PremierWest Bancorp Announces Third Quarter Results

MEDFORD, OR--(Marketwire - Oct 23, 2012) - PremierWest Bancorp ( NASDAQ : PRWT ) announced results for the third quarter ended September 30, 2012, as follows:

  • Net income applicable to common shareholders of $114,000, compared to a $2.0 million net loss in second quarter 2012 and a $3.5 million net loss in third quarter 2011;
  • No loan loss provision expense versus $1.3 million in second quarter 2012 and $5.1 in third quarter 2011;
  • Net loan charge-offs of $344,000 compared to net loan charge-offs of $2.1 million in second quarter 2012 and $6.5 million in third quarter 2011;
  • Net OREO and foreclosed asset expenses of $883,000, a decrease from $1.2 million in second quarter 2012, and an increase from $644,000 in third quarter 2011;
  • One-time expenses of $900,000 and $500,000, associated with capital strategy initiatives and adjustments to deferred benefit obligations, respectively, were partially offset by $700,000 in net gain on sale of securities;
  • Net interest margin of 4.01%, a decrease from 4.34% in second quarter 2012 and 4.21% in third quarter 2011;
  • Average rate paid on total deposits and borrowings of 0.55%, a decline from 0.56% in the second quarter in 2012 and 0.72% in third quarter 2011.

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

  • Reducing adversely classified loans to $103.7 million, down from $118.1 million at June 30, 2012 and $192.4 million at September 30, 2011;
  • Reducing non-performing assets to $59.8 million, a decline from $72.3 million at June 30, 2012 and $106.3 million at September 30, 2011;
  • Improving the allowance for loan and lease losses coverage of non-performing loans to 62.9%, up from 50.8% at June 30, 2012 and 34.5% at September 30, 2011;
  • Completing additional expense control initiatives that began in the second quarter 2012, including a restructuring of staff and processes that are projected to result in annualized savings of approximately $2.5 million. As a result of these changes, some staff positions were eliminated and other vacant positions were not filled in order to create a more efficient organization;
  • Strengthening the Bank's total risk-based and leverage capital ratios to 14.28% and 9.34%, respectively, as compared to 13.64% and 9.01% at June 30, 2012 and 12.71% and 8.80% at September 30, 2011;
  • Increasing non-interest bearing demand deposits to 27% of total deposits, as compared to 26% in second quarter 2012 and 24% in third quarter 2011.

James M. Ford, PremierWest's President & Chief Executive Officer, remarked, "I am pleased to report that we posted a profit for the quarter. In addition, we had another successful quarter in reducing problem assets, which are now at the lowest levels in several years. Contributing to this reduction was the sale or payoff of over $10.0 million in adversely classified loans. Our recent initiatives to reduce salary and other operating expenses have had a positive impact on the Company's bottom line. Credit resolution costs have also declined, primarily due to a reduction in OREO impairment charges. We believe this is indicative of more stability in real estate prices within our marketplace.

"The branch consolidation and administrative staffing restructuring started earlier this year have already produced meaningful cost savings. These results demonstrate our commitment to creating a more efficient and proactive organization able to flourish within our increasingly competitive industry.

"Reducing our levels of higher-cost certificates of deposit continues to be an emphasis. In addition, we remain focused on having non-interest bearing deposits as an important component of our funding," noted Ford. "Unfortunately, loan demand continues to be sluggish due to the continued economic downturn. As a result, the investment portfolio, which consists of high quality federal government agency and municipal securities, is contributing to earnings until loan demand improves. In addition, we are seeing solid growth in revenue from investment brokerage and mortgage banking activities."

In closing, Ford observed, "I believe that the profit for this quarter signifies that our strategies to reduce problem assets and streamline our business operations are bearing fruit, even with the one-time expenses we incurred. Similarly, expense reductions and continued deleveraging have contributed to continued improvement in our capital levels. We will maintain steadfast in our focus to enhance the operating results of PremierWest. I very much appreciate the devotion of our employees and the loyalty of the shareholders as we work toward additional improvement in performance going forward."

OPERATING RESULTS

Net Interest Income
Net interest income for the quarter and nine months ended September 30, 2012 declined from the three and nine months ended September 30, 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. 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 soft due to the continued economic weakness. As such, investment securities, which typically generate a lower yield than loans, comprise a higher percentage of the Bank's earning assets.

Net interest income for the current quarter decreased from the quarter ended June 30, 2012 primarily due to the decline in earning assets between the periods. Interest income also decreased due to the collection of approximately $500,000 in recaptured loan interest in second quarter 2012 from the sale of a note. Interest expense continued to decline due to the reduction in the balances of, and rates paid on, certificates of deposit. Also, an adjustment of $82,000 in interest expense on junior subordinated debentures was taken in the current quarter. This adjustment increased the cost of average borrowings by 91 basis points and average total deposits and borrowings and net interest margin by 3 basis points each during this period.

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 September 30, 2012     For the Three Months Ended June 30,
2012
    $
Change
    % Change     For the Three Months Ended September 30, 2011     $
Change
    % Change  
                                                     
Interest and dividend income   $ 12,110     $ 13,177     $ (1,067 )   -8 %   $ 15,036     $ (2,926 )   -19 %
Interest expense     1,486       1,543       (57 )   -4 %     2,187       (701 )   -32 %
  Net interest income     10,624       11,634       (1,010 )   -9 %     12,849       (2,225 )   -17 %
Loan loss provision     -       1,275       (1,275 )   -100 %     5,050       (5,050 )   -100 %
Non-interest income     3,350       2,594       756     29 %     2,667       683     26 %
Non-interest expense     13,215       14,247       (1,032 )   -7 %     13,298       (83 )   -1 %
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES     759       (1,294 )     2,053     159 %     (2,832 )     3,591     127 %
PROVISION FOR INCOME TAXES     11       37       (26 )   -70 %     23       (12 )   -52 %
  NET INCOME (LOSS)     748       (1,331 )     2,079     156 %     (2,855 )     3,603     126 %
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION     634       634       -     0 %     614       20     3 %
                                                     
  NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS   $ 114     $ (1,965 )   $ 2,079     106 %   $ (3,469 )   $ 3,583     103 %
                                                     
INCOME (LOSS) PER COMMON SHARE:                                                    
  BASIC (1)   $ 0.01     $ (0.20 )   $ 0.21     105 %   $ (0.35 )   $ 0.36     103 %
  DILUTED (1)   $ 0.01     $ (0.20 )   $ 0.21     105 %   $ (0.35 )   $ 0.36     103 %
                                                     
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 Nine Months Ended September 30, 2012       For the Nine Months Ended September 30, 2011       $
Change
    % Change                        
                                                     
Interest and dividend income   $ 38,405     $ 45,765     $ (7,360 )   -16 %                      
Interest expense     4,773       7,589       (2,816 )   -37 %                      
  Net interest income     33,632       38,176       (4,544 )   -12 %                      
Loan loss provision     4,775       11,350       (6,575 )   -58 %                      
Non-interest income     10,427       8,462       1,965     23 %                      
Non-interest expense     43,998       46,911       (2,913 )   -6 %                      
LOSS BEFORE PROVISION FOR INCOME TAXES     (4,714 )     (11,623 )     6,909     59 %                      
PROVISION FOR INCOME TAXES     58       44       14     32 %                      
  NET LOSS     (4,772 )     (11,667 )     6,895     59 %                      
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION     1,896       1,883       13     1 %                      
                                                     
  NET LOSS APPLICABLE TO COMMON SHAREHOLDERS   $ (6,668 )   $ (13,550 )   $ 6,882     51 %                      
                                                     
LOSS PER COMMON SHARE:                                                    
  BASIC (1)   $ (0.66 )   $ (1.35 )   $ 0.69     51 %                      
  DILUTED (1)   $ (0.66 )   $ (1.35 )   $ 0.69     51 %                      
                                                     
Average common shares outstanding - basic (1)     10,034,741       10,035,240       (499 )   0 %                      
Average common shares outstanding - diluted (1)     10,034,741       10,035,240       (499 )   0 %                      
 
(1) As of September 30, 2012, June 30, 2012, and September 30, 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 (non-GAAP) for the periods presented:

 
Reconciliation of Non-GAAP Measure:
Non-GAAP Operating Income
(Dollars in Thousands)
                                           
For The Three Months Ended   September 30, 2012     June 30,
2012
    $
Change
    % Change     September 30, 2011     $
Change
    % Change  
                                                     
Net income (loss) applicable to common shareholders   $ 114     $ (1,965 )   $ 2,079     106 %   $ (3,469 )   $ 3,583     103 %
  Provision for loan losses     -       1,275       (1,275 )   -100 %     5,050       (5,050 )   100 %
  Net cost of operations of other real estate owned and foreclosed assets     883       1,223       (340 )   -28 %     644       239     37 %
  Provision for income taxes     11       37       (26 )   -70 %     23       (12 )   -52 %
  Preferred stock dividends and discount accretion     634       634       -     0 %     614       20     3 %
Pre-tax, pre-credit cost operating income   $ 1,642     $ 1,204     $ 438     36 %   $ 2,862     $ (1,220 )   -43 %
                                                     
                                                     
For The Nine Months Ended     September 30, 2012       September 30, 2011       $
Change
    % Change                        
                                                     
Net loss applicable to common shareholders   $ (6,668 )   $ (13,550 )   $ 6,882     51 %                      
  Provision for loan losses     4,775       11,350       (6,575 )   -58 %                      
  Net cost of operations of other real estate owned and foreclosed assets     4,530       7,174       (2,644 )   -37 %                      
  Provision for income taxes     58       44       14     32 %                      
  Preferred stock dividends and discount accretion     1,896       1,883       13     1 %                      
Pre-tax, pre-credit cost operating income   $ 4,591     $ 6,901     $ (2,310 )   -33 %                      
                                                     
 
Reconciliation of Non-GAAP Measure:
Tax Equivalent Net Income (Loss) Applicable to Common Shareholders
(Dollars in Thousands)
 
For the Three Months ended   September 30, 2012     June 30,
2012
    $
Change
    % Change     September 30, 2011     $
Change
    % Change  
                                                     
Net interest income   $ 10,624     $ 11,634     $ (1,010 )   -9 %   $ 12,849     $ (2,225 )   -17 %
Tax equivalent adjustment for municipal loan interest     41       42       (1 )   -2 %     45       (4 )   -9 %
Tax equivalent adjustment for municipal bond interest     3       8       (5 )   -63 %     4       (1 )   -25 %
Tax equivalent net interest income     10,668       11,684       (1,016 )   -9 %     12,898       (2,230 )   -17 %
Provision for loan losses     -       1,275       (1,275 )   -100 %     5,050       (5,050 )   -100 %
Non-interest income     3,350       2,594       756     29 %     2,667       683     26 %
Non-interest expense     13,215       14,247       (1,032 )   -7 %     13,298       (83 )   -1 %
Provision for income taxes     11       37       (26 )   -70 %     23       (12 )   -52 %
Tax equivalent net income (loss)     792       (1,281 )     2,073     162 %     (2,806 )     3,598     128 %
Preferred stock dividends and discount accretion     634       634       -     0 %     614       20     3 %
Tax equivalent net income (loss) applicable to common shareholders   $ 158     $ (1,915 )   $ 2,073     108 %   $ (3,420 )   $ 3,578     105 %
                                                     
                                                     
For the Nine Months ended     September 30, 2012       September 30, 2011       $
Change
    % Change                        
                                                     
Net interest income   $ 33,632     $ 38,176     $ (4,544 )   -12 %                      
Tax equivalent adjustment for municipal loan interest     125       134       (9 )   -7 %                      
Tax equivalent adjustment for municipal bond interest     20       51       (31 )   -61 %                      
Tax equivalent net interest income     33,777       38,361       (4,584 )   -12 %                      
Provision for loan losses     4,775       11,350       (6,575 )   -58 %                      
Non-interest income     10,427       8,462       1,965     23 %                      
Non-interest expense     43,998       46,911       (2,913 )   -6 %                      
Provision for income taxes     58       44       14     32 %                      
Tax equivalent net loss     (4,627 )     (11,482 )     6,855     60 %                      
Preferred stock dividends and discount accretion     1,896       1,883       13     1 %                      
Tax equivalent net loss applicable to common shareholders   $ (6,523 )   $ (13,365 )   $ 6,842     51 %                      
                                                     

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 September 30, 2012 increased compared to the quarter ended September 30, 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 activity. Continued repositioning of the investment securities portfolio to adjust to changes in market outlook occurred during the current quarter, 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.

Non-interest income for the nine months ended September 30, 2012 grew as compared to the nine months ended September 30, 2011 due to an increase in net gains on sales of securities. Mortgage banking income increased and service charge income on deposits decreased during the nine-month period consistent with the third quarter results.

Non-interest income for the current quarter increased from the quarter ended June 30, 2012 primarily due to the increase in net gains on sales of securities, investment brokerage revenue and mortgage banking fees, as explained above.

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                                    
    September 30, 2012   June 30,
2012
  $
Change
    % Change     September 30, 2011   $
Change
    % Change  
                                               
Service charges on deposit accounts   $ 847   $ 888   $ (41 )   -5 %   $ 946   $ (99 )   -10 %
Other commissions and fees     676     697     (21 )   -3 %     724     (48 )   -7 %
Net gain on sale of securities, available for sale     713     227     486     214 %     227     486     214 %
Investment brokerage and annuity fees     581     370     211     57 %     468     113     24 %
Mortgage banking fees     204     105     99     94 %     61     143     234 %
Other non-interest income:                                              
  Increase in value of BOLI     123     118     5     4 %     126     (3 )   -2 %
  Other non-interest income     206     189     17     9 %     115     91     79 %
Total non-interest income   $ 3,350   $ 2,594   $ 756     29 %   $ 2,667   $ 683     26 %
                                               
                                               
                                               
For The Nine Months Ended                                              
      September 30, 2012     September 30, 2011     $
Change
    % Change                      
                                               
Service charges on deposit accounts   $ 2,600   $ 2,822   $ (222 )   -8 %                    
Other commissions and fees     2,022     2,040     (18 )   -1 %                    
Net gain on sale of securities, available for sale     3,108     1,000     2,108     211 %                    
Investment brokerage and annuity fees     1,389     1,394     (5 )   0 %                    
Mortgage banking fees     424     270     154     57 %                    
Other non-interest income:                                              
  Increase in value of BOLI     366     384     (18 )   -5 %                    
  Other non-interest income     518     552     (34 )   -6 %                    
Total non-interest income   $ 10,427   $ 8,462   $ 1,965     23 %                    
                                               

Non-interest Expense
Non-interest expense for the current quarter declined from the quarter ended June 30, 2012. Salaries and employee benefits expense fell primarily due to branch consolidation, branch sales and administrative restructuring initiatives completed earlier in 2012. This was despite an expense of $500,000 in the current period due to costs associated with the adoption of updated actuarial projections related to deferred benefit obligations. In addition, an expense of $200,000 was incurred in second quarter 2012 to enhance our provision for off-balance sheet credit risk. Other non-interest expenses also declined as second quarter 2012 results included approximately $300,000 in costs related to the retirement of fixed assets due to branch consolidation or sale. These decreases were offset by increases in net cost of operations of OREO and professional fees.

Non-interest expense for the three months ended September 30, 2012 was relatively unchanged compared to the three months ended September 30, 2011 in total. Salaries and employee benefits expense fell primarily due to branch consolidation, branch sales and administrative restructuring initiatives completed earlier in 2012. This was despite the expense related to deferred benefit obligations as noted above. In addition, net cost of OREO increased primarily due to an impairment charge of $600,000 taken on one land development parcel currently held as OREO. Professional fees included $900,000 in expenses associated with capital strategy activities. A number of expense categories experienced declines due to company-wide efforts to reduce expenses. In addition, FDIC assessments dropped commensurate with the decline in total assets over the period. Problem loan expenses increased primarily due to increased expenses associated with credit resolution efforts.

Non-interest expense for the nine months ended September 30, 2012 decreased compared to the nine months ended September 30, 2011 due to the changes listed above specifically related to the current quarter and also due to salaries and employee benefits expense which fell primarily due to branch consolidation, branch sales and administrative restructuring initiatives completed earlier in 2012. 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. In addition, FDIC assessments dropped commensurate with the decline in total assets over the period. Problem loan expenses increased primarily due to payment of $1.3 million in delinquent property taxes to acquire OREO properties in first and second quarter 2012. Other non-interest expenses decreased despite a cost of approximately $900,000 to retire assets as a result of the branch consolidation and sales initiative completed in second quarter 2012.

Non-interest expense
(Dollars in Thousands)
 
For The Three Months Ended
    September 30, 2012   June 30,
2012
  $
Change
    % Change     September 30, 2011   $
Change
    % Change  
                                               
Salaries and employee benefits   $ 6,065   $ 6,277   $ (212 )   -3 %   $ 6,395   $ (330 )   -5 %
Net cost of operations of other real estate owned and foreclosed assets     883     1,223     (340 )   -28 %     644     239     37 %
Net occupancy and equipment     1,694     1,761     (67 )   -4 %     2,140     (446 )   -21 %
FDIC and state assessments     690     711     (21 )   -3 %     800     (110 )   -14 %
Professional fees     1,020     629     391     62 %     613     407     66 %
Communications     411     453     (42 )   -9 %     488     (77 )   -16 %
Advertising     166     193     (27 )   -14 %     241     (75 )   -31 %
Third-party loan costs     165     314     (149 )   -47 %     196     (31 )   -16 %
Professional liability insurance     215     213     2     1 %     202     13     6 %
Problem loan expense     570     789     (219 )   -28 %     263     307     117 %
Other non-interest expense:                                              
  Director fees     120     120     -     0 %     98     22     22 %
  Internet costs     113     114     (1 )   -1 %     161     (48 )   -30 %
  ATM debit card costs     210     196     14     7 %     196     14     7 %
  Business development     61     71     (10 )   -14 %     81     (20 )   -25 %
  Amortization     105     116     (11 )   -9 %     116     (11 )   -9 %
  Supplies     91     97     (6 )   -6 %     154     (63 )   -41 %
  Other non-interest expense     636     970     (334 )   -34 %     510     126     25 %
Total non-interest expense   $ 13,215   $ 14,247   $ (1,032 )   -7 %   $ 13,298   $ (83 )   -1 %
                                               
                                               
For The Nine Months Ended                                              
      September 30, 2012     September 30, 2011     $
Change
    % Change                      
                                               
Salaries and employee benefits   $ 19,152   $ 20,534   $ (1,382 )   -7 %                    
Net cost of operations of other real estate owned and foreclosed assets     4,530     7,174     (2,644 )   -37 %                    
Net occupancy and equipment     5,267     5,959     (692 )   -12 %                    
FDIC and state assessments     2,072     2,721     (649 )   -24 %                    
Professional fees     2,057     2,246     (189 )   -8 %                    
Communications     1,332     1,443     (111 )   -8 %                    
Advertising     557     693     (136 )   -20 %                    
Third-party loan costs     734     923     (189 )   -20 %                    
Professional liability insurance     641     577     64     11 %                    
Problem loan expense     2,647     453     2,194     484 %                    
Other non-interest expense:                                              
  Director fees     349     299     50     17 %                    
  Internet costs     371     387     (16 )   -4 %                    
  ATM debit card costs     545     502     43     9 %                    
  Business development     203     255     (52 )   -20 %                    
  Amortization     337     383     (46 )   -12 %                    
  Supplies     324     421     (97 )   -23 %                    
  Other non-interest expense     2,880     1,941     939     48 %                    
Total non-interest expense   $ 43,998   $ 46,911   $ (2,913 )   -6 %                    

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

As of September 30, 2012, the Company maintained a full valuation allowance of $38.8 million against its 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. Currently, the only tax expense the Company is recognizing relates to Oregon minimum tax.

 
BALANCE SHEET OVERVIEW
 
 
(Dollars in Thousands)
 
...
    September 30,     June 30,         %     September 30,         %  
    2012     2012      Change     Change     2011      Change     Change  
Assets:                                                    
  Cash and cash equivalents   $ 65,543     $ 87,868     $ (22,325 )   -25 %   $ 66,061     $ (518 )   -1 %
  Interest-bearing certificates of deposit     1,500       1,500       -     0 %     1,500       -     0 %