PremierWest Bancorp Announces Fourth Quarter Results

January 22, 2013

MEDFORD, OR--(Marketwire - Jan 22, 2013) - PremierWest Bancorp ( NASDAQ : PRWT ) (Company), parent company of PremierWest Bank (Bank), announced results for the fourth quarter and year ended December 31, 2012, as follows:

For the quarter ended December 31, 2012:

  • Net loss applicable to common shareholders of $7.3 million, compared to net income of $114,000 in third quarter 2012 and a $4.1 million net loss in fourth quarter 2011;
  • Net OREO and foreclosed asset expenses of $4.6 million, an increase from $883,000 in third quarter 2012, and $1.4 million in fourth quarter 2011;
  • No loan loss provision expense in fourth or third quarter 2012, compared to $3.0 million in fourth quarter 2011;
  • Net loan charge-offs of $614,000 compared to net loan charge-offs of $344,000 in third quarter 2012 and $7.3 million in fourth quarter 2011;
  • A charge of $2.8 million was taken to recognize an updated estimate of a liability for post-retirement health insurance benefits previously committed to certain current and former directors and officers;
  • Net interest margin of 3.85%, a decrease from 4.01% in third quarter 2012 and 3.95% in fourth quarter 2011; 
  • Average rate paid on total deposits and borrowings of 0.50%, a decline from 0.55% in the third quarter in 2012 and 0.66% in fourth quarter 2011.

For the year ended December 31, 2012:

  • Net loss applicable to common shareholders of $13.9 million, after $4.8 million in loan loss provision, net OREO and foreclosed asset expenses of $9.2 million and a charge of $2.8 million to recognize an updated estimate of a liability associated with post-retirement benefits, as noted above. This compares to a net loss applicable to common shareholders of $17.6 million for the year ended 2011, with a $14.4 million loan loss provision and net OREO and foreclosed asset expenses of $8.6 million;
  • Net interest margin of 4.08%, an increase of 3 basis points from 4.05% for the year ended 2011;
  • Average rate paid on total deposits and borrowings of 0.56%, a 22 basis point decline from 0.78% for the year ended 2011;
  • Net loan charge-offs of $8.9 million, compared to $27.2 million for the year ended 2011;
  • Allowance for loan losses of $18.6 million, or 2.87% of gross loans, compared to $22.7 million, or 2.84%, at December 31, 2011;
  • Non-performing loans of $22.7 million, or 3.50% of gross loans, compared to $76.2 million, or 9.56% of gross loans, at December 31, 2011, representing a $53.6 million, or 70%, reduction when comparing the two periods; 
  • OREO of $25.4 million, up from $22.8 million at December 31, 2011. 

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

  • Reducing adversely classified loans by $82.3 million, or 52%, from $159.8 million at December 31, 2011;
  • Reducing non-performing assets by $51.1 million, or 52%, from $99.1 million at December 31, 2011;
  • Strengthening the Bank's total risk-based and leverage capital ratios to 14.06% and 8.95%, respectively, as compared to 13.03% and 8.72% at December 31, 2011;
  • Improving non-interest bearing demand deposits as a percentage of total deposits to 28% at December 31, 2012, up from 25% at December 31, 2011. 

James M. Ford, President & Chief Executive Officer, stated, "As I have reported over the past several quarters, the Company has made significant progress. However, the Board of Directors and executive management determined that without an infusion of additional capital, the Bank would not be able to exit all problem credit relationships, meet obligations to holders of our trust preferred securities at the expiration of the deferral period, comply with the FDIC Consent Order, satisfy our commitment to the U.S. Treasury as holder of our Series B Preferred Stock issued under TARP, and complete the restructuring initiatives begun earlier this year. After studying many options, we announced in October our decision to merge with AmericanWest Bank as the best course of action for our employees, shareholders and communities.

"We continue to make significant reductions in problem assets," Ford continued. "As part of this effort, OREO impairment charges taken this quarter resulted in a net loss for the current period. These charges were associated with numerous properties received earlier this year as part of a master settlement agreement with a large non-performing loan relationship. These charges were taken primarily on properties for land development, which have continued to experience declines in value. Concurrently, we had another successful quarter in reducing problem assets, which are now at the lowest levels since 2007. Contributing to this reduction was the paydown or payoff of over $3.9 million in non-performing loans. As a result of these improvements in credit quality, net charge-offs were at reduced levels for the second consecutive quarter. Non-interest expenses included a charge of $2.8 million during the fourth quarter to recognize an updated estimate of a liability for post-retirement health insurance benefits previously committed to certain current and former directors and officers. Despite this, the expense reduction initiatives completed earlier this year have produced the expected results. These efforts validate our commitment to operating a more cost-effective organization. 

"We continue to be successful at reducing our levels of higher-cost certificates of deposits. In addition, we remain focused on having non-interest bearing deposits as an important component of our funding," commented Ford. "Loan demand remains subdued due to the continued sluggish economy. In the meantime, contributions to revenue are being made by the investment portfolio, investment brokerage and mortgage banking activities."

In closing, Ford remarked, "I believe that our efforts to reduce problem assets and restructure our business operations are proving beneficial, even with the OREO impairment charges we incurred this quarter. Similarly, reductions in infrastructure expenses and continued deleveraging have contributed to additional improvement in our capital levels. We remain focused in our efforts to enhance the operating results of PremierWest through the continued reduction in problem assets and enhanced efficiency of our business operations."

OPERATING RESULTS

Net Interest Income
Net interest income for the quarter and twelve months ended December 31, 2012 declined from the three and twelve months ended December 31, 2011. This is primarily due to a decline in average interest earning assets during these periods as a result of the Company's deleveraging strategy. In addition, average interest bearing liabilities decreased during these same periods. Correspondingly, interest expense continued to decline due to the reduction in the balances of, and rates paid on, certificates of deposit. 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 soft due to continued weakness in the economy. As such, investment securities, which typically generate a lower yield than loans, comprise a higher percentage of the Bank's earning assets.

Certain reclassifications have been made to the following financial table presentations to conform to current period presentations. These reclassifications have no effect on previously reported net income (loss) per share.

                               
STATEMENT OF OPERATIONS OVERVIEW                        
                               
(Dollars in Thousands, Except for Loss per Share Data)                          
                           
    For the Three Months Ended December 31, 2012     For the Three Months Ended September 30, 2012   $ Change     % Change     For the Three Months Ended December 31, 2011     $ Change     % Change  
                                                   
Interest and dividend income   $ 11,398     $ 12,110   $ (712 )   -6 %   $ 13,710     $ (2,312 )   -17 %
Interest expense     1,325       1,486     (161 )   -11 %     1,969       (644 )   -33 %
  Net interest income     10,073       10,624     (551 )   -5 %     11,741       (1,668 )   -14 %
Loan loss provision     -       -     -     0 %     3,000       (3,000 )   -100 %
Non-interest income     2,717       3,350     (633 )   -19 %     2,377       340     14 %
Non-interest expense     19,415       13,215     6,200     47 %     14,476       4,939     34 %
Income (loss) before provision for income taxes     (6,625 )     759     (7,384 )   973 %     (3,358 )     (3,267 )   97 %
Provision for income taxes     10       11     (1 )   -9 %     26       (16 )   -62 %
  Net income (loss)     (6,635 )     748     (7,383 )   987 %     (3,384 )     (3,251 )   96 %
Preferred stock dividends and discount accretion     632       634     (2 )   0 %     682       (50 )   -7 %
                                                   
  Net income (loss) applicable to common shareholders   $ (7,267 )   $ 114   $ (7,381 )   6475 %   $ (4,066 )   $ (3,201 )   79 %
                                                   
Income (loss) per common share:                                                  
  Basic (1)   $ (0.72 )   $ 0.01   $ (0.73 )   7300 %   $ (0.41 )   $ (0.31 )   76 %
  Diluted (1)   $ (0.72 )   $ 0.01   $ (0.73 )   7300 %   $ (0.41 )   $ (0.31 )   76 %
                                                   
Average common shares outstanding - basic (1)     10,034,741       10,034,741     -     0 %     10,035,241       (500 )   0 %
Average common shares outstanding - diluted (1)     10,034,741       10,034,741     -     0 %     10,035,241       (500 )   0 %
                                                   
                         
    For the Year Ended December 31, 2012     For the Year Ended December 31, 2011     $ Change     % Change  
                         
Interest and dividend income   $ 49,803     $ 59,475     $ (9,672 )   -16 %
Interest expense     6,098       9,558       (3,460 )   -36 %
  Net interest income     43,705       49,917       (6,212 )   -12 %
Loan loss provision     4,775       14,350       (9,575 )   -67 %
Non-interest income     13,144       10,838       2,306     21 %
Non-interest expense     63,413       61,386       2,027     3 %
Income (loss) before provision for income taxes     (11,339 )     (14,981 )     3,642     24 %
Provision for income taxes     68       70       (2 )   -3 %
  Net loss     (11,407 )     (15,051 )     3,644     24 %
Preferred stock dividends and discount accretion     2,528       2,565       (37 )   -1 %
                               
  Net loss applicable to common shareholders   $ (13,935 )   $ (17,616 )   $ 3,681     21 %
                               
Loss per common share:                              
  Basic (1)   $ (1.39 )   $ (1.76 )   $ 0.37     21 %
  Diluted (1)   $ (1.39 )   $ (1.76 )   $ 0.37     21 %
                               
Average common shares outstanding - basic (1)     10,034,741       10,035,241       (500 )   0 %
Average common shares outstanding - diluted (1)     10,034,741       10,035,241       (500 )   0 %
                               
(1) As of December 31, 2012, September 30, 2012, and December 31, 2011, 109,039 common shares related to the potential exercise of the warrant issued to the U.S. Treasury pursuant to the Troubled Asset Relief Program (TARP) Capital Purchase Program were not included in the computation of diluted earnings per share as their inclusion would have been anti-dilutive.  
   

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

 
Reconciliation of Non-GAAP Measure:             
Non-GAAP Operating Income (Loss)             
(Dollars in Thousands)             
For The Three Months Ended   December 31, 2012     September 30, 2012   $ Change     % Change     December 31, 2011     $ Change     % Change  
                                                   
Net income (loss) applicable to common shareholders   $ (7,267 )   $ 114   $ (7,381 )   6475 %   $ (4,066 )   $ (3,201 )   79 %
  Provision for loan losses     -       -     -     0 %     3,000       (3,000 )   100 %
  Net cost of operations of other real estate owned and foreclosed assets    
4,642
     
883
   
3,759
   
426
%    
1,380
     
3,262
   
236
%
  Provision for income taxes     10       11     (1 )   -9 %     26       (16 )   -62 %
  Preferred stock dividends and discount accretion     632       634     (2 )   0 %     682       (50 )   -7 %
Pre-tax, pre-credit cost operating income (loss)   $ (1,983 )   $ 1,642   $ (3,625 )   -221 %   $ 1,022     $ (3,005 )   -294 %
                         
                         
For The Year Ended   December 31, 2012     December 31, 2011     $ Change     % Change  
                               
Net loss applicable to common shareholders   $ (13,935 )   $ (17,616 )   $ 3,681     21 %
  Provision for loan losses     4,775       14,350       (9,575 )   -67 %
  Net cost of operations of other real estate owned and foreclosed assets    
9,172
     
8,554
     
618
   
7
%
  Provision for income taxes     68       70       (2 )   -3 %
  Preferred stock dividends and discount accretion     2,528       2,565       (37 )   -1 %
Pre-tax, pre-credit cost operating income   $ 2,608     $ 7,923     $ (5,315 )   -67 %
                               

The following table provides a summary of tax equivalent net income (loss) applicable to common shareholders (non-GAAP) for the periods presented:

 
Reconciliation of Non-GAAP Measure:       
Tax Equivalent Net Income (Loss) Applicable to Common Shareholders      
(Dollars in Thousands)       
                                         
For the Three Months ended   December 31, 2012     September 30, 2012   $ Change     % Change     December 31, 2011     $ Change     % Change  
                                                   
Net interest income   $ 10,073     $ 10,624   $ (551 )   -5 %   $ 11,741     $ (1,668 )   -14 %
Tax equivalent adjustment for municipal loan interest     33       41     (8 )   -20 %     44       (11 )   -25 %
Tax equivalent adjustment for municipal bond interest     2       3     (1 )   -33 %     7       (5 )   -71 %
Tax equivalent net interest income     10,108       10,668     (560 )   -5 %     11,792       (1,684 )   -14 %
Provision for loan losses     -       -     -     0 %     3,000       (3,000 )   -100 %
Non-interest income     2,717       3,350     (633 )   -19 %     2,377       340     14 %
Non-interest expense     19,415       13,215     6,200     47 %     14,476       4,939     34 %
Provision for income taxes     10       11     (1 )   -9 %     26       (16 )   -62 %
Tax equivalent net income (loss)     (6,600 )     792     (7,392 )   933 %     (3,333 )     (3,267 )   98 %
Preferred stock dividends and discount accretion     632       634     (2 )   0 %     682       (50 )   -7 %
Tax equivalent net income (loss) applicable to common shareholders   $ (7,232 )   $ 158   $ (7,390 )   4677 %   $ (4,015 )   $ (3,217 )   80 %
                         
                         
For the Year ended   December 31, 2012     December 31, 2011     $ Change     % Change  
                               
Net interest income   $ 43,705     $ 49,917     $ (6,212 )   -12 %
Tax equivalent adjustment for municipal loan interest     157       178       (21 )   -12 %
Tax equivalent adjustment for municipal bond interest     22       58       (36 )   -62 %
Tax equivalent net interest income     43,884       50,153       (6,269 )   -12 %
Provision for loan losses     4,775       14,350       (9,575 )   -67 %
Non-interest income     13,144       10,838       2,306     21 %
Non-interest expense     63,413       61,386       2,027     3 %
Provision for income taxes     68       70       (2 )   -3 %
Tax equivalent net loss     (11,228 )     (14,815 )     3,587     24 %
Preferred stock dividends and discount accretion     2,528       2,565       (37 )   -1 %
Tax equivalent net loss applicable to common shareholders   $ (13,756 )   $ (17,380 )   $ 3,624     21 %
                               

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Management believes that presentation of these non-GAAP financial measures provide 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.

Non-interest Income
Non-interest income for the quarter ended December 31, 2012 increased compared to the quarter ended December 31, 2011. Service charge income on deposit accounts declined due to a reduction in the amount of non-sufficient check items. This was partially offset by growth in mortgage banking income, primarily associated with refinancing activity. Investment brokerage and annuity fee income also grew due to an increase in sales volume. Other non-interest income increased due to a gain from sale of fixed assets associated with the sale of a former branch location. 

Non-interest income for the twelve months ended December 31, 2012, grew as compared to the twelve months ended December 31, 2011. Service charge income on deposit accounts declined due to a reduction in the amount of non-sufficient check items. Growth in investment brokerage and annuity fees due to an increase in sales volume was accompanied by similar growth in income from increased mortgage banking revenue, primarily due to increased refinancing activity. Continued repositioning of the investment securities portfolio to adjust to changes in market outlook occurred throughout the current period, resulting in higher net gains on sale of securities. Other non-interest income increased due to a gain from sale of fixed assets associated with the sale of a former branch location.

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 third quarter of 2011 to comply with the FDIC's mandates. The Company believes these mandates have continued to adversely affect non-interest income.

 
Non-interest income             
(Dollars in Thousands)             
                                       
For The Three Months Ended                                      
    December 31, 2012     September 30, 2012   $ Change     % Change     December 31, 2011   $ Change     % Change  
                                                 
Service charges on deposit accounts   $ 816     $ 847   $ (31 )   -4 %   $ 898   $ (82 )   -9 %
Other commissions and fees     664       676     (12 )   -2 %     684     (20 )   -3 %
Net gain (loss) on sale of securities, available for sale     (4 )     713     (717 )   -101 %     116     (120 )   -103 %
Investment brokerage and annuity fees     397       581     (184 )   -32 %     360     37     10 %
Mortgage banking fees     329       204     125     61 %     143     186     130 %
Other non-interest income:                                                
  Increase in value of BOLI     122       123     (1 )   -1 %     125     (3 )   -2 %
  Other non-interest income     393       206     187     91 %     51     342     671 %
Total non-interest income   $ 2,717     $ 3,350   $ (633 )   -19 %   $ 2,377   $ 340     14 %
                                                 
                     
For The Year Ended                    
    December 31, 2012   December 31, 2011   $ Change     % Change  
                           
Service charges on deposit accounts   $ 3,416   $ 3,720   $ (304 )   -8 %
Other commissions and fees     2,686     2,724     (38 )   -1 %
Net gain on sale of securities, available for sale     3,104     1,115     1,989     178 %
Investment brokerage and annuity fees     1,786     1,754     32     2 %
Mortgage banking fees     753     413     340     82 %
Other non-interest income:                          
  Increase in value of BOLI     488     508     (20 )   -4 %
  Other non-interest income     911     604     307     51 %
Total non-interest income   $ 13,144   $ 10,838   $ 2,306     21 %
                           

Non-interest Expense
Non-interest expense for the current quarter increased from the quarter ended December 31, 2011. This was primarily due to increases in net cost of operations of OREO from impairment charges taken on numerous properties received earlier this year as part of a master settlement agreement with a large non-performing loan relationship. These charges were taken primarily on properties for land development, which have continued to experience declines in value. In addition, a charge of $2.8 million was taken during the current quarter to recognize an updated estimate of a liability for post-retirement health insurance benefits previously committed to certain current and former directors and officers. This charge, which is not related to the proposed merger with AmericanWest Bank, increased director fee expense by $1.6 million and salaries and employee benefits expense by $1.2 million. Excluding the impact of recording the post-retirement obligation, salary and employee benefits expense fell versus the quarter ended December 31, 2011 due to branch consolidation, branch sales and administrative restructuring initiatives completed earlier in 2012. 

Non-interest expense for the twelve months ended December 31, 2012 increased compared to the twelve months ended December 31, 2011. The increase was primarily due to higher net cost of operations of OREO and problem loan expenses associated with the payment of delinquent property taxes of $1.6 million incurred to acquire OREO properties. Salary and employee benefits expense declined despite the charges taken to recognize a liability for post-retirement health insurance benefits, as mentioned above, due to the branch reduction and administrative restructuring initiatives completed earlier in 2012. In addition, a number of expense categories experienced declines due to company-wide efforts to reduce expenses. Such reductions were primarily the result of operating fewer branch locations. Similarly, FDIC assessments dropped commensurate with the decline in total assets over the period. Director fee expenses increased as a result of the charge to record a liability for post-retirement health insurance benefits, as mentioned above. Other non-interest expense increased primarily due to a cost of approximately $800,000 to retire assets as a result of the branch reduction initiative completed in second quarter 2012. 

 
Non-interest expense             
(Dollars in Thousands)             
                                     
For The Three Months Ended                                    
    December 31, 2012   September 30, 2012   $ Change     % Change     December 31, 2011   $ Change     % Change  
                                               
Salaries and employee benefits   $ 6,925   $ 6,065   $ 860     14 %   $ 6,302   $ 623     10 %
Net cost of operations of other real estate owned and foreclosed assets    
4,642
   
883
   
3,759
   
426
%    
1,380
   
3,262
   
236
%
Net occupancy and equipment     1,757     1,694     63     4 %     1,690     67     4 %
FDIC and state assessments     628     690     (62 )   -9 %     727     (99 )   -14 %
Professional fees     876     1,020     (144 )   -14 %     807     69     9 %
Communications     388     411     (23 )   -6 %     509     (121 )   -24 %
Advertising     186     166     20     12 %     135     51     38 %
Third-party loan costs     250     165     85     52 %     343     (93 )   -27 %
Professional liability insurance     214     215     (1 )   0 %     540     (326 )   -60 %
Problem loan expense     459     570     (111 )   -19 %     200     259     130 %
Other non-interest expense:                                              
  Director fees     1,774     120     1,654     1378 %     105     1,669     1590 %
  Internet costs     121     113     8     7 %     237     (116 )   -49 %
  ATM debit card costs     177     210     (33 )   -16 %     190     (13 )   -7 %
  Business development     54     61     (7 )   -11 %     85     (31 )   -36 %
  Amortization     210     105     105     100 %     116     94     81 %
  Supplies     95     91     4     4 %     149     (54 )   -36 %
  Other non-interest expense     659     636     23     4 %     961     (302 )   -31 %
Total non-interest expense   $ 19,415   $ 13,215   $ 6,200     47 %   $ 14,476   $ 4,939     34 %
                                               
                     
For The Year Ended                    
    December 31, 2012   December 31, 2011   $ Change     % Change  
                           
Salaries and employee benefits   $ 26,077   $ 26,836   $ (759 )   -3 %
Net cost of operations of other real estate owned and foreclosed assets    
9,172
   
8,554
   
618
   
7
%
Net occupancy and equipment     7,024     7,953     (929 )   -12 %
FDIC and state assessments     2,700     3,448     (748 )   -22 %
Professional fees     2,933     3,053     (120 )   -4 %
Communications     1,720     1,953     (233 )   -12 %
Advertising     743     828     (85 )   -10 %
Third-party loan costs     984     1,266     (282 )   -22 %
Professional liability insurance     855     813     42     5 %
Problem loan expense     3,106     652     2,454     376 %
Other non-interest expense:                          
  Director fees     2,124     405     1,719     424 %
  Internet costs     492     624     (132 )   -21 %
  ATM debit card costs     722     692     30     4 %
  Business development     257     340     (83 )   -24 %
  Amortization     547     499     48     10 %
  Supplies     419     569     (150 )   -26 %
  Other non-interest expense     3,538     2,901     637     22 %
Total non-interest expense   $ 63,413   $ 61,386   $ 2,027     3 %
                           

Income Taxes
The Company recorded an income tax provision for the three months ended December 31, 2012, September 30, 2012, and December 31, 2011. The provision was made for minimum state income taxes owed.

As of December 31, 2012, the Company maintained a full valuation allowance against its deferred tax asset. If the Company returns to sustained profitability, all or a portion of the deferred tax asset valuation allowance may be reversed. A reversal of the deferred tax asset valuation allowance would decrease the Company's income tax expense and increase net income. Currently, the only tax expense the Company is recognizing relates to Oregon minimum tax.

...
                                           
BALANCE SHEET OVERVIEW  
                                           
                                           
(Dollars in Thousands)                                          
    December 31,     September 30,           %     December 31,           %  
    2012     2012     $ Change     Change     2011     $ Change     Change  
Assets:                                                    
  Cash and cash equivalents   $ 80,252     $ 65,543     $ 14,709     22 %   $ 71,349     $ 8,903     12 %
  Interest-bearing certificates of deposit     1,500       1,500       -     0 %     1,500       -     0 %
  Investment securities     333,157       328,627       4,530     1 %     319,415       13,742     4 %
                                                     
  Gross loans, net of deferred fees     647,272       676,101       (28,829 )   -4 %     797,416       (150,144 )   -19 %
  Allowance for loan losses     (18,560 )     (19,174 )     614     3 %     (22,683 )     4,123     18 %
  Net loans     628,712       656,927       (28,215 )   -4 %     774,733       (146,021 )   -19 %
                                                     
Other assets     96,346       104,953       (8,607 )   -8 %     99,050       (2,704 )   -3 %
    Total assets   $ 1,139,967     $ 1,157,550     $ (17,583 )   -2 %   $ 1,266,047     $ (126,080 )   -10 %
                                                     
Liabilities and stockholders' equity                                                    
  Total deposits   $ 1,006,184     $ 1,014,982     $ (8,798 )   -1 %   $ 1,127,749     $