- Annual Report (10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2011

Commission file number: 000-50332

PREMIERWEST BANCORP

(Exact name of registrant as specified in its charter)

Oregon

93-1282171

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

503 Airport Road – Suite 101

Medford, Oregon

97504

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (541) 618-6003

Securities 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark 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. ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $11.5 million, based on the closing price on June 30, 2011, reported on NASDAQ.

The number of shares outstanding of Registrant’s common stock as of March 15, 2012 was 10,034,741.

Documents Incorporated by Reference

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the 2012 Annual Meeting of Shareholders are incorporated by reference into Part III.

PREMIERWEST BANCORP

FORM 10-K

TABLE OF CONTENTS


		PAGE
Disclosure Regarding Forward-Looking Statements			3

PART I

Item 1.	Business		4-18
Item 1A.	Risk Factors		19-26
Item 1B.	Unresolved Staff Comments		27
Item 2.	Properties		27
Item 3.	Legal Proceedings		27
Item 4.	Mine Safety Disclosures		27

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		28-29
Item 6.	Selected Financial Data		30-31
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32-71
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		72-74
Item 8.	Financial Statements and Supplementary Data		75-131
Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		132
Item 9A.	Controls and Procedures		132
Item 9B.	Other Information		132

PART III

Item 10.	Directors, Executive Officers and Corporate Governance		133
Item 11.	Executive Compensation		133
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		133
Item 13.	Certain Relationships and Related Transactions, and Director Independence		133
Item 14.	Principal Accounting Fees and Services		133

PART IV

Item 15.	Exhibits and Financial Statement Schedules		134

EXHIBIT INDEX			134-136

SIGNATURES			137

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

•

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

•

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

•

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

•

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

•

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

Furthermore, forward-looking statements are subject to risks and uncertainties related to the Company’s ability to, among other things: dispose of properties or other assets obtained through foreclosures at expected prices and within a reasonable period of time; attract and retain key personnel; generate loan and deposit balances at projected spreads; sustain fee generation including gains on sales of loans; maintain asset quality and control risk; limit the amount of net loan charge-offs; manage its interest rate sensitivity position in periods of changing market interest rates; adapt to changing customer deposit, investment and borrowing behaviors; control expense growth; and monitor and manage the Company’s financial reporting, operating and disclosure control environments. Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis only as of the date of the statements. The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review all disclosures we file from time to time with the SEC.

PART I

ITEM 1.

BUSINESS

G ENERAL

PremierWest Bancorp, an Oregon corporation (the “Company”), is a bank 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”), which offers a variety of financial services.

PremierWest Bank conducts a general commercial banking business, gathering deposits from the general public and applying those funds to the origination of loans for real estate, commercial 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. 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. On January 26, 2008, the Company acquired Stockmans Financial Group and its wholly owned banking subsidiary, Stockmans Bank, with five branch offices located in the greater Sacramento, California area. This acquisition was accounted for as a purchase and is reflected in the consolidated financial statements of PremierWest from the date of acquisition forward. On July 17, 2009, the Company acquired two Wachovia Bank branches in Northern California. This acquisition was accounted for under the acquisition method of accounting and is reflected in the consolidated financial statements of PremierWest from the date of acquisition forward.

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 including the Rogue Valley and Roseburg, Oregon; the markets situated around Sacramento, California; and the Bend/Redmond area of Deschutes County located in central Oregon.

S UBSIDIARIES

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, Eugene and Portland, Oregon and Redding, California. PremierWest Investment Services, Inc. provides investment brokerage services to customers throughout the Bank’s market. Blue Star Properties, Inc. serves solely to hold real estate properties for PremierWest and presently has no properties under its ownership.

P RODUCTS AND SERVICES

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

Loan and lease products —PremierWest Bank makes commercial and real estate loans, construction loans for owner-occupied and investment properties, leases through a third-party vendor, 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 certain 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 and agricultural properties and other income-producing 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 require 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 facilitate interest-rate risk management and, historically, have contributed 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 real estate lending. Generally, the Bank mitigates its risk on construction loans by lending to customers who have been pre-qualified with performance conditions 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.

Deposit products and other services —PremierWest Bank offers a variety of traditional deposit products to attract both commercial and consumer deposits using checking and savings accounts, money market accounts and certificates of deposit. The Bank also offers internet banking, online bill pay, treasury management services, 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.

M ARKET AREA

PremierWest Bank conducts a regional community banking business in southern and central Oregon and northern California. On December 31, 2011, the Company had a network of 44 full service bank branches. The Bank has evolved over the past ten 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 with six branch offices in Medford and a branch office in each of the surrounding communities of Central Point, Eagle Point, Ashland and Shady Cove. Medford is the seventh largest city in Oregon and is the center for commerce, medicine and transportation in southwestern Oregon. PremierWest Bank serves neighboring Josephine County with two full service branches in Grants Pass, 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 retirement community.

Another primary market area is in Douglas County with three branches in Roseburg, Oregon, and four branches located in the communities of Winston, Glide, Sutherlin and Drain. The economy in Douglas County has historically depended on the forest products industry, as 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.

Also in Oregon and located inland from the Interstate 5 corridor, PremierWest Bank operates four branches. Two are located in Klamath Falls in Klamath County. Klamath County’s principal industries include lumber and wood products, agriculture, transportation, recreation and government. Two other branch offices are located in Deschutes County, with a branch in both Bend and Redmond. This area’s principle businesses include recreation, tourism, education and manufacturing.

As of December 31, 2011, the Bank has established offices within seven counties in California. In Siskiyou County there are eight branch locations in the communities of Dorris, Dunsmuir, Greenview, McCloud, Mt. Shasta, Tulelake, Weed and Yreka. In Shasta County there are three branch locations with two located in Redding and one located in Anderson. In Tehama County there are two branches with one in Corning and one in Red Bluff. In Yolo County there are two branch offices in the communities of Woodland and Davis. There is one office in Chico in Butte County and Nevada County has a branch in Grass Valley. The economy of northern California from Siskiyou County south to Butte County is primarily driven by government services, retail trade and services, education, healthcare, agriculture, recreation and tourism.

The Company has four branch locations in Sacramento County. These branches are located in the greater Sacramento area in the communities of Elk Grove, Folsom, Galt, and Rocklin. These branches have established PremierWest Bank’s southern-most reach in California. In addition to wholesale and retail trade, the key industries include agriculture and food processing, manufacturing, transportation and distribution, education, healthcare and government services.

Oregon and California have experienced economic challenges in the past three years, including high unemployment rates and deteriorating fiscal condition of state and local governments. Many of our branches are located in smaller markets that have experienced higher than average unemployment. The recession, housing market downturn and declining real estate values in our markets, have negatively impacted our loan portfolio and the business conditions in the markets we serve.

The following table presents the Bank’s market share percentage for total deposits as of June 30, 2011, in each county where we have a branch. All information in the table was obtained from deposit data published by the FDIC as of June 30, 2011.

Deposit Market Share ($000’s)

Totals by County


		2011							2010							2009
State	County	Market		PRWT		% Share			Market		PRWT		% Share			Market		PRWT		% Share
OR	Deschutes		2,354,513		14,223		0.60	%		2,635,087		15,534		0.59	%		2,716,450		23,132		0.85	%
OR	Douglas		1,526,714		137,054		8.98	%		1,507,749		146,814		9.74	%		1,413,851		161,027		11.39	%
OR	Jackson		2,741,782		310,691		11.33	%		2,796,890		365,158		13.06	%		2,874,655		503,981		17.53	%
OR	Josephine		1,247,267		32,559		2.61	%		1,291,985		34,243		2.65	%		1,277,205		36,009		2.82	%
OR	Klamath		774,561		13,999		1.81	%		779,395		13,664		1.75	%		831,244		26,404		3.18	%
Sub-total			8,644,837		508,526		5.88	%		9,011,106		575,413		6.39	%		9,113,405		750,553		8.24	%

CA	Butte		2,906,233		10,302		0.35	%		2,887,149		10,658		0.37	%		2,908,129		7,574		0.26	%
CA	Nevada		1,600,712		119,356		7.46	%		1,614,667		138,544		8.58	%		1,689,110		174,958		10.36	%
CA	Placer		7,248,794		12,099		0.17	%		7,149,159		13,330		0.19	%		6,802,407		19,581		0.29	%
CA	Shasta		2,402,162		40,884		1.70	%		2,449,362		44,326		1.81	%		2,364,239		41,839		1.77	%
CA	Siskiyou		608,075		113,263		18.63	%		611,907		122,534		20.02	%		623,940		124,692		19.98	%
CA	Tehama		599,032		94,093		15.71	%		588,312		97,054		16.50	%		591,475		96,691		16.35	%
CA	Yolo		2,320,830		139,694		6.02	%		2,271,132		160,290		7.06	%		2,272,196		190,515		8.38	%
CA	Sacramento		20,334,135		139,773		0.69	%		19,745,515		151,109		0.77	%		19,648,670		197,156		1.00	%
Sub-total			38,019,973		669,464		1.76	%		37,317,203		737,845		1.98	%		36,900,166		853,006		2.31	%
	Total		46,664,810		1,177,990		2.52	%		46,328,309		1,313,258		2.83	%		46,013,571		1,603,559		3.48	%

On January 13, 2012, the Company announced it will consolidate 11 of its 44 branches into existing nearby branches by the end of April 2012. Five of the branches to be consolidated are located in Oregon, and the other six branches are located in California. The decision to consolidate these branches and the projected reduction in expenses followed an extensive branch network analysis with a focus on reducing expense, improving efficiency, and positively impacting the overall value of the Company. These branches represent less than 10% of the total bank-wide deposits.

Effective April 30, 2010, four existing branches (one each in Douglas, Butte, Placer and Sacramento counties) were closed and consolidated with existing PremierWest branches in close proximity.

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.

I NDUSTRY OVERVIEW

The commercial banking industry continues to face increased competition from non-bank competitors, and is undergoing significant 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, stored-value-card providers and leasing companies 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; however, the percentage of financial transactions handled by

commercial banks continues to decline as the market penetration of other financial service providers has grown. The impact on the commercial banking industry of the economic downturn beginning in 2008 and continuing through the present has been meaningful, with bank failures resulting in consolidation and increased legislation and regulation.

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 quality of our services, our array of commercial and mortgage loan products and on the basis of interest rates and loan fees. Lending activity can also be affected by 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.

E MPLOYEES

As of December 31, 2011, PremierWest Bank had 452 full-time equivalent employees compared to 477 at December 31, 2010. None of our employees are represented by a collective bargaining group. Management considers its relations with employees to be good.

W EBSITE ACCESS TO PUBLIC FILINGS

PremierWest makes available all periodic and current reports in the “Investor Relations” section of 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.

G OVERNMENT POLICIES

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.

S UPERVISION AND REGULATION

Based on the results of an examination completed during the third quarter of 2009, the Bank entered into a formal regulatory agreement (the “Agreement”) with the FDIC and the Oregon Department of Consumer and Business Services acting through its Division of Finance and Corporate Securities (“DCBS”), the Bank’s principal regulators, primarily as a result of recent significant operating losses and increasing levels of non-performing assets. The Agreement imposed certain operating requirements on the Bank, many of which have already been implemented by the Bank as discussed in Note 2 of the audited financial statements. The Company entered into a similar agreement with the Federal Reserve Bank of San Francisco and DCBS.

General – Over the past four years, the banking industry has seen an unprecedented number of sweeping changes in federal regulation. The most significant of these changes resulted from the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010, the American Recovery and Reinvestment Act of 2009 (“ARRA”), and the Emergency Economic Stabilization Act of 2008 (“EESA”). EESA and ARRA were enacted to strengthen our financial markets and promote the flow of credit to businesses and consumers. Dodd-Frank has brought and will continue to bring additional, significant changes to the regulatory landscape affecting banks and bank holding companies.

PremierWest is extensively regulated under federal and state law. These laws and regulations are generally intended to protect consumers, depositors and the FDIC’s Deposit Insurance Fund (“DIF”), 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 statute or regulation. 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 DCBS and the FDIC. These agencies regularly examine all facets of the Bank’s operations and our financial condition, and may prohibit the Company from engaging in what they believe constitutes unsafe or unsound banking practices. We are required to seek approval from the FDIC and DCBS to open new branches and engage in mergers and acquisitions, among other things.

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 subject to restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interests 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 exhibit 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 or 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 risk 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.

FDICIA included provisions to reform the federal deposit insurance system, including the implementation of risk-based deposit insurance premiums. 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 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 Deposit Insurance Fund (“DIF”). 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. While PremierWest Bank has historically qualified for the lowest premium level, losses incurred over the past four years have reduced the Company’s capital levels and increased supervisory concerns resulting in increased FDIC and state assessments on PremierWest Bank, from $1.1 million in 2008 to $3.4 million in 2011.

From 2008 to 2011, the banking industry, as well as other sectors of the United States economy, realized a number of changes in federal regulation due to the disruption in credit market operations. The most significant of these changes that affected the Company are discussed below.

Temporary Liquidity Guarantee Program (“TLGP”)—On October 13, 2008, the FDIC announced the TLGP to strengthen confidence and encourage liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt (the Debt Guarantee Program) and a temporary unlimited guarantee of funds in non-interest-bearing transaction and regular checking accounts at FDIC-insured institutions (the Transaction Account Guarantee Program). On December 5, 2008, the Company elected to participate in both the Debt Guarantee Program and Transaction Account Guarantee Program. However, the Company declined the option of issuing certain non-guaranteed senior unsecured debt before issuing the maximum amount of guaranteed debt. The Transaction Account Guarantee Program expired on December 31, 2010. Dodd-Frank provides for unlimited deposit insurance for noninterest bearing transaction accounts (excluding NOW, but including IOLTAs) beginning December 31, 2010 for a period of two years.

Troubled Asset Relief Program (“TARP”)—On October 14, 2008, the U.S. Department of the Treasury announced the TARP Capital Purchase Program. Under the TARP Capital Purchase Program, the U.S. Department of the Treasury purchased senior preferred stock in qualified U.S. financial institutions. The program was intended to encourage participating financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. Companies participating in the program must comply with limits on stock repurchases and dividends, and requirements related to executive compensation and corporate governance. Additionally, participants must agree to accept future program requirements as may be promulgated by Congress and regulatory authorities. In 2009, the Company sold $41.4 million of its preferred stock to the U.S. Treasury under the TARP Capital Purchase Program.

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

•

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

•

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

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

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

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

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Federal Reserve determination of reasonable debit card fees.

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Permanent increase to the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.

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Requirement of publicly traded companies to provide stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate additional rules that would affect corporate governance and enhance disclosure requirements. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

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

Deposit Insurance —PremierWest opted to participate in the Transaction Account Guarantee Program, which provides unlimited deposit insurance for non-interest bearing transaction accounts and for regular savings accounts, resulting in an additional quarterly deposit insurance premium assessment paid to the FDIC. As part of this program, PremierWest paid quarterly deposit insurance premium assessments to the FDIC.

The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our client deposits through the Deposit Insurance Fund (“DIF”) up to prescribed limits for each depositor. Pursuant to the Emergency Economic Stabilization Act of 2008 (the “EESA”), the maximum deposit insurance amount was increased from $100,000 to $250,000 per depositor. The EESA, as amended by the Helping Families Save Their Homes Act of 2009, provides that the basic deposit insurance limit will return to $100,000 after December 31, 2013; however, Dodd-Frank made permanent the $250,000 per depositor insurance limit for qualifying accounts. The amount of FDIC assessments paid by each deposit insurance fund member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. Pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC is authorized to set the reserve ratio for the deposit insurance fund annually at between 1.15% and 1.50% of estimated insured deposits. Dodd-Frank eliminated the previous requirement to set the reserve ratio within a range of 1.15% to 1.50%, directed the FDIC to set the reserve ratio at a minimum of 1.35% and eliminated the maximum limitation on the reserve ratio. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.

On November 17, 2009, the FDIC imposed a prepayment requirement on most insured depository organizations, requiring that the organizations prepay estimated quarterly risk-based assessments for the fourth

quarter of 2009 and for each calendar quarter for calendar years 2010, 2011 and 2012. The FDIC has stated that the prepayment requirement was imposed in response to a negative balance in the deposit insurance fund. The actual assessments due from the Bank on the last day of each calendar quarter will be applied against the prepaid amount until the prepayment amount is exhausted. If the prepayment amount is not exhausted before June 30, 2013 any remaining balance will be returned to the Bank. The prepayment amount does not bear interest.

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. Under the Oregon Business Corporation Act, the Company cannot pay a dividend if, after making such dividend payment, it would be unable to pay its debts as they become due in the usual course of business, or if its total liabilities, plus the amount that would be needed, in the event PremierWest Bancorp were to be dissolved at the time of the dividend payment, to satisfy preferential rights on dissolution of holders of preferred stock ranking senior in right of payment to the capital stock on which the applicable distribution is to be made exceed total assets.

The Company’s ability to pay dividends depends primarily on dividends we receive from the Bank. Under federal regulations, the dollar amount of dividends the Bank may pay depends upon its capital position and recent net income. Generally, if the Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed under state law and FDIC regulations. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, a bank holding company may be prohibited from paying any dividends if the holding company’s bank subsidiary is not adequately capitalized. Due to the losses we experienced, we suspended dividend payments on our common stock in the second quarter of 2009 and on our preferred stock in the fourth quarter of 2009. We cannot pay dividends unless we receive prior regulatory consent. Until conditions improve and we increase our capital levels we do not expect to pay dividends on our capital stock or receive dividends from the Bank.

In addition, the appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends if, in their opinion, such payment constitutes an unsafe or unsound banking practice.

Capital Adequacy— The federal and state bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank 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 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.

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.

Prompt Corrective Action. The “prompt corrective action” provisions of the FDIA create a statutory framework that applies a system of both discretionary and mandatory supervisory actions indexed to the capital level of FDIC-insured depository institutions. These provisions impose progressively more restrictive constraints on operations, management, and capital distributions of the institution as its regulatory capital decreases, or in some cases, based on supervisory information other than the institution’s capital level. This framework and the authority it confers on the federal banking agencies supplements other existing authority vested in such agencies to initiate supervisory actions to address capital deficiencies. Moreover, other provisions of law and regulation employ regulatory capital level designations the same as or similar to those established by the prompt corrective action provisions both in imposing certain restrictions and limitations and in conferring certain economic and other benefits upon institutions. These include restrictions on brokered deposits, limits on exposure to interbank liabilities, determination of risk-based FDIC deposit insurance premium assessments, and action upon regulatory applications.

FDIC-insured depository institutions are grouped into one of five prompt corrective action capital categories—well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized—using the Tier 1 risk-based, total risk-based, and Tier 1 leverage capital ratios as the relevant capital measures. An institution is considered well-capitalized if it has a total risk-based capital ratio of

at least 10.00%, a Tier 1 risk-based capital ratio of at least 6.00% and a Tier 1 leverage capital ratio of at least 5.00% and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure. An adequately capitalized institution must have a total risk-based capital ratio of at least 8.00%, a Tier 1 risk-based capital ratio of at least 4.00% and a Tier 1 leverage capital ratio of at least 4.00% (3.00% if it has achieved the highest composite rating in its most recent examination and is not well-capitalized). An institution’s prompt corrective action capital category, however, may not constitute an accurate representation of the overall financial condition or prospects of the institution or its parent bank holding company, and should be considered in conjunction with other available information regarding the financial condition and results of operations of the institution and its parent bank holding company.

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.

Conservatorship and Receivership of Institutions— If an insured depository institution becomes insolvent and the FDIC is appointed its conservator or receiver, the FDIC may, under federal law, disaffirm or repudiate any contract to which such institution is a party, if the FDIC determines that performance of the contract would be burdensome, and that disaffirmance or repudiation of the contract would promote the orderly administration of the institution’s affairs. Such disaffirmance or repudiation would result in a claim by its holder against the receivership or conservatorship. The amount paid upon such claim would depend upon, among other factors, the amount of receivership assets available for the payment of such claim and its priority relative to the priority of others. In addition, the FDIC as conservator or receiver may enforce most contracts entered into by the institution notwithstanding any provision providing for termination, default, acceleration, or exercise of rights upon or solely by reason of insolvency of the institution, appointment of a conservator or receiver for the institution, or exercise of rights or powers by a conservator or receiver for the institution. The FDIC as conservator or receiver also may transfer any asset or liability of the institution without obtaining any approval or consent of the institution’s shareholders or creditors. The FDIC provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Bank Holding Company Structure— As a bank holding company, the Company is registered with and subject to regulation by the Federal Reserve Board (FRB) under the Bank Holding Company Act of 1956, as amended, or the BHCA. Under FRB policy, a bank holding company is expected to serve as a source of financial and managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support such subsidiary bank. This support may be required at a time when the Company may not have the resources to, or would choose not to, provide it. Certain loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits in, and certain other indebtedness of, the subsidiary bank. In addition, federal law provides that in the event of its bankruptcy, any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Under the BHCA, we are subject to periodic examination by the FRB. We are also required to file with the FRB periodic reports of our operations and such additional information regarding the Company and its

subsidiaries as the FRB may require. Pursuant to the BHCA, we are required to obtain the prior approval of the FRB before we acquire all or substantially all of the assets of any bank or ownership or control of voting shares of any bank if, after giving effect to such acquisition, we would own or control, directly or indirectly, more than 5 percent of such bank. Under the BHCA, we may not engage in any business other than managing or controlling banks or furnishing services to our subsidiaries that the FRB deems to be so closely related to banking as “to be a proper incident thereto.” We are also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company unless the company is engaged in banking activities or the FRB determines that the activity is so closely related to banking to be a proper incident to banking. The FRB’s approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices.

The FRB has cease and desist powers over parent bank holding companies and non-banking subsidiaries where the action of a parent bank holding company or its non-financial institutions represent an unsafe or unsound practice or violation of law. The FRB has the authority to regulate debt obligations, other than commercial paper, issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations.

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.

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.

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 adequately capitalized, under the Federal Reserve capital adequacy guidelines, and 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”) 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. Sarbanes-Oxley includes numerous provisions, but in particular, Section 404 requires PremierWest Bancorp’s Management to assess the adequacy and effectiveness of its internal controls over financial reporting. As of December 31, 2011, Management believes the Company is in full compliance with the requirements and provisions of Sarbanes-Oxley.

Section 613 of the Dodd-Frank Act eliminates interstate branching restrictions that were implemented as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, and removes many restrictions on de novo interstate branching by national and state-chartered banks. The FDIC and the OCC now have

authority to approve applications by insured state nonmember banks and national banks, respectively, to establish de novo branches in states other than the bank’s home state if “the law of the State in which the branch is located, or is to be located, would permit establishment of the branch, if the bank were a State bank chartered by such State.”

Executive Compensation and Corporate Governance. Dodd-Frank includes several corporate governance and executive compensation provisions that apply to public companies generally. The SEC must issue rules requiring exchanges to prohibit the listing of a company’s securities if its board does not have a compensation committee composed entirely of independent directors. Dodd-Frank requires compensation committees to consider factors that might affect the independence of advisors such as compensation consultants and attorneys. At least once every three years, companies are required to provide shareholders with an advisory vote on executive compensation. At least once every six years, shareholders must be provided a separate advisory vote on whether the say-on-pay vote should occur—every one, two or three years. Dodd-Frank requires the SEC to adopt rules requiring disclosure in a company’s annual proxy statement of the relationship between executive compensation actually paid and the financial performance of the company, taking into account any change in the value of the shares of stock and dividends of the company and any distributions. Dodd-Frank mandates exchanges to adopt listing standards requiring that listed companies develop and implement a claw back policy for accounting restatements. This provision is broader than a similar provision contained in Section 304 of the Sarbanes-Oxley Act in that it covers all current and former executive officers and not only the CEO and CFO; does not require that the restatement results from misconduct and the look-back period is three years instead of one year; and requires companies to adopt and disclose a specific claw back policy.

On June 21, 2010, federal banking regulators issued final joint agency guidance on Sound Incentive Compensation Policies . This guidance applies to executive and non-executive incentive compensation plans administered by banks. The guidance says that incentive compensation programs must:

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Provide employees incentives that appropriately balance risk and reward;

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Compensation should be commensurate with risk- if two activities produce same profit but one carries more risk, the incentive should be lower for the riskier activity;

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Plans that provide awards based on company-wide performance are not likely to create unbalanced risk-taking incentives except, perhaps for senior executives;

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Make sure actual payouts reflect adverse outcomes;

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Consider deferred payouts, judgmental adjustments and longer performance periods to balance short term results against risks that materialize over time.

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Be compatible with effective controls and risk- management;

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The bank should have strong controls for designing, implementing and monitoring incentive plans;

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Create and maintain documentation to support meaningful audits;

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Include appropriate personnel, including risk-management personnel in the design process;

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Risk management and control personnel should have appropriate skills, be sufficiently compensated to attract and retain them and be free of conflicts of interest;

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Monitor performance of incentive compensation plans and make adjustments.

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Be supported by strong corporate governance, including active and effective oversight by the board;

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The board should approve incentive compensation arrangements for senior executives;

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The board should regularly review the design and function of incentive plans;

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The board should keep abreast of emerging practices and choose those that fit the company;

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The board should have sufficient expertise and resources to carry out its oversight function;

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Incentive compensation arrangements should be disclosed to shareholders.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations. The findings of the supervisory initiatives will be included in reports of examination and any deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

The FDIC has indicated that it may incorporate a compensation-related risk element in determining levels of deposit insurance assessments. The Federal Reserve, OCC and FDIC recently proposed rules to implement Section 956 of the Dodd-Frank Act, which requires that the agencies prohibit incentive-based payment arrangements that the agencies determine encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss.

REGULATORY AGREEMENT

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

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

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

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

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

As of the date of this report, the Company has met all of the requirements expect the leverage ratio requirement. Prior to completing the Agreement with the FDIC in April 2010, we completed a common stock offering that raised $33.2 million in gross proceeds, which raised the Bank’s Tier 1 leverage ratio from 5.70% at December 31, 2009, to 8.21% at March 31, 2010. Subsequently the Bank has engaged in balance sheet management activities, including loan and deposit reductions which have further increased its capital ratios as noted above. Similarly, the Company has reduced its assets classified “Substandard” to 68% of Tier 1 capital plus ALLL as of December 31, 2011, compared to 178.4% as of June 30, 2009, in the report of examination. As previously noted, the Company has demonstrated progress and is committed to achieving all the requirements of the Agreement.

ITEM 1A.

RISK FACTORS

The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties not presently known to us or that we currently deem immaterial, materialize, then our business, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you may lose all or part of your investment in our shares. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

Risks Related to Our Company

We may be required to raise additional capital, but that capital may not be available when it is needed, or it may only be available on unfavorable terms.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. The proceeds of our 2010 rights offering returned our Bank capital levels to published “Well-Capitalized” levels, including exceeding the 10.0% risk-based capital level. We are, however, subject to a Consent Order that requires higher capital levels, including a 10.0% leverage ratio. Our Bank leverage ratio as of December 31, 2011, was 8.72%.

We may need to raise additional capital to maintain or improve our capital position or to comply with regulatory requirements and support our operations. In addition, future losses could reduce our capital levels. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our financial condition and our ability to support our operations could be materially impaired. We could be required to take other actions to improve capital ratios including reducing asset levels or shifting asset types to assets with lower risk-weightings, which could reduce our ability to generate revenues and adversely affect our financial condition.

We are subject to formal regulatory agreements with the FDIC, DCBS and Federal Reserve.

In light of the challenging operating environment over the past three years, along with our elevated level of non-performing assets, delinquencies and adversely classified assets, we are subject to increased regulatory scrutiny, including a Consent Order with the FDIC and DCBS dated effective April 6, 2010, and a Written Agreement with the Federal Reserve and DCBS dated effective June 4, 2010. The Consent Order requires us to take steps to strengthen the Bank and to refrain from undertaking certain activities. We have limitations on the rates paid by the Bank to attract retail deposits in its local markets. We are required to reduce our levels of non-performing assets within specified time frames, which could result in less than ideal pricing on the sale of assets. We are restricted from paying dividends from the Bank to the Holding Company during the life of the Consent Order, which restricts our ability to issue preferred stock dividends and make junior subordinated debenture interest payments. The added costs of compliance with additional regulatory requirements could have an adverse effect on our financial condition and earnings. Our ability to grow is constrained by the Consent Order and Written Agreement and we will be unable to expand our operations until we achieve material compliance with the regulatory agreements. The requirements and restrictions of the Consent Order and the Written Agreement are judicially enforceable and the failure of the Company or the Bank to comply with such requirements and restrictions may subject the Company and the Bank to additional regulatory restrictions including: the imposition of civil monetary penalties; the issuance of directives to increase capital or enter into a strategic transaction, whether by merger or otherwise, with a third party; the appointment of a conservator or receiver for the Bank; the liquidation or other closure of the Bank and inability of the Company to continue as a going concern; the termination of insurance of deposits; the issuance of removal and prohibition orders against institution-affiliated parties; and the enforcement of such actions through injunctions or restraining orders. Generally, these enforcement actions will be lifted only after subsequent examinations substantiate complete correction of the underlying issues.

Continued weak or worsening regional and national business and economic conditions, and regulatory responses to such conditions could constrain our growth and profitability and have a material adverse effect on our business, financial condition and results of operations.

Our business and operations are sensitive to general business and economic conditions in the United States, and southern and central Oregon and northern California, specifically. If the national, regional and local economies are unable to overcome stagnant growth, high unemployment rates and depressed real estate markets resulting from the economic weakness that began in 2007, or experience worsening economic conditions, our growth and profitability could be constrained. Weak economic conditions are characterized by, among other indicators, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines and lower home sales and commercial activity. All of these factors are generally detrimental to our business. We expect only moderate improvement in these conditions in the near future. In particular, we may face the following risks in connection with these events:

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Our ability to assess the creditworthiness of our clients may be impaired if the models and approaches we use to select, manage and underwrite our clients become less predictive of future performance.

•

The process we use to estimate losses inherent in our loan portfolio requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which process may no longer be capable of accurate estimation and may, in turn, adversely affect its reliability.

•

We may be required to pay significantly higher FDIC insurance premiums in the future if industry losses further deplete the FDIC deposit insurance fund.

•

Changes in interest rates as a result of changes in the United States’ credit rating could affect our current interest income spread.

•

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions and government sponsored entities.

•

We may face increased competition due to consolidation within the financial services industry.

If current levels of market disruption and volatility continue or worsen, our ability to access capital may be adversely affected and asset quality may further deteriorate, which would harm our business, financial condition and results of operations.

The negative impact of the current economic recession has been particularly acute in our primary market areas of southern and central Oregon and in northern California.

Our operations are geographically concentrated in southern and central Oregon and northern California and our business is sensitive to regional business conditions. Our financial condition and results of operations are highly dependent on the economic conditions of the markets we serve, where adverse economic developments or regional or local disasters (such as earthquakes, fires, floods or droughts), among other things, could affect the volume of loan originations, increase the level of non-performing assets, increase the rate of foreclosure losses on loans and reduce the value of our loans. Substantially all of our loans are to businesses and individuals in our primary market areas. Our customers are directly and indirectly dependent upon the economies of these areas and upon the timber and tourism industries, which are significant employers and revenue sources in our markets – economic factors that affect these industries will have a disproportionately negative impact on our region and our customers. All geographic regions in which we operate have seen precipitous declines in property values. Since 2009, Oregon has had one of the nation’s highest unemployment rates and major employers have implemented substantial layoffs or scaled back growth plans. Oregon continues to face fiscal challenges, the long-term effects of which on the state’s economy cannot be predicted. The State of California continues to face significant fiscal challenges, the long-term effects of which cannot be predicted. A further deterioration in the economic and business conditions or a prolonged delay in economic recovery in our primary market areas could result in the

following consequences that could materially and adversely affect our business: increased loan delinquencies; increased problem assets and foreclosures; reduced demand for our products and services; reduction in cash balances of consumers and businesses resulting in declines in deposits; reduced property values that diminish the value of assets and collateral associated with our loans; and a decrease in capital resulting from charge-offs and losses.

We have taken actions, and may take additional actions, to help us improve our regulatory capital ratios, including reducing expense, assets and liabilities.

On January 12, 2012, we announced plans to close and consolidate eleven branches, representing approximately 10% of the Bank’s deposits, by April 2012. Branch consolidation is projected to result in expense savings of approximately $1.9 million annually beginning in the second quarter of 2012. First quarter 2012 pre-tax income is expected to be reduced by approximately $790 thousand as a result of consolidation expenses. The branch closures are part of our plans to reduce assets and liabilities and to reduce expenses, improve efficiency and positively impact the value of the Company. We expect to further evaluate our options for reducing expenses and assets and liabilities which could include branch or asset sales. The disposition of our assets and liabilities could hurt our long-term profitability. While branch closures, if completed, will likely reduce our assets and liabilities and increase our Bank capital ratios, we expect that our net income in the future could be reduced as a result of the loss of income generated by these branches. When we close or consolidate a branch, customers at those branches may transition their business to our competitors. We also face the risks of higher than expected consolidation expenses and the inability to realize projected savings levels.

As of December 31, 2011, approximately 79% of our gross loan portfolio was secured by real estate, the majority of which is commercial real estate and continued market deterioration could lead to losses.

Declining real estate values have caused increasing levels of charge-offs and provisions for loan losses since 2008. The market value of real estate can fluctuate significantly in a short period of time as a result of local market conditions. Adverse changes affecting real estate values and the liquidity of real estate in our markets could increase the credit risk associated with our loan portfolio, and could result in losses that would adversely affect our profitability. Adverse changes in the economy affecting real estate values and liquidity in our markets could significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on the loan. Declines in real estate market values, increases in commercial and consumer delinquency levels or losses may precipitate increased charge-offs and a further increase in our loan loss provisions, which could have a material adverse effect on our business, financial condition and results of operations.

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.

We will suffer losses 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 our management believes are appropriate to minimize this risk by assessing the likelihood of non-performance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, involve subjective judgments and may not prevent unexpected losses that could materially affect our results of operations. Moreover, bank regulators frequently monitor loan loss allowances. If regulators were to determine that the allowance was inadequate, they may require us to increase the allowance, which also would adversely impact our financial condition.

We have continuing losses and continuing volatility in our results of operations.

We reported a net loss applicable to shareholders of $17.6 million for the year ended December 31, 2011. Losses resulted primarily from the high level of nonperforming assets and the related reduction in interest income and increased provision for loan losses. We can provide no assurance that we will not have continuing losses in our operations.

We are required to reduce levels of nonperforming assets under our Consent Order.

We are required to improve our financial condition by reducing nonperforming assets. We may seek to sell assets, but market conditions for the sale of assets may not be favorable and we may not be able to lower nonperforming asset levels sufficiently to meet the requirements of the Consent Order or to maintain existing capital levels. If other banks are also required to improve capital levels and choose to sell assets, or if the FDIC sells assets in its position as receiver for a failed bank in our market area, asset pricing could be unfavorable. The sale of nonperforming assets could reduce capital levels and delay compliance with the Consent Order.

We have high levels of nonperforming assets which negatively affect our results of operations.

Our nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to continue to incur additional losses relating to nonperforming loans. We do not record interest income on non-accrual loans, thereby adversely affecting our income, and increasing loan administration costs. When we receive collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which may result in a loss. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of such risks. Decreases in the value of problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to performance of their other responsibilities. We could experience further increases in nonperforming loans in the future.

The Consent Order limits the types of funding sources on which we may rely and may have a negative impact on our liquidity.

We cannot accept, renew or roll over any brokered deposits. In addition, certain interest-rate limits apply to our brokered and solicited deposits. The reduction in the level of brokered deposits, even according to their regular maturity dates, may have a negative impact on our liquidity. Our financial flexibility could be severely constrained if we are unable to obtain brokered deposits or renew wholesale funding or if adequate financing is not available in the future at acceptable rates of interest. We may not have sufficient liquidity to continue to fund new loan originations, and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature. Furthermore, we are now required to provide a higher level of collateral for any funds that we borrow from the Federal Reserve, and we may be required to provide additional collateral to our other funding sources as well. Any additional collateral requirements or limitations on our ability to access additional funding sources are expected to have a negative impact on our liquidity.

We are subject to restrictions on our ability to declare or pay dividends on and repurchase shares of our common stock and to repay our junior subordinated debentures.

We are a separate, distinct legal entity from the Bank and receive substantially all of our revenue from dividends from the Bank. Our inability to receive dividends from the Bank adversely affects our financial condition. The Bank’s ability to pay dividends is primarily dependent on net interest income, which is the income that remains after deducting from total income generated by earning assets the expense attributable to the acquisition of the funds required to support earnings assets, the general level of interest rates, the dynamics of

changes in interest rates and the levels of nonperforming loans. Our ability to pay dividends, and the Bank’s ability to pay dividends to us, are also limited by regulatory restrictions and the need to maintain sufficient capital. In the second quarter of 2009, we suspended payment of dividends on our common stock in order to conserve capital. We are subject to formal regulatory restrictions that will continue to prohibit us from declaring or paying any dividend without prior approval of banking regulators. Although we can seek to obtain waiver of such prohibition, we would not expect to be granted such waiver or to be released from this obligation until our financial performance improves significantly. Therefore, we may not be able to resume payments of dividends in the future. In addition the Bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet the “adequately capitalized” level in accordance with regulatory capital requirements. It is also possible that, depending on the financial condition of the Bank and other factors, regulatory authorities could assert that payment of dividends or other payments by the Bank, including payments to the Company, is an unsafe and unsound practice. Under Oregon law, the amount of a dividend from the Bank may not be greater than net unreserved retained earnings, after first deducting 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 unless the debt is fully secured and in the process of collection; all other assets charged-off as required by the Oregon Division of Finance and Corporate Securities (“DFCS”) or state or federal examiner; and all accrued expenses, interest and taxes.

Under the terms of our agreements with the U.S. Treasury in connection with the sale of our Series B Preferred Stock, we are unable to declare dividend payments on common, junior preferred or pari passu preferred shares if we are in arrears on the dividends on the Series B Preferred Stock. We suspended further dividend payments on the Series B Preferred Stock in the fourth quarter of 2009 in order to conserve capital. If dividends on the Series B Preferred Stock are not paid in full for six dividend periods, whether or not consecutive, the holders of the Series B Preferred Stock will have the right to elect two directors. Such right to elect directors will end when full dividends have been paid for four consecutive dividend periods. In December 2011, the U.S. Treasury elected Mary Carryer to our board of directors. We also announced in the fourth quarter of 2009 that we would defer, as permitted under the terms of indentures, interest payments on junior subordinated debentures issued in connection with trust preferred securities. We are permitted to defer such interest payments for up to 20 consecutive quarters, but during a deferral period we are prohibited from making dividend payments on our capital stock.

Further, if we become current on our Series B Preferred Stock dividends and junior subordinated debenture payments, we cannot increase dividends on our common stock above $0.57 per share per quarter without the U.S. Treasury’s approval or redemption or transfer of the Series B Preferred Stock.

We are subject to executive compensation restrictions because of our participation in the U.S. Treasury’s TARP Capital Purchase Program.

We are subject to TARP rules and standards governing executive compensation, which generally apply to our Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers and, with amendments to the rules in 2009, apply to a number of other employees. The standards include (i) a requirement to recover any bonus payment to senior executive officers or certain other employees if payment was based on materially inaccurate financial statements or performance metric criteria; (ii) a prohibition on making any golden parachute payments to senior executive officers and certain other employees; (iii) a prohibition on paying or accruing any bonus payment to certain employees, with narrow exceptions for grants of long-term restricted stock; (iv) a prohibition on maintaining any plan for senior executive officers that encourages such officers to take unnecessary and excessive risks that threaten the Company’s value; (v) a prohibition on maintaining any employee compensation plan that encourages the manipulation of reported earnings to enhance the compensation of any employee; and (vi) a prohibition on providing tax gross-ups to senior executive officers and certain other employees. These restrictions and standards could limit our ability to recruit and retain executives.

Our business is heavily regulated and Dodd-Frank and additional new regulations may negatively affect our operations.

The wide range of federal and state laws and regulations affecting the Holding Company and the Bank are designed primarily to protect the deposit insurance funds and consumers, and not to benefit shareholders. These laws and regulations can sometimes impose significant limitations on our operations as well as result in higher operating 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 affect our results materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions and interest rates that impact the Company. We could experience credit losses if new federal or state legislation, or regulatory changes, are implemented to protect customers by reducing the amount that the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts or by limiting the Bank’s ability to foreclose on property or other collateral or makes foreclosure less economically feasible.

Compliance with the recently enacted financial reform legislation may increase our costs of operations and adversely impact our earnings. Dodd-Frank contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions. Dodd-Frank also establishes a new financial industry regulator, the Consumer Financial Protection Bureau (“CFPB”). Our banking regulators have introduced and continue to introduce new regulations and supervisory guidance and practices in response to the heightened Congressional and regulatory focus on the financial services industry generally. Additional legislative or regulatory action that may impact our business may result from the multiple studies mandated by Dodd-Frank. We are unable to predict the nature, extent or impact of any additional changes to statutes or regulations, including the interpretation or implementation thereof, which may occur in the future. The effect of Dodd-Frank and other regulatory initiatives on our business and operations could be significant, depending upon final implementing regulations, the actions of our competitors and the behavior of consumers. Dodd-Frank, other legislative and regulatory changes, and enhanced scrutiny by our regulators could have a significant impact on us by, for example, requiring us to limit or change our business practices, limiting our ability to pursue business opportunities, requiring us to invest valuable management time and resources in compliance efforts, imposing additional costs on us, limiting fees we can charge for services, requiring us to meet more stringent capital, liquidity and leverage ratio requirements, impacting the value of our assets, or otherwise adversely affecting our businesses. Dodd-Frank, its implementing regulations, and any other significant financial regulatory reform initiatives could have a material adverse effect on our business, results of operations, cash flows and financial condition. Significant changes include:

•

The establishment of the Financial Stability Oversight Counsel, which will be responsible for identifying and monitoring systemic risks posed by financial firms, activities, and practices. The establishment of the CFPB to serve as a dedicated consumer-protection regulatory body with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators. Because the CFPB has been recently established and its Director has been only recently appointed, there is significant uncertainty as to how the CFPB will exercise and implement its regulatory, supervisory, examination and enforcement authority. Changes in regulatory expectations, interpretations or practices could increase the risk of regulatory enforcement actions, fines and penalties. Actions by the CFPB could result in requirements to alter our products and services that would make our products less attractive to consumers. Changes to regulations or regulatory guidance adopted in the past by bank regulators could increase our compliance costs and litigation exposure.

•

Federal Reserve determination of reasonable debit card fees.

•

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

Many provisions in Dodd-Frank are aimed at financial institutions that are significantly larger than the Company or the Bank. Nonetheless, there are provisions that apply to us and we have to apply resources to ensure compliance, which may adversely impact our earnings. The precise nature, extent and timing of many of these reforms and the impact on us is still uncertain.

Changes in interest rates could adversely impact our net interest margin, net interest income and net income.

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. We 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 adjusting the re-pricing frequency of PremierWest Bank’s rate-sensitive assets and rate-sensitive liabilities over any given period. Significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.

Market conditions or regulatory constraints could restrict our access to funds necessary to meet liquidity demands.

Liquidity measures the ability to meet loan demand and deposit withdrawals and to pay liabilities as they come due. A sharp reduction in deposits or rapid increase in loans outstanding could force us to borrow heavily in the wholesale deposit market, purchase federal funds from correspondent banks, borrow at the Federal Home Loan Bank of Seattle or Federal Reserve discount window, raise deposit interest rates or reduce lending activity. Wholesale deposits, federal funds and sources for borrowings may not be available to us due to future regulatory constraints, market conditions or unfavorable terms.

We rely on the Federal Home loan Bank (“FHLB”) of Seattle as a source of liquidity.

The Company has the ability to borrow from FHLB of Seattle to provide a source of wholesale funding for immediate liquidity and borrowing needs. Changes or disruptions to the FHLB of Seattle or the FHLB system in general, may materially impair the Company’s ability to meet its growth plans or to meet short and long term liquidity demands. In October 2010, the FHLB of Seattle entered into the Consent Arrangement with the Federal Housing Finance Agency that requires the FHLB of Seattle to meet various standards including a minimum retained earnings requirement. As of December 31, 2011, the FHLB of Seattle continued to meet all of its

regulatory capital requirements, but remains classified as “undercapitalized” by the Federal Housing Finance Agency. The Federal Housing Finance Agency may take additional actions or require the FHLB of Seattle to meet additional requirements or conditions. The FHLB of Seattle cannot pay a dividend on their common stock and it cannot repurchase or redeem common stock. While the FHLB of Seattle has announced it does not anticipate that additional capital is immediately necessary, and believes that its capital level is adequate to support realized losses in the future, the FHLB of Seattle could require its members, including the Company, to contribute additional capital in order to return the FHLB of Seattle to compliance with capital guidelines.

The financial services industry is highly competitive.

Competition may adversely affect our performance. The financial services industry is highly competitive due to changes in regulation that permit more non-bank companies to offer financial services, technological advances that expand the ability of our competitors to reach our customers and offer products through the internet, and the accelerating pace of consolidation among financial services providers including due to bank failures. Credit unions, as a result of exemptions from federal corporate income tax and costly regulatory requirements facing banks, are able to offer certain products to our current and targeted customers at lower rates and fees. We face competition both in attracting deposits and in originating loans and providing transactional services.

We rely on technology to deliver products and services and interact with our customers.

We face operational risks as we depend on internal and outsourced technology to support all aspects of our business operations. We store and process sensitive consumer and business data, and a cybersecurity breach could result in data theft or system disruption. A cybersecurity breach of one of our vendor’s systems could also result in data theft or disruption of our business. Interruption or failure of these systems creates a risk of loss of customer confidence if technology fails to work as expected, risk of regulatory scrutiny and possible fines if security breaches occur, and significant expense to remedy the event. Risk management programs are expensive to maintain and will not protect the company from all risks associated with maintaining the security of customer information, proprietary data, external and internal intrusions, disaster recovery and failures in the controls used by vendors.

The value of securities in our investment securities portfolio may be negatively affected by disruptions in securities markets.

Market conditions may negatively affect the value of securities. There can be no assurance that the declines in market value associated with these disruptions will not result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

Our deposit insurance premium could be substantially higher in the future.

The FDIC insures deposits at the Bank and other financial institutions. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund at a certain level. Current economic conditions have caused bank failures and expectations for additional bank failures, in which case the FDIC, through the Deposit Insurance Fund, ensures payments of customer deposits at failed banks up to insured limits. In addition, deposit insurance limits on customer deposit accounts have generally increased to $250,000 from $100,000. These developments will cause the premiums assessed by the FDIC to increase and may materially increase our noninterest expense. An increase in the risk category of the Bank will also cause our premiums to increase. Whether through adjustments to base deposit insurance assessment rates, significant special assessments or emergency assessments under the TLGP, increased deposit insurance premiums could have a material adverse effect on our earnings.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

As of December 31, 2011, the Company conducted business through 54 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 54 offices included 44 full service bank branches and 10 other office locations.

PremierWest Bank’s 44 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 (7) and Klamath (2) counties of Oregon and 21 branches located in Siskiyou (8), Shasta (3), Butte (1), Tehama (2), Yolo (2), Nevada (1), and Sacramento (4) counties of California. Of the 44 branch locations, 35 are owned by PremierWest Bank, 9 are leased, and two locations involve long-term land leases where the Bank owns the building.

The Company’s 10 other locations house administrative and subsidiary operations. These facilities include one campus located in Medford, Oregon with two owned buildings housing the Company’s administrative head office, operations and data processing facilities; two owned administrative facilities—one in Redding, California housing regional administration, our Premier Finance Company subsidiary, and one in Red Bluff, California housing PremierWest Bank administrative functions; one leased location in Bend, Oregon, that was not renewed at December 2011; three leased locations housing stand-alone Premier Finance Company offices in Portland, Eugene, and Roseburg, Oregon; and, three buildings and two owned locations in Medford, Oregon occupied by a Premier Finance Company office and the Bank’s consumer lending group. The Company also leases a storage warehouse in Medford, Oregon.

In addition, to the above, three 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.

The annual rent expense on leased properties was $1.0 million, $1.2 million, and $1.1 million in 2011, 2010 and 2009, respectively.

ITEM 3.

LEGAL PROCEEDINGS

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

In September 2011, PremierWest Bank initiated a legal action to collect debts from Arthur Critchell Galpin, Eagle Point Developments, LLC, ACG Properties, LLC, and Eagle Point Golf Club, LLC, in the Circuit Court of the State of Oregon for Jackson County, Case No. 11-4146-E-9. The Bank’s action sought judgments against those parties and judicial foreclosure upon real estate that served as collateral for the loans. In October 2011, the defendants in the action filed counterclaims against the Bank alleging breach of fiduciary duty and fair dealing regarding the value of underlying collateral in connection with the sale of a Bank loan to an affiliate of one of the defendants and in connection with the negotiation and restructuring of loan transactions with the defendants. On January 3, 2012, the Company entered into a confidential master settlement agreement, and the lawsuits were dismissed on January 27, 2012.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

PremierWest common stock is quoted on the NASDAQ Capital Market (“NASDAQ”) under the symbol “PRWT”. From February 11, 2011 through March 10, 2011, the symbol converted to “PRWTD” as a result of our reverse stock split. 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 NASDAQ. This information has been adjusted to reflect previous stock dividends paid in 2009 and the 1-for-10 reverse stock split that was effective February 10, 2011. No stock dividend was paid in 2011 or 2010. Bid quotations reflect inter-dealer prices, without adjustment for mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. On March 6, 2012, the Company had 10,034,741 shares of common stock issued and outstanding, which were held by approximately 800 shareholders of record, a number which does not include approximately 4,800 beneficial owners who hold shares in “street name.” As of March 6, 2012, the most recent date prior to the date of this report, the closing price of the common stock was $1.40 per share.


	2011						2010						2009
	Closing Market Price				Cash Dividends Declared		Closing Market Price				Cash Dividends Declared		Closing Market Price				Cash Dividends Declared
	High		Low		Cash Dividends Declared		High		Low		Cash Dividends Declared		High		Low		Cash Dividends Declared
1st Quarter	$	4.30	$	2.19	$	—	$	16.30	$	4.50	$	—	$	67.00	$	26.20	$	0.10
2nd Quarter	$	2.43	$	1.29	$	—	$	13.80	$	3.90	$	—	$	46.70	$	33.50	$	—
3rd Quarter	$	1.88	$	0.91	$	—	$	5.60	$	3.40	$	—	$	36.70	$	27.10	$	—
4th Quarter	$	1.10	$	0.80	$	—	$	5.50	$	3.10	$	—	$	27.00	$	13.00	$	—

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. Beginning in the second quarter of 2009, the Company announced cessation of dividends. See Item 1 – Dividends. For a discussion of restrictions on dividend payments, please refer to Part I, Item 1A Risk Factors in this Form 10-K.

Cash paid for fractional shares in connection with the 1-for-10 reverse stock split was approximately $1,000 during the year ended December 31, 2011. There were no other repurchases of common stock by the Company during 2011.

The following table provides information about the number of outstanding options, the associated weighted average price and the number of options available for issuance as of December 31, 2011:

Equity Compensation Plan Information


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders		74,743	$	91.75		502,850
Equity compensation plans not approved by security holders		—		—		—

Total		74,743	$	91.75		502,850

Performance Graph

The following graph, which is furnished not filed, 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 LLC from sources deemed to be reliable. The comparison assumes that $100 was invested on December 31, 2006 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 -99.42% compared to -46.26% and 13.16% for the SNL NASDAQ Bank and NASDAQ Composite indexes, respectively.

LOGO


	Period Ending
Index	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
PremierWest Bancorp		100.00		76.16		45.77		10.22		2.45		0.58
NASDAQ Bank		100.00		80.09		62.84		52.60		60.04		53.74
NASDAQ Composite		100.00		110.66		66.42		96.54		114.06		113.16

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.

Consolidated Five-Year Financial Data


(Dollars in thousands except per share data)	Years Ended December 31,
	2011			2010			2009			2008			2007
Operating Results
Total interest and dividend income	$	59,475		$	69,041		$	77,964		$	88,936		$	82,400
Total interest expense		9,558			13,074			19,968			28,573			27,216

Net interest income		49,917			55,967			57,996			60,363			55,184
Provision for loan losses		14,350			10,050			88,031			36,500			686
Non-interest income		10,838			11,238			11,003			10,234			8,880
Non-interest expense		61,386			61,980			129,722			47,129			38,973

Income (loss) before provision for income taxes		(14,981	)		(4,825	)		(148,754	)		(13,032	)		24,405
Provision (benefit) for income taxes		70			134			(2,282	)		(5,493	)		9,303

Net income (loss)		(15,051	)		(4,959	)		(146,472	)		(7,539	)		15,102
Preferred stock dividends and discount accretion		2,565			2,533			2,171			275			275

Net income (loss) available to common shareholders	$	(17,616	)	$	(7,492	)	$	(148,643	)	$	(7,814	)	$	14,827

Per Share Data (1)
Basic earnings (loss) per common share (1)	$	(1.76	)	$	(0.90	)	$	(60.07	)	$	(3.36	)	$	8.30
Diluted earnings (loss) per common share (1)	$	(1.76	)	$	(0.90	)	$	(60.07	)	$	(3.36	)	$	7.80
Dividends declared per common share (1)	$	—		$	—		$	0.10		$	1.80		$	1.70
Ratio of dividends declared to net income (loss)		0.00	%		0.00	%		-0.16	%		-53.48	%		19.14	%

Financial Ratios
Return on average common equity		-34.33	%		-13.69	%		-93.07	%		-4.41	%		13.05	%
Return on average assets		-1.31	%		-0.51	%		-9.29	%		-0.54	%		1.38	%
Efficiency ratio (2)		101.04	%		92.23	%		188.01	%		66.76	%		60.83	%
Net interest margin (3)		4.05	%		4.08	%		4.10	%		4.68	%		5.72	%

Balance Sheet Data at Year End
Gross loans	$	797,878		$	978,546		$	1,149,027		$	1,247,988		$	1,025,329
Allowance for loan losses	$	22,683		$	35,582		$	45,903		$	17,157		$	11,450
Allowance as percentage of gross loans		2.84	%		3.64	%		3.99	%		1.37	%		1.12	%
Total assets	$	1,266,047		$	1,411,220		$	1,536,314		$	1,475,954		$	1,157,961
Total deposits	$	1,127,749		$	1,266,249		$	1,420,762		$	1,211,269		$	935,315
Total equity	$	84,365		$	97,008		$	71,535		$	176,984		$	127,675

Notes:

(1)

Per share data have been restated for subsequent stock dividends and for 1-for-10 reverse stock split effective February 10, 2011.

(2)

Efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income plus non-interest income.

(3)

Tax adjusted at 40.0% for 2011, 2010 and 2009, 34.00% for 2008, and 38.25% for 2007.

Consolidated Quarterly Financial Data

The following tables set forth the Company’s unaudited consolidated financial data regarding operations for each quarter of 2011 and 2010. 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.


	2011
(Dollars in thousands, except per share data)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
STATEMENT OF OPERATIONS DATA
Total interest and dividend income	$	15,032		$	15,697		$	15,036		$	13,710
Total interest expense		2,831			2,571			2,187			1,969

Net interest income		12,201			13,126			12,849			11,741
Provision for loan losses		6,300			—			5,050			3,000

Net interest income after provision for loan losses		5,901			13,126			7,799			8,741
Non-interest income		3,101			2,693			2,667			2,377
Non-interest expense		15,740			17,872			13,298			14,476

Income (loss) before income taxes		(6,738	)		(2,053	)		(2,832	)		(3,358	)
Provision for income taxes		16			5			23			26

Net loss		(6,754	)		(2,058	)		(2,855	)		(3,384	)
Preferred stock dividends and discount accretion		656			613			614			682

Net loss available to common shareholders	$	(7,410	)	$	(2,671	)	$	(3,469	)	$	(4,066	)

Basic loss per common share	$	(0.74	)	$	(0.27	)	$	(0.35	)	$	(0.41	)

Diluted loss per common share	$	(0.74	)	$	(0.27	)	$	(0.35	)	$	(0.41	)


	2010
(Dollars in thousands, except per share data)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
STATEMENT OF OPERATIONS DATA
Total interest and dividend income	$	18,178		$	17,657		$	17,261		$	15,945
Total interest expense		3,351			2,828			3,636			3,259

Net interest income		14,827			14,829			13,625			12,686
Provision for loan losses		6,100			2,350			1,600			—

Net interest income after provision for loan losses		8,727			12,479			12,025			12,686
Non-interest income		2,717			2,445			2,736			3,340
Non-interest expense		14,135			16,351			15,562			15,932

Income (loss) before income taxes		(2,691	)		(1,427	)		(801	)		94
Provision for income taxes		—			—			—			134

Net loss		(2,691	)		(1,427	)		(801	)		(40	)
Preferred stock dividends and discount accretion		611			636			620			666

Net loss available to common shareholders	$	(3,302	)	$	(2,063	)	$	(1,421	)	$	(706	)

Basic loss per common share	$	(1.02	)	$	(0.21	)	$	(0.14	)	$	(0.07	)

Diluted loss per common share	$	(1.02	)	$	(0.21	)	$	(0.14	)	$	(0.07	)

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

C RITICAL ACCOUNTING POLICIES AND ESTIMATES

We have identified our accounting policies related to our calculation of the allowance for credit losses, valuation of other real estate owned (“OREO”), impaired loans, and estimates relating to income taxes as policies that are most critical to an understanding of our financial condition and operating results. Application of these policies and calculation of these amounts involve difficult, subjective, and complex judgments, and often involve estimates about matters that are inherently uncertain. These policies are discussed in greater detail below, as well as in Note 1 “Summary of Significant Accounting Policies” to the Company’s audited consolidated financial statements included under the section “Financial Statements and Supplementary Data” Item 8 of this report.

Allowance for Credit Losses. The allowance for loan losses is established to absorb known and inherent losses attributable to loans outstanding. 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, 2011, approximately 79% of PremierWest’s gross loan portfolio is secured by real estate. Accordingly, a significant decline in real estate values from current levels in Oregon and California could cause Management to increase the allowance for loan losses and/or experience greater loan charge-offs.

Other Real Estate Owned (“OREO”). OREO acquired through foreclosure or deeds in lieu of foreclosure, is carried at the lower of cost or fair value, less estimated costs of disposal. When property is acquired, any excess of the loan balance over the fair value is charged to the allowance for loan losses. Holding costs, subsequent write-downs to fair value, if any, or any disposition gains or losses are included in non-interest expense.

Stock Option Plan. The Company measures and recognizes as compensation expense, the grant date fair market value for all share-based awards. The Company estimates the fair market value of stock-based payment awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model to value its stock options. The Black-Scholes model requires the use of assumptions regarding the risk-free interest rate, the expected dividend yield, the weighted average expected life of the options, and the historical volatility of its stock price.

Income Taxes. The Company establishes a deferred tax valuation allowance 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. At December 31, 2011, the Company continued to conclude it was more likely than not that the deferred tax asset would not be realized, and the valuation allowance reduced the deferred tax asset to zero. The determination of our ability to fully utilize our deferred tax assets requires significant judgment, the use of estimates and the interpretation of complex tax laws. As such, we have written them down to the net realizable value. Prospectively, as the Company continues to evaluate available evidence, including the depth of the current economic downturn and its implications on its operating results, it is possible that the Company may deem some or all of its deferred income tax assets to be realizable.

Core Deposit Intangibles. In July 2009, the Company acquired two Wachovia Bank branches in Northern California. This acquisition included a core deposit intangible asset representing the value of the long-term deposit relationships acquired and a negative CD premium as a result of the current all-in cost of the CD portfolio being well above the cost of similar funding. The core deposit intangible asset is being amortized over an estimated weighted average useful life of 7.4 years. The negative CD premium was fully amortized in 2010.

O VERVIEW

For the year ended December 31, 2011:

•

Net loss applicable to common shareholders of $17.6 million, after $14.4 million in loan loss provision and net OREO and foreclosed asset expenses of $8.6 million. This compares to a net loss applicable to common shareholders of $7.5 million for the year ended 2010, with a $10.1 million loan loss provision and net OREO and foreclosed asset expenses of $6.9 million;

•

Net interest margin of 4.05%, a decrease of 3 basis points from 4.08% for the year ended 2010;

•

Average rate paid on total deposits and borrowings of 0.78%, an 18 basis point decline from 0.96% for the year ended 2010;

•

Net loan charge-offs of $27.2 million, compared to $20.4 million for the year ended 2010;

•

Loans past due 30 – 89 days and still accruing of $2.9 million or 0.40% of total loans, down from $4.2 million or 0.49% at December 31, 2010;

•

Allowance for loan losses of $22.7 million, or 2.84% of gross loans, compared to $35.6 million, or 3.64%, at December 31, 2010.

•

Non-performing loans of $76.2 million, or 9.56% of gross loans, compared to $129.6 million, or 13.25% of gross loans, at December 31, 2010.

•

OREO of $22.8 million down from $32.0 million at December 31, 2010.

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

•

Reducing adversely classified loans by $105.6 million, or 40%, from $265.4 million at December 31, 2010;

•

Reducing non-performing assets by $62.6 million, or 39%, from $161.6 million at December 31, 2010;

•

Stability of the Bank’s total risk-based and leverage capital ratios of 13.03% and 8.72%, respectively, as compared to 12.59% and 8.85% at December 31, 2010;

•

Growth in average non-interest bearing demand deposits of $17.0 million during 2011 to $268.7 million, or 22% of total average deposits, up from $251.7 million, or 19% of total average deposits in 2010.

On January 3, 2012, the Company entered into a confidential master settlement agreement with its largest non-performing loan relationship totaling $28.7 million. This settlement resulted in a charge-off of $6.2 million including a partial write-down of a remaining non-performing loan and a cash settlement in exchange for deeds in lieu of foreclosure and dismissal of lawsuits. The impact on operations of this settlement was reflected in fourth quarter 2011, whereas the Company obtained possession of real property and other collateral on January 11, 2012. The lawsuits were dismissed on January 27, 2012.

The table provided below displays selected asset quality ratios as of December 31, 2011, and those same ratios adjusted for the impact of this settlement, had the collateral and real property been obtained as of December 31, 2011:


	December 31, 2011 Actual			December 31, 2011 Adjusted for Settlement
Allowance for loan losses to gross loans		2.84	%		2.90	%
Allowance for loan losses to non-performing loans		29.75	%		36.98	%
Non-performing loans to gross loans		9.56	%		7.83	%
Non-performing assets to total assets		7.83	%		7.83	%

ASSET QUALITY

At December 31, 2011, the Company had $159.8 million in adversely classified loans. This compares favorably to $265.4 million at December 31, 2010. Adversely classified loans have declined for five consecutive quarters and were down 39.8% from December 31, 2010.

Included in adversely classified loans at December 31, 2011, were non-performing loans of $76.2 million, compared to $129.6 million, at December 31, 2010. Non-performing loans have declined for five consecutive quarters and were down 41.2% from December 31, 2010. Reductions in non-performing loans occurred primarily in the commercial real estate loan category. Of those loans currently designated as non-performing, approximately $31.5 million, or 41.4% are current as to payment of principal and interest.

The Company monitors delinquencies, defined as loans on accruing status 30-89 days past due, as an indicator of future non-performing assets. Total delinquencies were $2.9 million, or 0.40% of gross loans, at December 31, 2011, a reduction from $4.2 million, or 0.49%, at December 31, 2010.

For the year ended December 31, 2011, total net loan charge-offs were $27.2 million compared to $20.4 million in the year ended December 31, 2010. The net charge-offs in the current period were concentrated in the construction and land development and non-owner occupied commercial real estate loan categories and were primarily associated with the master settlement with the Bank’s largest non-performing loan relationship. The ratio of net loan charge-offs to average gross loans for the current year was 3.06% compared to 1.88% in the previous year. Average gross loans in the current period were 17.7% lower than the previous year.

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

The Company’s allowance for credit losses continues to decline in concert with the reduction in adversely classified loans, loan delinquencies and other relevant credit metrics. With the reduction in net charge-offs over the past several years and change in the loan portfolio composition, loss factors used in management’s estimates to establish reserve levels have declined commensurately.

The provision for credit losses was $14.4 million for the twelve months ended December 31, 2011, compared to $10.1 million in the same period last year. The trend of future provision for credit losses will depend primarily on economic conditions, level of adversely-classified assets, and changes in collateral values.

At December 31, 2011, total non-performing assets were down compared to December 31, 2010. Non-performing assets and non-performing loans have also declined compared to December 31, 2010, in terms of percentage of total assets and loans, respectively. The amount of additions to non-performing assets has slowed during 2011 versus the prior year. This is due to the positive impact of business improvement plans implemented by a number of borrowers in response to the current economic downturn.

The Company has remained focused on OREO property disposition activities. While sales were down compared to the prior year, current period sales were higher than the same period last year. The largest balances in the OREO portfolio at December 31, 2011, were attributable to residential and commercial site development

projects, followed by income producing properties, all of which are located within the regions in which we operate. The total number of OREO property units has decreased during the year. This reduction is a result of sales that occurred during the year and fewer properties transferred to OREO during the period.

LOANS AND DEPOSITS

The Bank’s total loan portfolio declined from December 31, 2010, reflecting the continued challenges in the local and national economy. Loan totals have also declined because the Company exited a number of higher risk rated loan relationships over the past year which contributed to the contraction in the commercial real estate loan category over the same period.

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

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

Average total deposits declined 10.0% during 2011 as compared to 2010. This decrease was mainly due to the decision to continue to reduce higher cost time deposit balances. Total average time deposits declined as a percentage of the Company’s average total deposits in 2011 versus the prior year. The combination of the Company’s efforts to reduce higher-cost time deposits and recent deposit pricing strategies to lower interest rates in concert with market conditions has helped reduce the average rate paid on total deposits in 2011, down significantly from 2010.

REVERSE STOCK SPLIT

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

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

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

DISCUSSION AND ANALYSIS

The following discussion should be read in conjunction with PremierWest’s audited consolidated financial statements and the notes thereto as of December 31, 2011 and 2010 and for each of the three years in the periods ended December 31, 2011, 2010, and 2009, that are included in this report.

PremierWest conducts a general commercial banking business, gathering deposits 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). 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. Another indicator 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.

PremierWest’s profitability is also affected by such factors as the level of non-interest income and expenses and the provision for loan loss expense. Non-interest income consists primarily of service charges on deposit accounts and fees generated through PremierWest’s mortgage division and investment services subsidiary. Non-interest expense consists primarily of salaries, commissions and employee benefits, OREO and loan collection expenses, professional fees, equipment expenses, occupancy-related expenses, communications, advertising and other operating expenses.

F INANCIAL HIGHLIGHTS

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

For The Twelve Months Ended


(Dollars in Thousands)
	December 31, 2011			December 31, 2010			Year over Year % Change
Net loss applicable to common shareholders	$	(17,616	)	$	(7,492	)		-135	%
Provision for loan losses		14,350			10,050			43	%
Net cost of operations of other real estate owned and foreclosed assets		8,554			6,851			25	%
Provision (benefit) for income taxes		70			134			-48	%
Preferred stock dividends and discount accretion		2,565			2,533			1	%

Pre-tax, pre-credit cost operating income	$	7,923		$	12,076			-34	%

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

PremierWest recorded a net loss available to common shareholders of $17.6 million for the year ended December 31, 2011, compared to a net loss of $7.5 million in 2010 and a net loss of $148.6 million in 2009. Our diluted loss per common share was $1.76, $0.90, and $60.07, for the years ended 2011, 2010 and 2009, respectively, after adjusting for the 1-for-10 reverse stock split that occurred on February 10, 2011. Loss on average common equity available to common shareholders was -34.33%, -13.69%, and -93.07%, for the years ended December 31, 2011, 2010, and 2009, respectively.


	Years Ended December 31,
(Dollars in thousands)	2011			2010			2009			2008			2007
Net income (loss) available to common shareholders	$	(17,616	)	$	(7,492	)	$	(148,643	)	$	(7,814	)	$	14,827
Average assets	$	1,341,192		$	1,470,807		$	1,600,572		$	1,456,722		$	1,073,571
RETURN ON AVERAGE ASSETS		-1.31	%		-0.51	%		-9.29	%		-0.54	%		1.38	%

Net income (loss) available to common shareholders	$	(17,616	)	$	(7,492	)	$	(148,643	)	$	(7,814	)	$	14,827
Average common equity	$	51,317		$	54,725		$	159,717		$	177,254		$	113,654
RETURN ON AVERAGE EQUITY AVAILABLE TO COMMON SHAREHOLDERS		-34.33	%		-13.69	%		-93.07	%		-4.41	%		13.05	%

Cash dividends declared	$	—		$	—		$	236		$	4,032		$	2,891
Net income (loss)	$	(15,051	)	$	(4,959	)	$	(146,472	)	$	(7,539	)	$	15,102
PAYOUT RATIO		0.00	%		0.00	%		-0.16	%		-53.48	%		19.14	%

Average stockholders’ equity	$	91,464		$	94,486		$	194,475		$	186,032		$	123,244
Average assets	$	1,341,192		$	1,470,807		$	1,600,572		$	1,456,722		$	1,073,571
AVERAGE EQUITY TO ASSETS RATIO		6.82	%		6.42	%		12.15	%		12.77	%		11.48	%

During the second quarter of 2009, federal and state bank regulators initiated their annual regulatory examination and completed the examination during the third quarter of 2009. As a result of the examination and capital levels, in 2010 the Bank became subject to a formal regulatory agreement with the FDIC. Our Board of Directors initiated a rights offering, as discussed in Note 2—“Regulatory Agreement, Economic Condition and Management Plan.” The agreement required our leverage capital ratio to reach 10.00% by October 3, 2010, a level above the published regulatory minimum for “well-capitalized.” Our Board of Directors approved Management’s recommendations that the following steps be taken to meet regulatory requirements for Bank capital:

•

Deferring further dividend payments on the preferred stock issued pursuant to the U.S. Treasury’s Capital Purchase Program; and

•

Deferring further interest payments on the Company’s trust preferred securities.

Due to these and other steps taken to comply with the regulatory agreement, the Bank’s capital ratios as of December 31, 2011, are as follows:


	December 31, 2011			December 31, 2010			Regulatory Minimum to be “Adequately Capitalized”			Regulatory Minimum to be “Well-Capitalized”
							greater than or equal to			greater than or equal to
Total risk-based capital ratio		13.03	%		12.59	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		11.77	%		11.31	%		4.00	%		6.00	%
Leverage ratio		8.72	%		8.85	%		4.00	%		5.00	%

The FDIC has not taken action to date regarding the Company’s status of non-compliance with the capital ratio requirement.

In addition, the Regulatory Agreement required the Bank to reduce its levels of adversely classified assets as of the 2009 regulatory examination to 100% of Tier 1 Capital plus the Allowance for Loan and Lease Losses

(ALLL) as of November 3, 2010 and 70% of Tier 1 Capital plus the ALLL as of April 2, 2011. The Company has kept regulatory authorities informed regarding its progress in complying with this requirement. As of December 31, 2011 adversely classified assets to Tier 1 Capital plus ALLL was 68.0%.

The Oregon Department of Consumer and Business Services, which supervises banks and bank holding companies through its Division of Finance and Corporate Securities, and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by banks and bank holding companies, respectively. We do not expect to be in a position to pay dividends on our common or preferred stock or interest payments on trust preferred securities without regulatory approval or until we are “well-capitalized” and have satisfied conditions in, and been released from, our regulatory agreements with the FDIC, DCBS and FRB.

The Company and Bank are currently subject to regulatory requirements to improve capital ratios, reduce non-performing asset totals, restrict dividend payments, maintain an adequate allowance for loan losses, retain experienced management, limit deposit pricing and use of brokered deposits or other wholesale funding sources. Our inability to comply with any aspect of the agreement could result in additional restrictions and penalties, impact our ability to obtain regulatory approval to effect branch transactions or other corporate activities, have an adverse impact on our ability to continue as a going concern and prolong the time we are under regulatory constraints on growing our business.

R ESULTS OF OPERATIONS

Average Balances, Interest Rates and Yields

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


	For the Years Ended
	December 31, 2011								December 31, 2010								December 31, 2009
(Dollars in 000’s)	Average Balance			Interest Income or Expense		Average Yields or Rates			Average Balance			Interest Income or Expense		Average Yields or Rates			Average Balance			Interest Income or Expense		Average Yields or Rates
ASSETS:
Interest earning balances due from banks	$	69,896		$	187		0.27	%	$	88,514		$	269		0.30	%	$	39,223		$	308		0.79	%
Federal funds sold		3,172			7		0.22	%		23,148			45		0.19	%		66,966			175		0.26	%
Investments—taxable		271,909			6,046		2.22	%		179,839			4,808		2.67	%		86,353			2,401		2.78	%
Investments—nontaxable		2,502			143		5.72	%		5,349			328		6.13	%		3,647			232		6.36	%
Gross loans (1)		891,846			53,293		5.98	%		1,083,574			63,882		5.90	%		1,221,842			75,078		6.14	%
Mortgages held for sale		692			34		4.91	%		615			27		4.39	%		1,100			49		4.45	%

Total interest earning assets		1,240,017			59,710		4.82	%		1,381,039			69,359		5.02	%		1,419,131			78,243		5.51	%
Allowance for loan losses		(30,516	)							(44,966	)							(37,795	)
Other assets		131,691								134,734								219,236

Total assets	$	1,341,192							$	1,470,807							$	1,600,572

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing deposits		440,257			908		0.21	%		487,182			2,372		0.49	%		480,760			4,245		0.88	%
Time deposits		487,905			8,020		1.64	%		590,701			9,599		1.63	%		629,742			13,896		2.21	%
Short-term borrowings		3,762			15		0.40	%		25			2		8.00	%		4,809			33		0.69	%
Long-term borrowings		30,928			615		1.99	%		30,928			1,101		3.56	%		30,928			1,794		5.80	%

Total interest bearing liabilities		962,852			9,558		0.99	%		1,108,836			13,074		1.18	%		1,146,239			19,968		1.74	%
Non-interest-bearing deposits		268,656								251,670								245,829
Other liabilities		18,220								15,815								22,472
Equity		91,464								94,486								186,032

Total liabilities and shareholders’ equity	$	1,341,192							$	1,470,807							$	1,600,572

Net interest income (3)				$	50,152							$	56,285							$	58,275

Net interest spread							3.83	%							3.84	%							3.77	%
Average yield on earning assets (2) (3)							4.82	%							5.02	%							5.51	%
Interest expense to earning assets							0.77	%							0.95	%							1.41	%
Net interest income to earning assets (2) (3)							4.04	%							4.08	%							4.11	%
Reconciliation of Non-GAAP measure:
Tax Equivalent Net Interest Income
Net interest income				$	49,917							$	55,967							$	57,996
Tax equivalent adjustment for municipal loan interest					178								187								186
Tax equivalent adjustment for municipal bond interest					57								131								93

Tax equivalent net interest income				$	50,152							$	56,285							$	58,275

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

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

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

(1)	Non-accrual loans of approximately $76.2 million at 12/31/11, $129.5 million at 12/31/2010, $98.5 million for 12/31/2009 are included in the average loan balances.

(2)	Loan interest income includes loan fee income of $324,000, $263,000, and $1.1 million for 12/31/2011, 12/31/2010, and 12/31/2009, respectively.

(3)	Tax-exempt income has been adjusted to a tax equivalent basis at a 40% effective rate. The amount of such adjustment was an additional to recorded pre-tax income of $235,000, $318,000, and $279,000 for 2011, 2010, and 2009, respectively.

Rate/Volume Analysis

The following table provides an analysis of the net interest income on a tax equivalent basis indicating the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and of changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities. The values in this table reflect 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.


	2011 vs. 2010 Increase (Decrease) Due To									2010 vs. 2009 Increase (Decrease) Due To
							Net									Net
(Dollars in 000’s)	Volume			Rate			Change			Volume			Rate			Change
ASSETS:
Interest earning balances due from banks	$	(56	)	$	(26	)	$	(82	)	$	389		$	(428	)	$	(39	)
Federal funds sold		(38	)		—			(38	)		(114	)		(16	)		(130	)
Investments—taxable		2,458			(1,220	)		1,238			2,599			(192	)		2,407
Investments—nontaxable		(175	)		(10	)		(185	)		108			(12	)		96
Gross loans		(11,312	)		723			(10,589	)		(8,490	)		(2,706	)		(11,196	)
Mortgages held for sale		3			4			7			(22	)		—			(22	)

Total interest earning assets		(9,120	)		(529	)		(9,649	)		(5,530	)		(3,354	)		(8,884	)

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing deposits		(230	)		(1,234	)		(1,464	)		57			(1,930	)		(1,873	)
Time deposits		(1,676	)		97			(1,579	)		(863	)		(3,434	)		(4,297	)
Short-term borrowings		299			(286	)		13			(33	)		2			(31	)
Long-term borrowings		—			(486	)		(486	)		—			(693	)		(693	)

Total interest bearing liabilities		(1,607	)		(1,909	)		(3,516	)		(839	)		(6,055	)		(6,894	)

Net increase (decrease) in net interest income	$	(7,513	)	$	1,380		$	(6,133	)	$	(4,691	)	$	2,701		$	(1,990	)

Income Statement Overview

Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders for the twelve months ended December 31, 2011 was $17.6 million. This compares to a net loss applicable to common shareholders of $7.5 million for the twelve months ended December 31, 2010, respectively. Loss per basic and diluted share for the twelve months ended December 31, 2011, was $1.76 as compared to a loss per basic and diluted share of $0.90 for the twelve months ended December 31, 2010. For additional detail regarding calculation of our earnings per diluted share in the current quarter and year to date, see Note 19 “Basic and Diluted Loss Per Common Share” of this report.

(All amounts in Thousands, except per share data)

STATEMENT OF OPERATIONS AND LOSS PER COMMON SHARE DATA

For the Twelve Months Ended


	December 31, 2011			December 31, 2010			Change			% Change
Interest and dividend income	$	59,475		$	69,041		$	(9,566	)		-13.9	%
Interest expense		9,558			13,074			(3,516	)		-26.9	%

Net interest income		49,917			55,967			(6,050	)		-10.8	%
Loan loss provision		14,350			10,050			4,300			42.8	%
Non-interest income		10,838			11,238			(400	)		-3.6	%
Non-interest expense		61,386			61,980			(594	)		-1.0	%

Loss before provision for income taxes		(14,981	)		(4,825	)		(10,156	)		-210.5	%
Provision for income taxes		70			134			(64	)		-47.8	%

Net loss	$	(15,051	)	$	(4,959	)	$	(10,092	)		-203.5	%
Less preferred stock dividends and discount accretion		2,565			2,533			32			1.3	%

Net loss applicable to common shareholders	$	(17,616	)	$	(7,492	)	$	(10,124	)		-135.1	%

Basic loss per common share (1)	$	(1.76	)	$	(0.90	)	$	(0.86	)		-95.6	%

Diluted loss per common share (1)	$	(1.76	)	$	(0.90	)	$	(0.86	)		-95.6	%

Average common shares outstanding—basic (1)		10,035,241			8,318,042			1,717,199			20.6	%
Average common shares outstanding—diluted (1)		10,035,241			8,318,042			1,717,199			20.6	%

(1)

As of December 31, 2011 and December 31, 2010, 109,039 common shares related to the potential exercise of the warrant issued to the U.S. Treasury, pursuant to theTroubled Asset Relief Program (TARP) Capital Purchase Program were not included in the computation of diluted earnings per share as their inclusion would have been anti-dilutive.

nm = not meaningful

For the Twelve Months ended

Reconciliation of Non-GAAP Measure:

Tax Equivalent Net Loss Applicable to Common Shareholders

(Dollars in 000’s)


	December 31, 2011			December 31, 2010
Net interest income	$	49,917		$	55,967
Tax equivalent adjustment for municipal loan interest		178			187
Tax equivalent adjustment for municipal bond interest		57			131

Tax equivalent net interest income		50,152			56,285
Provision for loan losses		14,350			10,050
Non-interest income		10,838			11,238
Non-interest expense		61,386			61,980
Provision for income taxes		70			134

Tax equivalent net loss		(14,816	)		(4,641	)
Preferred stock dividends and discount accretion		2,565			2,533

Tax equivalent net loss applicable to common shareholders	$	(17,381	)	$	(7,174	)

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

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

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

Net interest income for twelve months ended December 31, 2011, was down as compared to the prior year. This is primarily due to a decline in average interest earning assets during these periods as part of the company’s deleveraging strategy. Correspondingly, average interest bearing liabilities decreased during these same periods. Changes in the balance sheet mix also contributed to declines in net interest income during these periods. Loan balances have declined through payoffs and charge-offs. Investment securities have grown as a proportion of the balance sheet with loan demand continuing to be weak due to the extended economic slowdown. As such, investment securities, which typically generate a lower yield than loans, comprise a higher percentage of earning assets.

Net interest margin for 2011 increased as compared to 2010, predominantly due to a lower cost of interest bearing deposits. The yield earned on loans improved year-over-year primarily due to a reduction in the amount of interest reversed from placement of loans on non-accrual in 2011 as compared to 2010. As a result, the yield on loans for the twelve months ended December 31, 2011 declined by 4 basis points versus 13 basis points for the same period in 2010 due to interest reversed from placement of loans on non-accrual. The decline in the amount of interest reversed in 2011 is due to the significant reduction in the dollar amount of loans placed on non-accrual during 2011 as compared to 2010.

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

Provision for Credit Losses. The provision for credit losses was $14.4 million for the twelve months ended December 31, 2011, compared to $10.1 million in the same period last year. While loan net charge-offs in 2011 increased versus 2010, the overall risk profile of the Company’s loan portfolio continues to improve. The level of adversely classified and non-performing loans has declined significantly during the past year. In addition, the

percentage of loans past due 30 – 89 days and still accruing as of December 31, 2011 continued to be under 1.00%. The provision for credit losses will depend primarily on economic conditions, real estate valuations, and the interest rate environment, as an increase in interest rates could put pressure on the ability of our borrowers to repay loans. For more information, see the discussion under the subheading “Allowance for Credit Losses and Net Loan Charge-offs” below.

Non-interest Income. Non-interest income for the twelve months ended December 31, 2011 was relatively unchanged as compared to the same period in 2010. Service charge income on deposit accounts declined due to a reduction in the amount of non-sufficient check items from the same period in 2010. Non-interest income was also impacted by gains on sales of securities taken in order to reduce the proportion of lower yielding cash-equivalent investments and increase the proportion of relatively higher-yielding federal government guaranteed and municipal securities. In addition, investment brokerage fee income grew from increased sales of investment products in a period of historically low deposit interest rates. This was offset by declines in the one-time gain on death-benefit from bank-owned life insurance and in deposit account service charge income as compared to the previous period.

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

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

For The Twelve Months Ended


(Dollars in Thousands)
	December 31, 2011		December 31, 2010		$ Change			% Change
Non-interest income
Service charges on deposit accounts	$	3,720	$	4,175	$	(455	)		-10.9	%
Other commissions and fees		2,724		2,802		(78	)		-2.8	%
Net gain on sale of securities, available for sale		1,115		732		383			52.3	%
Investment brokerage and annuity fees		1,754		1,554		200			12.9	%
Mortgage banking fees		413		385		28			7.3	%
Other non-interest income:
Other income		429		574		(145	)		-25.3	%
Increase in value of BOLI		508		542		(34	)		-6.3	%
Other non-interest income		175		474		(299	)		-63.1	%

Total non-interest income	$	10,838	$	11,238	$	(400	)		-3.6	%

Non-interest Expense. Non-interest expense for the twelve months ended December 31, 2011 declined compared to the same period in 2010. Salaries and employee benefits expense decreased due to a reduction in loan workout personnel to reflect the decline in problem assets. Personnel reductions were also affected in loan production staff in response to soft loan demand due to the current economic downturn. Reductions in branch personnel were also made to correspond to the continued growth in use of non-branch channels by customers to access banking services. In addition, the Company’s FDIC insurance premium expense declined in 2011 as compared to 2010 as a result of a change in assessment methodology beginning in 2011 and declines in asset levels average as part of the planned deleveraging of the Bank. This decrease was partially offset by larger dollar amounts of OREO write downs to current market value and expenses incurred to sell and maintain these properties. We expect our non-interest expense will continue to be affected by expenses associated with elevated levels of non-performing assets.

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

For The Twelve Months Ended


(Dollars in Thousands)
	December 31, 2011		December 31, 2010		$ Change			% Change
Non-interest expense
Salaries and employee benefits	$	26,836	$	28,420	$	(1,584	)		-5.6	%
Net cost of OREO and foreclosed assets		8,554		6,851		1,703			24.9	%
Net occupancy and equipment		7,953		7,794		159			2.0	%
FDIC and state assessments		3,448		4,670		(1,222	)		-26.2	%
Professional fees		3,053		2,839		214			7.5	%
Communications		1,953		1,973		(20	)		-1.0	%
Advertising		828		801		27			3.4	%
Third-party loan costs		1,266		1,366		(100	)		-7.3	%
Professional liability insurance		813		721		92			12.8	%
Problem loan expense		652		380		272			71.6	%
Other non-interest expense:
Director fees		405		402		3			0.7	%
Internet costs		624		396		228			57.6	%
ATM debit card costs		692		595		97			16.3	%
Business development		340		421		(81	)		-19.2	%
Amortization		499		958		(459	)		-47.9	%
Supplies		569		608		(39	)		-6.4	%
Other non-interest expense		2,901		2,785		116			4.2	%

Total non-interest expense	$	61,386	$	61,980	$	(594	)		-1.0	%

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

Income Taxes. The Company recorded an income tax provision for the twelve months ended December 31, 2011 and 2010. The provision was made for minimum state income taxes owed.

As of December 31, 2011, the Company maintained a valuation allowance of $37.6 million against its deferred tax asset balance of $37.6 million, for no net deferred tax asset. If the company returns to sustained profitability, all or a portion of the deferred tax asset valuation allowance would be reversed. A reversal of the deferred tax asset valuation allowance would decrease the Company’s income tax expense and increase net income.

Balance Sheet Overview

Balance sheet highlights as of December 31, 2011 are as follows:

•

Total assets were $1.27 billion, down 10.3% from December 31, 2010 primarily as a result of deleveraging activities;

•

Total net loans of $774.7 million, declined by 17.7% from the balance at December 31, 2010;

•

Total investment securities of $319.4 million increased 46.3% from December 31, 2010; and

•

Total deposits of $1.13 billion at December 31, 2011, were down 10.9% from year end 2010, due to a continued shift away from time deposits and success in migrating to noninterest-bearing deposits as sources of funding.

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

The table below sets forth certain summary balance sheet information for December 31, 2011, 2010 and 2009.


	December 31,						Increase (Decrease) December 31,
(Dollars in Thousands)	2011		2010		2009		2011 – 2010					2010 – 2009
ASSETS
Federal funds sold	$	4,030	$	3,085	$	69,855	$	945		30.63	%	$	(66,770	)	(95.58	%)
Investment securities		314,160		212,816		158,321		101,344		47.62	%		54,495		34.42	%
Other Community Reinvestment Act		2,000		2,000		4,000		—		0.00	%		(2,000	)	(50.00	%)
Restricted equity investments		3,255		3,474		3,643		(219	)	(6.30	%)		(169	)	(4.64	%)
Loans, net		774,733		941,213		1,102,224		(166,480	)	(17.69	%)		(161,011	)	(14.61	%)
Other assets (1)		167,869		248,632		198,271		(80,763	)	(32.48	%)		50,361		25.40	%

Total assets	$	1,266,047	$	1,411,220	$	1,536,314	$	(145,173	)	(10.29	%)	$	(125,094	)	(8.14	%)

LIABILITIES
Noninterest-bearing deposits	$	281,519	$	242,631	$	256,167	$	38,888		16.03	%	$	(13,536	)	(5.28	%)
Interest-bearing deposits		846,230		1,023,618		1,164,595		(177,388	)	(17.33	%)		(140,977	)	(12.11	%)

Total deposits		1,127,749		1,266,249		1,420,762		(138,500	)	(10.94	%)		(154,513	)	(10.88	%)
Other liabilities (2)		53,933		47,963		44,017		5,970		12.45	%		3,946		8.96	%

Total liabilities		1,181,682		1,314,212		1,464,779		(132,530	)	(10.08	%)		(150,567	)	(10.28	%)
SHAREHOLDERS’ EQUITY		84,365		97,008		71,535		(12,643	)	(13.03	%)		25,473		35.61	%

Total liabilities and share-holder’s equity	$	1,266,047	$	1,411,220	$	1,536,314	$	(145,173	)	(10.29	%)	$	(125,094	)	(8.14	%)

(1)	Include cash and due from banks, mortgage loans held-for-sale, property and equipment, accrued interest receivable, goodwill, intangible assets and other assets.

(2)	Includes federal funds purchased, borrowings, accrued interest payable and other liabilities.


(All amounts in Thousands, except per share data)
BALANCE SHEET
	December 31, 2011			December 31, 2010			Change			%Change
Cash and cash equivalents	$	71,349		$	138,974		$	(67,625	)		-48.7	%
Interest-bearing certificates of deposit		1,500			1,500			—			0.0	%
Investment securities		319,415			218,290			101,125			46.3	%
Gross loans, net of deferred fees		797,416			976,795			(179,379	)		-18.4	%
Allowance for loan losses		(22,683	)		(35,582	)		12,899			-36.3	%

Net loans		774,733			941,213			(166,480	)		-17.7	%
Other assets		99,050			111,243			(12,193	)		-11.0	%

Total assets	$	1,266,047		$	1,411,220		$	(145,173	)		-10.3	%

Total deposits		1,127,749			1,266,249			(138,500	)		-10.9	%
Borrowings		35,169			30,950			4,219			13.6	%
Other liabilities		18,764			17,013			1,751			10.3	%
Stockholders’ equity		84,365			97,008			(12,643	)		-13.0	%

Total liabilities and stockholders’ equity	$	1,266,047		$	1,411,220		$	(145,173	)		-10.3	%

Period end common shares outstanding		10,035,241			10,034,830			411			0.0	%
Book value per common share (1)	$	4.38		$	5.69		$	(1.31	)		-23.0	%
Tangible book value per common share (2)	$	4.18		$	5.44		$	(1.26	)		-23.2	%
Adversely classified loans
Rated substandard or worse	$	83,583		$	135,826		$	(52,243	)		-38.5	%
Impaired		76,241			129,616			(53,375	)		-41.2	%

Total adversely classified loans (3)	$	159,824		$	265,442		$	(105,618	)		-39.8	%

Loans 30-89 days past due and still accruing	$	2,916		$	4,199		$	(1,283	)		-30.6	%
Non-performing assets:
Loans on nonaccrual status	$	76,097		$	129,493		$	(53,396	)		-41.2	%
90-days past due and accruing		144			123			21			17.1	%

Total non-performing loans		76,241			129,616			(53,375	)		-41.2	%
Other real estate owned and foreclosed assets		22,829			32,009			(9,180	)		-28.7	%

Total non-performing assets	$	99,070		$	161,625		$	(62,555	)		-38.7	%

Troubled debt restructurings:
On accrual status	$	4,069		$	224		$	3,845			1716.5	%
On nonaccrual status		47,599			45,010			2,589			5.8	%

Total troubled-debt restructurings	$	51,668		$	45,234		$	6,434			14.2	%

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

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

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

nm = not meaningful


YEAR-TO-DATE ACTIVITY
	December 31, 2011			December 31, 2010			Change			%Change
Allowance for loan losses:
Balance beginning of period	$	35,582		$	45,903		$	(10,321	)		-22.5	%
Provision for loan losses		14,350			10,050			4,300			42.8	%
Net (charge-offs) recoveries		(27,249	)		(20,371	)		6,878			-33.8	%

Balance end of period	$	22,683		$	35,582		$	(12,899	)		-36.3	%

Nonperforming loans:
Balance beginning of period	$	129,616		$	103,917		$	25,699			24.7	%
Transfers from performing loans		22,340			99,058			(76,718	)		-77.4	%
Loans returned to performing status		(4,906	)		(8,369	)		3,463			41.4	%
Transfers to OREO		(15,842	)		(30,619	)		14,777			48.3	%
Principal reduction from payment		(20,911	)		(7,798	)		(13,113	)		-168.2	%
Principal reduction from charge-off		(34,056	)		(26,573	)		(7,483	)		-28.2	%

Total nonperforming loans	$	76,241		$	129,616		$	(53,375	)		-41.2	%

Other real estate owned (OREO) and foreclosed assets, beginning of period	$	32,009		$	24,748		$	7,261			29.3	%
Transfers from outstanding loans		15,842			30,619			(14,777	)		-48.3	%
Improvements and other additions		10			465			(455	)		-97.8	%
Sales, net of gains		(15,753	)		(18,476	)		(2,723	)		-14.7	%
Impairment charges		(9,279	)		(5,347	)		3,932			-73.5	%

Total OREO and foreclosed assets, end of period	$	22,829		$	32,009		$	(9,180	)		-28.7	%


YEAR-TO-DATE AVERAGES
	December 31, 2011			December 31, 2010			Change			%Change
Average fed funds sold and investments	$	347,299		$	296,840		$	50,459			17.0	%
Average gross loans	$	891,846		$	1,083,574		$	(191,728	)		-17.7	%
Average mortgages held for sale	$	692		$	615		$	77			12.5	%
Average interest earning assets	$	1,239,837		$	1,381,029		$	(141,192	)		-10.2	%
Average total assets	$	1,341,192		$	1,470,807		$	(129,615	)		-8.8	%
Average non-interest-bearing deposits	$	268,656		$	251,670		$	16,986			6.7	%
Average interest-bearing deposits	$	928,162		$	1,077,883		$	(149,721	)		-13.9	%
Average total deposits	$	1,196,818		$	1,329,554		$	(132,736	)		-10.0	%
Average total borrowings	$	34,690		$	30,953		$	3,737			12.1	%
Average stockholders’ equity	$	91,464		$	94,486		$	(3,022	)		-3.2	%
Average common equity	$	51,317		$	54,725		$	(3,408	)		-6.2	%


SELECTED FINANCIAL RATIOS (annualized)
For the Twelve Months ended	December 31, 2011			December 31, 2010			Change
Yield on average gross loans (1)		5.98	%		5.90	%		0.08
Yield on average investments (1)		1.84	%		1.84	%		0.00
Total yield on average earning assets (1)		4.82	%		5.02	%		(0.20	)
Cost of average interest bearing deposits		0.96	%		1.11	%		(0.15	)
Cost of average borrowings		1.81	%		3.56	%		(1.75	)
Cost of average total deposits and borrowings		0.78	%		0.96	%		(0.18	)
Cost of average interest bearing liabilities		0.99	%		1.18	%		(0.19	)
Net interest spread		3.83	%		3.84	%		(0.01	)
Net interest margin (1)		4.05	%		4.08	%		(0.03	)

Net charge-offs to average gross loans		3.06	%		1.88	%		1.18
Allowance for loan losses to gross loans		2.84	%		3.64	%		(0.80	)
Allowance for loan losses to non-performing loans		29.75	%		27.45	%		2.30
Non-performing loans to gross loans		9.56	%		13.25	%		(3.69	)
Non-performing assets to total assets		7.83	%		11.45	%		(3.62	)

Return on average common equity		-34.33	%		-13.69	%		(20.64	)
Return on average assets		-1.31	%		-0.51	%		(0.80	)

Efficiency ratio (2)		101.04	%		92.23	%		8.81

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

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

Cash and Cash Equivalents

As of December 31, 2011, total cash and cash equivalents decreased from December 31, 2010, as we utilized our cash and cash equivalents more effectively by redeploying these assets into higher-yielding investment securities.


(Dollars in Thousands)	December 31, 2011		% of Total			December 31, 2010		% of Total
Cash and cash equivalents:
Cash and due from banks	$	40,179		56	%	$	21,716		16	%
Federal funds sold		4,030		6	%		3,085		2	%
Interest-bearing deposits in other banks		27,140		38	%		114,173		82	%

Total cash and cash equivalents	$	71,349		100	%	$	138,974		100	%

Investment Portfolio

The compositions, carrying values, and fair values of our investment securities portfolio were as follows:


(Dollars in Thousands)
	December 31, 2011						December 31, 2010
	Amortized cost		Fair value		Net unrealized gain/(loss)		Amortized cost		Fair value		Net unrealized gain/(loss)
Collateralized mortgage obligations	$	134,074	$	134,416	$	342	$	131,372	$	132,217	$	845
Mortgage-backed securities		70,449		71,773		1,324		13,804		13,945		141
U.S. Government and agency securities		39,899		41,093		1,194		48,522		48,805		283
Obligations of states and political subdivisions		64,423		66,878		2,455		18,210		18,331		121
Investment securities—
Other Community Reinvestment Act		2,000		2,000		—		2,000		2,000		—
Restricted equity securities		3,255		3,255		—		3,474		3,474		—

Total investment portfolio	$	314,100	$	319,415	$	5,315	$	217,382	$	218,772	$	1,390

At December 31, 2011, the net unrealized gain in the investment portfolio was up as compared to year end 2010. An increase in net unrealized gains in all sectors of the Company’s investment portfolio was due to both declining market interest rates and the overall growth in the portfolio experienced since the beginning of the year.

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

Over the past twelve months we purchased primarily U.S. Government agency securities, U.S. Government guaranteed mortgage-backed securities, obligations of states and political subdivisions and U.S. Government agency mortgage backed securities. The expected duration of the investment portfolio was 4.4 years at December 31, 2011, compared to 3.2 years at December 31, 2010, and 2.8 years at December 31, 2009.

For additional detail regarding our investment securities portfolio, see Note 4 “Investment Securities” and Note 23 “Fair Value Measurement and Fair Values of Financial Instruments” under Item 8 of this report.

The following table sets forth the carrying value of PremierWest’s available-for-sale and held-to-maturity investment portfolio at the dates indicated.


	December 31,
(Dollars in Thousands)	2011		2010		2009
Investment securities (available-for sale)
Collateralized mortgage obligations	$	134,416	$	132,217	$	76,957
Mortgage-backed securities		71,773		9,056		4,301
U.S. Government and agency securities		41,093		36,276		27,794
Obligations of states and political subdivisions		66,878		6,134		5,885

		314,160		183,683		114,937
Investment securities (held-to-maturity)
Collateralized mortgage obligations	$	—	$	—	$	—
Mortgage-backed securities		—		4,781		5,807
U.S. Government and agency securities		—		12,151		28,238
Obligations of states and political subdivisions		—		12,201		9,339

		—		29,133		43,384
Investment securities—CRA		2,000		2,000		4,000
Restricted equity securities		3,255		3,474		3,643

Total investment securitites	$	319,415	$	218,290	$	165,964

The contractual maturities of investment securities at December 31, 2011, excluding mortgage-related securities, investment securities—CRA and restricted equity securities for which contractual maturities are diverse or nonexistent, are shown below. Actual 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.


	2011							2010							2009
(Dollars in Thousands)	Amortized Cost		Estimated Fair Value		% Yield (1)			Amortized Cost		Estimated Fair Value		% Yield (1)			Amortized Cost		Estimated Fair Value		% Yield (1)
U.S. Government and agency securities:
One year or less	$	3,007	$	3,012		0.52	%	$	7,832	$	7,832		1.26	%	$	3,992	$	4,035		2.92	%
One to five years		36,892		38,081		1.85	%		40,690		40,973		1.61	%		35,907		36,175		2.20	%
Five to ten years		—		—		—			—		—		0.00	%		16,000		15,983		0
Over ten years		—		—		—			—		—		0.00	%		—		—		—
Obligations of states and political subdivisions:
One year or less		1,515		1,527		2.26	%		—		—		0.00	%		261		261		6.03	%
One to five years		5,904		5,934		2.36	%		3,154		3,192		5.38	%		3,542		3,600		4.12	%
Five to ten years		38,575		40,030		3.42	%		5,123		5,067		5.19	%		2,775		2,733		4.88	%
Over ten years		18,429		19,387		4.40	%		9,933		10,072		5.75	%		8,805		8,595		—

Total debt securities		104,322		107,971					66,732		67,136					71,282		71,382
Collaterlized mortgage obligations	$	134,074	$	134,416		3.03	%	$	131,372	$	132,217		2.86	%	$	75,843	$	76,957		3.07	%
Mortgaged-backed securities		70,449		71,773		1.02	%		13,804		13,945		3.93	%		10,003		10,134		4.32	%
Investment securities—CRA		2,000		2,000		nm			2,000		2,000		nm			4,000		4,000		nm
Restricted equity securities		3,255		3,255		nm			3,474		3,474		nm			3,643		3,643		nm

Total securities	$	314,100	$	319,415				$	217,382	$	218,772				$	164,771	$	166,116

(1)	For the purposes of this schedule, weighted average yields are stated on an approximate tax-equivalent basis at a 40% rate.

nm = non meaningful

The carrying value of the investment portfolio has fluctuated during the twelve months ended December 31, 2011 and 2010, as illustrated in the table below:


(Dollars in Thousands)
	December 31,
	2011			2010
Balance beginning of period	$	218,290		$	165,964
Principal purchases		279,981			193,506
Proceeds from sales		(132,543	)		(81,158	)
Principal paydowns, maturities, and calls		(47,455	)		(58,080	)
Gains on sales of securities		1,345			766
Losses on sales of securities		(230	)		(34	)
Change in unrealized gains (loss) before tax		4,351			(296	)
Amortization and accretion of discounts and premiums		(4,324	)		(2,378	)

Total investment portfolio	$	319,415		$	218,290

As of December 31, 2011, 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, 2011 and 2010, the Bank met its minimum required investment in FHLB. In addition to FHLB stock, PremierWest bank holds 11,300 shares of stock in the Federal Home Loan Bank of San Francisco. This stock was acquired pursuant to the acquisition of Stockmans Bank and reflects its required minimum stock investment in Federal Home Loan Bank of San Francisco, which must be maintained for a four-year period. The Company is required to hold FHLB’s stock in order to receive advances and views this investment as long-term. In addition, PremierWest also held 200 shares of $1.00 par value Federal Agricultural Mortgage Corporation stock valued at $8,000 that was acquired with the acquisition of Stockmans Bank.

The Bank also owns stock in Pacific Coast Banker’s Bank (PCBB) with a balance of $529,000. This investment is carried at its fair market value at acquisition and is included in restricted equity investments on the balance sheet. PCBB 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, deferred loan fees and restructured loan concessions. 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, loan concentrations, 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 limitations as to amounts. These limitations apply to the borrower’s total outstanding indebtedness to the Bank, including the indebtedness of the borrower in a guarantor capacity. 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 and Chief Executive Officer, or Chief Credit Officer within their own delegated authority.

The Chief Executive Officer or Chief Credit Officer has the authority to approve loans less than $5 million lending limit as set by the Board of Directors. All loans at or above the $5 million, but below $7.5 million, may be approved jointly by the Chief Executive Officer and Chief Credit Officer, alternatively they may be approved by the Chief Executive Officer or Chief Credit Officer along with a Credit Committee member. Loans that exceed this limit are subject to the review and approval by the Board’s Credit Committee. Credit Committee approval is required for credit extensions rated substandard or worse. As of December 31, 2011, PremierWest’s unsecured legal lending limit was approximately $18.7 million and our real estate secured lending limit was approximately $31.2 million.

The following table sets forth the composition of the loan portfolio, as of December 31, 2007 through December 31, 2011:


	Years Ended December 31,
	2011					2010					2009					2008					2007
(Dollars in Thousands)	Amount		Percentage			Amount		Percentage			Amount		Percentage			Amount		Percentage			Amount		Percentage
Commercial	$	93,607		11.73	%	$	156,482		15.99	%	$	209,538		18.24	%	$	252,377		20.22	%	$	244,156		23.81	%
Real estate—Construction		38,903		4.88	%		123,707		12.64	%		211,732		18.43	%		280,219		22.45	%		268,254		26.16	%
Real Estate—Commercial/ Residential		592,204		74.22	%		579,493		59.22	%		596,007		51.86	%		574,677		46.05	%		405,663		39.57	%
Consumer		35,522		4.45	%		80,004		8.18	%		86,504		7.53	%		89,715		7.19	%		75,395		7.35	%
Other and Agriculture		37,642		4.72	%		38,860		3.97	%		45,246		3.94	%		51,000		4.09	%		31,861		3.11	%

Total gross loans	$	797,878		100.00	%	$	978,546		100.00	%	$	1,149,027		100.00	%	$	1,247,988		100.00	%	$	1,025,329		100.00	%

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


Loans by category
(Dollars in Thousands)	December 31, 2011			% of Gross Loans			December 31, 2010			% of Gross Loans			$ Change
Construction, Land Dev & Other Land	$	38,903			5	%	$	62,666			6	%	$	(23,763	)
Commercial & Industrial		93,607			12	%		119,077			12	%		(25,470	)
Commercial Real Estate Loans		522,500			66	%		626,387			64	%		(103,887	)
Secured Multifamily Residential		21,792			3	%		24,227			3	%		(2,435	)
Other Commercial Loans Secured by RE		47,912			6	%		59,284			6	%		(11,372	)
Loans to Individuals, Family & Personal Expense		9,784			1	%		12,472			1	%		(2,688	)
Consumer/Finance		35,522			4	%		36,859			4	%		(1,337	)
Other Loans		27,594			3	%		37,255			4	%		(9,661	)
Overdrafts		264			0	%		319			0	%		(55	)

Gross loans		797,878						978,546						(180,668	)
Less: allowance for loan losses		(22,683	)		-3	%		(35,582	)		-4	%		12,899
Less: deferred fees and restructured loan concessions		(462	)		0	%		(1,751	)		0	%		1,289

Loans, net	$	774,733					$	941,213					$	(166,480	)

The table below shows total loan commitments (funded and unfunded) by loan type and geographic region at December 31, 2011:


	December 31, 2011
(Dollars in Thousands)	Southern Oregon		Mid-Central Oregon		Northern California		Sacramento Valley		Total
Construction, Land Dev & Other Land	$	15,064	$	11,992	$	2,791	$	11,259	$	41,106
Commercial & Industrial		76,227		23,783		22,792		19,060		141,862
Commercial Real Estate Loans		245,566		105,456		50,999		123,334		525,355
Secured Multifamily Residential		12,301		6,289		2,152		1,050		21,792
Other Commercial Loans Secured by RE		32,708		8,692		14,452		10,415		66,267
Loans to Individuals, Family & Personal Expense		7,490		879		1,256		891		10,516
Consumer/Finance		10,493		20,315		4,714		270		35,792
Other Loans		10,942		591		3,473		18,887		33,893

Subtotal	$	410,791	$	177,997	$	102,629	$	185,166		876,583

Overdrafts										264

Total									$	876,847

The table below shows total loan commitments (funded and unfunded) by loan at December 31, 2011 and 2010:



	December 31, 2011												December 31, 2010
(Dollars in Thousands)	Funded Loan Totals		% of Gross Loans			Unfunded Loan Commitments		% of Gross Loans			Total Loan Commitments		Funded Loan Totals		% of Gross Loans			Unfunded Loan Commitments		% of Gross Loans			Total Loan Commitments		$ Change Total Loan Commitments
Construction, Land Dev & Other Land	$	38,903		5	%	$	2,203		3	%	$	41,106	$	62,666		6	%	$	206		0	%	$	62,872	$	(21,766	)
Commercial & Industrial		93,607		12	%		48,255		61	%		141,862		119,077		12	%		51,232		63	%		170,309	$	(28,447	)
Commercial Real Estate Loans		522,500		66	%		2,855		4	%		525,355		626,387		64	%		2,288		3	%		628,675	$	(103,320	)
Secured Multifamily Residential		21,792		3	%		—		0	%		21,792		24,227		3	%		—		0	%		24,227	$	(2,435	)
Other Commercial Loans Secured by RE		47,912		6	%		18,355		23	%		66,267		59,284		6	%		17,534		21	%		76,818	$	(10,551	)
Loans to Individuals, Family & Personal Expense		9,784		1	%		732		1	%		10,516		12,472		1	%		2,375		3	%		14,847	$	(4,331	)
Consumer/Finance		35,522		4	%		270		0	%		35,792		36,859		4	%		290		0	%		37,149	$	(1,357	)
Other Loans		27,594		3	%		6,299		8	%		33,893		37,255		4	%		8,098		10	%		45,353	$	(11,460	)
Overdrafts		264		0	%		—		0	%		264		319		0	%		—		0	%		319	$	(55	)

Gross loans	$	797,878		100	%	$	78,969		100	%	$	876,847	$	978,546		100	%	$	82,023		100	%	$	1,060,569	$	(183,722	)

The table provided below summarizes the Bank’s level of concentrations in commercial real estate as of December 31, 2011, December 31, 2010 and December 31, 2009, respectively, as defined in the Interagency Guidelines for Real Estate Lending and the Commercial Real Estate Lending Joint Guidance policy. The results displayed document the Bank’s successful efforts to reduce CRE concentrations in the loan portfolio. Management anticipates that its continued efforts to reduce adversely classified assets will result in further reductions in concentrations of commercial real estate.

Commercial Real Estate (“CRE”)

Portfolio Policy Concentrations


	December 31, 2011			December 30, 2010			December 30, 2009			Guideline
Total Regulatory CRE 1		297	%		337	%		474	%		300	%
Construction & Land Development CRE 2		65	%		88	%		188	%		100	%
As a percent of total risk based capital (“TRBC”)

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

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

The table below shows the distribution of our commercial real estate loan portfolio at December 31, 2011, and our branch presence in our operating markets.


(Dollars in Thousands) except number of loans
	December 31, 2011
	Southern Oregon		Mid-Central Oregon		Northern California		Sacramento Valley		Total
Commercial Real Estate Loans	$	243,334	$	105,428	$	50,999	$	122,739	$	522,500
Number of loans in region		406		104		99		137		746
Number of branches in region		13		9		15		7		44

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

As indicated above, the Company’s loan portfolio has been concentrated in commercial real estate loans and commercial real estate loans for residential purposes during recent years, a common characteristic among community banks due to focused lending for business and consumer needs in communities within 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 collateral.

Since 2006, Management has taken actions in an attempt to reduce higher risk commercial real estate loan volume by directing efforts away from new commercial real estate loan production. However, the levels of non-owner occupied and land and land development commercial real estate loans remain above what

Management considers desirable, particularly in light of current conditions. Economic circumstances have produced significant reductions in real estate values, and the slowdown has resulted in business failures that have adversely affected commercial real estate activities. Consequently, Management actively pursues additional credit support and appropriate exit strategies for commercial real estate loans that have suffered or are anticipated to encounter difficulties.

The following table presents maturity and re-pricing information for the loan portfolio at December 31, 2011. The table segments the loan portfolio between fixed-rate and adjustable-rate loans and their respective re-pricing intervals based on fixed-rate loan maturity dates and variable-rate loan re-pricing dates for the periods indicated:


	December 31, 2011
(Dollars in Thousands)	Within One Year (1)		One to Five Years		After Five Years		Total
Fixed-rate loan maturities
Construction, Land Dev & Other Land	$	17,732	$	10,730	$	—	$	28,462
Commercial & Industrial		32,158		47,383		1,360		80,901
Commercial Real Estate Loans		77,449		122,536		23,816		223,801
Secured Multifamily Residential		1,337		4,316		251		5,904
Other Commercial Loans Secured by RE		11,735		18,570		10,426		40,731
Loans to Individuals, Family & Personal Expense		1,461		7,535		788		9,784
Consumer/Finance		1,078		19,040		15,404		35,522
Other Loans		18,976		3,285		364		22,625

Total fixed rate loan maturities		161,926		233,395		52,409		447,730

Adjustable-rate loan maturities
Construction, Land Dev & Other Land		68		10,098		275		10,441
Commercial & Industrial		380		5,918		6,408		12,706
Commercial Real Estate Loans		22,310		145,572		130,817		298,699
Secured Multifamily Residential		756		2,401		12,731		15,888
Other Commercial Loans Secured by RE		829		1,284		5,068		7,181
Other Loans		—		1,618		3,615		5,233

Total adjustable-rate loan repricings		24,343		166,891		158,914		350,148

Total maturities and repricings	$	186,269	$	400,286	$	211,323	$	797,878

Nonperforming Assets and Delinquencies

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

Management considers a loan to be nonperforming when it is 90 days or more past due, or sooner if the Bank has determined that repayment of the loan in full is unlikely. For commercial purpose loans, interest accrual ceases when 90 days past due (but no later than the date of acquisition by foreclosure, voluntary deed or other means) and the loan is classified as nonperforming. For consumer purpose loans, interest accrual ceases when 120 days past due. A loan placed on non-accrual status may or may not be contractually past due at the time the determination is made to place the loan on non-accrual status, and it may or may not be secured. When a loan is placed on non-accrual status, it is the Bank’s policy to reverse interest previously accrued but uncollected.

In some instances where the loans are well secured and in the process of collection, such loans will not be placed on non-accrual status. In addition, loans that are impaired pursuant to “Accounting by Creditors for the Impairment of a Loan,” are classified as non-accrual consistent with regulatory guidance. Loans placed on

non-accrual status typically remain so until all principal and interest payments are brought current, and the potential for future payments, in accordance with associated loan agreements, appears reasonably certain.

Impaired loans are defined as loans where full recovery of contractual principal and interest is in doubt and include all non-accrual and restructured commercial and real estate loans. The dollar amount of loan impairment is determined using either 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. Current accounting practice and regulatory guidance places primary emphasis on appraised value for collateral dependent loans. Loan impairment is typically recognized through a charge to the allowance for loan losses reflecting any shortfall between the principal balance owing and the net realizable value of the loan.

Nonperforming loans (loans 90 days or more delinquent and/or on non-accrual status) at December 31, 2011 and 2010 are displayed by category in the following table. Management has assessed the real estate collateral for impairment and charged off any impairment on real estate collateral dependent loans. On all other real estate collateralized loans, Management believes that, based on current appraisals or estimates based on the most recent available appraisals discounted for aging, adequate collateral coverage existed as of each year end.

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


	December 31,
(Dollars in Thousands)	2011			2010			2009			2008			2007
Loans on nonaccrual status	$	76,097		$	129,493		$	98,497		$	68,496		$	8,221
Loans past due greater than 90 days but not on nonaccrual status		144			123			5,420			1,437			147

Total non-performing loans		76,241			129,616			103,917			69,933			8,368
Impaired loans in process of collection		—			—			—			12,682			—
Other real estate owned and foreclosed assets		22,829			32,009			24,748			4,423			—

Total nonperforming assets	$	99,070		$	161,625		$	128,665		$	87,038		$	8,368

Non-performing loans to gross loans		9.56	%		13.25	%		9.04	%		5.60	%		0.82	%
Percentage of nonperforming assets to total assets		7.83	%		11.45	%		8.37	%		5.90	%		0.73	%

Interest income that would have been recognized on nonaccrual loans if such loans had performed in accordance with their contractual terms totaled $8.3 million, $10.3 million, $9.1 million, $4.7 million, and $243,000 for the years ended December 31, 2011, 2010, 2009, 2008, and 2007 respectively.

Loans on accrual status and not included in the table above that were identified as troubled-debt restructurings (“TDR”) were $4.1 million and $224,000 for the years ended December 31, 2011, and 2010, respectively. There were no loans identified as TDRs for the years ended December 31, 2009, 2008, and 2007.

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


Nonperforming loans by category
(Dollars in Thousands)	December 31, 2011		% of Loan Category			December 31, 2010		% of Loan Category			$ Change
Construction, Land Dev & Other Land	$	15,584		20	%	$	32,584		25	%	$	(17,000	)
Commercial & Industrial		2,181		3	%		2,709		2	%		(528	)
Commercial Real Estate Loans		51,051		67	%		80,604		63	%		(29,553	)
Secured Multifamily Residential		—		0	%		307		0	%		(307	)
Other Commercial Loans Secured by RE		3,536		5	%		10,725		8	%		(7,189	)
Loans to Individuals, Family & Personal Expense		633		1	%		26		0	%		607
Consumer/Finance		81		0	%		123		0	%		(42	)
Other Loans		3,175		4	%		2,538		2	%		637

Total non-performing loans	$	76,241				$	129,616				$	(53,375	)

At December 31, 2011, total nonperforming assets were down compared to December 31, 2010. Nonperforming assets and loans have also declined in terms of percentage of total assets and loans, respectively. The amount of additions to nonperforming assets has slowed during 2011 versus the prior year. This is due, in part, to the positive impact of business improvement plans implemented by a number of borrowers in response to the current economic downturn.

The following table summarizes the Company’s non-performing loans by loan type and geographic region as of December 31, 2011:


	December 31, 2011
	Non-performing Loans
(Dollars in Thousands)	Southern Oregon			Mid-Central Oregon			Northern California			Sacramento Valley			Totals			Funded Loan Totals		Percent NPL to Funded Loan Totals by Category
Construction, Land Dev & Other Land	$	1,333		$	7,978		$	962		$	5,311		$	15,584		$	38,903		40.1	%
Commercial & Industrial		1,575			606			—			—			2,181		$	93,607		2.3	%
Commercial Real Estate Loans		38,324			6,543			4,304			1,880			51,051		$	522,500		9.8	%
Secured Multifamily Residential		—			—			—			—			—		$	21,792		0.0	%
Other Commercial Loans Secured by RE		372			386			751			2,027			3,536		$	47,912		7.4	%
Loans to Individuals, Family & Personal Expense		633			—			—			—			633		$	9,784		6.5	%
Consumer/Finance		42			15			24			—			81		$	35,522		0.2	%
Other Loans		3,175			—			—			—			3,175		$	27,594		11.5	%
Overdrafts		—			—			—			—			—		$	264		0.0	%

Total non-performing loans	$	45,454		$	15,528		$	6,041		$	9,218		$	76,241		$	797,878

Non-performing loans to total funded loans		12.2	%		9.5	%		6.4	%		5.5	%		9.6	%
Total funded loans	$	371,595		$	163,939		$	94,044		$	168,300		$	797,878

The balance of non-performing loans has fluctuated during the twelve months ended December 31, 2011 and 2010, as illustrated in the table below:


(Dollars in Thousands)
	December 31,
	2011			2010
Balance beginning of period	$	129,616		$	103,917
Transfers from performing loans		22,340			99,058
Loans returned to performing status		(4,906	)		(8,369	)
Transfers to OREO		(15,842	)		(30,619	)
Principal reduction from payment		(20,911	)		(7,798	)
Principal reduction from charge-off		(34,056	)		(26,573	)

Total nonperforming loans	$	76,241		$	129,616

The Company’s principal source of non-performing loans is real estate related loans. Borrowers either involved in real estate or having secured loans with real estate have been vulnerable to both the ongoing economic downturn and to declining real estate collateral values. Approximately 92% or $70.2 million of our non-performing loan total of $76.2 million is directly related to real estate in the form of commercial or residential real estate loans. At December 31, 2011, $29.5 million of our real estate related loans remain current as to contractual principal and interest payments, but were placed on non-accrual status due to the absence of evidence supporting the borrowers’ ongoing ability to fully discharge their loan obligations.

Troubled Debt Restructurings. The following table summarizes the Company’s troubled debt restructured loans by type and geographic region as of December 31, 2011:


(Dollars in Thousands)
	December 31, 2011 Restructured loans
	Southern Oregon		Mid Oregon		Northern California		Sacramento Valley		Totals		Number of Loans
Construction, Land Dev & Other Land	$	—	$	4,227	$	—	$	6,441	$	10,668		11
Commercial & Industrial		1,905		—		—		221		2,126		4
Commercial Real Estate Loans		29,882		5,530		915		97		36,424		18
Other Commercial Loans Secured by RE		211		—		212		2,027		2,450		5

Total restructured loans	$	31,998	$	9,757	$	1,127	$	8,786	$	51,668		38

The following table summarizes the Company’s troubled debt restructured loans by year of maturity, according to the restructured terms, as of December 31, 2011:


(Dollars in Thousands)

Year	Amount
2012	$	41,929
2013		2,949
2014		2,420
2015		—
2016		682
Thereafter		3,688

Total	$	51,668

Continuing actions taken to address the troubled credit situation:

•

Credit monitoring activities have escalated since the fourth quarter of 2008 to provide early warning of possible borrower distress that could lead to loan payment defaults. Enhanced credit monitoring and early warnings are intended to provide additional time to seek viable alternatives with the borrower.

•

Management and staff are actively involved in seeking loan restructuring and other loan modification options including obtaining additional collateral coverage for those borrowers who have experienced payment problems and wish to seek a workable arrangement with the Company.

•

The Company established a special asset resolution group to interface both directly with borrowers and with line managers to expedite resolution of existing and potential troubled credits. As of December 31, 2011, this group had 13 staff members. In those instances where alternatives have been exhausted or determined to be impractical and default under the terms of the loans has occurred, foreclosure actions are pursued.

•

Enhancement of the quarterly review process to focus on higher dollar credits rated watch or worse not managed by the special asset resolution group.

•

Improvement in risk rating recertification to include relevant credit metrics in support of the risk rating.

•

Quantitative risk rating tools and training provided to all lenders or loan officers to improve risk rating accuracy and consistency.

•

Improved credit risk transparency and oversight through the development of a comprehensive portfolio review package including the monitoring of relevant credit metrics

•

Internal credit examinations are completed on a significant portion of our loan portfolio periodically during the year.

A continued decline in economic conditions in our market areas and nationally, as well as other factors, could adversely impact individual borrowers or our loan portfolio in general. As a result, we can provide no assurance that additional loans will not become 90 days or more past due, become impaired or be placed on non-accrual status, restructured or transferred to other real estate owned in the future. Additional information regarding our loan portfolio is provided in Note 5 of the Notes to the Condensed Consolidated Financial Statements.

OREO. The Company has remained focused on OREO property disposition activities during 2011. Dollar volume sales were down year-to-date as compared to the prior year even though the number of properties sold in 2011 was higher than in the same period for 2010. This was due to the higher number of residential real estate lots sold in 2011. The largest balances in the OREO portfolio at December 31, 2011, were attributable to residential and commercial site development projects, followed by income producing properties, all of which are located in the regions in which we operate. The number and value of OREO properties decreased during the year, primarily in the construction, land development and other land category.

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


(Dollars in Thousands)
	December 31, 2011		# of Properties		December 31, 2010		# of Properties
Construction, Land Dev & Other Land	$	6,633		39	$	17,612		60
Commercial & Industrial		23		1		1,049		2
Commercial Real Estate Loans		14,039		36		12,263		31
Secured Multifamily Residential		139		1		—		—
Other Commercial Loans Secured by RE		233		1		1,085		5
Consumer/Finance		—		—		—		—
Other Loans		1,762		1		—		—

Total OREO by type	$	22,829		79	$	32,009		98

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

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


(Dollars in Thousands)
	Twelve Months Ended December 31,
	2011			2010
Other real estate owned, beginning of period	$	32,009		$	24,748
Transfers from outstanding loans		15,842			30,619
Improvements and other additions		10			465
Proceeds from sales		(17,564	)		(20,211	)
Gain on sales		1,811			1,735
Impairment charges		(9,279	)		(5,347	)

Total other real estate owned	$	22,829		$	32,009

Adversely Classified Loans and Delinquencies. The Company also monitors adversely classified loans and delinquencies, defined as loan balances 30-89 days past due not on nonaccrual status, as an indicator of future nonperforming assets. The Bank continues to experience declines in adversely classified loans, primarily from improvements in credit quality ratings and transfers to OREO, pay offs, and charge-offs of impaired loans. Total 30-89 days delinquencies also continue to remain below 1.00%, mirroring the improvement in overall credit quality noted previously. This current quarter is the fifth consecutive period in which delinquencies have been below this target. While the local and national economy continues to languish, more borrowers are demonstrating the ability to adjust to current economic conditions.

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


(Dollars in Thousands)
	December 31, 2011			December 31, 2010			2011 Increase (Decrease) from 2010
Rated substandard or worse	$	83,583		$	135,826		$	(52,243	)
Impaired		76,241			129,616			(53,375	)

Total adversely classified loans *	$	159,824		$	265,442		$	(105,618	)

Gross loans	$	797,878		$	978,546		$	(180,668	)
Adversely classified loans to gross loans		20.03	%		27.13	%		-7.10	%
Loans 30-89 days past due and still accruing as a percent of gross loans		0.40	%		0.49	%		-0.09	%
Allowance for loan losses	$	22,683		$	35,582		$	(12,899	)
Allowance for loan losses as a percentage of adversely classified loans		14.19	%		13.40	%		0.79	%
Allowance for loan losses to gross loans		2.84	%		3.64	%		-0.80	%
Allowance for loan losses to total non-performing loans		29.75	%		27.45	%		2.30	%

*	Adversely classified loans are defined as loans having a well-defined weakness or weaknesses related to the borrower’s financial capacity or to pledged collateral that may jeopardize the repayment of the debt. They

are characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard classification are not corrected. Note that any loans internally rated worse than substandard are included in the impaired loan totals.

The following table summarizes loans 30-89 days past due not on nonaccrual status by type of the dates shown:


(Dollars in Thousands)
	December 31,
	2011			% of Category			2010			% of Category			2009			% of Category
Construction, Land Dev & Other Land	$	—			0.0	%	$	133			3.2	%	$	8,143			54.4	%
Commercial & Industrial		128			4.4	%		152			3.6	%		1,529			10.2	%
Commercial Real Estate Loans		626			21.5	%		2,792			66.5	%		2,988			20.0	%
Secured Multifamily Residential		242			8.3	%		—			0.0	%		—			0.0	%
Other Commercial Loans Secured by RE		533			18.3	%		320			7.6	%		1,222			8.2	%
Loans to Individuals, Family & Personal Expense		108			3.7	%		10			0.2	%		100			0.7	%
Consumer/Finance		1,279			43.9	%		792			18.9	%		977			6.5	%
Other Loans		—			0.0	%		—			0.0	%		—			0.0	%

Total loans 30-89 days past due, not in nonaccrual status	$	2,916					$	4,199					$	14,959

Delinquent loans to total loans, not in nonaccrual status		0.40	%					0.49	%					1.70	%

Allowance for Credit Losses and Net Loan Charge-offs

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

•

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

•

Analyses are performed to establish the loss factors based on historical experience, as well as, expected losses based on qualitative evaluations of such factors as the economic trends and conditions, industry conditions, levels and trends in delinquencies, collateral valuations and impaired loans, levels and trends in charge-offs and recoveries, among others. The loss factors are applied to loan category pools segregated by risk classification to estimate the loss inherent in the Company’s loan portfolio pursuant to “Accounting for Contingencies.”

•

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

•

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

•

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

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


	December 31,
(Dollars in Thousands)	2011			2010			2009			2008			2007
Gross loans outstanding at end of year	$	797,878		$	978,546		$	1,149,027		$	1,247,988		$	1,025,329

Average loans outstanding, gross	$	891,846		$	1,083,574		$	1,221,842		$	1,255,203		$	961,534

Allowance for loan losses, beginning of year	$	35,582		$	45,903		$	17,157		$	11,450		$	10,877
Loans charged-off:
Commercial		(2,123	)		(2,364	)		(21,997	)		(10,366	)		(134	)
Real estate		(28,433	)		(21,657	)		(36,353	)		(25,059	)		—
Consumer		(1,595	)		(1,697	)		(2,524	)		(1,879	)		(539	)
Other		(1,905	)		(855	)		(193	)		(3,611	)		(154	)

Total loans charged-off		(34,056	)		(26,573	)		(61,067	)		(40,915	)		(827	)

Recoveries:
Commercial		4,793			2,020			143			143			204
Real estate		1,459			2,983			876			216			—
Consumer		443			917			662			229			217
Other		112			282			101			422			112

Total recoveries		6,807			6,202			1,782			1,010			533

Net charge-offs		(27,249	)		(20,371	)		(59,285	)		(39,905	)		(294	)
Allowance for loan losses transferred from:
Stockmans Financial Group		—			—			—			9,112
Other adjustments (1)		—			—			—			—			181
Provision charged to income		14,350			10,050			88,031			36,500			686

Allowance for loan losses, end of year	$	22,683		$	35,582		$	45,903		$	17,157		$	11,450

Ratio of net loans charged-off to average gross loans outstanding, annualized		3.06	%		1.88	%		4.85	%		3.18	%		0.03	%

Ratio of allowance for loan losses to gross loans outstanding		2.84	%		3.64	%		3.99	%		1.37	%		1.12	%

The Company’s allowance for credit losses continues to decline in concert with the reduction in adversely classified assets and continued reduction in loan delinquencies and other relevant credit metrics. Loss factors used in management’s estimates have declined as a result of the general reduction in net charge-offs over the past several years.

Overall, we believe that the allowance for credit losses is adequate to absorb probable losses in the loan portfolio at December 31, 2011, although there can be no assurance that future loan losses will not exceed our current estimates. The process for determining the adequacy of the allowance for credit losses is critical to our financial results. Please see Item 1A “Risk Factors” in this report.

Net Loan Charge-offs. For the twelve months ended December 31, 2011, total net loan charge-offs were up from the twelve months ended December 31, 2010, primarily in the real estate loan category. This is chiefly due to a confidential master settlement agreement the Company entered into on January 3, 2012 with its largest non-performing loan relationship totaling $28.7 million. This settlement resulted in a charge-off of $6.2 million including a partial write-down of a remaining non-performing loan and a cash settlement in exchange for deeds in lieu of foreclosure and dismissal of lawsuits. The impact on operations of this settlement was reflected in fourth quarter 2011, whereas the Company obtained possession of real property and other collateral on January 11, 2012.


	December 31, 2011 Actual			December 31, 2011 Adjusted for Settlement
Allowance for loan losses to gross loans		2.84	%		2.90	%
Allowance for loan losses to non-performing loans		29.75	%		36.98	%
Non-performing loans to gross loans		9.56	%		7.83	%
Non-performing assets to total assets		7.83	%		7.83	%

The following table shows the allocation of PremierWest’s allowance for loan losses by category and the percent of loans in each category to gross loans at the dates indicated. PremierWest allocates its allowance for loan losses to each loan classification based on relative risk characteristics. General, Specific and Qualitative allocations are made based on estimated losses that are due to current credit circumstances and other available information for each loan category. General allocations are based on historical loss factors. Specific allocations are related to loans on non-accrual status; estimated reserves based on individual credit risk ratings; loans for which Management believes the borrower might be unable to comply with loan repayment terms, even though the loans are not in non-accrual status; and, loans for which supporting collateral might not be adequate to recover loan amounts if foreclosure and subsequent sale of collateral become necessary. Qualitative allocations include adjustments for economic conditions, concentrations and other subjective factors, and 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 necessarily represent the actual losses that may occur within that loan category.


	December 31,
	2011					2010					2009					2008					2007
(Dollars in Thousands)	Allowance for loan losses		% of loans in each category to total loans			Allowance for loan losses		% of loans in each category to total loans			Allowance for loan losses		% of loans in each category to total loans			Allowance for loan losses		% of loans in each category to total loans			Allowance for loan losses		% of loans in each category to total loans
Type of loan:
Commercial	$	4,448		11.73	%	$	9,759		15.99	%	$	6,441		18.24	%	$	2,157		20.22	%	$	1,684		23.81	%
Real estate- Construction		1,416		4.88	%		9,072		12.64	%		14,953		18.43	%		6,015		22.45	%		3,720		26.16	%
Real estate- Commercial/ Residential		13,492		74.22	%		12,423		59.22	%		21,958		51.86	%		7,154		46.05	%		4,516		39.57	%
Consumer and Other		3,327		9.17	%		4,328		12.15	%		2,551		11.47	%		1,831		11.28	%		1,530		10.46	%

Total	$	22,683		100.00	%	$	35,582		100.00	%	$	45,903		100.00	%	$	17,157		100.00	%	$	11,450		100.00	%

As of December 31, 2011, Management believes that the Company’s total allowance for credit losses and its reserve for off-balance sheet commitments are sufficient to absorb the losses inherent in the loan portfolio, related both to funded loans and unfunded commitments. The off-balance sheet commitments include commitments to extend credit and standby letters of credit. The Bank’s exposure to credit loss in the event of non-performance for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. This assessment, based on both historical levels of net charge-offs and continuing detailed reviews of the quality of the loan portfolio and current business, economic and regulatory conditions, involves uncertainty and judgment. As a result, the adequacy of the allowance for loan losses and the reserve for unfunded commitments cannot be determined with inherent accuracy and may change in future periods. Additionally, bank regulatory authorities may require additional charges to the provision for loan losses as a result of their periodic examinations of the Company and their judgment of information available to them at the time of their examination. 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 were to occur. Total off-balance sheet financial instruments consisting of commitments to extend credit, standby letters of credit, and overdraft protection for demand deposit account were $79.0 million and $82.0 million as of December 31, 2011 and 2010, respectively.

Despite diligent assessment by Management, there can be no assurance regarding the actual amount of charge-offs that will be incurred in the future. A further slowing in the Oregon and/or California economies, further declines in real estate values or increased unemployment could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in income.

Regulatory guidance and current accounting practice is to value all non-performing assets at current appraised value less estimated costs to sell without regard to other factors or documentation. Management continues to work closely with borrowers who are motivated to resolve their financial issues through properly collateralized restructures and workouts. Management continually reviews the holding costs of certain other real estate owned in light of current market conditions.

Deposits and Borrowings

Deposit accounts are PremierWest’s primary source of funds. PremierWest offers a number of deposit products to attract 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 time deposits 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 obtain certain types or maturities of deposit liabilities.

The following table summarizes the quarterly average dollar amount in, and the interest rate paid on, each of the deposit and borrowing categories during the twelve months ended December 31, 2011, December 31, 2010, and December 31, 2009:


For the twelve months ended	December 31, 2011										December 31, 2010										December 31, 2009
(Dollars in Thousands)	Average Balance		Percent of Total			Interest Expense		Rate Paid			Average Balance		Percent of Total			Interest Expense		Rate Paid			Average Balance		Percent of Total			Interest Expense		Rate Paid
Interest-bearing demand and money market	$	353,998		29.6	%	$	814		0.23	%	$	401,430		30.2	%	$	2,175		0.54	%	$	386,400		28.5	%	$	3,831		0.99	%
Savings		86,259		7.2	%		94		0.11	%		85,752		6.4	%		197		0.23	%		94,360		7.0	%		414		0.44	%
Time deposits		487,905		40.8	%		8,020		1.64	%		590,701		44.4	%		9,599		1.63	%		629,742		46.4	%		13,896		2.21	%

Total interest-bearing deposits		928,162		77.6	%		8,928		0.96	%		1,077,883		81.1	%		11,971		1.11	%		1,110,502		81.9	%		18,141		1.63	%
Non-interest bearing demand		268,656		22.4	%		—		0.00	%		251,670		18.9	%		—		0.00	%		245,830		18.1	%		—		0.00	%

Total deposits	$	1,196,818		100.0	%	$	8,928		0.75	%	$	1,329,553		100.0	%	$	11,971		0.90	%	$	1,356,332		100.0	%	$	18,141		1.34	%

Short-term borrowings		3,762		10.8	%		15		0.40	%		25		0.1	%		2		8.00	%		4,809		13.5	%		33		0.69	%
Long-term borrowings		30,928		89.2	%		615		1.99	%		30,928		99.9	%		1,101		3.56	%		30,928		86.5	%		1,794		5.80	%

Total borrowings		34,690		100.0	%		630		1.82	%		30,953		100.0	%		1,103		3.56	%		35,737		100.0	%		1,827		5.11	%

Total deposits and borrowings	$	1,231,508				$	9,558		0.78	%	$	1,360,506				$	13,074		0.96	%	$	1,392,069				$	19,968		1.43	%

During 2011 average total deposits declined 10.0% from 2010. This decrease was mainly due to the decision to continue to reduce higher cost time deposit balances, which declined 17.4% from last year. The combination of the Company’s efforts to reduce higher-cost time deposits and recent deposit pricing strategies to lower interest rates in concert with market conditions has helped reduce the average rate paid on total deposits in 2011 from 2010. Whether we will continue to be successful maintaining or growing our low cost deposit base will depend on various factors, including deposit pricing strategies, market interest rates, the effects of competition, client behavior, and regulatory changes and requirements.

Total brokered deposits were $241,000, compared to $742,000 at December 31, 2010, and $ 44.3 million at December 31, 2009. Brokered deposits are currently not being replaced as they mature.

The following table sets forth time deposit accounts outstanding at December 31, 2011, by time remaining to maturity:


	Time Deposits of $250,000 or More					Time Deposits of $100,000 through $250,000					Time Deposits Less Than $100,000
(Dollars in Thousands)	Amount		Percentage			Amount		Percentage			Amount		Percentage
Three months or less	$	5,991		14.2	%	$	32,236		25.5	%	$	66,957		25.4	%
Over three months through six months		5,027		11.9	%		18,510		14.7	%		44,717		17.0	%
Over six months through 12 months		10,553		25.0	%		25,310		20.1	%		53,247		20.2	%
Over 12 months		20,663		48.9	%		50,047		39.7	%		98,495		37.4	%

Total	$	42,234		100.0	%	$	126,103		100.0	%	$	263,416		100.0	%

The Bank had no long-term borrowings outstanding with the Federal Home Loan Bank (“FHLB”) at December 31, 2011, and long-term borrowings totaling $22,000 as of December 31, 2010. The Bank paid the FHLB borrowings in full during 2011. Prior to paying the borrowings in full, the Bank made monthly principal and interest payments on the long-term borrowings, which were scheduled to mature in 2014 with a fixed interest rate of 6.53%. The Bank also participates in the Cash Management Advance (“CMA”) program with the FHLB. CMA borrowings are short-term borrowings that mature within one day and accrue interest at the variable rate as published by the FHLB. The Bank had no outstanding CMA borrowings during the years ended December 31, 2011 and 2010. The maximum CMA borrowings outstanding at any month-end during the year ended 2009 was $20,000, the average amount outstanding during the period was $1,973, and the average weighted interest rate during the period was 0.22%. 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. At December 31, 2011, the Company maintained a line of credit with the FHLB of Seattle for $55.3 million and was in compliance with its related collateral requirements. The Bank had no Federal Funds purchased during the years ended 2011 or 2010. The maximum Federal Funds outstanding at any month-end during the year ended 2009 was $12,000, the average amount outstanding during the period was $885, and the average weighted interest rate during the period was 1.59%.

The Bank also had $15.0 million available for additional borrowing from a correspondent bank; and $8.2 million available for borrowing from the Federal Reserve discount window.

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

At December 31, 2011, the Company held a total of approximately $784,000 of cash on deposit with the FHLB of Seattle and FHLB of San Francisco.

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

At December 31, 2011, the balance of junior subordinated debentures issued in connection with our prior issuances of trust preferred securities was $30.9 million or unchanged from December 31, 2010. Under the Written Agreement with the Oregon Department of Consumer and Business Services, Division of Finance and

Corporate Securities (“DFCS”) and the Federal Reserve Bank (“Reserve Bank”), we must request regulatory approval prior to making payments on our trust preferred securities. For additional detail regarding Bancorp’s outstanding debentures, see Note 14 in the financial statements included under Item 8 of this report.

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 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. In November 2009, the Company notified the investors holding its Debentures that interest payments were being temporarily suspended pursuant to current regulatory restrictions related to dividends from the Bank. Under the terms of each Debenture indenture agreement, the Company may defer payment of interest on the Debentures for the lesser of 20 consecutive quarters or to the maturity date of the Debentures. Deferral of interest also results in interest being computed quarterly on any deferred interest payments. At December 31, 2011, the Company had deferred payment of interest for nine consecutive quarters.

By issuing trust preferred securities the Company was 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. Further, the aggregate amount of “restrictive core” elements consisting of cumulative perpetual preferred stock (including related surplus) and qualifying trust preferred securities that a bank holding company may include in Tier 1 Capital continues to be an amount up to 25 percent of the sum of: (1) qualifying common stockholder equity, (2) qualifying noncumulative and cumulative perpetual preferred stock (including related surplus), (3) qualifying minority interest in the equity accounts of consolidated subsidiaries and (4) qualifying trust preferred securities. Tier 1 Capital must represent at least 50 percent of a bank holding company’s qualifying total capital. The excess of “restricted core” capital not included in Tier 1 may generally continue to be included in the calculation of Tier 2 Capital.

The following table is a summary of current trust preferred securities at December 31, 2011:

Trust Name

Issue Date

Issued
Amount

Rate

Maturity
Date

Redemption
Date

PremierWest Statutory
Trust I

December
2004

7,732,000

LIBOR + 1.75%(1)

December
2034

December
2009

PremierWest Statutory
Trust II

December
2004

7,732,000

LIBOR + 1.79%(2)

March
2035

March
2010

Stockmans Financial
Trust I

August
2005

15,464,000

LIBOR + 1.42%(3)

September
2035

September
2010

30,928,000

(1)	PremierWest Statutory Trust I was bearing interest at the fixed rate of 5.65% until mid-December 2009, at which time it changed to a variable rate of 3-month LIBOR (0.559% at December 15, 2011) plus 1.75% or 2.309%, adjusted quarterly, through the final maturity date in December 2034.

(2)	PremierWest Statutory Trust II was bearing interest at the fixed rate of 5.65% until March 2010, at which time it changed to the variable rate of 3-month LIBOR (0.559% at December 15, 2011) plus 1.79% or 2.349%, adjusted quarterly, through the final maturity date in March 2035.

(3)	Stockmans Financial Trust I was bearing interest at the fixed rate of 5.93% until September 2010, at which time it changed to the variable rate of 3-month LIBOR (0.559% at December 15, 2011) plus 1.42% or 1.979%, adjusted quarterly, through the final maturity date in September 2035.

PremierWest is a party to numerous contractual financial obligations including repayment of time deposits, borrowings, operating lease obligations, and other commitments. The scheduled repayment of long-term borrowings and other contractual obligations is as follows:


(Dollars in Thousands)	Payments due by period
Contractual Obligations	Total		< 1 year		1-3 years		3-5 years		> 5 years
Time deposits (2)	$	432,060	$	262,855	$	131,879	$	37,007	$	319
Borrowings		4,241		4,241		—		—		—
Operating lease obligations		4,848		793		1,061		807		2,187
Junior subordinated debentures		30,928		—		—		—		30,928
Other commitments (1)		8,952		816		1,548		1,519		5,069

Total	$	481,029	$	268,705	$	134,488	$	39,333	$	38,503

(1)	Employee benefits that include Deferred Compensation, Executive Supplemental Retirement Plans, Employee Life Benefit Plans and Split Dollar Obligations

(2)	Accrued interest of $307,000 is included in < 1 year category

Capital Resources

The Board of Governors of the Federal Reserve System (“Federal Reserve”) and the FDIC have established minimum requirements for capital adequacy for bank holding companies and state non-member banks. For more information on these topics, see the discussions under the subheadings “Capital Adequacy Requirements” in the section “Supervision and Regulation” included in Item 1 of this report.

The following table summarizes the capital measures of Bancorp and the Bank, respectively, at the dates listed below:

Bancorp:


	December 31, 2011			December 31, 2010			Regulatory Minimum to be “Adequately Capitalized”
							greater than or equal to
Total risk-based capital ratio		12.45	%		12.36	%		8.00	%
Tier 1 risk-based capital ratio		10.80	%		11.09	%		4.00	%
Leverage ratio		8.01	%		8.66	%		4.00	%

Bank:


	December 31, 2011			December 31, 2010			Regulatory Minimum to be “Adequately Capitalized”			Regulatory Minimum to be “Well- Capitalized”
							greater than or equal to			greater than or equal to
Total risk-based capital ratio		13.03	%		12.59	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		11.77	%		11.31	%		4.00	%		6.00	%
Leverage ratio		8.72	%		8.85	%		4.00	%		5.00	%

Bancorp’s total risk-based capital ratio improved from December 31, 2010, while its Tier 1 and leverage ratio declined during this period. The Bank’s capital ratios either strengthened or remained relatively unchanged during 2011. Improvements to these ratios were the result of management’s strategy to deleverage the Company and restructure the balance sheet to lower its risk-based capital profile. However, continued losses, primarily associated with credit resolution costs, did contribute to the decline in leverage ratios for the Bancorp and Bank during 2011. For more information, see discussion under the heading “Note 2—Regulatory Agreement, Economic Condition and Management Plan.”

The total risk based capital ratios of Bancorp include $30.9 million of junior subordinated debentures, of which $26.4 million qualified as Tier 1 capital at December 31, 2011, under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, which was signed into law on July 21, 2010, Bancorp expects to continue to rely on these junior subordinated debentures as part of its regulatory capital. However, at this point, Bancorp does not expect to issue additional junior subordinated debentures as any future issued junior subordinated debentures would not qualify as Tier 1 total capital under Dodd-Frank.

Liquidity and Sources of Funds

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

Deposits are our primary source of funds. Our loan to deposit ratio has declined since December 31, 2009 as a result of weak loan demand due to the current economic downturn and the Bank’s planned initiatives to reduce the level of higher risk loans. The decline in loan balances has resulted in an increase in the more liquid, but lower yielding investment securities portfolio. In light of our substantial liquidity position, we continued to reduce higher cost time deposits during the most recent quarter.

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


	December 31, 2011			December 31, 2010			December 31, 2009
Primary liquidity		29.5	%		22.4	%		15.9	%
Current ratio		28.2	%		24.8	%		18.1	%
Net non-core funding dependency		0.1	%		-5.9	%		-2.3	%
Gross loans to deposits		70.7	%		77.3	%		80.9	%

An analysis of liquidity should encompass a review of the changes that appear in the consolidated statements of cash flows for the year ended December 31, 2011. The statement of cash flows includes operating, investing, and financing categories.

Cash flows provided by operating activities was $14.8 million with the difference between cash provided by operating activities and a net loss of $15.1 million consisting primarily of noncash items of $14.4 million in the

loan loss provision and $3.3 million in depreciation and amortization. These noncash items were offset by $9.3 million in write down of OREO due to impairment, $1.8 million gain on sales of OREO and other foreclosed assets, and $1.1 million gain on sale of investment securities.

Cash flows provided by investing activities of $51.8 million consisted primarily of $180.0 million of proceeds from sales, calls, paydowns, and maturities of securities, $136.3 million in net loan pay downs, $17.6 million in proceeds from the sale of OREO, offset by $280.0 million used for purchases of securities, and $1.4 million used for purchases of premises and equipment.

Cash flows used in financing activities of $134.3 million consisted primarily of $138.5 million net decrease in deposits, offset by $4.2 million in net increase in securities sold under agreements to repurchase.

At December 31, 2011, the Bank had $4.2 million in borrowings from securities sold under an agreement to repurchase with various business customers. At this same period, the Bank had no outstanding borrowings against its $55.3 million in established borrowing capacity with the FHLB, as compared to letters of credit totaling $915,000 outstanding against its $80.6 million in established borrowing capacity at December 31, 2010. The borrowing capacity at the FHLB declined from year end as the Company elected to hold a higher balance of unpledged securities. The Bank’s borrowing facility is subject to collateral and stock ownership requirements. The Bank also had an available discount window primary credit line with the Federal Reserve Bank of San Francisco of $8.2 million, and $15.0 million from a correspondent bank with no balance outstanding on either facility, both of which are pursuant to collateralized credit arrangements.

In June 2010, Bancorp entered into a Written Agreement with the Federal Reserve Bank of San Francisco and DFCS. For detailed discussion of the Written Agreement, see Item 1, “Business—Supervision and Regulation” in this report. Under the Written Agreement, Bancorp may not directly or indirectly take dividends or other forms of payment representing a reduction in capital from the Bank without the prior written approval of the Reserve Bank and the DFCS. Also, under our Memorandum of Understanding, the Bank may not pay dividends to the holding company without the consent of the FDIC and the DFCS. At December 31, 2011, the holding company did not have any borrowing arrangements of its own.

Off-Balance Sheet Arrangements

At December 31, 2011, the Bank had off-balance sheet financial instruments of $79.0 million compared to $82.0 million at December 31, 2010. For additional information regarding off balance sheet arrangements and future financial commitments, see Note 17 “Commitments and Contingent Liabilities” and Note 15 “Off-Balance Sheet Financial Instruments” in the financial statements included in this report.

R ECENTLY ISSUED ACCOUNTING STANDARDS

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

test described in Topic 350. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU No. 2011-08 is not expected to have a material impact on the consolidated financial statements.

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

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

In April 2011, the FASB issued Accounting Standards Update ASU No. 2011-03 “Transfers and servicing (Topic 860)—Reconsideration of Effective Control for Repurchase Agreements.” This Standard is intended to improve the manner in which repo and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity are reported in the financial statements by modifying Topic 860. This standard is effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date, with early adoption disallowed. The adoption of ASU No. 2011-03 did not have a material impact on the consolidated financial statements.

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

In January 2011, the FASB issued Accounting Standards Update ASU No. 2011-01“Receivables (Topic 310)—Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” This standard temporarily delays the public entity effective date for disclosures related to troubled debt restructurings originally introduced in ASU No. 2010-20. According to the current guidance in ASU No. 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. That guidance is now effective for interim and annual periods ending after June 15, 2011. This standard is effective upon issuance. This update requires a significant expansion of disclosures for troubled debt restructurings, but the adoption of the expanded disclosures is not expected to have a material impact on the consolidated financial statements.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Like other financial institutions, PremierWest is subject to interest rate risk. Interest-earning assets could mature or re-price more rapidly than, or on a different basis from, interest-bearing liabilities (primarily deposits with short- and medium-term maturities and borrowings) 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.

Despite the unprecedented level of governmental debt and economic instability, both internationally and domestically, the flight to safety by investors throughout the world has driven current domestic interest rates to historic lows. In addition, the Federal Reserve Bank (FRB) has recently announced that it intends to maintain short-term rates at very low levels into 2014, given the continued sluggish economy. The FRB has stated it is managing monetary policy to provide support to the struggling housing market as a means to revive the economy. Extended periods of historically low levels generally have a dampening impact on net interest margins of financial institutions. During such conditions, asset yields can continue to decline while the opportunities to lower deposit costs diminish.

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. Also impacting interest rate sensitivity are loans that are subject to a rate floor. 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 or adverse effect on net interest income. A negative gap (with liabilities re-pricing 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 re-pricing more rapidly than liabilities) generally should have an adverse effect when rates are falling, and a favorable effect when rates are rising.

The following table illustrates the maturities or re-pricing of PremierWest’s assets and liabilities as of December 31, 2011, based upon the contractual maturity or contractual re-pricing dates of loans (excluding nonperforming 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.


	BY REPRICING INTERVAL
(Dollars in Thousands)	0 – 3 Months			4 – 12 Months			1 – 5 Years			Over 5 Years			Total
ASSETS
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	32,670		$	—		$	—		$	—		$	32,670
Investment securities		17,331			42,277			150,239			109,568			319,415
Loans, net (1)		217,602			137,604			289,844			53,586			698,636

Total	$	267,603		$	179,881		$	440,083		$	163,154		$	1,050,721

LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand and savings	$	189,799		$	12,811		$	—		$	211,867		$	414,477
Time deposits		105,334			157,140			169,088			191			431,753
Borrowings		4,241			—			—			—			4,241
Junior subordinated debentures		—			—			—			30,928			30,928

Total	$	299,374		$	169,951		$	169,088		$	242,986		$	881,399

Interest rate sensitivity gap	$	(31,771	)	$	9,930		$	270,995		$	(79,832	)	$	169,322

Cumulative	$	(31,771	)	$	(21,841	)	$	249,154		$	169,322

Cumulative gap as a % of interest-earning assets		-3.0	%		-2.1	%		23.7	%		16.1	%

(1)	For purposes of the gap analysis, loans are reduced by the allowance for loan losses, nonaccrual loans, deferred loan fees, and restructuring concessions.

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 re-pricing within a stated period might actually mature or re-price at different times and at different volumes from those estimated. The actual prepayments and withdrawals after a change in interest rates could deviate significantly from those assumed in calculating the data shown in the table. Certain assets, adjustable-rate loans for example, commonly have provisions that limit changes in interest rates each time the interest rate changes and on a cumulative basis over the life of the loan. Also, the renewal or re-pricing 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.

Interest rate, credit and operations risks are the most significant market risks impacting our performance. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of our business activities. We rely on loan reviews, prudent loan underwriting standards and an adequate allowance for credit losses to attempt to mitigate credit risk. Interest rate risk is reviewed at least quarterly by the Asset Liability Management Committee (“ALCO”) which includes senior management representatives. The ALCO manages our balance sheet to maintain net interest income and present value of equity within acceptable ranges.

Asset/liability management simulation models are used to measure interest rate risk. The models quantify interest rate risk by simulating forecasted net interest income over a 12-month time horizon under various rate scenarios, as well as monitoring the change in the present value of equity under the same rate scenarios. The present value of equity is defined as the difference between the market value of current assets less current liabilities. By measuring the change in the present value of equity under different rate scenarios, management can identify interest rate risk that may not be evident in simulating changes in forecasted net interest income. Readers are referred to the sections, “Forward Looking Statement Disclosure” and “Risk Factors” of this report in connection with this discussion of market risk.

The following table shows the approximate percentage changes in forecasted net interest income over a 12-month period under several rate scenarios. For the net interest income analysis, three rate scenarios are compared to a stable (unchanged from December 31, 2011) rate scenario:


Stable rate scenario compared to:	Percent change in Net Interest Income
Up 200 basis points		0.3
Up 100 basis points		0.4
Down 100 basis points		-2.4

As illustrated in the above table, we estimate our balance sheet was slightly asset sensitive over a 12-month horizon at December 31, 2011, in the up 200 basis points scenario meaning that interest earning assets are expected to mature or reprice more quickly than interest-bearing liabilities in a given period. A decrease in market rates of interest could adversely affect net interest income, while an increase in market rates may increase net interest income slightly. At December 31, 2010, we also estimated that our balance sheet was slightly asset sensitive. We attempt to limit our interest rate risk through managing the repricing characteristics of our assets and liabilities.

For the present value of equity analysis, the results are compared to the net present value of equity using the yield curve as of December 31, 2011. This curve is then shifted up and down and the net present value of equity is computed. This table does not include flattening or steepening yield curve effects.


December 31, 2011 Change in Interest Rates	Percent Change in Present Value of Equity
Up 200 basis points		8.9
Up 100 basis points		5.6
Down 100 basis points		-11.9

It should be noted that the simulation model does not take into account future management actions that could be undertaken should a change occur in actual market interest rates during the year. Also, certain assumptions are required to perform modeling simulations that may have a significant impact on the results. These include important assumptions regarding the level of interest rates and balance changes on deposit products that do not have stated maturities, as well as the relationship between loan yields and deposit rates relative to market interest rates. These assumptions have been developed through a combination of industry standards and future expected pricing behavior but could be significantly influenced by future competitor pricing behavior. The model also includes assumptions about changes in the composition or mix of the balance sheet. The results derived from the simulation model could vary significantly due to external factors such as changes in the prepayment assumptions, early withdrawals of deposits and competition. Any transaction activity will also have an impact on the asset/liability position as new assets are acquired and added.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONTENTS


	PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		76-77

CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets		78
Statements of operations		79
Statements of comprehensive loss		80
Statements of changes in shareholders’ equity		81
Statements of cash flows		82-83
Notes to financial statements		84-131

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 Shareholders

PremierWest Bancorp and Subsidiary

We have audited the accompanying consolidated balance sheets of PremierWest Bancorp and Subsidiary (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. We also have audited the Company’s internal control over financial reporting as of December 31, 2011 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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, included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the 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 consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A 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. A 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, 2011 and 2010, and the consolidated results of their operations and their cash flows each of the three years in the period ended December 31, 2011, in conformity with generally accepted accounting principles in the United States of America. Also in our opinion, PremierWest Bancorp and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ Moss Adams LLP

Portland, Oregon

March 15, 2012

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)


	December 31, 2011			December 31, 2010
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	40,179		$	21,716
Federal funds sold		4,030			3,085
Interest-bearing deposits		27,140			114,173

Total cash and cash equivalents		71,349			138,974

Interest-bearing certificates of deposit (original maturities greater than 90 days)		1,500			1,500
Investments:
Investment securities available-for-sale, at fair market value		314,160			183,683
Investment securities held-to-maturity, at amortized cost (fair value of $29,615 at 12/31/10)		—			29,133
Investment securities—Community Reinvestment Act		2,000			2,000
Restricted equity securities		3,255			3,474

Total investments		319,415			218,290

Mortgage loans held-for-sale		810			929
Loans, net of deferred loan fees		797,416			976,795
Allowance for loan losses		(22,683	)		(35,582	)

Loans, net		774,733			941,213

Premises and equipment, net of accumulated depreciation and amortization		46,272			47,924
Core deposit intangibles, net of amortization		1,990			2,489
Other real estate owned and foreclosed assets		22,829			32,009
Accrued interest and other assets		27,149			27,892

TOTAL ASSETS	$	1,266,047		$	1,411,220

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand	$	281,519		$	242,631
Interest-bearing demand and savings		414,477			469,897
Time deposits		431,753			553,721

Total deposits		1,127,749			1,266,249

Federal Home Loan Bank borrowings		—			22
Securities sold under agreements to repurchase		4,241			—
Junior subordinated debentures		30,928			30,928
Accrued interest and other liabilities		18,764			17,013

Total liabilities		1,181,682			1,314,212

COMMITMENTS AND CONTINGENCIES (Note 17)
SHAREHOLDERS’ EQUITY
Preferred Stock, net of unamortized discount, no par value 1,000,000 shares authorized, 41,400 shares issued and outstanding, liquidation preference $1,000 per share (41,400 at 12/31/2011 and 12/31/2010)		40,399			39,946
Common stock—no par value; 150,000,000 shares authorized; 10,035,241 shares issued and outstanding (10,034,830 at 12/31/2010)		208,469			208,324
Accumulated deficit		(169,818	)		(152,202	)
Accumulated other comprehensive income		5,315			940

Total shareholders’ equity		84,365			97,008

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,266,047		$	1,411,220

See accompanying notes.

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

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


	December 31, 2011			December 31, 2010			December 31, 2009
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	53,115		$	63,695		$	74,892
Interest on investments:
Taxable		6,046			4,808			2,401
Nontaxable		86			197			139
Interest on federal funds sold		7			45			175
Other interest and dividends		221			296			357

Total interest and dividend income		59,475			69,041			77,964

INTEREST EXPENSE
Deposits:
Interest-bearing demand and savings		908			2,372			4,245
Time		8,020			9,599			13,896
Interest on securities sold under agreements to repurchase		14			—			—
Federal funds purchased		—			—			14
Federal Home Loan Bank advances		1			2			19
Junior subordinated debentures		615			1,101			1,794

Total interest expense		9,558			13,074			19,968

Net interest income		49,917			55,967			57,996
LOAN LOSS PROVISION		14,350			10,050			88,031

Net interest income (loss) after loan loss provision		35,567			45,917			(30,035	)

NON-INTEREST INCOME
Service charges on deposit accounts		3,720			4,175			5,286
Other commissions and fees		2,724			2,802			2,764
Net gain on sale of securities, available-for-sale		1,115			732			50
Investment brokerage and annuity fees		1,754			1,554			1,285
Mortgage banking fees		413			385			676
Other non-interest income		1,112			1,590			942

Total non-interest income		10,838			11,238			11,003

NON-INTEREST EXPENSE
Salaries and employee benefits		26,836			28,420			28,260
Net cost of operations of other real estate owned and foreclosed assets		8,554			6,851			2,504
Net occupancy and equipment		7,953			7,794			7,276
FDIC and state assessments		3,448			4,670			3,631
Professional fees		3,053			2,839			2,250
Communications		1,953			1,973			2,051
Advertising		828			801			894
Third-party loan costs		1,266			1,366			583
Professional liability insurance		813			721			308
Problem loan expense		652			380			915
Goodwill impairment		—			—			74,920
Other non-interest expense		6,030			6,165			6,130

Total non-interest expense		61,386			61,980			129,722

LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		(14,981	)		(4,825	)		(148,754	)
PROVISION (BENEFIT) FOR INCOME TAXES		70			134			(2,282	)

NET LOSS		(15,051	)		(4,959	)		(146,472	)
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		2,565			2,533			2,171

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(17,616	)	$	(7,492	)	$	(148,643	)

LOSS PER COMMON SHARE:
BASIC	$	(1.76	)	$	(0.90	)	$	(60.07	)

DILUTED	$	(1.76	)	$	(0.90	)	$	(60.07	)

See accompanying notes.

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in Thousands)


	December 31, 2011			December 31, 2010			December 31, 2009
NET LOSS	$	(15,051	)	$	(4,959	)	$	(146,472	)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Change in fair value of securities available-for-sale		4,488			154			817
Adjustment for realized gain (loss), net of tax of $446 at 12/31/2011, $293 at 12/31/2010, and $20 at 12/31/2009		(669	)		(439	)		(30	)
Amortization of unrealized gain (loss) for investment securities transferred to held-to-maturity, net of $8 tax		(12	)		(10	)		409
Unrealized holding gain resulting from transfer of securities from held-to-maturity to available-for-sale, net of $379 tax		568			—			—

Total other comprehensive income (loss), net of tax		4,375			(295	)		1,196

COMPREHENSIVE LOSS	$	(10,676	)	$	(5,254	)	$	(145,276	)

See accompanying notes.

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands, Except Share Amounts)


											Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
	Preferred Stock				Common Stock
	Shares		Amount		Shares			Amount
BALANCE—December 31, 2008		—		—		2,357,435		$	168,032		$	8,913		$	39		$	176,984
Net loss		—		—		—			—			(146,472	)		—			(146,472	)
Total other comprehensive income, net of tax		—		—		—			—			—			1,196			1,196
Preferred stock dividend paid		—		—		—			—			(1,047	)		—			(1,047	)
Preferred stock dividend accrued		—		—		—			—			(784	)		—			(784	)
Common stock dividend (5%)		—		—		117,871			4,741			(4,741	)		—			—
Common stock cash dividend		—		—		—			—			(236	)		—			(236	)
Cash paid for fractional shares		—		—		—			—			(3	)		—			(3	)
Stock-based compensation expense		—		—		—			448			—			—			448
Stock options exercised and issuance of restricted stock		—		—		1,887			49			—			—			49
Issuance of Series B preferred stock to U.S. Treasury, and accretion of discount		41,400		39,561		—			—			(340	)		—			39,221
Issuance of warrant to U.S. Treasury		—		—		—			2,179			—			—			2,179

BALANCE—December 31, 2009		41,400		39,561		2,477,193			175,449			(144,710	)		1,235			71,535
Net loss		—		—		—			—			(4,959	)		—			(4,959	)
Total other comprehensive loss, net of tax		—		—		—			—			—			(295	)		(295	)
Preferred stock dividend accrued		—		—		—			—			(2,148	)		—			(2,148	)
Stock offering		—		—		7,557,637			32,503			—			—			32,503
Stock-based compensation expense		—		—		—			372			—			—			372
Accretion of discount from Series B preferred stock		—		385		—			—			(385	)		—			—

BALANCE—December 31, 2010		41,400		39,946		10,034,830			208,324			(152,202	)		940			97,008
Net loss		—		—		—			—			(15,051	)		—			(15,051	)
Total other comprehensive income, net of tax		—		—		—			—			—			4,375			4,375
Preferred stock dividend accrued		—		—		—			—			(2,112	)		—			(2,112	)
Restricted stock issued		—		—		750			—			—			—			—
Cash paid for fractional shares in connection with 1-for-10 reverse stock split		—		—		(339	)		(1	)		—			—			(1	)
Stock-based compensation expense		—		—		—			146			—			—			146
Accretion of discount from Series B preferred stock		—		453		—			—			(453	)		—			—

BALANCE—December 31, 2011		41,400	$	40,399		10,035,241		$	208,469		$	(169,818	)	$	5,315		$	84,365

See accompanying notes.

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)


	For The Years Ended
	December 31, 2011			December 31, 2010			December 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(15,051	)	$	(4,959	)	$	(146,472	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization		3,281			3,856			3,907
Impairment of goodwill		—			—			74,920
Loan loss provision		14,350			10,050			88,031
Deferred income taxes		—			—			5,580
Amortization of premiums and accretion of discounts on investment securities, net		4,324			2,378			923
Gain on sale of investment securities		(1,115	)		(732	)		(50	)
Funding of loans held-for-sale		(21,282	)		(18,681	)		(35,455	)
Sale of loans held-for-sale		21,815			19,867			34,707
Gain on sale of loans held-for-sale		(414	)		(384	)		(675	)
Change in BOLI value (net of benefit obligations)		(274	)		383			(553	)
Stock-based compensation expense		146			372			448
Loss on sales of premises and equipment		36			409			(94	)
Impairment of premises and equipment		120			—			—
Gain on sale of other real estate owned and foreclosed assets		(1,811	)		(1,735	)		(343	)
Write down of other real estate owned due to impairment		9,279			5,347			1,507
Write down of low income housing tax credit investment		210			177			152
Changes in accrued interest receivable/payable and other assets/liabilities		1,204			10,431			1,135

Net cash provided by operating activities		14,818			26,779			27,668

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of interest-bearing certificates of deposit		—			(33,100	)		(50,452	)
Proceeds from interest-bearing certificates of deposit		—			82,250			—
Purchase of investment securities available-for-sale		(279,981	)		(189,989	)		(144,461	)
Purchase of investment securities held-to-maturitiy		—			(3,517	)		(46,031	)
Proceeds from principal payments received on securities available-for-sale		44,343			29,300			6,143
Proceeds from maturities and calls of investment securities available-for-sale		—			9,000			—
Proceeds from sale of securities available-for-sale		132,543			81,158			24,079
Proceeds from principal payments received on securities held-to-maturity		—			18,610			164
Proceeds from maturities and calls of investment securities held-to-maturity		2,893			1,002			34,440
Proceeds from FHLB stock redemption		219			169			—
Loan payments, net		136,288			120,342			11,657
Purchase of premises and equipment		(1,352	)		(3,461	)		(2,268	)
Proceeds from disposal of premises and equipment		66			4			534
Purchase of low income housing tax credit investments		(734	)		(418	)		(897	)
Purchase of improvements for other real estate owned and foreclosed assets		(10	)		(464	)		(671	)
Proceeds from sale of other real estate owned and foreclosed assets		17,564			20,210			7,485
Cash received, net of cash paid for acquisition of Wachovia branches		—			—			334,718

Net cash provided by investing activities		51,839			131,096			174,440

PREMIERWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS—(continued)

(Dollars in Thousands)


	For The Years Ended
	December 31, 2011			December 31, 2010			December 31, 2009
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(138,500	)		(154,513	)		(132,891	)
Net decrease in Federal Home Loan Bank borrowings		(22	)		(6	)		(20,014	)
Net decrease in Federal Funds purchased		—			—			(25,003	)
Dividends paid on common stock		—			—			(236	)
Dividends paid on preferred stock		—			—			(1,047	)
Net increase in securities sold under agreements to repurchase		4,241			—			—
Cash paid for fractional shares relating to stock dividend		—			—			(3	)
Cash paid for fractional shares in connection with 1-for-10 reverse stock split		(1	)		—			—
Stock options exercised		—			—			49
Proceeds from issuance of preferred stock		—			—			41,400
Cash received from stock offering, net of costs		—			32,503			—

Net cash used in financing activities		(134,282	)		(122,016	)		(137,745	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(67,625	)		35,859			64,363
CASH AND CASH EQUIVALENTS—Beginning of the period		138,974			103,115			38,752

CASH AND CASH EQUIVALENTS—End of the period	$	71,349		$	138,974		$	103,115

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	9,253		$	12,328		$	20,257

Cash paid for taxes	$	40		$	50		$	650

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate owned and foreclosed assets	$	15,842		$	30,619		$	28,303

Increase in goodwill resulting from acquisition of Stockmans Financial Group	$	—		$	—		$	37

Increase in goodwill resulting from acquisition of Wachovia branches	$	—		$	—		$	4,483

Preferred stock dividend declared and accrued during the period but not yet paid	$	2,112		$	2,148		$	784

Trust preferred securities interest accrued during the period but not yet paid	$	615		$	1,610		$	—

Accretion of preferred stock discount	$	453		$	385		$	340

Transfer of investment securities from held-to-maturity to available-for-sale	$	26,250		$	—		$	—

See accompanying notes.

PREMIERWEST BANCORP AND SUBSIDIARY

NOTES 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 44 full service branch offices, 37 of which are located along the Interstate 5 freeway corridor between Roseburg, Oregon, and Sacramento, California. Of the 44 full service branch offices, 23 are located in Oregon (Jackson, Josephine, Deschutes, Douglas, and Klamath Counties) and 21 are located in California (Siskiyou, Shasta, Butte, Tehama, Sacramento, Yolo, and Nevada Counties). Effective April 30, 2010, four existing branches (one each in Douglas, Butte, Placer, and Sacramento counties) were closed and consolidated with existing PremierWest branches in close proximity. 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, Eugene and Portland, Oregon and Redding, California and is engaged in the business of consumer lending. PremierWest Investment Services, Inc. operates throughout the Bank’s market area providing brokerage services for investment products including stocks, bonds, mutual funds and annuities. Blue Star Properties, Inc. serves solely to hold real estate properties for the Company but is currently inactive.

On January 13, 2012, the Company announced it will consolidate 11 branches into existing nearby branches by the end of April 2012. Five of the branches to be consolidated are located in Oregon, and the other six branches are located in California. The decision to consolidate these branches and the projected reduction in expenses followed an extensive branch network analysis with a focus on reducing expense, improving efficiency, and positively impacting the overall value of the Company. These branches represent less than 10% of the total bank-wide deposits. Branch consolidation is projected to result in expense savings of approximately $1.9 million annually beginning in the second quarter of 2012. First quarter 2012 reduction of pretax income as a result of consolidation expense is expected to be approximately $790,000.

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

The company issued a 1-for-10 reverse stock split on February 10, 2011. No stock dividend was declared in 2011 or 2010. The Company declared a 5% stock dividend in January 2009. All per share amounts and calculations in the accompanying consolidated financial statements have been recalculated to reflect the effects of the reverse stock split and the 2009 stock dividend.

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.

PREMIERWEST BANCORP AND SUBSIDIARY

NOTES 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 losses, valuation of impaired loans, the fair value of available-for-sale investment securities, the value of other real estate owned, and determination of a deferred tax asset valuation allowance.

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. Cash and cash equivalents have an original maturity of 90 days or less.

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.

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 resulting from the transfer of available-for-sale securities to the held-to-maturity classification.

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

Prior to the second quarter of 2009, the Company would assess an other-than-temporary impairment (“OTTI”) or permanent impairment based on the nature of the decline and whether the Company has the ability and intent to hold the investments until a market price recovery. If the Company determined a security to be other-than-temporary or permanently impaired, the full amount of the impairment would be recognized through earnings in its entirety. New guidance related to the recognition and presentation of OTTI of debt securities became effective in the second quarter of 2009. Rather than asserting whether a Company has the ability and intent to hold an investment until a market price recovery, a company must consider whether it intends to sell a security or if it is unlikely that they would be required to sell the security before recovery of the amortized cost basis of the investment, which may be at maturity. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held-to-maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses, the security is re-evaluated according to the procedures described above. No OTTI losses were recognized in the years ended December 31, 2011, 2010 and 2009.

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 Federal Home Loan Bank of Seattle (“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, 2011 and 2010, 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.

As required of all members of the Federal Home Loan Bank of Seattle (FHLB) system, the Company maintains investment in the capital stock of the FHLB in an amount equal to the greater of $500 or 0.5% of home mortgage loans and pass-through securities plus 5.0% of the outstanding balance of mortgage home loans sold to FHLB under the Mortgage Purchase Program. The FHLB system, the largest government sponsored entity in the United States, is made up of 12 regional banks, including the FHLB of Seattle. Participating banks record the value of FHLB stock equal to its par value at $100 per share. The Company is required to hold FHLB’s stock in order to receive advances and views this investment as long-term. Thus, when evaluating it for impairment, the value is

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

determined based on the ultimate recoverability of cost through redemption by the FHLB or from the sale to another member, rather than by recognizing temporary declines in value. The FHLB disclosed that it incurred net losses in its fiscal year 2009, suspended dividend payments to its members and remains undercapitalized as of December 31, 2011. The Company has concluded that its investment in FHLB is not impaired as of December 31, 2011, and believes that it will ultimately recover the par value of its investment in this stock.

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.

Investments in limited partnerships —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 credits are recorded in the years they become available to reduce income taxes.

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.

Transfer of financial assets —In the normal course of business, the Bank participates portions of loans to third parties in order to extend the Bank’s lending capacity or to mitigate risk. Upon completion of a transfer of a participating interest accounted for as sale, the Bank allocates the previous carrying amount of the entire financial asset between the participating interest sold and the participating interest that continues to be held by the Bank. The Bank derecognizes the participating interest sold and recognizes in earnings any gain or loss on the sale.

Loans and the allowance for loan losses —Loans are stated at the amount of unpaid principal reduced by the allowance for loan losses, deferred loan fees, and restructuring concessions. 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 probable 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.

In some instances, the Company modifies or restructures loans to amend the interest rate and/or extend the maturity. Such amendments are generally consistent with the terms of newly booked loans reflecting current standards for amortization and interest rates and do not represent concessions to the borrowers.

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

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 based on current information 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 less estimated costs to sell 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 disclosures. Generally, the Bank evaluates a loan for impairment when it is placed on non-accrual status. All of the Bank’s impaired loans were on non-accrual status at December 31, 2011. 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.

Loans are reported as troubled debt restructurings (“TDR”) when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan losses.

Interest income on all loans is accrued as earned. 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. Non-accrual 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 current 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. The required annual analysis of long-lived assets indicated that one land parcel held for future branch development was impaired for the year ended December 31, 2011. No impairment existed for the years ended December 31, 2010 and 2009.

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

Core deposit intangibles —Core deposit intangibles are amortized to their estimated residual values over their respective estimated useful lives and are also reviewed for impairment. The required annual analysis of the core deposit intangibles indicated that no impairment existed for the years ended December 31, 2011, 2010 and 2009.

Goodwill —Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. After completing the required annual analysis of goodwill in 2009, an impairment charge of $74.9 million was taken during the year ended December 31, 2009, to adjust the goodwill balance to zero.

Other real estate owned and foreclosed assets —Other real estate (“OREO”), acquired through foreclosure or deeds in lieu of foreclosure, is carried at the lower of cost or fair value, less estimated costs of disposal. When property is acquired, any excess of the loan balance over the fair value is charged to the allowance for loan losses. Holding costs, subsequent write-downs to fair value, if any, or any disposition gains or losses are included in non-interest expense. The Bank had $22.8 million in other real estate at December 31, 2011 and $32.0 million at December 31, 2010. The Bank held other foreclosed assets of approximately $372,000 at December 31, 2011, and zero at December 31, 2010.

Advertising —Advertising and promotional costs are generally charged to expense during the period in which they are incurred.

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. At December 31, 2011 and 2010, the net deferred tax asset balance was zero.

The Company had no unrecognized tax benefits at December 31, 2011, 2010 and 2009. During the years ended December 31, 2011 and 2010, the Company recognized no interest and penalties. The Company files income tax returns in the U.S. Federal jurisdiction, California and Oregon. The Company is no longer subject to U.S. or Oregon state examinations by tax authorities for years before 2008 and California state examinations for years before 2007.

Earnings (loss) per common share —Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders (net income (loss) less dividends declared on preferred stock and accretion of discount) by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock dividends and splits. Diluted earnings (loss) per common share is computed similar to basic earnings (loss) per common share except that the numerator is equal to net income (loss) available to common shareholders 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 convertible preferred stock as if converted to common stock.

Preferred stock —In accordance with the relevant accounting pronouncements and guidance from the Securities and Exchange Commission’s (the “SEC”) Office of the Chief Accountant, the Company recorded the issuance of

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the Preferred Stock and detachable Warrant pursuant to the U.S. Department of Treasury’s Troubled Asset Relief Capital Purchase Program (“TARP”) within shareholders’ equity on the Consolidated Balance Sheets. The Preferred Stock and detachable Warrant were initially recognized based on their relative fair values at the date of issuance. As a result, the Preferred Stock’s carrying value is at a discount to the liquidation value or stated value. In accordance with “Increasing Rate Preferred Stock,” the discount is considered an unstated dividend cost that shall be amortized over the period preceding commencement of the perpetual dividend using the effective interest method, by charging the imputed dividend cost against retained earnings and increasing the carrying amount of the Preferred Stock by a corresponding amount. The discount is therefore being amortized over five years using a 6.26% effective interest rate. The total stated dividends (whether or not declared) and unstated dividend cost combined represents a period’s total Preferred Stock dividend, which is deducted from net income to arrive at net loss available to common shareholders on the Consolidated Statements of Operations.

Stock-based compensation —The Company measures and recognizes as compensation expense the grant date fair market value for all share-based awards. That portion of the grant date fair market value that is ultimately expected to vest is recognized as expense over the requisite service period, typically the vesting period, utilizing the straight-line attribution method.

The Company uses the Black-Scholes option-pricing model to value stock options. The Black-Scholes model requires the use of assumptions regarding the risk-free interest rate, expected dividend yield, the weighted average expected life of the options and the historical stock price volatility.

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. Expected dividend yield is based on Management’s estimate at the time of grant. One cash dividend was declared during fiscal year 2009. No cash dividends were declared during fiscal years 2010 or 2011. Going forward in fiscal 2012, the Board of Directors will review the dividend policy on a quarter-by-quarter basis subject to regulatory approval. 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.

Cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for stock options (excess tax benefits) are reported as financing cash flows. There were no excess tax benefits classified as financing cash inflows for the years ended December 31, 2011, 2010 and 2009.

Comprehensive income (loss) —Comprehensive income (loss) for the Company includes net income (loss) reported on the consolidated statements of operations, 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 —Financial Accounting Standards “Fair Value Measurements.” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands

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disclosures about fair value measurements. This Standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, “Fair Value Measurements” established a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

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

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

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

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

Investment securities available-for-sale —Fair values for investment securities are based on quoted market prices or the market values for comparable securities.

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

Other Real Estate Owned and Foreclosed Assets —Real estate acquired through foreclosure, voluntary deed, or similar means is classified as other real estate owned (“OREO”) until it is sold. Foreclosed properties included as OREO are recorded at fair value less the cost to sell which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Certain assets held within this balance sheet caption represent impaired real estate that has been adjusted to its estimated fair value as a result of management’s periodic impairment evaluations using property appraisals from independent real estate appraisers.

The following methods and assumptions were used by the Bank in estimating fair values of assets and liabilities, in accordance with the provisions of Financial Accounting Standards Board, “Disclosures about Fair Value on Financial Instruments”:

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

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

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

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

Loans held-for-sale —Loans held-for-sale include mortgage loans and are reported at the lower of cost or market value. Cost generally approximates market value, given the short duration of these assets. Gains or losses on the sale of loans that are held-for-sale are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights.

Loans —For variable rate loans that re-price 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, less costs to sell, where applicable.

Deposit liabilities —The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts, savings accounts, and interest checking accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

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

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

Off-balance sheet instruments —The Bank’s off-balance sheet instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.

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

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

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

In April 2011, the FASB issued Accounting Standards Update ASU No. 2011-03 “Transfers and servicing (Topic 860)—Reconsideration of Effective Control for Repurchase Agreements.” This Standard is intended to improve the manner in which repo and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity are reported in the financial statements by modifying Topic 860. This standard is effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date, with early adoption disallowed. The adoption of ASU No. 2011-03 is not expected to have a material impact on the consolidated financial statements.

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

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originally introduced in ASU No. 2010-20. According to the current guidance in ASU No. 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. That guidance is now effective for interim and annual periods ending after June 15, 2011. This standard is effective upon issuance. This update requires a significant expansion of disclosures for troubled debt restructurings, but the adoption of the expanded disclosures is not expected to have a material impact on the consolidated financial statements.

Reclassifications —Certain reclassifications have been made to the 2010 and 2009 consolidated financial statements to conform to current year presentations. These reclassifications have no effect on previously reported net loss per share.

NOTE 2—REGULATORY AGREEMENT, ECONOMIC CONDITION AND MANAGEMENT PLAN

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

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

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

•

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

•

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

•

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

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

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

•

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

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NOTE 2—REGULATORY AGREEMENT, ECONOMIC CONDITION AND MANAGEMENT PLAN—(continued)

•

Take steps to ensure the Bank complies with the Agreement,

•

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

•

Obtain approvals for a variety of other routine items.

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

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

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

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

NOTE 3—CASH AND DUE FROM BANKS

The Bank was required to maintain an average reserve balance of approximately $4.7 million and $4.8 million at December 31, 2011 and 2010, 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 the held cash amounts.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—INVESTMENT SECURITIES

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


(Dollars in Thousands)
	December 31, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Available-for-sale:
Collateralized mortgage obligations	$	134,074	$	1,036	$	(694	)	$	134,416
Mortgage-backed securities		70,449		1,344		(20	)		71,773
U.S. Government and agency securities		39,899		1,194		—			41,093
Obligations of states and political subdivisions		64,423		2,652		(197	)		66,878

Total	$	308,845	$	6,226	$	(911	)	$	314,160

Investment securities—
Other Community Reinvestment Act	$	2,000	$	—	$	—		$	2,000

Restricted equity securities	$	3,255	$	—	$	—		$	3,255


	December 31, 2010
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Available-for-sale:
Collateralized mortgage obligations	$	131,372	$	1,647	$	(802	)	$	132,217
Mortgage-backed securities		9,023		72		(39	)		9,056
U.S. Government and agency securities		36,371		24		(119	)		36,276
Obligations of states and political subdivisions		6,009		125		—			6,134

Total	$	182,775	$	1,868	$	(960	)	$	183,683

Held-to-maturity:
Mortgage-backed securities	$	4,781	$	108	$	—		$	4,889
U.S. Government and agency securities		12,151		378		—			12,529
Obligations of states and political subdivisions		12,201		179		(183	)		12,197

Total	$	29,133	$	665	$	(183	)	$	29,615

Investment securities—
Other Community Reinvestment Act	$	2,000	$	—	$	—		$	2,000

Restricted equity securities	$	3,474	$	—	$	—		$	3,474

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—INVESTMENT SECURITIES—(continued)

The table below presents the gross unrealized losses and fair value of the Bank’s investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and December 31, 2010. At December 31, 2011, 35 investment securities comprised the less than 12 months category and one investment security comprised the 12 months or more category. At December 31, 2010, 23 available-for-sale investment securities and five held-to-maturity investment securities comprised the less than 12 months category, and one available-for-sale investment security and four held-to-maturity investment securities comprised the 12 months or more category.


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

	$	99,526	$	(905	)	$	1,728	$	(6	)	$	101,254	$	(911	)



	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
At December 31, 2010
Available-for-sale:
Collateralized mortgage obligations	$	43,239	$	(802	)	$	2	$	—		$	43,241	$	(802	)
Mortgage-backed securities		2,960		(39	)		—		—			2,960		(39	)
U.S. Government and agency securities		19,974		(119	)		—		—			19,974		(119	)
Held-to-maturity:
Obligations of state and political subdivisions		3,593		(176	)		553		(7	)		4,146		(183	)

	$	69,766	$	(1,136	)	$	555	$	(7	)	$	70,321	$	(1,143	)

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 does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost bases, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

The amortized cost and estimated fair value of investment securities at December 31, 2011, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—INVESTMENT SECURITIES—(continued)

have the right to call or prepay obligations with or without call or prepayment penalties. For the purpose of this table, collateralized mortgage obligations and mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted average contractual maturities of underlying collateral.


(Dollars in Thousands)
	Available-for-sale
	Amortized Cost		Estimated Fair Value
Due in one year or less	$	4,522	$	4,539
Due after one year through five years		42,796		44,015
Due after five years through ten years		44,812		46,252
Due after ten years		216,715		219,354

	$	308,845	$	314,160

The following table summarizes the gross realized gains and gross realized losses on the sale of available-for-sale securities for the years ended December 31, 2011, 2010, and 2009:

(Dollars in Thousands)


Years ended December 31	2011					2010					2009
	Gains		Losses			Gains		Losses			Gains		Losses
Collateralized mortgage obligations		596		(208	)		590		—			119		(69	)
Mortgage-backed securities		116		(22	)		84		—			—		—
U.S. Government and agency securities		435		—			92		(34	)		—		—
Obligations of states and political subdivisions		198		—			—		—			—		—

Total		1,345		(230	)		766		(34	)		119		(69	)

At December 31, 2011, investment securities with an estimated fair market value of $181.3 million were pledged to secure public deposits, certain nonpublic deposits and borrowings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5—LOANS

Loans as of December 31, 2011 and 2010, consisted of the following (in thousands):


(Dollars in Thousands)	December 31, 2011			December 31, 2010
Construction, Land Dev & Other Land	$	38,903		$	62,666
Commercial & Industrial		93,607			119,077
Commercial Real Estate Loans		522,500			626,387
Secured Multifamily Residential		21,792			24,227
Other Commercial Loans Secured by RE		47,912			59,284
Loans to Individuals, Family & Personal Expense		9,784			12,472
Consumer/Finance		35,522			36,859
Other Loans		27,594			37,255
Overdrafts		264			319

Gross loans		797,878			978,546
Less: allowance for loan losses		(22,683	)		(35,582	)
Less: deferred fees and restructured loan concessions		(462	)		(1,751	)

Loans, net	$	774,733		$	941,213

The Bank’s market area consists principally of Jackson, Josephine, Deschutes, Douglas and Klamath counties of Oregon, and Butte, Siskiyou, Shasta, Tehama, Sacramento 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 collectability 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, 2011 and 2010, the portion of these loans participated to third parties (which are not included in the accompanying consolidated financial statements) totaled approximately $10.0 million and $24.6 million, respectively.

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

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

•

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

•

Analyses are performed to establish the loss factors based on historical experience, as well as expected losses based on qualitative evaluations of such factors as the economic trends and conditions, industry

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)

conditions, levels and trends in delinquencies and impaired loans, levels and trends in charge-offs and recoveries, among others. The loss factors are applied to loan category pools segregated by risk classification to estimate the loss inherent in the Company’s loan portfolio pursuant to “Accounting for Contingencies.”

•

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

The Company updated its methodology in 2010 for estimating probable credit losses to better align the allowance with the risk within in its loan portfolio by improving the timeliness and relevance of losses reflected in the historical loss factors applied to each loan category pool. These changes included the following:

•

Reducing the time period over which the historical loss factors are calculated from five years to three years.

•

Moving the time period over which the historical loss factors are calculated forward to eliminate time lag and incorporate all losses incurred through the balance sheet date.

•

Further segmentation of the loan portfolio for purposes of developing and applying historical loss factors to specific segments within the portfolio, rather than loss rates determined at an aggregated general loan category level.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 —ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables


	Construction, Land Dev			Comm & Industrial			Comm Real Estate			Comm Real Estate Multi			Comm Real Estate - Other			Loans to Individuals			Consumer Finance			Other Loans, Concessions, and Overdrafts			Total
For the twelve months ended December 31, 2011
Allowance for credit losses:
Beginning balance	$	4,703		$	8,051		$	14,419		$	126		$	4,623		$	973		$	2,376		$	311		$	35,582
Charge-offs and concessions		(9,123	)		(2,123	)		(16,574	)		(56	)		(2,680	)		(969	)		(1,595	)		(936	)		(34,056	)
Recoveries		338			4,793			1,027			—			94			1			443			111			6,807
Provision		5,498			(6,273	)		12,639			115			(241	)		375			1,459			778			14,350

Ending balance	$	1,416		$	4,448		$	11,511		$	185		$	1,796		$	380		$	2,683		$	264		$	22,683

Ending balance: individually evaluated for impairment	$	—		$	128		$	1,959		$	—		$	—		$	—		$	—		$	—		$	2,087

Ending balance: collectively evaluated for impairment	$	1,416		$	4,320		$	9,552		$	185		$	1,796		$	380		$	2,683		$	264		$	20,596

Loans:
Ending balance	$	38,903		$	93,607		$	522,500		$	21,792		$	47,912		$	9,784		$	35,522		$	27,858		$	797,878

Ending balance: individually evaluated for impairment	$	15,584		$	2,181		$	51,051		$	—		$	3,536		$	633		$	81		$	3,175		$	76,241

Ending balance: collectively evaluated for impairment	$	23,319		$	91,426		$	471,449		$	21,792		$	44,376		$	9,151		$	35,441		$	24,683		$	721,637

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NOTE 6 —ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)



Allowance for Credit Losses and Recorded Investment in Financing Receivables

	Construction, Land Dev			Comm & Industrial			Comm Real Estate			Comm Real Estate Multi			Comm Real Estate - Other			Loans to Individuals			Consumer Finance			Other Loans, Concessions, and Overdrafts			Total
For the twelve months ended December 31, 2010
Allowance for credit losses:
Beginning balance	$	15,033		$	6,409		$	20,923		$	506		$	531		$	231		$	1,150		$	1,120		$	45,903
Charge-offs		(11,689	)		(2,364	)		(8,534	)		—			(1,434	)		(133	)		(1,697	)		(722	)		(26,573	)
Recoveries		1,757			2,020			1,124			—			102			6			917			276			6,202
Provision		(398	)		1,986			906			(380	)		5,424			869			2,006			(363	)		10,050

Ending balance	$	4,703		$	8,051		$	14,419		$	126		$	4,623		$	973		$	2,376		$	311		$	35,582

Ending balance: individually evaluated for impairment	$	2,365		$	295		$	3,554		$	—		$	3,440		$	5		$	—		$	—		$	9,659

Ending balance: collectively evaluated for impairment	$	2,338		$	7,756		$	10,865		$	126		$	1,183		$	968		$	2,376		$	311		$	25,923

Loans:
Ending balance	$	62,666		$	119,077		$	626,387		$	24,227		$	59,284		$	12,472		$	36,859		$	37,574		$	978,546

Ending balance: individually evaluated for impairment	$	32,584		$	2,709		$	80,604		$	307		$	10,725		$	26		$	123		$	2,538		$	129,616

Ending balance: collectively evaluated for impairment	$	30,082		$	116,368		$	545,783		$	23,920		$	48,559		$	12,446		$	36,736		$	35,036		$	848,930

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)

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


(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days Past Due and Accruing
December 31, 2011:
Construction, Land Dev & Other Land	$	—	$	81	$	3,578	$	3,659	$	35,244	$	38,903	$	62
Commercial & Industrial		128		—		222		350		93,257		93,607		—
Commercial Real Estate Loans		3,263		—		33,355		36,618		485,882		522,500		—
Secured Multifamily Residential		242		—		—		242		21,550		21,792		—
Other Commercial Loans Secured by RE		302		230		1,019		1,551		46,361		47,912		—
Loans to Individuals, Family & Personal Expense		108		—		618		726		9,058		9,784		1
Consumer/Finance		1,005		275		81		1,361		34,161		35,522		81
Other Loans and Overdrafts		250		1,228		1,697		3,175		24,683		27,858		—

Total	$	5,298	$	1,814	$	40,570	$	47,682	$	750,196	$	797,878	$	144

December 31, 2010:
Construction, Land Dev & Other Land	$	133	$	—	$	7,447	$	7,580	$	55,086	$	62,666	$	—
Commercial & Industrial		222		5		1,298		1,525		117,552		119,077		—
Commercial Real Estate Loans		8,011		2,007		36,396		46,414		579,973		626,387		—
Secured Multifamily Residential		—		—		307		307		23,920		24,227		—
Other Commercial Loans Secured by RE		97		224		2,709		3,030		56,254		59,284		—
Loans to Individuals, Family & Personal Expense		10		—		—		10		12,462		12,472		—
Consumer/Finance		603		188		123		914		35,945		36,859		123
Other Loans and Overdrafts		2,104		—		434		2,538		35,036		37,574		—

Total	$	11,180	$	2,424	$	48,714	$	62,318	$	916,228	$	978,546	$	123

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)

Impaired loans by type for the years ended December 31 were as follows:


(Dollars in Thousands)	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2011
With no Related Allowance:
Construction, Land Dev & Other Land	$	31,333	$	15,584	$	—	$	18,980	$	5
Commercial & Industrial		943		943		—		1,081		—
Commercial Real Estate Loans		55,590		41,001		—		53,196		—
Secured Multifamily Residential		—		—		—		98		—
Other Commercial Loans Secured by RE		4,661		3,536		—		3,566		—
Loans to Individuals, Family & Personal Expense		1,483		633		—		189		—
Consumer/Finance		81		81		—		140		15
Other Loans		3,367		3,175		—		2,535		—

Total	$	97,458	$	64,953	$	—	$	79,785	$	20
With a Related Allowance:
Construction, Land Dev & Other Land	$	—	$	—	$	—	$	1,452	$	—
Commercial & Industrial		1,238		1,238		128		851		—
Commercial Real Estate Loans		15,555		10,050		1,959		11,463		—
Secured Multifamily Residential		—		—		—		—		—
Other Commercial Loans Secured by RE		—		—		—		1,990		—
Loans to Individuals, Family & Personal Expense		—		—		—		64		—
Consumer/Finance		—		—		—		—		—
Other Loans		—		—		—		—		—

Total	$	16,793	$	11,288	$	2,087	$	15,820	$	—
Total Impaired Loans:
Construction, Land Dev & Other Land	$	31,333	$	15,584	$	—	$	20,432	$	5
Commercial & Industrial		2,181		2,181		128		1,932		—
Commercial Real Estate Loans		71,145		51,051		1,959		64,659		—
Secured Multifamily Residential		—		—		—		98		—
Other Commercial Loans Secured by RE		4,661		3,536		—		5,556		—
Loans to Individuals, Family & Personal Expense		1,483		633		—		253		—
Consumer/Finance		81		81		—		140		15
Other Loans		3,367		3,175		—		2,535		—

Total Impaired Loans	$	114,251	$	76,241	$	2,087	$	95,605	$	20

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)

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


	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
(Dollars in Thousands)
December 31, 2010

With no Related Allowance:
Construction, Land Dev & Other Land	$	39,517	$	26,007	$	—	$	25,675	$	—
Commercial & Industrial		2,598		1,682		—		2,654		—
Commercial Real Estate Loans		76,316		66,917		—		57,839		—
Secured Multifamily Residential		307		307		—		183		—
Other Commercial Loans Secured by RE		4,553		3,913		—		4,897		—
Loans to Individuals, Family & Personal Expense		26		26		—		5		—
Consumer/Finance		123		123		—		10		16
Other Loans		2,864		2,538		—		737		—

Total	$	126,304	$	101,513	$	—	$	92,000	$	16

With a Related Allowance:
Construction, Land Dev & Other Land	$	8,151	$	6,577	$	2,365	$	11,324	$	—
Commercial & Industrial		1,027		1,027		295		782		—
Commercial Real Estate Loans		19,321		13,687		3,554		8,800		—
Secured Multifamily Residential		—		—		—		—		—
Other Commercial Loans Secured by RE		6,812		6,812		3,440		2,017		—
Loans to Individuals, Family & Personal Expense		—		—		5		9		—
Consumer/Finance		—		—		—		—		—
Other Loans		—		—		—		207		—

Total	$	35,311	$	28,103	$	9,659	$	23,139	$	—

Total Impaired Loans:
Construction, Land Dev & Other Land	$	47,668	$	32,584	$	2,365	$	36,999	$	—
Commercial & Industrial		3,625		2,709		295		3,436		—
Commercial Real Estate Loans		95,637		80,604		3,554		66,639		—
Secured Multifamily Residential		307		307		—		183		—
Other Commercial Loans Secured by RE		11,365		10,725		3,440		6,914		—
Loans to Individuals, Family & Personal Expense		26		26		5		14		—
Consumer/Finance		123		123		—		10		16
Other Loans		2,864		2,538		—		944		—

Total Impaired Loans	$	161,615	$	129,616	$	9,659	$	115,139	$	16

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)

Included in the table above are $123,000 of consumer loans that are 90 days past due and still accruing interest. These loans are charged off according to policy after 120 days. The remaining loans are on non-accrual status at December 31, 2010.

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

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

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)

The following table summarizes our loans by type and group of December 31, 2011 and December 31, 2010:

(Dollars in Thousands)

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


December 31, 2011	Construction, Land Dev		Comm & Industrial		Comm Real Estate		Comm Real Estate Multi		Comm Real Estate - Other		Loans to Individuals		Other Loans and Overdraft		Total

Pass	$	14,965	$	54,861	$	300,112	$	9,246	$	37,145	$	9,063	$	22,822	$	448,214
Watch		207		4,725		58,449		5,740		490		—		725		70,336
Special Mention		6,772		2,908		64,893		6,564		2,926		—		—		84,063
Substandard		16,959		31,113		99,046		242		7,351		721		4,311		159,743
Doubtful		—		—		—		—		—		—		—		—

Total	$	38,903	$	93,607	$	522,500	$	21,792	$	47,912	$	9,784	$	27,858		762,356

Total Consumer Credit																35,522

Total loans															$	797,878

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity


	Consumer
Performing	$	35,441
Nonperforming		81

Total	$	35,522


December 31, 2010	Construction, Land Dev		Comm & Industrial		Comm Real Estate		Comm Real Estate Multi		Comm Real Estate - Other		Loans to Individuals		Other Loans and Overdraft		Total
Pass	$	17,261	$	58,567	$	314,878	$	9,215	$	40,293	$	11,620	$	24,792	$	476,626
Watch		—		5,676		31,395		—		2,098		—		3,824		42,993
Special Mention		6,435		12,337		118,287		13,540		2,309		—		3,841		156,749
Substandard		35,893		41,404		147,513		1,472		7,772		826		5,117		239,997
Doubtful		3,077		1,093		14,314		—		6,812		26		—		25,322

Total	$	62,666	$	119,077	$	626,387	$	24,227	$	59,284	$	12,472	$	37,574		941,687

Total Consumer Credit																36,859

Total loans															$	978,546

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity


	Consumer
Performing	$	36,736
Nonperforming		123

Total	$	36,859

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)

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

Modification Categories

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

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

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

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

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

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

As of December 31, 2011, no available commitments were outstanding on troubled debt restructurings.

The same factors and methodology used to establish an appropriate reserve for the loan portfolio are applied to TDR’s on accrual status using the risk ratings assigned to them. All TDR’s on nonaccrual status are collateral dependent loans and are carried at fair value based on current appraisals. Given our ALLL methodology, TDR modifications and defaults have no additional effect on the reserve.

The following tables summarize the Company’s troubled debt restructured loans by type and geographic region as of December 31, 2011:

(Dollars in Thousands)


	December 31, 2011 Restructured loans
	Southern Oregon		Mid Oregon		Northern California		Sacramento Valley		Totals		Number of Loans
Construction, Land Dev & Other Land	$	—	$	4,227	$	—	$	6,441	$	10,668		11
Commercial & Industrial		1,905		—		—		221		2,126		4
Commercial Real Estate Loans		29,882		5,530		915		97		36,424		18
Other Commercial Loans Secured by RE		211		—		212		2,027		2,450		5

Total restructured loans	$	31,998	$	9,757	$	1,127	$	8,786	$	51,668		38

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY – (continued)

The table below presents the estimated troubled debt restructured loan maturities for each of the next five years and thereafter:


(Dollars in Thousands)
Year	Amount

2012	$	41,929
2013		2,949
2014		2,420
2015		—
2016		682
Thereafter		3,688

Total	$	51,668

The following table presents troubled debt restructurings by accrual or nonaccrual status as of December 31, 2011 and 2010:


Restructured loans by accrual or nonaccrual status (Dollars in Thousands)
	December 31, 2011
	Restructured loans
	Accrual Status		Non-accrual Status		Total Modifications
Construction, Land Dev & Other Land	$	1,452	$	9,216	$	10,668
Commercial & Industrial		1,230		896		2,126
Commercial Real Estate Loans		1,177		35,247		36,424
Other Commercial Loans Secured by RE		211		2,239		2,450

Total restructured loans	$	4,070	$	47,598	$	51,668


	December 31, 2010
	Restructured loans
	Accrual Status		Non-accrual Status		Total Modifications
Construction, Land Dev & Other Land	$	—	$	12,226	$	12,226
Commercial & Industrial		224		—		224
Commercial Real Estate Loans		—		30,152		30,152
Other Commercial Loans Secured by RE		—		2,632		2,632

Total restructured loans	$	224	$	45,010	$	45,234

As of December 31, 2011, $4.1 million in loans designated as TDR’s met the criteria for placement back on accrual status. This criteria is a minimum of six months of continuous satisfactory (less than 30 days past-due) payment performance under existing or modified terms, and this payment performance is expected to continue as documented by analysis based on current financial statements and/or tax returns.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY—(continued)

The following tables present newly restructured loans by type of modification that occurred during the twelve months ended December 31, 2011 and 2010, respectively:


(Dollars in Thousands)
	Twelve Months Ended December 31, 2011
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	—	$	9,216	$	9,216
Commercial & Industrial		—		1,226		679		1,905
Commercial Real Estate Loans		478		2,624		11,685		14,787
Other Commercial Loans Secured by RE		—		211		2,027		2,238

Total restructured loans	$	478	$	4,061	$	23,607	$	28,146


	Twelve Months Ended December 31, 2010
	Interest Only		Term		Combination		Total Modifications
Construction, Land Dev & Other Land	$	—	$	2,221	$	10,005	$	12,226
Commercial & Industrial		—		—		224		224
Commercial Real Estate Loans		4,122		—		26,030		30,152
Other Commercial Loans Secured by RE		—		—		2,632		2,632

Total restructured loans	$	4,122	$	2,221	$	38,891	$	45,234

The following table represents restructured loans with a payment default occurring within 12 months of the restructured date during the twelve month periods ended December 31, 2011 and 2010, respectively:


(Dollars in Thousands)
	Twelve Months Ended
	December 31, 2011		December 31, 2010
Construction, Land Dev & Other Land	$	—	$	—
Commercial & Industrial		—		—
Commercial Real Estate Loans		2,420		—
Other Commercial Loans Secured by RE		—		—

Total restructured loans	$	2,420	$	—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7—PREMISES AND EQUIPMENT

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


	2011			2010
Land and improvements	$	13,552		$	13,672
Buildings and leasehold improvements		39,250			37,440
Furniture and equipment		20,304			19,809

		73,106			70,921
Less accumulated depreciation and amortization		(26,898	)		(25,024	)

		46,208			45,897
Construction in progress		64			2,027

Premises and equipment, net of accumulated depreciation and amortization	$	46,272		$	47,924

Included in land and improvements is a land parcel, classified as held for sale, with a book value of $228,000 located in Rogue River, Oregon. This property had been held for future branch development. It was offered for sale in the current year, and the fair value as determined by current market prices was greater than the book value. An impairment charge of $120,000 to reduce the book value to the fair value is reported on the statement of cash flows in the year ended December 31, 2011.

Depreciation expense totaled $2.8 million, $2.9 million, and $3.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.

At December 31, 2011, there were no new construction contracts for new branches.

NOTE 8—CORE DEPOSIT INTANGIBLES

At December 31, 2011 and 2010, PremierWest had $2.0 million and $2.5 million of core deposit intangibles, respectively, net of accumulated amortization of $5.3 million and $4.8 million, respectively. For each of the years ending December 31, 2011, 2010 and 2009, PremierWest recorded amortization expense related to these core deposit intangibles totaling $499,000, $959,000, and $817,000 respectively.

The table below presents the estimated amortization expense for the core deposit intangibles acquired in all mergers for each of the next five years and thereafter:


(Dollars in Thousands)
Year	Estimated Amount

2012		465
2013		465
2014		465
2015		334
2016		241
Thereafter		20

	$	1,990

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9—GOODWILL

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

At December 31, 2009, the Company determined that a number of factors suggested that goodwill impairment might exist and, accordingly engaged an independent third-party valuation consultant to assist management in performing an impairment analysis.

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

NOTE 10—INCOME TAXES

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


(Dollars in Thousands)	2011			2010			2009
Current expense:
Federal	$	—		$	(345	)	$	(7,938	)
State		70			53			76

		70			(292	)		(7,862	)

Deferred expense (benefit):
Federal		(938	)		1,006			17,617
State		938			(580	)		(12,037	)

		—			426			5,580

Provision (benefit) for income taxes	$	70		$	134		$	(2,282	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10—INCOME TAXES—(continued)

The provision (benefit) for income taxes results in effective tax rates that are different than the federal income tax statutory rate. Differences for the years ended December 31 are as follows (in thousands):


(Dollars in Thousands)
	2011						2010						2009
	Amount			Rate			Amount			Rate			Amount			Rate
Expected federal income tax provision at statutory rate	$	(5,243	)		35.00	%	$	(1,689	)		35.00	%	$	(52,064	)		35.00	%
State income taxes, net of federal effect		(881	)		5.88	%		(338	)		7.01	%		(4,133	)		2.78	%
Effect of non-taxable interest income, net		(120	)		0.80	%		(160	)		3.32	%		(131	)		0.09	%
Effect of non-taxable increases in the cash surrender value of life insurance		(203	)		1.36	%		(217	)		4.50	%		(219	)		0.15	%
Stock-based compensation		17			-0.11	%		91			-1.90	%		156			-0.11	%
Goodwill impairment		—			0.00	%		—			0.00	%		24,274			-16.32	%
Increase in valuation allowance		7,447			-49.71	%		1,963			-40.68	%		30,172			-20.28	%
Estimated impact of Section 382		(331	)		2.21	%		832			-17.24	%		—			0.00	%
Other, net		(616	)		4.10	%		(348	)		7.22	%		(337	)		0.23	%

Provision (benefit) for income taxes	$	70			-0.47	%	$	134			-2.77	%	$	(2,282	)		1.53	%

The change in the valuation allowance is due to net operating losses established during the year due to taxable losses incurred and the impact of the Bank’s preliminary Internal Revenue Code Section 382 analysis.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of net operating loss and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50 percent occurs within a three-year period. We determined that such an ownership change occurred as of March 19, 2010 as a result of stock issuances. Based on preliminary calculations, this ownership change resulted in estimated limitations on the utilization of tax attributes, including net operating loss carryforwards and tax credits. We estimated that approximately $8.1 million of our Oregon net operating loss carryforwards and $103,000 of Oregon tax credits will be effectively eliminated. Pursuant to Section 382, a portion of the limited net operating loss carryforwards and credits becomes available to use each year. We estimate that approximately $3.7 million, $2.6 million, and $1.1 million of the restricted federal and Oregon net operating losses and tax credits and California net operating loss carryforwards, respectively, will become available each year.

The Bank’s deferred tax assets and valuation allowance have been reduced by $0.5 million to reflect the estimated impact of Section 382 limitations on the utilization of the Oregon and California net operating loss carryforwards and Oregon tax credits. The impact is also reflected in the reconciliation of the income tax (benefit) provision for the years 2011 and 2010.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10—INCOME TAXES—(continued)

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


(Dollars in Thousands)
	2011			2010
Assets:
Allowance for loan losses	$	9,217		$	14,463
Benefit plans		3,638			3,795
Intangibles		1,453			1,510
State tax credits		480			511
Net operating loss		20,995			9,508
Other		8,883			7,876

Total deferred tax assets		44,666			37,663

Liabilities:
Net unrealized gains on investment securities available-for-sale		2,005			324
FHLB stock dividends		357			357
Premises and equipment		2,753			3,243
Loan origination costs		981			1,081
Prepaids		610			345
Deferred revenue		10			37
Other		373			465

Total deferred tax liabilities		7,089			5,852

Net deferred tax asset subtotal		37,577			31,811
Valuation allowance		(37,577	)		(31,811	)

Net deferred tax asset	$	—		$	—

A $46.8 million federal net operating loss carryforward is available to offset future federal taxable income. This net operating loss will begin to expire in 2029 if not utilized in an earlier period. After the impact of the estimated Section 382 analysis, an Oregon net operating loss carryforward of $51.7 million is available to offset future Oregon taxable income, which will begin to expire in 2023 if not utilized in an earlier period. After the impact of the estimated Section 382 analysis, a California net operating loss carryforward of $26.5 million is available to offset future California taxable income which will begin to expire in 2028 if not utilized in an earlier period. Federal general business credits of $764,000 are available to offset future income and will begin to expire in 2028. Federal alternative minimum tax credits of $503,000 are available to offset future federal income tax. These credits have no expiration.

After the impact of the estimated Section 382 analysis, the state tax credits include purchased tax credits totaling $163,000 and $9,000 at December 31, 2011 and 2010, respectively. 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 in 2006 through 2010. The purchased credits expire after 8 years but are expected to be utilized within 5 years of purchase. Additional state tax credits include Oregon Lending credits that expire in 2014 as well as California Hiring credits and California Low-Income Housing credits. Neither of these credits has an expiration period; however, the California Hiring credit is dependent upon the Company continuing to transact business in the Enterprise Zone.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10—INCOME TAXES—(continued)

The 2011 increase in the net deferred tax asset valuation allowance of approximately $5.8 million included the effect of $(1.7) million related to unrealized gains and losses on securities available-for-sale that was allocated to other comprehensive income.

Management believes, based upon the Bank’s expected performance, that it is more likely than not that the deferred tax assets will not be recognized in the normal course of operations within the next business cycle and, accordingly, Management has reduced the entire net deferred tax asset by a corresponding valuation allowance.

NOTE 11—TIME DEPOSITS

Time deposits of $100,000 and over totaled approximately $168.3 million and $220.4 million at December 31, 2011 and 2010, respectively.

At December 31, 2011, the scheduled annual maturities for all time deposits were as follows (in thousands):


Years ending December 31, 2012	$	262,548
2013		110,948
2014		20,931
2015		14,064
2016		22,943
Thereafter		319

	$	431,753

The Company had $241,000 and $742,000 brokered deposits at December 31, 2011 and 2010, respectively.

NOTE 12—FEDERAL FUNDS PURCHASED

The Bank maintains Federal funds lines with correspondent banks and the Federal Reserve discount window as a backup source of liquidity. Federal funds purchased generally mature within one to four days from the transaction date. The Federal Funds purchased balance at both December 31, 2011 and 2010 was zero. The Bank had approximately $15.0 million of Federal Funds lines available to draw against with correspondent banks. In addition, certain qualifying loans totaling approximately $18.6 million were pledged to provide for an additional available borrowing capacity of approximately $8.2 million with the Federal Reserve discount window as of December 31, 2011.

NOTE 13—FEDERAL HOME LOAN BANK BORROWINGS AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13—FEDERAL HOME LOAN BANK BORROWINGS AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE—(continued)

investment securities held by the FHLB that are not otherwise pledged for the benefit of others. At December 31, 2011, the Company maintained a line of credit with the FHLB of Seattle for $55.3 million and was in compliance with its related collateral requirements.

The Company held a total of approximately $784,000 and $354,000 of cash on deposit with the FHLB of Seattle and FHLB of San Francisco at December 31, 2011 and 2010, respectively.

NOTE 14—JUNIOR SUBORDINATED DEBENTURES

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

Following are the terms of the junior subordinated debentures as of December 31, 2011:

Trust Name

Issue Date

Issued
Amount

Rate

Maturity
Date

Redemption
Date

PremierWest Statutory
Trust I

December
2004

7,732,000

LIBOR + 1.75%(1)

December
2034

December
2009

PremierWest Statutory
Trust II

December
2004

7,732,000

LIBOR + 1.79%(2)

March
2035

March
2010

Stockmans Financial
Trust I

August
2005

15,464,000

LIBOR + 1.42%(3)

September
2035

September
2010

30,928,000

(1)	PremierWest Statutory Trust I was bearing interest at the fixed rate of 5.65% until mid-December 2009, at which time it changed to a variable rate of 3-month LIBOR (0.559% at December 15, 2011) plus 1.75% or 2.309%, adjusted quarterly, through the final maturity date in December 2034.

(2)	PremierWest Statutory Trust II was bearing interest at the fixed rate of 5.65% until March 2010, at which time it changed to the variable rate of 3-month LIBOR (0.559% at December 15, 2011) plus 1.79% or 2.349%, adjusted quarterly, through the final maturity date in March 2035.

(3)	Stockmans Financial Trust I was bearing interest at the fixed rate of 5.93% until September 2010, at which time it changed to the variable rate of 3-month LIBOR (0.559% at December 15, 2011) plus 1.42% or 1.979%, adjusted quarterly, through the final maturity date in September 2035.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14—JUNIOR SUBORDINATED DEBENTURES—(continued)

authority to limit the dividends paid by banks and bank holding companies, respectively. The Company does not expect to be in a position to pay interest payments on trust preferred securities without regulatory approval or until the Bank is “well-capitalized” and has satisfied conditions in any regulatory agreement or action. We are permitted to defer such interest payments for up to 20 consecutive quarters, but during a deferral period we are prohibited from making dividend payments on our capital stock. The amount of accrued and unpaid interest was approximately $2.2 million as of December 31, 2011. At December 31, 2011, the Company had deferred payment of interest for nine consecutive quarters.

NOTE 15—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, 2011 and 2010, 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 non-performance for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The distribution of commitments to extend credit approximates the distribution of loans outstanding.

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


(Dollars in Thousands)
	December 31, 2011		December 31, 2010
Commitments to extend credit	$	72,637	$	76,536
Standby letters of credit		6,062		5,197
Overdraft protection for demand deposit accounts		270		290

Total off-balance sheet financial instruments	$	78,969	$	82,023

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.

The Bank maintains a reserve against these off-balance sheet financial instruments of $98,000 and $85,000 at December 31, 2011 and 2010, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16—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. 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 collectability or present any other unfavorable features.

One director who is also a borrower of the Bank has a fixed rate commercial real estate secured loan with an outstanding balance of approximately $679,000. During 2011, the loan was rated “substandard” and is currently on accrual status and reported as a TDR. After consultation with bank regulators, the board of directors (with the director/borrower excused) approved an extension of the loan maturity to June 2012 to give the borrower additional time to resolve the issue.

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):


	2011			2010
Beginning balance	$	24,058		$	23,171
Additions		424			3,905
Repayments		(3,711	)		(3,018	)

Ending balance	$	20,771		$	24,058

Deposits held for executive officers and directors at December 31, 2011 and 2010, were approximately $4.0 million and $4.5 million, respectively.

NOTE 17—COMMITMENTS AND CONTINGENCIES

Operating lease commitments —As of December 31, 2011, 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, 2012	$	793
2013		588
2014		473
2015		470
2016		337
Thereafter		2,187

	$	4,848

Rental expense for all operating leases was $1.0 million, $1.2 million, and $1.1 million for the years ended December 31, 2011, 2010, and 2009, respectively.

Legal contingencies —In the ordinary course of business, the Bank may become involved in litigation arising from normal banking activities. In the opinion of Management, the ultimate disposition of current actions is unlikely to have a material adverse effect on the Company’s consolidated financial position or results of operations. Based on currently available information, Management believes that the ultimate outcome of these

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NOTE 17—COMMITMENTS AND CONTINGENCIES—(continued)

matters, individual and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction prohibiting us from selling one or more products. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the financial position and results of operations of the period in which the ruling occurs or in future periods.

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 $189,000, $205,000, and $343,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

Executive supplemental retirement and severance plans —In connection with previous acquisitions of United Bancorp, Timberline Bancshares, Inc., Mid Valley Bank and Stockmans Bank, the Company entered into various severance, non-compete, deferred compensation and retirement agreements with previous executives and Board members of the acquired companies. These plans provide for retirement benefits that increase annually until each executive reaches retirement age and will be paid out over a period ranging from 15 years to life (for two executives). The deferred compensation plan provides interest on income previously earned for which receipt was deferred for tax purposes, plus interest accrued. As of December 31, 2011 and 2010, the Bank’s recorded liability pursuant to these agreements was $8.9 million and $9.3 million respectively. Payments on these plans are made monthly and will continue until the liabilities are paid in full. The expenses related to these agreements were $684,000, $936,000, and $1.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. To support its obligations under these arrangements, the Bank acquired bank-owned life insurance policies. These policies had aggregate cash surrender values of $15.9 million and $15.7 million as of December 31, 2011 and 2010, respectively. A death benefit payout on bank-owned life insurance policies of $241,000 was received in 2011. The income attributed to the increase in the cash surrender value of the bank-owned life insurance policies was $508,000, $542,000, and $556,000 for the years ended December 31, 2011, 2010, and 2009, respectively.

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NOTE 19—BASIC AND DILUTED LOSS PER COMMON SHARE

The following summarizes the calculations for basic and diluted loss per common share, after giving retroactive effect for stock dividends and the 1-for-10 reverse stock split, for the years ended December 31, (in thousands, except per share amounts):


	Net Loss Available to Common Shareholders (Numerator)			Weighted Average Shares (Denominator)		Per Share Amount
2011

Basic loss per common share (loss available to common shareholders net of $2.6 million preferred share dividends declared and accretion of discount)	$	(17,616	)		10,035,241	$	(1.76	)

Diluted loss per common share	$	(17,616	)		10,035,241	$	(1.76	)

2010

Basic loss per common share (loss available to common shareholders net of $2.5 million preferred share dividends declared and accretion of discount)	$	(7,492	)		8,318,042	$	(0.90	)

Diluted loss per common share	$	(7,492	)		8,318,042	$	(0.90	)

2009

Basic loss per common share (loss available to common shareholders net of $2.2 million preferred share dividends declared and accretion of discount)	$	(148,643	)		2,474,484	$	(60.07	)

Diluted loss per common share	$	(148,643	)		2,474,484	$	(60.07	)

As of December 31, 2011, 2010 and 2009, stock options of approximately 75,000, 85,000, and 96,000, respectively, were not included in the computation of diluted earnings per share as their inclusion would have been anti-dilutive.

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NOTE 20—PREFERRED STOCK

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

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

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

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

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

While payments have not been made for nine dividend periods (since the third quarter of 2009) in order to preserve capital, the Company has continued to accrue dividends through the fourth quarter of 2011. As of December 31, 2011, accrued and unpaid dividends totaled approximately $5.0 million.

NOTE 21—STOCK OPTION PLAN

At December 31, 2011, PremierWest Bancorp had one active equity incentive plan—the 2011 Stock Incentive Plan (“2011 Plan”). Upon the recommendation of the Compensation Committee, the Board of Directors adopted

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NOTE 21—STOCK OPTION PLAN—(continued)

the PremierWest Bancorp 2011 Plan effective February 24, 2011, subject to shareholder approval which was approved at the Annual Shareholder Meeting on May 26, 2011. The 2011 Plan authorizes the issuance of up to 500,000 shares of stock, all of which were available for issuance at December 31, 2011. With the adoption of the 2011 Plan, no further grants will be made under the 2002 Plan. At December 31, 2011 there were unexercised grants totaling 56,368 shares, all of which had been made under the 1992 Plan or the 2002 Plan.

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

Stock option activity during the year ended December 31, 2011 was as follows:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Stock options outstanding, 12/31/2010		85,376		$	91.33
Issued		—			—
Forfeited		(10,563	)		88.71
Expired		(70	)		37.38

Stock options outstanding, 12/31/2011		74,743			91.75		3.81	$	—

Stock options exercisable, 12/31/2011		56,368		$	90.13		3.08	$	—

PremierWest Bancorp follows ASC 718 “Compensation—Stock Compensation” which requires companies to measure and recognize as compensation expense the grant date fair market value for all share-based awards. That portion of the grant date fair market value that is ultimately expected to vest is recognized as expense over the requisite service period, typically the vesting period, utilizing the straight-line attribution method. This Standard requires companies to estimate the fair market value of stock-based payment awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model to value our stock options. The Black-Scholes model requires the use of assumptions regarding the historical volatility of our stock price, our expected dividend yield, the risk-free interest rate and the weighted average expected life of the options. The following schedule reflects the weighted-average assumptions included in this model as it relates to the valuation of options granted for the periods indicated:


	2011		2010			2009
Risk-free interest rate		—		2.5	%		3.0	%
Expected dividend		—		0.00	%		2.54	%
Expected life, in years		—		7.0			7.0
Expected volatility		—		64	%		38	%

There were no stock options granted during the year ended 2011. There were 750 restricted stock grants issued during the year ended 2011. As of December 31, 2011, there were 1,250 restricted stock grants outstanding, all expected to fully vest between 2016 and 2018.

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NOTE 21—STOCK OPTION PLAN—(continued)

The weighted-average grant date fair value of restricted stock grants for the year ended 2011 was $3.30. The weighted-average grant date fair value of stock options granted during the years ended 2010 and 2009 was $5.70, and $9.20, respectively.

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 and the unrecognized stock-based compensation as of or for the years ended December 31, 2011, 2010, and 2009. No stock options were exercised for the year ended December 31, 2010 or 2011.


	2011		2010		2009
Intrinsic value of stock options exercised	$	—	$	—	$	30,000
Cash received from stock options exercised	$	—	$	—	$	43,800
Tax benefit realized from stock options exercised	$	—	$	—	$	—
Unrecognized stock-based compensation	$	322,376	$	459,222	$	910,918

Stock-based compensation expense recognized under “Share-Based Payment” resulting from stock options that were granted during the current and previous periods was $146,000, 372,000, and 448,000 for the years ended December 31, 2011, 2010, and 2009, respectively.

The unrecognized stock-based compensation will be recognized over 1.5, 3.0, and 1.9 weighted-average remaining years as of December 31, 2011, 2010 and 2009, respectively.

Information regarding the number, weighted-average exercise price and weighted-average remaining contractual life of options by range of exercise price at December 31, 2011, is as follows:


	Options Outstanding						Exercisable Options
Exercise Price Range	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)		Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)
$0.00 – $50.00		1,219	$	38.40		3.22		755	$	40.94		0.64
$50.01 – $75.00		13,620		53.27		1.13		13,158		52.95		0.94
$75.01 – $90.00		23,008		86.37		4.94		12,462		83.93		3.75
$90.01 – $125.00		30,203		101.07		4.08		23,300		97.07		3.66
$125.01 – $150.00		905		132.98		4.90		905		132.98		4.90
$150.01 – $175.00		5,788		159.81		4.25		5,788		159.81		4.25

		74,743	$	91.75		3.81		56,368	$	90.13		3.08

NOTE 22—REGULATORY MATTERS

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

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

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NOTE 22—REGULATORY MATTERS—(continued)

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

Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well-capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective

A bank is deemed to be “ well-capitalized” if the bank:

•

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

•

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

•

has a leverage ratio of 5.0 percent or greater; and

•

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

A bank is deemed to be “ adequately capitalized” if the bank:

•

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

•

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

•

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

•

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

Although the Bank meets the quantitative guidelines set forth above to be deemed “well-capitalized”, the Bank remains subject to the Agreement with the FDIC and, therefore, is deemed to be “adequately capitalized.” Pursuant to the Agreement with the FDIC, as discussed in Note 2 – “Regulatory Agreement, Economic Condition, and Management Plan”, the Bank was required to increase and maintain its Tier 1 capital in such an amount as to ensure a leverage ratio of 10% or more by October 3, 2010, well in excess of the 5% requirement set forth in regulatory guidelines. The 10% leverage ratio was not achieved by October 3, 2010. Management believes that, while not achieving this target in the timeframe required, the Company has demonstrated progress, taken prudent actions and maintained a good-faith commitment to reaching the requirements of the Agreement. Management continues to work toward achieving all requirements contained in the regulatory agreements in as expeditious a manner as possible.

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NOTE 22—REGULATORY MATTERS—(continued)

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


(Dollars in Thousands)	Actual					Regulatory Minimum To Be Adequately Capitalized					Regulatory Minimum To Be Well-Capitalized Under the Consent Order Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2011
Tier 1 capital (to average assets)
Company	$	103,410		8.01	%	$	51,670	³	4.0	%		N/A		N/A
Bank	$	112,578		8.72	%	$	51,614	³	4.0	%	$	64,517	³	5.0	%
Tier 1 capital (to risk-weighted assets)
Company	$	103,410		10.80	%	$	38,299	³	4.0	%		N/A		N/A
Bank	$	112,578		11.77	%	$	38,273	³	4.0	%	$	57,409	³	6.0	%
Total capital (to risk-weighted assets)
Company	$	119,162		12.45	%	$	76,598	³	8.0	%		N/A		N/A
Bank	$	124,672		13.03	%	$	76,546	³	8.0	%	$	95,682	³	10.0	%

	Actual					Regulatory Minimum To Be Adequately Capitalized					Regulatory Minimum To Be Well-Capitalized Under the Consent Order Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2010
Tier 1 capital (to average assets)
Company	$	123,579		8.66	%	$	57,100	³	4.0	%		N/A		N/A
Bank	$	126,065		8.85	%	$	57,007	³	4.0	%	$	71,259	³	5.0	%
Tier 1 capital (to risk-weighted assets)
Company	$	123,579		11.09	%	$	44,593	³	4.0	%		N/A		N/A
Bank	$	126,065		11.31	%	$	44,576	³	4.0	%	$	66,864	³	6.0	%
Total capital (to risk-weighted assets)
Company	$	137,782		12.36	%	$	89,186	³	8.0	%		N/A		N/A
Bank	$	140,263		12.59	%	$	89,152	³	8.0	%	$	111,440	³	10.0	%

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NOTE 23—FAIR VALUE MEASUREMENTS

The Company’s available-for-sale securities is the only balance sheet category the Company accounts for at fair value on a recurring basis, as defined in the fair value hierarchy of “Fair Value Measurements.” The tables below present information about these securities and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as of December 31, 2011 and 2010:


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

Total assets measured at fair value	$	314,160	$	—	$	314,160	$	—


	Fair Value Measurements At December 31, 2010, Using
Description	Fair Value 12/31/2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Collaterialized mortgage obligations	$	132,217	$	—	$	132,217	$	—
Mortgage-backed securities		9,056		—		9,056		—
U.S. Government and agency securities		36,276		—		36,276		—
Obligations of states and political subdivisions		6,134		—		6,134		—

Total assets measured at fair value	$	183,683	$	—	$	183,683	$	—

Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

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NOTE 23—FAIR VALUE MEASUREMENTS—(continued)

Certain assets and liabilities are measured at fair value on a non-recurring basis after initial recognition such as loans measured for impairment. The following tables present the fair value measurement of assets on a non-recurring basis as of December 31, 2011 and 2010, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:


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

Total impaired assets measured at fair value	$	59,354	$	—	$	—	$	59,354	$	(28,627	)


	Fair Value Measurements As of December 31, 2010, Using
Description	Fair Value 12/31/2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total period losses included in earnings
Other real estate owned and foreclosed assets	$	32,009	$	—	$	—	$	32,009	$	(5,347	)
Loans measured for impairment, net of specific reserves		46,863		—		—		46,863		(22,311	)

Total impaired assets measured at fair value	$	78,872	$	—	$	—	$	78,872	$	(27,658	)

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


(Dollars in Thousands)	Twelve Months Ended December 31,
	2011			2010
Other real estate owned, beginning of period	$	32,009		$	24,748
Transfers from outstanding loans		15,842			30,619
Improvements and other additions		10			465
Proceeds from sales		(17,564	)		(20,211	)
Gain on sales		1,811			1,735
Impairment charges		(9,279	)		(5,347	)

Total other real estate owned	$	22,829		$	32,009

A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured as a practical expedient, at the loan’s observable market price or the fair market value of the collateral if the loan is collateral dependent.

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NOTE 23—FAIR VALUE MEASUREMENTS—(continued)

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


(Dollars in Thousands)	As of December 31, 2011			As of December 31, 2010
	Carrying Value			Carrying Value
Impaired loans with charge-offs loan-to-date (1)	$	27,324		$	28,393
Impaired loans with specific reserves		7,600			27,832
Impaired loans with both specific reserves and charge-offs loan-to-date (1)		3,688			297

Subtotal impaired loans with specific reserves and/or charge-offs loan-to-date		38,612			56,522
Specific reserves associated with impaired loans		(2,087	)		(9,659	)

Total loans measured for impairment, net of specific reserves	$	36,525		$	46,863

Impaired loans without charge-offs or specific reserves	$	37,629		$	73,094
Loans with specific reserves and/or charge-offs loan-to-date		38,612			56,522

Total impaired loans	$	76,241		$	129,616

(1)	Total charge-offs incurred from inception of the loans

The following disclosures are made in accordance with the provisions of “Disclosures About Fair Value of Financial Instruments,” which requires the disclosure of fair value information about financial instruments where it is practicable to estimate that value. In cases where quoted market values are not available, the Bank primarily uses present value techniques to estimate the fair values of its financial instruments. Valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts 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 non-acquired deposits. The Bank does not believe that it would be practicable to estimate a representational fair value for these types of items as of December 31, 2011 and 2010.

As “Disclosures About Fair Value of Financial Instruments” excludes certain financial instruments and all non-financial instruments from its disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Bank.

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NOTE 23—FAIR VALUE MEASUREMENTS—(continued)

The estimated fair values of the Bank’s significant on-balance sheet financial instruments at December 31 were as follows:


(Dollars in Thousands)	As of December 31, 2011				As of December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	71,349	$	71,349	$	138,974	$	138,974
Interest-bearing certificates of deposit
(original maturities greater than 90 days)	$	1,500	$	1,500	$	1,500	$	1,500
Investment securities available-for-sale	$	314,160	$	314,160	$	183,683	$	183,683
Investment securities held-to-maturity	$	—	$	—	$	29,133	$	29,615
Investment securities - CRA	$	2,000	$	2,000	$	2,000	$	2,000
Restricted equity investments	$	3,255	$	3,255	$	3,474	$	3,474
Loans held-for-sale	$	810	$	810	$	929	$	929
Loans	$	797,878	$	799,218	$	978,546	$	913,834
Accrued interest receivable	$	4,567	$	4,567	$	5,585	$	5,585

Financial liabilities:
Deposits	$	1,127,749	$	1,133,695	$	1,266,249	$	1,275,519
FHLB borrowings	$	—	$	—	$	22	$	22
Securities sold under agreements to repurchase	$	4,241	$	4,241	$	—	$	—
Junior subordinated debentures	$	30,928	$	12,999	$	30,928	$	20,629
Accrued interest payable	$	2,536	$	2,536	$	2,102	$	2,102

NOTE 24—PARENT COMPANY FINANCIAL INFORMATION

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

CONDENSED BALANCE SHEETS

(Dollars in Thousands)


	December 31,
	2011		2010
ASSETS
Cash and cash equivalents	$	1,075	$	1,551
Investment in subsidiary		119,883		129,494
Other assets		1,609		1,435

Total assets	$	122,567	$	132,480

LIABILITIES
Junior subordinated debentures	$	30,928	$	30,928
Other liabilities		7,274		4,544

Total liabilities		38,202		35,472
SHAREHOLDERS’ EQUITY		84,365		97,008

Total liabilities and shareholders’ equity	$	122,567	$	132,480

129

PREMIERWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 24—PARENT COMPANY FINANCIAL INFORMATION—(continued)

CONDENSED STATEMENTS OF OPERATIONS

(Dollars in Thousands)


	Years Ended December 31,
	2011			2010			2009
Operating income	$	21		$	46		$	587
Cash dividends from bank subsidiary		—			—			3,100
Interest expense		(615	)		(1,102	)		(1,794	)
Other operating expense		(471	)		(759	)		(1,110	)
Provision for income taxes		—			—			751

Income (loss) before equity in undistributed net loss of subsidiary		(1,065	)		(1,815	)		1,534

Undistributed net loss of subsidiary		(13,986	)		(3,144	)		(148,006	)

NET LOSS		(15,051	)		(4,959	)		(146,472	)
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION		2,565			2,533			2,171

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(17,616	)	$	(7,492	)	$	(148,643	)

CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)


	Years Ended December 31,
	2011			2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(15,051	)	$	(4,959	)	$	(146,472	)
Adjustments to reconcile net income to net cash from operating activities:
Undistributed net loss of subsidiary		13,986			3,144			148,006
Other, net		590			2,845			617

Net cash (used in) provided by operating activities		(475	)		1,030			2,151

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Bank subsidiary		—			(32,503	)		—
Advances made to Bank subsidiary		—			1,462			238
Repayment of advances made to Bank subsidiary		—			(1,462	)		(40,400	)

Net cash used in investing activities		—			(32,503	)		(40,162	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised		—			—			48
Dividends paid on common stock		—			—			(236	)
Dividends paid on preferred stock		—			—			(1,047	)
Cash paid for fractional shares in connction with 1-for-10 reverse stock split		(1	)		—			—
Proceeds from issuance of preferred stock		—			—			41,400
Proceeds from issuance of common stock		—			32,503			—
Other, net		—			(750	)		(1,244	)

Net cash (used in) provided by financing activities		(1	)		31,753			38,921

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(476	)		280			910
CASH AND CASH EQUIVALENTS, Beginning of year		1,551			1,271			361

CASH AND CASH EQUIVALENTS, End of year	$	1,075		$	1,551		$	1,271

130

PREMIERWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 25—SUBSEQUENT EVENT

On January 13, 2012, the Company announced it will consolidate 11 branches into existing nearby branches by the end of April 2012. Five of the branches to be consolidated are located in Oregon with the other six branches located in California. The decision to consolidate these branches and the projected reduction in expenses followed an extensive branch network analysis with a focus on reducing expense, improving efficiency, and positively impacting the overall value of the Company. These branches represent less than 10% of the total bank-wide deposits. Branch consolidation is projected to result in expense savings of approximately $1.9 million annually beginning in the second quarter of 2012. First quarter 2012 reduction of pretax income as a result of consolidation expense is expected to be approximately $790,000.

131

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Evaluation of Disclosure Controls and Procedures

We evaluated the effectiveness of our disclosure controls and procedures, as defined in the Exchange Act as of December 31, 2011, for the period covered by this Annual Report, on Form 10-K. Our Chief Executive Officer and our Chief Financial Officer participated in this evaluation. Based upon that evaluation they concluded that our disclosure controls and procedures were effective as of the end of the period covered by the report.

Internal Control over Financial Reporting

Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:

•

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;

•

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

•

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. 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.

No change occurred during any quarter in 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s report on internal control over financial reporting is set forth below, and should be read with these limitations in mind.

Management’s Report on Internal Control over Financial Reporting

Our Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Management conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment and those criteria, we believe that, as of December 31, 2011, the Company maintained effective internal control over financial reporting.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, has been audited by MOSS ADAMS LLP, an independent registered public accounting firm, as stated in their report, which is included in this Annual Report on Form 10-K.

ITEM 9B.

OTHER INFORMATION

None.

132

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 2012 Annual Meeting of Shareholders, which the Company expects to be filed with the SEC on or before April 29, 2012.

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 2012 Annual Meeting of Shareholders.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information provided in response to this Item is incorporated by reference to the Definitive Proxy Statement on Schedule 14A for the Company’s 2012 Annual Meeting of Shareholders.

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 2012 Annual Meeting of Shareholders.

ITEM 14.

PRINCIPAL ACCOUNTING 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 2012 Annual Meeting of Shareholders.

133

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)

Financial Statements:

The consolidated financial statements for the fiscal years ended December 31, 2011, 2010 and 2009, are included as Item 8 of this report beginning on page 75.

(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:

EXHIBIT INDEX



3.1				Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to Form 10-K filed March 16, 2011)

3.2				Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K filed March 16, 2010)

4.1				Form of Stock Certificate for Common Stock (incorporated by reference to Exhibit 4 to the Form S-4/A (Registration No. 333-96209) filed March 17, 2000)

4.2				Form of Stock Certificate for Series B Preferred Stock (incorporated by reference to Exhibit 4.1 Form 8-K filed February 17, 2009)

4.3				Warrant to purchase shares of common stock, issued to the U.S. Department of the Treasury February 13, 2009 (incorporated by reference to Exhibit 4.3 to Form 8-K filed February 17, 2009)

10.1				Letter Agreement, dated February 13, 2009, including Securities Purchase Agreement—Standard Terms, between the Registrant and the United States Department of the Treasury (incorporated by reference to Exhibit 4.2 to Form 8-K filed February 17, 2009)

10.2.1*				Employment Agreement with Tom Anderson (incorporated by reference to Exhibit 10.2 to Form 10-K filed March 14, 2008)

10.2.2*				Amendment to Employment Agreement with Tom Anderson (incorporated by reference to Exhibit 10.4.2 to Form 10-K filed March 18, 2009)

10.3*				Employment Agreement with Doug Biddle (incorporated by reference to Exhibit 99.1 to Form 8-K)

10.4*				Employment Agreement with James Ford (incorporated by reference to the substantially identical (other than base salary) form of employment agreement with Mr. Anderson filed as Exhibit 10.2 to Form 10-K filed March 14, 2008)

10.5.1*				Employment Agreement with Joe Danelson (incorporated by reference to Exhibit 10.2 to Form 10-Q filed August 11, 2008)

10.5.2*				Amendment to Employment Agreement with Joe Danelson (incorporated by reference to Exhibit 10.7.2 to Form 10-K filed March 18, 2009)

10.6*				Supplemental Executive Retirement Plan Agreement with James Ford (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 3, 2009)

10.7*				Supplemental Executive Retirement Plan Agreement with Joe Danelson (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 20, 2011)

10.8*				Supplemental Executive Retirement Plan Agreement with John Anhorn (incorporated by reference to Exhibit 10.3 to Form 10-K filed March 14, 2008)

134



10.9.1*				Supplemental Executive Retirement Plan Agreement with Rich Hieb (incorporated by reference to Exhibit 10.4 to Form 10-K filed March 14, 2008)

10.9.2*				Amendment to Supplemental Executive Retirement Plan with Rich Hieb (incorporated by reference to Exhibit 10.10.2 to Form 10-K filed March 18, 2009)

10.10.1*				Supplemental Executive Retirement Plan Agreement with Tom Anderson (incorporated by reference to Exhibit 10.5 to Form 10-K filed March 14, 2008)

10.10.2*				First Amendment to Supplemental Executive Retirement Plan Agreement with Tom Anderson (incorporated by reference to Exhibit 10.11.2 to Form 10-K filed March 18, 2009)

10.11.1*				2002 Executive Survivor Income Agreement with John Anhorn (incorporated by reference to Exhibit 10.13.1 to Form 10-K filed March 18, 2009)

10.11.2*				Amendment to Executive Survivor Income Agreement with John Anhorn (incorporated by reference to Exhibit 10.4 to Form 10-Q filed November 5, 2004)

10.12.1*				2002 Executive Survivor Income Agreement with Rich Hieb (incorporated by reference to Exhibit 10.14.1 to Form 10-K filed March 18, 2009)

10.12.2*				Amendment to Executive Survivor Income Agreement with Rich Hieb (incorporated by reference to a substantially identical (other than a pre-retirement death benefit of $150,000) amendment with John Anhorn filed as Exhibit 10.4 to Form 10-Q filed November 5, 2004)

10.13.1*				Executive Survivor Income Agreement with Tom Anderson (incorporated by reference to Exhibit 10.15.1 to Form 10-K filed March 18, 2009)

10.13.2*				Amendment to Executive Survivor Income with Tom Anderson (incorporated by reference to Exhibit 10.8 to Form 10-Q filed November 5, 2004)

10.14*				Executive Deferred Compensation Agreement with John Anhorn (incorporated by reference to the substantially identical form attached as Exhibit 10.8 to Form 10-K filed March 14, 2008)

10.15*				Executive Deferred Compensation Agreement with Rich Hieb (incorporated by reference to the substantially identical form attached as Exhibit 10.8 to Form 10-K filed March 14, 2008)

10.16*				Executive Deferred Compensation Agreement with Tom Anderson (incorporated by reference to Exhibit 10.8 to Form 10-K filed March 14, 2008)

10.17*				Executive Deferred Compensation Agreement with Joe Danelson (incorporated by reference to Exhibit 10.20 to Form 10-K filed March 18, 2009)

10.18*				2011 PremierWest Stock Incentive Plan (incorporated by reference to Appendix A to the proxy statement for the 2011 annual meeting of shareholders, filed April 7, 2011)

10.19*				2002 PremierWest Bancorp Stock Option Plan (incorporated by reference to the proxy statement (DEF 14A) filed April 13, 2005)

10.20*				Form of Share Vesting Agreement for Restricted Stock Award (incorporated by reference to Exhibit 10.34 to Form 10-K filed March 16, 2010)

10.21*				Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.12.2 to the Form 10-K filed March 15, 2006)

10.22*				Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.12.1 to the Form 10-K filed March 15, 2006)

10.23*				Director Deferred Compensation Agreement (with individual directors John B. Dickerson, John A. Duke, Dennis N. Hoffbuhr, Patrick G. Huycke, Brian Pargeter, James L. Patterson, Tom Becker and Rickar D. Watkins ) (incorporated by reference to Exhibit 10.10 to Form 10-K filed March 14, 2008)

10.24*				Continuing Benefits Agreement (with individual directors John B. Dickerson, John A. Duke, Dennis N. Hoffbuhr, Patrick G. Huycke, Brian Pargeter, James L. Patterson, Tom Becker and Rickar D. Watkins ) (incorporated by reference to Exhibit 10.9 to Form 10-K filed March 14, 2008)

135



10.25*		Form of Senior Executive Officer Waiver pursuant to TARP Capital Purchase Program (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 17, 2009)

10.26*		Form of Senior Executive Officer Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K filed February 17, 2009)

10.27*		Form of Compensation Modification Agreement with executive officers James Ford, John Anhorn, Rich Heib, Tom Anderson, Michael Fowler and Joe Danelson (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 8, 2010)

10.28*		Form of Compensation Modification Agreement (for 409A compliance purposes) with executive officers James Ford, John Anhorn, Rich Heib, Tom Anderson, Michael Fowler, Joe Danelson, and Jim Earley effective December 31, 2010 (incorporated by reference to Exhibit 10.34 to Form 10-K filed March 17, 2011)

10.29		Consent Order with FDIC and Oregon Department of Consumer and Business Services Division of Finance and Corporate Securities (incorporated by reference to Exhibit 99.1 to Form 8-K filed April 8, 2010)

10.30		Written Agreement with Federal Reserve Bank of San Francisco and Oregon Department of Consumer and Business Services Division of Finance and Corporate Securities (incorporated by reference to Exhibit 99.1 to Form 8-K filed June 9, 2010)

21	#	Subsidiaries

23.1	#	Consent of Moss Adams LLP

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

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

99.1	#	Subsequent year certification of Principal Executive Officer pursuant to TARP Capital Purchase Program

99.2	#	Subsequent year certification of Principal Financial Officer pursuant to TARP Capital Purchase Program

101	**	The following financial information from the Annual Report on Form 10-K for the period ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Loss; (iv) the Consolidated Statements of Changes in Shareholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text.

#	filed herewith

*	compensatory plan or arrangement

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

136

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/ J AMES M. F ORD

Date: March 15, 2012

James M. Ford,

President and Chief Executive Officer

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



By:	/s/ J AMES M. F ORD	Date: March 15, 2012
	James M. Ford, President and Chief Executive Officer (Principal Executive Officer)

By:	/s/ J OHN L. A NHORN John L. Anhorn, Director and Chairman of PremierWest Bank	Date: March 15, 2012

By:	/s/ R ICHARD R. H IEB Richard R. Hieb, Director and Chief Operating Officer	Date: March 15, 2012

By:	/s/ D OUGLAS N. B IDDLE Douglas N. Biddle, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	Date: March 15, 2012

By:	/s/ J OHN D UKE John Duke, Director	Date: March 15, 2012

By:	/s/ D ENNIS H OFFBUHR Dennis Hoffbuhr, Director	Date: March 15, 2012

By:	/s/ R ICKAR W ATKINS Rickar Watkins, Director	Date: March 15, 2012

By:	/s/ J AMES P ATTERSON James Patterson, Director	Date: March 15, 2012

By:	/s/ T OM B ECKER Tom Becker, Director	Date: March 15, 2012

By:	/s/ B RIAN P ARGETER Brian Pargeter, Director	Date: March 15, 2012

By:	/s/ P ATRICK H UYCKE Patrick Huycke, Director	Date: March 15, 2012

137



By:	/s/ J OHN D ICKERSON John Dickerson, Director	Date: March 15, 2012

By:	/s/ G EORGES C. S T . L AURENT , J R . Georges C. St. Laurent, Jr., Director	Date: March 15, 2012

By:	/s/ M ARY C ARRYER Mary Carryer, Director	Date: March 15, 2012