|UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
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|FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



|For the fiscal year ended: December 31, 2006Commission file number: 000-50332
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PREMIERWEST BANCORP

(Exact name of registrant as specified in its charter)

|Oregon(State or other jurisdiction of 
incorporation or organization)                 | 93-1282171(I.R.S. Employer 
                                               Identification No.)
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|                                                                                     
|503 Airport Road  Suite 101Medford, Oregon  (Address of principal executive offices) | 97504 (Zip Code)                                                                              
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Registrant's telephone number, including area code: (541) 618-6003Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:Common Stock, No Par Value(title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes [      ]No [  X  ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [      ]No [  X  ]

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.  [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.Large accelerated filer  [   ]                                     Accelerated filer   [ X  ]                     Non-accelerated filer  [   ]

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

As of June 30, 2006, the aggregate market value of the registrants common stock held by non-affiliates of the registrant was $215,761,084 based on the $14.43 closing price as reported on the National Association of Securities Dealers Automated Quotation System National Market System.

The number of shares outstanding of Registrant's common stock as of March 8, 2007 was 16,217,860.



|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 24, 2007 are incorporated by reference into Part III.

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|                                                |  | PREMIERWEST BANCORP                                                       |  |         | 
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|                                                |  | FORM 10-K                                                                 |  |         | 
|                                                |  | TABLE OF CONTENTS                                                         |  |         | 
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|                                                |  |                                                                           |  | PAGE    | 
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|Disclosure Regarding Forward Looking Statements |  | 1                                                                         | 
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|PART I                                          |  |                                                                           |  |         | 
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|Item 1.                                         |  | Business                                                                  |  | 1 - 8   | 
|Item 1A.                                        |  | Risk Factors                                                              |  | 9 - 10  | 
|Item 1B.                                        |  | Unresolved Staff Comments                                                 |  | 10      | 
|Item 2.                                         |  | Properties                                                                |  | 10      | 
|Item 3.                                         |  | Legal Proceedings                                                         |  | 11      | 
|Item 4.                                         |  | Submission of Matters to a Vote of Security Holders                       |  | 11      | 
|                                               
|PART II                                         |  |                                                                           |  |         | 
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|Item 5.                                         |  | Market for Registrant's Common Equity and Related Stockholder Matters     |  | 12      | 
|Item 6.                                         |  | Selected Financial Data                                                   |  | 14      | 
|Item 7.                                         |  | Management's Discussion and Analysis of Financial Condition               |  |         | 
|                                                |  | and Results of Operations                                                 |  | 15 - 33 | 
|Item 7A.                                        |  | Quantitative and Qualitative Disclosures About Market Risk                |  | 34 - 35 | 
|Item 8.                                         |  | Financial Statements and Supplementary Data                               |  | 36      | 
|Item 9.                                         |  | Changes In and Disagreements with Accountants on Accounting               |  |         | 
|                                                |  | and Financial Disclosure                                                  |  | 37      | 
|Item 9A                                         |  | Controls and Procedures                                                   |  | 37      | 
|Item 9B                                         |  | Other Information                                                         |  | 37      | 
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|PART III                                        |  |                                                                           |  |         | 
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|Item 10.                                        |  | Directors, Executive Officers and Corporate Governance                    |  | 38      | 
|Item 11                                         |  | Executive Compensation                                                    |  | 38      | 
|Item 12.                                        |  | Security Ownership of Certain Beneficial Owners and Management            |  |         | 
|                                                |  | and Related Stockholder Matters                                           |  | 38      | 
|Item 13.                                        |  | Certain Relationships and Related Transactions, and Director Independence |  | 38      | 
|Item 14.                                        |  | Principal Accountant Fees and Services                                    |  | 38      | 
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|PART IV                                         |  |                                                                           |  |         | 
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|Item 15.                                        |  | Exhibits and Financial Statement Schedules                                |  | 39 - 40 | 
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|SIGNATURES                                      |  | 41 - 42                                                                   | 

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DISCLOSUREREGARDINGFORWARD-LOOKINGSTATEMENTS

This report includes forward-looking statements within the meaning of the "safe-harbor" provisions of Sections 21D and 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of PremierWest Bancorp's (the Company) management and on assumptions made by management on the basis of information currently available. Other than for statements of historical fact, all statements about our financial position and results of operations, business strategy and management's plans and objectives for future operations are forward-looking statements. When used in this report, the words "anticipate," "believe," "estimate," "expect," and "intend" and words or phrases of similar meaning, as they relate to the Company or management, are intended in part to help identify forward-looking statements. Examples of forward-looking statements include, but are not limited to statements that include projections or management's expectations for revenues, income or expenses, earnings per share, capital expenditures, dividends, capital structure and other financial items; statements of the plans and objectives of the Company, its management or its board of directors, including the introduction of new products or services, plans for expansion, acquisitions or future growth and estimates or predictions of actions by customers, vendors, competitors or regulatory authorities; statements about future economic performance; and statements of assumptions underlying other statements about the Company and its business. Although management believes that the expectations reflected in forward-looking statements are reasonable, we can make no assurance that such expectations will prove correct. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. These risks and uncertainties include our ability to maintain or expand our market share or our net interest margin; and factors that could limit or delay implementation of our marketing and growth strategies. Further, actual results may be affected by our ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; localized economic conditions and events that disproportionately affect our business; and general trends in the banking industry, interest rate economy and regulatory environment. In addition, we face various risks inherent in the banking industry relating to collectibility of loans and changes in interest rates. See other risks identified in the section captioned "Factors that May Affect Future Results of Operations." Other risks include those identified from time to time in our past and future filings with the Securities and Exchange Commission. Note that this list of risks is not exhaustive, and risks identified are applicable as of the date made and cannot be updated.



|PART I
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|ITEM 1. BUSINESSINTRODUCTION
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PremierWest Bancorp, an Oregon corporation (the "Company"), is a financial services holding company headquartered in Medford, Oregon. The Company operates primarily through its principal subsidiary, PremierWest Bank ("PremierWest Bank" or "Bank" and collectively with the Company, "PremierWest"). In addition there are two special purpose trust subsidiaries - PremierWest Statutory Trust I and II.

PremierWest earned $14.6 million for the year ended December 31, 2006, an 11.1% increase compared to net income of $13.2 million for 2005. Net income of $13.2 million in 2005 was up 44.8% over 2004 earnings of $9.1 million. Our diluted earnings per share were $0.83, $0.75 and $0.53 for the years ended 2006, 2005 and 2004, respectively. Return on average shareholders' equity was 13.26% for the year ended December 31, 2006 compared to the return on average shareholders equity of 13.59% and 10.74% for 2005 and 2004, respectively.



|SUBSIDIARIES
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PremierWest Bank 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. The Bank 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. In April 2001, the Company acquired Timberline Bancshares, Inc. and its wholly-owned subsidiary, Timberline Community Bank ("Timberline"), with eight branch offices located in Siskiyou County in 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. On January 23, 2004, the Company acquired Mid Valley Bank, with five branch offices located in the northern California counties of Shasta, Tehama, and Butte. This acquisition was also accounted for as a purchase and is reflected in the 2004 consolidated financial statements of PremierWest from the date of acquisition.

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PremierWest Bank adheres to a community banking strategy by offering a full range of financial products and services through its network of branches encompassing a two state region between northern California and southern Oregon from Roseburg, Oregon, to the north, and the markets situated around Roseville and Woodland, California, to the south; and the high growth market area of Deschutes County located in central Oregon. The Bank has three subsidiaries: Premier Finance Company, PremierWest Investment Services, Inc. and Blue Star Properties, Inc. Premier Finance Company originates consumer loans from offices located in Medford, Grants Pass, Klamath Falls, Roseburg and Portland, Oregon and Redding and Yreka, California. PremierWest Investment Services, Inc. provides investment brokerage services to customers throughout the Bank's market. Blue Star Properties serves solely to hold real estate properties for PremierWest and presently has no properties under its ownership.

PremierWest Statutory Trusts I and II are two special purpose subsidiaries formed for the sole purpose of issuing Trust Preferred Securities. Further information regarding the Company's issuance of trust preferred securities, recorded as junior subordinated debentures, is included in Note 12 to the Consolidated Financial Statements.



|PRODUCTS AND SERVICES
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PremierWest Bank offers a broad range of banking services to its customers, principally to small and medium-sized businesses, professionals and retail customers.

Loan products- PremierWest Bank makes commercial and real estate loans, construction loans for owner-occupied and investment 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 Bank 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 Bank also makes Small Business Administration loans to qualified businesses. A substantial portion of the Bank'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 for the purpose of financing 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 Banks underwriting guidelines require secondary sources of repayment, such as real estate collateral, and generally require personal guarantees from the borrower's principals.

Real estate lending- Real estate is commonly a material component of collateral for PremierWest Bank's loans. Although the expected source of repayment for 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 property 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 the potential loss of income for the borrower and the ability of the market to sustain occupancy and rent levels. PremierWest Bank's underwriting standards limit the maximum loan-to-value ratio on real estate held as collateral and requires a minimum debt service coverage ratio for each of its commercial real estate loans.

Although commercial loans and commercial real estate loans generally are accompanied by somewhat greater risk than single-family residential mortgage loans, commercial loans 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 loans and commercial real estate loans assist with interest-rate risk management while contributing to strong asset and income growth.

PremierWest Bank 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

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real estate lending. Generally, the Bank mitigates its risk on construction loans by lending to customers who have been pre-qualified for long-term financing and who are using contractors acceptable to PremierWest Bank.

Consumer lending- PremierWest Bank and Premier Finance Company, make secured and unsecured loans to individual borrowers for a variety of purposes including personal loans, revolving credit lines and home equity loans, as well as consumer loans secured by autos, boats and recreational vehicles. Besides targeting non-bank customers in PremierWest 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.

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, during 2002 management elected to curtail its leasing activities in favor of other commercial lending opportunities. No lease transactions have been originated since 2002 and no activity is anticipated to occur during 2007. The existing commercial lease portfolio is not significant to the operations of PremierWest Bank.

Deposit products and other services- PremierWest Bank 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, traveler's checks, money orders and automated teller machines at most of its facilities.

PremierWest Bank's investment subsidiary, PremierWest Investment Services, Inc., provides investment brokerage services to its customers through a third-party broker-dealer arrangement as well as through independent insurance companies allowing for the sale of investment and insurance products such as stocks, bonds, mutual funds, annuities, and other insurance products.

For the three year period ended December 31, 2006, no class of similar products or services accounted for 10% or more of consolidated revenues for PremierWest.



|MARKET AREA
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PremierWest Bank conducts a regional community banking business in southern and central Oregon and northern California through a network of 39 full service bank branches. The Bank has evolved over the past six years through a combination of acquisitions and de novo branch openings and its geographic footprint can be subdivided into several key market areas that are generally identifiable by a specific community, county or combination thereof.

The Company serves Jackson County, Oregon, from its main office facility in Medford plus six branch offices in Medford and branch offices in the surrounding communities of Central Point, Eagle Point, Ashland and Shady Cove. Medford is the fourth largest city in Oregon and is the center for commerce, medicine and transportation in southwestern Oregon. PremierWest Bank also has two full-service branches in Grants Pass (Josephine County), Oregon. 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 non-manufacturing 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. In addition, the Bank is located in Klamath Falls market has a branch located in Klamath Falls serving the south/central market of Klamath County

Another primary market area is centered in Roseburg, Oregon, and the surrounding communities in Douglas County, that PremierWest Bank serves from eight branches - four of which are located in Roseburg and four others located in the communities of Winston, Glide, Sutherlin, and Drain. PremierWest Bank's presence in the Douglas County market area resulted from Bank of Southern Oregon's merger with Douglas National Bank in May of 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.

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The Bank has eight branch locations within Siskiyou County in northern California, resulting from the April 2001 acquisition of Timberline Bank and five branch locations resulting from the January 2004 acquisition of Mid Valley Bank. The Mid Valley Bank branches are located in Redding (2), Red Bluff, Chico and Corning representing Shasta, Tehama and Butte counties, respectively. Late in 2005 PremierWest opened a new branch in the community of Anderson outside of Redding. The economy of northern California from Siskiyou County south to Butte County is primarily involved in government services, retail trade and services, education, healthcare, agriculture, recreation and tourism.

Late in 2004 the Bank opened a branch office in Woodland (Yolo County), California. This was followed by a branch opened in Roseville (Placer County), California in August 2005. These two branches have established PremierWest Banks most southern reach with Woodland being located 20 miles northwest of Sacramento, at the intersection of Interstate 5 and State Route 113, while Roseville is located 16 miles northeast of Sacramento on Interstate 80. In addition to wholesale and retail trade, Woodlands key industries include agriculture and food processing, manufacturing, transportation and distribution, education, healthcare and government services, while Rosevilles major employers include manufacturing, healthcare, transportation, and government services.

Within Oregon and located inland from the Interstate 5 corridor, PremierWest Bank operates three branches, one located in Klamath Falls (Klamath County), and two located in Deschutes County (Bend and Redmond). The Company opened its Klamath Falls office during the first quarter of 2004. Klamath County's principal industries include lumber and wood products, agriculture, transportation, recreation and government. In October 2004, the Bank established a loan production office in Bend. This office was subsequently converted to a full service banking office in August 2005. During the fourth quarter of 2006, a new branch was opened in Redmond firmly establishing PremierWest Banks presence in central Oregons Deschutes County. Deschutes County is Oregon's fastest growing county with a diverse employment base including manufacturing, retail trade, tourism, natural resources and government.

While PremierWest Bank does business in many different communities, the geographic areas we serve make the Bank more reliant on local economies in contrast to super-regional and national banks. Nevertheless, management considers the diversity of our customers, communities, and economic sectors a source of strength and competitive advantage in pursuing our community banking strategy.



|INDUSTRY OVERVIEW
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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 Bank'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 accounts at rates generally competitive with other financial institutions in the area.

PremierWest Bank's competition for loans comes principally from commercial banks, savings banks, 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 Bank competes with larger commercial banks by emphasizing a community bank orientation and personal service to both commercial and individual customers.



|EMPLOYEES
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As of December 31, 2006, PremierWest Bank had 435 full-time equivalent employees compared to 422 at December 31, 2005. None of our employees are represented by a collective bargaining group. Management considers its relations with employees to be good.

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|WEBSITE ACCESS TO PUBLIC FILINGS
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PremierWest makes available all periodic and current reports, free of charge, on PremierWest Bank's website, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). PremierWest Bank'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
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The operations of PremierWest and its 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
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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."

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 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.

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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.

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. 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

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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 could 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.

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, so long as 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 nonbank 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.

7

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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.

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 Sarbanes-Oxley Act ("Sarbanes-Oxley" or "Act") of 2002 implemented legislative reforms intended to address corporate and accounting fraud. Sarbanes-Oxley applies to publicly reporting companies including PremierWest Bancorp. The legislation established the Public Company Accounting Oversight Board whose duties include the registering of public accounting firms and the establishment of standards for auditing, quality control, ethics and independence relating to the preparation of public company audit reports by registered accounting firms. The Act includes numerous provisions, but in particular, Section 404 that requires PremierWest Bancorp's management, to assess the adequacy and effectiveness of its internal controls over financial reporting. As of December 31, 2006, management believes the Company is in full compliance with the requirements and provisions of the Sarbanes-Oxley Act.

8

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|ITEM 1A.   RISK FACTORS
|-----------------------

The following are certain risk factors that management believes are specific to PremierWest Bancorp. These risks are not all inclusive and should be read in conjunction with the other information contained in this report.

Interest Rate Risk - 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. Changes in interest rates could adversely impact our net interest margin, net interest income and net income.PremierWest Bancorps 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 PremierWest 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.

Credit Risk - 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 a credit policy, including the establishment and review of the allowance for loan 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.

Management Risk - We may not effectively manage our growth or future acquisitions which could adversely affect the quality of our operations and our costs.PremierWest Bancorps financial performance and profitability will depend on our ability to manage recent growth and implement our plans and strategies for 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 operational or 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.

Competitive Risk - In our intensely competitive markets our competitors offer similar services, which could affect our ability to successfully 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 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.

Geographic Risk - 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 greater geographic diversity.PremierWest Bancorps geographic footprint is predominately situated along the Interstate 5 corridor from just south of Eugene, Oregon to just north of Sacramento, California. 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

9

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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.

Regulatory Risk - 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 regulations are 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 as well as result in higher operation costs. In addition, these regulations are constantly evolving and may change significantly over time. Significant new regulation or changes in existing regulations 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.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

The Company has not received any comments from the Securities and Exchange Commission.



|ITEM 2.     PROPERTIES
|----------------------

As of December 31, 2006, the Company conducted business through 47 offices including the operations of PremierWest Bank, PremierWest Banks mortgage division, and also PremierWest Banks two subsidiaries Premier Finance Company and PremierWest Investment Services, Inc. The 47 offices included 39 full service bank branches and 8 other office locations.

PremierWest Banks 39 full service branch facilities are located in Oregon and California and more specifically broken down as follows: 23 branches are located in Jackson (10), Josephine (2), Deschutes (2), Douglas (8) and Klamath (1) counties of Oregon and 16 branches offices located in Siskiyou (8), Shasta (3), Butte (1), Tehama (2), Placer (1) and Yolo (1) counties of California. Of the 39 branch locations, 29 are owned by PremierWest Bank, 8 are leased, and two locations involve long-term land leases where the Bank owns the building.

The Companys eight other locations house administrative, subsidiary or mortgage lending operations. These facilities include two owned buildings housing the Companys administrative head office, operations and data processing facilities located on one campus located in Medford, Oregon; two owned administrative facilities - one in Redding, California housing regional administration, our Premier Finance Company subsidiary and PremierWest Bank mortgage division offices and one in Red Bluff, California housing PremierWest Bank data processing functions; three leased locations housing stand-alone Premier Finance Company offices in Portland, Roseburg and Medford, Oregon; and, one owned location in Medford, Oregon occupied by the Banks mortgage division.

In addition, to the above, four Premier Finance Company offices are housed within PremierWest Bank full service branch offices, as are various employees of PremierWest Investment Services, Inc. and the Banks mortgage division.

As of December 31, 2006, the aggregate monthly rental on leased locations was $57,000.

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|ITEM 3.   LEGALPROCEEDINGS
|--------------------------

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

ITEM 4.   SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of securities holders of PremierWest during thequarterended December 31, 2006.

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|        |  | PART II                                                      
|------- |  | -------------------------------------------------------------
|       
|ITEM 5. |  | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
|        |  | MATTERS                                                      

PremierWest common stock is quoted on the NASDAQ SmallCap Market ("Nasdaq") under the symbol "PRWT". The common stock is registered under the Securities Exchange Act of 1934. The table below sets forth the high and low sales prices of PremierWest common stock as reported on the Nasdaq. This information has been adjusted to reflect previous stock dividends paid in 2006, 2005 and 2004. Bid quotations reflect inter-dealer prices, without adjustment for mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. On March 8, 2007, the Company had 16,217,860 shares of common stock issued and outstanding which were held by approximately 782 shareholders of record, a number which does not include approximately 2,369 beneficial owners who hold shares in "street name." As of March 7, 2007, the most recent date prior to the date of this Report, the closing price of the common stock was $12.77 per share.

|            |  |   |  |                         |  |                                |  |       |  | 2006                    |  |                                 |      |   |     |                         |  |   |  |       |  |   |  | 2005 |  |   |  |       |  |   | 2004
|----------- |  | - |  | ----------------------- |  | ------------------------------ |  | ----- |  | ----------------------- |  | ------------------------------- | ---- | - | --- | ----------------------- |  | - |  | ----- |  | - |  | ---- |  | - |  | ----- |  | - | ----
|            |  |  
|            |  |   |  | Closing    Market Price |  | Cash  
  Dividends  
 Declared |  |       |  | Closing    Market Price |  | Cash  
  Dividends  
  Declared |      |   |     | Closing    Market Price
|            |  |   |  |                         |  |                                |  |      
|            |  |   |  |                         |  |                                |  |      
|            |  |   |  | High                    |  |                                |  | Low   |  |                         |  |                                 | High |   | Low |                         |  |   |  | High  |  |   |  | Low 
|            |  |   |  |                         |  |                                |  |       |  |                        
|           
|1st Quarter |  | $ |  | 17.91                   |  | $                              |  | 13.30 |  | $                       |  | -                               |      | $ |     | 11.76                   |  | $ |  | 9.89  |  | $ |  | -    |  | $ |  | 8.85  |  | $ |     
|2nd Quarter |  | $ |  | 17.62                   |  | $                              |  | 13.52 |  | $                       |  | -                               |      | $ |     | 14.25                   |  | $ |  | 9.84  |  | $ |  | -    |  | $ |  | 9.29  |  | $ |     
|3rd Quarter |  | $ |  | 16.37                   |  | $                              |  | 14.15 |  | $                       |  | 0.05                            |      | $ |     | 15.24                   |  | $ |  | 12.14 |  | $ |  | -    |  | $ |  | 9.98  |  | $ |     
|4th Quarter |  | $ |  | 16.98                   |  | $                              |  | 15.25 |  | $                       |  | 0.05                            |      | $ |     | 14.24                   |  | $ |  | 12.74 |  | $ |  | 0.05 |  | $ |  | 12.02 |  | $ |     

PremierWest declared its first cash dividend in the fourth quarter of 2005 and declared two cash dividends during 2006. All three dividends were $0.05 per share. The timing and amount of any future dividends PremierWest might pay will be determined by its board of directors and will depend on earnings, cash requirements and the financial condition of PremierWest and its subsidiaries, applicable government regulations, and other factors deemed relevant by the board of directors.

The Company did not repurchase any shares during the quarter ending December 31, 2006.

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

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|Performance Graph
|-----------------

The following graph shows the cumulative total return for our common stock compared to the cumulative total returns for the SNL NASDAQ Bank index and the NASDAQ Composite index. All values were gathered by SNL Financial LC from sources deemed to be reliable. The comparison assumes that $100.00 was invested on December 31, 2001 in PremierWest Bancorp common stock and in each of the comparative indexes. The cumulative total return on each investment is as of December 31 for each of the subsequent five years and assumes the reinvestment of all cash dividends and the retention of all stock dividends. PremierWest Bancorps five year cumulative total return was 250.5% compared to 65.6% and 27.6% for the SNL NASDAQ Bank and NASDAQ Composite indexes, respectively.



| |                     |  | Period Ending
| | ------------------- |  | -------------
| |                     |  |              
| | Index               |  | 12/31/01     
|
| | PremierWest Bancorp |  | 100.00       
| | SNL NASDAQ Bank     |  | 100.00       
| | NASDAQ Composite    |  | 100.00       
|

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|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 per share data and financial ratios) |  |   |  |                          |   |  |   |  |         |   |  |   |  |         |   |  |   |  |         |  |        |   |  |         |  |        |  
|----------------------------------------------------------------- |  | - |  | ------------------------ | - |  | - |  | ------- | - |  | - |  | ------- | - |  | - |  | ------- |  | ------ | - |  | ------- |  | ------ | -
|                                                                  |  |   |  | Years Ended December 31,
|                                                                  |  |  
|                                                                  |  |   |  | 2006                     |   |  |   |  | 2005    |   |  |   |  | 2004    |   |  |   |  | 2003    |  |        |   |  | 2002    | 
|                                                                  |  |  
|Operating Results                                                 |  |   |  |                          |   |  |   |  |         |   |  |   |  |         |   |  |   |  |         |  |        |   |  |         |  |        |  
|                                                                  |  |  
|Total interest income                                             |  | $ |  | 73,252                   |   |  | $ |  | 57,527  |   |  | $ |  | 42,835  |   |  | $ |  | 31,779  |  |        | $ |  | 32,298  | 
|Total interest expense                                            |  |   |  | 19,104                   |   |  |   |  | 10,785  |   |  |   |  | 6,356   |   |  |   |  |         |  | 6,391  |   |  |         |  | 8,502  |  
|                                                                  |  |  
|Net interest income                                               |  |   |  | 54,148                   |   |  |   |  | 46,742  |   |  |   |  | 36,479  |   |  |   |  |         |  | 25,388 |   |  |         |  | 23,796 |  
|Provision for loan losses                                         |  |   |  | 800                      |   |  |   |  | 150     |   |  |   |  | 800     |   |  |   |  |         |  | 1,200  |   |  |         |  | 1,037  |  
|Noninterest income                                                |  |   |  | 7,701                    |   |  |   |  | 7,351   |   |  |   |  | 6,602   |   |  |   |  |         |  | 5,880  |   |  |         |  | 5,552  |  
|Noninterest expense                                               |  |   |  | 37,415                   |   |  |   |  | 33,618  |   |  |   |  | 28,687  |   |  |   |  |         |  | 21,041 |   |  |         |  | 21,739 |  
|                                                                  |  |  
|Income before provision for income taxes and                      |  |   |  |                          |   |  |   |  |         |   |  |   |  |         |   |  |   |  |         |  |        |   |  |         |  |        |  
|cumulative effect of an accounting change                         |  |   |  | 23,634                   |   |  |   |  | 20,325  |   |  |   |  | 13,594  |   |  |   |  |         |  | 9,027  |   |  |         |  | 6,572  |  
|Provision for income taxes                                        |  |   |  | 8,986                    |   |  |   |  | 7,136   |   |  |   |  | 4,486   |   |  |   |  |         |  | 3,024  |   |  |         |  | 2,169  |  
|                                                                  |  |  
|Net income before cumulative effect                               |  |   |  |                          |   |  |   |  |         |   |  |   |  |         |   |  |   |  |         |  |        |   |  |         |  |        |  
|of an accounting change                                           |  |   |  | 14,648                   |   |  |   |  | 13,189  |   |  |   |  | 9,108   |   |  |   |  |         |  | 6,003  |   |  |         |  | 4,403  |  
|Cumulative effect of an accounting change, net of tax             |  |   |  | -                        |   |  |   |  | -       |   |  |   |  | -       |   |  |   |  |         |  | -      |   |  |         |  | (99    | )
|                                                                  |  |  
|Net income                                                        |  | $ |  | 14,648                   |   |  | $ |  | 13,189  |   |  | $ |  | 9,108   |   |  | $ |  | 6,003   |  |        | $ |  | 4,304   | 
|                                                                  |  |  
|Per Share Data (1)                                                |  |   |  |                          |   |  |   |  |         |   |  |   |  |         |   |  |   |  |         |  |        |   |  |         |  |        |  
|                                                                  |  |  
|Basic earnings per common share                                   |  | $ |  | 0.89                     |   |  | $ |  | 0.80    |   |  | $ |  | 0.55    |   |  | $ |  | 0.42    |  |        | $ |  | 0.31    | 
|Diluted earnings per common share                                 |  | $ |  | 0.83                     |   |  | $ |  | 0.75    |   |  | $ |  | 0.53    |   |  | $ |  | 0.42    |  |        | $ |  | 0.31    | 
|Dividends declared per common share                               |  | $ |  | 0.10                     |   |  | $ |  | 0.05    |   |  | $ |  | -       |   |  | $ |  | -       |  |        | $ |  | -       | 
|Ratio of dividends declared to net income                         |  |   |  | 11.07                    | % |  |   |  | 5.83    | % |  |   |  | 0.0     | % |  |   |  |         |  | 0.0    | % |  |         |  | 0.0    | %
|                                                                 
|Financial Ratios                                                  |  |   |  |                          |   |  |   |  |         |   |  |   |  |         |   |  |   |  |         |  |        |   |  |         |  |        |  
|                                                                  |  |  
|Return on average equity                                          |  |   |  | 13.26                    | % |  |   |  | 13.59   | % |  |   |  | 10.74   | % |  |   |  |         |  | 11.23  | % |  |         |  | 9.13   | %
|Return on average assets                                          |  |   |  | 1.52                     | % |  |   |  | 1.52    | % |  |   |  | 1.20    | % |  |   |  |         |  | 1.11   | % |  |         |  | 0.87   | %
|Efficiency ratio (2)                                              |  |   |  | 60.49                    | % |  |   |  | 62.15   | % |  |   |  | 66.59   | % |  |   |  |         |  | 67.29  | % |  |         |  | 74.07  | %
|Net interest margin (3)                                           |  |   |  | 6.25                     | % |  |   |  | 6.05    | % |  |   |  | 5.48    | % |  |   |  |         |  | 5.29   | % |  |         |  | 5.44   | %
|                                                                 
|Balance Sheet Data at Year-End                                    |  |   |  |                          |   |  |   |  |         |   |  |   |  |         |   |  |   |  |         |  |        |   |  |         |  |        |  
|                                                                  |  |  
|Gross loans                                                       |  | $ |  | 922,687                  |   |  | $ |  | 808,577 |   |  | $ |  | 690,461 |   |  | $ |  | 459,763 |  |        | $ |  | 398,350 | 
|Allowance for loan losses                                         |  | $ |  | 10,877                   |   |  | $ |  | 10,341  |   |  | $ |  | 9,171   |   |  | $ |  | 5,466   |  |        | $ |  | 4,838   | 
|Allowance as percentage of loans                                  |  |   |  | 1.18                     | % |  |   |  | 1.28    | % |  |   |  | 1.33    | % |  |   |  |         |  | 1.19   | % |  |         |  | 1.21   | %
|Total assets                                                      |  |   |  | 1,034,511                | $ |  | $ |  | 913,661 |   |  | $ |  | 804,445 |   |  | $ |  | 571,321 |  |        | $ |  | 515,084 | 
|Total deposits                                                    |  | $ |  | 879,350                  |   |  | $ |  | 768,419 |   |  | $ |  | 688,985 |   |  | $ |  | 475,746 |  |        | $ |  | 428,337 | 
|Total equity                                                      |  | $ |  | 116,259                  |   |  | $ |  | 102,784 |   |  | $ |  | 90,580  |   |  | $ |  | 64,751  |  |        | $ |  | 49,172  | 

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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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, 2006 and 2005, and for each of the three years in the period ended December 31, 2006, that are included as exhibits 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'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 interest rates earned on interest-earning assets and interest rates paid on interest-bearing liabilities, and by the relative volume 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 noninterest income and expenses, the provision for loan losses, and the provision for income taxes. Noninterest income consists primarily of service charges on deposit accounts and fees generated through PremierWest's mortgage division and investment services subsidiary. Noninterest expense consists primarily of salaries, commissions and employee benefits, professional fees, equipment expenses, occupancy-related expenses, communications, advertising and other operating expenses.



|FINANCIAL HIGHLIGHTS
|--------------------

Net income for 2006 was $14.6 million, a 11.1% improvement over 2005 net income of $13.2 million. Our diluted earnings per share were $0.83 and $0.75 for the years ended 2006 and 2005, respectively. This improvement resulted from a $15.7 million increase in interest income and a $350,000 increase in noninterest income. These results were offset by a $8.3 million increase in interest expense, a $3.8 million increase in noninterest expense and a $650,000 increase in the loan loss provision. Return on average shareholders' equity was 13.26% and return on average assets was 1.52% for the year ended December 31, 2006. This compared with a return on average shareholders' equity of 13.59% and a return on average assets of 1.52% for 2005.

|                              |  |   |  | Years Ended December 31,
|----------------------------- |  | - |  | ------------------------
|                              |  |  
|                              |  |   |  | 2006                    
|                              |  |  
|(dollars in thousands except  |  |   |  |                         
|financial ratios)             |  |   |  |                         
|Net income                    |  | $ |  | 14,648                  
|Average assets                |  | $ |  | 966,786                 
|RETURN ON AVERAGE ASSETS      |  |   |  | 1.52                    
|                             
|Net income                    |  | $ |  | 14,648                  
|Average equity                |  | $ |  | 110,454                 
|RETURN ON AVERAGE EQUITY      |  |   |  | 13.26                   
|                             
|Cash dividends declared       |  | $ |  | 1,621                   
|Net income                    |  | $ |  | 14,648                  
|PAYOUT RATIO                  |  |   |  | 11.07                   
|                             
|Average equity                |  | $ |  | 110,454                 
|Average assets                |  | $ |  | 966,786                 
|AVERAGE EQUITY TO ASSET RATIO |  |   |  | 11.42                   

15

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Total loans outstanding, net of deferred loan fees, grew $114.2 million, or 14.2% in 2006 and totaled $920.5 million at December 31, 2006 compared to $806.3 at December 31, 2005. Growth in loan volumes were generated internally across all of PremierWest Banks market areas. Over the past year our allowance for loan loss increased 5.2% to $10.9 million totaling 1.18% of outstanding loans. The provision expense for loan losses was $800,000 for 2006 compared to $150,000 in 2005. The prior years provision was relatively low due to the beneficial impact of a $1.0 million net loan recovery during fiscal year 2005. Management believes that an appropriate overall reserve exists based on our ongoing assessment of loan portfolio quality, the relatively stable level of nonperforming assets over the past three operating years, continuing seasoning of acquired loan portfolios and our judgment of economic conditions that exist.

Total deposits also grew to $879.4 million at December 31, 2006, an increase of $110.9 million from $768.4 million at December 31, 2005. Noninterest-bearing demand deposits totaled $199.5 million and accounted for 22.7% of total deposits at year end compared to 27.2% at December 31, 2005. The Bank intends to maintain an aggressive approach in pursuing noninterest-bearing deposit relationships from consumers and businesses.



|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 nonperforming 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, 2006, approximately 72% of PremierWest's loan portfolio is secured by real estate. Accordingly, a significant rise in loan interest rates and/or a decline in real estate values in Oregon and California may cause management to increase the allowance for loan and lease losses.

At December 31, 2006, PremierWest had approximately $20.4 million in unamortized goodwill as a result of previous business combinations. PremierWest adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. Annual and periodic analysis of the fair value of recorded goodwill for impairment involves a substantial amount of judgment, as does establishing and monitoring estimated lives of other amortizable intangible assets.

Effective January 1, 2006, PremierWest Bancorp adopted Financial Accounting Standards Board Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires companies to measure and recognize as compensation expense, the grant date fair market value for all share-based awards. SFAS 123R requires companies to estimate the fair market value of stock-based payment awards on the date of grant using an option-pricing model. We use the Black-Scholes option-pricing model to value our stock options. The Black-Scholes model requires the use of assumptions regarding the risk-free interest rate, our expected dividend yield, the weighted average expected life of the options and the historical volatility of our stock price.

16

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|Results of operations
|---------------------



|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 loans and securities.

|                                              |  |   |  | Year Ended December 31, 2006 |   |  |      |   | Year Ended December 31, 2005 |  |           |   |  | Year Ended December 31, 2004 | 
|--------------------------------------------- |  | - |  | ---------------------------- | - |  | ---- | - | ---------------------------- |  | --------- | - |  | ---------------------------- | 
|                                              |  |  
|                                              |  |   |  |                              |   |  |      |   | Interest                     |  | Average   |   |  |                              | 
|                                              |  |   |  | Average                      |   |  |      |   | Income or                    |  | Yields or |   |  |                              | 
|                                              |  |   |  | Balance                      |   |  |      |   | Expense                      |  | Rates     |   |  |                              | 
|                                              |  |  
|(dollars in thousands)                        |  |   |  |                              |   |  |      |   |                              |  |           |   |  |                              | 
|INTEREST-EARNING ASSETS:                      |  |   |  |                              |   |  |      |   |                              |  |           |   |  |                              | 
|Loans (1) (2)                                 |  | $ |  | 855,562                      |   |  | $    |   | 72,830                       |  | 8.51      | % |  | $                            | 
|Investment securities:                        |  |   |  |                              |   |  |      |   |                              |  |           |   |  |                              | 
|Taxable securities                            |  |   |  | 5,735                        |   |  |      |   | 98                           |  | 1.71      | % |  |                              | 
|Nontaxable securities (1)                     |  |   |  | 7,896                        |   |  |      |   | 521                          |  | 6.60      | % |  |                              | 
|Temporary investments                         |  |   |  | 2,591                        |   |  |      |   | 136                          |  | 5.25      | % |  |                              | 
|                                              |  |   |  |                              |   |  |      |   |                              |  |           |  
|Total interest-earning assets                 |  |   |  | 871,784                      |   |  |      |   | 73,585                       |  | 8.44      | % |  |                              | 
|Cash and due from banks                       |  |   |  | 30,453                       |   |  |      |   |                              |  |           |   |  |                              | 
|Allowance for loan losses                     |  |   |  | (10,682                      | ) |  |      |   |                              |  |           |   |  |                              | 
|Other assets                                  |  |   |  | 75,231                       |   |  |      |   |                              |  |           |   |  |                              | 
|                                              |  |   |  |                              |   |  |      |   |                              |  |           |  
|Total assets                                  |  | $ |  | 966,786                      |   |  |      |   |                              |  |           |   |  | $                            | 
|                                              |  |   |  |                              |   |  |      |   |                              |  |           |  
|                                             
|INTEREST-BEARING LIABILITIES:                 |  |   |  |                              |   |  |      |   |                              |  |           |   |  |                              | 
|Interest-bearing checking and                 |  |   |  |                              |   |  |      |   |                              |  |           |   |  |                              | 
|savings accounts                              |  | $ |  | 342,221                      |   |  |      |   | 5,896                        |  | 1.72      | % |  | $                            | 
|Time deposits                                 |  |   |  | 248,887                      |   |  |      |   | 10,035                       |  | 4.03      | % |  |                              | 
|Other borrowings                              |  |   |  | 58,106                       |   |  |      |   | 3,173                        |  | 5.46      | % |  |                              | 
|                                              |  |   |  |                              |   |  |      |   |                              |  |           |   |  |                              | 
|Total interest-bearing liabilities            |  |   |  | 649,214                      |   |  |      |   | 19,104                       |  | 2.94      | % |  |                              | 
|Noninterest-bearing deposits                  |  |   |  | 198,295                      |   |  |      |   |                              |  |           |   |  |                              | 
|Other liabilities                             |  |   |  | 8,823                        |   |  |      |   |                              |  |           |   |  |                              | 
|                                              |  |   |  |                              |   |  |      |   |                              |  |           |  
|Total liabilities                             |  |   |  | 856,332                      |   |  |      |   |                              |  |           |   |  |                              | 
|Shareholders' equity                          |  |   |  | 110,454                      |   |  |      |   |                              |  |           |   |  |                              | 
|                                              |  |   |  |                              |   |  |      |   |                              |  |           |  
|Total liabilities and                         |  |   |  |                              |   |  |      |   |                              |  |           |   |  |                              | 
|shareholders' equity                          |  | $ |  | 966,786                      |   |  |      |   |                              |  |           |   |  | $                            | 
|                                              |  |   |  |                              |   |  |      |   |                              |  |           |   |  |                              | 
|                                             
|Net interest income (1)                       |  |   |  |                              |   |  | $    |   | 54,481                       |  |           |   |  |                              | 
|                                              |  |   |  |                              |   |  |      |   |                              |  |           |  
|Net interest spread                           |  |   |  |                              |   |  |      |   |                              |  | 5.50      | % |  |                              | 
|                                              |  |   |  |                              |   |  |      |   |                              | 
|                                             
|Average yield on earning assets (1) (2)       |  |   |  |                              |   |  | 8.44 | % |                              |  |           |   |  |                              | 
|Interest expense to earning assets            |  |   |  |                              |   |  |      |   |                              |  | 2.19      | % |  |                              | 
|                                              |  |   |  |                              |   |  |      |   |                              | 
|Net interest income to earning assets (1) (2) |  |   |  |                              |   |  | 6.25 | % |                              |  |           |   |  |                              | 
|                                              |  |   |  |                              |   |  |      |   |                              | 

|(1) | Tax-exempt income has been adjusted to a tax equivalent basis at a 38% effective rate for 2006 and a 34% effective rate for 2005 and 2004. The amount of such adjustment was an addition to recorded pre tax income of $333,000, $409,000 and $402,000 for 2006, 2005, and 2004, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Average nonaccrual loans of approximately $1.5 million for 2006, $2.0 million for 2005 and $3.8 million for 2004 are included in the average loan balances.                                                                                                                                   
|   

17

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|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 between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities (the "interest rate spread"), 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.

Net interest income on a tax equivalent basis, before provisions for loan losses, for the year ended December 31, 2006, was $54.5 million, an increase of 15.54% compared to tax equivalent net interest income of $47.2 million in 2005, which was an increase of 27.84% compared to tax equivalent net interest income of $36.9 million in 2004. The overall tax-equivalent earning asset yield was 8.44% in 2006 compared to 7.43% in 2005 and 6.43% in 2004. For the same years, rates on interest-bearing liabilities were 2.94%, 1.91% and 1.29%, respectively.

Total interest-earning assets averaged $871.8 million for the year ended December 31, 2006, compared to $779.4 million for the corresponding period in 2005. The net growth in earning assets resulted from an overall growth in loan volume from all our geographic markets served. Growth in our higher yielding loan assets were partially offset by decreases in lower yielding Federal Funds sold and investment securities.

Interest-bearing liabilities averaged $649.2 million for the year ended December 31, 2006, compared to $564.6 million for the same period in 2005. Interest expense, as a percentage of average earning assets, increased to 2.19% in 2006, compared to 1.38% in 2005 and 0.95% in 2004.

Average loans, which generally carry a higher yield than investment securities and other earning assets, comprised 98.14% of average earning assets during 2006, compared to 96.80% in 2005 and 90.08% in 2004. During the same periods, average yields on loans were 8.51% in 2006, 7.54% in 2005, and 6.86% in 2004. Average investment securities comprised 1.56% of average earning assets in 2006, which was down from 2.32% in 2005 and 4.11% in 2004. Tax equivalent interest yields on investment securities were 4.54% for 2006, 4.57% for 2005, and 4.48% in 2004.

During the first half of 2006 the short-term interest rate environment, as measured by the Prime lending rate, increased 100 basis points, then remained stable over the second half of the year. Overall this 100 basis point rise in the Prime rate in combination with our continued growth in loan volume, excellent credit quality and a growing core deposit base, resulted in our net interest margin increasing 20 basis points, from 6.05% in 2005 to 6.25% for 2006. Over the same time period our net interest spread decreased 2 basis points, from 5.52% in 2005 to 5.50% in 2006. Management believes that the Bank's strong core deposit base coupled with a quality credit portfolio continues to position the Bank well for the future. However, the expectation in 2007 is for continued rate stability and potentially an interest rate decline during the second half of the year. This coupled with the competitive environment for deposits that has necessitated the use of borrowed funds in the short term will place downward pressure on our net interest margin and net interest spread during 2007.

18

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|Rate/Volume Analysis
|--------------------

The following table analyzes net interest income on a tax equivalent basis 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.

|                                    |  |   |  |                            |   |  |   |  | 2006 vs. 2005 |   |                            |   |  |        |  |        |   |  |        |  |        |   |  |       |  | 2005 vs. 2004 |   |  |        |  |  |  |        |  
|----------------------------------- |  | - |  | -------------------------- | - |  | - |  | ------------- | - | -------------------------- | - |  | ------ |  | ------ | - |  | ------ |  | ------ | - |  | ----- |  | ------------- | - |  | ------ |  |  |  | ------ | -
|                                    |  |   |  | Increase (Decrease) Due To |   |  |   |  |               |   | Increase (Decrease) Due To |   |  |       
|                                    |  |  
|                                    |  |   |  |                            |   |  |   |  |               |   |                            |   |  |        |  | Net    |   |  |        |  |        |   |  |       |  |               |   |  |        |  |  |  | Net    |  
|(in thousands)                      |  |   |  | Volume                     |   |  |   |  | Rate          |   |                            |   |  |        |  | Change |   |  |        |  | Volume |   |  |       |  | Rate          |   |  |        |  |  |  | Change |  
|                                    |  |  
|Interest-earning assets:            |  |   |  |                            |   |  |   |  |               |   |                            |   |  |        |  |        |   |  |        |  |        |   |  |       |  |               |   |  |        |  |  |  |        |  
|Loans                               |  | $ |  | 7,621                      |   |  | $ |  | 8,308         |   |                            | $ |  | 15,929 |  |        | $ |  | 10,202 |  |        | $ |  | 5,153 |  |               | $ |  | 15,355 | 
|Investment securities:              |  |   |  |                            |   |  |   |  |               |   |                            |   |  |        |  |        |   |  |        |  |        |   |  |       |  |               |   |  |        |  |  |  |        |  
|Taxable securities                  |  |   |  | (44                        | ) |  |   |  | (46           | ) |                            |   |  |        |  | (90    | ) |  |        |  | (211   | ) |  |       |  | (50           | ) |  |        |  |  |  | (261   | )
|Nontaxable securities               |  |   |  | (161                       | ) |  |   |  | 44            |   |                            |   |  |        |  | (117   | ) |  |        |  | (173   | ) |  |       |  | 20            |   |  |        |  |  |  | (153   | )
|Temporary investments               |  |   |  | (131                       | ) |  |   |  | 58            |   |                            |   |  |        |  | (73    | ) |  |        |  | (372   | ) |  |       |  | 130           |   |  |        |  |  |  | (242   | )
|                                    |  |  
|Total                               |  |   |  | 7,285                      |   |  |   |  | 8,364         |   |                            |   |  |        |  | 15,649 |   |  |        |  | 9,446  |   |  |       |  | 5,253         |   |  |        |  |  |  | 14,699 |  
|                                    |  |  
|Interest-bearing liabilities:       |  |   |  |                            |   |  |   |  |               |   |                            |   |  |        |  |        |   |  |        |  |        |   |  |       |  |               |   |  |        |  |  |  |        |  
|Deposits:                           |  |   |  |                            |   |  |   |  |               |   |                            |   |  |        |  |        |   |  |        |  |        |   |  |       |  |               |   |  |        |  |  |  |        |  
|Interest-bearing demand and savings |  | $ |  | 30                         |   |  |   |  | 2,204         |   |                            |   |  |        |  | 2,234  |   |  | $      |  | 276    |   |  |       |  | 1,323         |   |  |        |  |  |  | 1,599  |  
|Time deposits                       |  |   |  | 1,470                      |   |  |   |  | 2,748         |   |                            |   |  |        |  | 4,218  |   |  |        |  | 414    |   |  |       |  | 1,604         |   |  |        |  |  |  | 2,018  |  
|Other borrowings                    |  |   |  | 1,582                      |   |  |   |  | 285           |   |                            |   |  |        |  | 1,867  |   |  |        |  | 338    |   |  |       |  | 474           |   |  |        |  |  |  | 812    |  
|                                    |  |  
|Total                               |  |   |  | 3,082                      |   |  |   |  | 5,237         |   |                            |   |  |        |  | 8,319  |   |  |        |  | 1,028  |   |  |       |  | 3,401         |   |  |        |  |  |  | 4,429  |  
|                                    |  |  
|Net increase (decrease) in net      |  |   |  |                            |   |  |   |  |               |   |                            |   |  |        |  |        |   |  |        |  |        |   |  |       |  |               |   |  |        |  |  |  |        |  
|interest income                     |  | $ |  | 4,203                      |   |  | $ |  | 3,127         |   |                            | $ |  | 7,330  |  |        | $ |  | 8,418  |  |        | $ |  | 1,852 |  |               | $ |  | 10,270 | 
|                                    |  |   |  |                            |   |  |   | 



|Loan Loss Provision
|-------------------

The loan loss provision represents charges made against 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 estimated reserves based on assigned credit risk ratings for our entire loan portfolio, and the other representing specifically established reserves for individually 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 nonperforming 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, 2006, the loan loss provision totaled $800,000, compared to $150,000 for 2005, and $800,000 for 2004. This represents an increase of 433.3% between 2005 and 2006 and a decrease of 81.25% between 2004 and 2005. During 2006 the Bank continued to experience significant loan growth and the loan loss provision reflected this growth. The decrease in the loan loss provision that occurred during 2005 was principally the result of a large recovery that contributed to overall net loan loss recoveries of $1.0 million. Contributing to stable trends in overall credit quality has been the concerted effort on the part of management toward building and maintaining a consistent, proactive and responsive credit culture throughout the organization. Management has progressively evolved the Companys loan policies and procedures, conducted an ongoing and comprehensive analysis of loan portfolio quality, increased the number of credit administration and internal audit personnel to oversee the consistent application and adherence to established loan policies and procedures and provided training to all lending personnel. A more detailed review of the loan loss provision is presented in the table on page 28.

19

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Loan "charge-offs" refer 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. Management will continue to closely monitor the loan quality of new and existing relationships through strict review and evaluation procedures and by making loan officers accountable for collection efforts.

For the year ended December 31, 2006 loan charge-offs exceeded recoveries by $264,000. In contrast, loan recoveries exceeded charge-offs by over $1.0 million in 2005. A more detailed review of charge-offs and recoveries is presented in the table on page 28.



|Noninterest Income
|------------------

Noninterest income is primarily comprised of service charges on deposit accounts; mortgage banking fees; investment brokerage and annuity fees; other commissions and fees; and other noninterest income including gains on sales of investment securities. Deposit account related service charges and fees for other banking services have grown consistently over the past three years as a result of the Banks internal growth generally and also from increases made in our fee schedule for banking services. Mortgage lending fees, investment brokerage and annuity fees are commission based sources of revenue that reflected decreases in revenue during 2006 compared with 2005.

During 2006 noninterest income increased from $7.4 million to $7.7 million, an increase of $350,000 or 4.8% . Overall, deposit service charge income increased $582,000; mortgage lending income decreased $390,000; investment brokerage and annuity fees fell $106,000; other commissions and fees increased $183,000; offset by a $82,000 increase in other noninterest income. Gains from the sale of investment securities were $2,000.

For 2005, noninterest income increased 11.3% or $749,000 from $6.6 million recorded in 2004 to $7.4 million. Overall deposit service charge income increased $156,000; mortgage banking income increased $108,000; investment brokerage and annuity fees grew $332,000; other commissions and fees increased $289,000 while other noninterest income decreased $138,000. Gains from the sale of investment securities were $3,000.

In general, management prices the Bank's deposit accounts at rates competitive with those offered by other commercial banks in its market area. Deposit and deposit fee growth have been generated by branch expansion, offering competitive deposit products, cultivating strong customer relationships through exceptional service and cross-selling deposit products to loan customers.



|Noninterest Expense
|-------------------

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

Over 2006, noninterest expense increased $3.8 million or 11.29% from $33.6 million in 2005 to $37.4 million in 2006 as the Bank continued to pursue its growth strategy through the opening of three new branch offices bringing the total number of branches to 39. Increased expenses were principally in salaries and employee benefits ($3.5 million or 17.97%), occupancy expenses ($567,000 or 10.18%), and communications, professional fees and advertising expense ($84,000 or 2.33%) . These increases were partially offset by a decline in other expenses ($363,000 or 7.38%).

During 2005 noninterest expense increased $4.9 million or 17.2% to $33.6 million from $28.7 million in 2004. Full service branches increased to 36 from 32. As a result, increased expenses were centered in salaries and employee benefits ($3.4 million or 21.4%), occupancy expenses ($618,000 or 12.5%), communications, professional fees and advertising expense ($243,000 or 7.2%) and other expenses ($632,000 or 14.8%) .

20

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|Provision for Income Taxes
|--------------------------

PremierWest's taxable income resulted in an effective tax rate of 38.0% or $9.0 million in federal and state income taxes for 2006. This compares to an effective tax rate of 35.1% for 2005 and 33.0% for 2004.



|Efficiency Ratio
|----------------

Banks use the term "efficiency ratio" to describe the relationship of administrative and other costs associated with generating revenues, a concept similar to a measurement of overhead. The efficiency ratio is computed by dividing noninterest expense bythe sum of net interest income plus noninterest income. Management views the efficiency ratio as a measure of PremierWest's ability to control noninterest expenses.

Management has been successful at achieving its targeted efficiency ratio in the low 60 percent range. For the year ended December 31, 2006, our efficiency ratio was 60.49%, as compared to 62.15% in 2005, and 66.59% in 2004.

Generally, lower efficiency ratios reflect greater cost controls; however, the success of PremierWests community banking strategy necessitates a balance between pure expense control and the need to maintain a high level of customer service in conjunction with effective risk management. Accordingly, PremierWest staffs its branches in a manner to support its high standards for delivering exceptional customer service and maintains the necessary administrative personnel to support the delivery of exceptional customer service and effective risk management through internal control functions such as credit administration, internal audit, credit examination and compliance.

21

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|FINANCIAL CONDITION
|-------------------

The table below sets forth certain summary balance sheet information for December 31, 2006, 2005 and 2004.

|                       |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|---------------------- |  | - |  | --------- |  |  | - |  | ------------ |  | - |  | ------- |  | - |  | ------------------- | - |  | ------------------- | -- | ------------------- | - |  | ------- | - |  | ------ | --
|                       |  |   |  |           |  |  |   |  | December 31, |  |   |  |         |  |   |  |                     |   |  | Increase (Decrease) |    |                     |   | 
|                       |  |  
|                       |  |   |  | 2006      |  |  |   |  | 2005         |  |   |  | 2004    |  |   |  | 12/31/05  12/31/06 |   |  |                     |    | 12/31/04  12/31/05 |  
|                       |  |  
|(dollars in thousands) |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|                      
|ASSETS                 |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|Federal funds sold     |  | $ |  | -         |  |  | $ |  | 453          |  | $ |  | 15,350  |  | $ |  | (453                | ) |  | (100.00             | %) |                     | $ |  | (14,897 | ) |  | (97.05 | %)
|Investment securities  |  |   |  | 7,318     |  |  |   |  | 14,869       |  |   |  | 17,602  |  |   |  | (7,551              | ) |  | (50.78              | %) |                     |   |  | (2,733  | ) |  | (15.53 | %)
|Restricted equity      |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|investments            |  |   |  | 2,061     |  |  |   |  | 1,865        |  |   |  | 1,599   |  |   |  | 196                 |   |  | 10.51               | %  |                     |   |  | 266     |   |  | 16.64  | % 
|Loans                  |  |   |  | 908,652   |  |  |   |  | 795,230      |  |   |  | 678,594 |  |   |  | 113,422             |   |  | 14.26               | %  |                     |   |  | 116,636 |   |  | 17.19  | % 
|Other assets (1)       |  |   |  | 116,480   |  |  |   |  | 101,244      |  |   |  | 91,300  |  |   |  | 15,236              |   |  | 15.05               | %  |                     |   |  | 9,944   |   |  | 10.89  | % 
|                       |  |   |  |           |  |  |   | 
|                      
|Total assets           |  | $ |  | 1,034,511 |  |  | $ |  | 913,661      |  | $ |  | 804,445 |  | $ |  | 120,850             |   |  | 13.23               | %  |                     | $ |  | 109,216 |   |  | 13.58  | % 
|                       |  |   |  |           |  |  |   | 
|                      
|LIABILITIES            |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|Noninterest-bearing    |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|deposits               |  | $ |  | 199,462   |  |  | $ |  | 208,840      |  | $ |  | 183,845 |  | $ |  | (9,378              | ) |  | (4.49               | %) |                     | $ |  | 24,995  |   |  | 13.60  | % 
|Interest-bearing       |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|deposits               |  |   |  | 679,888   |  |  |   |  | 559,579      |  |   |  | 505,140 |  |   |  | 120,309             |   |  | 21.50               | %  |                     |   |  | 54,439  |   |  | 10.78  | % 
|                       |  |   |  |           |  |  |   | 
|                      
|Total deposits         |  |   |  | 879,350   |  |  |   |  | 768,419      |  |   |  | 688,985 |  |   |  | 110,931             |   |  | 14.44               | %  |                     |   |  | 79,434  |   |  | 11.53  | % 
|                      
|Other liabilities (2)  |  |   |  | 38,902    |  |  |   |  | 42,458       |  |   |  | 24,880  |  |   |  | (3,556              | ) |  | (8.38               | %) |                     |   |  | 17,578  |   |  | 70.65  | % 
|                       |  |   |  |           |  |  |   | 
|                      
|Total liabilities      |  |   |  | 918,252   |  |  |   |  | 810,877      |  |   |  | 713,865 |  |   |  | 107,375             |   |  | 13.24               | %  |                     |   |  | 97,012  |   |  | 13.59  | % 
|                      
|SHAREHOLDERS          |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|                      
|EQUITY                 |  |   |  | 116,259   |  |  |   |  | 102,784      |  |   |  | 90,580  |  |   |  | 13,475              |   |  | 13.11               | %  |                     |   |  | 12,204  |   |  | 13.47  | % 
|                       |  |   |  |           |  |  |   | 
|                      
|Total liabilities      |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|and share-             |  |   |  |           |  |  |   |  |              |  |   |  |         |  |   |  |                     |   |  |                     |    |                     |   |  |         |   |  |        |   
|holders equity        |  | $ |  | 1,034,511 |  |  | $ |  | 913,661      |  | $ |  | 804,445 |  | $ |  | 120,850             |   |  | 13.23               | %  |                     | $ |  | 109,216 |   |  | 13.58  | % 
|                       |  |   |  |           |  |  |   | 

|(1) | Includes cash and due from banks, mortgage loans held-for-sale, property and equipment, goodwill, federal funds sold, accrued interest receivable and other assets.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes federal funds purchased, borrowings, accrued interest payable and other liabilities.                                                                      
|   



|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 or 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.

22

---

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

|                                           |  |   |  |       |  |   |  | December 31, |  |   |  |       
|------------------------------------------ |  | - |  | ----- |  | - |  | ------------ |  | - |  | ------
|                                           |  |  
|(in thousands)                             |  |   |  | 2006  |  |   |  | 2005         |  |   |  | 2004  
|                                           |  |  
|                                          
|Investment securities (available-for sale) |  |   |  |       |  |   |  |              |  |   |  |       
|U.S. Government and agency                 |  |   |  |       |  |   |  |              |  |   |  |       
|securities                                 |  | $ |  | -     |  | $ |  | 3,969        |  | $ |  | 4,034 
|Mortgage-backed securities and             |  |   |  |       |  |   |  |              |  |   |  |       
|collateralized mortgage                    |  |   |  |       |  |   |  |              |  |   |  |       
|obligations                                |  |   |  | 263   |  |   |  | 326          |  |   |  | 446   
|Corporate bonds                            |  |   |  | -     |  |   |  | 997          |  |   |  | 2,035 
|Restricted equity securities               |  |   |  | 2,061 |  |   |  | 1,865        |  |   |  | 1,599 
|                                           |  |  
|                                           |  |   |  | 2,324 |  |   |  | 7,157        |  |   |  | 8,114 
|Investment securities (held-to-maturity)   |  |   |  |       |  |   |  |              |  |   |  |       
|Obligations of states and                  |  |   |  |       |  |   |  |              |  |   |  |       
|political subdivisions                     |  |   |  | 7,055 |  |   |  | 9,577        |  |   |  | 11,087
|                                           |  |  
|Total Investment Securities                |  | $ |  | 9,379 |  | $ |  | 16,734       |  | $ |  | 19,201
|                                           |  |  

The contractual maturity of investment securities at December 31, 2006, including restricted equity securities, 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, 2006   |  |   |  | December 31, 2005 |  |           |                     | December 31, 2004
|                                                                                        |  |   |  |                     |  |   |  |                   |  |           |                     |                  
|                                                                                        |  |   |  | Amortized Estimated |  | % |  |                   |  |           | Amortized Estimated |                   | % |      |        |  |   | Amortized Estimated |        | %         |     
|                                                                                        |  |   |  | Cost                |  |   |  | Fair Value        |  | Yield (1) |                     |                   |   | Cost |        |  |   | Fair Value          |        | Yield (1) |      |   |  |   | Cost |        |  |   | Fair Value |        | Yield (1) |     
|(dollars in thousands)                                                                  |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                    
|                                                                                        |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |      |   |  |   |      |        |  |   |            |        |           |      |  
|U.S. Government and agency securities:                                                  |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |      |   |  |   |      |        |  |   |            |        |           |      |  
|One year or less                                                                        |  | $ |  | -                   |  | $ |  | -                 |  | -         |                     |                   | $ |      | 4,050  |  | $ |                     | 3,969  |           | 3.46 | % |  | $ |      | -      |  | $ |            | -      |           | -    |  
|One to five years                                                                       |  |   |  | -                   |  |   |  | -                 |  | -         |                     |                   |   |      | -      |  |   |                     | -      |           | -    |   |  |   |      | 4,106  |  |   |            | 4,034  |           | 3.41 | %
|Five to ten years                                                                       |  |   |  | -                   |  |   |  | -                 |  | -         |                     |                   |   |      | -      |  |   |                     | -      |           | -    |   |  |   |      | -      |  |   |            | -      |           | -    |  
|                                                                                       
|Obligations of states and                                                               |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |      |   |  |   |      |        |  |   |            |        |           |      |  
|political subdivisions:                                                                 |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |      |   |  |   |      |        |  |   |            |        |           |      |  
|One year or less                                                                        |  |   |  | 2,180               |  |   |  | 2,175             |  | 5.89      | %                   |                   |   |      | 1,871  |  |   |                     | 1,866  |           | 5.68 | % |  |   |      | 1,229  |  |   |            | 1,235  |           | 5.52 | %
|One to five years                                                                       |  |   |  | 2,002               |  |   |  | 1,980             |  | 6.72      | %                   |                   |   |      | 4,494  |  |   |                     | 4,451  |           | 6.16 | % |  |   |      | 6,351  |  |   |            | 6,417  |           | 6.06 | %
|Five to ten years                                                                       |  |   |  | 2,873               |  |   |  | 2,844             |  | 6.03      | %                   |                   |   |      | 3,212  |  |   |                     | 3,190  |           | 6.09 | % |  |   |      | 2,776  |  |   |            | 2,792  |           | 5.79 | %
|Over ten years                                                                          |  |   |  | -                   |  |   |  | -                 |  | -         |                     |                   |   |      | -      |  |   |                     | -      |           | -    |   |  |   |      | 732    |  |   |            | 736    |           | 6.89 | %
|                                                                                       
|Corporate bonds:                                                                        |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |      |   |  |   |      |        |  |   |            |        |           |      |  
|One year or less                                                                        |  |   |  | -                   |  |   |  | -                 |  | -         |                     |                   |   |      | 1,000  |  |   |                     | 998    |           | 6.13 | % |  |   |      | 1,000  |  |   |            | 1,009  |           | 6.25 | %
|One to five years                                                                       |  |   |  | -                   |  |   |  | -                 |  | -         |                     |                   |   |      | -      |  |   |                     | -      |           | -    |   |  |   |      | 999    |  |   |            | 1,026  |           | 6.13 | %
|                                                                                        |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |      |   |  |   |      |        |  |   |            |        |           |      |  
|                                                                                       
|Total debt securities                                                                   |  |   |  | 7,055               |  |   |  | 6,999             |  |           |                     |                   |   |      | 14,627 |  |   |                     | 14,474 |           |      |   |  |   |      | 17,193 |  |   |            | 17,249 |           |      |  
|                                                                                       
|Mortgaged-backed securities                                                             |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |      |   |  |   |      |        |  |   |            |        |           |      |  
|and collateralized mortgage                                                             |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |      |   |  |   |      |        |  |   |            |        |           |      |  
|obligations                                                                             |  |   |  | 264                 |  |   |  | 263               |  | 5.78      | %                   |                   |   |      | 326    |  |   |                     | 325    |           | 5.10 | % |  |   |      | 442    |  |   |            | 446    |           | 5.03 | %
|Restricted equity securities                                                            |  |   |  | 2,061               |  |   |  | 2,061             |  | N/A       |                     |                   |   |      | 1,865  |  |   |                     | 1,865  |           | N/A  |   |  |   |      | 1,599  |  |   |            | 1,599  |           | N/A  |  
|                                                                                        |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |     
|                                                                                       
|Total securities                                                                        |  | $ |  | 9,380               |  | $ |  | 9,323             |  |           |                     |                   | $ |      | 16,818 |  | $ |                     | 16,664 |           |      |   |  | $ |      | 19,234 |  | $ |            | 19,294 |           |      |  
|                                                                                        |  |   |  |                     |  |   |  |                   |  |           |                     |                   |   |      |        |  |   |                     |        |           |     
|                                                                                       
|                                                                                       
|                                                                                       
|(1) Weighted average yields are stated on a federal tax-equivalent basis at a 34% rate. |  |   |  |                     |  |   |  |                   |  |           |                     |                  

23

---

During 2006, $7.5 million in securities matured, called or were paid down and no purchases or sales were made. This compares to proceeds from sales, maturities and/or calls of investment securities of $2.5 million in 2005, and $54.0 million (including $38.6 million from the acquired securities portfolio of Mid Valley Bank) in 2004. These sales, maturities and/or calls resulted in realized gains of $2,000, $3,000 and $1,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

At December 31, 2006, PremierWest's investment portfolio had total net unrealized losses of approximately $57,000. This compares to net unrealized losses of approximately $154,000 at December 31, 2005, and net unrealized gains of $60,000 at December 31, 2004. Unrealized gains and losses reflect changes in market conditions and do not represent the amount of actual profits or losses that may be recognized by the Bank. Actual realized gains and losses occur at the time investment securities are sold or called. During the third quarter of 2004, the Bank reclassified obligations of states and political subdivisions from available-for-sale to held-to-maturity to more accurately reflect its purpose and intent to be reserved for the on-going pledging needs, particularly for collateralizing public funds on deposit that exceed the $100,000 FDIC insurance limit. The unrealized holding gain at the time of transfer was $335,000 and is being amortized as an adjustment to yield from the date of transfer through the maturity date of each security transferred. The amortization of the unrealized holding gain reported in shareholders' equity will offset or mitigate the effect on interest income of the amortization of the discount for the securities transferred. As of December 31, 2006, the unamortized unrealized holding gain on held-to-maturity securities was $101,000.

Securities may be pledged from time-to-time to secure public deposits, FHLB borrowings, repurchase agreement deposit accounts, or for other purposes as required or permitted by law. At December 31, 2006, securities with a market value of $7.3 million were pledged for such purposes.

As of December 31, 2006, PremierWest also held 15,881 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 their outstanding mortgages, total assets or FHLB advances. At December 31, 2006 and 2005, the Bank met its minimum required investment in FHLB.

The Bank also owns stock in Pacific Coast Banker's Bank (PCBB). The investment in PCBB of $277,000 is carried at its fair market value at acquisition and is included in restricted equity investments on the balance sheet. Pacific Coast Banker's Bank operates under a special purpose charter to provide wholesale correspondent banking services to depository institutions. By statute, 100% of PCBB's outstanding stock is held by depository institutions that utilize its correspondent banking services.



|Loan Portfolio
|--------------

The most significant asset on our balance sheet in terms of risk and the 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 and deferred loan fees. 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 credit administration department and in conformity with established loan policies. On an as needed but not less than 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 own 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 higher limit, may be approved jointly by the Chief Credit Officer along with either the President or Chief Executive Officer. Loans, that 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 meetings. PremierWest's unsecured

24

---

legal lending limit was approximately $17.5 million and our real estate secured lending limit was approximately $29.0 million at December 31, 2006. PremierWest seldom makes loans for an amount approaching its legal lending limits. The following table sets forth the composition of the loan portfolio including loans held-for-sale, in dollar amounts and in percentages as of December 31, 2002, through 2006.

|                           |  |   |  | December 31, 2006 |  |            |   |  | December 31, 2005 |  |         |  |            | December 31, 2004 |  |   |  |         | December 31, 2003 |            |   |  |   | December 31, 2002 |        
|-------------------------- |  | - |  | ----------------- |  | ---------- | - |  | ----------------- |  | ------- |  | ---------- | ----------------- |  | - |  | ------- | ----------------- | ---------- | - |  | - | ----------------- | -------
|                           |  |  
|(dollars in thousands)     |  |   |  | Amount            |  | Percentage |   |  |                   |  | Amount  |  | Percentage |                   |  |   |  | Amount  |                   | Percentage |   |  |   |                   | Amount 
|                           |  |  
|                          
|Commercial                 |  | $ |  | 175,292           |  | 19.0       | % |  | $                 |  | 131,819 |  | 16.3       | %                 |  | $ |  | 94,560  |                   | 13.7       | % |  | $ |                   | 60,598 
|Real estate - Construction |  |   |  | 259,254           |  | 28.1       | % |  |                   |  | 237,150 |  | 29.3       | %                 |  |   |  | 149,250 |                   | 21.6       | % |  |   |                   | 54,900 
|Real Estate - Commercial/  |  |   |  |                   |  |            |   |  |                   |  |         |  |            |                   |  |   |  |         |                   |            |   |  |   |                   |        
|Residential                |  |   |  | 405,499           |  | 43.9       | % |  |                   |  | 367,069 |  | 45.4       | %                 |  |   |  | 372,812 |                   | 54.0       | % |  |   |                   | 288,051
|Consumer                   |  |   |  | 53,542            |  | 5.8        | % |  |                   |  | 49,520  |  | 6.1        | %                 |  |   |  | 43,039  |                   | 6.2        | % |  |   |                   | 34,273 
|Other                      |  |   |  | 29,100            |  | 3.2        | % |  |                   |  | 23,019  |  | 2.9        | %                 |  |   |  | 30,800  |                   | 4.5        | % |  |   |                   | 21,941 
|                           |  |  
|Total loans, gross         |  | $ |  | 922,687           |  | 100.0      | % |  | $                 |  | 808,577 |  | 100.0      | %                 |  | $ |  | 690,461 |                   | 100.0      | % |  | $ |                   | 459,763
|                           |  |  

Net outstanding loans, excluding loans held-for-sale, totaled $908.7 million at December 31, 2006, representing an increase of $113.4 million, or 14.3% compared to $795.2 million as of December 31, 2005. Loan commitments were $185.2 million as of December 31, 2006, representing a decrease of $12.5 million over year-end 2005. For a more detailed discussion of off-balance sheet arrangements, see Note 14 to the financial statements included in this report starting on page F-29.

PremierWest's gross loan portfolio at December 31, 2006, includes loans secured by real estate 72.0%, commercial loans 19.0%, and consumer and other loans 9.0% . The largest category is concentrated in real estate loans, typical for a community bank and also due to management's focus on the significant growth opportunities existing within mortgage and commercial real estate activities occurring in the Bank's market area. Some commercial loans are secured by real estate, but funds 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. Loans of this type are characterized as real estate loans because of the real estate held as collateral.

The following table presents maturity and re-pricing information for the loan portfolio at December 31, 2006. The table segments the loan portfolio between fixed-rate and adjustable rate loans and their respective repricing intervals based on fixed-rate loan maturity dates and variable-rate loan re-pricing dates for the periods indicated.

|                                      |  |   |  |            |  |  |   |  | December 31, 2006 |  |   |  |           
|------------------------------------- |  | - |  | ---------- |  |  | - |  | ----------------- |  | - |  | ----------
|                                      |  |  
|                                      |  |   |  | Within One |  |  |   |  | One to Five       |  |   |  | After Five
|(dollars in thousands)                |  |   |  | Year (1)   |  |  |   |  | Y ears            |  |   |  | Y ears    
|                                      |  |  
|                                     
|FIXED -RATE LOAN MATURITIE S          |  |   |  |            |  |  |   |  |                   |  |   |  |           
|Commercial                            |  | $ |  | 12,164     |  |  | $ |  | 16,394            |  | $ |  | 4,306     
|Real estate  Construction            |  |   |  | 30,412     |  |  |   |  | 7,686             |  |   |  | -         
|Real estate  Commercial/Residential  |  |   |  | 24,866     |  |  |   |  | 4,406             |  |   |  | 94        
|Consumer                              |  |   |  | 12,784     |  |  |   |  | 7,407             |  |   |  | 15,868    
|Other                                 |  |   |  | 3,201      |  |  |   |  | 4,201             |  |   |  | 502       
|                                      |  |  
|Total fixed rate loan maturities      |  |   |  | 83,427     |  |  |   |  | 40,094            |  |   |  | 20,770    
|                                      |  |  
|                                     
|ADJUSTABLE -RATE LOAN REPRICINGS      |  |   |  |            |  |  |   |  |                   |  |   |  |           
|Commercial                            |  |   |  | 125,525    |  |  |   |  | 11,821            |  |   |  | 5,082     
|Real estate  Construction            |  |   |  | 195,842    |  |  |   |  | 18,792            |  |   |  | 6,522     
|Real estate  Commercial/Residential  |  |   |  | 291,678    |  |  |   |  | 80,844            |  |   |  | 3,611     
|Consumer                              |  |   |  | 16,918     |  |  |   |  | 445               |  |   |  | 120       
|Other                                 |  |   |  | 17,023     |  |  |   |  | 2,477             |  |   |  | 1,696     
|                                      |  |  
|Total adjustable-rate loan repricings |  |   |  | 646,986    |  |  |   |  | 114,379           |  |   |  | 17,031    
|                                      |  |  
|                                     
|Total maturities and repricings       |  | $ |  | 730,413    |  |  | $ |  | 154,473           |  | $ |  | 37,801    
|                                      |  |  

|(1) | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   

25

---



|Nonperforming Loans
|-------------------

Management considers a loan to be nonperforming when it is 90 days or more past due, 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 nonperforming. A loan placed on nonaccrual status may or may not be contractually past due at the time the determination is made to place the loan on nonaccrual status, and it may or may not be secured. When a loan is placed on nonaccrual status, it is the Bank's policy to reverse interest previously accrued but uncollected. Interest later collected on the nonaccrual loan, for book purposes, is credited to loan principal if, in management's opinion, full collectibility of principal is doubtful.

At December 31, 2006 and 2005, loans that were more than 90 days delinquent or for which the accrual of interest had been discontinued included the following:

|                                     |  |   |  |        |  |           |   | December 31, |   |  |       
|------------------------------------ |  | - |  | ------ |  | --------- | - | ------------ | - |  | ------
|                                     |  |  
|                                     |  |   |  | 2006   |  |           |   | 2005        
|                                     |  |  
|                                     |  |   |  |        |  | % of      |   |              |   |  |       
|                                     |  |   |  |        |  | Related   |   |              |   |  |       
|(dollars in thousands)               |  |   |  | Amount |  | Portfolio |   |              |   |  | Amount
|                                     |  |  
|                                    
|Commercial                           |  | $ |  | 995    |  | 0.57      | % |              | $ |  | 791   
|Real estate  Construction           |  |   |  | 278    |  | 0.11      | % |              |   |  | -     
|Real estate  Commercial/Residential |  |   |  | 23     |  | 0.01      | % |              |   |  | 1,405 
|Consumer                             |  |   |  | 51     |  | 0.10      | % |              |   |  | 77    
|Other                                |  |   |  | 107    |  | 0.37      | % |              |   |  | -     
|                                     |  |  
|Total                                |  | $ |  | 1,454  |  | 0.16      | % |              | $ |  | 2,273 
|                                     |  |  

Impaired loans include all nonaccrual 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 effective 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, 2006 and 2005 there was no other real estate owned. 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 as incurred. "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 cost value of the related loan exceeds the estimated net realizable value of the property acquired. Subsequent write-downs are recorded as noninterest expense.

At December 31, 2006 and 2005, nonperforming loans (loans more than 90 days delinquent and/or on nonaccrual status) totaled approximately $1.5 million and $2.3 million, respectively. Management is committed to a credit culture that emphasizes quality underwriting standards and that provides for the effective monitoring of loan quality and aggressive resolution to problem loans once they are identified. Nonperforming assets amounted to 0.14% of total assets outstanding at December 31, 2006 and 0.25% at December 31, 2005. Interest income that would have been recognized on nonaccrual loans if such loans had performed in accordance with contractual terms totaled $40,000 for the year ended December 31, 2006, $143,000 for the year ended December 31, 2005, and $177,000 for the year ended December 31, 2004. Actual interest income recognized on such loans during all of the periods was not significant. At December 31, 2006 and 2005, the allowance for loan losses related to impaired loans was $116,000 and $710,000, respectively.

26

---

|The following table summarizes nonperforming assets by category: |  |   |  |              |   |  |   |  |       |   |  |   |  |       |   | 
|---------------------------------------------------------------- |  | - |  | ------------ | - |  | - |  | ----- | - |  | - |  | ----- | - | 
|                                                                
|                                                                 |  |   |  | December 31,
|                                                                 |  |  
|(dollars in thousands)                                           |  |   |  | 2006         |   |  |   |  | 2005  |   |  |   |  | 2004  |   | 
|                                                                 |  |  
|Loans on nonaccrual status                                       |  | $ |  | 1,430        |   |  | $ |  | 2,273 |   |  | $ |  | 1,890 |   | 
|Loans past due greater than 90 days but                          |  |   |  |              |   |  |   |  |       |   |  |   |  |       |   | 
|not on nonaccrual status                                         |  |   |  | 24           |   |  |   |  | 2     |   |  |   |  | 26    |   | 
|Other real estate owned                                          |  |   |  | -            |   |  |   |  | -     |   |  |   |  | 483   |   | 
|                                                                 |  |  
|Total nonperforming assets                                       |  | $ |  | 1,454        |   |  | $ |  | 2,275 |   |  | $ |  | 2,399 |   | 
|                                                                 |  |  
|                                                                
|Percentage of nonperforming assets                               |  |   |  |              |   |  |   |  |       |   |  |   |  |       |   | 
|to total assets                                                  |  |   |  | 0.14         | % |  |   |  | 0.25  | % |  |   |  | 0.30  | % | 
|                                                                 |  |  

|Allowance for Loan Losses
|-------------------------

The allowance for loan losses is established through the provision for loan losses charged to expense 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 nonaccrual 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:

- Analysis of risks inherent in the various segments of the loan portfolio;
- Management's assessment of known or potential problem credits which have come to management's attention during the ongoing review of credit quality;
- Estimates of the value of underlying collateral and guarantees;
- Legal representation regarding the potential outcome of pending actions for collection of loans and related guarantees;
- Historical loss experience; and,
- Current local and national economic conditions and other factors.

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.

A downturn in the local Oregon and/or California economies and employment could result in increased levels of nonperforming 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 $10.9 million at December 31, 2006, and $10.3 million at December 31, 2005, representing 1.18% of total loans at December 31, 2006 and 1.28% of total loans at December 31, 2005. The loan loss allowance represents 748.07% of nonperforming loans at December 31, 2006, and 454.55% of nonperforming loans at December 31, 2005. 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, 2006, 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.

27

---

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

|                                           |  |   |  |         |   |  |   |  |         |   |  |   |  | December 31, |   |  |   |  |         |   |  |   |  |         |  
|------------------------------------------ |  | - |  | ------- | - |  | - |  | ------- | - |  | - |  | ------------ | - |  | - |  | ------- | - |  | - |  | ------- | -
|                                           |  |  
|(dollars in thousands)                     |  |   |  | 2006    |   |  |   |  | 2005    |   |  |   |  | 2004         |   |  |   |  | 2003    |   |  |   |  | 2002    |  
|                                           |  |  
|Gross loans outstanding at end of year     |  | $ |  | 922,687 |   |  | $ |  | 808,577 |   |  | $ |  | 690,461      |   |  | $ |  | 459,763 |   |  | $ |  | 398,350 |  
|                                           |  |  
|Average loans outstanding                  |  | $ |  | 855,562 |   |  | $ |  | 754,465 |   |  | $ |  | 605,747      |   |  | $ |  | 414,623 |   |  | $ |  | 380,068 |  
|                                           |  |  
|Allowance for loan losses, beginning       |  |   |  |         |   |  |   |  |         |   |  |   |  |              |   |  |   |  |         |   |  |   |  |         |  
|of year                                    |  | $ |  | 10,341  |   |  | $ |  | 9,171   |   |  | $ |  | 5,466        |   |  | $ |  | 4,838   |   |  | $ |  | 4,825   |  
|Loans charged off:                         |  |   |  |         |   |  |   |  |         |   |  |   |  |              |   |  |   |  |         |   |  |   |  |         |  
|Commercial                                 |  |   |  | (100    | ) |  |   |  | (13     | ) |  |   |  | (176         | ) |  |   |  | (252    | ) |  |   |  | (672    | )
|Real estate                                |  |   |  | -       |   |  |   |  | (500    | ) |  |   |  | (563         | ) |  |   |  | (160    | ) |  |   |  | (253    | )
|Consumer                                   |  |   |  | (271    | ) |  |   |  | (147    | ) |  |   |  | (302         | ) |  |   |  | (222    | ) |  |   |  | (216    | )
|Other                                      |  |   |  | (125    | ) |  |   |  | (111    | ) |  |   |  | (2,758       | ) |  |   |  | -       |   |  |   |  | -       |  
|                                           |  |  
|Total loans charged off                    |  |   |  | (496    | ) |  |   |  | (771    | ) |  |   |  | (3,799       | ) |  |   |  | (634    | ) |  |   |  | (1,141  | )
|                                           |  |  
|Recoveries:                                |  |   |  |         |   |  |   |  |         |   |  |   |  |              |   |  |   |  |         |   |  |   |  |         |  
|Commercial                                 |  |   |  | 95      |   |  |   |  | 119     |   |  |   |  | 75           |   |  |   |  | 28      |   |  |   |  | 55      |  
|Real estate                                |  |   |  | -       |   |  |   |  | -       |   |  |   |  | 3            |   |  |   |  | -       |   |  |   |  | 2       |  
|Consumer                                   |  |   |  | 93      |   |  |   |  | 50      |   |  |   |  | 87           |   |  |   |  | 34      |   |  |   |  | 60      |  
|Other                                      |  |   |  | 44      |   |  |   |  | 1,622   |   |  |   |  | 454          |   |  |   |  | -       |   |  |   |  | -       |  
|                                           |  |  
|                                          
|Total recoveries                           |  |   |  | 232     |   |  |   |  | 1,791   |   |  |   |  | 619          |   |  |   |  | 62      |   |  |   |  | 117     |  
|                                           |  |  
|Net (charge offs) or recoveries            |  |   |  | (264    | ) |  |   |  | 1,020   |   |  |   |  | (3,180       | ) |  |   |  | (572    | ) |  |   |  | (1,024  | )
|Allowance for loan losses transferred from |  |   |  |         |   |  |   |  |         |   |  |   |  |              |   |  |   |  |         |   |  |   |  |         |  
|Mid Valley Bank                            |  |   |  | -       |   |  |   |  | -       |   |  |   |  | 6,085        |   |  |   |  | -       |   |  |   |  | -       |  
|Provision charged to income                |  |   |  | 800     |   |  |   |  | 150     |   |  |   |  | 800          |   |  |   |  | 1,200   |   |  |   |  | 1,037   |  
|                                           |  |  
|Allowance for loan losses, end of year     |  | $ |  | 10,877  |   |  | $ |  | 10,341  |   |  | $ |  | 9,171        |   |  | $ |  | 5,466   |   |  | $ |  | 4,838   |  
|                                           |  |  
|Ratio of net loans charged off to average  |  |   |  |         |   |  |   |  |         |   |  |   |  |              |   |  |   |  |         |   |  |   |  |         |  
|loans outstanding                          |  |   |  | 0.03    | % |  |   |  | n/a     |   |  |   |  | 0.52         | % |  |   |  | 0.14    | % |  |   |  | 0.27    | %
|                                           |  |  
|Ratio of allowance for loan losses to      |  |   |  |         |   |  |   |  |         |   |  |   |  |              |   |  |   |  |         |   |  |   |  |         |  
|ending total loans                         |  |   |  | 1.18    | % |  |   |  | 1.28    | % |  |   |  | 1.33         | % |  |   |  | 1.19    | % |  |   |  | 1.21    | %
|                                           |  |  

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, whether positive or negative, 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, |  |               |   |  |   |  |          |  |               |   |  |   |  |          | 
|---------------------- |  | - |  | -------- |  | ------------- | - |  | - |  | -------- |  | ------------- | - |  | - |  | ------------ |  | ------------- | - |  | - |  | -------- |  | ------------- | - |  | - |  | -------- | 
|                       |  |  
|                       |  |   |  |          |  | 2006          |   |  |   |  |          |  | 2005          |   |  |   |  |              |  | 2004          |   |  |   |  |          |  | 2003          |   |  |   |  |          | 
|                       |  |  
|                       |  |   |  |          |  | Percentage of |   |  |   |  |          |  | Percentage of |   |  |   |  |              |  | Percentage of |   |  |   |  |          |  | Percentage of |   |  |   |  |          | 
|                       |  |   |  | Reserve  |  | loans in each |   |  |   |  | Reserve  |  | loans in each |   |  |   |  | Reserve      |  | loans in each |   |  |   |  | Reserve  |  | loans in each |   |  |   |  | Reserve  | 
|                       |  |   |  | for loan |  | category to   |   |  |   |  | for loan |  | category to   |   |  |   |  | for loan     |  | category to   |   |  |   |  | for loan |  | category to   |   |  |   |  | for loan | 
|(dollars in thousands) |  |   |  | losses   |  | total loans   |   |  |   |  | losses   |  | total loans   |   |  |   |  | losses       |  | total loans   |   |  |   |  | losses   |  | total loans   |   |  |   |  | losses   | 
|                       |  |  
|Type of loan:          |  |   |  |          |  |               |   |  |   |  |          |  |               |   |  |   |  |              |  |               |   |  |   |  |          |  |               |   |  |   |  |          | 
|Commercial             |  | $ |  | 1,889    |  | 19.00         | % |  | $ |  | 2,478    |  | 16.30         | % |  | $ |  | 2,833        |  | 13.70         | % |  | $ |  | 874      |  | 13.20         | % |  | $ |  | 1,148    | 
|Real estate-           |  |   |  |          |  |               |   |  |   |  |          |  |               |   |  |   |  |              |  |               |   |  |   |  |          |  |               |   |  |   |  |          | 
|Construction           |  |   |  | 4,096    |  | 28.10         | % |  |   |  | 2,005    |  | 29.30         | % |  |   |  | 767          |  | 21.60         | % |  |   |  | 475      |  | 11.90         | % |  |   |  | 286      | 
|Real estate-           |  |   |  |          |  |               |   |  |   |  |          |  |               |   |  |   |  |              |  |               |   |  |   |  |          |  |               |   |  |   |  |          | 
|Commercial/            |  |   |  |          |  |               |   |  |   |  |          |  |               |   |  |   |  |              |  |               |   |  |   |  |          |  |               |   |  |   |  |          | 
|Residential            |  |   |  | 3,820    |  | 43.90         | % |  |   |  | 4,148    |  | 45.40         | % |  |   |  | 3,171        |  | 54.00         | % |  |   |  | 3,038    |  | 62.70         | % |  |   |  | 2,374    | 
|Consumer and Other     |  |   |  | 1,072    |  | 9.00          | % |  |   |  | 718      |  | 9.00          | % |  |   |  | 435          |  | 10.70         | % |  |   |  | 718      |  | 12.20         | % |  |   |  | 822      | 
|Unallocated            |  |   |  | -        |  |               |   |  |   |  | 992      |  |               |   |  |   |  | 1,965        |  |               |   |  |   |  | 361      |  |               |   |  |   |  | 208      | 
|                       |  |  
|Total                  |  | $ |  | 10,877   |  | 100.00        | % |  | $ |  | 10,341   |  | 100.00        | % |  | $ |  | 9,171        |  | 100.00        | % |  | $ |  | 5,466    |  | 100.00        | % |  | $ |  | 4,838    | 
|                       |  |  

28

---

As of December 31, 2006, PremierWest's specific allocation of its allowance for loan losses related to loans on nonaccrual 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 nonaccrual 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 provides for coverage of credit losses inherent in the loan portfolio that are not provided for from either the formula or specific allocation components of the Banks allowance for loan loss model and acknowledges the inherent imprecision of loss prediction models in general. PremierWests allowance for loan loss policy allows for the unallocated portion to be within an acceptable range not to exceed 7.50% of the calculated book allowance for loan losses. During 2004 and 2005 the unallocated portion of the allowance exceeded this range; however, it was considered reasonable based on the uncertain effects upon the loan portfolio during the transition period for the Banks geographic expansion into California and, more specifically, during the period of transition and assimilation of its acquisition of Mid Valley Bank.

Even with a diligent assessment by management, there can be no assurance regarding the actual amount of charge-offs that will be incurred in the future.



|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, money market 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.

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, |  |   |  |          |  |         |   |  |   |  |         | 
|------------------------------- |  | - |  | ------- |  | - |  | -------- |  | ------- | - |  | - |  | ------------------------ |  | - |  | -------- |  | ------- | - |  | - |  | ------- | 
|                                |  |  
|                                |  |   |  |         |  |   |  | 2006     |  |         |   |  |   |  |                          |  |   |  | 2005     |  |         |   |  |   |  |         | 
|                                |  |  
|                                |  |   |  | Average |  |   |  | Interest |  | Average |   |  |   |  | Average                  |  |   |  | Interest |  | Average |   |  |   |  | Average | 
|(dollars in thousands)          |  |   |  | Balance |  |   |  | Expense  |  | Rate    |   |  |   |  | Balance                  |  |   |  | Expense  |  | Rate    |   |  |   |  | Balance | 
|                                |  |  
|Savings, money market and       |  |   |  |         |  |   |  |          |  |         |   |  |   |  |                          |  |   |  |          |  |         |   |  |   |  |         | 
|interest bearing demand         |  | $ |  | 342,221 |  | $ |  | 5,896    |  | 1.72    | % |  | $ |  | 339,480                  |  | $ |  | 3,662    |  | 1.08    | % |  | $ |  | 299,460 | 
|                               
|Time deposits                   |  |   |  | 248,887 |  |   |  | 10,035   |  | 4.03    | % |  |   |  | 198,833                  |  |   |  | 5,817    |  | 2.93    | % |  |   |  | 179,305 | 
|                                |  |   |  |         |  |   |  |          |  |         |   | 
|                               
|Total interest-bearing deposits |  |   |  | 591,108 |  | $ |  | 15,931   |  | 2.70    | % |  |   |  | 538,313                  |  | $ |  | 9,479    |  | 1.76    | % |  |   |  | 478,765 | 
|                                |  |   |  |         |  |   |  |          |  |         |   | 
|Noninterest-bearing deposits    |  |   |  | 198,295 |  |   |  |          |  |         |   |  |   |  | 198,777                  |  |   |  |          |  |         |   |  |   |  | 168,493 | 
|                                |  |   |  |         |  |   |  |          |  |         |   | 
|Total interest-bearing and      |  |   |  |         |  |   |  |          |  |         |   |  |   |  |                          |  |   |  |          |  |         |   |  |   |  |         | 
|noninterest-bearing deposits    |  | $ |  | 789,403 |  |   |  |          |  |         |   |  | $ |  | 737,090                  |  |   |  |          |  |         |   |  | $ |  | 647,258 | 
|                                |  |   |  |         |  |   |  |          |  |         |   | 

Total deposits grew $110.9 million during 2006, reaching $879.4 million at December 31, 2006 compared to $768.4 million at December 31, 2005, a 14.4% increase. At December 31, 2005, total deposits were $768.4 million, an increase of $79.4 million or 11.5%, from total deposits of $689.0 million at December 31, 2004. During 2006, noninterest-bearing deposits declined $9.3 million, from $208.8 million at December 31, 2005 to $199.5 million at December 31, 2006, a 4.5% decrease. At December 31, 2006, core deposits, which consist of all demand deposit accounts, savings accounts, and certificates of deposit less than $100,000, accounted for 88.9% of total deposits, down from 90.2% as of December 31, 2005.

Interest-bearing deposits consist of money market, NOW, 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, 2006, total interest-bearing deposit accounts were $679.9 million, an increase of $120.3 million, or 21.5%, from December 31, 2005.

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Management may from time-to-time rely on brokered deposits with maturities that are typically less than one year as a short-term funding source for loan growth At December 31, 2006, time certificates of deposits of $100,000 and over totaled $103.0 million, or 11.7% of total outstanding deposits, compared to $75 million, or 9.76%, of total outstanding deposits at December 31, 2005, and $60.9 million, or 8.83%, of total outstanding deposits at December 31, 2004. The following table sets forth, by time remaining to maturity, time certificates of deposit accounts outstanding at December 31, 2006:

|                                     |  |   |  | Time Deposits of |  |            |   |  | Time Deposits Less | 
|------------------------------------ |  | - |  | ---------------- |  | ---------- | - |  | ------------------ | 
|                                     |  |   |  | $100,000 or More |  |            |   |  | Than $100,000      | 
|                                     |  |  
|(dollars in thousands)               |  |   |  | Amount           |  | Percentage |   |  |                    | 
|                                     |  |  
|                                    
|Three months or less                 |  | $ |  | 22,694           |  | 22.03      | % |  | $                  | 
|Over three months through six months |  |   |  | 11,545           |  | 11.21      | % |  |                    | 
|Over six months through 12 months    |  |   |  | 27,375           |  | 26.58      | % |  |                    | 
|Over 12 months                       |  |   |  | 41,379           |  | 40.18      | % |  |                    | 
|                                     |  |  
|                                    
|Total                                |  | $ |  | 102,993          |  | 100.0      | % |  | $                  | 
|                                     |  |  

Short-term and Long-term Borrowings and Other Contractual Obligations

The following table sets forth certain information with respect to PremierWest's short-term borrowings from Federal Home Loan Bank (FHLB) Cash Management Advances (CMA) and federal funds purchased:

|                                    |  |   |  |          |   |  |           |   |  |   |  | Years Ended December 31, |   |  |           |   |   |          | 
|----------------------------------- |  | - |  | -------- | - |  | --------- | - |  | - |  | ------------------------ | - |  | --------- | - | - | -------- | 
|                                    |  |  
|                                    |  |   |  | 2006     |   |  |           |   |  |   |  | 2005                     |   |  |           |   |   |          | 
|                                    |  |  
|                                    |  |   |  | FHLB     |   |  | Federal   |   |  |   |  | FHLB                     |   |  | Federal   |   |   | FHLB     | 
|                                    |  |   |  | CMA      |   |  | Funds     |   |  |   |  | CMA                      |   |  | Funds     |   |   | CMA      | 
|                                    |  |   |  | Advances |   |  | Purchased |   |  |   |  | Advances                 |   |  | Purchased |   |   | Advances | 
|                                    |  |  
|(dollars in thousands)              |  |   |  |          |   |  |           |   |  |   |  |                          |   |  |           |   |   |          | 
|                                   
|Amount outstanding at end of period |  | $ |  | 5,000    |   |  | 6,835     |   |  | $ |  | -                        |   |  | 16,430    |   | $ | -        | 
|Weighted average interest rate at   |  |   |  |          |   |  |           |   |  |   |  |                          |   |  |           |   |   |          | 
|end of period                       |  |   |  | 5.63     | % |  | 6.21      | % |  |   |  | n/a                      |   |  | 5.07      | % |   | n/a      | 
|Maximum amount outstanding at any   |  |   |  |          |   |  |           |   |  |   |  |                          |   |  |           |   |   |          | 
|month-end during the year           |  | $ |  | 35,000   |   |  | 33,551    |   |  | $ |  | 25,000                   |   |  | 16,430    |   | $ | -        | 
|Average amount outstanding during   |  |   |  |          |   |  |           |   |  |   |  |                          |   |  |           |   |   |          | 
|the period                          |  | $ |  | 24,973   |   |  | 16,236    |   |  | $ |  | 6,901                    |   |  | 1,822     |   | $ | -        | 
|Average weighted interest rate      |  |   |  |          |   |  |           |   |  |   |  |                          |   |  |           |   |   |          | 
|during the period                   |  |   |  | 5.31     | % |  | 5.46      | % |  |   |  | 3.36                     | % |  | 4.39      | % |   | n/a      | 

PremierWest had long-term borrowings outstanding with the Federal Home Loan Bank of Seattle (FHLB) totaling $1.1 million, $1.8 million and $2.4 million as of December 31, 2006, 2005 and 2004, respectively. The Bank makes monthly principal and interest payments on the long-term borrowings which mature between 2007 and 2014 and bear interest at rates ranging from 5.82% to 7.63% . The Bank also participates in the Cash Management Advance Program (CMA) with the FHLB. CMA borrowings outstanding were $5.0 million at December 31, 2006 and there were no borrowings outstanding at December 31, 2005. During fiscal year 2004, PremierWest did not require the use of short-term borrowings as a source of funding. At December 31, 2006, the Bank had total FHLB borrowings of $6.1 million against an available collateral base of approximately $40.0 million. All outstanding borrowings with the FHLB are collateralized by a blanket pledge agreement principally covering loans in the Bank's portfolio that are secured by 1stliens against 1-4 family or multi-family residential properties as well as the Bank's FHLB stock and potentially any funds, investment securities or loans on deposit with the FHLB.

At December 31, 2006, two wholly-owned special purpose subsidiary trusts established by PremierWest Bancorp had issued $15.5 million of pooled trust preferred securities. Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the indentures. The trusts used the net proceeds from the offering to purchase a like amount of Junior Subordinated Debentures (the "Debentures") of the Company. The Debentures are the sole assets of the trusts. The Company's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon

30

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earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date.

By issuing Trust Preferred Securities the Company is able to secure a long-term source of borrowed funds in support of its growth needs with a debt instrument that is includable as capital for regulatory purposes in the calculation of its risk based capital ratios. Under current Federal Reserve Bank policy, all of the outstanding debentures, subject to certain limitations, have been included in the determination of Tier I capital for regulatory purposes.

The following table is a summary of current trust preferred securities at December 31, 2006.

|                               |  |               |  |   |  | Issue     |  |           |  |      |   |  |               |  | Redemption   
|------------------------------ |  | ------------- |  | - |  | --------- |  | --------- |  | ---- | - |  | ------------- |  | -------------
|Trust Name                     |  | Issue Date    |  |   |  | Amount    |  | Rate Type |  | Rate |   |  | Maturity Date |  | Date         
|                              
|PremierWest Statutory Trust I  |  | December 2004 |  | $ |  | 7,732,000 |  | Fixed (1) |  | 5.65 | % |  | December 2034 |  | December 2009
|PremierWest Statutory Trust II |  | December 2004 |  | $ |  | 7,732,000 |  | Fixed (2) |  | 5.65 | % |  | March 2035    |  | March 2010   

(1) PremierWest Statutory Trust I bears interest at the fixed rate of 5.65% until December 2009 at which time it converts to the variable rate of LIBOR +1.75%, adjusted quarterly, through the maturity date.
(2) PremierWest Statutory Trust II bears interest at the fixed rate of 5.65% until March 2010 at which time it converts to the variable rate of LIBOR +1.79%, adjusted quarterly, through the maturity date.

PremierWest is a party to numerous contractual financial obligations including repayment of borrowings, operating lease payments and commitments to extend credit under off-balance sheet arrangements. The scheduled repayment of long-term borrowings and other contractual obligations is as follows (in thousands):

|                               |  |   |  |        |  |   |  | Payments due by period |  |  |   |  |           | 
|------------------------------ |  | - |  | ------ |  | - |  | ---------------------- |  |  | - |  | --------- | 
|                               |  |  
|Contractual Obligations        |  |   |  | Total  |  |   |  | < 1 year               |  |  |   |  | 1-3 years | 
|                              
|Long-term borrowings           |  | $ |  | 1,141  |  | $ |  | 633                    |  |  | $ |  | 480       | 
|Operating lease obligations    |  | $ |  | 6,399  |  |   |  | 685                    |  |  |   |  | 1,339     | 
|Junior subordinated debentures |  | $ |  | 15,464 |  |   |  | -                      |  |  |   |  | -         | 
|                               |  |  
|Total                          |  | $ |  | 23,004 |  | $ |  | 1,318                  |  |  | $ |  | 1,819     | 
|                               |  |  

|Off-Balance Sheet Arrangements
|------------------------------

Significant off-balance sheet commitments at December 31, 2006 include commitments to extend credit of $175.0 million and standby letters of credit of $10.2 million. See Note 14 on page F-29 of the Notes to Consolidated Financial Statements included with this report for a discussion on the nature, business purpose and importance of off-balance sheet arrangements.

LIQUIDITY AND CAPITAL RESOURCES; REGULATORY CAPITAL

Shareholders' equity was $116.3 million at December 31, 2006, an increase of $13.5 million or 13.1% from December 31, 2005. The increase reflects comprehensive income of $14.6 million, the exercise of stock options and related tax benefit of $532,000 and stock-based compensation expense of $226,000. This was offset by the declaration of preferred and common stock dividends of $275,000 and $1,621,000, respectively, and cash paid for fractional shares resulting from a 5% stock dividend.

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, 2006, unused and available lines of credit totaled $14.0 million from FHLB's Cash Management Advance Program and $113.0 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

31

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investments, market competition, economic conditions, and other factors. Liquid asset balances include cash, amounts due from other banks, federal funds sold, and investment securities available-for-sale. At December 31, 2006, these liquid assets totaled $36.8 million or 3.55% of total assets as compared to $33.8 million or 3.70% of total assets at December 31, 2005. Total liquid assets of $33.8 million as of December 31, 2005, compare to $43.0 million or 5.34% of total assets at December 31, 2004. Our liquidity continues to tighten as loan volumes have grown faster than our ability to build deposits as our preferred source of funding. Further, our securities portfolio has declined from calls and maturities to a point where 100% of our securities portfolio is committed towards pledging requirements for collateralizing public funds deposits that exceed the FDIC insurance limits. It is expected that continued strong loan growth and managements reluctance to attract higher cost transactional deposits will result in the continued reliance on short-term borrowings to augment core deposits as a source of funding. Management continues to focus on strategies to grow the Banks core deposit base, while exploring alternate wholesale funding avenues. The Bank maintains contingency plans to address its liquidity needs including borrowing capacity through the Federal Home Loan Bank and other correspondent banks to support its funding needs that are not covered by our deposit base. Further, management has elected to pursue strategies for building core deposits rather than aggressively attracting higher cost certificates of deposit either through more aggressive pricing or through brokered sources.

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, 2006. The statement of cash flows includes operating, investing, and financing categories. Operating activities include net income of $14.6 million and $2.1 million in adjustments for non-cash items and changes in cash due to changes in certain assets and liabilities. Investing activities consist primarily of proceeds from sold or matured securities and purchases of securities, the impact of the net growth in loans, and purchases of premises and equipment. Financing activities present the cash flows associated with the change in deposit accounts, changes in long-term and other borrowings and various shareholder transactions.

At December 31, 2006, PremierWest had outstanding unfunded lending commitments of $185.2 million. Nearly all of these commitments represented unused portions of credit lines available to businesses. Many of these credit lines are not expected to 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 table reflects PremierWest Bank's various capital ratios at December 31, as compared to regulatory minimums for capital adequacy purposes:

|                                |  | 2006   |   |  | 2005   |   |  |          |  | Minimum to be            |  |  |  |  | Minimum to be      | 
|------------------------------- |  | ------ | - |  | ------ | - |  | -------- |  | ------------------------ |  |  |  |  | ------------------ | 
|                                |  | Actual |   |  | Actual |   |  |          |  | Adequately Capitalized |  |  |  |  | Well-Capitalized | 
|                                |  |       
|                               
|Total risk-based capital ratio  |  | 11.49  | % |  | 11.36  | % |  | > 8.00 % |  | > 10.00 %               
|Tier 1 risk-based capital ratio |  | 10.42  | % |  | 10.19  | % |  | > 4.00 % |  | > 6.00 %                
|Leverage ratio                  |  | 10.79  | % |  | 10.27  | % |  | > 4.00 % |  | > 5.00 %                

The various capital ratios for PremierWest Bancorp at December 31, compared to regulatory minimums for capital adequacy purposes are as follows:

|                                |  | 2006   |   |  | 2005   |   |  |          |  | Minimum to be            | 
|------------------------------- |  | ------ | - |  | ------ | - |  | -------- |  | ------------------------ | 
|                                |  | Actual |   |  | Actual |   |  |          |  | Adequately Capitalized | 
|                                |  |       
|                               
|Total risk-based capital ratio  |  | 11.78  | % |  | 11.85  | % |  | > 8.00 %
|Tier 1 risk-based capital ratio |  | 10.71  | % |  | 10.68  | % |  | > 4.00 %
|Leverage ratio                  |  | 11.08  | % |  | 10.76  | % |  | > 4.00 %

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|RECENTLY ISSUED ACCOUNTING STANDARDS
|------------------------------------

In February 2006, the FASB issued SFAS No. 155 (SFAS 155), Accounting for Certain Hybrid Financial Instruments which amends SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 simplifies the accounting for certain derivative embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. Management does not expect the adoption of SFAS 155 to have a material impact on the consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156 (SFAS 156), Accounting for Servicing of Financial Assets which amends SFAS No. 140. SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS 156 is effective for fiscal years beginning after September 15, 2006. Management does not expect the adoption of SFAS 156 to have a material impact on the consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Management does not expect the adoption of FIN 48 to have a material impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management does not expect the adoption of SFAS 157 to have a material impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Additionally, SFAS 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The new reporting requirements and related new footnote disclosure rules of SFAS 158 are effective for fiscal years ending after December 15, 2006. The new measurement date requirement applies for fiscal years ending after December 15, 2008. The adoption of this standard did not have a material impact on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure financial instruments and certain other financial assets and financial liabilities at fair value. This Statement is effective for fiscal years beginning after November 15, 2007. Management is currently assessing the impact this Statement will have on its consolidated financial statements and results of operations.

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ITEM7A. QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKETRISK

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, 2006, based upon the contractual maturity or contractual repricing dates of loans and the contractual maturities of time deposits and borrowings. 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.

|(dollars in thousands)                  |  |   |  |              |   |  |   |  | BY REPRICING INTERVAL |   |  |   |  |             |   |  |   |  |             
|--------------------------------------- |  | - |  | ------------ | - |  | - |  | --------------------- | - |  | - |  | ----------- | - |  | - |  | ------------
|                                        |  |   |  |             
|                                        |  |   |  | 0  3 Months |   |  |   |  | 4  12 Months         |   |  |   |  | 1  5 Years |   |  |   |  | Over 5 Years
|                                        |  |  
|ASSETS                                  |  |   |  |              |   |  |   |  |                       |   |  |   |  |             |   |  |   |  |             
|Interest-earning assets:                |  |   |  |              |   |  |   |  |                       |   |  |   |  |             |   |  |   |  |             
|Federal funds sold and interest-earning |  |   |  |              |   |  |   |  |                       |   |  |   |  |             |   |  |   |  |             
|deposits                                |  | $ |  | 7            |   |  | $ |  | -                     |   |  | $ |  | -           |   |  | $ |  | -           
|Investment Securities                   |  |   |  | 574          |   |  |   |  | 1,606                 |   |  |   |  | 2,318       |   |  |   |  | 2,820       
|Loans                                   |  |   |  | 539,994      |   |  |   |  | 190,419               |   |  |   |  | 154,473     |   |  |   |  | 37,801      
|                                        |  |  
|                                       
|Total                                   |  | $ |  | 540,575      |   |  | $ |  | 192,025               |   |  | $ |  | 156,791     |   |  | $ |  | 40,621      
|                                        |  |  
|LIABILITIES                             |  |   |  |              |   |  |   |  |                       |   |  |   |  |             |   |  |   |  |             
|Interest-bearing liabilities:           |  |   |  |              |   |  |   |  |                       |   |  |   |  |             |   |  |   |  |             
|Interest-bearing checking and savings   |  | $ |  | 169,621      |   |  | $ |  | 68,248                |   |  | $ |  | 145,858     |   |  | $ |  | 23,832      
|Time deposits                           |  |   |  | 60,327       |   |  |   |  | 109,421               |   |  |   |  | 102,351     |   |  |   |  | 230         
|Borrowings                              |  |   |  | 11,995       |   |  |   |  | 486                   |   |  |   |  | 15,942      |   |  |   |  | 17          
|                                        |  |  
|                                       
|Total                                   |  | $ |  | 241,943      |   |  | $ |  | 178,155               |   |  | $ |  | 264,151     |   |  | $ |  | 24,079      
|                                        |  |  
|                                       
|Interest rate sensitivity gap           |  | $ |  | 298,632      |   |  | $ |  | 13,870                |   |  | $ |  | (107,360    | ) |  | $ |  | 16,542      
|                                        |  |  
|Cumulative                              |  | $ |  | 298,632      |   |  | $ |  | 312,502               |   |  | $ |  | 205,142     |   |  | $ |  | 221,684     
|                                        |  |   |  |             
|                                       
|Cumulative gap as a % of earning-assets |  |   |  | 32.1         | % |  |   |  | 33.6                  | % |  |   |  | 22.1        | % |  |   |  | 23.8        
|                                        |  |   |  |             

For purposes of the gap analysis, loans are not reduced by the allowance for loan losses and nonperforming loans. Unearned discounts and deferred loan fees are also 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

34

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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 50 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, 2006 data, estimates that if a decline of 200 basis points occurs, net interest income could be unfavorably affected up to approximately 8.94%, while a similar increase in market rates would have a favorable impact of approximately 10.56% . 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      |   |  |           |  
|------------------------------- |  | - |  | ------------------- | - |  | -------- | - |  | --------- | -
|                                |  |   |  | Net Interest Income |   |  | Interest |   |  | Return on |  
|                                |  |   |  | (in thousands)      |   |  | Margin   |   |  | Equity    |  
|                                |  |  
|                               
|As of December 31, 2006,        |  |   |  |                     |   |  |          |   |  |           |  
|the prime rate was 8.25%        |  | $ |  | -                   |   |  | 6.25     | % |  | 13.26     | %
|                                |  |  
|                               
|Prime rate increase of:         |  |   |  |                     |   |  |          |   |  |           |  
|200 basis points to 10.25%      |  | $ |  | 5,718               |   |  | 6.91     | % |  | 18.44     | %
|100 basis points to 9.25%       |  | $ |  | 2,937               |   |  | 6.59     | % |  | 15.92     | %
|                               
|Prime rate decrease of:         |  |   |  |                     |   |  |          |   |  |           |  
|200 basis points to 6.25%       |  | $ |  | (4,842              | ) |  | 5.69     | % |  | 8.88      | %
|100 basis points to 7.25%       |  | $ |  | (2,738              | ) |  | 5.94     | % |  | 10.78     | %
|                               
|(1) Tax adjusted at a 38% rate. |  |   |  |                     |   |  |          |   |  |           |  

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

35

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements called for by this item are included in this report beginning on page F-3.

The following tables set forth the Company's unaudited consolidated financial data regarding operations for each quarter of 2006 and 2005. 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.

|                                              |  |   |  | 2006         
|--------------------------------------------- |  | - |  | -------------
|                                              |  |  
|                                              |  |   |  |              
|(dollars in thousands, except per share data) |  |   |  | First Quarter
|                                              |  |  
|                                             
|INCOME STATEMENT DATA                         |  |   |  |              
|Total interest income                         |  | $ |  | 16,700       
|Total interest expense                        |  |   |  | 3,724        
|                                              |  |  
|Net interest income                           |  |   |  | 12,976       
|Provision for loan losses                     |  |   |  | 300          
|                                              |  |  
|Net interest income after                     |  |   |  |              
|provision for loan losses                     |  |   |  | 12,676       
|Noninterest income                            |  |   |  | 1,834        
|Noninterest expense                           |  |   |  | 9,334        
|                                              |  |  
|Income before income taxes                    |  |   |  | 5,176        
|Provision for income taxes                    |  |   |  | 1,890        
|                                              |  |  
|Net income                                    |  | $ |  | 3,286        
|                                              |  |  
|                                             
|Basic earnings per common share               |  | $ |  | 0.21         
|                                              |  |  
|Diluted earnings per common share             |  | $ |  | 0.19         
|                                              |  |  
|                                             
|                                              |  |   |  | 2005         
|                                              |  |  
|                                              |  |   |  |              
|(dollars in thousands, except per share data) |  |   |  | First Quarter
|                                              |  |  
|INCOME STATEMENT DATA                         |  |   |  |              
|Total interest income                         |  | $ |  | 12,496       
|Total interest expense                        |  |   |  | 2,195        
|                                              |  |  
|Net interest income                           |  |   |  | 10,301       
|Provision for loan losses                     |  |   |  | 150          
|                                              |  |  
|Net interest income after                     |  |   |  |              
|provision for loan losses                     |  |   |  | 10,151       
|Noninterest income                            |  |   |  | 1,759        
|Noninterest expense                           |  |   |  | 7,870        
|                                              |  |  
|Income before income taxes                    |  |   |  | 4,040        
|Provision for income taxes                    |  |   |  | 1,393        
|                                              |  |  
|Net income                                    |  | $ |  | 2,647        
|                                              |  |  
|                                             
|Basic earnings per common share               |  | $ |  | 0.16         
|                                              |  |  
|Diluted earnings per common share             |  | $ |  | 0.15         
|                                              |  |  

36

---

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
     None.

ITEM 9A.  CONTROLS AND PROCEDURES

MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such term is defined in Exchange Act Rules 13a -15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal controls over financial reporting were effective as of December 31, 2006.

Management's assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2006 has been audited by Moss Adams, LLP, an independent registered public accounting firm, as stated in their report which is included herein.

INTERNAL CONTROL OVER FINANCIAL REPORTING

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



|DISCLOSURE CONTROLS AND PROCEDURES
|----------------------------------

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



|ITEM 9B.
|--------



|OTHER INFORMATION
|-----------------



|None.
|-----

37

---



|PART III
|--------

ITEM 10.       DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information provided in response to this Item is incorporated by reference to the Definitive Proxy Statement on Schedule 14A for the Company's 2007 Annual Meeting of Shareholders, which the Company expects first to be sent or given to security holders on or about April 10, 2007.



|ITEM 11.      EXECUTIVE COMPENSATION
|------------------------------------

The information provided in response to this Item is incorporated by reference to the Definitive Proxy Statement on Schedule 14A for the Company's 2007 Annual Meeting of Shareholders, which the Company expects first to be sent or given to security holders on or about April 10, 2007.

|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- |  | --------------------------------------------------------------
|         |  | AND RELATED STOCKHOLDER MATTERS                               

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 2007 Annual Meeting of Shareholders, which the Company expects first to be sent or given to security holders on or about April 10, 2007.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information provided in response to this Item is incorporated by reference to the Definitive Proxy Statement on Schedule 14A for the Company's 2007 Annual Meeting of Shareholders, which the Company expects first to be sent or given to security holders on or about April 10, 2007.

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information provided in response to this item is incorporated by reference to the Definitive Proxy Statement on Schedule 14A for the Company's 2007 Annual Meeting of Shareholders, which the Company expects first to be sent or given to security holders on or about April 10, 2007.

38

---

|       |   |          |                       |  | PART IV                                                                                     
|------ | - | -------- | --------------------- |  | --------------------------------------------------------------------------------------------
|      
|       |   | ITEM 15. |                       |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                  
|      
|(a) (1 | ) |          | Financial Statements:
|       |   |          |                       |  | The consolidated financial statements for the fiscal years ended December 31, 2006, 2005,   
|       |   |          |                       |  | and 2004 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 1                                                                                                               
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2     | Amended and Restated Bylaws of PremierWest Bancorp 2                                                                                                             
|4.1     | Specimen Stock Certificate 3                                                                                                                                     
|4.2     | Series A Preferred Stock Certificate Designation of the Registrant 1                                                                                             
|10.1    | Amendment, dated December 27, 2004, to Employment Agreement, dated July 29, 2004, between John L. Anhorn and PremierWest Bancorp 4 6 A +                         
|10.2    | Amendment, dated December 27, 2004, to Employment Agreement, dated July 29, 2004, between Tom Anderson and PremierWest Bancorp 4 6 B +                           
|10.3    | Amendment, dated December 27, 2004, to Supplemental Executive Retirement Plan Agreement, dated July 29, 2004, between John L. Anhorn and PremierWest Bank 4 6 C +
|10.4    | Amendment, dated December 27, 2004, to Supplemental Executive Retirement Plan Agreement, dated July 29, 2004, between Tom Anderson and PremierWest Bank 4 6 D +  
|10.5    | Amendment, dated July 29, 2004, to Executive Survivor Income Agreement dated, November 12, 2002, between John A. Anhorn and PremierWest Bank 4 E +               
|10.6    | Amendment, dated July 29, 2004, to Executive Survivor Income Agreement dated, November 12, 2002, between Tom Anderson and PremierWest Bank 4 F +                 
|10.7    | 2005 Executive Deferred Compensation Agreement between John A. Anhorn and PremierWest Bank dated December 27, 2004 6 G +                                         
|10.8    | Continuing Benefits Agreement between Thomas Becker and PremierWest Bank dated December 27, 20046 H +                                                            
|10.9    | 2005 Director Deferred Compensation Agreement between Thomas Becker and PremierWest Bank dated December 27, 2004 6 H +                                           
|10.10   | 1992 Combined Incentive and Non-Qualified Stock Option Plan of Bank of Southern Oregon 3                                                                         
|10.11   | United Bancorp Stock Option Plan, as amended 5                                                                                                                   
|10.12   | PremierWest Bancorp Stock Option Plan 4                                                                                                                          
|10.12.1 | Non Qualified Stock Option Agreement 8                                                                                                                           
|10.12.2 | Incentive Stock Option Agreement 8                                                                                                                               
|10.13   | 2006 Bonus Program7                                                                                                                                              
|10.14   | Summary of 2006 Director Compensation 8                                                                                                                          
|10.15   | Employment Agreement dated February 1, 2006 between James M. Ford and PremierWest Bank 9 +                                                                       
|21.1    | Subsidiaries of PremierWest Bancorp 1                                                                                                                            
|23.1    | Consent of Moss Adams LLP relating to the audited financial statements of the registrant for the period ending December 31, 2006, 2005 and 2004                  
|31.1    | Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002                          
|31.2    | Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002                          
|       

39

---

|32.1 | Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|32.2 | Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350                                                                                                             
|    
|1    | Incorporated by reference to Registrant's statement on Form S-4 (File NO. 333-110842).                                                                                                                                                                                      
|2    | Incorporated by reference to Registrant's quarterly report on Form 10-Q for the period ended September 30, 2003.                                                                                                                                                            
|3    | Incorporated by reference to Registrant's statement on Form S-4 (File No. 333-96209).                                                                                                                                                                                       
|4    | Incorporated by reference to the Registrant's quarterly report on form 10-Q for the period ended September 30, 2004.                                                                                                                                                        
|5    | Incorporated by reference to the registration statement on Form S-8 (File No. 333-40886).                                                                                                                                                                                   
|6    | Incorporated by reference to the Registrant's report on Form 8-K filed December 23, 2005.                                                                                                                                                                                   
|7    | Incorporated by reference to the Registrant's report on Form 8-K filed January 3, 2006.                                                                                                                                                                                     
|8    | Incorporated by reference to the Registrant's annual report on form 10-K for the year ended December 31, 2005.                                                                                                                                                              
|9    | Incorporated by reference to the Registrant's report on Form 8-K filed March 22, 2006.                                                                                                                                                                                      
|    
|A    | A substantially identical agreement exists between PremierWest Bancorp and Richard Hieb, except that Mr. Hieb's agreement provides for a base salary of $150,000.                                                                                                           
|B    | A substantially identical agreement exists between PremierWest Bancorp and James Earley, except that Mr. Earley's agreement provides for a base salary of $110,000.                                                                                                         
|C    | A substantially identical agreement exists between PremierWest Bancorp and Richard Hieb, except that Mr. Hieb's agreement provides for retirement pay of 42% of base salary.                                                                                                
|D    | A substantially identical agreement exists between PremierWest Bancorp and James Earley, except that Mr. Earley's agreement provides for retirement pay of 40% of base salary.                                                                                              
|E    | A substantially identical agreement exists between PremierWest Bancorp and Richard Hieb, except that Mr. Hieb's agreement provides for a pre-retirement death benefit of $150,000.                                                                                          
|F    | A substantially identical agreement exists between PremierWest Bancorp and James Earley, except that Mr. Earley's agreement provides for a pre- and post-retirement death benefits of $150,000 and $150,000 respectively.                                                   
|G    | Substantially identical agreements dated December 27, 2004 were entered into by and between PremierWest Bank and the following executives: Richard Hieb, Tom Anderson and Jim Earley.                                                                                       
|H    | Substantially identical agreements dated December 27, 2004 were entered into by and between PremierWest Bank and the following directors: John B. Dickerson, John A. Duke, Dennis N. Hoffbuhr, Patrick G. Huycke, Brian Pargeter, James L. Patterson, and Rickar D. Watkins.
|    

+Management contract or compensatory plan or arrangement.

40

---



|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 8, 2007
|--------------------------------------- |  | ------------------ |  | -------------------
|                                        |  |                    |  |                    
|John L. Anhorn, 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 8, 2007
|--- |  | ----------------------------------------------------- |  | -------------------
|    |  |                                                      
|    |  | John Duke, Director                                   |  |                    
|   
|By: |  | /s/ Dennis Hoffbuhr                                   |  | Date: March 8, 2007
|    |  |                                                       |  |                    
|    |  | Dennis Hoffbuhr, Director                             |  |                    
|   
|By: |  | /s/ Rickar Watkins                                    |  | Date: March 8, 2007
|    |  |                                                      
|    |  | Rickar Watkins, Director                              |  |                    
|   
|By: |  | /s/ James Patterson                                   |  | Date: March 8, 2007
|    |  |                                                       |  |                    
|    |  | James Patterson, Director                             |  |                    
|   
|By: |  | /s/ John L. Anhorn                                    |  | Date: March 8, 2007
|    |  |                                                       |  |                    
|    |  | John L. Anhorn, Director and                          |  |                    
|    |  | Chief Executive Officer                               |  |                    
|   
|By: |  | /s/ Richard R. Hieb                                   |  | Date: March 8, 2007
|    |  |                                                       |  |                    
|    |  | Richard R. Hieb, Director and Chief Operating Officer |  |                    
|   
|By: |  | /s/ Tom Anderson                                      |  | Date: March 8, 2007
|    |  |                                                       |  |                    
|    |  | Tom Anderson, Chief Financial Officer, and            |  |                    
|    |  | Principal Accounting Officer                          |  |                    

41

---



|Signatures- (continued)
|-----------------------

|By: |  | /s/ James M. Ford                     |  | Date: March 8, 2007
|--- |  | ------------------------------------- |  | -------------------
|    |  |                                       |  |                    
|    |  | James M. Ford, Director and President |  |                    
|   
|By: |  | /s/ Tom Becker                        |  | Date: March 8, 2007
|    |  |                                       |  |                    
|    |  | Tom Becker, Director                  |  |                    
|   
|By: |  | /s/ Brian Pargeter                    |  | Date: March 8, 2007
|    |  |                                       |  |                    
|    |  | Brian Pargeter, Director              |  |                    
|   
|By: |  | /s/ Patrick Huycke                    |  | Date: March 8, 2007
|    |  |                                       |  |                    
|    |  | Patrick Huycke, Director              |  |                    
|   
|By: |  |                                       |  | Date: March 8, 2007
|    |  |                                       |  |                    
|    |  | John Dickerson, Director              |  |                    

42

---

PREMIERWEST BANCORP AND SUBSIDIARY

INDEPENDENT AUDITORS REPORT AND

CONSOLIDATED FINANCIAL STATEMENTS

__________

DECEMBER 31, 2006, 2005, AND 2004

---

|CONTENTS                                                               |  |              |  |  |     | 
|---------------------------------------------------------------------- |  | ------------ |  |  | --- | 
|                                                                      
|                                                                       |  | PAGE         | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC                                |  |              |  |  |     | 
|ACCOUNTING FIRM                                                        |  | F-1
	- 
	F-2
|                                                                      
|CONSOLIDATED FINANCIAL STATEMENTS                                      |  |              |  |  |     | 
|Balance sheets                                                         |  |              |  |  | F-3 | 
|Statements of income                                                   |  |              |  |  | F-4 | 
|Statements of changes in shareholders equity and comprehensive income |  |              |  |  | F-5 | 
|Statements of cash flows                                               |  | F-6
	- 
	F-7
|Notes to financial statements                                          |  | F-8 - F-42  

Note: These consolidated financial statements have not been reviewed, or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and ShareholdersPremierWest Bancorp and Subsidiary

We have audited the accompanying consolidated statement of financial condition of PremierWest Bancorp and subsidiary (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders' equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2006. We also have audited management's assessment included in the accompanying Management Report on Internal Control over Financial Reporting that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management's assessment, and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

F-1

---

Report of Independent Registered Public Accounting Firm 
Page Two

The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PremierWest Bancorp and subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management's assessment that PremierWest Bancorp maintained effective internal control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, PremierWest Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

F-2

---

PREMIERWEST BANCORP AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS

|A S S E T S                                              
|---------------------------------------------------------
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|Cash and cash equivalents:                               
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|Interest-bearing deposits with Federal Home Loa n Bank   
|Investments:                                             
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|Mortgage loans held-for-sale                             
|Loans, net of allowance for loan losses and              
|                                                         
|                                                         
|                                                         
|Premises and equipment, net of accumulated               
|                                                         
|Core deposit in tangibles, net of amortization           
|Goodwill                                                 
|Accrued interest and other assets                        
|                                                         
|TOTAL ASSETS                                             
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|LIABILITIES                                              
|Deposits:                                                
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|Federal funds purchased                                  
|Federal Home Loan Bank borrowings                        
|Junior subordinated debentures                           
|Accrued interest and other liabilities                   
|                                                         
|                                                         
|                                                         
|                                                         
|COMMITMENTS AND CONTINGENCIES (Notes 14 and 20 )         
|                                                         
|SHAREHOLDERS EQUITY                                     
|Series A Preferred Stock,  no par value, 1,000,000 shares
|                                                         
|Common stock, no par value,  50,000,000 shares           
|                                                         
|                                                         
|Retained earnings                                        
|Accumulated other comprehensive income                   
|                                                         
|                                                         
|                                                         
|                                                         
|TOTAL LIABILITIES AND SHAREHOLDERS  EQUITY              
|                                                         



|See accompanying notes                                                                                                                                   F-3
|------------------------------------------------------------------------------------------------------------------------------------------------------------



|
|

---

PREMIERWEST BANCORP AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME

|                                              |  |   |  | Years Ended December 31,                          |  |  
|--------------------------------------------- |  | - |  | ------------------------------------------------- |  | -
|                                              |  |  
|                                              |  |   |  | 2006                                              |  |  
|                                              |  |  
|                                              |  |   |  | (in thousands, except earnings per share amounts)
|                                             
|INTEREST AND DIVIDEND INCOME                  |  |   |  |                                                   |  |  
|Interest and fees on loans                    |  | $ |  | 72,695                                            |  | $
|Interest on investments:                      |  |   |  |                                                   |  |  
|Taxable                                       |  |   |  | 88                                                |  |  
|Nontaxable                                    |  |   |  | 323                                               |  |  
|Interest on federal funds sold                |  |   |  | 136                                               |  |  
|Other interest and dividends                  |  |   |  | 10                                                |  |  
|                                              |  |  
|                                             
|Total interest and dividend income            |  |   |  | 73,252                                            |  |  
|                                              |  |  
|INTEREST EXPENSE                              |  |   |  |                                                   |  |  
|Deposits:                                     |  |   |  |                                                   |  |  
|Interest-bearing demand and savings           |  |   |  | 5,896                                             |  |  
|Time                                          |  |   |  | 10,035                                            |  |  
|Other borrowing                               |  |   |  | 3,173                                             |  |  
|                                              |  |  
|                                             
|Total interest expense                        |  |   |  | 19,104                                            |  |  
|                                              |  |  
|NET INTEREST INCOME                           |  |   |  | 54,148                                            |  |  
|LOAN LOSS PROVISION                           |  |   |  | 800                                               |  |  
|                                              |  |  
|Net interest income after loan loss provision |  |   |  | 53,348                                            |  |  
|                                              |  |  
|NONINTEREST INCOME                            |  |   |  |                                                   |  |  
|Service charges on deposit accounts           |  |   |  | 3,316                                             |  |  
|Mortgage banking fees                         |  |   |  | 1,036                                             |  |  
|Investment brokerage and annuity fees         |  |   |  | 1,162                                             |  |  
|Other commissions and fees                    |  |   |  | 1,572                                             |  |  
|Other noninterest income                      |  |   |  | 613                                               |  |  
|Net gains on sales of securities              |  |   |  | 2                                                 |  |  
|                                              |  |  
|Total noninterest income                      |  |   |  | 7,701                                             |  |  
|                                              |  |  
|NONINTEREST EXPENSE                           |  |   |  |                                                   |  |  
|Salaries and employee benefits                |  |   |  | 23,038                                            |  |  
|Net occupancy and equipment                   |  |   |  | 6,138                                             |  |  
|Communications                                |  |   |  | 1,678                                             |  |  
|Professional fees                             |  |   |  | 979                                               |  |  
|Advertising                                   |  |   |  | 1,029                                             |  |  
|Other                                         |  |   |  | 4,553                                             |  |  
|                                              |  |  
|Total noninterest expense                     |  |   |  | 37,415                                            |  |  
|                                              |  |  
|INCOME BEFORE PROVISION FOR INCOME TAXES      |  |   |  | 23,634                                            |  |  
|PROVISION FOR INCOME TAXES                    |  |   |  | 8,986                                             |  |  
|                                              |  |  
|NET INCOME                                    |  | $ |  | 14,648                                            |  | $
|                                              |  |  
|                                             
|BASIC EARNINGS PER COMMON SHARE               |  | $ |  | 0.89                                              |  | $
|                                              |  |  
|DILUTED EARNINGS PER COMMON SHARE             |  | $ |  | 0.83                                              |  | $
|                                              |  |  



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



---

PREMIERWEST BANCORP AND SUBSIDIARYCONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY(in thousands, except share amounts)

|                                    |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|----------------------------------- |  | ---------------------------------------------------------- |  | ------------ |  | ------ |  | ---------- |  | - |  | ------ |  | - |  | -------- | -
|                                   
|                                   
|                                   
|                                    |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|                                    |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|                                    |  | Preferred Stock                                            |  | Common Stock |  |        |  |            |  |   |  |        |  |   |  |          |  
|                                    |  | Accumulated
                                         Other |  |              |  | Total  |  |            |  |   |  |       
|                                    |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  | Retained |  
|                                    |  | Shares                                                     |  |              |  | Amount |  | Shares     |  |   |  | Amount |  |   |  | Earnings |  
|                                   
|BALANCE, December 31, 2003          |  | 11,000                                                     |  | $            |  | 9,590  |  | 12,162,026 |  | $ |  | 38,260 |  | $ |  | 16,463   |  
|Comprehensive income:               |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|Net income                          |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | 9,108    |  
|Other comprehensive income         |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|unrealized losses on investment     |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|securities held-to-maturity of      |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|$29 (net taxes of $15)              |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | -        |  
|Unrealized losses on investment     |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|securities available-for-sale of    |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|$125 (net taxes of $64)             |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | -        |  
|                                    |  |                                                           
|Comprehensive income                |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|                                    |  |                                                           
|Common Stock issued to shareholders |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|of Mid Valley Bank                  |  | -                                                          |  |              |  | -      |  | 1,697,473  |  |   |  | 16,805 |  |   |  | -        |  
|Preferred stock dividend declared   |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | (275     | )
|5% stock dividend                   |  | -                                                          |  |              |  | -      |  | 692,698    |  |   |  | 7,066  |  |   |  | (7,066   | )
|Cash paid for fractional shares     |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | (6       | )
|Stock options exercised             |  | -                                                          |  |              |  | -      |  | 60,135     |  |   |  | 188    |  |   |  | -        |  
|Income tax benefit of stock options |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|exercised                           |  | -                                                          |  |              |  | -      |  | -          |  |   |  | 163    |  |   |  | -        |  
|                                    |  |                                                            |  |             
|BALANCE, December 31, 2004          |  | 11,000                                                     |  |              |  | 9,590  |  | 14,612,332 |  |   |  | 62,482 |  |   |  | 18,224   |  
|Comprehensive income:               |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|Net income                          |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | 13,189   |  
|Other comprehensive income         |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|Amortization of unrealized gains    |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|for investment securities           |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|transferred to held-to-maturity     |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|of $126 (net of taxes of $65)       |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | -        |  
|Unrealized losses on investment     |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|securities available-for-sale of    |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|$34 (net taxes of $17)              |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | -        |  
|                                    |  |                                                           
|Comprehensive income                |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|                                    |  |                                                           
|Preferred stock dividend declared   |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | (275     | )
|Common stock cash dividend declared |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  | (769     | )
|5% stock dividend                   |  | -                                                          |  |              |  | -      |  | 730,756    |  |   |  | 10,523 |  |   |  | (10,523  | )
|Cash paid for fractional shares     |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | (10      | )
|Stock options exercised             |  | -                                                          |  |              |  | -      |  | 30,343     |  |   |  | 188    |  |   |  | -        |  
|Income tax benefit of stock options |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|exercised                           |  | -                                                          |  |              |  | -      |  | -          |  |   |  | 41     |  |   |  | -        |  
|                                    |  |                                                            |  |             
|BALANCE, December 31, 2005          |  | 11,000                                                     |  | $            |  | 9,590  |  | 15,373,431 |  | $ |  | 73,234 |  | $ |  | 19,836   |  
|Comprehensive income:               |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|Net income                          |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | 14,648   |  
|Other comprehensive income         |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|Amortization of unrealized gains    |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|for investment securities           |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|transferred to held-to-maturity     |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|of $79 (net of taxes of $49)        |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | -        |  
|Unrealized gains on investment      |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|securities available-for-sale of    |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|$55 (net taxes of $33)              |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | -        |  
|                                    |  |                                                           
|Comprehensive income                |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|                                    |  |                                                           
|Preferred stock dividend declared   |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | (275     | )
|Common stock cash dividend declared |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | (1,621   | )
|Stock-based compensation expense    |  | -                                                          |  |              |  | -      |  | -          |  |   |  | 226    |  |   |  | -        |  
|5% stock dividend                   |  | -                                                          |  |              |  | -      |  | 769,145    |  |   |  | 11,914 |  |   |  | (11,914  | )
|Cash paid for fractional shares     |  | -                                                          |  |              |  | -      |  | -          |  |   |  | -      |  |   |  | (11      | )
|Stock options exercised             |  | -                                                          |  |              |  | -      |  | 73,905     |  |   |  | 363    |  |   |  | -        |  
|Income tax benefit of stock options |  |                                                            |  |              |  |        |  |            |  |   |  |        |  |   |  |          |  
|exercised                           |  | -                                                          |  |              |  | -      |  | -          |  |   |  | 169    |  |   |  | -        |  
|                                    |  |                                                            |  |             
|BALANCE, December 31, 2006          |  | 11,000                                                     |  | $            |  | 9,590  |  | 16,216,481 |  | $ |  | 85,906 |  | $ |  | 20,663   |  
|                                    |  |                                                            |  |             



|See accompanying notes.                                                                                                                                 F-5
|-----------------------------------------------------------------------------------------------------------------------------------------------------------



---

PREMIERWEST BANCORP AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                        |  |   |  |          |   |  |   |  | Years Ended December 31, |   |  |   |  |          |  
|------------------------------------------------------- |  | - |  | -------- | - |  | - |  | ------------------------ | - |  | - |  | -------- | -
|                                                        |  |  
|                                                        |  |   |  | 2006     |   |  |   |  | 2005                     |   |  |   |  | 2004     |  
|                                                        |  |  
|                                                        |  |   |  |          |   |  |   |  | (in thousands)           |   |  |   |  |          |  
|CASH FLOWS FROM OPERATING ACTIVITIES                    |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|Net income                                              |  | $ |  | 14,648   |   |  | $ |  | 13,189                   |   |  | $ |  | 9,108    |  
|Adjustments to reconcile net income to net cash         |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|from operating activities:                              |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|Depreciation and amortization                           |  |   |  | 3,188    |   |  |   |  | 3,133                    |   |  |   |  | 2,871    |  
|Loan loss provision                                     |  |   |  | 800      |   |  |   |  | 150                      |   |  |   |  | 800      |  
|Deferred income taxes                                   |  |   |  | (1,772   | ) |  |   |  | (1,770                   | ) |  |   |  | 1,783    |  
|Net gains on sales of investment securities             |  |   |  | (2       | ) |  |   |  | (3                       | ) |  |   |  | (1       | )
|Amortization of premium on investment                   |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|securities, net                                         |  |   |  | 48       |   |  |   |  | 57                       |   |  |   |  | 141      |  
|Funding of loans held-for-sale                          |  |   |  | (18,788  | ) |  |   |  | (18,404                  | ) |  |   |  | (16,660  | )
|Sale of loans held-for-sale                             |  |   |  | 18,728   |   |  |   |  | 18,395                   |   |  |   |  | 17,164   |  
|Gain on sale of loans held for sale                     |  |   |  | (166     | ) |  |   |  | (225                     | ) |  |   |  | (197     | )
|Restricted equity security stock dividends              |  |   |  | -        |   |  |   |  | (6                       | ) |  |   |  | (52      | )
|Excess tax benefit from stock options exercised         |  |   |  | (146     | ) |  |   |  | -                        |   |  |   |  | -        |  
|Stock based compensation expense                        |  |   |  | 226      |   |  |   |  | -                        |   |  |   |  | -        |  
|Gain on sales of premises and equipment                 |  |   |  | (18      | ) |  |   |  | (25                      | ) |  |   |  | (38      | )
|Loss (gain) on sale of other real estate owned          |  |   |  | (145     | ) |  |   |  | 28                       |   |  |   |  | 352      |  
|Changes in accrued interest receivable/payable          |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|and other assets/liabilities                            |  |   |  | 140      |   |  |   |  | 1,790                    |   |  |   |  | (1,009   | )
|                                                        |  |  
|                                                       
|Net cash from operating activities                      |  |   |  | 16,741   |   |  |   |  | 16,309                   |   |  |   |  | 14,262   |  
|                                                        |  |  
|                                                       
|CASH FLOWS FROM INVESTING ACTIVITIES                    |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|Proceeds from maturities and calls of investment        |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|securities available-for-sale                           |  |   |  | 5,062    |   |  |   |  | 1,114                    |   |  |   |  | 13,917   |  
|Proceeds from sales of investment securities available- |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|for-sale                                                |  |   |  | -        |   |  |   |  | -                        |   |  |   |  | 38,566   |  
|Proceeds from maturities and calls of investment        |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|securities held-to-maturity                             |  |   |  | 2,447    |   |  |   |  | 1,235                    |   |  |   |  | 1,485    |  
|Proceeds from sales of investment securities held-to-   |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|maturity                                                |  |   |  | -        |   |  |   |  | 153                      |   |  |   |  | -        |  
|Decrease (increase) in interest-bearing deposits with   |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|Federal Home Loan Bank                                  |  |   |  | 2        |   |  |   |  | 12                       |   |  |   |  | (16      | )
|Purchase of equity securities                           |  |   |  | (197     | ) |  |   |  | (260                     | ) |  |   |  | (5       | )
|Proceeds from sale of equity securities                 |  |   |  | -        |   |  |   |  | -                        |   |  |   |  | 872      |  
|Loan originations, net                                  |  |   |  | (114,222 | ) |  |   |  | (116,786                 | ) |  |   |  | (125,804 | )
|Purchases of premises and equipment, net                |  |   |  | (6,189   | ) |  |   |  | (5,282                   | ) |  |   |  | (4,402   | )
|Proceeds from the sale of other real estate owned       |  |   |  | -        |   |  |   |  | 455                      |   |  |   |  | 675      |  
|Cash and cash equivalents received in acquisition of    |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|Mid Valley Bank, net of cash paid of $9,813 and         |  |   |  |          |   |  |   |  |                          |   |  |   |  |          |  
|acquisition costs of $627                               |  |   |  | -        |   |  |   |  | -                        |   |  |   |  | 6,817    |  
|                                                        |  |  
|                                                       
|Net cash from investing activities                      |  |   |  | (113,097 | ) |  |   |  | (119,359                 | ) |  |   |  | (67,895  | )
|                                                        |  |  



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



---

PREMIERWEST BANCORP AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                           |  |   |  |         |   |     |   |  |        |   | Years Ended December 31, |   |  |         |   |        |   |     |  
|---------------------------------------------------------- |  | - |  | ------- | - | --- | - |  | ------ | - | ------------------------ | - |  | ------- | - | ------ | - | --- | -
|                                                           |  |  
|                                                           |  |   |  | 2006    |   |     |   |  |        |   | 2005                     |   |  |         |   | 2004   |   |     |  
|                                                           |  |  
|                                                           |  |   |  |         |   |     |   |  |        |   | (in thousands)           |   |  |         |   |        |   |     |  
|CASH FLOWS FROM FINANCING ACTIVITIES                       |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|Net increase in deposits                                   |  | $ |  | 110,931 |   |     | $ |  | 79,434 |   |                          | $ |  | 48,387  |  
|Net increase (decrease) in borrowings from                 |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|the Federal Home Loan Bank                                 |  |   |  | 4,361   |   |     |   |  | (639   | ) |                          |   |  | (20,639 | )
|Net increase (decrease) in Federal Funds purchased         |  |   |  | (9,595  | ) |     |   |  | 16,430 |   |                          |   |  |         |   | -      |  
|Net decrease in securities sold under agreements           |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|to repurchase                                              |  |   |  |         |   | -   |   |  |        |   | -                        |   |  |         |   | (3,401 | )
|Proceeds from issuance of junior subordinated              |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|debentures                                                 |  |   |  |         |   | -   |   |  |        |   | -                        |   |  |         |   | 15,464 |  
|Excess tax benefit from stock options exercised            |  |   |  |         |   | 146 |   |  |        |   | -                        |   |  |         |   |        |   | -   |  
|Dividends paid on common stock                             |  |   |  | (1,579  | ) |     |   |  | -      |   |                          |   |  |         |   | -      |  
|Dividends paid on preferred stock                          |  |   |  | (275    | ) |     |   |  | (275   | ) |                          |   |  | (275    | )
|Stock options exercised                                    |  |   |  |         |   | 363 |   |  |        |   | 188                      |   |  |         |   |        |   | 188 |  
|Cash paid for fractional shares relating to stock dividend |  |   |  |         |   | (11 | ) |  |        |   | (10                      | ) |  |         |   |        |   | (6  | )
|                                                           |  |  
|                                                          
|Net cash from financing activities                         |  |   |  | 104,341 |   |     |   |  | 95,128 |   |                          |   |  | 39,718  |  
|                                                           |  |  
|                                                          
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS       |  |   |  | 7,985   |   |     |   |  | (7,922 | ) |                          |   |  | (13,915 | )
|                                                          
|CASH AND CASH EQUIVALENTS,                                 |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|beginning of year                                          |  |   |  | 28,512  |   |     |   |  | 36,434 |   |                          |   |  | 50,349  |  
|                                                           |  |  
|                                                          
|CASH AND CASH EQUIVALENTS,                                 |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|end of year                                                |  | $ |  | 36,497  |   |     | $ |  | 28,512 |   |                          | $ |  | 36,434  |  
|                                                           |  |  
|                                                          
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW                       |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|INFORMATION                                                |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|Cash paid for interest                                     |  | $ |  | 18,693  |   |     | $ |  | 9,744  |   |                          | $ |  | 6,475   |  
|                                                           |  |  
|Cash paid for taxes                                        |  | $ |  | 10,517  |   |     | $ |  | 7,980  |   |                          | $ |  | 2,220   |  
|                                                           |  |  
|                                                          
|SUPPLEMENTAL DISCLOSURE OF NONCASH                         |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|INVESTING AND FINANCING ACTIVITIES                         |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|Transfers of loans to other real estate owned              |  |   |  | $ -     |   |     |   |  | $ -    |   |                          | $ |  | 127     |  
|                                                           |  |  
|Transfer of securities from available-for-sale to          |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|held-to-maturity classification                            |  |   |  | $ -     |   |     |   |  | $ -    |   |                          | $ |  | 12,953  |  
|                                                           |  |  
|                                                          
|Income tax benefit of stock options exercised              |  | $ |  | 169     |   |     | $ |  | 41     |   |                          | $ |  | 163     |  
|                                                           |  |  
|Increase in goodwill resulting from Mid Valley             |  |   |  |         |   |     |   |  |        |   |                          |   |  |         |   |        |   |     |  
|Bank purchase price adjustment                             |  |   |  | $ -     |   |     | $ |  | 848    |   |                          | $ |  | -       |  
|                                                           |  |  
|                                                          
|Cash dividends declared                                    |  | $ |  | 811     |   |     | $ |  | 769    |   |                          | $ |  | -       |  
|                                                           |  |  



|See accompanying notes.                                                                                                                                     F-7
|---------------------------------------------------------------------------------------------------------------------------------------------------------------



---

PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The Bank offers a full range of financial products and services through a network of 39 full service branch offices, 36 of which are located along the Interstate 5 freeway corridor between Roseburg, Oregon, and Woodland, California. Of the 39 full service branch offices, 23 are located in Oregon (Jackson, Josephine, Deschutes, Douglas, and Klamath Counties) and 16 are located in California (Siskiyou, Shasta, Butte, Tehama, Placer and Yolo Counties). The Banks activities include the usual lending and deposit functions of a community oriented commercial bank: commercial, real estate, installment, and mortgage loans; checking, time deposit, and savings accounts; mortgage loan brokerage services; and automated teller machines (ATMs) and safe deposit facilities. The Bank has three subsidiaries: Premier Finance Company, PremierWest Investment Services, Inc., and Blue Star Properties, Inc. Premier Finance Company, has offices in Medford, Grants Pass, Roseburg, Klamath Falls and Portland, Oregon and Redding and Yreka, California and is engaged in the business of consumer lending. PremierWest Investment Services, Inc. operates throughout the Banks market area providing brokerage services for investment products including stocks, bonds, mutual funds and annuities. Blue Star Properties, Inc. serves solely to hold real estate properties for the Company but is currently inactive.

In December 2004, the Company established PremierWest Statutory Trust I and II (the Trusts), as wholly-owned Delaware statutory business trusts, for the purpose of issuing guaranteed individual beneficial interests in junior subordinated debentures (Trust Preferred Securities). The Trusts issued $15.5 million in Trust Preferred Securities for the purpose of providing additional funding for operations and enhancing the Companys consolidated regulatory capital. In accordance with the Financial Accounting Standards Boards (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, the Company has not included the Trusts in its consolidated financial statements but has recognized, as junior subordinated debt, the outstanding balance of the Trust Preferred Securities as of December 31, 2006 and 2005.

The Company declared 5% stock dividends in June 2006, June 2005, and June 2004. All per share amounts and calculations in the accompanying consolidated financial statements have been restated to reflect the effects of these stock dividends.

Method of accounting and use of estimates The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. The Company 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.

F-8

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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. Significant estimates made by management involve the calculation of the allowance for loan loss, the fair value of available-for-sale investment securities, the value of other real estate owned, and the calculations involved in determining potential goodwill impairment.

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.

Securities are classified as available-for-sale if the Bank intends to hold those debt securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors such 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. Premiums and discounts are recognized in interest income using the effective interest method. Realized gains and losses are determined using the specific-identification method and included in earnings.

Securities are classified as held-to-maturity if the Bank has both the intent and ability to hold those debt securities to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium or accretion of discount computed using the effective interest method.

F-9

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

PremierWest Bancorps investment policy does not permit management to purchase securities for the purpose of trading. Accordingly, no securities were classified as trading securities during the periods reported.

Upon transfers of securities from the available-for sale classification to the held-to-maturity classification, the Bank ceases to recognize unrealized gains and losses, net of deferred taxes, in other comprehensive income, and records the unrealized gain or loss at the time of transfer, net of related deferred taxes, as a premium or discount on the related security. The unrealized gain or loss at the time of transfer is then amortized or accreted as an adjustment to yield from the date of transfer through the maturity date of each security transferred. The amortization or accretion of the unrealized gain or loss reported in shareholders equity will offset or mitigate the effect on interest income, of the amortization or accretion of the discount or premium resulting from the transfer of available-for-sale securities to the held-to-maturity classification.

At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends. A decline in the market value of any security below cost that is deemed other-than-temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security.

Restricted equity securities The Banks investment in FHLB stock is recorded as a restricted equity security and 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, 2006 and 2005, 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.

The Bank has a minority interest (less than 10%) in two limited partnerships that own and operate affordable housing projects. Investments in these projects serve as an element of the Banks compliance with the Community Reinvestment Act, and the Bank receives tax benefits in the form of deductions for operating losses and tax credits. The tax credits may be used to reduce taxes currently payable or may be carried back one year or forward 20 years to recapture or reduce taxes. The Bank uses the equity method in accounting for its interest in the partnerships operating results. The credits are recorded in the years they become available to reduce income taxes.

The Bank also owns stock in Pacific Coast Bankers Bank (PCBB). The investment in PCBB is carried at cost. Pacific Coast Bankers Bank operates under a special purpose charter to provide wholesale correspondent banking services to depository institutions. By statute, 100% of PCBBs outstanding stock is held by depository institutions that utilize its correspondent banking services.

F-10

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Mortgage loans held-for-sale Mortgage loans held-for-sale are reported at the lower of cost or market value. Gains or losses on the sale of loans that are held-for-sale are recognized at the time of sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights. The Bank currently does not retain mortgage servicing rights.

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 guarantees; current economic conditions; legal representation regarding the outcome of pending legal action for collection of loans and related loan guarantees; 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 guarantee. 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 guarantee. 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

F-11

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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, 2006 and 2005, were on nonaccrual status. After considering the borrowers financial condition, the loans collateral position, collection efforts and other pertinent factors, impaired loans and other loans are charged to the allowance when the Bank believes that collection of future payments of principal is not probable.

Interest income on all loans is accrued as earned by 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 on nonaccrual loans is subsequently recognized only to the extent cash payments are received. Nonaccrual loans are returned to accrual status when the loans are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan.

Loan origination and commitment fees, net of certain direct loan origination costs, are capitalized as an offset to the outstanding loan balance and 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.

Core deposit intangibles Core deposit intangibles are amortized by the straight-line method over seven years.

Goodwill Goodwill represents the excess of cost over the 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. Required annual analysis of this and other recorded goodwill components indicate that no impairment of asset values existed for the years ended December 31, 2006, 2005 and 2004.

F-12

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Other real estate Other real estate, acquired through foreclosure or deeds in lieu of foreclosure, is carried at the lower of cost, less estimated costs of disposal, or estimated net realizable value. When property is acquired, any excess of the loan balance over the estimated net realizable value is charged to the allowance for loan losses. Holding costs, subsequent write-downs to net realizable value, if any, or any disposition gains or losses are included in noninterest income and expense. The Bank held no other real estate at December 31, 2006 and 2005. The bank held approximately $483,000 at December 31, 2004. During 2006 the Bank received proceeds totaling $145,000 relating to other real estate that had been written down to zero book value in previous years.

Advertising Advertising and promotional costs are generally charged to expense during the period in which they are incurred. Advertising and promotional expenses were approximately $1,029,000, $999,000, and $885,000, for the years ended December 31, 2006, 2005, and 2004, respectively.

Income taxes Income taxes are accounted for using the asset and liability method. 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. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some of the deferred tax asset will not be realized.

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

F-13

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Stock Based Compensation Effective January 1, 2006, PremierWest Bancorp adopted Financial Accounting Standards Board Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires companies to measure and recognize as compensation expense the grant date fair market value for all share-based awards. That portion of the grant date fair market value that is ultimately expected to vest is recognized as expense over the requisite service period, typically the vesting period, utilizing the straight-line attribution method.

SFAS 123R requires companies to estimate the fair market value of stock-based payment awards on the date of grant using an option-pricing model. We use the Black-Scholes option-pricing model to value our stock options. The Black-Scholes model requires the use of assumptions regarding the risk-free interest rate; our expected dividend yield; the weighted average expected life of the options; and the historical volatility of our stock price.

The following schedule reflects the weighted-average assumptions included in this model as it relates to the valuation of options granted for the years ended December 31:

The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Our expected dividend yield is based on managements estimate at the time of grant. PremierWest Bancorp declared its first cash dividend during fiscal year 2005; therefore, an historical dividend pattern has not been established by the Company. Cash dividends are not paid on unexercised options. The Company attempts to use historical data to estimate option exercise and employee termination behavior in order to estimate an expected life for each option grant. The expected life falls between the vesting period or requisite service period and the contractual term for the option. Two employee classes having similar exercise and termination behavior are used for valuation purposes. Those classes are employees and executive officers and directors. During 2006, for options granted to the employee class, the Company estimated an expected life of 6.5 years based on the Security and Exchange Commissions shortcut methodology as defined by SAB 107. During 2006, for options granted to the executive officers and director class, the Company estimated an expected life of 7.5 years based on managements historical analysis of exercise and forfeiture behavior for the Companys executives and directors.

F-14

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

We adopted SFAS 123R using the modified prospective transition method, which requires adoption as of January 1, 2006, the first day of PremierWest Bancorps 2006 fiscal year. In accordance with the modified prospective method, the Companys consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Stock-based compensation expense recognized under SFAS 123R for the year ended December 31, 2006, resulting from stock options that were granted during the current and previous periods that vested during the current period, totaled $226,000 with a related tax benefit of $86,000. At December 31, 2006, unrecognized stock-based compensation expense totaled $662,000 and will be expensed over a weighted average period of 2.0 years.

Prior to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123R requires that the cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for stock options (excess tax benefits) be reported as financing cash flows. An excess tax benefit of $146,000 is classified as financing cash inflows for the year ended December 31, 2006. The excess tax benefits reported as operating cash flows for the years ended December 31, 2005 and 2004 were $29,000 and $124,000, respectively.

Under SFAS 123, prior to its revision, the Company accounted for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB No. 25). Accordingly, prior to January 1, 2006, no accounting recognition was given to stock options granted at fair market value until they were exercised, at which time the net proceeds including tax benefits realized, were credited to shareholders equity.

The following table presents the pro forma effect on net income and earnings per share had PremierWest Bancorp applied the fair value recognition provisions of SFAS 123 in all periods presented:

|                                                  |  |   |  | Year Ended December 31, |  |     |  
|------------------------------------------------- |  | - |  | ----------------------- |  | --- | -
|                                                  |  |   |  | 2005                    |  |     |  
|                                                  |  |  
|                                                 
|Net Income, as reported                           |  | $ |  | 13,189                  |  |     | $
|Less: Total stock based employee compensation     |  |   |  |                         |  |     |  
|expense determined under fair value based methods |  |   |  |                         |  |     |  
|for all awards, net of related tax effects        |  |   |  |                         |  | (87 | )
|                                                  |  |  
|Pro forma Net Income                              |  | $ |  | 13,102                  |  |     | $
|                                                  |  |  
|                                                 
|Earnings Per Share                                |  |   |  |                         |  |     |  
|Basic - as reported                               |  | $ |  | 0.80                    |  |     | $
|Basic - pro forma                                 |  | $ |  | 0.80                    |  |     | $
|Diluted - as reported                             |  | $ |  | 0.75                    |  |     | $
|Diluted - pro forma                               |  | $ |  | 0.74                    |  |     | $

F-15

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Comprehensive income -Comprehensive income for the Company includes net income reported on the consolidated statements of income, the amortization of unrealized gains for available-for-sale securities transferred to held-to-maturity, and changes in the fair value of available-for-sale investments which are reported as a component of shareholders equity.

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

Fair value of financial instruments The following methods and assumptions were used by the Company 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.

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

Interest-bearing deposits with FHLB and restricted equity securities The carrying amount approximates the estimated fair value and expected redemption values.

Loans 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, savings accounts, and interest checking accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

F-16

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Short-term borrowings The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Banks current incremental borrowing rate for similar types of borrowing arrangements.

Long-term debt The fair values of the Banks long-term debt is estimated using discounted cash flow analyses based on the Banks current incremental borrowing rate for similar types of borrowing arrangements.

Interest receivable and payable The carrying amounts of accrued interest receivable and payable approximate their fair value.

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 February 2006, the FASB issued SFAS No. 155 (SFAS 155), Accounting for Certain Hybrid Financial Instruments which amends SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. Management does not expect the adoption of SFAS 155 to have a material impact on the consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156 (SFAS 156), Accounting for Servicing of Financial Assets which amends SFAS No. 140. SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS 156 is effective for fiscal years beginning after September 15, 2006. Management does not expect the adoption of SFAS 156 to have a material impact on the consolidated financial statements.

F-17

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Management does not expect the adoption of FIN 48 to have a material impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management does not expect the adoption of SFAS 157 to have a material impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158 (SFAS 158), Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Additionally, SFAS 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The new reporting requirements and related new footnote disclosure rules of SFAS 158 are effective for fiscal years ending after December 15, 2006. The new measurement date requirement applies for fiscal years ending after December 15, 2008. The adoption of this standard did not have a material impact on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure financial instruments and certain other financial assets and financial liabilities at fair value. This Statement is effective for fiscal years beginning after November 15, 2007. Management is currently assessing the impact this Statement will have on its consolidated financial statements and results of operations.

Reclassifications Certain reclassifications have been made to the 2005 and 2004 consolidated financial statements to conform with current year presentations. These reclassifications have no effect on previously reported net income or earnings per share.

F-18

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2  ACQUISITION OF MID VALLEY BANK

On January 23, 2004, PremierWest completed its acquisition of Mid Valley Bank. Shareholders of Mid Valley Bank received a combination of 1,697,473 shares of PremierWest Bancorp stock and $9,813,000 in cash in exchange for their shares of Mid Valley Bank common stock. The acquisition was accounted for using the purchase method of accounting; accordingly, the assets acquired and liabilities assumed of Mid Valley Bank were recorded at their respective fair market values as of the date of acquisition. Goodwill, the excess of the purchase price over the fair value of the assets and liabilities acquired, was recorded at $12.9 million. At the time of acquisition, Mid Valley Bank had total assets of $196.0 million including loans of $101.5 million, and deposits of $165.1 million.

The following information presents unaudited pro forma results of operations for the year ended December 31, 2004, as though the Mid Valley Bank acquisition had occurred on January 1, 2004. The pro forma results do not necessarily indicate the results that would have been obtained had the acquisition actually occurred on January 1, 2004 (in thousands, except per share data).

|                                      |  |   |  | Year ended December 31,
|------------------------------------- |  | - |  | -----------------------
|                                      |  |  
|                                      |  |   |  | 2004                   
|                                      |  |  
|                                      |  |   |  | (Unaudited)            
|Total interest and noninterest income |  | $ |  | 50,068                 
|Net income                            |  | $ |  | 8,651                  
|                                     
|Basic earnings per common share       |  | $ |  | 0.54                   
|Diluted earnings per common share     |  | $ |  | 0.52                   
|                                     
|Basic shares outstanding              |  |   |  | 16,046,095             
|Diluted shares outstanding            |  |   |  | 17,378,479             

The fair values of the Mid Valley Bank assets acquired and liabilities assumed as of January 23, 2004, were initially recorded as follows:

|            |  | Cash and due from banks                 |  | $ |  | 11,092 
|----------- |  | --------------------------------------- |  | - |  | -------
|            |  | Federal funds sold                      |  |   |  | 6,165  
|            |  | Investment securities                   |  |   |  | 49,755 
|            |  | Loans, net of allowance for loan losses |  |   |  | 101,458
|            |  | Property and equipment                  |  |   |  | 4,105  
|            |  | Other Assets                            |  |   |  | 23,382 
|            |  |                                        
|            |  | Total assets acquired                   |  | $ |  | 195,957
|            |  |                                        
|LIABILITIES |  |                                         |  |   |  |        
|            |  | Deposits                                |  | $ |  | 165,126
|            |  | Other liabilities                       |  |   |  | 2,316  
|            |  |                                        
|            |  | Total liabilities assumed               |  |   |  | 167,442
|            |  | Net assets acquired                     |  |   |  | 28,515 
|            |  |                                        
|           
|            |  |                                         |  | $ |  | 195,957
|            |  |                                        

F-19

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2  ACQUISITION OF MID VALLEY BANK (continued)

In 2005, subsequent to the acquisition, deferred income tax assets and goodwill were increased by $848,000 as part an adjustment to the original purchase price. At December 31, 2005, the goodwill recorded in connection with the acquisition of Mid Valley Bank was approximately $13.8 million.

|A summary of the Mid Valley Bank transaction costs is as follows:                       |  |   |  |        |  |       |  
|--------------------------------------------------------------------------------------- |  | - |  | ------ |  | ----- | -
|                                                                                       
|Fair value of common stock issued to Mid Valley Bank shareholders                       |  | $ |  | 16,805 | 
|Cash paid to Mid Valley Bank shareholders                                               |  |   |  |        |  | 9,813 |  
|Direct transaction costs incurred                                                       |  |   |  |        |  | 627   |  
|Restructuring charges in the form of severance and other payments                       |  |   |  |        |  | 1,270 |  
|                                                                                        |  |  
|Net assets acquired                                                                     |  | $ |  | 28,515 | 
|                                                                                        |  |  
|                                                                                       
|                                                                                       
|The following table summarizes activity in the Companys accrued restructuring charges: |  |   | 
|                                                                                       
|Restructuring charges liability balance as of January 23, 2004                          |  | $ |  | 1,368  | 
|Payments made for restructuring charges                                                 |  |   |  |        |  | (914  | )
|Net adjustments made to decrease restructuring charge liability                         |  |   |  |        |  | (98   | )
|                                                                                        |  |  
|Restructuring charges liability balance as of December 31, 2004                         |  |   |  |        |  | 356   |  
|Payments made for restructuring charges                                                 |  |   |  |        |  | (296  | )
|                                                                                        |  |  
|Restructuring charges liability balance as of December 31, 2005                         |  |   |  |        |  | 60    |  
|Payments made for restructuring charges                                                 |  |   |  |        |  | (60   | )
|                                                                                        |  |  
|Restructuring charges liability balance as of December 31, 2006                         |  | $ |  | -      | 
|                                                                                        |  |  
|                                                                                       
|                                                                                       
|NOTE 3  CASH AND DUE FROM BANKS                                                        |  |   |  |        |  |       |  

The Bank was required to maintain an average reserve balance of approximately $3.5 million and $4.3 million at December 31, 2006 and 2005, respectively, with the Federal Reserve Bank or maintain such reserve balances in the form of cash. This requirement was met by holding cash and maintaining average reserve balances with the Federal Reserve Bank in excess of these amounts.

F-20

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4  INVESTMENT SECURITIES

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

|                             |  |   |  |           |  |   |  | Gross      |  |   |  | Gross      |   |  |   |  | Estimated
|---------------------------- |  | - |  | --------- |  | - |  | ---------- |  | - |  | ---------- | - |  | - |  | ---------
|                             |  |   |  | Amortized |  |   |  | Unrealized |  |   |  | Unrealized |   |  |   |  | Fair     
|                             |  |   |  | Cost      |  |   |  | Gains      |  |   |  | Losses     |   |  |   |  | Value    
|                             |  |  
|2006                         |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|Available-for-sale:          |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|Mortgage-backed securities   |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|and collateralized           |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|mortgage obligations         |  |   |  | 264       |  |   |  | 2          |  |   |  | (3         | ) |  |   |  | 263      
|Corporate bonds              |  |   |  | -         |  |   |  | -          |  |   |  | -          |   |  |   |  | -        
|                             |  |  
|                             |  | $ |  | 264       |  | $ |  | 2          |  | $ |  | (3         | ) |  | $ |  | 263      
|                             |  |  
|                            
|Held-to-maturity:            |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|Obligations of state and     |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|political subdivisions       |  | $ |  | 7,055     |  | $ |  | 6          |  | $ |  | (62        | ) |  | $ |  | 6,999    
|                             |  |  
|                            
|Restricted equity securities |  | $ |  | 2,061     |  | $ |  | -          |  | $ |  | -          |   |  | $ |  | 2,061    
|                             |  |  
|                            
|                            
|                             |  |   |  |           |  |   |  | Gross      |  |   |  | Gross      |   |  |   |  | Estimated
|                             |  |   |  | Amortized |  |   |  | Unrealized |  |   |  | Unrealized |   |  |   |  | Fair     
|                             |  |   |  | Cost      |  |   |  | Gains      |  |   |  | Losses     |   |  |   |  | Value    
|                             |  |  
|2005                         |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|Available-for-sale:          |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|U.S. Government and agency   |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|securities                   |  | $ |  | 4,050     |  | $ |  | -          |  | $ |  | (81        | ) |  | $ |  | 3,969    
|Mortgage-backed securities   |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|and collateralized           |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|mortgage obligations         |  |   |  | 327       |  |   |  | 2          |  |   |  | (3         | ) |  |   |  | 326      
|Corporate bonds              |  |   |  | 999       |  |   |  | -          |  |   |  | (2         | ) |  |   |  | 997      
|                             |  |  
|                             |  | $ |  | 5,376     |  | $ |  | 2          |  | $ |  | (86        | ) |  | $ |  | 5,292    
|                             |  |  
|                            
|Held-to-maturity:            |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|Obligations of state and     |  |   |  |           |  |   |  |            |  |   |  |            |   |  |   |  |          
|political subdivisions       |  | $ |  | 9,577     |  | $ |  | 4          |  | $ |  | (74        | ) |  | $ |  | 9,507    
|                             |  |  
|                            
|                            
|Restricted equity securities |  | $ |  | 1,865     |  | $ |  | -          |  | $ |  | -          |   |  | $ |  | 1,865    
|                             |  |  

F-21

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4  INVESTMENT SECURITIES (continued)

During the third quarter of 2004, the Bank reclassified obligations of state and political subdivision securities from available-for-sale to held-to-maturity to more accurately reflect the purpose and intent in holding these securities for long-term pledging requirements. Unrealized holding gains at the time of transfer were $335,000, net of deferred taxes of $224,000, and are being amortized as an adjustment to yield. This is offset by a similar amount recorded in shareholders equity, within accumulated other comprehensive income, which is being amortized from the date of transfer through the maturity date of each security transferred.

The following table presents the gross unrealized losses and fair value (in thousands) of the Banks investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2006:

|                                   |  |   |  |            |  | Less Than 12 Months |  |        |   |            | 12 Months or More |  |            |  |   | Total
|---------------------------------- |  | - |  | ---------- |  | ------------------- |  | ------ | - | ---------- | ----------------- |  | ---------- |  | - | -----
|                                   |  |  
|                                   |  |   |  |            |  |                     |  |        |   | Unrealized |                   |  |            |  |   |      
|                                   |  |   |  | Fair Value |  |                     |  | Losses |   |            |                   |  | Fair Value |  |   |      
|                                   |  |  
|                                  
|Mortgage-backed securities         |  |   |  |            |  |                     |  |        |   |            |                   |  |            |  |   |      
|and
		collateralized               |  |   |  |            |  |                     |  |        |   |            |                   |  |            |  |   |      
|mortgage
		obligations             |  | $ |  | -          |  | $                   |  | -      |   |            | $                 |  | 113        |  | $ |      
|                                  
|Obligations of state and political |  |   |  |            |  |                     |  |        |   |            |                   |  |            |  |   |      
|subdivisions                       |  | $ |  | 204        |  | $                   |  | (2     | ) |            | $                 |  | 5,811      |  | $ |      
|                                   |  |  
|                                  
|                                   |  | $ |  | 204        |  | $                   |  | (2     | ) |            | $                 |  | 5,924      |  | $ |      
|                                   |  |  

All unrealized losses reflected above were the result of changes in interest rates subsequent to the purchase of the securities. Because the decline in fair value is attributable to the changes in interest rates and not credit quality, and because the Bank has the ability and intent to hold these investments until a market price recovery or to maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

F-22

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4  INVESTMENT SECURITIES (continued)

The amortized cost and estimated fair value of investment securities at December 31, 2006, 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.

|                                 |  |   |  | Available-for-Sale |  |   |  | Held-to-Maturity
|-------------------------------- |  | - |  | ------------------ |  | - |  | ----------------
|                                 |  |  
|                                 |  |   |  | Amortized          |  |   |  | Estimated       
|                                 |  |   |  | Cost               |  |   |  | Fair Value      
|                                 |  |  
|                                
|Due in one year or less          |  | $ |  | -                  |  | $ |  | -               
|Due after one
		year through     |  |   |  |                    |  |   |  |                 
|five years                       |  |   |  | -                  |  |   |  |                 
|Due after five through ten years |  |   |  | -                  |  |   |  |                 
|Mortgage-backed securities and   |  |   |  |                    |  |   |  |                 
|collateralized mortgage          |  |   |  |                    |  |   |  |                 
|obligations                      |  |   |  | 264                |  |   |  |                 
|                                 |  |  
|                                
|                                 |  | $ |  | 264                |  | $ |  | 263             
|                                 |  |  

Investment securities with a carrying amount of $7.3 million and $14.9 million at December 31, 2006 and 2005, respectively, were pledged to secure public deposits, FHLB borrowings, and for other purposes as required or permitted by law.

Realized gains on sales of investment securities were $2,000, $3,000 and $1,000 in 2006, 2005, and 2004, respectively. There were no realized losses for these years.

F-23

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|NOTE 5  LOANS
|--------------

Loans, including loans held-for-sale, as of December 31 consisted of the following (in thousands):

|                               |  |  |  |                                         |  |                        |   |  |   |              |              |              |  |  |              | 2 0 0 6 |              |  |  |  | 2 0 0 5 | 
|------------------------------ |  |  |  | --------------------------------------- |  | ---------------------- | - |  | - | ------------ | ------------ | ------------ |  |  | ------------ | ------- | ------------ |  |  |  | ------- | 
|                               |  | 
|Real estate  commercial       |  |  |  | $                                       |  | 3 8 7 ,9 8 6           |   |  | $ |              | 3 4 7 ,0 3 3 |             
|Real estate  construction     |  |  |  |                                         |  | 2 5 9 ,2 5 4           |   |  |   |              | 2 3 7 ,1 5 0 |             
|Real estate  residential      |  |  |  |                                         |  | 1 7 ,5 1 3             |   |  |   |              | 2 0 ,0 3 6   |             
|Commercial                     |  |  |  |                                         |  |                        |   |  |   | 1 7 5 ,2 9 2 |              |              |  |  | 1 3 1 ,8 1 9 |        
|Agricultural                   |  |  |  |                                         |  |                        |   |  |   | 2 0 ,0 6 6   |              |              |  |  | 1 5 ,8 5 8   |        
|Consumer                       |  |  |  |                                         |  |                        |   |  |   |              |              | 5 3 ,5 4 2   |  |  |              |         | 4 9 ,5 2 0   | 
|Overdrafts                     |  |  |  |                                         |  |                        |   |  |   |              |              | 2 ,3 3 3     |  |  |              |         | 4 ,9 5 8     | 
|Other                          |  |  |  |                                         |  |                        |   |  |   |              |              | 6 ,7 0 1     |  |  |              |         | 2 ,2 0 3     | 
|                               |  | 
|                               |  |  |  | Total loans                             |  |                        |   |  |   | 9 2 2 ,6 8 7 |              |              |  |  | 8 0 8 ,5 7 7 |        
|Less allowance for loan losses |  |  |  |                                         |  | (1 0 ,8 7 7            | ) |  |   |              | (1 0 ,3 4 1  | )           
|Less deferred loan fees        |  |  |  |                                         |  | (2 ,1 6 5              | ) |  |   |              | (2 ,2 3 9    | )           
|                               |  | 
|                               |  |  |  | Loans, net of allowance for loan losses |  |                        |   |  |   |              |              |              |  | 
|                               |  |  |  |                                         |  | and deferred loan fees |   |  |   | $            |              | 9 0 9 ,6 4 5 |  |  | $            |         | 7 9 5 ,9 9 7 | 
|                               |  | 

The Banks market area consists principally of Jackson, Josephine, Deschutes, Douglas, and Klamath counties of Oregon, and Butte, Siskiyou, Shasta, Tehama, Placer and Yolo 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, 2006 and 2005, the portion of these loans participated to third parties (which are not included in the accompanying consolidated financial statements) totaled approximately $42.4 million and $28.1 million, respectively.

F-24

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6  ALLOWANCE FOR LOAN LOSSES

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

|                                       |  |   |  | 2006   |   |  |   |  | 2005   |   |  |   |  | 2004   |  
|-------------------------------------- |  | - |  | ------ | - |  | - |  | ------ | - |  | - |  | ------ | -
|                                       |  |  
|                                      
|BALANCE, beginning of year             |  | $ |  | 10,341 |   |  | $ |  | 9,171  |   |  | $ |  | 5,466  |  
|Loan loss provision                    |  |   |  | 800    |   |  |   |  | 150    |   |  |   |  | 800    |  
|Mid Valley Bank allowance              |  |   |  |        |   |  |   |  |        |   |  |   |  |        |  
|for loan losses at date of acquisition |  |   |  | -      |   |  |   |  | -      |   |  |   |  | 6,085  |  
|Loans charged off                      |  |   |  | (496   | ) |  |   |  | (771   | ) |  |   |  | (3,799 | )
|Recoveries of loans previously         |  |   |  |        |   |  |   |  |        |   |  |   |  |        |  
|charged off                            |  |   |  | 232    |   |  |   |  | 1,791  |   |  |   |  | 619    |  
|                                       |  |  
|                                      
|BALANCE, end of year                   |  | $ |  | 10,877 |   |  | $ |  | 10,341 |   |  | $ |  | 9,171  |  
|                                       |  |  

Impaired loans, including loans on nonaccrual status, had a recorded investment of approximately $1.5 million and $2.3 million at December 31, 2006 and 2005, respectively. The total allowance for loan losses related to these loans at December 31, 2006 and 2005, was approximately $151,000 and $710,000, respectively. The Banks average investment in impaired loans was approximately $1.4 million, $2.2 million and $2.3 million during 2006, 2005 and 2004 respectively. Had the impaired loans performed according to their original terms, additional interest income of $40,000, $143,000, and $177,000, would have been recognized in 2006, 2005, and 2004, respectively. No interest income has been recognized on impaired loans during the period of impairment. Further, loans contractually past due 90 days or more on which the Bank continued to accrue interest at December 31, 2006 and 2005, were insignificant.

F-25

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7  PREMISES AND EQUIPMENT

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

|                                               |  |                               |  |             |   |            |   | 2 0 0 6    |             |   |            |  | 2 0 0 5    | 
|---------------------------------------------- |  | ----------------------------- |  | ----------- | - | ---------- | - | ---------- | ----------- | - | ---------- |  | ---------- | 
|                                               |  |                              
|                                              
|Land and improvements                          |  | $                             |  | 7 ,0 3 5    |   |            | $ |            | 5 ,6 0 1    |  
|Buildings and leasehold improvements           |  |                               |  | 2 6 ,1 2 2  |   |            |   |            | 2 2 ,4 9 4  |  
|Furniture and equipment                        |  |                               |  | 1 6 ,6 2 8  |   |            |   |            | 1 4 ,9 8 4  |  
|                                               |  |                              
|                                              
|                                               |  |                               |  |             |   |            |   | 4 9 ,7 8 5 |             |   |            |  | 4 3 ,0 7 9 | 
|Less accumulated depreciation and amortization |  |                               |  | (1 6 ,2 5 9 | ) |            |   |            | (1 3 ,7 3 4 | )
|                                               |  |                              
|                                              
|                                               |  |                               |  |             |   |            |   | 3 3 ,5 2 6 |             |   |            |  | 2 9 ,3 4 5 | 
|Construction in progress                       |  |                               |  | 5 7 6       |   |            |   |            | 1 ,2 4 4    |  
|                                               |  |                              
|                                              
|Premises and equipment, net of accumulated     |  |                               |  |             |   |            |   |            |             |  
|                                               |  | depreciation and amortization |  | $           |   | 3 4 ,1 0 2 |   |            | $           |   | 3 0 ,5 8 9 | 
|                                               |  |                              

Depreciation expense totaled $2.7 million, $2.6 million, and $2.4 million for the years ended December 31, 2006, 2005, and 2004, respectively.

At December 31, 2006, there were four branch facilities subject to construction contracts for their improvement. Aggregate unpaid construction contracts related to branch facility improvements were approximately $300,000 as of December 31, 2006.



|NOTE 8  CORE DEPOSIT INTANGIBLES
|---------------------------------

At December 31, 2006 and 2005, PremierWest had $2,010,000 and $2,504,000 of core deposit intangibles, respectively, net of accumulated amortization of $1,860,000 and $1,366,000, respectively. The estimated annual amortization of core deposit intangibles over a remaining life of approximately four years is $494,000.

For the years ending December 31, 2006, 2005, and 2004, PremierWest had recorded amortization expense related to these core deposit intangibles totaling $494,000, $494,000, and $459,000, respectively.

F-26

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|NOTE 9  TIME DEPOSITS
|----------------------

Time deposits of $100,000 and over totaled approximately $103.0 million and $75.0 million at December 31, 2006 and 2005, respectively.

At December 31, 2005, the scheduled annual maturities for all time deposits were as follows (in thousands):

|Years ending December 31, |  | 2007       |  | $ |  | 169,744
|------------------------- |  | ---------- |  | - |  | -------
|                          |  | 2008       |  |   |  | 82,045 
|                          |  | 2009       |  |   |  | 6,650  
|                          |  | 2010       |  |   |  | 7,330  
|                          |  | 2011       |  |   |  | 6,307  
|                          |  | Thereafter |  |   |  | 253    
|                          |  |           
|                         
|                          |  |            |  | $ |  | 272,329
|                          |  |           

NOTE 10  FEDERAL FUNDS PURCHASED

The Bank maintains federal funds lines with correspondent banks as a backup source of liquidity. Federal funds purchased generally mature within one to four days from the transaction date. The balance outstanding as of December 31, 2006 was $6.8 million, on an unsecured basis and accruing interest at the weighted average rate of 6.2% . The balance outstanding as of December 31, 2005 was $16.4 million. As of December 31, 2006, the Bank had approximately $113.0 million of federal funds lines available to draw against on an unsecured basis.

NOTE 11  FEDERAL HOME LOAN BANK BORROWINGS

The Bank had long-term borrowings outstanding with the Federal Home Loan Bank totaling $1.1 million and $1.8 million as of December 31, 2006 and 2005, respectively. The Bank makes monthly principal and interest payments on the long-term borrowings, which mature between 2007 and 2014 and bear fixed interest at rates ranging from 5.82% to 7.63% . The Bank also participates in the Cash Management Advance (CMA) program with the FHLB. CMA borrowings are short-term borrowings that mature within one year and accrue interest at the variable Cash Management Advance rate as published by the FHLB. As of December 31, 2006, the Bank had $5.0 million in CMA borrowings outstanding at the variable interest rate of 5.63% . As of December 31, 2005 the Bank had no borrowings outstanding under the CMA program. All outstanding borrowings with the FHLB are collateralized as provided for under the Advances, Security and Deposit Agreement between the Bank and the FHLB and include the Banks FHLB stock and any funds or investment securities held by the FHLB that are not otherwise pledged for the benefit of others. In addition, certain qualifying loans totaling approximately $51.0 million were pledged to support the Banks outstanding advances and provided for an additional available borrowing capacity of approximately $14.0 million as of December 31, 2006.

F-27

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11  FEDERAL HOME LOAN BANK BORROWINGS (continued)

The scheduled repayment of FHLB borrowings is as follows (in thousands):

|Years ending December 31, |  | 2007       |  | $ |  | 5,633
|------------------------- |  | ---------- |  | - |  | -----
|                          |  | 2008       |  |   |  | 466  
|                          |  | 2009       |  |   |  | 14   
|                          |  | 2010       |  |   |  | 7    
|                          |  | 2011       |  |   |  | 7    
|                          |  | Thereafter |  |   |  | 14   
|                          |  |           
|                         
|                          |  |            |  | $ |  | 6,141
|                          |  |           

NOTE 12  JUNIOR SUBORDINATED DEBENTURES

On December 30, 2004, the Company established two wholly-owned statutory business trusts (PremierWest Statutory Trust I and II) that were formed to issue junior subordinated debentures and related common securities. The $15,464,000 of junior subordinated debentures issued by the Trusts require quarterly interest-only payments. Common stock issued by the Trusts and held as an investment by the Company is recorded in other assets in the consolidated balance sheets. Following are the terms of the junior subordinated debentures as of December 31, 2006:

|                      |  | Issue    |  |   |  | Issued     |  |      |   |  |      |   |      | Maturity |  | Redemption
|--------------------- |  | -------- |  | - |  | ---------- |  | ---- | - |  | ---- | - | ---- | -------- |  | ----------
|Trust Name            |  | Date     |  |   |  | Amount     |  | Rate |   |  | Date |   | Date
|                     
|PremierWest Statutory |  | December |  |   |  |            |  |      |   |  |      |   |      | December |  | December  
|Trust I               |  | 2004     |  | $ |  | 7,732,000  |  | 5.65 | % |  | (1   | ) |      | 2034     |  | 2009      
|PremierWest Statutory |  | December |  |   |  |            |  |      |   |  |      |   |      | March    |  | March     
|Trust II              |  | 2004     |  |   |  | 7,732,000  |  | 5.65 | % |  | (2   | ) |      | 2035     |  | 2010      
|                      |  |          |  |  
|                      |  |          |  | $ |  | 15,464,000 |  |      |   |  |      |   |      |          |  |           
|                      |  |          |  |  

|(1) | PremierWest Statutory Trust I bears interest at the fixed rate of 5.65% until December 2009 at which time it converts to the variable rate of LIBOR + 1.75%, adjusted quarterly, through the maturity date.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | PremierWest Statutory Trust II bears interest at the fixed rate of 5.65% until March 2010 at which time it converts to the variable rate of LIBOR + 1.79%, adjusted quarterly, through the maturity date.  
|   

F-28

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|NOTE 13  PREFERRED STOCK
|-------------------------

On November 17, 2003, PremierWest closed a private offering involving 11,000 shares of its Series A Preferred Stock to a group of private investors, including a director of PremierWest, for $875 per share. The Series A Preferred Stock offering yielded net proceeds of $9.6 million. Holders of the preferred stock are entitled to receive cash dividends at the annual rate of $25 per share, payable when and if declared by the Board of Directors. Such dividends are not cumulative. Beginning November 17, 2006, each share of the Series A Preferred Stock became convertible into 101.292 shares of PremierWest common stock. As of December 31, 2006, no shares had been converted to common stock. If not previously converted to common stock, the Series A Preferred Stock will automatically convert to common stock on the fifth anniversary of the issue date. Although the preferred stock ranks senior to common stock through a liquidation preference of $875 per share plus any declared but unpaid dividends, the shares do not have voting rights except in the event of extraordinary corporate events, such as a merger in which PremierWest is not the surviving entity. In 2006, 2005, and 2004 the Company declared and paid dividends of $275,000 to holders of preferred stock.

NOTE 14  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, 2006 and 2005, 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.

F-29

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14  OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS -(continued)

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

|                                              |  |   |  | 2006    |  |   |  | 2005   
|--------------------------------------------- |  | - |  | ------- |  | - |  | -------
|                                              |  |  
|Commitments to extend credit                  |  | $ |  | 175,032 |  | $ |  | 187,094
|Standby letters of credit                     |  |   |  | 10,154  |  |   |  | 10,573 
|                                              |  |  
|Total off-balance-sheet financial instruments |  | $ |  | 185,186 |  | $ |  | 197,667
|                                              |  |  

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 15  INCOME TAXES
|----------------------

The provision for income taxes for the years ended December 31 was as follows (in thousands):

|                            |  |   |  | 2006   |   |  |   |  | 2005   |   |  |   |  | 2004 
|--------------------------- |  | - |  | ------ | - |  | - |  | ------ | - |  | - |  | -----
|                            |  |  
|Current expense:            |  |   |  |        |   |  |   |  |        |   |  |   |  |      
|Federal                     |  | $ |  | 8,772  |   |  | $ |  | 7,720  |   |  | $ |  | 2,374
|State                       |  |   |  | 1,986  |   |  |   |  | 1,186  |   |  |   |  | 329  
|                            |  |  
|                            |  |   |  | 10,758 |   |  |   |  | 8,906  |   |  |   |  | 2,703
|                            |  |  
|Deferred expense (benefit): |  |   |  |        |   |  |   |  |        |   |  |   |  |      
|Federal                     |  |   |  | (1,401 | ) |  |   |  | (1,548 | ) |  |   |  | 1,554
|State                       |  |   |  | (371   | ) |  |   |  | (222   | ) |  |   |  | 229  
|                            |  |  
|                            |  |   |  | (1,772 | ) |  |   |  | (1,770 | ) |  |   |  | 1,783
|                            |  |  
|Provision for income taxes  |  | $ |  | 8,986  |   |  | $ |  | 7,136  |   |  | $ |  | 4,486
|                            |  |  

F-30

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|NOTE 15  INCOME TAXES (continued)
|-----------------------------------

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 for the years ended December 31 were as follows (in thousands):

|                                          |  |   |  | 2006   |   |  |       |   | 2005 |   |  |        |   | 2004 |      
|----------------------------------------- |  | - |  | ------ | - |  | ----- | - | ---- | - |  | ------ | - | ---- | -----
|                                          |  |  
|                                         
|                                          |  |   |  | Amount |   |  | Rate  |   |      |   |  | Amount |   |      | Rate 
|                                          |  |  
|Expected federal income tax provision     |  |   |  |        |   |  |       |   |      |   |  |        |   |      |      
|at statutory rate                         |  | $ |  | 8,272  |   |  | 35.00 | % |      | $ |  | 7,114  |   |      | 35.00
|State income taxes, net of federal effect |  |   |  | 1,200  |   |  | 5.08  | % |      |   |  | 721    |   |      | 3.55 
|Effect of nontaxable interest income, net |  |   |  | (174   | ) |  | -0.74 | % |      |   |  | (263   | ) |      | -1.29
|Effect of nontaxable increases in the     |  |   |  |        |   |  |       |   |      |   |  |        |   |      |      
|surrender value of life insurance         |  |   |  | (150   | ) |  | -0.63 | % |      |   |  | (155   | ) |      | -0.76
|Other, net                                |  |   |  | (162   | ) |  | -0.69 | % |      |   |  | (281   | ) |      | -1.38
|                                          |  |   |  |       
|Provision for income taxes                |  | $ |  | 8,986  |   |  | 38.02 | % |      | $ |  | 7,136  |   |      | 35.12
|                                          |  |   |  |        |   |  |       |   |      |   |  |       

The components of the net deferred tax assets as of December 31 were approximately as follows (in thousands):

|                                   |  |   |  | 2006  |  |   |  | 2005 
|---------------------------------- |  | - |  | ----- |  | - |  | -----
|                                   |  |  
|                                  
|Assets:                            |  |   |  |       |  |   |  |      
|Allowance for loan losses          |  | $ |  | 4,170 |  | $ |  | 3,586
|Benefit plans                      |  |   |  | 1,973 |  |   |  | 1,538
|State tax credits                  |  |   |  | 358   |  |   |  | 260  
|Other                              |  |   |  | 354   |  |   |  | 269  
|                                   |  |  
|Total deferred tax assets          |  |   |  | 6,855 |  |   |  | 5,653
|                                   |  |  
|                                  
|Liabilities:                       |  |   |  |       |  |   |  |      
|Net unrealized gains on investment |  |   |  |       |  |   |  |      
|securities available-for-sale      |  |   |  | 1     |  |   |  | 64   
|FHLB stock dividends               |  |   |  | 353   |  |   |  | 531  
|Premises and equipment             |  |   |  | 1,489 |  |   |  | 1,749
|Intangibles                        |  |   |  | 814   |  |   |  | 1,020
|Loan origination costs             |  |   |  | 799   |  |   |  | 784  
|Prepaids                           |  |   |  | 315   |  |   |  | 444  
|Deferred revenue                   |  |   |  | 356   |  |   |  | 374  
|Other                              |  |   |  | 171   |  |   |  | 64   
|                                   |  |  
|Total deferred tax liabilities     |  |   |  | 4,298 |  |   |  | 5,030
|                                   |  |  
|Net deferred tax asset (liability) |  | $ |  | 2,557 |  | $ |  | 623  
|                                   |  |  

F-31

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|NOTE 15  INCOME TAXES (continued)
|-----------------------------------

The state tax credits include purchased tax credits totaling $168,000 and $15,000 at December 31, 2006 and 2005. These purchased tax credits consist of State of Oregon Business Energy Tax Credits (BETC) that will be utilized to offset future Oregon income taxes. The Company made BETC purchases during both 2006 and 2005. The purchased credits expire after eight years but are expected to be utilized within five years of purchase.

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-32

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16  BASIC AND DILUTED EARNINGS PER COMMON SHARE

The following summarizes the calculations for basic and diluted earnings per common share, after giving retroactive effect for stock dividends, for the years ended December 31, (in thousands, except per share amounts):

|                                       |  |   |  |             |  | Weighted Average |  |   |  |           |  | 
|-------------------------------------- |  | - |  | ----------- |  | ---------------- |  | - |  | --------- |  | 
|                                       |  |   |  | Net Income  |  | Shares           |  |   |  | Per Share |  | 
|                                       |  |   |  | (Numerator) |  | (Denominator)    |  |   |  | Amount    |  | 
|                                       |  |  
|                                      
|2006                                   |  |   |  |             |  |                  |  |   |  |           |  | 
|                                       |  |  
|                                      
|Basic earnings per common share       |  |   |  |             |  |                  |  |   |  |           |  | 
|income available to common             |  |   |  |             |  |                  |  |   |  |           |  | 
|shareholders (net of $275,000 declared |  |   |  |             |  |                  |  |   |  |           |  | 
|dividends to prefered shareholders)    |  | $ |  | 14,373      |  | 16,182,334       |  | $ |  | 0.89     
|                                       |  |  
|Effect of assumed conversion of        |  |   |  |             |  |                  |  |   |  |           |  | 
|stock options                          |  |   |  | -           |  | 391,819          |  |   |  |           |  | 
|Effect of assumed conversion of        |  |   |  |             |  |                  |  |   |  |           |  | 
|Preferred Stock                        |  |   |  | -           |  | 1,114,214        |  |   |  |           |  | 
|Add back preferred stock dividend      |  |   |  |             |  |                  |  |   |  |           |  | 
|declared                               |  |   |  | 275         |  | -                |  |   |  |           |  | 
|                                       |  |   |  |            
|Diluted earnings per common share      |  | $ |  | 14,648      |  | 17,688,367       |  | $ |  | 0.83     
|                                       |  |  
|                                      
|2005                                   |  |   |  |             |  |                  |  |   |  |           |  | 
|                                       |  |  
|                                      
|Basic earnings per common share       |  |   |  |             |  |                  |  |   |  |           |  | 
|income available to common             |  |   |  |             |  |                  |  |   |  |           |  | 
|shareholders (net of $275,000 declared |  |   |  |             |  |                  |  |   |  |           |  | 
|dividends to prefered shareholders)    |  | $ |  | 12,914      |  | 16,126,605       |  | $ |  | 0.80     
|                                       |  |  
|Effect of assumed conversion of        |  |   |  |             |  |                  |  |   |  |           |  | 
|stock options                          |  |   |  | -           |  | 379,836          |  |   |  |           |  | 
|Effect of assumed conversion of        |  |   |  |             |  |                  |  |   |  |           |  | 
|Preferred Stock                        |  |   |  | -           |  | 1,114,214        |  |   |  |           |  | 
|Add back preferred stock dividend      |  |   |  |             |  |                  |  |   |  |           |  | 
|declared                               |  |   |  | 275         |  | -                |  |   |  |           |  | 
|                                       |  |   |  |            
|Diluted earnings per common share      |  | $ |  | 13,189      |  | 17,620,655       |  | $ |  | 0.75     
|                                       |  |  
|                                      
|2004                                   |  |   |  |             |  |                  |  |   |  |           |  | 
|                                       |  |  
|                                      
|Basic earnings per common share       |  |   |  |             |  |                  |  |   |  |           |  | 
|income available to common             |  |   |  |             |  |                  |  |   |  |           |  | 
|shareholders (net of $275,000 declared |  |   |  |             |  |                  |  |   |  |           |  | 
|dividends to prefered shareholders)    |  | $ |  | 8,833       |  | 15,922,609       |  | $ |  | 0.55     
|                                       |  |  
|Effect of assumed conversion of        |  |   |  |             |  |                  |  |   |  |           |  | 
|stock options                          |  |   |  | -           |  | 218,169          |  |   |  |           |  | 
|Effect of assumed conversion of        |  |   |  |             |  |                  |  |   |  |           |  | 
|Preferred Stock                        |  |   |  | -           |  | 1,114,214        |  |   |  |           |  | 
|Add back preferred stock dividend      |  |   |  |             |  |                  |  |   |  |           |  | 
|declared                               |  |   |  | 275         |  | -                |  |   |  |           |  | 
|                                       |  |   |  |            
|Diluted earnings per common share      |  | $ |  | 9,108       |  | 17,254,992       |  | $ |  | 0.53     
|                                       |  |  

The effect of outstanding common stock options that would be antidilutive if converted are excluded from the computation of diluted earnings per share. As of December 31, 2006, 2005 and 2004, there were no antidilutive options outstanding.

F-33

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17  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 years ended December 31 is as follows (in thousands):

|                  |  |   |  | 2006   |   |  |   |  | 2005    |  
|----------------- |  | - |  | ------ | - |  | - |  | ------- | -
|                  |  |  
|                 
|Beginning balance |  | $ |  | 8,870  |   |  | $ |  | 16,280  |  
|Additions         |  |   |  | 5,874  |   |  |   |  | 8,135   |  
|Repayments        |  |   |  | (3,249 | ) |  |   |  | (15,545 | )
|                  |  |  
|                 
|Ending balance    |  | $ |  | 11,495 |   |  | $ |  | 8,870   |  
|                  |  |  

Deposits held for executive officers and directors at December 31, 2006 and 2005, were approximately $2,641,000 and $3,667,000, respectively.



|NOTE 18  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 six years. Total amounts charged to operations under the Plan were approximately $366,000, 267,000 and $239,000 for the years ended December 31, 2006, 2005, and 2004, respectively.

Executive supplemental retirement and severance plans In connection with previous acquisitions of United Bancorp, Timberline Bancshares, Inc. and Mid Valley Bank, the Company entered into various severance, noncompete, and retirement agreements with previous executives and Board members of the acquired companies. As of December 31, 2006 and 2005, the Banks recorded liability pursuant to these collective agreements was $1.0 million and $1.0 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. To support its obligations under these arrangements, the Bank acquired bank-owned life insurance policies which had aggregate cash surrender values of $6.2 million and $6.0 million as of December 31, 2006 and 2005, respectively. For the years ended December 31, 2006, 2005, and 2004, the Bank recognized expenses relating to these agreements of $123,000, $113,000, and $131,000, respectively.

F-34

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|NOTE 18  BENEFIT PLANS (continued)
|------------------------------------

The Bank has entered into supplemental retirement plans with five key executive officers. These plans provide for retirement benefits which increase annually until each executive reaches retirement age and will be paid out over a 15-year period following the retirement of covered executives. To support its obligations under these plans and to provide death benefits to other selected employees, the Bank has acquired bank-owned life insurance with a cash surrender value of $5.4 million and $5.2 million at December 31, 2006 and 2005, respectively. As of December 31, 2006 and 2005, the Banks liability pursuant to these supplemental retirement plans was $2.0 million and $1.2 million, respectively. For the years ended December 31, 2006, 2005 and 2004, related expenses of $859,000, $564,000 and $283,000, respectively, were recorded.



|NOTE 19  STOCK OPTION PLAN
|---------------------------

At December 31, 2006, PremierWest Bancorp had two outstanding stock option plans  the 1992 Stock Option Plan (1992 Plan) and the 2002 Stock Incentive Plan (2002 Plan). The 2002 Plan superseded the 1992 Plan; no additional grants may be made under the 1992 Plan. The 2002 Plan was initially established May 2002 and was approved by shareholders. The plan was subsequently amended and restated to allow for the issuance of restricted stock grants in addition to stock options. The amended and restated 2002 Plan was approved by shareholders in May 2005 and allows for the issuance of up to 943,891 shares of stock awards of which a total of 341,259 shares were available for issuance as either stock options or restricted stock grants as of December 31, 2006. As of December 31, 2006, there were no restricted stock grants outstanding.

The amended and restated 2002 Plan allows for stock options to be granted at an exercise price of not less than the fair market value of PremierWest Bancorp stock on the date of issuance, for a term not to exceed ten years. The Compensation Committee establishes the vesting schedule for each grant; historically, the Committee has utilized graded vesting schedules over two or five year periods. Upon exercise of stock options or issuance of restricted stock grants, it is the Companys policy to issue new shares of common stock.

During the year ended December 31, 2006, stock option activity, adjusted for the 5% common stock dividend paid on June 29, 2006, was as follows:

|                                    |  |            |   |  |   |  |                  |  | Weighted Average |  |   |  | Aggregate      
|----------------------------------- |  | ---------- | - |  | - |  | ---------------- |  | ---------------- |  | - |  | ---------------
|                                    |  | Number     |   |  |   |  | Weighted Average |  | Remaining        |  |   |  | Intrinsic Value
|                                    |  | of Options |   |  |   |  | Exercise Price   |  | Contractual Term |  |   |  | (in thousands) 
|                                    |  |           
|Stock options outstanding, 01/01/06 |  | 908,003    |   |  | $ |  | 7.49             |  |                  |  |   |  |                
|Granted                             |  | 62,758     |   |  | $ |  | 17.20            |  |                  |  |   |  |                
|Exercised                           |  | (75,108    | ) |  | $ |  | 4.80             |  |                  |  |   |  |                
|Forfeited or Expired                |  | (23,989    | ) |  | $ |  | 9.78             |  |                  |  |   |  |                
|                                    |  |            |   | 
|Stock options outstanding, 12/31/06 |  | 871,664    |   |  | $ |  | 8.35             |  | 5.87             |  | $ |  | 6,633          
|                                    |  |           
|Stock options exercisable, 12/31/06 |  | 472,904    |   |  | $ |  | 6.41             |  | 4.05             |  | $ |  | 4,516          
|                                    |  |           

F-35

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19  STOCK OPTION PLAN (continued)

The weighted-average grant date fair value of options granted during the years ended 2006, 2005 and 2004 was $7.18, $2.61, and $2.98 respectively.

The following schedule reflects the weighted-average assumptions included in this model as it relates to the valuation of options granted for the years ended December 31:

|                        |  | 2006 |   |  | 2005 |   |  | 2004 |  
|----------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                        |  |     
|                       
|Risk-free interest rate |  | 4.8  | % |  | 4.4  | % |  | 3.4  | %
|Expected dividend       |  | 0.29 | % |  | 5.0  | % |  | 5.0  | %
|Expected life, in years |  | 7.3  |   |  | 7.5  |   |  | 7.8  |  
|Expected volatility     |  | 27   | % |  | 39   | % |  | 40   | %

The following table presents the intrinsic value of stock options exercised, cash received from stock options exercised, and the tax benefit realized for deductions related to stock options exercised for the years ended December 31, 2006, 2005 and 2004.

|                                                  |  |   |  | 2006    |  |   |  | 2005    |  |   |  | 2004   
|------------------------------------------------- |  | - |  | ------- |  | - |  | ------- |  | - |  | -------
|                                                  |  |  
|                                                 
|Intrinsic value of stock options exercised        |  | $ |  | 778,000 |  | $ |  | 466,000 |  | $ |  | 208,000
|Cash received from stock options exercised        |  | $ |  | 363,000 |  | $ |  | 188,000 |  | $ |  | 188,000
|Tax benefit realized from stock options exercised |  | $ |  | 169,000 |  | $ |  | 41,000  |  | $ |  | 163,000

Information regarding the number, weighted-average exercise price, and weighted-average remaining contractual life of options by range of exercise price at December 31, 2006, is as follows:

|  |  |                |  |           |  |   |  | Options Outstanding |  |              |  |            |  |   |  | Exercisable Options |  |             
|- |  | -------------- |  | --------- |  | - |  | ------------------- |  | ------------ |  | ---------- |  | - |  | ------------------- |  | ------------
|  |  |               
|  |  |                |  |           |  |   |  |                     |  | Weighted-    |  |            |  |   |  |                     |  | Weighted-   
|  |  |                |  |           |  |   |  | Weighted-           |  | Average      |  |            |  |   |  | Weighted-           |  | Average     
|  |  |                |  |           |  |   |  | Average             |  | Remaining    |  |            |  |   |  | Average             |  | Remaining   
|  |  | Exercise       |  | Number of |  |   |  | Exercise            |  | Contractual  |  | Number     |  |   |  | Exercise            |  | Contractual 
|  |  | Price Range    |  | Options   |  |   |  | Price               |  | Life (Years) |  | of Options |  |   |  | Price               |  | Life (Years)
| 
|$ |  | 3.01  $6.00   |  | 220,254   |  | $ |  | 5.26                |  | 5.17         |  | 184,565    |  | $ |  | 5.23                |  | 5.05        
|$ |  | 6.01  $9.00   |  | 305,600   |  | $ |  | 7.11                |  | 3.52         |  | 247,997    |  | $ |  | 6.69                |  | 2.64        
|$ |  | 9.01  $12.00  |  | 273,080   |  | $ |  | 10.03               |  | 8.24         |  | 39,229     |  | $ |  | 9.99                |  | 8.22        
|$ |  | 12.01  $15.00 |  | 15,730    |  | $ |  | 13.62               |  | 8.96         |  | 1,113      |  | $ |  | 13.30               |  | 8.78        
|$ |  | 15.01  $18.00 |  | 57,000    |  | $ |  | 17.43               |  | 9.35         |  | -          |  |   |  |                     |  |             
|  |  |                |  |           |  |   |  |                    
|  |  |                |  | 871,664   |  | $ |  | 8.35                |  | 5.87         |  | 472,904    |  | $ |  | 6.41                |  | 4.05        
|  |  |                |  |           |  |   |  |                    

F-36

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20  COMMITMENTS AND CONTINGENCIES

Operating lease commitments As of December 31, 2006, the Bank leased certain properties from unrelated third parties. Future minimum lease commitments pursuant to these operating leases are as follows (in thousands):

|Years ending December 31, |  | 2007       |  | $ |  | 685  
|------------------------- |  | ---------- |  | - |  | -----
|                          |  | 2008       |  |   |  | 682  
|                          |  | 2009       |  |   |  | 657  
|                          |  | 2010       |  |   |  | 557  
|                          |  | 2011       |  |   |  | 550  
|                          |  | Thereafter |  |   |  | 3,268
|                          |  |           
|                         
|                          |  |            |  | $ |  | 6,399
|                          |  |           

Rental expense for all operating leases was $642,000 $442,000 and $342,000 for the years ended December 31, 2006, 2005, and 2004, respectively.

Legal contingencies The Company 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 Company.

NOTE 21  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.

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, 2006 and 2005.

F-37

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21  ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)

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):

|                                     |  |   |  | 2006     |  |   |  | 2005   
|------------------------------------ |  | - |  | -------- |  | - |  | -------
|                                     |  |  
|                                     |  |   |  | Carrying |  |   |  |        
|                                     |  |   |  | Value    |  |   |  |        
|                                     |  |  
|                                    
|Financial assets:                    |  |   |  |          |  |   |  |        
|Cash and cash equivalents            |  | $ |  | 36,497   |  | $ |  | 36,497 
|Interest-bearing deposits with FHLB  |  | $ |  | 7        |  | $ |  | 7      
|Investment securities available-for- |  |   |  |          |  |   |  |        
|sale                                 |  | $ |  | 263      |  | $ |  | 263    
|Investment securities held-to-       |  |   |  |          |  |   |  |        
|maturity                             |  | $ |  | 7,055    |  | $ |  | 6,999  
|Restricted equity investments        |  | $ |  | 2,061    |  | $ |  | 2,061  
|Loans held-for-sale                  |  | $ |  | 993      |  | $ |  | 993    
|Loans, net                           |  | $ |  | 908,652  |  | $ |  | 904,381
|                                    
|Financial liabilities:               |  |   |  |          |  |   |  |        
|Deposits                             |  | $ |  | 879,350  |  | $ |  | 879,415
|Federal funds purchased              |  | $ |  | 6,835    |  | $ |  | 6,835  
|FHLB borrowings                      |  | $ |  | 6,141    |  | $ |  | 6,146  
|Junior Subordinated Debentures       |  | $ |  | 15,464   |  | $ |  | 15,730 



|NOTE 22  REGULATORY MATTERS
|----------------------------

PremierWest and the Bank are subject to various regulatory capital requirements administered by 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s and the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, PremierWest and the 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s and the Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

F-38

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 22  REGULATORY MATTERS (continued)

Quantitative measures established by regulation to ensure capital adequacy require PremierWest and the Bank to maintain minimum amounts and ratios (set forth in the following tables) 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, 2006 and 2005, PremierWest and the Bank met or exceeded all relevant capital adequacy requirements.

As of December 31, 2006, the most recent notification from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt correction action. There are no conditions or events since the notification from the regulators that management believes would change the Banks regulatory capital categorization. To be categorized as well capitalized, PremierWest and the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.

PremierWests and the Banks actual and required capital amounts and ratios are presented in the following table (amounts in thousands):

|                         |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  | Regulatory        | 
|------------------------ |  | - |  | ------- |  | ----- | - |  | - |  | ------------- |  | - |  | ----- | ------------- |  | - |  | ----------------- | 
|                         |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       | Minimum To Be | 
|                         |  |   |  |         |  |       |   |  |   |  | Regulatory    |  |   |  |       |               |  |   |  | Well Capitalized  | 
|                         |  |   |  |         |  |       |   |  |   |  | Minimum To Be |  |   |  |       |               |  |   |  | Under Prompt      | 
|                         |  |   |  |         |  |       |   |  |   |  | Adequately    |  |   |  |       |               |  |   |  | Corrective        | 
|                         |  |   |  | Actual  |  |       |   |  |   |  | Capitalized   |  |   |  |       |               |  |   |  | Action Provisions | 
|                         |  |  
|                         |  |   |  | Amount  |  | Ratio |   |  |   |  | Amount        |  |   |  | Ratio |               |  |   |  | Amount            | 
|                         |  |  
|                        
|December 31, 2006        |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|                        
|Tier 1 capital (to       |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|average assets)          |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|Company                  |  | $ |  | 108,735 |  | 11.1  | % |  | $ |  | 39,245        |  | > |  | 4.0   | %             |  |   |  | N/A               | 
|Bank                     |  | $ |  | 105,693 |  | 10.8  | % |  | $ |  | 39,185        |  | > |  | 4.0   | %             |  | $ |  | 48,981            | 
|Tier 1 capital (to risk- |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|weighted assets)         |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|Company                  |  | $ |  | 108,735 |  | 10.7  | % |  | $ |  | 40,615        |  | > |  | 4.0   | %             |  |   |  | N/A               | 
|Bank                     |  | $ |  | 105,693 |  | 10.4  | % |  | $ |  | 40,576        |  | > |  | 4.0   | %             |  | $ |  | 60,863            | 
|Total capital (to risk-  |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|weighted assets)         |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|Company                  |  | $ |  | 119,612 |  | 11.8  | % |  | $ |  | 81,231        |  | > |  | 8.0   | %             |  |   |  | N/A               | 
|Bank                     |  | $ |  | 116,570 |  | 11.5  | % |  | $ |  | 81,151        |  | > |  | 8.0   | %             |  | $ |  | 101,439           | 

F-39

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 22  REGULATORY MATTERS (continued)

|                         |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  | Regulatory        | 
|------------------------ |  | - |  | ------- |  | ----- | - |  | - |  | ------------- |  | - |  | ----- | ------------- |  | - |  | ----------------- | 
|                         |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       | Minimum To Be | 
|                         |  |   |  |         |  |       |   |  |   |  | Regulatory    |  |   |  |       |               |  |   |  | Well Capitalized  | 
|                         |  |   |  |         |  |       |   |  |   |  | Minimum To Be |  |   |  |       |               |  |   |  | Under Prompt      | 
|                         |  |   |  |         |  |       |   |  |   |  | Adequately    |  |   |  |       |               |  |   |  | Corrective        | 
|                         |  |   |  | Actual  |  |       |   |  |   |  | Capitalized   |  |   |  |       |               |  |   |  | Action Provisions | 
|                         |  |  
|                         |  |   |  | Amount  |  | Ratio |   |  |   |  | Amount        |  |   |  | Ratio |               |  |   |  | Amount            | 
|                         |  |  
|                        
|December 31, 2005        |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|                        
|Tier 1 capital (to       |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|average assets)          |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|Company                  |  | $ |  | 94,741  |  | 10.8  | % |  | $ |  | 35,219        |  | > |  | 4.0   | %             |  |   |  | N/A               | 
|Bank                     |  | $ |  | 90,277  |  | 10.3  | % |  | $ |  | 35,167        |  | > |  | 4.0   | %             |  | $ |  | 43,959            | 
|Tier 1 capital (to risk- |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|weighted assets)         |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|Company                  |  | $ |  | 94,741  |  | 10.7  | % |  | $ |  | 35,478        |  | > |  | 4.0   | %             |  |   |  | N/A               | 
|Bank                     |  | $ |  | 90,277  |  | 10.2  | % |  | $ |  | 35,442        |  | > |  | 4.0   | %             |  | $ |  | 53,163            | 
|Total capital (to risk-  |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|weighted assets)         |  |   |  |         |  |       |   |  |   |  |               |  |   |  |       |               |  |   |  |                   | 
|Company                  |  | $ |  | 105,082 |  | 11.9  | % |  | $ |  | 70,956        |  | > |  | 8.0   | %             |  |   |  | N/A               | 
|Bank                     |  | $ |  | 100,618 |  | 11.4  | % |  | $ |  | 70,884        |  | > |  | 8.0   | %             |  | $ |  | 88,605            | 

F-40

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23  PARENT COMPANY FINANCIAL INFORMATION

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



|CONDENSED BALANCE SHEETS
|------------------------

|                                             |  |   |  |                          |   |  |   |  |         |  | December 31, |  
|-------------------------------------------- |  | - |  | ------------------------ | - |  | - |  | ------- |  | ------------ | -
|                                             |  |  
|                                             |  |   |  |                          |   |  |   |  |         |  | 2006         |  
|                                             |  |  
|ASSETS                                       |  |   |  |                          |   |  |   |  |         |  |              |  
|Cash and cash equivalents                    |  |   |  |                          |   |  | $ |  | 24      |  |              | $
|Investment in subsidiary                     |  |   |  |                          |   |  |   |  |         |  | 129,042      |  
|Advances made to subsidiary                  |  |   |  |                          |   |  |   |  |         |  | 2,140        |  
|Other assets                                 |  |   |  |                          |   |  |   |  |         |  | 1,642        |  
|                                             |  |  
|Total assets                                 |  |   |  |                          |   |  | $ |  | 132,848 |  |              | $
|                                             |  |  
|                                            
|LIABILITIES                                  |  |   |  |                          |   |  |   |  |         |  |              |  
|Junior subordinated debentures               |  |   |  |                          |   |  | $ |  | 15,464  |  |              | $
|Other liabilities                            |  |   |  |                          |   |  |   |  |         |  | 1,125        |  
|                                             |  |  
|Total liabilities                            |  |   |  |                          |   |  |   |  |         |  | 16,589       |  
|SHAREHOLDERS EQUITY                         |  |   |  |                          |   |  |   |  |         |  | 116,259      |  
|                                             |  |  
|Total liabilities and shareholders equity   |  |   |  |                          |   |  | $ |  | 132,848 |  |              | $
|                                             |  |  
|                                            
|                                            
|CONDENSED STATEMENTS OF INCOME              
|                                             |  |   |  | Years Ended December 31, |   |  |  
|                                             |  |   |  | 2006                     |   |  |   |  |         |  | 2005         |  
|                                             |  |  
|                                            
|Operating income                             |  | $ |  | 211                      |   |  | $ |  | 210     |  |              | $
|Cash dividends from bank subsidiary          |  |   |  | -                        |   |  |   |  |         |  | -            |  
|Interest expense                             |  |   |  | 874                      |   |  |   |  |         |  | 874          |  
|Other operating expense                      |  |   |  | 436                      |   |  |   |  |         |  | 188          |  
|                                             |  |  
|Income (loss) before equity in undistributed |  |   |  |                          |   |  |   |  |         |  |              |  
|net earnings of subsidiary                   |  |   |  | (1,099                   | ) |  |   |  |         |  | (852         | )
|                                             |  |  
|Equity in undistributed net earnings of      |  |   |  |                          |   |  |   |  |         |  |              |  
|subsidiary                                   |  |   |  | 15,747                   |   |  |   |  |         |  | 14,041       |  
|Distributions in excess of equity in         |  |   |  |                          |   |  |   |  |         |  |              |  
|net earnings of subsidiary                   |  |   |  | -                        |   |  |   |  |         |  | -            |  
|                                             |  |  
|NET INCOME                                   |  | $ |  | 14,648                   |   |  | $ |  | 13,189  |  |              | $
|                                             |  |  

F-41

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PREMIERWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23  PARENT COMPANY FINANCIAL INFORMATION (continued)

|CONDENSED STATEMENTS OF CASH FLOWS           
|---------------------------------------------
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|CASH FLOWS FROM OPERATING                    
|ACTIVITIES                                   
|Net income                                   
|Adjustments to reconcile net income to       
|net cash from operating activities:          
|Equity in undistributed net                  
|earnings of subsidiary                       
|Other, net                                   
|                                             
|Net cash from operating                      
|activities                                   
|                                             
|CASH FLOWS FROM INVESTING                    
|ACTIVITIES                                   
|Cash paid to shareholders of                 
|Mid Valley Bank                              
|Dividend received from Bank subsidiary       
|Investment in subsidiary                     
|Repayment of advances made to Bank subsidiary
|                                             
|Net cash from investing                      
|activities                                   
|                                             
|CASH FLOWS FROM FINANCING                    
|ACTIVITIES                                   
|Proceeds from Trust Preferred                
|securities                                   
|Proceeds from stock options exercised        
|Dividends paid on common stock               
|Dividends paid on preferred stock            
|Other, net                                   
|                                             
|Net cash from financing                      
|activities                                   
|                                             
|NET DECREASE IN                              
|CASH AND CASH EQUIVALENTS                    
|CASH AND CASH EQUIVALENTS,                   
|beginning of year                            
|                                             
|CASH AND CASH EQUIVALENTS,                   
|end of year                                  
|                                             

F-42

---