its charter)

|                         | 
|------------------------ | 
|                         | 
|Oregon                   | 
|(State of incorporation) | 
|                         | 

503 Airport RoadMedford,
Oregon   97504  (Address of principal
executive offices)

Registrants
telephone number: (541) 618-6003

Securities registered
under Section 12(b) of the Exchange Act:   None

Securities registered
under Section 12(g) of the Exchange Act:   Common stock

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. c

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



As
of February 28, 2003, there were 11,567,559 shares of common stock outstanding. The
aggregate market value of common stock held by nonaffiliates was approximately $73 million
at February 28, 2003, based on the average bid and ask prices of such stock on that date
as reported by the OTC Bulletin Board System.

# Documents Incorporated
by Reference:

Portions
of the definitive Proxy Statement to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held May 22, 2003 are incorporated by reference into
Part III.

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PREMIERWEST BANCORPFORM 10-KTABLE OF CONTENTS

|                                                |  |                                                                      
|----------------------------------------------- |  | ---------------------------------------------------------------------
|                                                |  |                                                                      
|Disclosure Regarding Forward Looking Statements |  | 1                                                                    
|PART I                                          | 
|Item 1                                          |  | Business                                                             
|Item 2                                          |  | Properties                                                           
|Item 3                                          |  | Legal Proceedings                                                    
|Item 4                                          |  | Submission of Matters to a Vote of Security Holders                  
|PART II                                         | 
|Item 5                                          |  | Market for Registrant's Common Equity and Related Stockholder Matters
|Item 6                                          |  | Selected Financial Data                                              
|Item 7                                          |  | Management's Discussion and Analysis of Financial Condition          
|                                                |  | and Results of Operations                                            
|Item 7A                                         |  | Quantitative and Qualitative Disclosures about Market Risk           
|Item 8                                          |  | Financial Statements and Supplementary Data                          
|Item 9                                          |  | Changes In and Disagreements with Accountants on Accounting          
|                                                |  | and Financial Disclosure                                             
|PART III                                        | 
|Item 10                                         |  | Directors, Executive Officers of the Registrant                      
|Item 11                                         |  | Executive Compensation and Report of Compensation Committee          
|Item 12                                         |  | Security Ownership of Certain Beneficial Owners and Management       
|Item 13                                         |  | Certain Relationships and Related Transactions                       
|Item 14                                         |  | Controls and Procedures                                              
|PART IV                                         | 
|Item 15                                         |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K     
|CERTIFICATIONS                                  |  | 40-41                                                                
|SIGNATURES                                      |  | 42-43                                                                
|                                                | 

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# DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report, particularly including
the section entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations, contains a number of forward-looking statements about our
anticipated business, operations, financial performance, and cash flows. Statements in
this report that relate to future plans, events, and circumstances are provided to
describe managements intentions and expectations based on currently available
information, and readers should not construe these statements as assurances or
guarantees. As with any predictions, these statements are inherently difficult to make
with any degree of assurance, and actual results may differ materially and adversely from
managements expectations described herein. Likewise, managements plans
described in this report may not come to pass because unforeseen events may force
management to deviate from its expressed intentions. Forward-looking statements often can
be identified by the use of predictive or prospective terms such as expect,anticipate, believe, plan, intend, and
words of similar construction or meaning. Some of the events or circumstances that may
cause our actual results to deviate from managements expectations include the
impact of competition and local and regional economic factors upon our customer base, our
deposits and our loan portfolio; economic and regulatory limits on our ability to grow
our assets and manage our business; interest rate fluctuations that may adversely impact
our revenues and expenses; and the impact of impairment charges upon our intangible and
other assets. Other factors that may adversely impact our performance are discussed in
the section entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations  Factors that May Affect Future Results of Operations, as
well as other disclosures we make from time to time in our other filings with the
Securities and Exchange Commission. Readers also should note that forward-looking
statements expressed in this report are made as of the date this report is filed and
management cannot undertake to update those statements to reflect future events or
circumstances.

# PART I

# ITEM 1. BUSINESS

# INTRODUCTION

PremierWest
Bancorp, an Oregon corporation (the Company), is a bank holding company
headquartered in Medford, Oregon. We operate primarily through our subsidiary, PremierWest
Bank (the Bank and collectively with the Company, PremierWest).
PremierWest conducts a general commercial banking business, gathering deposits from the
general public and applying those funds to the origination of loans for commercial, real
estate, and consumer purposes and investments. PremierWest was created from the merger of
Bank of Southern Oregon and Douglas National Bank on May 8, 2000, and the simultaneous
formation of a bank holding company for the resulting bank, PremierWest Bank. The merger
was accounted for as a pooling of interests. Accordingly, the consolidated financial
statements included elsewhere in this statement, and the following discussion, present the
Company as if the merger had taken place prior to the periods presented.

The
Bank is a community bank offering a full range of financial products and services through
a network of branches along the Interstate 5 freeway corridor between Roseburg, Oregon,
and Redding, California. The Bank has three subsidiaries: Premier Finance Company,
PremierWest Investment Services, Inc. and Blue Star Properties, Inc. Premier Finance
Company has offices in Medford, Klamath Falls and Portland, Oregon. Premier Investment
Services, Inc. operates throughout the Banks entire market.

PremierWest
was originally state chartered as Bank of Southern Oregon in 1992 and was headquartered in
Medford, Oregon. In May 2000, Bank of Southern Oregon merged with Douglas National Bank
(Douglas National) headquartered in Roseburg, Oregon, and simultaneously
formed a holding company for the resultant Bank, which was renamed PremierWest Bank. In
April 2001, the Company acquired Timberline Bancshares, Inc. and its wholly-owned
subsidiary, Timberline Community Bank (Timberline), with branch locations in
northern California.

For
the year ended December 31, 2002, PremierWest earned $4.3 million, an increase of 110.98%
compared to $2.0 million in net income for 2001. Net income of $2.0 million in 2001 was up
13.08% over 2000 earnings of $1.8 million. Our diluted earnings per share were $0.37,
$0.19 and $0.19 for the years ended 2002, 2001 and 2000, respectively. Return on average
shareholders equity was 9.13% for the year ended December 31, 2002. This compared
with a return on average shareholders equity of 5.12% for 2001 and a return on
average shareholders equity of 5.96% for 2000.

1

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# PRODUCTS AND SERVICES

PremierWest
offers a broad range of banking services to its customers, principally to small and
medium-sized businesses and professional and retail customers.

Loan
products  PremierWest makes commercial and real estate loans, construction loans
for owner-occupied and rental properties, commercial and equipment leases, and secured and
unsecured consumer loans. Commercial and real estate-based lending has been the primary
focus of the Banks lending activities.

Commercial
lending  PremierWest offers specialized loans for business and commercial
customers, including equipment and inventory financing, accounts receivable financing,
operating lines of credit, and real estate construction loans. PremierWest also makes
Small Business Administration loans to qualified businesses. A substantial portion of
PremierWests commercial loans are designated as real estate loans for regulatory
reporting purposes because they are secured by mortgages and trust deeds on real property,
even if the loans are made to finance commercial activities, such as inventory and
equipment purchases and leasing, and even if they are secured by other assets such as
equipment or accounts receivable.

One
of the primary risks associated with commercial loans is the risk that the commercial
borrower might not generate sufficient cash flows to repay the loan. PremierWest always
requires secondary sources of repayment, such as real estate collateral, and generally
requires personal guarantees from the borrowers principals.

Real
estate lending  Real estate is commonly a material component of collateral for
PremierWests loans. Although the expected source of repayment of these loans is
generally business or personal income, real estate collateral provides an additional
measure of security. Risks associated with loans secured by real estate include
fluctuating land values, changing local economic conditions, changes in tax policies, and
a concentration of real estate loans within a limited geographic area.

Commercial
real estate loans primarily include owner-occupied commercial properties and
income-producing or farm properties. The primary risks of commercial real estate loans are
loss of income of the borrower and the inability of the market to sustain rent levels.
PremierWests underwriting standards limit the maximum loan-to-value ratio and
require a minimum debt service coverage ratio for each of its commercial real estate
loans.

Although
commercial and commercial real estate loans generally are accompanied by somewhat greater
risk than single-family residential mortgage loans, commercial and commercial real estate
loans tend to be higher yielding, have shorter terms and generally provide for
interest-rate adjustments as prevailing rates change. Accordingly, commercial and
commercial real estate loans assist with interest-rate risk management while contributing
to strong asset and income growth.

PremierWest
originates several different types of construction loans, including residential
construction loans to borrowers who will occupy the premises upon completion of
construction, residential construction loans to builders, commercial construction loans,
and real estate acquisition and development loans. Because of the complex nature of
construction lending, these loans have a higher degree of risk than other forms of real
estate lending. Generally, the Bank mitigates its risk on construction loans by lending to
customers who have been prequalified for long-term financing and who are using contractors
acceptable to PremierWest.

Consumer
lending  PremierWest and its finance subsidiary, Premier Finance Company, make
secured and unsecured loans to individual borrowers for a variety of purposes including
personal loans and revolving credit lines, as well as consumer loans secured by autos,
boats, recreational vehicles, and other consumer products. Besides serving the Banks
immediate markets, Premier Finance Company also makes loans to Bank customers, where the
loans may carry a higher risk than permitted under the Banks lending criteria. Since
unsecured consumer loans normally carry significantly higher interest rates than secured
loans, PremierWest maintains a higher allowance for loan loss for consumer loans, while
maintaining strict credit guidelines when considering consumer loan applications.

Lease
financing  During 2001, the Bank contracted with a commercial leasing management
company in Portland, Oregon, to introduce commercial equipment lease financing to
customers primarily involved in the waste management industry. Management initially viewed
commercial leasing as an alternative that brought additional flexibility to conventional
borrowing for the purchase of business equipment. However, in 2002 management elected to
curtail its leasing activities in favor of focusing on other commercial banking
opportunities.

2

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Deposit
products and other services  PremierWest offers a variety of traditional deposit
products to attract both commercial and consumer deposits through checking and savings
accounts, money market accounts, and certificates of deposit. The Bank also offers safe
deposit facilities, travelers checks, money orders and automated teller machines at
many of its facilities.

PremierWests
investment subsidiary, PremierWest Investment Services, Inc., sells insurance and related
financial products, including life and health insurance, and provides mutual funds,
annuities and other investment products to its customers through a third-party registered
broker-dealer.

# MARKET AREA

PremierWest
conducts business in several primary market areas in southern Oregon and northern
California. The Company serves Jackson County, Oregon, from its main office in Medford,
five branch offices in Medford and one branch in Central Point. Medford is the fourth
largest city in Oregon and is the center for commerce, medicine and transportation in
southwestern Oregon. PremierWest also has two full-service branches in Grants Pass
(Josephine County), Oregon, which opened during 2001 and 2002. The principal industries in
Jackson and Josephine Counties include forest products, manufacturing and agriculture.
Other manufacturing segments include electrical equipment and supplies, computing
equipment, printing and publishing, fabricated metal products and machinery, and stone and
concrete products. In the nonmanufacturing sector, significant industries include
recreational services, wholesale and retail trades, as well as medical care, particularly
in connection with the areas growing retirement community.

Another
principal market area is centered in Roseburg, Oregon, and the surrounding communities in
Douglas County, which PremierWest serves from its eight branches in Roseburg, Winston,
Glide, Sutherlin, and Drain. PremierWests presence in the Roseburg market area
results primarily from Bank of Southern Oregons merger with Douglas National Bank on
May 8, 2000. The economy in Douglas County has historically depended on the forest
products industry, which is generally a declining industry, resulting in little economic
growth and lower per capita income levels compared to other market areas along the
Interstate 5 corridor, including those in Medford and Grants Pass and those in Northern
California, which are somewhat more economically diversified.

On
April 16, 2001, PremierWest acquired Timberline and its eight branch locations within
Siskiyou County in Northern California. PremierWest also opened a loan production office
in Redding, California, late in 2001. The economy of Northern California from Siskiyou
County to Redding is primarily involved in local government services, retail trade and
services, recreation and tourism and health care as the region moves away from timber and
timber products industries. Manufacturing jobs account for about 7% of all jobs in the
region.

PremierWest
does business in many different communities. However, the geographic areas we serve also
make our business more reliant on local economies than are super-regional and national
banks. Nevertheless, management believes the diversity of our customers, communities, and
economic sectors is a source of strength. In addition, management views our community
focus as among our greatest strengths.

# INDUSTRY OVERVIEW

The
commercial banking industry continues to undergo increased competition, consolidation and
change. In addition to traditional competitors such as banks and credit unions, noninsured
financial service companies such as mutual funds, brokerage firms, insurance companies,
mortgage companies and leasing companies now offer alternative investment opportunities
for customers funds and lending sources for their needs. Banks have been granted
extended powers to better compete with these financial service providers through the
limited right to sell insurance, securities products and other services, but the
percentage of financial transactions handled by commercial banks continues to decline as
the market penetration of other financial service providers has grown.

PremierWests
business model is to compete on the basis of customer service, not solely on price, and to
compete for deposits by offering a variety of deposit accounts at rates generally
competitive with financial institutions in the area.

3

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PremierWests
competition for loans comes principally from banks, savings and loan associations,
mortgage companies, finance companies, insurance companies, credit unions, and other
traditional lenders. We compete for loans on the basis of interest rates and loan fees,
our array of commercial and mortgage loan products, and the efficiency and quality of our
services. Lending activity can also be affected by our liquidity, local and national
economic conditions, current interest rate levels, and loan demand. As described above,
PremierWest competes with the larger commercial banks by emphasizing a community bank
orientation and efficient personal service to both commercial and individual customers.

# EMPLOYEES

As
of December 31, 2002, PremierWest had 288 full-time equivalent employees compared to 278
at December 31, 2001. This relative stability, while net income has grown more than 110%,
is due to increased efficiencies and our expansion of technology-based tools. None of our
employees are represented by a collective bargaining group. Management considers our
relations with employees to be excellent.

# WEBSITE ACCESS TO PUBLIC
FILINGS

PremierWest
makes available all periodic and current reports, free of charge, on its website as soon
as reasonably practicable after such material is electronically filed with or furnished to
the Securities and Exchange Commission (SEC). PremierWests website
address is www.premierwestbank.com. The contents of our website are not
incorporated into this report or into our other filings with the SEC.

# GOVERNMENT POLICIES

The
operations of PremierWests subsidiaries are affected by state and federal
legislative changes and by policies of various regulatory authorities, including those of
the States of Oregon and California, the Federal Reserve Bank, and the Federal Deposit
Insurance Corporation. These policies include, for example, statutory maximum legal
lending limits and rates, domestic monetary policies of the Board of Governors of the
Federal Reserve System, United States fiscal policy, and capital adequacy and liquidity
constraints imposed by national and state regulatory agencies.

# SUPERVISION AND
REGULATION

General PremierWest is extensively regulated under federal and state law. These laws
and regulations are generally intended to protect depositors, not shareholders. To the
extent that the following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory or regulatory
provisions. Any change in applicable laws or regulations may have a material effect on the
business and prospects of the Company. The operations of the Company may be affected by
legislative changes and by the policies of various regulatory authorities. The Company
cannot accurately predict the nature or the extent of the effects on its business and
earnings that fiscal or monetary policies, or new federal or state legislation, may have
in the future.

Federal
and State Bank Regulation PremierWest Bank, as a state chartered bank with
deposits insured by the Federal Deposit Insurance Corporation (FDIC), is
subject to the supervision and regulation of the State of Oregon and the FDIC. These
agencies may prohibit the Company from engaging in what they believe constitutes unsafe or
unsound banking practices.

The
Community Reinvestment Act (CRA) requires that, in connection with
examinations of financial institutions within its jurisdiction, the FDIC evaluate the
record of financial institutions in meeting the credit needs of their local communities,
including low and moderate-income neighborhoods, consistent with the safe and sound
operation of those institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a new branch or facility. The Companys current
CRA rating is Satisfactory.

4

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Banks
are also subject to certain restrictions imposed by the Federal Reserve Act on extensions
of credit to executive officers, directors, principal shareholders or any related interest
of such persons. Extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral as, and follow credit underwriting procedures that
are not less stringent than, those prevailing at the time for comparable transactions with
persons not affiliated with the Company, and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features. Banks are also subject to certain
lending limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary penalties on the
bank or any officer, director, employee, agent or other person participating in the
conduct of the affairs of that bank, the imposition of a cease and desist order, and other
regulatory sanctions.

Under
the Federal Deposit Insurance Corporation Improvement Act (FDICIA), each
federal banking agency has prescribed, by regulation, capital safety and soundness
standards for institutions under its authority. These standards cover internal controls,
information and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, fees and benefits, and standards for asset
quality, earnings and stock valuation. An institution that fails to meet these standards
must develop a plan acceptable to the agency, specifying the steps that the institution
will take to meet the standards. Failure to submit or implement such a plan may subject
the institution to regulatory sanctions. Management believes that the Company is in
substantial compliance with these standards.

Deposit
Insurance  The deposits of the Company are currently insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund (BIF), administered by
the FDIC. The Company is required to pay semiannual deposit insurance premium assessments
to the FDIC.

The
FDICIA included provisions to reform the federal deposit insurance system, including the
implementation of risk-based deposit insurance premiums. The FDICIA also permits the FDIC
to make special assessments on insured depository institutions in amounts determined by
the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed
from the U.S. Treasury and other sources or for any other purpose the FDIC deems
necessary. Pursuant to the FDICIA, the FDIC implemented a transitional risk-based
insurance premium system on January 1, 1993. Under this system, banks are assessed
insurance premiums according to how much risk they are deemed to present to the BIF. Banks
with higher levels of capital and a low degree of supervisory concern are assessed lower
premiums than banks with lower levels of capital or involving a higher degree of
supervisory concern. PremierWest Bank qualifies for the lowest premium level, and
currently pays only the statutory minimum rate.

Dividends
Under the Oregon Bank Act, banks are subject to restrictions on the payment of
cash dividends to their parent holding company. A bank may not pay cash dividends if that
payment would reduce the amount of its capital below that necessary to meet minimum
applicable regulatory capital requirements. In addition, the amount of the dividend may
not be greater than its net unreserved retained earnings, after first deducting (i) to the
extent not already charged against earnings or reflected in a reserve, all bad debts,
which are debts on which interest is unpaid and past due at least six months; (ii) all
other assets charged off as required by the state or federal examiner; and (iii) all
accrued expenses, interest and taxes of the Company.

In
addition, the appropriate regulatory authorities are authorized to prohibit banks and bank
holding companies from paying dividends constituting an unsafe or unsound banking
practice. The Company is not currently subject to any regulatory restrictions on dividends
other than those noted above.

Capital
Adequacy The federal and state bank regulatory agencies use capital adequacy
guidelines in their examination and regulation of financial holding companies and banks.
If capital falls below the minimum levels established by these guidelines, a holding
company or a bank may be denied approval to acquire or establish additional banks or
non-bank businesses or to open new facilities.

The
FDIC and Federal Reserve have adopted risk-based capital guidelines for banks and bank
holding companies. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure and to minimize disincentives
for holding liquid assets. Assets and off-balance-sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios represent capital
as a percentage of total risk-weighted assets and off-balance sheet items. The current
guidelines require all bank holding companies and federally regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1
capital. Generally, banking regulators expect banks to maintain capital ratios well in
excess of the minimum.

5

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Tier
1 capital for banks includes common shareholders equity, qualifying perpetual
preferred stock (up to 25% of total Tier 1 capital, if cumulative; under a Federal Reserve
rule, redeemable perpetual preferred stock may not be counted as Tier 1 capital unless the
redemption is subject to the prior approval of the Federal Reserve) and minority interests
in equity accounts of consolidated subsidiaries, less intangibles, except as described
above. Tier 2 capital includes: (i) the allowance for loan losses of up to 1.25% of
risk-weighted assets; (ii) any qualifying perpetual preferred stock which exceeds the
amount which may be included in Tier 1 capital; (iii) hybrid capital instruments (iv)
perpetual debt; (v) mandatory convertible securities and (vi) subordinated debt and
intermediate term preferred stock of up to 50% of Tier 1 capital. Total capital is the sum
of Tier 1 and Tier 2 capital less reciprocal holdings of other banking organizations,
capital instruments and investments in unconsolidated subsidiaries.

Banks
assets are given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. These computations result in the
total risk-weighted assets.

Most
loans are assigned to the 100% risk category, except for first mortgage loans fully
secured by residential property, which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds, which have a
50% risk-weight, and direct obligations of or obligations guaranteed by the U.S. Treasury
or U.S. Government agencies, which have 0% risk-weight. In converting off-balance sheet
items, direct credit substitutes, including general guarantees and standby letters of
credit backing financial obligations, are given 100% conversion factor. The
transaction-related contingencies such as bid bonds, other standby letters of credit and
undrawn commitments, including commercial credit lines with an initial maturity of more
than one year, have a 50% conversion factor. Short-term, self-liquidating trade
contingencies are converted at 20%, and short-term commitments have a 0% factor.

The
FDIC also has implemented a leverage ratio, which is Tier 1 capital as a percentage of
total assets less intangibles, to be used as a supplement to risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the maximum degree
to which a bank may leverage its equity capital base. The FDIC requires a minimum leverage
ratio of 3%. However, for all but the most highly rated bank holding companies and for
banks seeking to expand or experiencing or anticipating significant growth, the FDIC
requires a minimum leverage ratio of 4%.

The
FDICIA created a statutory framework of supervisory actions indexed to the capital level
of the individual institution. Under regulations adopted by the FDIC, an institution is
assigned to one of five capital categories depending on its total risk-based capital
ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with certain
subjective factors. Institutions deemed to be undercapitalized are subject to
certain mandatory supervisory corrective actions. The Company does not believe that these
regulations have any material effect on its operations.

Effects
of Government Monetary Policy The earnings and growth of the Company are
affected not only by general economic conditions, but also by the fiscal and monetary
policies of the federal government, particularly the Federal Reserve. The Federal Reserve
can and does implement national monetary policy for such purposes as curbing inflation and
combating recession, by its open market operations in U.S. Government securities, control
of the discount rate applicable to borrowings from the Federal Reserve, and establishment
of reserve requirements against certain deposits. These activities influence growth of
bank loans, investments and deposits, and also affect interest rates charged on loans or
paid on deposits. The nature and impact of future changes in monetary policies and their
impact on the Company cannot be predicted with certainty.

Changing
Regulatory Structure of the Banking Industry The laws and regulations affecting
banks and bank holding companies frequently undergo significant changes. Pending bills, or
bills that may be introduced in the future, may be expected to contain proposals for
altering the structure, regulation, and competitive relationships of the nations
financial institutions. If enacted into law, these bills could have the effect of
increasing or decreasing the cost of doing business, limiting or expanding permissible
activities (including insurance and securities activities), or affecting the competitive
balance among banks, savings associations, and other financial institutions. Some of these
bills would reduce the extent of federal deposit insurance, broaden the powers or the
geographical range of operations of bank holding companies, alter the extent to which
banks will be permitted to engage in securities activities, and realign the structure and
jurisdiction of various financial institution regulatory agencies. Whether, or in what
form, any such legislation may be adopted or the extent to which the business of the
Company might be affected thereby cannot be predicted with certainty.

6

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Of
particular note is legislation enacted by Congress in 1995 permitting interstate banking
and branching, which allows banks to expand nationwide through acquisition, consolidation
or merger. Under this law, an adequately capitalized bank holding company may acquire
banks in any state or merge banks across state lines if permitted by state law. Further,
banks may establish and operate branches in any state subject to the restrictions of
applicable state law. Under Oregon law, an out-of-state bank or bank holding company may
merge with or acquire an Oregon state chartered bank or bank holding company if the Oregon
bank, or in the case of a bank holding company, the subsidiary bank, has been in existence
for a minimum of three years, and the law of the state in which the acquiring bank is
located permits such merger. Branches may not be acquired or opened separately, but once
an out-of-state bank has acquired branches in Oregon, either through a merger with or
acquisition of substantially all the assets of an Oregon bank, the acquirer may open
additional branches.

In
December 1999, Congress enacted the Gramm-Leach-Bliley Act (the GLB Act) and
repealed the nearly 70-year prohibition on banks and bank holding companies engaging in
the businesses of securities and insurance underwriting imposed by the Glass-Steagall Act.

Under
the GLB Act, a bank holding company may, if it meets certain criteria, elect to be a
financial holding company, which is permitted to offer, through a non-bank
subsidiary, products and services that are financial in nature and to make
investments in companies providing such services. A financial holding company may also
engage in investment banking, and an insurance company subsidiary of a financial holding
company may also invest in portfolio companies, without regard to whether the
businesses of such companies are financial in nature.

The
GLB Act also permits eligible banks to engage in a broader range of activities through a
financial subsidiary, although a financial subsidiary of a bank is more
limited than a financial holding company in the range of services it may provide.
Financial subsidiaries of banks are not permitted to engage in insurance underwriting,
real estate investment or development, merchant banking or insurance portfolio investing.
Banks with financial subsidiaries must (i) separately state the assets, liabilities and
capital of the financial subsidiary in financial statements; (ii) comply with operational
safeguards to separate the subsidiarys activities from the bank; and (iii) comply
with statutory restrictions on transactions with affiliates under Sections 23A and 23B of
the Federal Reserve Act.

Activities
that are financial in nature include activities normally associated with
banking, such as lending, exchanging, transferring and safeguarding money or securities,
and investing for customers. Financial activities also include the sale of insurance as
agent (and as principal for a financial holding company, but not for a financial
subsidiary of a bank), investment advisory services, underwriting, dealing or making a
market in securities, and any other activities previously determined by the Federal
Reserve to be permissible non-banking activities.

Financial
holding companies and financial subsidiaries of banks may also engage in any activities
that are incidental to, or determined by order of the Federal Reserve to be complementary
to, activities that are financial in nature.

To
be eligible to elect status as a financial holding company, a bank holding company must be
well capitalized, under the Federal Reserve capital adequacy guidelines, and to be well
managed, as indicated in the institutions most recent regulatory examination. In
addition, each bank subsidiary must also be well capitalized and well managed, and must
have received a rating of satisfactory in its most recent CRA examination.
Failure to maintain eligibility would result in suspension of the institutions
ability to commence new activities or acquire additional businesses until the deficiencies
are corrected. The Federal Reserve could require a non-compliant financial holding company
that has failed to correct noted deficiencies to divest one or more subsidiary banks, or
to cease all activities other than those permitted to ordinary bank holding companies
under the regulatory scheme in place prior to enactment of the GLB Act.

In
addition to expanding the scope of financial services permitted to be offered by banks and
bank holding companies, the GLB Act addressed the jurisdictional conflicts between the
regulatory authorities that supervise various types of financial businesses. Historically,
supervision was an entity-based approach, with the Federal Reserve regulating member banks
and bank holding companies and their subsidiaries. As holding companies are now permitted
to have insurance and broker-dealer subsidiaries, the supervisory scheme is oriented
toward functional regulation. Thus, a financial holding company is subject to regulation
and examination by the Federal Reserve, but a broker-dealer subsidiary of a financial
holding company is subject to regulation by the Securities and Exchange Commission, while
an insurance company subsidiary of a financial holding company would be subject to
regulation and supervision by the applicable state insurance commission.

7

---

The
GLB Act also includes provisions to protect consumer privacy by prohibiting financial
services providers, whether or not affiliated with a bank, from disclosing non-public,
personal, financial information to unaffiliated parties without the consent of the
customer, and by requiring annual disclosure of the providers privacy policy. Each
functional regulator is charged with promulgating rules to implement these provisions.

The
Company is also subject to the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot
Act). Among other things, the USA Patriot Act requires financial institutions, such
as the Company to adopt and implement specific policies and procedures designed to prevent
and defeat money laundering. Management believes the Company is in compliance with the USA
Patriot Act.

The
Company is also subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the Securities Exchange Act of 1934, including
certain requirements under the Sarbanes-Oxley Act of 2002. On July 30, 2002, the
President signed into law the Sarbanes-Oxley Act of 2002 (the Act)
implementing legislative reforms intended to address corporate and accounting fraud. The
Act, which applies to any issuer that has securities registered, or that is required to
file reports, under the Securities Exchange Act, provides significant revisions to the
U.S. securities laws. Among other things, the Act and the accompanying regulation include
the following:

|o | Certification and Accountability.The Act requires chief executive officers
and chief financial officers or their equivalent, to certify to the accuracy of periodic
reports filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Criminal Penalty Enhancement.Longer prison terms will also be
applied to corporate executives who violate federal securities laws, the period during
which certain types of suits can be brought against a company or its officers has been
extended, and bonuses issued to top executives prior to restatement of a companys
financial statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement plan blackout periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the SEC as a
result of any judicial or administrative action under the Act be deposited to a fund for
the benefit of harmed investors.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Enhanced Financial Disclosures and Reporting Requirements.The
legislation accelerates the time frame for disclosures by public companies and insiders,
as they must more promptly disclose any material changes in their financial condition or
operations. Directors and executive officers must also provide information for most
changes in ownership in a companys securities within two business days of the
change.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Audit Committee Independence Requirements. The Company anticipates that the SEC
will adopt the proposed rules regarding audit committee independence as final rules on, or
around, April 26, 2003. The final rules will direct all national securities exchanges and
national securities associates, including NYSE and NASDAQ, to prohibit the listing of any
security of an issuer that is not in compliance with the audit committee requirements set
out in the proposed rules. The Company anticipates on being in compliance with the rules
when they become final rules and at such time when the final rules are applicable to the
Company.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Financial Expert. The Act also requires issuers to disclose whether at least one
member of the audit committee is a financial expert (as such term will be
defined by the SEC) and if not, why not. The Company is not required to disclose whether
at least one member of its audit committee is a financial expert in this
report; however, the Company will be required to make such a disclosure in its next annual
report for fiscal year ending 2003.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Code of Ethics. The Act also requires issuers to disclose whether they have adopted
a code of ethics for their senior financial officers, and if not, the reason therefor, as
well as any changes to, or waiver of any provision of, that code of ethics. The Company is
not required to disclose whether it has a code of ethics in place for its senior financial
officers in this report; however, the Company will be required to make such a disclosure
in its next annual report for fiscal year ending 2003.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

# ITEM 2. PROPERTIES

PremierWest
conducts its banking and financial businesses through 34 offices of which seven are
located in Jackson County, Oregon (including its headquarters and loan production office);
two in Josephine County, Oregon; nine in Douglas County, Oregon; and ten in Siskiyou and
Shasta Counties, California. The Company conducts business through Premier Finance Company
with offices located in Portland, Medford and Klamath Falls, Oregon. PremierWest
Investment Services, Inc. provides investment services through various PremierWest Bank
offices. PremierWest Mortgage, a division of PremierWest Bank, provides mortgage services
through PremierWest Bank offices and stand alone facilities located in Medford and Klamath
Falls, Oregon, and Redding, California.

The
following sets forth certain information regarding PremierWests office facilities:

|CountyFULL SERVICE BANKING OFFICES | City | Address        | SquareFootage | DateOpenedorAcquired            | Owned (O)orLeased (L)
|---------------------------------- | ---- | -------------- | ------------- | ------------------------------- | ---------------------
|Oregon                             |      |                |               |                                 |                      
|Jackson                            |      | Central Point  |               | 300 E. Pine                     |                      
|Jackson                            |      | Medford        |               | 1455 E. McAndrew                |                      
|Jackson                            |      | Medford        |               | 2600 E. Barnett                 |                      
|Jackson                            |      | Medford        |               | 3369 Crater Lake Hwy.           |                      
|Jackson                            |      | Medford        |               | 1200 Mira Mar (Rogue            |                      
|                                   |      |                |               | Valley Manor)                   |                      
|Jackson                            |      | Medford        |               | 300 E. Main                     |                      
|                                  
|Douglas                            |      | Drain          |               | 257 2nd Street                  |                      
|Douglas                            |      | Glide          |               | 19421 N. Umpqua Hwy.            |                      
|Douglas                            |      | Roseburg       |               | 555 S.E. Kane                   |                      
|Douglas                            |      | Roseburg       |               | 350 N.E. Garden Valley          |                      
|Douglas                            |      | Roseburg       |               | 2655 Van Pelt Ave. (Linus Oaks) |                      
|Douglas                            |      | Roseburg       |               | 2030 Stewart Pkwy.              |                      
|Douglas                            |      | Sutherlin      |               | 731 W. Central                  |                      
|Douglas                            |      | Winston        |               | 40 N.W. Glenhart                |                      
|                                  
|Josephine                          |      | Grants Pass    |               | 1689 Williams Hwy.              |                      
|Josephine                          |      | Grants Pass    |               | 1409 N.E. 7th                   |                      
|                                  
|California                         |     
|Siskiyou                           |      | Dorris         |               | 201 W. 3rd Street               |                      
|Siskiyou                           |      | Dunsmuir       |               | 5800 Dunsmuir Ave.              |                      
|Siskiyou                           |      | Greenview      |               | 6701 N. Hwy. 3                  |                      
|Siskiyou                           |      | McCloud        |               | 328 Main Street                 |                      
|Siskiyou                           |      | Mt. Shasta     |               | 309 N. Mt. Shasta               |                      
|Siskiyou                           |      | Tulelake       |               | 398 Main Street                 |                      
|Siskiyou                           |      | Weed           |               | 150 Alamo Ave.                  |                      
|Siskiyou                           |      | Yreka          |               | 123 N. Main                     |                      
|                                  
|Shasta                             |      | Redding        |               | 1320 Yuba Street, Suite 102     |                      
|                                  
|OTHER OFFICES                      |     
|Oregon                             |      | Administrative |              
|Jackson                            |      | Medford        |               | 503 Airport Rd. (Admin./        |                      
|                                   |      |                |               | Loan processing)                |                      
|Jackson                            |      | Medford        |               | 503 Airport Rd. (Processing/    |                      
|                                   |      |                |               | Proof dept.)                    |                      
|Douglas                            |      | Roseburg       |               | 605 S.E. Kane (Admin./          |                      
|                                   |      |                |               | Proof dept.)                    |                      
|                                  
|Premier Finance Company            |     
|Klamath                            |      | Klamath Falls  |               | 531 S. 6th                      |                      
|Jackson Co.                        |      | Medford        |               | 1175 Progress Way               |                      
|Multnomah                          |      | Portland       |               | 10415 S.E. Stark #D             |                      
|                                  
|PremierWest Mortgage               |     
|Klamath                            |      | Klamath Falls  |               | 409 Pine St. #309               |                      
|Jackson                            |      | Medford        |               | 1457 E. McAndrews               |                      
|                                   |      |                |               |                                 |                      

9

---

|County               | City | Address        | SquareFootage | DateOpenedorAcquired      | Owned (O)orLeased (L)
|-------------------- | ---- | -------------- | ------------- | ------------------------- | ---------------------
|California           |      | Administrative |               |                           |                      
|Siskiyou             |      | Yreka          |               | 2138 Fairlane Rd. (Proof  |                      
|                     |      |                |               | department)               |                      
|                    
|PremierWest Mortgage |      |                |               |                           |                      
|Shasta               |      | Redding        |               | 434 Redcliff Dr., Suite B |                      

|1. | The
land on which this location is situated is leased under a 50-year lease.  The building is
owned by the Company.
|-- | -------------------------------------------------------------------------------------------------------------------

|2. | This
branch is scheduled to open in the first quarter of 2003.
|-- | --------------------------------------------------------------

# ITEM 3. LEGAL
PROCEEDINGS

In
the  normal  course of  business,  PremierWest  is from time to time a party to  various
 legal  actions.  Generally  these actions,  if decided  adversely to  PremierWest,
 would not have a material  adverse  impact on our  business,  financial  condition or
results of operations except as set forth below:

Bernard
J. Woodward, et al vs. Bank of Southern Oregon (nka PremierWest Bank), Black Oak
Construction, Inc., et al; Jackson County Circuit Court, Oregon filed March 1, 2001.

This
 matter  involves  a claim by the  plaintiff  alleging  that the Bank  deposited  checks
 payable to the  plaintiff  and Black Oak Construction,  a Bank customer,  in the amount
of $930,840,  without plaintiff's consent.  Plaintiff is seeking return of the proceeds,
interest and costs and has indicated  intent to seek punitive  damages.  The Bank has
denied  liability  and filed a  counterclaim  for approximately  $1.16 million for losses
incurred on other loans to Black Oak  Construction.  The dispute involves the right of
the Bank depositing  proceeds  from  checks  payable  to Black  Oak  Construction
 thereby  repaying  certain  outstanding  loans  of Black  Oak Construction  in
 connection  with a joint  construction  project  between  the  plaintiff  and  Black
 Oak  Construction.  The  Bank's counterclaim  alleges the plaintiff  intentionally
caused Black Oak Construction to under-bid other construction  contracts.  Discovery in
the case is not yet  completed.  No trial date has been set.  Management  believes  its
actions were  proper;  however,  a favorable outcome in the litigation cannot be assured.

Bank
of Southern Oregon (nka PremierWest Bank) vs. Barry Fronek, Stanley Kelly, et al;
Jackson County Circuit Court, Oregon file din 1998; on Appeal to the Court of Appeals,
State of Oregon.

The
Bank brought suit against the  defendant  borrowers and  guarantors  for  collection of a
loan owing to the Bank.  After a trial in 2001, the Bank was awarded an amount of
$1,200,000 plus interest and attorney fees. When the Bank's  borrowers  failed to pay the
loan, defendant  Stanley  Kelly,  as guarantor,  paid the total  judgment in the amount
of  $1,475,000.  However,  Mr. Kelly has appealed the judgment as it applied to him
 arguing,  among other  things,  that his  guaranty  was  obtained by the Bank
 fraudulently.  Management believes the judgment will be confirmed  although no
assurances  can be given that the appellate  court will uphold the decision of the trial
court judge.

# ITEM 4. SUBMISSIONS OF
MATTERS TO A VOTE OF SECURITY HOLDERS

No
matters were submitted to a vote of securities holders of PremierWest during the quarter
ended December 31, 2002.

10

---

# PART II

# ITEM 5. MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Stock
 price  quotations  for the common  stock of  PremierWest  Bancorp  appear on the OTC
 Bulletin  Board,  an  electronic, screen-based market maintained by NASD Regulation,
 Inc., a subsidiary of the National  Association of Securities Dealers,  Inc., under the
trading symbol "PRWT." The common stock is registered under the Securities  Exchange Act
of 1934, but is not currently  eligible to be held in margin  accounts.  The following
 lists the high and low closing prices (the latest trade) for each period,  as adjusted
for subsequent  stock  dividends.  Prior to May 8,  2000,  the prices  reflect  the high
and low  closing  prices  during  each  period for PremierWest's  predecessor  company,
 the Bank of  Southern  Oregon,  whose  trading  symbol was "BSOR."  Prices do not
include  retail mark-ups,  mark-downs or commissions.  On February 28, 2003 the common
stock was held of record by approximately  664  shareholders,  a number which does not
include  approximately  1,124  beneficial  owners who hold shares in "street name." As of
February 28,  2003, the most recent date prior to the date of this Report, the closing
price of the common stock was $6.30 per share.

|            | 2002 |       | 2001 |       | 2000 |    
|----------- | ---- | ----- | ---- | ----- | ---- | ---
|
|
|1st Quarter |      | $5.81 |      | $5.33 |      | $--
|2nd Quarter |      | $7.75 |      | $5.49 |      | $--
|3rd Quarter |      | $7.40 |      | $6.17 |      | $--
|4th Quarter |      | $6.70 |      | $5.70 |      | $--

As
of February 28, 2003, the Company had 11,567,559 shares issued and outstanding which were
held by approximately 664 shareholders of record.

PremierWest
does not currently pay cash dividends, but rather retains earnings to help fund its
acquisition plans and internal growth. We do not anticipate that this policy will change
in the future, and any change will depend upon our future financial needs and economic
situations.

11

---

# ITEM 6. SELECTED
FINANCIAL DATA

The
following table sets forth certain information concerning the consolidated financial
condition, operating results, and key operating ratios for PremierWest at the dates and
for the periods indicated. This information does not purport to be complete, and should be
read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the Consolidated Financial Statements of
PremierWest and Notes thereto.

(Dollars in thousands except share
data and financial ratios)

|                                           | Years ended December 31,
|------------------------------------------ | ------------------------
|                                           |                         
|                                           |                         
|                                           |                         
|Operating Results                          |                         
|                                           |                         
|Total interest income                      |                         
|Total interest expense                     |                         
|                                           |                         
|Net interest income                        |                         
|Provision for loan losses                  |                         
|Noninterest income                         |                         
|Noninterest expense                        |                         
|                                           |                         
|Income before income taxes and             |                         
|cumulative effect of an                    |                         
|accounting change                          |                         
|Provision for income taxes                 |                         
|                                           |                         
|Net income before                          |                         
|cumulative of an effect                    |                         
|of an accounting change                    |                         
|Cumulative effect of an accounting change, |                         
|net of tax                                 |                         
|                                           |                         
|Net Income                                 |                         
|                                           |                         
|Per Share Data (1)                         |                         
|                                           |                         
|Basic earnings per common share            |                         
|Diluted earnings per common share          |                         
|Dividends declared per common share        |                         
|Ratio of dividends declared to net  income |                         
|Financial Ratios                           |                         
|                                           |                         
|Return on average equity                   |                         
|Return on average assets                   |                         
|Efficiency ratio (2)                       |                         
|Net interest margin                        |                         
|Balance Sheet Data at Year-End             |                         
|                                           |                         
|Gross loans                                |                         
|Allowance for loan losses                  |                         
|Allowance as percentage of loans           |                         
|Total assets                               |                         
|Total deposits                             |                         
|Total equity                               |                         

Notes:

|(1) | Per share
data has been retroactively adjusted for subsequent stock dividends and
stock splits.
|--- | -----------------------------------------------------------------------------------------------

|(2) | Efficiency
ratio is non-interest expense divided by the           sum of net interest income plus
non-interest income.
|--- | ----------------------------------------------------------------------------------------------------------------------

12

---

# ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATION

# OVERVIEW

The
following discussion should be read in conjunction with PremierWests audited
consolidated financial statements and the notes thereto as of December 31, 2002 and 2001,
and for each of the three years in the period ended December 31, 2002, included elsewhere
in this report.

PremierWest
conducts a general commercial banking business, gathering deposits from the general public
and applying those funds to the origination of loans for commercial, real estate, and
consumer purposes and investments. PremierWest was created from the merger of Bank of
Southern Oregon and Douglas National Bank on May 8, 2000, and the simultaneous formation
of a bank holding company for the resulting bank, PremierWest Bank. The merger was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements included elsewhere in this statement, and the following discussion, present the
Company as if the merger had taken place prior to the periods presented.

On
April 16, 2001, PremierWest acquired Timberline Bancshares, Inc. and its wholly-owned
subsidiary, Timberline Community Bank, with eight branch locations in Siskiyou County of
Northern California. This acquisition was accounted for as a purchase. Accordingly, the
consolidated financial statements of PremierWest include the results of operations of
Timberline since the acquisition date.

PremierWests
profitability depends primarily on net interest income, which is the difference between
(a) interest income generated by interest-earning assets (principally loans and
investments) and (b) interest expense incurred on interest-bearing liabilities
(principally customer deposits and borrowed funds). Net interest income is affected by the
difference (the interest rate spread) between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing liabilities, as
well as the relative amounts of interest-earning assets and interest-bearing liabilities.
Financial institutions have traditionally used interest rate spreads as a measure of net
interest income. Another indication of an institutions net interest income is its
net yield on interest-earning assets or net interest margin, which
is net interest income divided by average interest-earning assets.

To
a lesser extent, PremierWests profitability is also affected by such factors as the
level of non-interest income and expenses, the provision for loan losses, and the
provision for income taxes. Non-interest income consists primarily of service charges on
deposit accounts and fees generated through PremierWests mortgage division and
investment services subsidiary. Non-interest expense consists primarily of salaries and
employee benefits, professional fees, equipment expenses, occupancy-related expenses, data
processing, advertising and other operating expenses.

# FINANCIAL HIGHLIGHTS

For
the year ended December 31, 2002, PremierWest earned $4.3 million, an increase of 110.98%
compared to $2.0 million in net income for 2001. The increase in net income in 2002 is due
to an increase of $5.7 million in net interest income, after the provision for loan
losses, and $1.6 million in non-interest income, offset by an increase of $3.9 million in
non-interest expense and an increase of $1.1 million in the provision for income taxes.
Our diluted earnings per share were $0.37 and $0.19 for the years ended 2002 and 2001,
respectively. Return on average shareholders equity was 9.13% and return on average
assets was 0.87% for the year ended December 31, 2002. This compared with a return on
average shareholders equity of 5.12% and a return on average assets of 0.46% for
2001.

Loans
outstanding grew to a record level at December 31, 2002. Gross loans increased from $358.4
million at December 31, 2001, to $398.4 million at December 31, 2002. Deposits declined
$1.7 million to $428.3 million at December 31, 2002. Management attributes the strong loan
growth achieved in 2002 to a focus on improved penetration in the markets served.
Management noted that the decline in deposits was a result of managements strategy
to restructure the Banks deposit base. During 2002, $37.5 million of higher-cost
time certificates of deposits acquired with the Douglas National Bank acquisition were
closed and not renewed. Of these deposits, $21.5 million were in amounts of $100,000 or
more. The average rate paid on the $37.5 million was 6.43%.

13

---

Net
income of $2.0 million in 2001 was up 13.08% over 2000 earnings of $1.8 million. The
increase in net income in 2001 was due to an increase of $5.2 million in net interest
income and non-interest income offset by an increase of $494,000 in the provision for loan
losses and a $4.5 million increase in non-interest expense. Diluted earnings per share
were stable at $0.19 in 2001 and 2000. The return on average shareholders equity
declined to 5.12% for 2001 compared with 5.96% for 2000. Total loans grew over 51.24% in
2001 from $237.0 million to $358.4 million at year-end. Total deposits increased 45.17%
from $296.2 million to $430.1 million during the same period. Net income in 2000 increased
compared to 1999 as a result of a $2.1 million increase in net interest income and
non-interest income offset by a $1.8 million increase in non-interest expense.

|                                               | Years Ended December 31, |             
|---------------------------------------------- | ------------------------ | ------------
|                                               |                          |             
|                                               |                          | 2002        
|                                               |                          |             
|(dollars in thousands except   per share data) |                         
|                                               |                         
|Net income                                     |                          | $    4,304  
|Average assets                                 |                          | $497,036    
|RETURN ON AVERAGE ASSETS                       |                          | 0.87%       
|                                               |                          |             
|Net income                                     |                          | $    4,304  
|Average equity                                 |                          | $  47,129   
|RETURN ON AVERAGE EQUITY                       |                          | 9.13%       
|                                               |                          |             
|Cash dividends declared and                    |                         
|Paid                                           |                          | $         --
|Average equity                                 |                          | $  47,129   
|DIVIDEND PAYOUT RATIO                          |                          | --          
|                                               |                          |             
|Average equity                                 |                          | $  47,129   
|Average assets                                 |                          | $497,036    
|AVERAGE EQUITY TO   ASSET RATIO                |                          | 9.48%       

# CRITICAL ACCOUNTING
POLICIES AND ESTIMATES

This
Managements Discussion and Analysis of Financial Condition and Results of
Operations, as well as disclosures included elsewhere in this Form 10-K, are based
upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing
basis, management evaluates the estimates used, including the adequacy of the allowance
for loan and lease losses, impairment of intangible assets, and contingencies and
litigation. Estimates are based upon historical experience, current economic conditions
and other factors that management considers reasonable under the circumstances. These
estimates result in judgments regarding the carrying values of assets and liabilities when
these values are not readily available from other sources as well as assessing and
identifying the accounting treatments of commitments and contingencies. Actual results may
differ from these estimates under different assumptions or conditions. The following
critical accounting policies involve the more significant judgments and assumptions used
in the preparation of the consolidated financial statements.

The
allowance for loan and lease losses is established to absorb known and inherent losses
attributable to loans and leases outstanding and related off-balance-sheet commitments.
The adequacy of the allowance is monitored on an ongoing basis and is based on
managements evaluation of numerous factors. These factors include the quality of the
current loan portfolio, the trend in the loan portfolios risk ratings, current
economic conditions, loan concentrations, loan growth rates, past-due and non-performing
trends, evaluation of specific loss estimates for all significant problem loans,
historical charge-off and recovery experience and other pertinent information. As of
December 31, 2002, approximately 76.90% of PremierWests loan portfolio is secured by
real estate and a significant depreciation in real estate values in Oregon and California
would cause management to increase the allowance for loan and lease losses.

14

---

At
December 31, 2002, PremierWest had approximately $6.6 million in unamortized goodwill as a
result of business combinations. PremierWest adopted Statement of Financial Accounting
Standards (SFAS) No. 142 on January 1, 2002. Ongoing analysis of the fair
value of recorded goodwill for impairment will involve a substantial amount of judgment,
as will establishing and monitoring estimated lives of other amortizable intangible
assets.

PremierWest
applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans.
Accordingly, compensation costs are recognized as the difference between the exercise
price of each option and the market price of PremierWests stock at the date of each
grant. Had compensation cost for PremierWests 2002, 2001, and 2000 grants for
stock-based compensation plans been determined consistent with SFAS No. 123, its net
income and earnings per common share for December 31, 2002, 2001, and 2000 would
approximate the pro forma amounts below (in thousands, except per share data).

|                                   |              |              |             
|---------------------------------- | ------------ | ------------ | ------------
|                                   | 2002         | 2001         | 2000        
|Net income:                       
|As reported                        | $     4,304  | $     2,040  | $     1,804 
|Pro forma                          | $     4,224  | $     1,965  | $     1,690 
|                                  
|Basic earnings per common share:  
|As reported                        | $       0.37 | $       0.19 | $       0.19
|Pro forma                          | $       0.37 | $       0.18 | $       0.18
|                                  
|Diluted earnings per common share:
|As reported                        | $       0.37 | $       0.19 | $       0.19
|Pro forma                          | $       0.36 | $       0.18 | $       0.18

The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for December 31, 2002,
2001, and 2000:

|                    |         |         |        
|------------------- | ------- | ------- | -------
|                    | 2002    | 2001    | 2000   
|Dividend yield      | 5.1%    | 1.5%    | 1.5%   
|Expected life       | 3 years | 7 years | 7 years
|Expected volatility | 46%     | 35%     | 41%    
|Risk-free rate      | 3.3%    | 5.0%    | 5.0%   

The
effects of applying SFAS No. 123 in the pro forma disclosure are not indicative of future
amounts. Additionally, there can be no assurance that the Financial Accounting Standards
Board will not adopt accounting principles mandating the application of SFAS No. 123 in
the future.

PremierWest
may become party to various legal proceedings in the future. These matters have a high
degree of uncertainty associated with them. There can be no assurance that the ultimate
outcome will not be adverse to the financial condition and results of operations of
PremierWest. There can also be no assurance that all matters that may be brought against
us are known to us at any point in time.

# RESULTS OF OPERATIONS

Net Interest Income

PremierWests
profitability depends primarily on net interest income, which is the difference between
interest income generated by interest-earning assets (principally loans and investments)
and interest expense incurred on interest-bearing liabilities (principally customer
deposits and borrowed funds). Net interest income is affected by the difference (the
interest rate spread) between rates of interest earned on interest-earning
assets and rates of interest paid on interest-bearing liabilities, as well as the relative
volumes of interest-earning assets and interest-bearing liabilities. Financial
institutions have traditionally used interest rate spreads as a measure of net interest
income. Another indication of an institutions net interest income is its net
yield on interest-earning assets or net interest margin, which is net
interest income divided by average interest-earning assets.

15

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Average Balances,
Interest Rates and Yields

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

|                                            | Year-End December, 2002 | Year-End December, 2001 | Year-End December, 2000
|------------------------------------------- | ----------------------- | ----------------------- | -----------------------
|
|
|INTEREST-BEARING ASSETS                     |                         |                         |                        
|Loans (1)(2)                                | $ 380,068               | $ 29,595                | 7.79%                  
|Investment securities:                     
|Taxable securities                          | 34,359                  | 1,784                   | 5.19%                  
|Nontaxable securities                       | 16,496                  | 1,048                   | 6.35%                  
|Temporary investments                       | 13,409                  | 227                     | 1.69%                  
|Total interest-earning assets               | 444,332                 | $   32,654              | 7.35%                  
|Cash and due from banks                     | 23,085                  |                         |                        
|Allowance for loan losses                   | (5,152)                 |                         |                        
|Other assets                                | 34,771                  |                         |                        
|Total assets                                | $ 497,036               |                         |                        
|INTEREST-BEARING LIABILITIES               
|Interest-bearing checking and              
|savings accounts                            | $ 197,362               | $ 2,353                 | 1.19%                  
|Time deposits                               | 141,200                 | 5,460                   | 3.87%                  
|Term debt                                   | 23,486                  | 689                     | 2.93%                  
|Total interest-bearing liabilities          | 362,048                 | $     8,502             | 2.35%                  
|Noninterest-bearing deposits                | 85,523                  |                         |                        
|Other liabilities                           | 2,336                   |                         |                        
|Total liabilities                           | 449,907                 |                         |                        
|Shareholders' equity                        | 47,129                  |                         |                        
|Total liabilities and shareholders'        
|equity                                      | $ 497,036               |                         |                        
|Net interest income (1)                     |                         | $  24,152               |                        
|Net interest spread                         |                         |                         | 5.00%                  
|Average yield on earning assets (1)(2)      |                         |                         | 7.35%                  
|Interest expense to earnings assets         |                         |                         | 1.91%                  
|Net interest income to earning assets(1)(2) |                         |                         | 5.44%                  

|(1) | Tax-exempt
income has been adjusted to a tax equivalent basis at a 34% effective           rate. The
amount of such adjustment was an addition to recorded income of $356,           $391, and
$388 for 2002, 2001, and 2000, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Nonaccrual loans of $3.2 million for 2002, $3.7 million for 2001, and $4.5
          million for 2000 are included in the average balances.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

16

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Rate/Volume Analysis

The
following table analyzes net interest income in terms of changes in the volume of
interest-earning assets and interest-bearing liabilities, and changes in net interest
income that are attributable to changes in yields earned on interest-earning assets and
rates paid on interest-bearing liabilities. The table reflects the extent to which changes
in interest income and changes in interest expense are attributable to changes in volume
(changes in volume multiplied by the prior-year rate) and changes in rate (changes in rate
multiplied by prior-year volume). Changes attributable to the combined impact of volume
and rate have been allocated to rate.

|                               | 2002 vs. 2001Increase (Decrease) Due To | 2001 vs. 2000Increase (Decrease) Due To
|------------------------------ | --------------------------------------- | ---------------------------------------
|
|Interest-earned assets:        |                                         |                                        
|Loans                          | $ 6,747                                 | $(4,230)                               
|Investment securities:        
|Taxable                        | (956)                                   | (244)                                  
|Tax-exempt                     | (52)                                    | (51)                                   
|Temporary investments          | (455)                                   | (235)                                  
|Total                          | 5,284                                   | (4,760)                                
|Interest-bearing liabilities: 
|Deposits:                     
|Interest-bearing checking and 
|Savings                        | (970)                                   | 2,949                                  
|Time deposits                  | 563                                     | 2,669                                  
|Term debt                      | (177)                                   | 33                                     
|Total                          | (584)                                   | 5,651                                  
|Net increase (decrease) in net
|Interest income                | $ 4,700                                 | $    891                               

Net
interest income on a tax equivalent basis, before provisions for loan losses, for the year
ended December 31, 2002, was $24.2 million, an increase of 30.12% compared to net
interest income of $18.6 million in 2001, an increase of 20.60% compared to net interest
income of $15.4 million in 2000. The overall tax-equivalent earning asset yield was 7.35%
in 2002 compared to 8.06% in 2001 and 8.91% in 2000. For the same years, rates on
interest-bearing liabilities were 2.35%, 4.11% and 4.53%, respectively.

Total
interest-earning assets averaged $444.3 million for the year ended December 31, 2002,
compared to $398.7 million for the corresponding period in 2001. Most of the increase
occurred in the loan category. Increases in the loan portfolio are attributed to favorable
interest rates and the execution of PremierWests strategy to further establish
itself in the communities it serves, by emphasizing responsiveness and building complete
relationships with its customers.

Interest-bearing
liabilities averaged $362.0 million for the year ended December 31, 2002, compared to
$330.0 million during the same period in 2001. Interest cost, as a percentage of earning
assets, decreased to 1.91% in 2002, compared to 3.40% in 2001 and 3.75% in 2000.

During
2002, 2001, and 2000 PremierWest expanded through acquisitions in Northern California and
Douglas County, Oregon, and the establishment of new branch locations in the Southern
Oregon region. Management expects that the larger geographic footprint of
PremierWests service area will enhance opportunities for further growth in our loan
portfolio and deposit base.

17

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Average
loans, which generally carry a higher yield than investment securities and other earning
assets, comprised 85.53% of average earning assets during 2002, compared to 76.31% in 2001
and 71.28% in 2000. During the same periods, average yields on loans were 7.79% in 2002,
8.90% in 2001, and 9.85% in 2000. Average investment securities comprised 11.45% of
average earning assets in 2002, which was down from 17.01% in 2001 and 27.12% in 2000. Tax
equivalent interest yields on investment securities were 5.57% for 2002, 6.10% in 2001,
and 6.59% in 2000.

Solid
loan growth, improved credit quality and a stronger core deposit base contributed to an
overall 78 basis point improvement in the net interest margin and a 105 basis point
improvement in the net interest spread when comparing 2002 to 2001. The improvement was
accomplished despite a declining interest rate environment. A change in deposit mix and a
planned reduction in the higher cost transactional time deposits also contributed to the
improved margin. Management believes that the Banks net interest margin could be
pressured in an increasing rate environment. This is because a substantial dollar volume
of loans are currently priced at a floor rate. These floor rate
loans are currently priced considerably higher than the index rate of the loan and,
therefore, would not be subject to a rate adjustment until the differential between the
index rate and the floor rate narrows. However, management believes that
further growth in higher yielding earning assets, together with continued strengthening of
the Banks demand deposit base, should help avoid any material deterioration of the
net interest margin during 2003.

In
addition to the increase attributed to the Timberline acquisition, the increase in net
interest margin from 2001 to 2000 was primarily due to an increase in the volume of loans
offset by a 95 basis point decrease in loan yields from 9.85% to 8.90%. There was also an
increase of $82.9 million in the volume of interest-bearing liabilities, including
Timberline, while at the same time average rates paid declined from 4.53% to 4.11%.

Loan Loss Provision

The
loan loss provision represents charges made to earnings to maintain an adequate allowance
for loan losses. The allowance is maintained at an amount believed to be sufficient to
absorb losses in the loan portfolio and has two components, one of which represents a
pre-determined percentage of our entire loan portfolio, and the other representing
specifically established reserves for individual classified loans. Factors considered in
establishing an appropriate allowance include a careful assessment of the financial
condition of the borrower; a realistic determination of the value and adequacy of
underlying collateral; the condition of the local economy and the condition of the
specific industry of the borrower; a comprehensive analysis of the levels and trends of
loan categories; an assessment of pending legal action for collection of loans and related
guarantees; and a review of delinquent and classified loans. PremierWest applies a
systematic process for determining the adequacy of the allowance for loan losses,
including an internal loan review program and a quarterly analysis of the adequacy of the
allowance. The quarterly analysis includes determination of specific potential loss
factors on individual classified loans, historical potential loss factors derived from
actual net charge-off experience and trends in non-performing loans, and potential loss
factors for other loan portfolio risks such as loan concentrations, the condition of the
local economy, and the nature and volume of loans. The loan loss provision reflects
managements judgment of the credit risk inherent in the loan portfolio. Although
management believes the loan loss provision has been sufficient to maintain an adequate
reserve for loan losses, there can be no assurance that actual loan losses will not
require more significant charges to operations in the future.

For
the year ended December 31, 2002, the loan loss provision totaled $1.04 million, compared
to $1.16 million at December 31, 2001, and $669,000 at December 31, 2000. This represents
a decrease of 10.83% between 2001 and 2002 and an increase of 73.84% between 2000 and
2001. The provision for loan losses decreased during 2002 due to a substantial decline in
non-performing loans and improved credit quality of new loans generated. In 2001, the
provision for loan losses increased over 2000 primarily due to an increase in net
charge-offs for the year in connection with merged bank loan portfolios. Primary
contributors to the loan loss provisions in 2002, 2001, and 2000 were commercial loans
that were past due and not adequately collateralized. Management has since required
adherence to stringent loan policies and procedures and may require real estate to serve
as additional commercial loan collateral, thereby reducing credit risk and potentially
mitigating the need for additional loan loss allocations for commercial loans. A more
detailed review of the loan loss provision is presented in the table on page 26.

18

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Loan
charge-offs refers to the recorded values of loans actually removed from the
consolidated balance sheet and, after netting out recoveries on previously charged-off
loans, become net charge-offs. PremierWests policy is to charge off loans when, in
managements opinion, the loan or a portion thereof is deemed uncollectible, although
concerted efforts are made to maximize recovery after the charge-off. When a provision for
loan loss is recorded, the amount is based on past charge-off experience, a careful
analysis of the current portfolio, and an evaluation of economic trends in the Banks
market areas. Management will continue to closely monitor the loan quality of new and
existing relationships through stringent review and evaluation procedures and by making
loan officers accountable for collection efforts.

For
the year ended December 31, 2002, loan charge-offs exceeded recoveries by $1.02 million as
compared to 2001 and 2000, when loan charge-offs exceeded recoveries by $1.21 million and
$268,000, respectively. A more detailed review of the net charge-offs is presented in the
table on page 26.

Non-interest Income

Non-interest
income is primarily comprised of service charges on deposit accounts; mortgage loan
brokerage and related fees; investment brokerage and annuity fees; other commissions and
fees; gains on the sale of investment securities; and, other non-interest income. Nearly
all of these categories of non-interest income have grown consistently over the past three
years.

Non-interest
income increased from $4.0 million in 2001 to $5.6 million in 2002. An increase in
services charges on deposit accounts of 17.12%, an increase in investment brokerage fees
of 162.07% and an increase in other commissions and fees of 36.35% contributed to the
improved performance in this area. This increase is also attributable in part to strong
performances in 2002 by the Companys Mortgage Loan Division, Premier Finance Company
and PremierWest Investment Services, Inc.

Non-interest
income, including $452,000 related to acquired Timberline operations, increased to $4.0
million as compared to $1.9 million for 2000. Most of the remaining increase relates to
mortgage loan brokerage fees earned during 2001. The increase in mortgage loan brokerage
fees related to PremierWests acquisition of Leader Mortgage and a decreasing
mortgage interest rate environment which contributed to an increased volume of mortgage
financing activity.

In
general, management prices PremierWests deposit accounts at rates competitive with
those offered by other commercial banks in PremierWests market area. Deposit growth
has been generated by developing strong customer relationships and cross-selling deposit
relationships to loan customers. Management intends to continue promoting demand deposit
products, particularly non-interest-bearing deposit products, in order to obtain
additional interest-free, core deposits.

Non-interest Expense

Non-interest
expenses consist principally of salaries and employee benefits, occupancy and equipment
costs, communication expenses, professional fees, advertising and other expenses.

Non-interest
expense increased to $21.7 million in 2002 as compared to $17.9 million for 2001. Salaries
and employee benefits increased $2.6 million as 2002 included a full year of former
Timberline operations and the number of full-time employees increased to support the level
of customer service required for the growth in Company operations. Communications and
equipment costs increased $1.1 million as compared to 2001. This increase was attributed
to a full year operation with the former Timberline facilities; opening of a new
administration annex facility for data processing and operations support; and, continued
computer systems enhancements. While the size of our operations expanded, costs in other
non-interest expense have also increased though to a lesser degree. Management continually
reviews areas in which we might reduce duplication of operational processes in an effort
to reduce other non-interest expenses.

Non-interest
expense increased to $17.9 million in 2001, including a $305,000 charge for goodwill
amortization, as compared to $13.4 million in 2000, which included $1.0 million of merger
and data conversion costs. Salaries and employee benefits increased $3.3 million, of which
$1.0 million related to the Timberline operations acquired through the merger with the
remainder comprised of an increase in full-time employees to support growth in Company
operations. Occupancy and equipment expenses increased $1.1  million for 2001, as

19

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compared to 2000. This increase was
attributed to $371,000 due to the acquisition of Timberline; a new branch office in Grants
Pass, Oregon, that opened in 2001; and, computer system enhancements. Communications costs
including telephone network, postage and courier services increased $165,000 related to
Timberlines operations and $225,000 due to additional phone and data lines among all
facility locations.

Provision for Income Taxes

PremierWests
taxable income resulted in an effective tax rate of 33% or $2.2 million in federal and
state income taxes for 2002. This compares to an effective tax rate of 34% for 2001 and
38% for 2000. The effective tax rate for 2000 was greater than the expected statutory rate
primarily because a significant portion of merger costs incurred in 2000 were not
deductible for income tax purposes.

Efficiency Ratio

Banks
use the term efficiency ratio to describe the administrative and other costs
associated with generating revenues, a concept similar to a measurement of overhead. The
efficiency ratio is computed by dividing non-interest expense bythe sum of net
interest income plus noninterest income. Management views the efficiency ratio as a
measure of PremierWests ability to control non-interest expenses. For the year ended
December 31, 2002, the efficiency ratio was 74.07%, as compared to 80.83% in 2001, and
78.91% in 2000. The efficiency ratio reflects an improving trend and managements
focus in this area. Severance and noncompete payments associated with the acquisitions of
United Bancorp, Timberline Bancshares and Leader Mortgage were charged against operating
income during 2002, 2001, and 2000, adversely impacting those ratios. The minimal
remaining balance of these payments will be expensed in 2003. Improved staff management
and increased revenue during 2003 are key elements in managements strategy to
improve this important measurement

# FINANCIAL CONDITION

The
table below sets forth certain summary balance sheet information for December 31, 2002,
2001 and 2000.

|(dollars in thousands)    | December 31, | Increase (Decrease)
|------------------------- | ------------ | -------------------
|
|ASSETS                    |              |                    
|Federal funds sold        | $  12,485    | $  15,000          
|Investments               | 41,598       | 64,078             
|Federal Home Loan Bank   
|deposits and stock        | 1,904        | 2,845              
|Loans                     | 392,274      | 352,791            
|Other assets (1)          | 66,823       | 53,596             
|Total assets              | $515,084     | $488,310           
|LIABILITIES              
|Noninterest-bearing      
|deposits                  | $  91,611    | $  82,685          
|Interest-bearing deposits | 336,726      | 347,370            
|Total deposits            | 428,337      | 430,055            
|Other liabilities(2)      | 37,575       | 14,561             
|Total liabilities         | 465,912      | 444,616            
|SHAREHOLDERS' EQUITY      | 49,172       | 43,694             
|Total liabilities and    
|shareholder's            
|equity                    | $515,084     | $488,310           
|                         

(1)    Includes cash and due from banks, property and equipment, and accrued interest receivable.
(2)    Includes borrowings, repurchase agreements, accrued interest payable and other liabilities.

20

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Investment Portfolio

Investment
securities provide a return on residual funds after lending activities. Investments may be
in interest-bearing deposits, U.S. government and agency obligations, state and local
government obligations and government-guaranteed, mortgage-backed securities. PremierWest
generally does not invest in securities that are rated less than investment grade by a
nationally recognized statistical rating organization. All securities-related investment
activity is reported to the Board of Directors. Board review is required for significant
changes in investment strategy. Certain senior executives have the authority to purchase
and sell securities for our portfolio in accordance with PremierWests stated funds
management policy.

Management
determines the appropriate classification of securities at the time of purchase. If
management has the intent and PremierWest has the ability at the time of purchase to hold
a security until maturity or on a long-term basis, the security is classified as
held-to-maturity and is reflected on the balance sheet at historical cost.
Securities to be held for indefinite periods and not intended to be held to maturity or on
a long-term basis are classified as available-for-sale. Available-for-sale
securities are reflected on the balance sheet at their estimated fair market value.

The
following table sets forth the carrying value of PremierWests investment portfolio
at the dates indicated.

|                                          | December 31,
|----------------------------------------- | ------------
|
|Investment securities available-for-sale: |             
|Obligations of U.S. government agencies   | $18,658     
|Collateralized mortgage obligations and  
|mortgage-backed securities                | 1,913       
|Obligations of states and political      
|subdivisions                              | 16,708      
|Corporate bonds                           | 3,988       
|Equity securities                         | 331         
|                                          | $41,598     

The contractual maturity of
investment securities at December 31, 2002, is shown below. Expected maturities of
investment securities could differ from contractual maturities because the borrower, or
issuer, may have the right to call or prepay obligations with or without call or
prepayment penalties.

|                             | December 31, 2002 | December 31, 2001 |       |            |            |      
|---------------------------- | ----------------- | ----------------- | ----- | ---------- | ---------- | -----
|
|U.S. government and agency   |                   |                   |       |            |            |      
|securities                  
|Due in one year or less      | $       --        | $       --        | --    | $       -- | $       -- | --   
|Due after one year through  
|five years                   | 11,984            | 12,177            | 4.21% | 22,282     | 22,588     | 5.43%
|Due after five years through
|ten years                    | 6,447             | 6,481             | 4.44% | 8,983      | 9,093      | 6.10%
|                            

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|                                    | December 31, 2002 | December 31, 2002
|----------------------------------- | ----------------- | -----------------
|
|Obligations of states and           |                   |                  
|political subdivisions:            
|Due in one year or less             | $  1,440          | $  1,454         
|Due after one year through         
|five years                          | 9,412             | 9,828            
|Due after five years through       
|ten years                           | 2,494             | 2,589            
|Due after ten years                 | 2,774             | 2,837            
|Corporate bonds and other debt:    
|Due on one year or less             | --                | --               
|Due after one year through         
|five years                          | 3,964             | 3,988            
|Total debt securities               | 38,515            | 39,354           
|Collateralized mortgage obligations
|and mortgage- backed securities     | 1,875             | 1,913            
|Equity securities                   | 331               | 331              
|Total securities                    | $40,721           | $41,598          

*Weighted average yields are stated
on a federal tax-equivalent basis at a 34% rate.

PremierWest
received proceeds from the sale of investment securities of $12.5 million during 2002,
$18.1 million in 2001, and $4.8 million in 2000. These resulted in realized gains of
$304,000, $73,000, and $5,000 for the years ended December 31, 2002, 2001, and 2000,
respectively. Approximately $30.1 million of mostly U.S. government agency securities
matured or were called during 2002. This compares to proceeds from maturities and calls of
investment securities of $40.2 million and $5.2 million in 2001 and 2000, respectively.

At
December 31, 2002, PremierWests investment portfolio had total net unrealized gains
of approximately $877,000. This compares to net unrealized gains of approximately $596,000
at December 31, 2001, and net unrealized losses of $597,000 at December 31, 2000.
Unrealized gains and losses reflect changes in market conditions and do not represent the
amount of actual profits or losses. Actual realized gains and losses occur at the time
investment securities are sold or called.

Securities
may be pledged from time-to-time to secure public deposits, FHLB borrowings, repurchase
agreement deposit accounts, and for other purposes as required or permitted by law. At
December 31, 2002, $41.6 million of securities classified as available-for-sale were
pledged for such purposes.

As
of December 31, 2002, PremierWest also held 16,959 shares of $100 par value Federal Home
Loan Bank of Seattle (FHLB) stock, which is a restricted equity security. FHLB stock
represents an equity interest in the FHLB, but it does not have a readily determinable
market value. The stock can be sold at its par value only, and only to the FHLB or to
another member institution. Member institutions are required to maintain a minimum stock
investment in the FHLB based on specific percentages of its outstanding mortgages, total
assets or FHLB advances. At December 31, 2002 and 2001, the Bank met its minimum required
investment in FHLB.

22

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Loan Portfolio

The
most significant asset on our balance sheet in terms of its risk and its effect on our
earnings is our loan portfolio. On our balance sheet, the term net loans
refers to total loans outstanding, at their principal balance outstanding, net of the
allowance for loan losses. PremierWests loan policies and procedures establish the
basic guidelines governing our lending operations. Generally, the guidelines address the
types of loans that we seek, our target markets, underwriting and collateral requirements,
terms, interest rate and yield considerations, and compliance with laws and regulations.
All loans or credit lines are subject to approval procedures and amount limitations. These
limitations apply to the borrowers total outstanding indebtedness to the Bank,
including the indebtedness of any guarantor. The policies are reviewed and approved by the
Board of Directors of PremierWest on a routine basis.

Bank
officers are charged with loan origination in compliance with underwriting standards
overseen by the loan administration department and in conformity with established loan
policies. On an annual basis, the Board of Directors determines the lending authority of
the Banks loan officers. Such delegated authority may include authority related to
loans, letters of credit, overdrafts, uncollected funds, and such other authority as
determined by the Board, the President or Chief Credit Officer within their delegated
authority.

The
Chief Credit Officer has the authority to approve loans up to a lending limit as set by
the Board of Directors. All loans above the lending limit of the Chief Credit Officer, and
up to a certain limit, are reviewed for approval by the President or Chief Operating
Officer. Loans, which exceed this limit, are subject to review and approval by the
Boards Loan Committee. All loans approved by the Board Loan Committee are reviewed
by the full Board at regularly scheduled monthly meetings. PremierWests unsecured
legal lending limit was approximately $7.9 million and our real estate secured lending
limit was $13.2 million at December 31, 2002. PremierWest seldom makes loans for an amount
approaching its legal lending limits.

The
following table sets forth the composition of the loan portfolio in dollar amounts and in
percentages at December 31, 1998, through 2002.

|              | December 31,2002 | December 31,2001 | December 31,2000 | December 31,1999 | December 31,1998
|------------- | ---------------- | ---------------- | ---------------- | ---------------- | ----------------
|
|Commercial    | $  46,797        | 11.75%           | $  49,265        | 13.75%           | $  37,878       
|Real estate -
|Construction  | 47,221           | 11.85%           | 59,754           | 16.67%           | 48,039          
|Real estate -
|Commercial/  
|Residential   | 259,097          | 65.04%           | 206,648          | 57.66%           | 114,902         
|Consumer      | 34,648           | 8.70%            | 34,537           | 9.64%            | 30,675          
|Other         | 10,587           | 2.66%            | 8,189            | 2.28%            | 5,478           
|Total loans   | $398,350         | 100.00%          | $358,393         | 100.00%          | $236,972        

Net
outstanding loans totaled $392.3 million at December 31, 2002, representing an increase of
$39.5 million, or 11.19% compared to $352.8 million as of December 31, 2001. Loan
commitments grew to $66.6 million as of December 31, 2002, representing an increase of
$6.5 million over year-end 2001.

PremierWests
gross loan portfolio at December 31, 2002, includes loans secured by real estate 76.89%,
commercial loans 11.75%, and consumer and other loans 11.36%. The largest category is
concentrated in real estate loans. This is primarily due to the significant growth and
opportunity found in mortgage and commercial real estate loan activity within the
Banks market area. Some commercial loans are secured by real estate, but are used
for purposes other than financing the purchase of real property, such as inventory
financing and equipment purchases, where real property serves as collateral for the loan.

23

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The
following table presents maturity information for the loan portfolio at December 31, 2002.
The table segments the loan portfolio between fixed-rate loans and repricing dates on
variable rate loans for the periods indicated.

|                                 | December 31, 2002 |           |          |          
|-------------------------------- | ----------------- | --------- | -------- | ---------
|
|FIXED-RATE LOAN MATURITIES       |                   |           |          |          
|Commercial                       | $    5,646        | $  11,054 | $  1,519 | $  18,219
|Real estate - Construction       | 4,962             | 1,036     | 671      | 6,669    
|Real estate - Commercial/       
|residential                      | 25,885            | 26,552    | 1,810    | 54,247   
|Consumer                         | 3,902             | 8,239     | 10,594   | 22,735   
|Other                            | 2,326             | 1,765     | 59       | 4,150    
|Total fixed-rate loan maturities | 42,721            | 48,646    | 14,653   | 106,020  
|ADJUSTMENT-RATE LOAN            
|REPRICINGS                      
|Commercial                       | 26,052            | 2,202     | 324      | 28,578   
|Real estate - Construction       | 28,230            | 9,248     | 3,074    | 40,552   
|Real estate - Commercial/       
|residential                      | 99,927            | 96,031    | 8,892    | 204,850  
|Consumer                         | 10,137            | 1,650     | 126      | 11,913   
|Other                            | 4,887             | 1,550     | --       | 6,437    
|Total adjustable-rate loan      
|maturities                       | 169,233           | 110,681   | 12,416   | 292,330  
|Total maturities and            
|repricings                       | $211,954          | $159,327  | $27,069  | $398,350 

* Loans due on demand and
 overdrafts  are included in the amount due in one year or less.  PremierWest  has no
loans  without a stated schedule for repayment or a stated maturity.

Non-performing Loans

Management
 considers  a loan to be  non-performing  when it is 90 days or more  delinquent,  or
 sooner  when  the  Bank  has determined  that  repayment  of the loan in full is
 unlikely.  Generally,  unless  collateral  for a loan is a one-  to-  four  family
residential dwelling,  interest accrual ceases in 90 days (but no later than the date of
acquisition by foreclosure,  voluntary deed or other means) and the loan is classified as
 non-performing.  A loan placed on non-accrual  status may or may not be contractually
 past due at the time the  determination is made to place the loan on non-accrual
 status,  and it may or may not be secured.  When a loan is placed on non-accrual
 status,  it is the Bank's policy to reverse  interest  previously  accrued but
uncollected and charge it against current  income.  Interest later  collected on the
non-accrual  loan is credited to loan principal if, in  management's  opinion,  full
collectibility of principal is doubtful.

At
 December  31,  2002,  loans  that  were more  than 90 days  delinquent  or for which
 the  accrual  of  interest  had been discontinued included the following:

|(in thousands)                       | Amount  | % of RelatedPortfolio
|------------------------------------ | ------- | ---------------------
|Commercial                           | $   645 | 1.38%                
|Real estate - Construction           | --     
|Real estate - Commercial/residential | 2,723   | 1.05%                
|Consumer                             | 101     | 0.29%                
|Other                                | --     
|                                     | $3,469  | 0.87%                

24

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Impaired
loans include all non-accrual and restructured commercial and real estate loans. Loan
impairment is measured as the present value of expected future cash flows discounted at
the loans initial interest rate, the fair value of the collateral of an impaired
collateral-dependent loan or an observable market price. Interest income on impaired loans
is recognized by the cash basis method.

When
the Bank acquires real estate through foreclosure, voluntary deed, or similar means, it is
classified as other real estate owned until it is sold. On December 31, 2002,
other real estate owned amounted to approximately $85,000, compared to $1.3 million in
2001. When property is acquired in this manner, it is recorded at the lower of cost (the
unpaid principal balance at the date of acquisition) or fair value less estimated selling
costs. Any further write-down is charged to expense. All costs incurred from the date of
acquisition to maintain the property are expensed. Other real estate owned is
appraised during the foreclosure process, before acquisition. Losses are recognized
against the allowance for loan losses in the amount by which the book value of the related
loan exceeds the estimated net realizable value of the property acquired.

At
December 31, 2002 and 2001, non-performing loans totaled approximately $3.4 million and
$5.7 million, respectively. PremierWest had non-accrual loans of $3.4 million at December
31, 2002 and $2.1 million at December 31, 2001. Interest income that would have been
recognized on non-accrual loans if such loans had performed in accordance with contractual
terms totaled $324,000 for the year ended December 31, 2002, $334,000 for the year ended
December 31, 2001, and $539,000 for the year ended December 31, 2000. Actual interest
income recognized on such loans during all of the periods was insignificant. At December
31, 2002 and 2001, the allowance for loan losses related to impaired loans was $1.90
million and $556,000, respectively.

The
following table summarizes non-performing assets by category:

|                                  | December 31,
|--------------------------------- | ------------
|
|Loans on nonaccrual status        | $3,410      
|Loans past due greater than 90   
|days but not on nonaccrual status | 59          
|Other real estate owned           | 85          
|Total nonperforming assets        | $3,554      
|Percentage of nonperforming      
|assets to total loans             | 0.89%       

Allowance for Loan Losses

The
allowance for loan losses is established through the provision for loan losses charged to
expenses and represents the aggregate of the loan loss provision charged against earnings
as described above, net of loans charged-off and recoveries on previously charged-off
loans. The provision charged to operating expense is based on loan loss experience and
other factors that, in managements judgment, should be recognized to estimate
losses. Management monitors the loan portfolio to ensure that the reserve for loan losses
remains adequate to absorb potential losses identified by the portfolio review process,
including loans on non-accrual status and current loans whose repayment according to the
loans repayment plan is considered by management to be in serious doubt.

The
amount of the allowance for loan losses is based on a variety of factors, including:

| | o | Analysis
of risks inherent in the various segments of the loan portfolio;
| | - | -------------------------------------------------------------------------

| | o | Managements
assessment of known or potential problem credits which have come to managements
attention during the ongoing review of credit quality;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Estimates
of the value of underlying collateral and guaranties;
| | - | ---------------------------------------------------------------

| | o | Legal
representation regarding the potential outcome of pending actions for collection of loans
and related guaranties;
| | - | -----------------------------------------------------------------------------------------------------------------------

| | o | Historical
loss experience; and,
| | - | --------------------------------

| | o | Current
economic conditions and other factors.
| | - | ----------------------------------------------

25

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If
actual circumstances and losses differ substantially from managements assumptions
and estimates, the allowance for loan losses might not be sufficient to absorb all future
losses. Net earnings would be adversely affected if that occurred. Loan loss estimates are
reviewed periodically. Adjustments to the allowance, if any, are charged against or
credited to earnings in the period in which the basis for the adjustment becomes known. In
addition, management maintains a portion of the loan loss allowance to cover inherent
losses that have not been specifically identified.

A
downturn in the local Oregon and/or California economies and employment could result in
increased levels of non-performing assets and charge-offs, increased loan loss provisions
and reductions in income. Additionally, as an integral part of the examination process,
bank regulatory agencies periodically review PremierWests allowance for loan losses.
The banking agencies could require the recognition of additions to the loan loss allowance
based on their judgment of information available to them at the time of their examination.

PremierWests
allowance for loan losses totaled $4.8 million at both December 31, 2002, and
December 31, 2001, representing 1.21% of total loans at December 31, 2002, and 1.35%
of total loans at December 31, 2001. The loan loss allowance represents 140.44% of
non-performing loans at December 31, 2002, and 84.52% of non-performing loans at December
31, 2001. Although management believes that it uses the best information available in
providing for estimated loan losses and believes that the allowance was adequate at
December 31, 2002, future adjustments could be necessary and net earnings could be
negatively affected if circumstances and/or economic conditions differ substantially from
the assumptions used in making the determinations of the adequacy of the allowance for
loan losses.

The
following is a summary of PremierWests loan loss experience and selected ratios for
the periods presented.

|                               | Years Ended December 31, |             |             |             |            
|------------------------------ | ------------------------ | ----------- | ----------- | ----------- | -----------
|
|Loans outstanding at end       |                          |             |             |             |            
|of year                        | $ 398,350                | $ 358,393   | $ 236,972   | $ 174,980   | $ 143,148  
|Average loans outstanding      | $ 380,068                | $ 304,257   | $ 212,685   | $ 147,237   | $ 144,091  
|Allowance for loan losses,    
|beginning of year              | $     4,825              | $     3,476 | $     3,075 | $     2,832 | $     1,569
|Loans charged off:            
|Commercial                     | (672)                    | (500)       | (197)       | (726)       | (452)      
|Real estate                    | (253)                    | (538)       | (163)       | (34)        | (98)       
|Consumer                       | (216)                    | (297)       | (147)       | (74)        | (72)       
|Total loans charged off        | (1,141)                  | (1,335)     | (507)       | (834)       | (622)      
|Recoveries:                   
|Commercial                     | 55                       | 47          | 38          | 63          | 168        
|Real estate                    | 2                        | --          | 47          | 167         | --         
|Consumer                       | 60                       | 78          | 15          | 12          | 15         
|Other                          | --                       | --          | 139         | --          | --         
|Total recoveries               | 117                      | 125         | 239         | 242         | 183        
|Net loans charged off          | (1,024)                  | (1,210)     | (268)       | (592)       | (439)      
|Allowance for loan losses     
|transferred from Timberline    | --                       | 1,396       | --          | --          | --         
|Provision charged to income    | 1,037                    | 1,163       | 669         | 835         | 1,702      
|Provision for loan losses,    
|end of year                    | $     4,838              | $     4,825 | $     3,476 | $     3,075 | $     2,832
|Ratio of net loans charged-off
|to average loans outstanding   | (0.27)%                  | (0.40)%     | (0.13)%     | (0.40)%     | (0.30)%    
|Ratio of allowance for loan   
|losses to ending total loans   | 1.21%                    | 1.35%       | 1.47%       | 1.76%       | 1.98%      

26

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The
following table shows the allocation of PremierWests allowance for loan losses by
category and the percent of loans in each category to total loans at the dates indicated.
PremierWest allocates its allowance for loan losses to each loan classification based on
relative risk characteristics. Specific allocations represent estimated losses that are
due to current credit circumstances and other available information. Unallocated portions
of the allowance are intended to compensate for the subjective nature of the determination
of losses inherent in the overall loan portfolio. Because the total loan loss allowance is
a valuation reserve applicable to the entire loan portfolio, the portion of the allowance
allocated to each loan category does not represent the total potential for future losses
that may occur within that loan category.

|              | December 31, 2002 | December 31, 2001 | December 31, 2000 | December 31, 1999 | December 31, 1998
|------------- | ----------------- | ----------------- | ----------------- | ----------------- | -----------------
|
|Type of loan: |                   |                   |                   |                   |                  
|Commercial    | $1,148            | 23.73%            | $1,208            | 25.04%            | $1,214           
|Real estate -
|construction  | 286               | 5.91%             | 658               | 13.64%            | 925              
|Real estate -
|commercial/  
|residential   | 2,374             | 49.07%            | 2,677             | 55.48%            | 1,207            
|Consumer and 
|Other         | 822               | 16.99%            | 237               | 4.91%             | 94               
|Unallocated   | 208               | 4.30%             | 45                | 0.93%             | 36               
|Total         | $4,838            | 100.00%           | $4,825            | 100.00%           | $3,476           

As
of December 31, 2002, PremierWests specific allocation of its allowance for loan
losses related to loans on non-accrual status; estimated reserves based on individual
credit risk ratings; loans for which management believes the borrower might be unable to
comply with loan repayment terms, even though the loans are not in non-accrual status;
and, loans for which supporting collateral might not be adequate to recover loan amounts
if foreclosure and subsequent sale of collateral become necessary. The unallocated portion
of the allowance for loan losses is provided to recognize estimated potential losses for
which a specific reserve has not been established. The unallocated, general reserve is
based on the Banks historical loss experience. Management anticipates charge-offs
for 2003 will continue to show improvement over the amount experienced during the past
three years although there can be no assurance regarding the actual amount of future
charge-offs that will be incurred.

Deposits

Deposit
accounts are PremierWests primary source of funds. PremierWest offers a number of
deposit products to attract both commercial and consumer customers including regular
checking and savings accounts, and money market savings accounts, IRA accounts, NOW
accounts, and a variety of fixed-maturity, fixed-rate certificates with maturities ranging
from seven days to 60 months. These accounts earn interest at rates established by
management based on competitive market factors and managements desire to increase
certain types or maturities of deposit liabilities.

27

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The
distribution of deposit accounts by type and rate is set forth in the following tables as
of the indicated dates.

|                                                                  | Years Ended December 31,
|----------------------------------------------------------------- | ------------------------
|
|
|Interest-bearing   checking and   savings                         | $197,362                
|Time deposits                                                     | 141,200                 
|                                                                 
|Total       interest-
       bearing       deposits               | 338,562                 
|                                                                 
|Noninterest-   bearing deposits                                   | 85,523                  
|                                                                 
|Total interest-   bearing and non-   interest-bearing
   deposits | $424,085                
|                                                                 

At
December 31, 2002, total deposits were $428.3 million, a decrease of $1.7 million or
0.40%, from total deposits of $430.1 million at December 31, 2001. Total deposits at
December 31, 2001, of $430.1 million represent an increase of $133.8 million or
45.17%, from total deposits of $296.2 million at December 31, 2000. The decrease in
outstanding deposits from 2001 to 2002 is a direct result of managements decision to
reduce a concentration of higher priced time certificate accounts. However, while time
deposit accounts declined by $19.0 million in 2002 over 2001, all other deposit accounts
grew by $17.3 million or 6.41%. To the extent PremierWest can fund operations with
non-interest bearing demand deposits, net interest spread, which is the difference between
interest income and interest expense, will improve. At December 31, 2002, core deposits,
which consist of all demand deposit accounts, savings accounts, and certificates of
deposit less than $100,000, accounted for 89.54% of total deposits, up from 85.79% as of
December 31, 2001.

Interest-bearing
deposits consist of money market, savings, and time certificate accounts. Interest-bearing
account balances tend to grow or decline as PremierWest adjusts its pricing and product
strategies based on market conditions, including competing deposit products. At December
31, 2002, total interest-bearing deposit accounts were $336.7 million, a decrease of $10.6
million, or 3.06%, from December 31, 2001. Increases in savings accounts and in
interest-bearing deposits offset a decline in time deposits. Interest-bearing savings and
demand accounts increased $8.4 million, or 4.48%, from December 31, 2001 to 2002, after
increasing $93.6 million, or 53.04%, from 2001 to 2000.

PremierWest
generally has a policy against relying on brokered deposits as a source for funding future
loan growth, since in most cases, brokered deposit accounts are purchased with a long-term
maturity of two to seven years. At December 31, 2002, time certificates of deposits of
$100,000 and over totaled $44.8 million, or 10.46% of total outstanding deposits, compared
to $61.1 million,  or  14.21%,  of  total  outstanding
 deposits  at  December 31,

28

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2001, and $50.8 million, or 17.15%,
of total outstanding deposits at December 31, 2000. The following table sets forth, by
time remaining to maturity, all time certificates of deposit accounts outstanding at
December 31, 2002:

|                                    | Time Deposits of$100,000 or More | Time Deposits LessThan $100,000
|----------------------------------- | -------------------------------- | -------------------------------
|
|Three months or less                | $  6,952                         | 15.53%                         
|Over three months through 12 months | 17,431                           | 38.93%                         
|Over 12 months                      | 20,388                           | 45.54%                         
|Total                               | $44,771                          | 100.00%                        

Short-term and Long-term
Borrowings.

The
following table sets forth certain information with respect to PremierWests
short-term borrowings of federal funds purchased and securities sold under agreements to
repurchase:

|                            | Years Ended December 31,
|--------------------------- | ------------------------
|
|
|Amount outstanding at end   |                         
|of period                   | $8,890                  
|Weighted average interest  
|rate at end of period       | 1.0%                    
|Maximum amount outstanding 
|at any month-end during the
|year                        | $9,525                  
|Average amount outstanding 
|during the period           | $8,134                  
|Average weighted interest  
|rate during the period      | 1.3%                    

PremierWest
had long-term borrowings outstanding with the Federal Home Loan Bank of Seattle (FHLB)
totaling $24.8 million and $5.6 million as of December 31, 2002 and 2001, respectively.
The Company makes monthly principal and interest payments on the long-term borrowings
which mature between 2003 and 2014 and bear interest at rates ranging from 2.81% to 7.63%.
The Company also participates in the Cash Management Advance Program (the Program) with
the FHLB. As of December 31, 2002 and 2001, the Bank had no borrowings outstanding under
the Program but had an available line of credit of approximately $72.2 million as of
December 31, 2002, with interest at the FHLBs cash management rate. All outstanding
borrowings with the FHLB are collateralized by a blanket pledge agreement on the
Banks FHLB stock and any funds, investment securities available-for-sale, or loans
on deposit with the FHLB.

The maturity of
FHLB notes payable is as follows (in thousands):

|Years ending December 31, 2003 | $  1,789
|------------------------------ | --------
|2004                           | 20,639  
|2005                           | 639     
|2006                           | 639     
|2007                           | 633     
|Thereafter                     | 508     
|                               | $24,847 

29

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# LIQUIDITY AND CAPITAL
RESOURCES; REGULATORY CAPITAL

Shareholders
equity was $49.2 million at December 31, 2002, an increase of $5.5 million or 12.54% from
December 31, 2001. The increase reflects comprehensive income of $4.5 million, ESOP
compensation expense of $237,000, and the exercise of stock options and related tax
benefit of $764,000.

PremierWest
has adopted policies to maintain a relatively liquid position to enable it to respond to
changes in the financial environment and ensure sufficient funds are available to meet
customers needs for borrowing and deposit withdrawals. Generally, PremierWests
major sources of liquidity are customer deposits, sales and maturities of investment
securities, the use of borrowings from the FHLB and correspondent banks, and net cash
provided by operating activities. As of December 31, 2002 and 2001, unused and
available lines of credit totaled $72.2 million from FHLBs Cash Management Advance
Program and $20.0 million from correspondent banks. Scheduled loan repayments are a
relatively stable source of funds, while deposit inflows and unscheduled loan prepayments
are not as stable because they are influenced by general interest rate levels, competing
interest rates available on other investments, market competition, economic conditions,
and other factors. Liquid asset balances include cash, amounts due from other banks,
federal funds sold, and securities available-for-sale. At December 31, 2002, these liquid
assets totaled $83.2 million or 16.16% of total assets as compared to $100.1 million or
20.49% of total assets at December 31, 2001. Total liquid assets of $100.1 million as of
December 31, 2001, compare to $91.7 million or 26.63% of total assets at December 31,
2000. Liquidity declined during 2002 as a result of steady loan growth and
managements decision to not renew selected higher priced certificates of deposit.

Analysis
of liquidity should include a review of the changes that appear in the consolidated
statements of cash flows for the year ended December 31, 2002. The statement of cash flows
includes operating, investing, and financing categories. Operating activities include net
income of $4.3 million and adjustments for non-cash items and changes in cash due to
changes in certain assets and liabilities. Investing activities consist primarily of both
proceeds from and purchases of securities and the impact of the net growth in loans.
Financing activities present the cash flows associated with the change in deposit
accounts, changes in long-term and other borrowings, and various stockholder transactions.

At
December 31, 2002, PremierWest had outstanding commitments to make loans of $66.6 million.
Nearly all of these commitments represented unused portions of credit lines available to
businesses. Many of these credit lines will not be fully drawn upon and, accordingly, the
aggregate commitments do not necessarily represent future cash requirements. Management
believes that PremierWests sources of liquidity are sufficient to meet likely calls
on outstanding commitments, although there can be no assurance in this regard.

The
Federal Reserve Board and the Federal Deposit Insurance Corporation have established
minimum requirements for capital adequacy for financial holding companies and member
banks. The requirements address both risk-based capital and leveraged capital. The
regulatory agencies may establish higher minimum requirements if, for example, a
corporation has previously received special attention or has a high susceptibility to
interest rate risk. The following reflects PremierWest Banks various capital ratios
at December 31, 2002, and December 31, 2001, as compared to regulatory minimums for
capital adequacy purposes:

|                          | 2002 Actual | 2001 Actual | Minimum to be"Well-Capitalized" | Minimum to be"AdequatelyCapitalized"
|------------------------- | ----------- | ----------- | ------------------------------- | ------------------------------------
|Total risk-based capital  |             |             |                                 |                                     
|ratio                     | 10.34%      | 10.08%      | 10.00%                          | 8.00%                               
|Tier I risk-based capital
|ratio                     | 9.24%       | 8.87%       | 6.00%                           | 4.00%                               
|Leverage ratio            | 7.96%       | 7.33%       | 5.00%                           | 4.00%                               

# FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATIONS

In
addition to the other information contained in this report, the following risks may affect
PremierWest. If any of these risks occur, our business, financial condition or operating
results could be adversely affected.

30

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Our markets are geographically
concentrated and regional economic factors that impact our markets will affect our
business more than they might a bank holding company with more diverse markets.

A
substantial portion of our entire market is located on the Interstate 5 corridor between
Redding, California, and Roseburg, Oregon. Our customers are directly and indirectly
dependent upon the economies of these areas and upon the timber and tourism industries,
which are the primary employers and revenue sources in our markets. National, regional,
and local economic factors that affect these industries will have a disproportionately
negative impact on our customers. Localized economic declines will thus adversely impact
our customers, and in exacerbated circumstances may increase the rate at which our
borrowers default on their loans. Additionally, the vast majority of our loans are secured
by real and personal property located in this same region, and declining economic
conditions in this area could make it more difficult for us to realize full value on the
collateral that secures these loans. A deterioration in economic and business conditions
in our market areas, particularly in the natural resources, manufacturing and real estate
industries on which some of these areas depend, could have a material adverse impact on
the quality of our loan portfolio and the demand for our products and services, which in
turn may have a material adverse effect on our results of operations. Further, a downturn
in the national economy might further exacerbate local economic conditions. The extent of
the future impact of these events on economic and business conditions cannot be predicted.

We may not effectively manage our
growth and our recent and future acquisitions which could adversely effect the quality of
our operations and our costs.

Our
financial performance and profitability will depend on our ability to manage recent and
possible future growth. Although management believes that it has substantially integrated
the business and operations of recent acquisitions, there can be no assurance that
unforeseen issues relating to the acquisitions will not adversely affect us. In addition,
any future acquisitions and continued growth may present operating and other problems that
could have an adverse effect on our business, financial condition and results of
operations. Accordingly, there can be no assurance that we will be able to execute our
growth strategy or maintain the level of profitability that we have recently experienced.

Our earnings depend upon the
spread between the interest rate we receive on loans and securities and the interest rates
we pay on deposits and borrowings. If interest rates decline, our business may be
negatively impacted more severely than would be experienced in a diversified
business.

Our
earnings are impacted by changing interest rates. Changes in interest rates affect the
demand for new loans, the credit profile of existing loans, the rates received on loans
and securities, and rates paid on deposits and borrowings. The relationship between the
rates received on loans and securities and the rates paid on deposits and borrowings is
known as interest rate spread. Given our current volume and mix of interest-bearing
liabilities and interest-earning assets, our interest rate spread could be expected to
increase during times of rising interest rates and, conversely, to decline during times of
falling interest rates. Exposure to interest rate risk is managed by monitoring the
re-pricing frequency of the Banks rate-sensitive assets and rate-sensitive
liabilities over any given period. Although we believe our current level of interest rate
sensitivity is reasonable, significant fluctuations in interest rates may have an adverse
affect on our business, financial condition and results of operations.

Our business is heavily regulated
and the creation of additional regulations may negatively affect our operations.

We
are subject to government regulation that could limit or restrict our activities, which in
turn could adversely impact our operations. The financial services industry is regulated
extensively. Federal and state regulation is designed primarily to protect the deposit
insurance funds and consumers, and not to benefit our stockholders. These regulations can
sometimes impose significant limitations on our operations. In addition, these regulations
are constantly evolving and may change significantly over time. Significant new laws or
changes in existing laws or repeal of existing laws may cause our results to differ
materially. Further, federal monetary policy, particularly as implemented through the
Federal Reserve System, significantly affects credit conditions for us.

31

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In our intensely competitive
markets many of our competitors offer similar services, which could impair our ability to
attract new customers and retain existing customers.

Competition
may adversely affect our performance. The financial services business in our market areas
is highly competitive. It is becoming increasingly competitive due to changes in
regulation, technological advances, and the accelerating pace of consolidation among
financial services providers. We face competition both in attracting deposits and in
making loans. We compete for loans principally through the interest rates and loan fees we
charge and the efficiency and quality of services we provide. Increasing levels of
competition in the banking and financial services industries may reduce our market share
or cause the prices we charge for our services to fall. Our results may differ in future
periods depending upon the nature or level of competition.

Our earnings depend to a large
extent upon the ability of our borrowers to repay their loans and our inability to manage
credit risk would negatively affect our business.

A
source of risk arises from the possibility that losses will be sustained if a significant
number of our borrowers, guarantors and related parties fail to perform in accordance with
the terms of their loans. We have adopted underwriting and credit monitoring procedures
and credit policies, including the establishment and review of the allowance for credit
losses, that management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying our credit
portfolio. These policies and procedures, however, may not prevent unexpected losses that
could materially affect our results of operations.

# RECENTLY ISSUED
ACCOUNTING STANDARDS

In
December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosurean
Amendment of FASB Statement No. 123. This statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value-based method of accounting for
stock-based employee compensation. In addition, this statement amends the disclosure
requirements of statement No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. PremierWests
management intends to continue using the intrinsic value method for stock-based employee
compensation arrangements and, therefore, does not expect that the application provisions
of this statement will have a material impact on PremierWests consolidated financial
statements.

In
October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions. This statement provides guidance on the accounting for the acquisition
of a financial institution and applies to all acquisitions except those between two or
more mutual enterprises. PremierWests management does not expect that the
application provisions of this statement will have a material impact on PremierWests
consolidated financial statements.

In
June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities. This statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). The statement is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged.
PremierWests management does not expect that the application of the provisions of
this statement will have a material impact on PremierWests consolidated financial
statements.

In
April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This
statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that statement, FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of
Motor Carriers. This statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. This statement
also amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under conflicting
conditions. PremierWests management does not expect that the application of the
provisions of this statement will have a material impact on PremierWests
consolidated financial statements.

32

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In
November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on the disclosures to be made
by a guarantor in its financial statements about its obligations under certain guarantees
that is has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing a guarantee. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 31, 2002, and the
initial recognition and initial measurement provisions shall be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The Companys
management does not expect that the application of the provisions of this interpretation
will have a material impact on the Companys consolidated financial statements.

# ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Like
other financial institutions, PremierWest is subject to interest rate risk.
Interest-earning assets could mature or re-price more rapidly than, or on a different
basis from, interest-bearing liabilities (primarily borrowings and deposits with short-and
medium-term maturities) in a period of declining interest rates. Although having assets
that mature or re-price more frequently on average than liabilities will be beneficial in
times of rising interest rates, such an asset/liability structure will result in lower net
interest income during periods of declining interest rates. Interest rate sensitivity, or
interest rate risk, relates to the effect of changing interest rates on net interest
income. Interest-earning assets with interest rates tied to the prime rate for example, or
that mature in relatively short periods of time, are considered interest-rate sensitive.
Interest-bearing liabilities with interest rates that can be re-priced in a discretionary
manner, or that mature in relatively short periods of time, are also considered
interest-rate sensitive. The differences between interest-sensitive assets and
interest-sensitive liabilities over various time horizons are commonly referred to as
sensitivity gaps. As interest rates change, the sensitivity gap will have either a
favorable effect or an adverse effect on net interest income. A negative gap (with
liabilities repricing more rapidly than assets) generally should have a favorable effect
when interest rates are falling, and an adverse effect when rates are rising. A positive
gap (with assets repricing more rapidly than liabilities) generally should have the
opposite effect: an adverse effect when rates are falling and a favorable effect when
rates are rising.

The
following table illustrates the maturities or repricing of PremierWests assets and
liabilities as of December 31, 2002, based upon the contractual maturity or
contractual repricing dates of loans and the contractual maturities of time deposits.
Prepayment assumptions have not been applied to fixed-rate mortgage loans. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less.

|                              | By Repricing Interval |            
|----------------------------- | --------------------- | -----------
|
|ASSETS                        |                       |            
|Interest-earning assets:     
|Federal funds sold and       
|interest earning deposits     | $  12,693             | $        --
|Securities available-for-sale | 3,062                 | 7,406      
|Loans                         | 135,799               | 76,155     
|Total                         | $151,554              | $ 83,561   
|LIABILITIES                  
|Interest-bearing liabilities:
|Interest-bearing checking    
|and savings                   | $  75,306             | $ 26,716   
|Time deposits                 | 26,741                | 58,238     
|Borrowings                    | 10,075                | 3,617      
|Total                         | $112,122              | $ 88,571   
|Interest rate sensitivity gap | $  39,432             | $(5,010)   
|Cumulative                    | $  39,432             | $ 34,422   
|Cumulative gap as a % of     
|earning-assets                | 26.0%                 | 41.2%      

33

---

For
purposes of the gap analysis,  loans are not reduced by the allowance for loan losses and
non-performing loans.  Premiums, unearned discounts and deferred loan fees are excluded.

This
analysis of  interest-rate  sensitivity  has a number of  limitations.  The gap analysis
above is based upon  assumptions concerning  such  matters as when  assets and
 liabilities  will  re-price  in a changing  interest  rate  environment.  Because  these
assumptions  are no more than  estimates,  certain  assets and  liabilities  indicated as
maturing or repricing  within a stated period might  actually  mature or re-price at
 different  times and at different  volumes from those  estimated.  The actual
 prepayments  and withdrawals  after a change in interest  rates could  deviate
 significantly  from those assumed in  calculating  the data shown in the table. Certain
assets,  adjustable-rate loans for example,  commonly have provisions that limit changes
in interest rates each time the interest  rate  changes and on a cumulative  basis over
the life of the loan.  Also,  the renewal or  repricing  of certain  assets and
liabilities can be discretionary  and subject to competitive and other  pressures.  The
ability of many borrowers to service their debt could diminish  after an interest rate
increase.  Therefore,  the gap table above does not and cannot  necessarily  indicate the
actual future impact of general interest movements on net interest income.

In
addition to a static gap analysis of interest rate  sensitivity,  PremierWest  also
attempts to monitor  interest rate risk from the  perspective of changes in the economic
 value of equity,  also referred to as net portfolio  value (NPV),  and changes in net
interest  income.  Changes to the NPV and net interest  income are simulated  using
instant and permanent rate shocks of plus and minus 200 basis  points,  in  increments
 of 100 basis  points.  These  results are then compared to prior periods to determine
the effect of previously implemented  strategies.  If estimated changes to NPV or net
interest income are not within acceptable limits, the Board may direct  management to
adjust its asset and liability mix to bring interest rate risk within  acceptable
 limits.  The NPV  calculations are based on the net present value of  discounted  cash
flows,  using market  prepayment  assumptions  and market rates of interest for each
asset and liability  product type based on its  characteristics.  The theoretical
 projected change in NPV and net interest income over a 12-month period under each of the
 instantaneous  and permanent rate shocks have been  calculated by PremierWest  using
computer simulation.

PremierWest's
 simulation  analysis  forecasts net interest  income and earnings given  unchanged
 interest rates (stable rate scenario).  The model then  estimates a percentage  change
from the stable rate scenario  under  scenarios of rising and falling market interest
rates over various time horizons.  The  simulation  model based on December 31, 2002
data,  estimates that if a decline of 200 basis points occurs,  net interest income could
be unfavorably  affected up to  approximately  3.9%, while a similar increase in market
rates would have a favorable impact of  approximately  2.8%.  Because of uncertainties
 about customer  behavior,  refinance  activity, absolute and relative loan and deposit
 pricing  levels,  competitor  pricing and market  behavior,  product volumes and mix,
and other unexpected  changes in economic events  affecting  movements and volatility in
market rates,  there can be no assurance that simulation results are reliable indicators
of earnings under such conditions.

|                                   | Net (Decrease)In Net Interest Income (in thousands) | Net Interest Margin | Return Equity
|---------------------------------- | --------------------------------------------------- | ------------------- | -------------
|As of December 31, 2002, the prime |                                                     |                     |              
|rate was 4.25%                     | $   --                                              | 5.36%               | 9.13%        
|Prime rate increase of:           
|2% to 6.25%                        | $ 655                                               | 5.47%               | 10.46%       
|1% to 5.25%                        | $ 331                                               | 5.30%               | 10.03%       
|Prime rate decrease of:           
|2% to 2.25%                        | $(484)                                              | 4.82%               | 8.96%        
|1% to 3.25%                        | $(910)                                              | 4.97%               | 8.39%        

It
is PremierWests policy to manage interest rate risk to maximize long-term
profitability under the range of likely interest-rate scenarios.

34

---

# ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

The
financial statements called for by this item are included in this report beginning on page
F-1.

The
following tables set forth the Companys unaudited consolidated financial data
regarding operations for each quarter of 2002 and 2001. This information, in the opinion
of management, includes all adjustments necessary, consisting only of normal and recurring
adjustments, to state fairly the information set forth therein. Certain amounts previously
reported have been reclassified to conform to the current presentation. These
reclassifications had no net impact on the results of operations.

|                                   | 2002   
|---------------------------------- | -------
|
|INCOME STATEMENT DATA              |        
|Total interest income              | $8,150 
|Total interest expense             | 2,458  
|Net interest income                | 5,692  
|Provision for loan losses          | 292    
|Net interest income after         
|provision for loan losses          | 5,400  
|Noninterest revenue                | 1,278  
|Noninterest expense                | 5,294  
|Income before income taxes         | 1,384  
|Provision for income taxes         | 477    
|Income before cumulative effect of
|accounting change                  | 907    
|Cumulative effect of an accounting
|change, net of tax                 | --     
|Net income                         | $   907
|Basic earnings per common share    | $  0.08
|Diluted earnings per common share  | $  0.08

|                                  | 2001   
|--------------------------------- | -------
|
|INCOME STATEMENT DATA             |        
|Total interest income             | $6,853 
|Total interest expense            | 3,123  
|Net interest income               | 3,730  
|Provision for loan losses         | 162    
|Net interest income after        
|Provision for loan losses         | 3,568  
|Noninterest revenue               | 706    
|Noninterest expense               | 3,300  
|Income before income taxes        | 974    
|Provision for income taxes        | 324    
|Net income                        | $   650
|Basic earnings per common share   | $  0.07
|Diluted earnings per common share | $  0.07

35

---

# ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

During
2002, the Company changed  Certified Public  Accountants.  The Company engaged Moss Adams
LLP to audit the consolidated financial  statements  for 2002 and was noted on Form 8-K
filed June 17, 2002. The change from Symonds,  Evans & Company,  P.C. was not related to
a disagreement on accounting or financial  disclosures,  and at the time Symonds,  Evans & Company
was dismissed and for the two most  recent  fiscal  years  preceding  that date,  had
there been any  disagreements  on any matter of  accounting  principles  or practices,
 financial  statement  disclosure,  or auditing scope or procedure  which, if not
resolved to the satisfaction of that firm, would have caused it to make reference to the
subject of the  disagreement in the subject matter of its report.  At the time Moss Adams
LLP was  engaged,  they did not consult  with the Company  with  respect to the
 application  of specific  accounting  principles  to a specified  transaction,  whether
completed or proposed,  on the type of audit opinion that might be rendered on the
Company's financial statements, or any matter that was a subject of a disagreement with
Symonds, Evans & Company.

# PART III

# ITEM 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

The
information  provided in response to this Item is incorporated by reference to the
Definitive  Proxy Statement on Schedule 14A for the Company's 2003 Annual Meeting of
 Shareholders,  which the Company expects first to be sent or given to security holders
on or about April 2, 2003.

# ITEM 11 EXECUTIVE
COMPENSATION AND REPORT OF COMPENSATION COMMITTEE

The
information  provided in response to this Item is incorporated by reference to the
Definitive  Proxy Statement on Schedule 14A for the Company's 2003 Annual Meeting of
 Shareholders,  which the Company expects first to be sent or given to security holders
on or about April 2, 2003.

# ITEM 12 SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The
information  provided in response to the Security Ownership of Certain  Beneficial Owners
and Management  required by this Item is  incorporated  by  reference  to the  Definitive
 Proxy  Statement on Schedule  14A for the  Company's  2003 Annual  Meeting of
Shareholders, which the Company expects first to be sent or given to security holders on
or about April 2, 2003.

Equity
Compensation Plan Information

|Equity Compensation Plan Information                      
|----------------------------------------------------------
|
|Equity compensation plans approved by security holders    
|Equity compensation plans not approved by security holders
|Total                                                     

36

---

Under
the Bank's Stock Option Plan (the Stock Option  Plan),  it may grant  Incentive  Stock
Options  (ISOs) and  Nonqualified Stock Options  (NSOs) to key  employees.  The option
price of ISOs is the fair market value at the date of grant,  and the option price of
NSOs is to be a price not less than 85% of the fair market value at the date of grant.
 The options  generally  vest over time,  and all options  generally  expire after a
period of ten years.  However,  the Board has the right to suspend or terminate the Stock
Option Plan at any time, except with respect to the remaining options outstanding.

# ITEM 13 CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The
information  provided in response to this Item is incorporated by reference to the
Definitive  Proxy Statement on Schedule 14A for the Company's 2003 Annual Meeting of
 Shareholders,  which the Company expects first to be sent or given to security holders
on or about April 2, 2003.

# ITEM 14. CONTROLS AND
PROCEDURES

Within
90 days prior to the date of this report we evaluated the  effectiveness  of the design
and operation of our disclosure controls and procedures.  Our principal executive and
financial officers supervised and participated in this evaluation.  Based on this
evaluation,  our principal  executive and financial  officers each concluded that our
disclosure  controls and procedures are effective in timely alerting them to material
 information  required to be included in our periodic  reports to the SEC. The design of
any system of controls is based in part upon various  assumptions  about the likelihood
of future  events,  and there can be no assurance that any of our plans,  products,
 services or procedures will succeed in achieving their intended goals under future
 conditions.  In addition, there have been no  significant  changes in our internal
 controls or in other  factors known to  management  that could  significantly affect our
 internal  controls  subsequent  to our most  recent  evaluation.  We have found no facts
that would  require us to take any corrective actions with regard to significant
deficiencies or material weaknesses.

37

---

# PART IV

# Item 15. Exhibits,
Financial Statement Schedules and Reports on Form 8-K

|(a)(1) | Financial
Statements:           
          The  consolidated  financial  statements  for the
fiscal years ended  December 31, 2002,  2001,
           
          and 2000 are included in this report beginning on page F-1.
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Financial
Statement Schedules:           
          All schedules have been omitted  because
the  information is not required,  not  applicable,  not present in
           
          
                           amounts  sufficient to require  submission of the  schedule,
 or is included in the financial  statements or                            notes thereto.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The
 following  exhibits are filed with,  and  incorporated  into by reference,  this report,
 and this list  constitutes  the                   exhibit index:
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Exhibits

3.1      Articles
of Incorporation of PremierWest Bancorp*

3.2      Bylaws
of PremierWest Bancorp*

4.1      Specimen
Stock Certificate*

10.1     Stock
Option Agreement by and between Timberline Bancshares and PremierWest Bancorp, dated
October 16, 2000**

10.2     Employment
Agreement between John L. Anhorn and PremierWest Bancorp dated August 9, 2002

10.3     Employment
Agreement between Richard R. Hieb and PremierWest Bancorp dated August 9, 2002

10.4     Employment
Agreement between Tom Anderson and PremierWest Bancorp dated January 11, 2002

10.5     Salary
Continuation Agreement between John L. Anhorn and PremierWest Bank

10.6     Salary
Continuation Agreement between Richard R. Hieb and PremierWest Bank

10.7     1992
Combined Incentive and Non-Qualified Stock Option Plan of Bank of Southern Oregon*

10.8     United
Bancorp Stock Option Plan, as amended***

10.9     PremierWest
Bancorp Stock Option Plan

16.1     Symonds,
Evans & Company, P.C. consent letter regarding change of auditors.

21.1     Subsidiaries
of the PremierWest Bancorp

23.1     Consent
of Moss Adams LLP (relating to the audited  financial  statements of the registrant for
the period ending December 31,          2002.)

23.2     Consent
of Symonds,  Evans & Company  (relating to the audited  financial  statements of the
 registrant for the periods ended          December 31, 2001 and 2000.)

99.1     Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the          Sarbanes-Oxley Act of 2002

38

---

99.2     Certification
 of Chief  Financial  Officer  pursuant to 18 U.S.C.  Section  1350,  as adopted
 pursuant to Section 906 of the          Sarbanes-Oxley Act of 2002

* Incorporated by reference to the
 registration  statement on Form S-4 filed with the commission on February 4, 2000, and
all amendments thereto (commission file no. 333-96209)

**  Incorporated  by  reference  to
the  registration  statement  on Form S-4 filed  with the  commission  on  January
31,2001, and all amendments thereto (commission file no. 333-53588)

*** Incorporated by reference to the
 registration  statement on Form S-8 filed with the commission on July 6, 2000
(commission file no. 333-40886)

(b)  Reports on Form 8-K.  The
Company did not file any reports on Form 8-K during the period covered by this Report.

39

---

CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, John L. Anhorn, certify that:

|1. | I have reviewed this annual report on Form 10-K of PremierWest Bancorp.;
|-- | ------------------------------------------------------------------------

|2. | Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this quarterly
          report;
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The registrants other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | designed such disclosure controls and procedures to ensure that material
               information relating to the registrant, including its consolidated subsidiaries,
               is made known to us by others within those entities, particularly during the
               period in which this annual report is being prepared;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | evaluated the effectiveness of the registrants disclosure controls and
               procedures as of a date within 90 days prior to the filing date of this annual
               report (the Evaluation Date); and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | presented in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the Evaluation
               Date;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The registrants other certifying officer and I have disclosed, based on
          our most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors:
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | all significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record, process,
               summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls; and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | The registrants other certifying officer and I have indicated in this
          annual report whether or not there were significant changes in internal controls
          or in other factors that could significantly affect internal controls subsequent
          to the date of our most recent evaluation, including any corrective actions with
          regard to significant deficiencies and material weaknesses.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date:  March 21, 2003 |  | /s/ JOHN L. ANHORN                    | 
|--------------------- |  | ------------------------------------- | 
|                      |  | John L. Anhorn                        | 
|                      |  | President and Chief Executive Officer | 

40

---

CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Tom Anderson, certify
that:

|1. | I have reviewed this annual report on Form 10-K of PremierWest Bancorp.;
|-- | ------------------------------------------------------------------------

|2. | Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this annual report;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Based on my knowledge, the financial statements, and other financial information
          included in this annual report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the periods presented in this annual report;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | The registrants other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | designed such disclosure controls and procedures to ensure that material
               information relating to the registrant, including its consolidated subsidiaries,
               is made known to us by others within those entities, particularly during the
               period in which this annual report is being prepared;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | evaluated the effectiveness of the registrants disclosure controls and
               procedures as of a date within 90 days prior to the filing date of this annual
               report (the Evaluation Date); and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | presented in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the Evaluation
               Date;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | The registrants other certifying officer and I have disclosed, based on
          our most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors:
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | all significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record, process,
               summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls; and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | The registrant other certifying officer and I have indicated in this
          annual report whether or not there were significant changes in internal controls
          or in other factors that could significantly affect internal controls subsequent
          to the date of our most recent evaluation, including any corrective actions with
          regard to significant deficiencies and material weaknesses.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date:  March 20, 2003 |  | /s/ TOM ANDERSON                                          | 
|--------------------- |  | --------------------------------------------------------- | 
|                      |  | Tom Anderson                                              | 
|                      |  | Chief Financial Officer, and Principal Accounting Officer | 

41

---

Signatures

Pursuant
to the  requirements  of Section 13 or 15(d) of the  Securities  Exchange Act of 1934,
the registrant has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.

PREMIERWEST BANCORP (Registrant)

|By: | /s/ John L. Anhorn                                    |  | Date: March 26, 2003
|--- | ----------------------------------------------------- |  | --------------------
|    |                                                       |  |                     
|    | John L. Anhorn, President and Chief Executive Officer |  |                     

Pursuant
to the  requirements  of the  Securities  Exchange Act of 1934,  this report has been
signed  below by the  following persons on behalf of the registrant and in the capacities
and on the dates indicated.

|By: | /s/ John Duke       |  | Date: March 21, 2003
|--- | ------------------- |  | --------------------
|    |                     |  |                     
|    | John Duke, Director |  |                     

|By: | /s/ Dennis Hoffbuhr       |  | Date: March 20, 2003
|--- | ------------------------- |  | --------------------
|    |                           |  |                     
|    | Dennis Hoffbuhr, Director |  |                     

|By: | /s/ Thomas Becker       |  | Date: March 20, 2003
|--- | ----------------------- |  | --------------------
|    |                         |  |                     
|    | Thomas Becker, Director |  |                     

|By: | /s/ Rickar Watkins       |  | Date: March 20, 2003
|--- | ------------------------ |  | --------------------
|    |                          |  |                     
|    | Rickar Watkins, Director |  |                     

|By: | /s/ James Patterson       |  | Date: March 26, 2003
|--- | ------------------------- |  | --------------------
|    |                           |  |                     
|    | James Patterson, Director |  |                     

|By: | /s/ John L. Anhorn                                              |  | Date: March 26, 2003
|--- | --------------------------------------------------------------- |  | --------------------
|    |                                                                 |  |                     
|    | John L. Anhorn, Director, President and Chief Executive Officer |  |                     

|By: | /s/ Richard R. Hieb                      |  | Date: March 26, 2003
|--- | ---------------------------------------- |  | --------------------
|    |                                          |  |                     
|    | Richard R. Hieb, Chief Operating Officer |  |                     

|By: | /s/ Tom Anderson                                                        |  | Date: March 20, 2003
|--- | ----------------------------------------------------------------------- |  | --------------------
|    |                                                                         |  |                     
|    | Tom Anderson, Chief Financial Officer, and Principal Accounting Officer |  |                     

42

---

Signatures- (continued)

|By: | /s/ David A. Emmett       |  | Date: March 26, 2003
|--- | ------------------------- |  | --------------------
|    |                           |  |                     
|    | David A. Emmett, Director |  |                     

|By: | /s/ Brian Pargeter       |  | Date: March 26, 2003
|--- | ------------------------ |  | --------------------
|    |                          |  |                     
|    | Brian Pargeter, Director |  |                     

|By: | /s/ Richard K. Karchmer       |  | Date: March 26, 2003
|--- | ----------------------------- |  | --------------------
|    |                               |  |                     
|    | Richard K. Karchmer, Director |  |                     

43

---

# INDEPENDENT AUDITOR'S
REPORT

To the Board of Directors and
Shareholders PremierWest Bancorp and Subsidiary

We
have audited the accompanying  consolidated  balance sheet of PremierWest  Bancorp and
Subsidiary  (PremierWest Bank) as of December 31, 2002, and the related consolidated
 statements of income,  changes in shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of PremierWest Bancorp's
 management.  Our responsibility is to express an opinion on these  consolidated
 financial  statements  based on our audit.  The financial  statements of PremierWest
 Bancorp and Subsidiary as of December 31, 2001 and 2000,  were audited by other
 auditors whose report dated January 25, 2002,  expressed an unqualified  opinion on
those statements.

We
conducted our audit in accordance  with  auditing  standards  generally  accepted in the
United States of America.  Those  standards require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of material
misstatement.  An audit  includes  examining,  on a test  basis,  evidence  supporting
 the amounts and  disclosures  in the  financial statements.  An audit also includes
assessing the accounting principles used and significant  estimates made by management,
 as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In
our opinion, the 2002 consolidated  financial  statements referred to above present
fairly, in all material respects,  the financial position of PremierWest Bancorp and
Subsidiary,  as of December 31,  2002, and the results of their operations and their cash
flows for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.

Portland, Oregon January 17, 2003

F-1

---

|PREMIERWEST BANCORP AND
SUBSIDIARYCONSOLIDATED BALANCE SHEETS
|-------------------------------------------------------------

|ASSETS                                                        
|--------------------------------------------------------------
|
|
|
|Cash and cash equivalents:                                    
|Cash and due from banks                                       
|Federal funds sold                                            
|Total cash and cash equivalents                               
|Investment securities available-for-sale, at fair market value
|Interest-bearing deposits with Federal Home Loan Bank         
|Federal Home Loan Bank stock                                  
|Loans, net of allowance for loan losses and                   
|deferred loan fees                                            
|Premises and equipment, net of accumulated                    
|depreciation and amortization                                 
|Goodwill, net of amortization                                 
|Accrued interest and other assets                             
|TOTAL ASSETS                                                  

|LIABILITIES AND SHAREHOLDERS' EQUITY          
|----------------------------------------------
|LIABILITIES                                   
|Deposits:                                     
|Demand                                        
|Interest-bearing demand and savings           
|Time                                          
|                                              
|Total deposits                                
|Federal Home Loan Bank borrowings             
|Securities sold under agreements to repurchase
|ESOP notes payable                            
|Accrued interest and other liabilities        
|Total liabilities                             
|                                              

# COMMITMENTS AND
CONTINGENCIES (Note 18)

|SHAREHOLDERS' EQUITY                                      |           |          
|--------------------------------------------------------- | --------- | ---------
|Common stock, no par value, 20,000,000 shares authorized;
|11,567,559 shares issued and outstanding                 
|(10,854,732 in 2001)                                      | 33,875    | 29,480   
|Retained earnings                                         | 14,772    | 14,008   
|Unearned ESOP compensation                                | (16)      | (162)    
|Accumulated other comprehensive income                    | 541       | 368      
|                                                          |           |          
|Total shareholders' equity                                | 49,172    | 43,694   
|                                                          |           |          
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                | $ 515,084 | $ 488,310

|See accompanying notes. | F-2
|----------------------- | ---
|                       

---

|PREMIERWEST BANCORP AND
SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME
|-------------------------------------------------------------------

|                                              | Years Ended December 31,
|--------------------------------------------- | ------------------------
|
|
|INTEREST AND DIVIDEND INCOME                  |                         
|Interest and fees on loans                    |                         
|Taxable interest on investment securities     |                         
|Nontaxable interest on investment securities  |                         
|Interest on federal funds sold                |                         
|Interest-bearing deposits with Federal Home   |                         
|Loan Bank                                     |                         
|Federal Home Loan Bank stock and other        |                         
|dividends                                     |                         
|                                             
|Total interest and dividend income            |                         
|                                             
|INTEREST EXPENSE                              |                         
|Deposits:                                     |                         
|Interest-bearing demand and savings           |                         
|Time                                          |                         
|Federal funds purchased and securities sold   |                         
|under agreements to repurchase                |                         
|Federal Home Loan Bank borrowings and         |                         
|ESOP notes payable                            |                         
|                                             
|Total interest expense                        |                         
|                                             
|Net interest income                           |                         
|LOAN LOSS PROVISION                           |                         
|                                             
|Net interest income after loan loss provision |                         
|                                             
|NONINTEREST INCOME                            |                         
|Service charges on deposit accounts           |                         
|Mortgage loan brokerage and other fees        |                         
|Investment brokerage and annuity fees         |                         
|Other commissions and fees                    |                         
|Gains on sales of investment securities, net  |                         
|Other noninterest income                      |                         
|                                             
|Total noninterest income                      |                         
|                                             
|NONINTEREST EXPENSE                           |                         
|Salaries and employee benefits                |                         
|Net occupancy and equipment                   |                         
|Communications                                |                         
|Professional fees                             |                         
|Advertising                                   |                         
|Merger costs                                  |                         
|Other                                         |                         
|                                             
|Total noninterest expense                     |                         
|                                             

|F-3 | 
|--- | 
|   

---

|PREMIERWEST BANCORP AND
SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME
|-------------------------------------------------------------------

|                                    | Years Ended December 31, |          |            
|----------------------------------- | ------------------------ | -------- | -----------
|
|
|INCOME BEFORE PROVISION FOR INCOME  |                          |          |            
|TAXES AND CUMULATIVE EFFECT OF     
|AN ACCOUNTING CHANGE                | $  6,572                 | $  3,084 | $     2,902
|PROVISION FOR INCOME TAXES          | 2,169                    | 1,044    | 1,098      
|                                   
|NET INCOME BEFORE CUMULATIVE EFFECT
|OF AN ACCOUNTING CHANGE             | 4,403                    | 2,040    | 1,804      
|CUMULATIVE EFFECT OF AN ACCOUNTING 
|CHANGE, NET OF TAX                  | (99)                     | --       | --         
|                                   
|NET INCOME                          | $ 4,304                  | $ 2,040  | $ 1,804    
|                                   
|BASIC EARNINGS PER COMMON SHARE    
|BEFORE CUMULATIVE EFFECT OF        
|AN ACCOUNTING CHANGE                | $ 0.38                   | $ 0.19   | $ 0.19     
|                                   
|DILUTED EARNINGS PER COMMON SHARE  
|BEFORE CUMULATIVE EFFECT OF        
|AN ACCOUNTING CHANGE                | $ 0.38                   | $ 0.19   | $ 0.19     
|                                   
|PER SHARE CUMULATIVE EFFECT OF AN  
|ACCOUNTING CHANGE, NET OF TAX       | $ 0.01                   | $ --     | $ --       
|                                   
|BASIC EARNINGS PER COMMON SHARE    
|AFTER CUMULATIVE EFFECT OF AN      
|ACCOUNTING CHANGE                   | $ 0.37                   | $ 0.19   | $ 0.19     
|                                   
|DILUTED EARNINGS PER COMMON SHARE  
|AFTER CUMULATIVE EFFECT OF AN      
|ACCOUNTING CHANGE                   | $ 0.37                   | $ 0.19   | $ 0.19     
|                                   

|See accompanying notes. | F-4
|----------------------- | ---
|                       

---

|PREMIERWEST BANCORP AND
SUBSIDIARYCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|--------------------------------------------------------------------------------------------

|                                               | Numberof Shares | CommonStock     | RetainedEarnings | UnearnedESOPCompensation | AccumulatedOtherComprehensiveIncome (Loss) | TotalShareholders'Equity | ComprehensiveIncome (loss)
|---------------------------------------------- | --------------- | --------------- | ---------------- | ------------------------ | ------------------------------------------ | ------------------------ | --------------------------
|
|BALANCE, December 31, 1999                     | 8,407,879       | $        17,918 | $ 12,710         | $    (604)               | $(1,800)                                   | $ 28,224                 |                           
|Comprehensive income:                         
|Net income                                     | --              | --              | 1,804            |                          |                                            | 1,804                    | $   1,804                 
|Other comprehensive income -                  
|Unrealized gains on investment                
|securities available-for-sale                 
|of $1,436 (net of taxes of     $ 891)          | --              | --              | --               |                          | 1,436                                      | 1,436                    | 1,436                     
|Reclassification adjustment                   
|for net gains on sales of                     
|investment securities                         
|available-for-sale included in                
|net income of $4 (net of taxes     of $1)      | --              | --              | --               |                          | (4)                                        | (4)                      | (4)                       
|Comprehensive income                           |                 |                 |                  |                          |                                            |                          | $ 3,236                   
|ESOP compensation expense                      | --              | 71              | --               | 221                      | --                                         | 292                      |                           
|Stock options exercised                        | 191,122         | 593             | --               | --                       | --                                         | 593                      |                           
|Income tax benefit of stock options  exercised | --              | 97              | --               | --                       | --                                         | 97                       |                           
|Purchase of fractional shares                  | (84)            | --              | --               | --                       | --                                         | --                       |                           
|BALANCE, December 31, 2000                     | 8,598,917       | 18,679          | 14,514           | (383)                    | (368)                                      | 32,442                  
|Comprehensive income:                         
|Net income                                     |                 | --              | 2,040            | --                       | --                                         | 2,040                    | $   2,040                 
|Other comprehensive income -                  
|Unrealized gains on investment                
|securities available-for-sale of              
|$781 (net taxes of $485)                       |                 | --              | --               | --                       | 781                                        | 781                      | 781                       
|Reclassification adjustment for               
|net gains on sales of investment              
|securities available-for-sale                 
|included in net income of $45                 
|(net of taxes of $28)                          | --              | --              | --               | --                       | (45)                                       | (45)                     | (45)                      
|Comprehensive income                           |                 |                 |                  |                          |                                            |                          | $ 2,776                   
|Common stock issued to shareholders           
|of Timberline Bancshares, Inc.                 | 1,674,036       | 7,995           | --               | --                       | --                                         | 7,995                    |                           
|5% stock dividend                              | 513,945         | 2,546           | (2,546)          | --                       | --                                         | --                       |                           
|ESOP compensation expense                      | --              | 70              | --               | 221                      | --                                         | 291                      |                           
|Stock options exercised                        | 67,834          | 119             | --               | --                       | --                                         | 119                      |                           
|Income tax benefit of stock options           
|exercised                                      | --              | 71              | --               | --                       | --                                         | 71                       |                           
|                                               | 10,854,732      | $29,480         | $ 14,008         | $    (162)               | $      368                                 | $ 43,694                

|F-5 | 
|--- | 
|   

---

|PREMIERWEST BANCORP AND
SUBSIDIARYCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|--------------------------------------------------------------------------------------------

|                                    | Numberof Shares | CommonStock | RetainedEarnings | UnearnedESOPCompensation | AccumulatedOtherComprehensiveIncome (Loss) | TotalShareholders'Equity | ComprehensiveIncome (loss)
|----------------------------------- | --------------- | ----------- | ---------------- | ------------------------ | ------------------------------------------ | ------------------------ | --------------------------
|
|BALANCE, December 31, 2001          | 10,854,732      | $29,480     | $ 14,008         | $(162)                   | $    368                                   | $ 43,694                 |                           
|                                   
|Comprehensive income:              
|Net income                          |                 | --          | 4,304            | --                       | --                                         | 4,304                    | $   4,304                 
|Other comprehensive income -       
|Unrealized gains on investment     
|securities available-for-sale of   
|$361 (net of taxes of $224)         |                 | --          | --               | --                       | 361                                        | 361                      | 361                       
|                                   
|Reclassification adjustment for    
|net gains on sales of investment   
|securities available-for-sale      
|included in net income of $188     
|(net of taxes of $116)              | --              | --          | --               | (188)                    | (188)                                      |                          | (188)                     
|                                   
|Comprehensive income                |                 |             |                  |                          |                                            |                          | $  4,477                  
|                                   
|5% stock dividend                   | 542,574         | 3,540       | (3,540)          | --                       | --                                         | --                       |                           
|ESOP compensation expense           | 91              | --          | 146              | --                       | 237                                        |                         
|Stock options exercised             | 170,253         | 572         | --               | --                       | --                                         | 572                      |                           
|Income tax benefit of stock options
|exercised                           | --              | 192         | --               | --                       | --                                         | 192                      |                           
|                                   
|BALANCE, December 31, 2002          | 11,567,559      | $33,875     | $ 14,772         | $(16)                    | $    541                                   | $ 49,172                 |                           
|                                   

|See accompanying notes. | F-6
|----------------------- | ---
|                       

---

|PREMIERWEST BANCORP AND
SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS
|-----------------------------------------------------------------------

|                                                        | Years Ended December 31,
|------------------------------------------------------- | ------------------------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES                    |                         
|Net income                                              | $   4,304               
|Adjustments to reconcile net income to net cash        
|from operating activities:                             
|Depreciation and amortization                           | 2,026                   
|Loan loss provision                                     | 1,037                   
|Gain on the sales of investment securities             
|available-for-sale, net                                 | (304)                   
|Amortization of premium (accretion of                  
|discount) on investment securities, net                 | 28                      
|Deferred income taxes                                   | 350                     
|Income tax benefit of stock options exercised           | 192                     
|Dividends on Federal Home Loan Bank stock               | (101)                   
|Gain on sale of fixed assets                            | (66)                    
|Gain on sale of other real estate owned                 | (224)                   
|Changes in accrued interest receivable/payable         
|and other                                              
|assets/liabilities                                      | (3,825)                 
|Net cash from operating activities                      | 3,417                   
|CASH FLOWS FROM INVESTING ACTIVITIES                   
|Purchases of investment securities available-for-sale   | (19,498)                
|Proceeds from maturities and calls of investment       
|securities available-for-sale                           | 30,053                  
|Proceeds from sales of investment securities available-
|for-sale                                                | 12,482                  
|Proceeds from the sale of Federal Home Loan Bank       
|stock                                                   | --                      
|Decrease (increase) in interest-bearing deposits with  
|Federal Home Loan Bank                                  | 1,042                   
|Loan originations, net                                  | (41,971)                
|Purchases of premises and equipment, net                | (2,341)                 
|Proceeds from the sale of other real estate owned       | 1,977                   
|Acquired net assets of Timberline Bancshares, Inc.,    
|net of cash and cash equivalents acquired              
|of $24,314                                              | --                      
|Net cash from investing activities                      | (18,256)                

|F-7 | 
|--- | 
|   

---

|PREMIERWEST BANCORP AND
SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS
|-----------------------------------------------------------------------

|                                                 | Years Ended December 31,
|------------------------------------------------ | ------------------------
|
|
|CASH FLOWS FROM FINANCING ACTIVITIES             |                         
|                                                
|Net (decrease) increase in deposits              | $(1,718)                
|Net increase (decrease) in Federal Home Loan    
|Bank borrowings                                  | 19,281                  
|Net increase (decrease) in securities sold under
|agreements to repurchase                         | 3,410                   
|Stock options exercised                          | 572                     
|Net cash from financing activities               | 21,545                  
|NET INCREASE (DECREASE) IN CASH AND             
|CASH EQUIVALENTS                                 | 6,706                   
|CASH AND CASH EQUIVALENTS,                      
|beginning of year                                | 34,731                  
|CASH AND CASH EQUIVALENTS,                      
|end of year                                      | $41,437                 
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW            
|INFORMATION                                     
|Cash paid for interest                           | $8,783                  
|Cash paid for taxes                              | $2,344                  
|SUPPLEMENTAL DISCLOSURE OF NONCASH              
|INVESTING AND FINANCING ACTIVITIES              
|Transfers of loans to other real estate          | $1,451                  
|ESOP compensation expense, including market-    
|to-market adjustments                            | $  199                  

|See accompanying notes. | F-8
|----------------------- | ---
|                       

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 1 - ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization- The accompanying
consolidated financial statements include the accounts of PremierWest Bancorp and
its wholly-owned subsidiary, PremierWest Bank (collectively, "PremierWest" or "the
Bank"). PremierWest Bank's wholly-owned subsidiaries include PremierWest Investment
Services, Inc., Premier Finance Company, and Blue Star Properties, Inc. The
consolidated financial statements also reflect the Bank's acquisition in April 2001 of
Timberline Bancshares, Inc., which was accounted for by the purchase method, and its
acquisition in May 2000 of United Bancorp, which was accounted for by the
pooling-of-interests method of accounting (see Note 2).

The Bank conducts a general banking
 business  operating  primarily in Jackson,  Josephine,  Douglas,  and Klamath counties
of southern Oregon,  and Siskiyou and Shasta counties of northern  California.  Its
activities include the usual lending and deposit functions of a commercial bank;
 commercial,  real estate,  installment,  and mortgage loans; checking,  time deposit,
and savings accounts;  mortgage loan brokerage services; and automated teller machines
(ATMs) and safe deposit facilities.

Method of accounting and use of
estimates- The Bank 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. The Bank utilizes the accrual method
of accounting which recognizes income when earned and expenses when incurred. In
preparation of the consolidated financial statements, all significant intercompany
accounts and transactions have been eliminated in consolidation.

The preparation of  consolidated
 financial  statements,  in conformity with  accounting  principles  generally  accepted
in the United States of America,  requires  management to make estimates and assumptions
 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.  The significant  estimate made by management involves
the calculation of the allowance for loan loss.

Cash and cash equivalents- For
purposes of reporting cash flows, cash and cash equivalents include cash on hand, money
market funds, amounts due from banks and federal funds sold. Generally, federal funds are
sold for one-day periods.

The Bank maintains  balances in
correspondent bank accounts which, at times, may exceed federally insured limits.
 Management  believes that its risk of loss associated with such balances is minimal due
to the financial  strength of correspondent  banks. The Bank has not experienced any
losses in such accounts.

Investment securities- The Bank
is required to specifically identify its investment securities as
"available-for-sale," "held-to-maturity," or "trading accounts." Accordingly,
management has determined that all investment securities held at December 31, 2002,
2001, and 2000 are classified as "available-for-sale" and conform to the following
accounting policies:

Securities available-for-sale-
Available-for-sale securities consist of bonds, notes, debentures, and certain equity
securities not classified as held-to-maturity securities. Securities are generally
classified as available-for-sale if the instrument may be sold in response to such
factors as (1) changes in market interest rates and related changes in the prepayment
risk, (2) needs for liquidity, (3) changes in the availability of and the yield on
alternative instruments, and (4) changes in funding sources and terms. Unrealized
holding gains and losses, net of tax, on available-for-sale securities are reported
as other comprehensive income and carried as accumulated comprehensive income or loss
within shareholders' equity until realized. Fair values for these investment securities
are based on quoted market prices. Gains and losses on the sale of
available-for-sale securities are determined using the specific-identification
method.

Declines  in the fair value of
 individual  available-for-sale  securities  below  their cost that are other than
 temporary  result in write-downs  of the  individual  securities  to their fair  value.
 The related  write-downs  would be included in earnings as realized losses. Premiums and
discounts are recognized in interest income using the effective interest method over the
period to maturity.

|F-9 | 
|--- | 
|   

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 1 - ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -(continued)

Federal Home Loan Bank- The Bank's
interest-bearing deposits with Federal Home Loan Bank (FHLB) mature within one
year and are carried at cost.

The Bank's investment in FHLB stock
is carried at par value,  which  approximates fair value. As a member of the FHLB system,
 the Bank is required to maintain a minimum level of investment in FHLB stock based on
specific percentages of its outstanding  mortgages,  total assets,  or FHLB  advances.
 At  December  31,  2002 and 2001,  the Bank met its  minimum  required  investment.  The
Bank may  request redemption at par value of any FHLB stock in excess of the minimum
 required  investment.  Stock  redemptions  are at the discretion of the FHLB.

Loans- Loans are stated at the
amount of unpaid principal, reduced by the allowance for loan losses and deferred
loan fees. The allowance for loan losses represents management's recognition of
the assumed risks of extending credit and the quality of the existing loan
portfolio. The allowance is established to absorb known and inherent losses in the
loan portfolio as of the balance sheet date. The allowance is maintained at a level
considered adequate to provide for estimated loan losses based on management's
assessment of various factors affecting the portfolio. Such factors include
historical loss experience; review of problem loans; underlying collateral values and
guaranties; current economic conditions; legal representation regarding the outcome of
pending legal action for collection of loans and related loan guaranties; and an
overall evaluation of the quality, risk characteristics, and concentration of loans
in the portfolio. The allowance is based on estimates and ultimate losses may vary from
the current estimates. These estimates are reviewed periodically, and as adjustments
become necessary, they are reported in operations in the periods in which they become
known. The allowance is increased by provisions charged to operations and reduced by
loans charged-off, net of recoveries.

Various  regulatory  agencies,  as
an integral part of their  examination  process,  periodically  review the Bank's
allowance for loan losses.  Such  agencies  may require the Bank to  recognize  additions
 to the  allowance  based on their  judgment of the  information available to them at the
time of their examinations.

The Bank  considers  loans to be
impaired  when  management  believes  that it is probable  that all amounts due will not
be  collected according to the  contractual  terms.  Impairment is measured on a
 loan-by-loan  basis by either the present value of expected  future cash flows
 discounted at the loan's  effective  interest rate,  the loan's  obtainable  market
price,  or the fair value of the loan's underlying  collateral or related guaranty.
 Since a significant  portion of the Bank's loans are  collateralized  by real estate,
 the Bank primarily  measures  impairment  based on the estimated fair value of the
underlying  collateral or related  guaranty.  In certain other cases,  impairment  is
measured  based on the present  value of expected  future cash flows  discounted  at the
loan's  effective interest  rate.  Amounts  deemed  impaired are either  specifically
 allocated  for in the  allowance for loan losses or reflected as a partial charge-off of
the loan balance.  Smaller balance  homogeneous loans (typically,  installment loans) are
collectively  evaluated for  impairment.  Accordingly,  the Bank  does not  separately
 identify  individual  installment  loans  for  impairment  disclosures. Generally,  the
Bank  evaluates a loan for  impairment  when it is placed on nonaccrual  status.  All of
the Bank's  impaired  loans at December 31, 2002 and 2001, were on nonaccrual status.

Interest  income on all loans is
accrued  as earned on the simple  interest  method.  The  accrual of  interest  on
 impaired  loans is discontinued  when, in management's  opinion,  the borrower may be
unable to make payments as they become due. When interest accrual is discontinued,  all
unpaid accrued  interest is reversed.  Interest income is  subsequently  recognized only
to the extent cash payments are received.

Loan origination and commitment
fees, net of certain direct loan  origination  costs, are generally  recognized as an
adjustment of the yield of the related loan.

Premises and equipment- Premises
and equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization of premises and equipment is computed by the
straight-line method over the shorter of the estimated useful lives of the assets or
terms of underlying leases. Estimated useful lives range from 3 to 15 years for
furniture, equipment, and leasehold improvements, and up to 40 years for building
premises.

| | F-10
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 1    - ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -               (continued)

Goodwill- Goodwill represents
the excess of the cost over fair value of net assets acquired in business
combinations and was amortized by the straight-line method, generally over a 20-year
period, until December 31, 2001. Effective January 1, 2002, the Bank ceased
amortization of goodwill upon application of the nonamortization provisions of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." Under this statement impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. Accordingly, in June
2002, the Bank performed the first of on-going, required goodwill impairment tests
to determine if an impairment loss should be recognized. As a result of the impairment
test, management determined the effect on the Bank's consolidated financial position
and results of operations resulted in a $150,000 write-down of goodwill related to
Premier Finance Company and a recognition of an expense, recorded as the
cumulative effect of change in accounting principle, of $99,000, net of $51,000 in
related taxes. Continued analysis of this and other recorded goodwill components
indicate that no additional impairment of asset values exists as of December 31, 2002.

The following  summarizes the Bank's
recorded  goodwill account balance and the effects of adoption of SFAS No. 142 for the
years ended December 31, 2002, 2001, and 2000 (in thousands):

|                               | 2002          | 2001          | 2000         
|------------------------------ | ------------- | ------------- | -------------
|Goodwill, net                  | $     6,633   | $     6,562   | $          78
|                               |               |               |              
|Reported net income            | 4,304         | 2,040         | 1,840        
|Add back goodwill amortization | --            | 305           | 20           
|                               |               |               |              
|Adjusted net income            | $     4,304   | $     2,345   | $     1,860  
|                               |               |               |              
|Basic earnings per share:     
|Reported net income            | $        0.37 | $        0.19 | $        0.19
|Adjusted net income            | $        0.37 | $        0.22 | $        0.19
|Diluted earnings per share:   
|Reported net income            | $        0.37 | $        0.19 | $        0.19
|Adjusted net income            | $        0.37 | $        0.21 | $        0.19

Other real estate  Other
real estate, acquired through foreclosure or deeds in lieu of foreclosure, is carried at
the lower of cost or estimated net realizable value. When the 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 noninterest income and expense.
The Bank held approximately $85,000 and $1.3 million in other real estate at December 31,
2002 and 2001, respectively.

Advertising  Advertising
and promotional costs are generally charged to expense during the year in which they are
incurred. Advertising and promotional expenses were approximately $490,000, $385,000, and
$465,000 for the years ended December 31, 2002, 2001, and 2000, respectively.

Income taxes  Deferred
income tax assets and liabilities are determined based on the tax effects of the
differences between the book and tax bases of the various balance sheet assets and
liabilities. Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income taxes.

|F-11 | 
|---- | 
|    

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 1    - ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -               (continued)

Earnings per share 
Basic earnings per share is computed by dividing net income available to stockholders by
the weighted average number of common shares outstanding during the period, after giving
retroactive effect to stock dividends and splits. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. Included in the denominator is the dilutive
effect of stock options computed under the treasury stock method.

Stock options 
PremierWest applies Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its stock option
plans. SFAS No. 123, Accounting for Stock-Based Compensation, requires
companies, such as the Bank, that use the intrinsic value method to account for employee
stock options, to provide pro forma disclosures of the net income and earnings per share
effect of applying the fair value-based method  of  accounting  for
 stock options.

The effect of applying the fair
value-based method to stock options granted in the years ended December 31, 2002, 2001,
and 2000, resulted in an estimated weighted-average grant date fair value of $2.17, $2.07,
and $2.09, respectively. Had compensation cost been determined consistent with SFAS No.
123, its net income and earnings per common share, and diluted earnings per common share
for the years ended December 31, 2002, 2001, and 2000, would have been as follows (in
thousands, except per share amounts):

|                                   | 2002        | 2001        | 2000       
|---------------------------------- | ----------- | ----------- | -----------
|Net income:                        |             |             |            
|As reported                        | $     4,304 | $     2,040 | $     1,804
|Pro forma                          | $     4,224 | $     1,965 | $     1,690
|                                  
|Basic earnings per common share:  
|As reported                        | $      0.37 | $      0.19 | $      0.19
|Pro forma                          | $      0.37 | $      0.18 | $      0.18
|                                  
|Diluted earnings per common share:
|As reported                        | $      0.37 | $      0.19 | $      0.19
|Pro forma                          | $      0.36 | $      0.18 | $      0.18
|                                  

The fair value of each option granted
is estimated on the date of grant using the Black-Scholes option pricing model with the
following assumptions for December 31, 2002, 2001, and 2000:

|                      | 2002    | 2001    | 2000   
|--------------------- | ------- | ------- | -------
|Dividend yield        | 5.1%    | 1.5%    | 1.5%   
|Expected life (years) | 3 years | 7 years | 7 years
|Expected volatility   | 46%     | 35%     | 41%    
|Risk-free rate        | 3.3%    | 5.0%    | 5.0%   

The effects of applying SFAS No. 123
in this pro forma disclosure are not indicative of future amounts.

Off-balance-sheet financial
instruments  In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit, and standby
letters of credit. These financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.

| | F-12
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 1    - ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -               (continued)

Fair value of financial
instruments  The following methods and assumptions were used by the Bank in
estimating fair values of financial instruments as disclosed herein:

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

Available-for-sale  Fair
values for investment securities are based on quoted market prices or the market values
for comparable securities.

Interest-bearing deposits with
FHLB and FHLB stock  The carrying amount approximates the estimated fair value.

Loans receivable  For
variable-rate loans that reprice frequently 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, 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 and fixed-term certificates of deposit (CDs)
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 rates 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 rates for similar types of
borrowing arrangements.

Accrued interest  The
carrying amounts of accrued interest approximate their fair values.

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.

Recently issued accounting
standards  In December 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean Amendment of FASB Statement No.
123. This statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary change to
the fair value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of Statement FASB No. 123 to
require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method
used on reported results. The Banks management intends to continue using the
intrinsic value method for stock-based employee compensation arrangements and, therefore,
does not expect that the application provisions of this statement will have a material
impact on the Banks consolidated financial statements.

In October 2002, the FASB issued SFAS
No. 147, Acquisitions of Certain Financial Institutions. This statement
provides guidance on the accounting for the acquisition of a financial institution and
applies to all acquisitions except those between two or more mutual enterprises. The
Banks management does not expect that the application of the provisions of this
statement will have a material impact on the Banks consolidated financial
statements.

|F-13 | 
|---- | 
|    

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 1    - ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -               (continued)

In June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
This statement addresses financial accounting and reporting for costs associated with exit
or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring). This
statement is effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Banks management does not expect
that the application of the provisions of this statement will have a material impact on
the Banks consolidated financial statements.

In April 2002, the FASB issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This statement rescinds FASB Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that statement, FASB Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This statement also rescinds FASB Statement No.
44, Accounting for Intangible Assets of Motor Carriers. This statement amends
FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The Banks management does not expect that
the application of the provisions of this statement will have a material impact on the
Banks consolidated financial statements.

In January 2003, the FASB issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.
This interpretation clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, and requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. This interpretation
explains how to identify variable interest entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to consolidate that entity. This
interpretation applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an interest after
that date. It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable interest that
is acquired before February 1, 2003. The Interpretation applies to public enterprises as
of the beginning of the applicable interim or annual period, and it applies to nonpublic
enterprises as of the end of the applicable annual period. The Banks management does
not expect that the application of the provisions of this interpretation will have a
material impact on the Banks consolidated financial statements.

In November 2002, the FASB issued
Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. This interpretation elaborates on the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in issuing a
guarantee. The disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 31, 2002, and the initial recognition
and initial measurement provisions shall be applied on a prospective basis to guarantees
issued or modified after December 31, 2002. The Banks management does not expect
that the application of the provisions of this interpretation will have a material impact
on the Banks consolidated financial statements.

Reclassifications 
Certain amounts in 2001 and 2000 have been reclassified to conform with the 2002
presentation.

# NOTE 2  BUSINESS
COMBINATIONS

On     April 16,
2001, the Bank completed its  acquisition  of Timberline  Bancshares,  Inc. and its
 wholly-owned  subsidiary,  Timberline Community Bank (collectively, "Timberline"). The
Bank issued 1.758  million  shares  of  its

| | F-14
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 2    - BUSINESS
COMBINATIONS - (continued)

common stock valued at approximately
$8.0 million and approximately $5.6 million in cash to Timberline shareholders in
connection with the acquisition. In addition, the Bank incurred approximately $791,000 in
acquisition costs. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities of Timberline have been recorded by
the Bank at their respective estimated fair values at the time of the completion of the
transaction, and the results of operations of Timberline have been included with those of
the Bank since the date of the acquisition. The excess of the Banks purchase price
over the estimated net fair value of the identifiable assets acquired and liabilities
assumed is reported as goodwill.

The estimated fair values of the net
assets acquired and liabilities assumed at the acquisition date are summarized as follows
(in thousands):

|ASSETS                    |          
|------------------------- | ---------
|Cash and due from banks   | $  4,614 
|Federal funds sold        | 19,700   
|Investment securities     | 10,159   
|Loans, net                | 56,040   
|Premises and equipment    | 2,847    
|Other assets              | 8,604    
|Total assets acquired     | $101,964 
|LIABILITIES              
|Deposits                  | $  86,800
|Other liabilities         | 783      
|Total liabilities assumed | 87,583   
|Net assets acquired       | 14,381   
|                          | $101,964 
|                         

The following pro forma information
presents the Banks consolidated results of operations as if the acquisition of
Timberline had occurred at the beginning of the periods presented. The pro forma
information does not purport to be indicative of the actual results of operations that
would have occurred had the transaction taken place at the beginning of the periods
presented or the future results of operations.

|                                      | 2001          | 2000         
|------------------------------------- | ------------- | -------------
|Total interest and noninterest income | $     37,694  | $     35,600 
|Net income                            | $       1,436 | $       2,262
|Basic earnings per common share       | 0.12          | 0.20         
|Diluted earnings per common share     | 0.12          | 0.20         

Effective May 8, 2000, PremierWest
Bancorp became the holding company for PremierWest Bank and simultaneously acquired United
Bancorp and its wholly-owned subsidiary, Douglas National Bank (collectively,
United). The merger was effected by issuing approximately 3.9 million shares
of PremierWest common stock in exchange for 100% of the outstanding shares of United
common stock. The merger was accounted for as a pooling-of-interests and, accordingly, the
consolidated financial statements of PremierWest prior to its acquisition of United have
been restated to include the accounts and transactions of United.

|F-15 | 
|---- | 
|    

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 3  CASH AND
DUE FROM BANKS

The Bank was required to maintain an
average reserve balance of approximately $6.9 million and $2.0 million at December 31,
2002 and 2001, respectively, with the Federal Reserve Bank (FRB) or maintain such reserve
balances in the form of cash. This requirement was met by holding cash and maintaining
average reserve balances with the FRB in excess of these amounts.

# NOTE 4  INVESTMENT
SECURITIES AVAILABLE-FOR-SALE

Investment securities
available-for-sale as of December 31 consisted of the following (in thousands):

|                                      | AmortizedCost | GrossUnrealizedGains | GrossUnrealizedLosses | EstimatedFairValue
|------------------------------------- | ------------- | -------------------- | --------------------- | ------------------
|2002                                  |               |                      |                       |                   
|U.S. government and agency securities | $18,431       | $227                 | $        --           | $18,658           
|Mortgage-backed securities and       
|collateralized mortgage obligations   | 1,875         | 39                   | (1)                   | 1,913             
|Obligations of state and political   
|subdivisions                          | 16,120        | 588                  | --                    | 16,708            
|Corporate bonds                       | 3,964         | 31                   | (7)                   | 3,988             
|Equity securities                     | 331           | --                   | --                    | 331               
|                                     
|                                      | $40,721       | $885                 | (8)                   | $41,598           
|                                     
|2001                                  |              
|U.S. government and agency securities | $31,263       | $453                 | $      (35)           | $31,681           
|Mortgage-backed securities and       
|collateralized mortgage obligations   | 11,669        | 161                  | (11)                  | 11,819            
|Obligations of state and political   
|subdivisions                          | 16,255        | 162                  | (84)                  | 16,333            
|Corporate bonds                       | 3,971         | --                   | (50)                  | 3,921             
|Equity securities                     | 324           | --                   | --                    | 324               
|                                     
|                                      | $63,482       | $776                 | $    (180)            | $64,078           
|                                     

The amortized cost and estimated fair
value of investment securities available-for-sale at December 31, 2002, by contractual
maturity, are shown below (in thousands). 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.

|                                                                   | AmortizedCost | EstimatedFair Value
|------------------------------------------------------------------ | ------------- | -------------------
|Due in one year or less                                            |               | $  1,440           
|Due after one year through five years                              |               | 25,360             
|Due after five years through ten years                             |               | 8,941              
|Due after ten years                                                |               | 2,774              
|Mortgage-backed securities and collateralized mortgage obligations |               | 1,875              
|Equity securities                                                  |               | 331                
|                                                                  
|                                                                   |               | $40,721            
|                                                                  
|                                                                   |              

| | F-16
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 4    - INVESTMENT
SECURITIES AVAILABLE-FOR-SALE - (continued)

Investment securities
available-for-sale with a carrying amount of approximately $41.6 million and $38.8 million
at December 31, 2002 and 2001, respectively, were pledged to secure public deposits, FHLB
borrowings, repurchase agreement deposit accounts, and for other purposes as required or
permitted by law.

Net realized gains on sales of
investment securities available-for-sale were $304,000, $73,000, and $5,000 in 2002, 2001,
and 2000, respectively.

# NOTE 5  LOANS

Loans as of December 31 consisted of
the following (in thousands):

|                           | 2002 | 2001    
|-------------------------- | ---- | --------
|Real estate - commercial   |      | $255,172
|Real estate - construction |      | 47,221  
|Real estate - residential  |      | 3,925   
|Commercial                 |      | 46,797  
|Agricultural               |      | 7,410   
|Consumer                   |      | 34,648  
|Other                      |      | 3,177   
|                          
|                           |      | 398,350 
|                          
|Less:                      |     
|Allowance for loan losses  |      | 4,838   
|Deferred loan fees         |      | 1,238   
|                          
|                           |      | 6,076   
|                          
|Loans, net                 |      | $392,274
|                          
|                           |     

The Banks market area consists
principally of Jackson, Josephine, Douglas and Klamath counties of southern Oregon, and
Siskiyou and Shasta counties of northern California. A substantial portion of the
Banks loans are collateralized by real estate in these geographic areas and,
accordingly, the ultimate collectibility of a substantial portion of the Banks loan
portfolio is susceptible to changes in the respective local market conditions.

In the normal course of business, the
Bank participates portions of loans to third parties in order to extend the Banks
lending capability or to mitigate risk. At December 31, 2002 and 2001, the portion of
these loans participated to third parties (which are not included in the accompanying
consolidated financial statements) totaled approximately $3.0 million and $1.6 million,
respectively.

# NOTE 6  ALLOWANCE
FOR LOAN LOSSES

Transactions in the allowance for
loan losses for the years ended December 31 were as follows (in thousands):

|                                           | 2002 | 2001    | 2000
|------------------------------------------ | ---- | ------- | ----
|BALANCE, beginning of year                 |      | $ 4,825 |     
|Loan loss provision                        |      | 1,037   |     
|Timberline allowance for loan losses       |     
|at date of acquisition                     |      | --      |     
|Loans charged-off                          |      | (1,141) |     
|Recoveries of loans previously charged-off |      | 117     |     
|                                          
|BALANCE, end of year                       |      | $ 4,838 |     
|                                          
|                                           |     

|F-17 | 
|---- | 
|    

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|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 6    - ALLOWANCE
FOR LOAN LOSSES - (continued)

Loans on nonaccrual status and
classified as impaired at December 31, 2002 and 2001, were approximately $3.4 million and
$2.1 million, respectively. Interest income which would have been realized on such
nonaccrual loans if they had remained current in 2002, 2001, and 2000 was approximately
$324,000, $334,000, and $539,000, respectively. Loans contractually past due 90 days or
more on which the Bank continued to accrue interest at December 31, 2002 and 2001, were
insignificant. As of December 31, 2002 and 2001, commitments to lend additional funds
to borrowers whose loans had been modified or were on nonaccrual status were
insignificant.

Impaired loans were allocated
approximately $1.9 million and $556,000 of the allowance for loan losses at December 31,
2002 and 2001, respectively. The average recorded investment in impaired loans was
approximately $3.2 million, $3.7 million, and $3.9 million in 2002, 2001, and 2000,
respectively. Interest income recognized on impaired loans in 2002, 2001, and 2000 was
insignificant.

# NOTE 7 - PREMISES
AND EQUIPMENT

Premises and equipment at December 31
consisted of the following (in thousands)

|                                               |  | 2002     |  | 2001     | 
|---------------------------------------------- |  | -------- |  | -------- | 
|Land and improvements                          |  | $  3,605 |  | $  3,413 | 
|Buildings and leasehold improvements           |  | 13,769   |  | 11,884   | 
|Furniture and equipment                        |  | 9,523    |  | 8,937    | 
|                                              
|                                               |  | 26,897   |  | 24,234   | 
|Less accumulated depreciation and amortization |  | 8,172    |  | 6,617    | 
|                                              
|                                               |  | 18,725   |  | 17,617   | 
|Construction in progress                       |  | --       |  | 669      | 
|                                              
|Premises and equipment, net                    |  | $18,725  |  | $18,286  | 
|                                              
|                                               | 

Depreciation expense amounted to $2.0
million, $1.7 million, and $1.2 million for the years ended December 31, 2002, 2001, and
2000, respectively.

# NOTE 8 - TIME
DEPOSITS

Time deposits of $100,000 and over
aggregated approximately $44.8 million and $61.1 million at December 31, 2002 and
2001, respectively.

At December 31, 2002, the scheduled
annual maturities of all time deposits were approximately as follows (in thousands):

|Years Ending December 31, | 2003       |  |  | $  84,886 | 
|------------------------- | ---------- |  |  | --------- | 
|                          | 2004       |  |  | 33,581    | 
|                          | 2005       |  |  | 8,996     | 
|                          | 2006       |  |  | 2,915     | 
|                          | 2007       |  |  | 10,452    | 
|                          | Thereafter |  |  | 146       | 
|                          |            |  |  | $140,976  | 

| | F-18
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 9 - FEDERAL
HOME LOAN BANK (FHLB)

The Bank had long-term borrowings
outstanding with the FHLB totaling $24.8 million and $5.6 million as of December 31, 2002
and 2001, respectively. The Bank makes monthly principal and interest payments on the
long-term borrowings, which mature between 2003 and 2014 and bear interest at rates
ranging from 2.81% to 7.63%. The Bank also participates in the Cash Management Advance
Program (the Program) with the FHLB. As of December 31, 2002 and 2001, the Bank had
no borrowings outstanding under the Program but had an available line of credit of
approximately $72.2 million as of December 31, 2002, with interest at the FHLBs cash
management rate. All outstanding borrowings with the FHLB are collateralized by a blanket
pledge agreement on the Banks FHLB stock and any funds, investment securities
available-for-sale, or loans on deposit with the FHLB.

The maturity of FHLB notes payable is
as follows (in thousands):

|Years Ending December 31, | 2003       |  |  | $  1,789 | 
|------------------------- | ---------- |  |  | -------- | 
|                          | 2004       |  |  | 20,639   | 
|                          | 2005       |  |  | 639      | 
|                          | 2006       |  |  | 639      | 
|                          | 2007       |  |  | 633      | 
|                          | Thereafter |  |  | 508      | 
|                          |            |  |  | $24,847  | 

# NOTE 10 - FEDERAL
FUNDS PURCHASED

Federal funds purchased generally
mature within one to four days from the transaction date. Federal funds purchased were
insignificant in 2002. However, information concerning federal funds purchased for the
years ended December 31, 2001 and 2000, is summarized as follows (in thousands):

|                                          |  | 2001  |  | 2000   | 
|----------------------------------------- |  | ----- |  | ------ | 
|Average balance during the year           |  | $  17 |  | $3,286 | 
|Average interest rate during the year     |  | 3.4%  |  | 6.8%   | 
|Maximum month-end balance during the year |  | $700  |  | $6,370 | 

The Bank maintains federal funds
lines with correspondent banks as a back-up source of liquidity. As of December 31,
2002, the Bank had approximately $20.0 million of federal funds lines available to draw
against on an uncollateralized basis.

# NOTE 11 -
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to
repurchase represent short-term borrowings with maturities which do not exceed 90 days.
The following is a summary of such short-term borrowings for the years ended December 31
(in thousands):

|                                          | 2002 | 2001   | 2000
|----------------------------------------- | ---- | ------ | ----
|Average balance during the year           |      | $8,134 |     
|Average interest rate during the year     |      | 1.3%   |     
|Maximum month-end balance during the year |      | $9,525 |     
|                                          |     

|F-19 | 
|---- | 
|    

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 12 -
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

In the normal course of business, the
Bank is a party to financial instruments with off-balance-sheet risk to meet the financing
needs of its customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of amounts recognized in the accompanying
consolidated balance sheets. The contractual amounts of these instruments reflect the
extent of the Banks involvement in these particular classes of financial
instruments. As of December 31, 2002 and 2001, the Bank had no commitments to extend
credit at below-market interest rates and held no derivative financial instruments.

The Banks exposure to credit
loss in the event of nonperformance by another party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet instruments. The
distribution of commitments to extend credit approximates the distribution of loans
outstanding.

A summary of the Banks
off-balance-sheet financial instruments at December 31 is approximately as follows (in
thousands):

|                                              | 2002 |         | 2001 |        
|--------------------------------------------- | ---- | ------- | ---- | -------
|Commitments to extend credit                  |      | $62,280 |      | $58,075
|Standby letters of credit                     |      | 4,320   |      | 2,005  
|                                             
|Total off-balance-sheet financial instruments |      | $66,600 |      | $60,080
|                                             
|                                              |     

Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is
deemed necessary by the Bank upon extension of credit, is based on managements
credit evaluation of the counterparty. Collateral held for commitments varies but may
include accounts receivable, inventory, property and equipment, residential real estate,
or income-producing commercial properties.

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

# NOTE 13  INCOME
TAXES

The provision for income taxes as of
December 31 was as follows (in thousands):

|                 |  | 2002   |  | 2001   |  | 2000   | 
|---------------- |  | ------ |  | ------ |  | ------ | 
|Current expense: |  |        |  |        |  |        | 
|Federal          |  | $1,514 |  | $1,295 |  | $1,207 | 
|State            |  | 305    |  | 238    |  | 239    | 
|                
|                 |  | 1,819  |  | 1,533  |  | 1,446  | 
|                

| | F-20
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 13     - INCOME
TAXES - (continued)

|                            | 2002     | 2001     | 2000    
|--------------------------- | -------- | -------- | --------
|Deferred expense (benefit): |          |          |         
|Federal                     | $    298 | $  (416) | $  (296)
|State                       | 52       | (73)     | (52)    
|                           
|                            | 350      | (489)    | (348)   
|                           
|Provision for income taxes  | $ 2,169  | $ 1,044  | $ 1,098 
|                           

The provision for income taxes
results in effective tax rates which are different than the federal income tax statutory
rate. The nature of the differences were as follows (in thousands):

|                                          | 2002    | 2001    | 2000    
|----------------------------------------- | ------- | ------- | --------
|Expected federal income tax provision     |         |         |         
|at statutory rate of 34%                  | $ 2,201 | $ 1,049 | $    987
|State income taxes, net of federal effect | 253     | 148     | 158     
|Effect of nontaxable interest income, net | (216)   | (234)   | (254)   
|Nondeductible merger costs                | --      | --      | 218     
|Other, net                                | (69)    | 81      | (11)    
|                                         
|Provision for income taxes                | $ 2,169 | $ 1,044 | $ 1,098 
|                                         

The components of the net deferred
tax assets were approximately as follows (in thousands):

|                                      | 2002     | 2001   
|------------------------------------- | -------- | -------
|Assets:                               |          |        
|Allowance for loan losses             | $ 1,383  | $1,371 
|Benefit plans                         | 492      | 459    
|Other                                 | 84       | 76     
|                                     
|Total deferred tax assets             | 1,959    | 1,906  
|                                     
|Liabilities:                         
|Net unrealized gains on investment   
|securities available-for-sale         | 335      | 228    
|FHLB stock dividends                  | 644      | 605    
|Premises and equipment                | 791      | 443    
|Intangibles and other                 | 374      | 358    
|                                     
|Total deferred tax liabilities        | 2,144    | 1,634  
|                                     
|Net deferred tax (liabilities) assets | $  (185) | $   272
|                                     

Management believes, primarily based
upon the Banks historical performance, that deferred tax assets will be recognized
in the normal course of operations and, accordingly, management has not reduced deferred
tax assets by a valuation allowance.

|F-21 | 
|---- | 
|    

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 14 - BASIC AND
DILUTED EARNINGS PER COMMON SHARE

The numerators and denominators used
in computing basic and diluted earnings per common share for the years ended December 31
can be reconciled as follows (in thousands, except per share amounts):

|                                                   | Net Income(Numerator) | Shares(Denominator) | Per ShareAmount
|-------------------------------------------------- | --------------------- | ------------------- | ---------------
|2002                                               |                       |                     |                
|Basic earnings per common share -                  |                       |                     |                
|Income available to common shareholders            | $4,304                | 11,515,706          | $     0.37     
|Effect of assumed conversion of stock      options
|                                                   | --                    | 75,501              |                
|                                                  
|Diluted earnings per common share                  | $4,304                | 11,591,207          | $     0.37     
|                                                  
|2001                                               |                       |                     |                
|Basic earnings per common share -                 
|Income available to common shareholders            | $2,040                | 10,828,392          | $     0.19     
|Effect of assumed conversion of stock      options
|                                                   | --                    | 117,611             |                
|                                                  
|Diluted earnings per common share                  | $2,040                | 10,946,003          | $     0.19     
|                                                  
|2000                                               |                       |                     |                
|Basic earnings per common share -                 
|Income available to common shareholders            | $1,804                | 9,470,596           | $     0.19     
|Effect of assumed conversion of stock      options
|                                                   | --                    | 113,863             |                
|                                                  
|Diluted earnings per common share                  | $1,804                | 9,584,459           | $     0.19     
|                                                  

# NOTE 15 
TRANSACTIONS WITH RELATED PARTIES

Certain officers and directors (and
the companies with which they are associated) are customers of, and have had banking
transactions with the Bank in the ordinary course of business. In addition, the Bank
expects to continue to have such banking transactions in the future. All loans and
commitments to lend to such parties are generally made on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions
with other persons. In the opinion of management, these transactions do not involve more
than the normal risk of collectibility or present any other unfavorable features.

An analysis of the activity with
respect to loans outstanding to directors and executive officers of the Bank and their
affiliates for the year ended December 31 was as follows (in thousands):

|                  | 2002      | 2001   
|----------------- | --------- | -------
|Beginning balance | $   7,885 | $ 7,999
|Additions         | 12,745    | 4,283  
|Repayments        | (4,444)   | (4,397)
|Ending balance    | $ 16,186  | $ 7,885
|                 
|                 

| | F-22
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 16 - BENEFIT
PLANS

401(k) profit sharing plan  The Bank maintains a 401(k) profit sharing plan
          (the Plan) that covers substantially all full-time employees. Employees may make
          voluntary tax-deferred contributions to the Plan, and the Banks
          contributions to the Plan are at the discretion of the Board of Directors, not
          to exceed the amount deductible for federal income tax purposes. Employees vest
          in the Banks contributions to the Plan over a period of seven years. Total
          amounts charged to operations under the Plan were approximately $160,000,
          $106,000, and $69,000 for the years ended December 31, 2002, 2001, and 2000,
          respectively.

Employee stock ownership plan The Bank sponsors a leveraged employee stock ownership plan (ESOP) that covers
substantially all previous employees of United. The Bank makes annual contributions to the
ESOP. The amount of the annual contribution is discretionary, except that it must be
sufficient to enable the ESOP to service its debt. The debt of the ESOP consists of notes
payable to KeyBank with interest at fixed rates from 7.00% to 7.70%. The debt is due in
quarterly installments and is scheduled to mature in 2003. The initial ESOP shares were
pledged as collateral for the debt. As the debt is repaid, shares are released and
allocated to former United employees currently employed by the Bank, based on the
proportion of debt paid. The debt of the ESOP is recorded as a liability, and the shares
pledged as collateral are reported as unearned ESOP compensation in the shareholders
equity section of the accompanying consolidated balance sheets. As shares are released
from collateral, the Bank reports compensation expense equal to the current market price
of the shares for all shares acquired by the ESOP. The difference between the allocated
shares market value and the cost of the allocated shares in 2002, 2001, and 2000 was
approximately $91,000, $70,000, and $71,000, respectively, and is included in salaries and
employee benefits expense in the accompanying consolidated statements of income and in
common stock in the accompanying consolidated statements of changes in shareholders
equity. ESOP compensation expense related to the payment of debt was approximately
$146,000, $221,000, and $221,000 in 2002, 2001, and 2000, respectively. The ESOP shares
are considered outstanding for earnings per share computations. Cash dividends paid on
unallocated shares which are collateral for debt are used to repay the ESOP debt. Cash
dividends paid on allocated shares are distributed to the accounts of the ESOP
participants.

Shares held by the ESOP were
classified as follows:

|                                | 2002    | 2001   
|------------------------------- | ------- | -------
|Allocated shares:               |         |        
|Prior to January 1, 1993        | 64,748  | 64,748 
|Subsequent to December 31, 1992 | 529,476 | 494,224
|                               
|                                | 594,224 | 558,972
|Unallocated shares              | 26,113  | 61,365 
|                               
|Total ESOP shares               | 620,337 | 620,337
|                               

The approximate fair market value of
the Banks unallocated shares at December 31, 2002 and 2001, was $157,000 and
$356,000, respectively.

|F-23 | 
|---- | 
|    

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 16     - BENEFIT
PLANS - (continued)

Executive supplemental retirement
and severance plans  In connection with its acquisition of United and
Timberline, the Bank entered into various severance, noncompete, and retirement agreements
with previous executives and Board members of United and Timberline. As of December 31,
2002 and 2001, the Banks recorded liability pursuant to these collective agreements
was $1.3 million and $1.1 million, respectively. Payments on these plans are generally
made on a monthly or quarterly basis and will continue until all liabilities are paid in
full in 2015. To support its obligations under these arrangements, the Bank acquired
bank-owned life insurance policies which had aggregate cash surrender values of $2.9
million and $2.8 million as of December 31, 2002 and 2001, respectively. For the years
ended December 31, 2002, 2001, and 2000, the Bank recognized expenses relating to
these agreements of $503,000, $190,000, and $177,000, respectively.

During 2002, the Bank entered into
supplemental retirement plans for key executive officers. These plans provide for
retirement benefits which increase annually until each executive reaches age 65 and will
be paid out over a 15-year period following the retirement of each executive. Also to
support its obligations under these plans and to provide death benefits to other selected
employees, the Bank acquired bank-owned life insurance with a cash surrender value of $4.6
million at December 31, 2002. As of December 31, 2002, the Banks liability pursuant
to the supplemental retirement plans was $31,000 and, for the year ended December 31,
2002, related expenses of $31,000 were recorded.

# NOTE 17 - STOCK
OPTION PLAN

Under the Banks Stock Option
Plan (the Stock Option Plan), it may grant Incentive Stock Options (ISOs) and Nonqualified
Stock Options (NSOs) to key employees. The option price of ISOs is the fair market value
at the date of grant, and the option price of NSOs is to be a price not less than 85% of
the fair market value at the date of grant. The options generally vest over time, and all
options generally expire after a period of ten years. However, the Board has the right to
suspend or terminate the Stock Option Plan at any time, except with respect to the
remaining options outstanding.

At December 31, 2002, 739,500 shares
reserved under the Stock Option Plan were available for future grant. Activity, after
giving retroactive effect for the 5% stock dividend in 2002, related to the Stock Option
Plan for the years ended December 31, 2002, 2001, and 2000, was as follows:

|          | 2002      | 2001       | 2000    
|--------- | --------- | ---------- | --------
|
|Balance,  |           |            |         
|beginning
|of year   | 500,723   | $     4.44 | 626,413 
|         
|Granted   | 116,650   | $     6.85 | 5,250   
|Forfeited | (29,337)  | $     4.72 | (59,715)
|Exercised | (170,253) | $     2.34 | (71,226)
|         
|         
|Balance, 
|end of   
|year      | 417,783   | $     5.94 | 500,722 
|         
|         

| | F-24
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 17     - STOCK
OPTION PLAN - (continued)

Information regarding the number,
weighted-average exercise price, and weighted-average remaining contractual life of
options by range of exercise price at December 31, 2002, is as follows:

|              | Options Outstanding | Exercisable Options
|------------- | ------------------- | -------------------
|
|$0 - $1.00    | 36,927              | $     0.97         
|$1.01 - $2.00 | 15,117              | $     1.59         
|$2.01 - $3.00 | 26,076              | $     2.88         
|$4.01 - $5.00 | 36,518              | $     4.53         
|$5.01 - $6.00 | 21,000              | $     5.57         
|$6.01 - $7.00 | 5,248               | $     6.46         
|$7.01 - $8.00 | 276,897             | $     7.33         
|             
|              | 417,783             | $     5.94         
|             

# NOTE 18 -
COMMITMENTS AND CONTINGENCIES

Operating lease commitments
 As of December 31, 2002, the Bank leased certain properties. Future minimum lease
commitments are as follows (in thousands):

|Years Ending December 31, | 2003       |  |  | $  199 | 
|------------------------- | ---------- |  |  | ------ | 
|                          | 2004       |  |  | 158    | 
|                          | 2005       |  |  | 139    | 
|                          | 2006       |  |  | 107    | 
|                          | 2007       |  |  | 71     | 
|                          | Thereafter |  |  | 1,198  | 
|                          |            |  |  | $1,872 | 

Rental expense for all operating
leases was $253,000, $350,000, and $166,000 for the years ended December 31, 2002, 2001,
and 2000, respectively.

Legal contingencies  The
Bank may become a defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with legal counsel,
there are no current matters expected to have a material adverse effect on the
consolidated financial condition of the Bank.

# NOTE 19 - ESTIMATED
FAIR VALUES OF FINANCIAL INSTRUMENTS

The following disclosures are made in
accordance with the provisions of SFAS No. 107, 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 which could be realized in a current market exchange.

|F-25 | 
|---- | 
|    

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 19     - ESTIMATED
FAIR VALUES OF FINANCIAL INSTRUMENTS - (continued)

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 which are not defined as financial
instruments but which have significant value. These include such off-balance-sheet items
as core deposit intangibles on nonacquired deposits. The Bank does not believe that it
would be practicable to estimate a representational fair value for these types of items as
of December 31, 2002 and 2001.

Because SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure requirements,
any aggregation of the fair value amounts presented would not represent the underlying
value of the Bank.

The estimated fair values of the
Banks significant on-balance-sheet financial instruments at December 31, were as
follows (in thousands):

|                                         | 2002        | 2001       
|---------------------------------------- | ----------- | -----------
|
|Financial assets:                        |             |            
|Cash and cash equivalents                | $  41,437   | $  41,437  
|Investment securities available-for-sale | $  41,598   | $  41,598  
|Interest-bearing deposits with FHLB      | $       208 | $       208
|FHLB stock                               | $    1,696  | $    1,696 
|Loans, net                               | $392,274    | $398,704   

|                                 | 2002       | 2001      
|-------------------------------- | ---------- | ----------
|
|Financial liabilities:           |            |           
|Deposits                         | $428,337   | $430,661  
|FHLB borrowings                  | $  24,847  | $  25,304 
|Securities sold under agreements
|to repurchase                    | $    8,890 | $    8,890

# NOTE 20 
REGULATORY MATTERS

PremierWest Bancorp and PremierWest
Bank are subject to various regulatory capital requirements administered by the federal
and state banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory  and possibly additional discretionary  actions by
regulators that, if undertaken, could have a direct material effect on PremierWest
Bancorps and PremierWest Banks financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, PremierWest Bancorp
and PremierWest Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. PremierWest Bancorps and PremierWest Banks
capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.

| | F-26
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 20     - REGULATORY
MATTERS - (continued)

Quantitative measures established by
regulation to ensure capital adequacy require PremierWest Bancorp and PremierWest Bank to
maintain minimum amounts and ratios (set forth in the tables below) of Tier 1 capital to
average assets, and Tier 1 and total capital to risk-weighted assets (all as defined in
the regulations). Management believes that as of December 31, 2002 and 2001, PremierWest
Bancorp and PremierWest Bank met or exceeded all relevant capital adequacy requirements.

As of December 31, 2002, the most
recent notification from the regulators categorized PremierWest Bancorp and PremierWest
Bank as well capitalized under the regulatory framework for prompt correction action. To
be categorized as well capitalized, PremierWest Bancorp and PremierWest Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 Leverage ratios as set forth in
the table below. There are no conditions or events since the notification from the
regulators that management believes would change PremierWest Bancorps or PremierWest
Banks regulatory capital categorization.

|                                  | Actual  | RegulatoryMinimum To BeAdequatelyCapitalized | RegulatoryMinimum To BeWell CapitalizedUnder PromptCorrectiveAction Provisions
|--------------------------------- | ------- | -------------------------------------------- | ------------------------------------------------------------------------------
|
|(in thousands)                    |         |                                              |                                                                               
|December 31, 2002                
|PremierWest Bancorp              
|Tier 1 capital (to average       
|assets)                           | $41,268 | 8.1%                                         | $20,319                                                                       
|Tier 1 capital (to risk-weighted 
|assets)                           | $41,268 | 9.4%                                         | $17,527                                                                       
|Total capital (to risk-weighted  
|assets)                           | $46,106 | 10.5%                                        | $35,054                                                                       
|                                 
|December 31, 2001                
|PremierWest Bancorp              
|                                 
|Tier 1 capital (to average       
|assets)                           | $36,024 | 7.5%                                         | $19,198                                                                       
|Tier 1 capital (to risk-weighted 
|assets                            | $36,024 | 9.1%                                         | $15,870                                                                       
|Total capital (to risk-weighted  
|assets                            | $40,849 | 10.3%                                        | $31,740                                                                       
|                                 
|December 31, 2002                
|PremierWest Bank                 
|                                 
|Tier 1 capital (to average       
|assets)                           | $40,438 | 8.0%                                         | $20,312                                                                       
|Tier 1 capital (to risk- weighted
|assets)                           | $40,438 | 9.2%                                         | $17,513                                                                       
|Total capital (to risk-weighted  
|assets)                           | $45,276 | 10.3%                                        | $35,025                                                                       
|                                 

|F-27 | 
|---- | 
|    

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 20     - REGULATORY
MATTERS - (continued)

|                                 | Actual  | RegulatoryMinimum To BeAdequatelyCapitalized | RegulatoryMinimum To BeWell CapitalizedUnder PromptCorrectiveAction Provisions
|-------------------------------- | ------- | -------------------------------------------- | ------------------------------------------------------------------------------
|
|(in thousands)                   |         |                                              |                                                                               
|December 31, 2001               
|PremierWest Bank                
|Tier 1 capital (to average      
|assets)                          | $35,093 | 7.3%                                         | $19,153                                                                       
|Tier 1 capital (to risk-weighted
|assets)                          | $35,093 | 8.9%                                         | $15,834                                                                       
|Total capital (to risk- weighted
|assets)                          | $39,918 | 10.1%                                        | $31,667                                                                       

# NOTE 21 - PARENT
COMPANY FINANCIAL INFORMATION

Condensed financial information for
PremierWest Bancorp (parent company only) is presented as follows (in thousands):

|                                           | December 31,
|------------------------------------------ | ------------
|
|ASSETS                                     |             
|Cash and cash equivalents                  | $     500   
|Investment in subsidiary                   | 48,342      
|Premises and equipment                     | --          
|Other assets                               | 357         
|                                          
|Total assets                               | $49,199     
|                                          
|LIABILITIES                               
|ESOP notes payable                         | $       16  
|Other liabilities                          | 11          
|                                          
|Total liabilities                          | 27          
|SHAREHOLDERS' EQUITY                       | 49,172      
|                                          
|Total liabilities and shareholders' equity | $49,199     
|                                          

| | F-28
| | ----
|

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 21     - PARENT
COMPANY FINANCIAL INFORMATION - (continued)

|CONDENSED STATEMENTS OF INCOME         
|---------------------------------------
|
|
|Operating income                       
|Operating expense                      
|                                       
|Income (loss) before credit (provision)
|for income taxes, and equity in        
|undistributed net earnings of          
|subsidiary                             
|Credit (provision) for income taxes    
|                                       
|Income (loss) before dividends from    
|subsidiary, and equity in undistri-    
|buted net earnings of subsidiary       
|Equity in undistributed net earnings of
|subsidiary                             
|                                       
|Net income                             
|                                       

|CONDENSED STATEMENTS OF CASH FLOWS           
|---------------------------------------------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES         
|Net income                                   
|Adjustments to reconcile net income to       
|net cash from operating activities:          
|Depreciation and amortization                
|Equity in undistributed net earnings of      
|subsidiary                                   
|Income tax benefit of stock options exercised
|Other, net                                   
|                                             
|Net cash from operating activities           
|                                             

|F-29 | 
|---- | 
|    

---

|PREMIERWEST BANCORP AND
SUBSIDIARYNOTES TO FINANCIAL STATEMENTS
|---------------------------------------------------------------

# NOTE 21     - PARENT
COMPANY FINANCIAL INFORMATION - (continued)

|CONDENSED STATEMENTS OF CASH FLOWS      
|----------------------------------------
|
|
|CASH FLOWS FROM INVESTING ACTIVITIES    
|Purchases of premises and equipment, net
|                                        
|Net cash from investing activities      
|                                        
|CASH FLOWS FROM FINANCING ACTIVITIES    
|Payments on ESOP notes payable          
|Proceeds from stock options exercised   
|                                        
|Net cash from financing activities      
|                                        
|NET INCREASE (DECREASE) IN              
|CASH AND CASH EQUIVALENTS               
|CASH AND CASH EQUIVALENTS,              
|beginning of year                       
|                                        
|CASH AND CASH EQUIVALENTS,              
|end of year                             
|                                        

| | F-30
| | ----
|