ITEM 1. BUSINESS
GENERAL
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.
SUBSIDIARIES
The Bank has two subsidiaries: PremierWest Investment Services, Inc. and Blue Star Properties, Inc. 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. The offices of Premier Finance Company were closed during the second quarter of 2012 and the operations consolidated into the Bank. On September 28, 2012, Premier Finance Company filed Articles of Dissolution with the Oregon Secretary of State.
PRODUCTS 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 makes 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.
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.
MARKET AREA
PremierWest Bank conducts a regional community banking business in southern and central Oregon and northern California. On December 31, 2012, the Company had a network of 32 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 five branch offices in Medford and a branch office in each of the surrounding communities of Central Point, Eagle Point, and Ashland. 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 two branches in Roseburg, Oregon, and two branches located in the communities of Winston and Sutherlin. 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 three branches. One is 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, 2012, the Bank has established offices within eight counties in California. In Siskiyou County there are three branch locations in the communities of Greenview, Mt. Shasta, and Yreka. In Shasta County there are two branch locations with one in Redding and one 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, Nevada County has a branch in Grass Valley, and Placer County has a branch in Rocklin. 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 three branch locations in Sacramento County. These branches are located in the greater Sacramento area in the communities of Elk Grove, Folsom, and Galt. 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, 2012, 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, 2012.
Deposit Market Share ($000’s)
Totals by County
During 2012, the Company consolidated nine of its branches into existing nearby branches. Five of the consolidated branches were located in Oregon, and the other four branches were 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 represented less than 10% of the total bank-wide deposits. Also during 2012, the Company sold two of its branches to another financial institution for $439,000 which represents the net book value of the fixed assets. Included in this transaction was $16.3 million in deposits.
While PremierWest Bank does business in many different communities, the geographic areas we serve make the Bank more reliant on local economies in contrast to super-regional and national banks. Nevertheless, Management considers the diversity of our customers, communities, and economic sectors a source of strength and competitive advantage in pursuing our community banking strategy.
INDUSTRY OVERVIEW
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.
EMPLOYEES
As of December 31, 2012, PremierWest Bank had 383 full-time equivalent employees compared to 452 at December 31, 2011. None of our employees are represented by a collective bargaining group. Management considers its relations with employees to be good.
WEBSITE 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 SEC. PremierWest Bank’s website address is www.PremierWestBank.com. The contents of our website are not incorporated into this report or into our other filings with the SEC.
GOVERNMENT POLICIES
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 federal and state regulatory agencies.
SUPERVISION 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 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 constitute 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 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 $2.7 million in 2012.
From 2008 to 2012, 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, but was extended for a period of two years by Dodd-Frank. The program expired as of December 31, 2012.
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.
•
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.
•
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.
•
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.
•
Federal Reserve determination of reasonable debit card fees.
•
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. A provision that granted unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012 was not extended or renewed.
•
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 SEC 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. 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 DIF up to prescribed limits for each depositor. Pursuant to 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 Federal Deposit Insurance Act (“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, 2012, 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:
•
Provide employees incentives that appropriately balance risk and reward;
•
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;
•
Plans that provide awards based on company-wide performance are not likely to create unbalanced risk-taking incentives except, perhaps for senior executives;
•
Make sure actual payouts reflect adverse outcomes;
•
Consider deferred payouts, judgmental adjustments and longer performance periods to balance short term results against risks that materialize over time.
•
Be compatible with effective controls and risk-management;
•
The bank should have strong controls for designing, implementing and monitoring incentive plans;
•
Create and maintain documentation to support meaningful audits;
•
Include appropriate personnel, including risk-management personnel in the design process;
•
Risk management and control personnel should have appropriate skills, be sufficiently compensated to attract and retain them and be free of conflicts of interest;
•
Monitor performance of incentive compensation plans and make adjustments.
•
Be supported by strong corporate governance, including active and effective oversight by the board;
•
The board should approve incentive compensation arrangements for senior executives;
•
The board should regularly review the design and function of incentive plans;
•
The board should keep abreast of emerging practices and choose those that fit the company;
•
The board should have sufficient expertise and resources to carry out its oversight function;
•
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 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 Consent Order required, among other things, that the Bank:
•
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,
•
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
•
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 except the leverage ratio requirement. Prior to completing the Consent Order 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 44% of Tier 1 capital plus ALLL as of December 31, 2012, compared to 178.4% as of June 30, 2009, in the report of examination. The Company has demonstrated progress and is committed to achieving all the requirements of the Consent Order.
ITEM 1A.
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, 2012, was 8.95%.
We may need to raise additional capital to maintain or improve our capital position and currently need to in order to comply with regulatory requirements and to support future growth. 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. We may be required to seek the consent of the U.S. Treasury to complete a capital raise in which investors seek to have the U.S. Treasury convert its preferred stock into common stock or sell their preferred stock at a discount, which consent could be denied in the sole discretion of the U.S. Treasury. Accordingly, we may not be able to raise additional capital 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 four 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:
•
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. The States of Oregon and California continue to face 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.
During the second quarter of 2012, we consolidated nine branches into existing nearby branches and sold two branches. These branches represented less than 10% of the total bank-wide deposits. Branch consolidation is projected to result in expense savings of approximately $1.9 million annually. 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, 2012, approximately 76% 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 elevated levels of charge-offs and significant 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.
In the fourth quarter of 2014, the current deferral period for interest payments on junior subordinated debentures will expire.
We are permitted to defer quarterly interest payments for up to 20 consecutive quarters on all $30.9 of our junior subordinated debentures that we issued in connection with our trust preferred securities. We elected to defer such payments in 2009 and in the fourth quarter of 2014, our current deferral period will expire unless we have paid all accrued but unpaid interest and the then current interest payment. We will be unable to make such payment and bring the debentures current unless the Bank is permitted to pay dividends to the Company, which depends on a number of factors including federal and state regulatory restrictions on dividends, our return to consistent profitability and our ability to raise capital and come into compliance with the Consent Order and Written Agreement. Under the Written Agreement with the Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities and the Federal Reserve, we must request regulatory approval prior to making payments on our trust preferred securities.
Proposed rules could require increased capital and disqualify trust preferred securities as Tier 1 Capital.
In June 2012, federal banking regulators jointly proposed rules that would update the agencies’ general risk based and leverage capital requirements to incorporate “Basel III” capital requirements and implement section 171 of the Dodd Frank Act. The proposed rules would be phased in over the next 10 years, beginning January 1, 2013. Among other things, the proposed rules would require that we maintain a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8% and a leverage ratio of 4%. In addition, we would have to maintain an additional capital conservation buffer of 2.5% of total risk weighted assets or be subject to limitations on dividends and other capital distributions, as well as limiting discretionary bonus payments to executive officers. Under the proposed rules, trust preferred securities/junior subordinated debentures would be phased out of Tier 1 capital at a rate of 10% per year over a 10 year period. These securities currently constitute approximately 25.4% of our Tier 1 capital. These proposals may require us to raise more common capital or other capital that qualifies as Tier 1 capital. The application of more stringent capital requirements could, among other things, result in lower returns on invested capital and result in regulatory actions if we were to be unable to comply with such requirements. There is no assurance that the Basel III-related proposals will be adopted in their current form, what changes may be made prior to adoption, or when the final rules will become effective.
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 $13.9 million for the year ended December 31, 2012. Losses resulted primarily from expenses related to the disposition of nonperforming assets, an adjustment to a liability for post-retirement health insurance benefits and a reduction in interest income. We can provide no assurance that we will not have continuing losses in our operations due in large part to the continued elevated levels of nonperforming assets and increasing pressure on our net interest margin.
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. The U.S. Treasury elected Bruce Currier and Mary Carryer to our board of directors in 2012 and 2011, respectively. 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.
•
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.
•
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.
•
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.
•
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 (“Finance Agency”) that requires the FHLB of Seattle to meet various standards including a minimum retained earnings requirement. The Bank holds an investment in Federal Home Loan Bank of Seattle (FHLB) stock as a restricted equity security carried at par 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 FHLB advances. In November 2009, the Seattle FHLB reported it was classified as “undercapitalized” under the Prompt Corrective Action Rule by the Federal Housing Finance Agency (the FHFA), its primary regulator. In 2012, the Seattle FHLB reported it was now considered “adequately capitalized” by the FHFA; however, the Seattle FHLB is unable to redeem stock or pay a dividend without FHFA approval under the terms of the October 2010 Consent Order.
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. 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 2012, the Company conducted business through 40 offices including the operations of PremierWest Bank, PremierWest Bank’s mortgage division, and also PremierWest Bank’s subsidiary-PremierWest Investment Services, Inc. The 40 offices included 32 full service bank branches and 8 other office locations.
PremierWest Bank’s 32 full service branch facilities are located in Oregon and California and more specifically broken down as follows: 17 branches are located in Jackson (8), Josephine (2), Deschutes (2), Douglas (4) and Klamath (1) counties of Oregon and 15 branches located in Siskiyou (3), Shasta (2), Butte (1), Tehama (2), Yolo (2), Nevada (1), Placer (1) and Sacramento (3) counties of California. Of the 32 branch locations, 24 are owned by PremierWest Bank, 6 are leased, and two locations involve long-term land leases where the Bank owns the building.
The Company’s eight other locations house administrative and subsidiary operations. These facilities include two locations in Medford, Oregon, one campus location with two owned buildings housing the Company’s administrative head office, operations and data processing facilities, and a second Medford location with two owned buildings housing loan operations and credit administration; two owned administrative facilities-one in Redding, California housing regional administration, and one in Red Bluff, California housing PremierWest Bank administrative functions. The Company also leases a storage warehouse in Medford, Oregon.
In addition, to the above, various employees of PremierWest Investment Services, Inc., and the Bank’s mortgage division are housed within PremierWest Bank full service branch offices.
The annual rent expense on leased properties was $775,000, $1.0 million, and $1.2 million, in 2012, 2011, and 2010, respectively.
During 2012, the Company consolidated nine of its branches into existing nearby branches. Five of the branches consolidated were located in Oregon, and the other four branches were 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 represented less than 10% of the total bank-wide deposits. Also during 2012, the Company sold two of its branches to another financial institution.
ITEM 3.
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.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5.
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”. 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 for the periods indicated. No stock dividend was paid in 2012 or 2011. Bid quotations reflect inter-dealer prices, without adjustment for mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. On March 8, 2013, the Company had 10,034,741 shares of common stock issued and outstanding, which were held by approximately 786 shareholders of record, a number which does not include approximately 4,000 beneficial owners who hold shares in “street name.” As of March 8, 2013, the most recent date prior to the date of this report, the closing price of the common stock was $1.63 per share.
The timing and amount of any future dividends PremierWest might pay will be determined by its Board of Directors and will depend on earnings, cash requirements and the financial condition of PremierWest and its subsidiaries, applicable government regulations and other factors deemed relevant by the Board of Directors. 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 and Part I, Item 1, Business-Supervision and Regulation.
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 repurchases of common stock by the Company during 2012.
Stock 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- 98.48% compared to -20.36% and 20.42% for the SNL NASDAQ Bank and NASDAQ Composite indexes, respectively.
ITEM 6.
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
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 2012, 2011, 2010 and 2009, and 34.00% for 2008.
Consolidated Quarterly Financial Data
The following tables set forth the Company’s unaudited consolidated financial data regarding operations for each quarter of 2012 and 2011. 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.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
CRITICAL 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, supplemental executive retirement plans and post-retirement benefit obligations, and core deposit intangibles, 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, 2012, approximately 76% 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.
Impaired loans. Impaired loans have weaknesses which make collection or liquidation in full, on the basis of currently ascertainable facts, conditions and values, highly questionable or improbable. Loans in this category are carried on nonaccrual status.
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, 2012, 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.
Supplemental Executive Retirement Plans and Post-Retirement Benefit Obligations. The Company maintains a supplemental executive retirement plan (“SERP”) to provide retirement benefits to certain highly-compensated executives and provides post-retirement health insurance benefits (“PRBO”) for certain current and former directors and officers. Both the SERP and the PRBO are estimated using the actuarial present value of benefits expected to be paid during the retirement period.
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.
Fair Value. Valuation methods for financial instruments require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and method used. The Company bases fair value on the assumptions market participants would use when pricing the asset or liability.
OVERVIEW
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 health insurance benefits. 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%, to $77.5 million at December 31, 2012, from $159.8 million at December 31, 2011;
•
Reducing non-performing assets by $51.1 million, or 52%, to $48.0 million at December 31, 2012, 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.
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, 2012 and 2011 and for each of the three years in the periods ended December 31, 2012, 2011, and 2010, 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.
FINANCIAL HIGHLIGHTS
Net Loss Applicable to Common Shareholders. Net loss applicable to common shareholders for the twelve months ended December 31, 2012 was $13.9 million. This compares to a net loss applicable to common shareholders of $17.6 million for the twelve months ended December 31, 2011. Loss per basic and diluted share for the twelve months ended December 31, 2012, was $1.39 as compared to a loss per basic and diluted share of $1.76 for the twelve months ended December 31, 2011. 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.
RESULTS OF OPERATIONS
Average Balances, Interest Rates and Yields
Net Interest Income and Net Interest Margin. Net interest income for the twelve months ended December 31, 2012 declined from the 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. Correspondingly, average interest bearing liabilities decreased during these same periods. As a result, 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.
For the twelve months ended December 31, 2012, net interest margin increased over the same period in 2011. This was primarily due to the collection of approximately $500,000 in loan interest from the sale of a note and placement back on accrual of loans in non-accrual status in second quarter 2012. This additional interest income resulted in a 5 basis point increase in net interest margin for the twelve months ended December 31, 2012, as compared to same period in 2011. This is despite a decline in higher yielding loan balances and the impact of falling interest rates on investment securities purchased during 2012. The decline in investment yields was due primarily to an increase in premium amortization on collateralized mortgage obligations as a result of an acceleration of prepayment speeds that resulted from a drop in interest rates to historically low levels during the period. The margin was also positively impacted by the falling costs of interest-bearing liabilities caused by the Company’s on-going efforts to reduce higher-cost certificates of deposits as a source of funding.
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.
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.
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-performing loans of approximately $22.7 million at 12/31/2012, $76.2 million at 12/31/2011, and $129.5 million at 12/31/2010 are included in the average loan balances.
(2) Loan interest income includes loan fee income of $226,000, $324,000, $263,000 for the years ended 12/31/2012, 12/31/2011 and 12/31/2010, 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 increase to recorded pre-tax income of $179,000, $236,000, and $318,000 for the years ended 12/31/2012, 12/31/2011, and 12/31/2010, 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.
The following table shows the period to period changes in net interest income due to rate or volume. The continued reduction in higher-cost time deposits has resulted in a decline in interest expense, from both a reduction in volume and rates paid on these deposits. In addition, rates paid on other interest-bearing deposits have declined in the current period as compared to rates paid in the prior year. Deleveraging on the asset side of the balance sheet has been accomplished through the reduction of loan balances. This has resulted in a decrease in loan interest income primarily due to a decline in loan volume, rather than any changes in yields. This is despite collection of interest from the sale of and placement back on accrual of loans in non-accrual status, as previously mentioned. An increase in premium amortization contributed to a decrease in investment securities interest income in 2012, as noted above. However this was more than offset by the contribution from increased volume of investment securities, as compared to the previous year.
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.
SUMMARY AVERAGE BALANCE SHEETS
AVERAGE INTEREST EARNING ASSETS
STATEMENT OF OPERATIONS OVERVIEW
(1) As of December 31, 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.
FINANCIAL PERFORMANCE OVERVIEW
(1) Non-interest expense divided by net interest income plus non-interest income.
(2) 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.
(3) 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.
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 40% rate.
(2) Includes interest-bearing cash equivalents.
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:
Reconciliation of Non-GAAP Measure:
Tax Equivalent Net Income (Loss) Applicable to Common Shareholders
Reconciliation of Non-GAAP Measure:
Non-GAAP Operating Income
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.
Provision for Credit Losses. The provision for credit losses was $4.8 million for the twelve months ended December 31, 2012, compared to $14.4 million in the same period last year. Net loan charge-offs decreased in 2012 compared to 2011, and the overall risk profile of the Company’s loan portfolio continues to improve. 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, 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 during the current year, resulting in higher net gains on sale of securities, as compared to the prior year. 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.
The following table illustrates the components and change in noninterest income for the periods shown:
Non-interest Expense. 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. It also increased due to charges taken to recognize an updated estimate of a liability for post-retirement health insurance benefits of $2.8 million taken 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. 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. These charges updated the liability associated with obligations to provide health insurance benefits that were committed by the Bank to current and former directors and management. After a
comprehensive review of these obligations, it was determined that the liability associated with these obligations needed to be revised upward, resulting in the charge referred to previously. Excluding the impact of recording the post-retirement obligation, salary and employee benefits expense fell due to branch consolidation, branch sales 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 recognize an updated estimate of a liability for post-retirement health insurance benefits, as mentioned above. Other non-interest expenses increased primarily due to a cost of approximately $900,000 to retire assets as a result of the branch reduction initiative completed in second quarter 2012.
The following table illustrates the components and changes in noninterest expense for the periods shown:
For The Year Ended
Income Taxes. The Company recorded an income tax provision for the twelve months ended December 31, 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 of $41.8 million against its deferred tax asset of $41.8 million. 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.
The Company’s liquidity position remains strong as evidenced by its current level of combined cash and cash equivalents and investment securities. Over the past year, the Company has continued to manage its investment securities to maintain a diversified portfolio consisting of government guaranteed collateralized mortgage obligations and mortgage-backed securities.
The following table shows the changes in the investment portfolio for the periods presented:
The compositions, carrying values, and fair values of our investment securities portfolio were as follows:
Investment securities at December 31, 2012 and December 31, 2011 consisted of the following:
At December 31, 2012, the net unrealized gain in the investment portfolio was up as compared to year end 2011. 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 guaranteed mortgage-backed securities and U.S. Government agency mortgage backed securities. Municipal securities rated AA or better with maturities generally ranging from 5 to 15 years were also purchased during this period. The expected duration of the investment portfolio was 4.0 years at December 31, 2012, 4.4 years at December 31, 2011, and 3.2 years at December 31, 2010.
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 investment portfolio at the dates indicated.
The contractual maturities of investment securities at December 31, 2012, excluding 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.
As of December 31, 2012, PremierWest also held 15,599 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, 2012 and 2011, the Bank met its minimum required investment in FHLB. In addition to FHLB stock, PremierWest bank holds 8,801 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. This stock was repurchased in full by the Federal Home Loan Bank of San Francisco on January 28, 2013. In addition, PremierWest also held 200 shares of $1.00 par value Federal Agricultural Mortgage Corporation stock valued at $8,229 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 $529,230. 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 impact 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 the $5 million lending limit as set by the Board of Directors. All loans at or above the $5 million limit, 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, 2012, PremierWest’s unsecured legal lending limit was approximately $17.0 million and our real estate secured lending limit was approximately $28.3 million. However, the Bank currently has an “in-house” lending limit of $7.5 million.
The Bank’s total loan portfolio continues to decline, reflecting the Company’s efforts to reduce adversely classified loans. These declines are accentuated by soft loan demand and deleveraging by businesses and consumers due to continued weakness in the local and national economy. As a result, commercial, real estate construction, and commercial & industrial loan balances declined from year end. 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 and construction, land development & other land loan categories over the same period. This included a reduction, after charge-offs, of approximately $15 million in loan balances associated with settlement of the largest non-performing lending relationship in first quarter 2012.
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 ability to raise additional capital, 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.
At December 31, 2012, the Bank had outstanding loans of $18.7 million to persons serving as directors, executive officers, principal stockholders and their related interests. This compares to $20.7 million at December 31, 2011. These loans, when made, were made in the ordinary course of business on substantially the same terms, including interest rates, maturities and collateral, as comparable loans made to customers not related to the Bank.
The following table sets forth the composition of the loan portfolio, as of December 31, 2008 through December 31, 2012:
The composition of the Bank’s loan portfolio was as follows for the periods shown:
The table below shows total loan commitments (funded and unfunded) by loan type and geographic region at December 31, 2012:
Certain administrative departments not tracked by region are included on this table in Southern Oregon region
The table below shows total loan commitments (funded and unfunded) by loan at December 31, 2012 and 2011:
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.
The table provided below summarizes the Bank’s level of concentrations in commercial real estate as of December 31, 2012, December 31, 2011 and December 31, 2010, 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
As a percent of total risk based capital (“TRBC”)
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
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, 2012, and our branch presence in our operating markets.
Total CRE by count and geographic region
(Dollars in Thousands) except number of loans
Certain administrative departments not tracked by region are included on this table in Southern Oregon region
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. 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, 2012. 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:
DEPOSITS AND BORROWINGS
The trend in the decline in total deposits continues from recent quarters. This decrease was mainly due to the decision to continue to reduce higher cost time deposit balances. Time deposits declined as a percentage of the Company’s total deposits in the most recent year versus the previous year. In addition, deposits have declined as a result of the branch consolidation and sale of two branches during second quarter 2012. These branches represented approximately $102.0 million, or less than 10% of total Bank-wide deposits as of December 31, 2011. As of December 31, 2012, only $35.0 million in deposits have been lost as a result of this initiative, including $16.3 million located in the two branches sold to another financial institution. This represents a loss of deposits in these branches of 3.1% of total deposits as of December 31, 2011.
The combination of the Company’s efforts to reduce higher-cost time deposits and deposit pricing strategies to lower interest rates in concert with market conditions has reduced the average rate paid on total deposits in 2012 as compared to 2011. It has also increased the proportion of the Company’s funding from non-interest bearing and lower-cost non-maturity deposits over this period.
Total brokered deposits were $241,000 at December 31, 2012 and December 31, 2011. These deposits are currently not being replaced as they mature.
The following table shows total deposits by type at December 31, 2012 and 2011:
The following table summarizes the average dollar amount in each of the deposit and borrowing categories for the years ended December 31, 2012 and 2011:
The following table sets forth time deposit accounts outstanding at December 31, 2012, by time remaining to maturity:
The Bank had no long-term borrowings outstanding with the Federal Home Loan Bank (“FHLB”) at December 31, 2012 and December 31, 2011. The Bank paid the FHLB borrowings in full during 2011. 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, 2012 and 2011. 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, 2012, the Company maintained a line of credit with the FHLB of Seattle with available credit of $55.7 million and was in compliance with its related collateral requirements. The Bank had no Federal Funds purchased during the years ended 2012 or 2011.
The Bank also had $15.0 million available for additional borrowing from a correspondent bank and $9.0 million available for borrowing from the Federal Reserve discount window. At December 31, 2012, the Company held a total of approximately $941,000 of cash on deposit with the FHLB of Seattle and FHLB of San Francisco.
During the first quarter of 2011, the Company began a program to sell securities under agreements to repurchase. At December 31, 2012, the Bank had $5.4 million securities sold under agreements to repurchase with a maximum balance at any month end during the year of $7.3 million, a weighted average yearly balance of $5.0 million, and interest of 0.30% during the year. 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.
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, 2012, the balance of junior subordinated debentures issued in connection with our prior issuances of trust preferred securities was $30.9 million unchanged from December 31, 2011. 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, 2012, the Company had deferred payment of interest for thirteen 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, 2012:
(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 (0.311% at December 27, 2012) plus 1.75% or 2.061%, 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 (0.308% at December 17, 2012) plus 1.79% or 2.098%, 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 (0.308% at December 17, 2012) plus 1.42% or 1.728%, 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:
(1) Employee benefits that include Deferred Compensation, Executive Supplemental Retirement Plans, Employee Life Benefit Plans, Continuing Benefit Obligation Agreements, and Split Dollar Obligations
(2) Accrued interest of $183,000 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:
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.”
As of December 31, 2012, capital ratios at the Bank have improved as compared to December 31, 2011, primarily due to the Company’s deleveraging strategy and shift in the balance sheet mix to less risk-weighted assets, such as investment securities. PremierWest Bank has met the quantitative thresholds to be considered “Well-Capitalized” under published regulatory standards for total risk-based capital and Tier 1 risk-based capital at December 31, 2012. However, we continue to be subject to the terms of the Consent Order with the FDIC and have not yet reached the 10.00 percent leverage ratio required by the Consent Order. An additional $12.0 million in capital would be needed to achieve the 10.00 percent leverage ratio requirement. As such, we are not considered “Well-Capitalized” under all applicable regulatory requirements. 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 $21.9 million qualified as Tier 1 capital at December 31, 2012, under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, which was signed into law on July 21, 2010, Bancorp currently expects to continue to rely on these junior subordinated debentures as part of its regulatory capital. However, Bancorp also expects that future regulations related to Basel III capital standards could adversely impact continued reliance on junior subordinated debentures.
ASSET QUALITY
At December 31, 2012, the Company experienced a continued decrease in adversely classified loans, due to a decline in both loans rated substandard or worse but not impaired and non-performing (or impaired) loans. Non-performing loans have continued to decline, primarily in the construction and land development loan category, as a result of improvements in credit quality ratings, transfers to OREO, pay offs, and charge-offs of impaired loans. Of those loans currently designated as non-performing, approximately $13.4 million, or 59.3%, are current as to payment of principal and interest in accordance with terms pursuant to a formal plan.
The Company monitors delinquencies, defined as loans on accruing status 30-89 days past due, as an indicator of future non-performing assets. Total 30-89 days delinquencies remain below 1.00%, mirroring the improvement in overall credit quality noted previously. Loans to individuals did experience an increase in delinquencies due to a more assertive collection methodology being applied to loans formerly housed in the Bank’s now dissolved Finance Company. This approach is expected to reduce delinquencies going forward. While the local and national economy continues to languish, more borrowers are demonstrating the ability to adjust to current economic conditions.
At December 31, 2012, total non-performing assets were down compared to December 31, 2011. Non-performing assets and non-performing loans also declined during this period in terms of percentage of total assets and loans, respectively. The amount of additions to non-performing loans increased slightly in the current year as compared to the previous year. However, reductions in non-performing loans were accomplished largely due to the Company taking ownership of additional residential and commercial properties related to loans which previously were on nonaccrual status, nonaccrual loan payoffs and the return of loans to performing status. Also, the amount of non-performing loans charged-off in 2012 was down significantly from 2011.
Adversely classified loans
* 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.
The following table summarizes the Company’s accruing loans 30-89 days past due as of the periods shown:
The following table summarizes the Company’s non-performing loans as of the periods shown:
The following table summarizes the Company’s non-performing assets as of the periods shown:
The following table summarizes the Company’s non-performing loans by loan type and geographic region as of December 31, 2012:
Certain administrative departments not tracked by region are included on this table in Southern Oregon region
The following tables summarize the Company’s troubled debt restructured loans by type and geographic region as of December 31, 2012:
The following table presents the Company’s troubled debt restructured loans by year of maturity, according to the restructured terms, as of December 31, 2012:
The Company’s OREO property disposition activities continued at a steady pace in 2012, with proceeds from sales down slightly from 2011. The dollar volume of real estate properties taken into the OREO portfolio increased for the twelve months ended December 31, 2012 as compared to the same period in 2011. This is due primarily to the approximately $15 million in properties taken into OREO in first quarter 2012 associated with settlement of the Company’s largest non-performing lending relationship. Charges for valuation adjustments related to the properties associated with this relationship totaled $4.6 million in 2012. During the twelve months ended December 31, 2012, the Company disposed of 49 OREO properties while acquiring 38 properties. At December 31, 2012, the OREO portfolio consisted of 74 properties. The largest balances in the OREO portfolio were attributable to income-producing properties and residential or commercial land for development, all of which are located within our market area.
ALLOWANCE FOR LOAN LOSSES
The Company’s allowance for loan 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 and change in the loan portfolio composition over the past several years, loss factors used in Management’s estimates to establish reserve levels have declined commensurately. As a result, amounts provided to the allowance for loan losses declined for the twelve months ended December 31, 2012, as compared to the same period in 2011.
Total gross and net loan charge-offs were down substantially compared to the twelve months ended December 31, 2011. The significant decline in charge-offs during 2012 as compared to 2011 is due primarily to reductions in adversely classified loans during the period. Net charge-offs in the current period were concentrated in the construction and land development real estate, non-owner occupied commercial real estate and consumer loan categories.
The overall risk profile of the Company’s loan portfolio continues to improve, as stated above. However, the trend of future provision for loan losses will depend primarily on economic conditions, level of adversely-classified assets, and changes in collateral values.
An allowance for loan losses has been established based on management’s best estimate of probable losses inherent in the loan portfolio, as of the balance sheet date. For more information regarding the Company’s allowance for loan losses and net loan charge-offs, see the discussion under the subheadings “Credit Management”, “Allowance for Credit Losses and Net Loan Charge-offs” and “Critical Accounting Policies” included in Item 7 of this report.
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 by 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 conditions, levels and trends in delinquencies and impaired loans, levels and trends in charge-offs and recoveries, among others. In prior quarters, loss factors used to estimate loss potential within the loan portfolio were solely based on actual historical experience. Beginning in second quarter 2012, minimum loss factors were established based on a weighted average of historical loss experience by risk classification within each loan category pool. The minimum or historical loss factor, whichever is larger, is 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.” This change in methodology had no material impact on the Company’s total allowance for loan losses.
•
Additionally, impaired loans are evaluated for loss potential on an individual basis in accordance with “Accounting by 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, external appraisals on all 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 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 internal valuation adjustments 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.
Overall, we believe that the allowance for loan losses is adequate to absorb probable losses in the loan portfolio at December 31, 2012, although there can be no assurance that future loan losses will not exceed our current estimates. Please see Item 1A “Risk Factors” in this report.
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, borrowings from the Federal 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 year.
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 year end:
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, 2012. The statement of cash flows includes operating, investing, and financing categories.
Cash flows provided by operating activities was $12.9 million. The difference between cash provided by operating activities and a net loss of $11.4 million consisted primarily of noncash items of $4.8 million in the loan loss provision and $2.8 million in depreciation and amortization. Items that increased operating cash flows included $6.8 million in net amortization of premiums and accretion of discounts on investment securities, $8.3 million in net loss on sale of or from impairment charges on OREO and other foreclosed assets, and offset by $3.1 million gain on sale of investment securities.
Cash flows provided by investing activities of $116.4 million consisted primarily of $178.3 million of proceeds from sales, calls, paydowns, and maturities of securities, $116.1 million in net loan pay downs, $14.3 million in proceeds from the sale of OREO, $1.5 million proceeds from disposal of premises and equipment offset by $193.4 million used for purchases of securities.
Cash flows used in financing activities of $120.5 million consisted primarily of $121.6 million net decrease in deposits, offset by $1.1 million in net increase in securities sold under agreements to repurchase.
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, 2012, the holding company did not have any borrowing arrangements of its own.
Off-Balance Sheet Arrangements
At December 31, 2012, the Bank had off-balance sheet financial instruments of $75.9 million compared to $79.0 million at December 31, 2011. For additional information regarding off balance sheet arrangements and future financial commitments, see Note 15 “Off-Balance Sheet Financial Instruments” and Note 17 “Commitments and Contingencies” in the financial statements included in this report.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2013, the FASB issued Accounting Standards Update 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the
Obligation is Fixed at the Reporting Date.” This Standard provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments in this ASU should be applied retrospectively to all periods presented for those obligations resulting from joint and several liability arrangements within the ASU’s scope that exist at the beginning of an entity’s fiscal year of adoption with early adoption permitted. The adoption of ASU No. 2013-04 is not expected to have a material impact on the consolidated financial statements.
In February 2013, the FASB issued Accounting Standards Update 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The new amendments will require an organization to present the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period, and cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items to be reclassified directly to net income in the entirety in the same reporting period. The amendments are effective for reporting periods beginning after December 15, 2012 for public companies with early adoption permitted. The adoption of ASU No. 2013-02 is not expected to have a material impact on the consolidated financial statements.
In January 2013, the FASB issued Accounting Standards Update ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This Standard clarifies that ordinary trade receivables are not in the scope of ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement. An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11. The adoption of ASU No. 2013-01 is not expected to have a material impact on the consolidated financial statements.
In October 2012, the FASB issued Accounting Standards Update ASU No. 2012-06 “Business Combinations (Topic 805)-Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.” This Standard requires that when a reporting entity recognizes an indemnification asset (in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. This Standard is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. Certain transition disclosures are required. The adoption of ASU No. 2012-06 is not expected to have a material impact on the consolidated financial statements.
In July 2012, the FASB issued Accounting Standards Update ASU No. 2012-02 “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” This Standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early
adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, or nonpublic entitles, have not yet been made available for issuance. The adoption of ASU No. 2012-02 is not expected to have a material impact on the consolidated financial statements.
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.
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 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 did not 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.
ITEM 7A.
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, 2012, 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.
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, 2012) rate scenario:
As illustrated in the above table, we estimate our balance sheet was slightly asset sensitive over a 12-month horizon at December 31, 2012, 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, 2011, 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, 2012. 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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
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, 2012 and 2011, 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, 2012. We also have audited the Company’s internal control over financial reporting as of December 31, 2012 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, 2012 and 2011, and the consolidated results of their operations and their cash flows each of the three years in the period ended December 31, 2012, 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, 2012, 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 18, 2013
PREMIERWEST BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
See accompanying notes.
PREMIERWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Loss per Share Data)
See accompanying notes.
PREMIERWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
Tax adjusted with full valuation allowance
See accompanying notes.
PREMIERWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in Thousands, Except Share Amounts)
See accompanying notes.
PREMIERWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
PREMIERWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS-(continued)
(Dollars in Thousands)
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 32 full service branch offices, 26 of which are located along the Interstate 5 freeway corridor between Roseburg, Oregon, and Sacramento, California. Of the 32 full service branch offices, 17 are located in Oregon (Jackson, Josephine, Deschutes, Douglas and Klamath Counties) and 15 are located in California (Siskiyou, Shasta, Butte, Tehama, Sacramento, Nevada, Placer, and Yolo Counties). The Bank’s products and services include commercial, real estate, installment and mortgage loans; checking, time deposit and savings accounts; mortgage loan brokerage services; and automated teller machines (“ATM”) and safe deposit facilities. The Bank has two subsidiaries: PremierWest Investment Services, Inc. and Blue Star Properties, Inc. 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. The offices of Premier Finance Company were closed during the second quarter of 2012 and the operations consolidated into the Bank. On September 28, 2012, Premier Finance Company filed Articles of Dissolution with the Oregon Secretary of State.
In December 2004, the Company established PremierWest Statutory Trust I and II (the “Trusts”), as wholly-owned Delaware statutory business trusts, for the purpose of issuing guaranteed individual beneficial interests in junior subordinated debentures (“Trust Preferred Securities”). The Trusts issued $15.5 million in Trust Preferred Securities for the purpose of providing additional funding for operations and enhancing the Company’s consolidated regulatory capital. 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. 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.
During the second quarter of 2012, the Company consolidated nine of its branches into existing nearby branches and sold two branches. Five of the consolidated branches were located in Oregon, and the other four consolidated branches were located in California. The two branches sold were located in California. The decision to consolidate these branches and the projected reduction in expense 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 represented less than 10% of the total bank-wide deposits. Branch consolidation is projected to result in expense savings of approximately $1.9 million annually. The Company has incurred branch consolidation costs of approximately $1.7 million as of December 31, 2012.
The company issued a 1-for-10 reverse stock split on February 10, 2011. No stock dividend was declared in 2012 or 2011. All per share amounts and calculations in the accompanying consolidated financial statements have been recalculated to reflect the effects of the reverse stock split.
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.
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
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
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, post-retirement benefit obligations, 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.
For debt securities, if the Company intends to sell the security or it is likely that it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an other-than-temporary impairment (“OTTI”). If we do not intend to sell the security and it is not likely that we will be
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
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, 2012, 2011 and 2010.
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, 2012 and 2011, 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 Bank holds an investment in Federal Home Loan Bank of Seattle (FHLB) stock as a restricted equity security carried at par 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 FHLB advances. The Bank views this investment as long-term. Thus, when evaluating it for impairment, the value is 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. In November 2009, the Seattle FHLB reported it was classified as “undercapitalized” under the Prompt Corrective Action Rule by the Federal Housing Finance Agency (the FHFA), its primary regulator. In 2012, the Seattle FHLB reported it was now considered “adequately capitalized” by the FHFA; however, the Seattle FHLB is unable to redeem stock or pay a dividend without FHFA approval under the terms of the October 2010 Consent Order. The Company has concluded that its investment in FHLB is not impaired as of December 31, 2012, and believes that it will ultimately recover the par value of its investment in this stock.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
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.
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.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
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. 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. 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, 2012. 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 branch buildings, land parcels, and equipment classified as held-for-sale and included in accrued interest and other assets were impaired for the year ended December 31, 2012.
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, 2012 and 2011.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
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 $25.4 million in other real estate at December 31, 2012 and $22.8 million at December 31, 2011. The Bank held no other foreclosed assets at December 31, 2012, but held other foreclosed assets of approximately $372,000 at December 31, 2011.
Advertising-Advertising and promotional costs are generally charged to expense during the period in which they are incurred.
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.
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, 2012 and 2011, the net deferred tax asset balance was zero, as the full amount of deferred tax assets was offset with a valuation allowance.
The Company had no unrecognized tax benefits at December 31, 2012, 2011 and 2010. During the years ended December 31, 2012 and 2011, 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 2009 and California state examinations for years before 2008.
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 the Preferred Stock and detachable Warrant pursuant to the U.S. Department of Treasury’s Troubled Asset Relief
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
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 is 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. No cash dividends were declared during fiscal years 2012 or 2011. Going forward in fiscal 2013, 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, 2012, 2011, and 2010.
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 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
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
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 on a recurring or non-recurring basis in the financial statements:
Cash and cash equivalents-The carrying amounts of cash and short-term instruments approximate their fair value. Therefore, the company believes the measurement of fair value of cash and cash equivalents is derived from Level 1 inputs.
Interest-bearing deposits with the Federal Home Loan Bank of Seattle (“FHLB”) and restricted equity securities-The carrying amount approximates the estimated fair value and expected redemption values, and the Company uses these inputs to determine fair value. The Company has determined this is a Level 2 input.
Mortgage loans held-for-sale-Mortgage loans held-for-sale 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 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. The Company uses these inputs to determine fair value. Therefore, the Company has determined this is a Level 2 input.
Loans-Fair values for variable-rate commercial loans, certain mortgage loans (for example, commercial and one-to-four family residential), and other consumer loans are based on carrying values. For fixed rate loans, projected cash flows are discounted back to their present value based on spreads derived from the current relationship between industry observed benchmark rates and corresponding market indexes. Each pool of loans is then discounted to the Swap/LIBOR curve plus/minus this spread. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values based on current market appraisals, less costs to sell, where applicable. The ALLL is considered to be a reasonable estimate of loan discount for credit quality concerns. Using these inputs, the Company has determined this is a Level 3 input.
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
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
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. The Company utilized a third-party provider to calculate fair value using these inputs, and has therefore determined this is a Level 2 input.
Short-term borrowings and securities sold under agreements to repurchase-The carrying amounts of federal funds purchased, securities sold under agreements to repurchase, 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. Using these inputs, the Company has determined this is a Level 2 input.
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. The Company has determined this is a Level 2 input.
Off-balance sheet financial instruments-The Bank’s off-balance sheet financial 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. Given the uncertainty of a commitment being drawn upon, it is not reasonable to estimate the fair value of these commitments; therefore, the Company has not made any disclosure on the fair value of off-balance sheet financial instruments.
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.
Recently issued accounting standards-In February 2013, the FASB issued Accounting Standards Update 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” This Standard provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments in this ASU should be applied retrospectively to all periods presented for those obligations resulting from joint and several liability arrangements within the ASU’s scope that exist at the beginning of an entity’s fiscal year of adoption with early adoption permitted. The adoption of ASU No. 2013-04 is not expected to have a material impact on the consolidated financial statements.
In February 2013, the FASB issued Accounting Standards Update 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The new amendments will require an organization to present the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period, and cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items to be reclassified directly to net income in the entirety in the same reporting period. The amendments are effective for reporting periods beginning after December 15, 2012 for public companies with early adoption permitted. The adoption of ASU No. 2013-02 is not expected to have a material impact on the consolidated financial statements.
In January 2013, the FASB issued Accounting Standards Update ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This Standard clarifies that ordinary trade receivables are not in the scope of ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement. An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11. The adoption of ASU No. 2013-01 is not expected to have a material impact on the consolidated financial statements.
In October 2012, the FASB issued Accounting Standards Update ASU No. 2012-06 “Business Combinations (Topic 805)-Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.” This Standard requires that when a reporting entity recognizes an indemnification asset (in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. This Standard is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. Certain transition disclosures are required. The adoption of ASU No. 2012-06 is not expected to have a material impact on the consolidated financial statements.
In July 2012, the FASB issued Accounting Standards Update ASU No. 2012-02 “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” This Standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, or nonpublic entitles, have not yet been made available for issuance. The adoption of ASU No. 2012-02 did not have a material impact on the consolidated financial statements.
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 did not have a material impact on the consolidated financial statements.
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 did not 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 did not 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.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(continued)
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.
Reclassifications-Certain reclassifications have been made to the 2011 and 2010 consolidated financial statements to conform to current year presentations. These reclassifications have no effect on previously reported net income (loss) applicable to common shareholders or net income (loss) per share.
NOTE 2-REGULATORY AGREEMENT, ECONOMIC CONDITIONS AND MANAGEMENT’S 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 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 we believe have been implemented by the Bank.
In addition, among the corrective actions required under the Consent Order, the Bank must 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. The Agreement also provides timelines and thresholds from the date of issuance to achieve the aforementioned corrective actions. We believe the Bank has achieved compliance with all the requirements with the exception of the one relating to capital levels.
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 by the Agreement except for the 10.0% leverage ratio set by the Agreement.
•
Deleveraging the balance sheet with emphasis on reducing (1) non-performing 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.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-REGULATORY AGREEMENT, ECONOMIC CONDITIONS AND MANAGEMENT’S PLAN-(continued)
•
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,
•
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 deferred tax assets. The Bank continues to have high loan concentrations in commercial real estate 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 (8,174,736 shares, adjusted for 1-for-10 reverse stock split on February 10, 2011) 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 ($4.40 per share, adjusted for 1-for-10 reverse stock split on February 10, 2011). On April 7, 2010, the Company concluded its rights offering and the related public offering and issued approximately 75.6 million shares (7.6 million shares, adjusted for 1-for-10 reverse stock split on February 10, 2011) 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 $3.9 million and $4.7 million at December 31, 2012 and 2011, respectively, with the Federal Reserve Bank or maintain such reserve balances in the form of cash. The Bank held cash and maintained average reserve balances with the Federal Reserve Bank in excess of the required amounts.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4-INVESTMENT SECURITIES
Investment securities at December 31, 2012 and December 31, 2011 consisted of the following:
PREMIERWEST BANCORP AND SUBSIDIARY
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, 2012 and December 31, 2011. At December 31, 2012, 50 investment securities comprised the “less than 12 months” category and 4 investment securities comprised the “12 months or more” category. 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.
Substantially all unrealized losses reflected above were the result of changes in interest rates subsequent to the purchase of the securities. The investments with unrealized losses are not considered other-than-temporarily impaired because the decline in fair value is primarily attributable to the changes in interest rates rather than credit quality. 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.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4-INVESTMENT SECURITIES-(continued)
The amortized cost and estimated fair value of investment securities at December 31, 2012, by maturity are shown below. The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay underlying loans without prepayment penalties.
The following table presents the cash proceeds from the sales of securities and their associated gross realized gains and gross realized losses that are in earnings for the years ended December 31, 2012, 2011, and 2010:
(Dollars in Thousands)
At December 31, 2012, investment securities with an estimated fair market value of $157.2 million were pledged to secure public deposits, certain nonpublic deposits and borrowings.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-LOANS
Loans as of December 31, 2012 and 2011 consisted of the following:
The Bank’s market area consists principally of Jackson, Josephine, Deschutes, Douglas and Klamath counties of Oregon, and Butte, Siskiyou, Shasta, Tehama, Yolo, Placer, and Sacramento 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, 2012 and 2011, the portion of these loans participated to third parties (which are not included in the accompanying consolidated financial statements) totaled approximately $9.7 million and $10.0 million, respectively.
NOTE 6-ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY
The allowance for loan losses represents the Company’s estimate of potential credit losses 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 by 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
PREMIERWEST BANCORP AND SUBSIDIARY
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. Minimum loss factors are then established based on a weighted average of historical loss experience by risk classification within each loan category pool. The minimum or historical loss factor, whichever is larger, is 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 by 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.
•
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 Company.
In prior years, loss factors used to estimate loss potential within the loan portfolio were solely based on actual historical experience. Beginning in second quarter 2012, minimum loss factors were also developed based on a weighted average of historical loss experience by risk classification within each loan category pool. The minimum or historical loss factor, whichever is larger, is now 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.” Similarly, the minimum or actual loss factor is used as a basis for establishing a nominal reserve on unfunded balances (net available credit), depending on the loan category. This change in methodology had no material impact on the Company’s total allowance for loan losses.
PREMIERWEST BANCORP AND SUBSIDIARY
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
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY-(continued)
Allowance for Credit Losses and Recorded Investment in Financing Receivables
PREMIERWEST BANCORP AND SUBSIDIARY
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, 2012 and 2011:
PREMIERWEST BANCORP AND SUBSIDIARY
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:
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY-(continued)
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY-(continued)
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 Company 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.
Loss-Loans classified as loss, are considered uncollectible and of such little value that the continuance as an active Company asset is not warranted. This rating does not mean that the loan has no recovery or salvage value, but rather that the loan should be charged off now, even though partial or full recovery may be possible in the future.
Direct and indirect consumer loans are not risk rated, but designated as either “Prime” or “High Risk Consumer (HRC)” based on credit score at origination. However, consumer loans greater than 90 days past due are reported as non-performing loans. These loans are charged-off when they are 120 days past due; however, if these loans are secured by real estate, the Company may choose to write these loans down to the fair value of the collateral.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY-(continued)
The following table summarizes our loans by type and risk category as of December 31, 2012 and December 31, 2011:
(Dollars in Thousands)
Indirect Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
Indirect Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY-(continued)
Troubled Debt Restructurings (“TDR”)-At December 31, 2012 and 2011, loans of $24.0 million and $51.7 million, respectively, were classified as restructured loans. The restructurings were granted in response to borrower financial difficulty, and provide for a modification of loan repayment terms. As of December 31, 2012 and 2011, no available commitments were outstanding on troubled debt restructurings.
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.
All TDR’s on accrual and nonaccrual status are evaluated for loss potential on an individual basis in accordance with Company policy for impaired loans. The loans determined to be collateral dependent are carried at fair value based on current appraisals. Given our allowance for loan loss (“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, geographic region, and maturities as of December 31, 2012:
(Dollars in Thousands)
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY-(continued)
The following table presents troubled debt restructurings by accrual or nonaccrual status as of December 31, 2012 and 2011:
As of December 31, 2012, there were 14 borrowers with loans designated as TDR’s that 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 would be expected to continue as documented by analysis based on current financial statements and/or tax returns.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY-(continued)
The following tables present newly restructured loans at the net active principal balance on the date of the restructuring by type of modification that occurred during the twelve months ended December 31, 2012 and 2011, respectively. No modification terms included principal forgiveness in the newly restructured loans that occurred during these periods:
The following table represents restructured loans that defaulted during the twelve months ended December 31, 2012 and 2011 and within 12 months following their date of restructure:
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7-PREMISES AND EQUIPMENT
Premises and equipment at December 31 consisted of the following (in thousands):
Branch buildings, land parcels, and equipment classified as held-for-sale are included in accrued interest and other assets. These assets have a book value of $1.2 million, which approximates market value. The buildings and equipment were listed for sale after the branch consolidation was completed during the first quarter of 2012. The land parcels had been held for future branch development and are now listed for sale. An impairment charge of $719,000 to reduce the book value to the fair market value was reported in the statement of operations for the year ended December 31, 2012.
Depreciation expense totaled $2.2 million, $2.8 million, and $2.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
At December 31, 2012, there were no new construction contracts for new branches.
NOTE 8-CORE DEPOSIT INTANGIBLES
At December 31, 2012 and 2011, PremierWest had $1.4 million and $2.0 million of core deposit intangibles, respectively, net of accumulated amortization of $5.9 million and $5.3 million, respectively. For each of the years ending December 31, 2012, 2011 and 2010, PremierWest recorded amortization expense related to these core deposit intangibles totaling $547,000, $499,000, and $959,000 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:
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9-INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31 was as follows (in thousands):
The provision 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):
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. This ownership change resulted in limitations on the utilization of tax attributes, including net operating loss carryforwards and tax credits. Approximately $6.3 million of our Oregon net operating loss carryforwards and $165,000 of Oregon tax credits have been effectively eliminated. Pursuant to Section 382, a portion of the limited net operating loss carryforwards and credits becomes available for use each year. 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 during future years to offset taxable income.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9-INCOME TAXES-(continued)
The Bank’s deferred tax assets and valuation allowance have been reduced by $0.4 million to reflect the estimated impact of Section 382 limitations on the utilization of the Oregon net operating loss carryforwards and tax credits. The impact is also reflected in the reconciliation of the income tax (benefit) provision for the years 2010 through 2012.
The components of the net deferred tax asset as of December 31 were approximately as follows (in thousands):
A $55.2 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 $67.3 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 $28.5 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 $1.2 million are available to offset future taxable 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 $73,000 and $163,000 at December 31, 2012 and 2011, 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
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9-INCOME TAXES-(continued)
Company made BETC purchases in 2006 through 2012. The purchased credits expire after 8 years but are expected to be utilized within 5 years of purchase. Additional state tax credits include 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 related Enterprise Zone.
The 2012 increase in the net deferred tax asset valuation allowance of approximately $4.2 million included the effect of $943,000 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.
The Bank holding company was notified in 2011 that tax years 2008 and 2009 would be subject to an IRS audit. This audit was required because the Bank received a refund greater than $2 million dollars from amending returns for those years to utilize an net operating loss carryback. This audit was concluded during the third quarter 2012 resulting in changes between tax years for the carryback and carryforward of the net operating loss deductions, but with no additional cash paid for taxes in the current year. The IRS has submitted their audit report to the congressional Joint Committee on Taxation. Approval of their report is still pending, although no changes are anticipated.
NOTE 10-TIME DEPOSITS
Time deposits of $100,000 and over totaled approximately $127.3 million and $168.3 million at December 31, 2012 and 2011, respectively.
At December 31, 2012, the scheduled annual maturities for all time deposits were as follows (in thousands):
The Company had $241,000 brokered deposits at December 31, 2012 and 2011.
NOTE 11-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, 2012 and 2011 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 $15.8 million were pledged to provide for an additional available borrowing capacity of approximately $9.0 million with the Federal Reserve discount window as of December 31, 2012.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-FEDERAL HOME LOAN BANK BORROWINGS AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank had no long-term borrowings outstanding with the Federal Home Loan Bank (“FHLB”) at December 31, 2012 or 2011. The Bank paid the FHLB borrowings in full during 2011. 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. As of December 31, 2012 and 2011, the Bank had no outstanding CMA borrowings. 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, 2012, the Company maintained a line of credit with the FHLB of Seattle with available credit of $55.7 million and was in compliance with its related collateral requirements.
During the first quarter of 2011, the Company began a program to sell securities under agreements to repurchase. At December 31, 2012, the Bank had $5.4 million securities sold under agreements to repurchase with a maximum balance at any month end during the year of $7.3 million, a weighted average yearly balance of $5.0 million, and interest of 0.30% during the year. 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.
NOTE 13-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, 2012:
(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 (0.311% at December 27, 2012) plus 1.75% or 2.061%, 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 (0.308% at December 17, 2012) plus 1.79% or 2.098%, adjusted quarterly, through the final maturity date in March 2035.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13-JUNIOR SUBORDINATED DEBENTURES-(continued)
(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 (0.308% at December 17, 2012) plus 1.42% or 1.728%, adjusted quarterly, through the final maturity date in September 2035.
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. 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 considered “well-capitalized” and has satisfied conditions in its regulatory agreement (see Note 2). The Company is permitted to defer such interest payments for up to 20 consecutive quarters, but during a deferral period it is prohibited from making dividend payments on its capital stock. The amount of accrued and unpaid interest was approximately $3.0 million as of December 31, 2012. At December 31, 2012, the Company had deferred payment of interest for 13 consecutive quarters.
NOTE 14-OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve various levels and elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
A summary of the Bank’s off-balance sheet financial instruments at December 31 is as follows (in thousands):
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 guarantees 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.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14-OFF-BALANCE SHEET FINANCIAL INSTRUMENTS-(continued)
The Bank also maintains a reserve against these off-balance sheet financial instruments. The amount of the reserve was $311,000 at December 31, 2012 which was an increase of $213,000 from December 31, 2011. This increase was incurred to enhance our provision for off-balance sheet credit risk as part of a revision of the Company’s allowance for loan and lease losses methodology.
NOTE 15-TRANSACTIONS WITH RELATED PARTIES
Certain officers and directors (and the companies with which they are associated) are customers of, and have had banking transactions with, the Bank in the ordinary course of business. 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.
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):
Deposits held for executive officers and directors at December 31, 2012 and 2011, were approximately $4.4 million and $4.0 million, respectively.
NOTE 16-COMMITMENTS AND CONTINGENCIES
Operating lease commitments-As of December 31, 2012, the Bank leased certain properties from unrelated third parties. Future minimum lease commitments pursuant to these operating leases are as follows (in thousands):
Rental expense for all operating leases was $775,000, $1.0 million, and $1.2 million for the years ended December 31, 2012, 2011, and 2010, respectively.
Legal contingencies-In the ordinary course of business, the Bank may become involved in litigation arising from normal banking activities. Based on currently available information, Management believes that the ultimate
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16-COMMITMENTS AND CONTINGENCIES-(continued)
outcome of these 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 17-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 $162,000, $189,000, and $205,000 for the years ended December 31, 2012, 2011 and 2010, 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 or assumed various severance, non-compete, deferred compensation, retirement agreements, and continuing benefit 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. The deferred compensation plan provides interest on income previously earned for which receipt was deferred for tax purposes. As of December 31, 2012 and 2011, the Bank’s recorded liability pursuant to these agreements was $12.3 million and $8.9 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 $4.1 million, $684,000, and $936,000 for the years ended December 31, 2012, 2011 and 2010, respectively. To support its obligations under these arrangements, the Bank has acquired bank-owned life insurance policies. These policies had aggregate cash surrender values of $16.4 million and $15.9 million as of December 31, 2012 and 2011, 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 $488,000, $508,000, and $542,000 for the years ended December 31, 2012, 2011, and 2010, respectively.
During 2012, a liability of $2.8 million was recorded to recognize post-retirement health insurance benefits (“PRBO”) committed in prior years to certain current and former directors and officers. The PRBO liability represents the actuarial calculation of the present value of vested benefits expected to be paid to individuals during the retirement period based on the expected retirement date and term of benefits.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18-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):
As of December 31, 2012, 2011, and 2010, stock options for approximately 62,000, 75,000, and 85,000 shares, respectively, were not included in the computation of diluted earnings per share as their inclusion would have been anti-dilutive.
NOTE 19-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 “TARP Agreement”). The TARP 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 TARP 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
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19-PREFERRED STOCK-(continued)
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 since the third quarter of 2009, or the last thirteen quarters, the Company has continued to accrue dividends through the fourth quarter of 2012. As of December 31, 2012, accrued and unpaid dividends totaled approximately $7.1 million and are included within accrued interest and other liabilities on the balance sheet.
NOTE 20-STOCK OPTION PLAN
At December 31, 2012, 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 the PremierWest Bancorp 2011 Plan effective February 24, 2011, subject to shareholder approval, which was received at the Annual Shareholder Meeting on May 26, 2011. The 2011 Plan authorizes the issuance of up to 500,000 shares of common 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, 2012, there were unexercised grants totaling 48,213 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.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20-STOCK OPTION PLAN-(continued)
During the year ended December 31, 2012, stock option activity was as follows:
PremierWest Bancorp 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. 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 its stock options. The Black-Scholes model requires the use of assumptions regarding the historical volatility of the Company’s stock price, its 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:
There were no stock options granted or restricted stock grants during the year ended 2012 or 2011. There were 500 restricted stock grants forfeited during the year ended December 31, 2012. There were 750 restricted stock grants issued during the year ended 2011. As of December 31, 2012, there were 750 restricted stock grants outstanding, all expected to fully vest between 2016 and 2018.
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 year ended 2010 was $5.70.
The following table presents the unrecognized stock-based compensation as of or for the years ended December 31, 2012, 2011, and 2010. No stock options were exercised for the years ended December 31, 2012 or 2011. At December 31, 2012, unrecognized stock-based compensation expense for stock options and restricted stock grants will be expensed over a weighted-average period of approximately 1.0 years and 2.7 years, respectively.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20-STOCK OPTION PLAN-(continued)
Accounting for “Share-Based Payment” requires that the cash flows from the tax benefits resulting from tax deductions in excess of the compensation expense recognized for stock options (excess tax benefits) be reported as financing cash flows. There were no excess tax benefits classified as financing cash inflows for the years ended December 31, 2012, 2011, and 2010.
Stock-based compensation expense recognized under the standard was $116,000 with a related tax benefit of $46,000 for the year ended December 31, 2012, compared to stock-based compensation expense of $146,000, with a related tax benefit of $58,400, for the year ended December 31, 2011, and $372,000, with a related tax benefit of $148,800, for the year ended December 31, 2010.
Information regarding the number, weighted-average exercise price and weighted-average remaining contractual life of options by range of exercise price at December 31, 2012, is as follows:
NOTE 21-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.
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
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21-REGULATORY MATTERS-(continued)
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.
PremierWest’s and the Bank’s actual and required capital amounts and ratios are presented in the following tables (in thousands):
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21-REGULATORY MATTERS-(continued)
NOTE 22-FAIR VALUE MEASUREMENTS
The Company bases fair value on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the Company establishes 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 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 that 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 that are not defined as financial instruments but have significant value. These include such off-balance sheet items as core deposit intangibles on 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 the periods presented.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22-FAIR VALUE MEASUREMENTS-(continued)
The Company used the following methods and significant assumptions to estimate fair value for its assets measured and carried at fair value on a recurring basis in the financial statements:
Investment securities available-for-sale-Securities classified as available-for-sale are reported at fair value utilizing Level 1 and 2 inputs. However, as practically expedient, all securities are reported as utilizing Level 2 inputs. Fair values for investment securities are based on quoted market prices or the market values for comparable 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. Available-for-sale securities are the only balance sheet category the Company accounts for at fair value on a recurring basis.
The following table presents information about these securities and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
The Company used the following methods and significant assumptions to estimate fair value for its assets measured and carried at fair value on a non-recurring basis in the financial statements.
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. Non-performing loans are evaluated and valued at the time the loan is
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22-FAIR VALUE MEASUREMENTS-(continued)
identified as impaired, at the lower of cost or fair value less selling costs (“net realizable 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 generally determined based on independent appraisals.
Other Real Estate and Foreclosed Assets-Other real estate and foreclosed assets (“OREO”) acquired through foreclosure or deeds in lieu of foreclosure are carried at fair value, less costs to sell, or estimated net realizable value utilizing current property appraisal valuations. When property is acquired, any excess of the loan balance over the estimated net realizable value is charged to the allowance for loan losses. Holding costs, subsequent write-downs to net realizable value, if any, or any disposition gains or losses are included in non-interest expense. The Bank had $25.4 million and $22.8 million in OREO at December 31, 2012, and December 31, 2011, respectively.
The following table presents the fair value measurement for non-earning assets as of December 31, 2012, and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value on a non-recurring basis:
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22-FAIR VALUE MEASUREMENTS-(continued)
As of December 31, 2012, and 2011, all non-performing loans were considered impaired and were measured for impairment. The table below shows the detail of the various categories of impaired loans:
(1) Represents loans reduced for charge-offs incurred from inception of the loans
As this standard excludes certain financial instruments and all non-financial instruments from its disclosure requirements, any aggregation of the fair value amounts presented in the following table would not represent the underlying value of the Bank.
The following tables present information about the level in the fair value hierarchy for the Company’s assets and liabilities that are not measured on a recurring basis as of December 31, 2012 and 2011.
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22-FAIR VALUE MEASUREMENTS-(continued)
NOTE 23-PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for PremierWest (parent company only) is presented as follows (in thousands):
CONDENSED BALANCE SHEETS
(Dollars in Thousands)
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23-PARENT COMPANY FINANCIAL INFORMATION-(continued)
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24-SUBSEQUENT EVENT
On October 29, 2012, PremierWest Bancorp entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Starbuck Bancshares, Inc., a Minnesota corporation (“Starbuck”), and Pearl Merger Sub Corp., an Oregon corporation and a newly formed subsidiary of Starbuck (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, including regulatory and shareholder approval, PremierWest will merge (the “Merger”) with and into Merger Sub, with Merger Sub as the surviving corporation. The parties contemplate in the Merger Agreement that immediately following the Merger, PremierWest Bank will merge with and into AmericanWest Bank, a wholly owned subsidiary of Starbuck, with AmericanWest Bank as the surviving bank. The Board of Directors of each of PremierWest, Starbuck and Merger Sub adopted and approved the Merger Agreement and the transactions contemplated thereby, and the parties have received all necessary regulatory approvals. A copy of the Merger Agreement is included as Exhibit 2.1 to PremierWest Bancorp’s Form 8-K filed October 30, 2012.
A special meeting of shareholders was held on February 19, 2013, asking shareholders to consider and vote on the approval of the Merger Agreement. The meeting was adjourned until March 13, 2013, to provide the Company with additional time to solicit proxies from its shareholders. The reconvened special meeting of shareholders held March 13, 2013, was further adjourned until March 28, 2013 to provide additional time to solicit proxies on the merger proposal.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
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, 2012, 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 2012 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, 2012, 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, 2012, the Company maintained effective internal control over financial reporting.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, 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.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
John L. Anhorn, age 70, currently serves as Chairman of PremierWest Bank, a position he has held since December 2008. Prior to December of 2008, Mr. Anhorn served as Chief Executive Officer of PremierWest Bancorp, and has been a director since its formation and served as a director of its predecessor, Bank of Southern Oregon, since May 1998. Mr. Anhorn also serves as a director of PremierWest Bancorp’s subsidiary, PremierWest Bank. Mr. Anhorn previously served as President of Western Bank until April 1997, when Western Bank was acquired by Washington Mutual Bank. Mr. Anhorn has over 47 years’ experience in the banking industry.
James M. Ford, age 54, is PremierWest Bancorp’s and PremierWest Bank’s President & Chief Executive Officer, and a director of PremierWest Bancorp and its subsidiary, PremierWest Bank. Mr. Ford was appointed President of PremierWest Bancorp and its subsidiary PremierWest Bank in October 2006 and at the same time joined the Boards of Directors of PremierWest Bancorp and PremierWest Bank. Mr. Ford joined PremierWest in March 2006 as part of a multi-year executive succession plan. He initially held the position of Senior Executive Vice President with direct responsibility for PremierWest Bank’s network of branches in Oregon and California, and PremierWest Bank’s Mortgage Division and PremierWest Finance Company. Mr. Ford’s career spans over 30 years in the financial services industry including roles as Executive Vice President of Planning and Development and Executive Vice President & Chief Operating Officer. Among other duties, he serves on the Board of Directors of the Oregon Bankers Association. He is a graduate of the University of Oregon and of the Pacific Coast Banking School at University of Washington.
Richard R. Hieb, age 68, served, prior to his retirement in 2011, as Senior Executive Vice President & Chief Operating Officer of PremierWest Bancorp and PremierWest Bank since March 2005, and has been a director of PremierWest Bancorp since its formation; and served as a director of PremierWest Bank and its predecessor, Bank of Southern Oregon, since May 1998. Prior to his appointment as Senior Executive Vice President, Mr. Hieb served as Executive Vice President & Chief Operating Officer of PremierWest Bancorp and PremierWest Bank, and its predecessor Bank of Southern Oregon. Previous to his employment with PremierWest, Mr. Hieb was Executive Vice President & Chief Administrative Officer of Western Bank, until it was acquired by Washington Mutual Bank in April 1997. Mr. Hieb has in excess of 47 years’ experience in the banking industry.
John A. Duke, age 74, is currently a director and served as Chairman of the Board of PremierWest Bancorp since its formation until July 2012. He also served as a director with its predecessor, Bank of Southern Oregon, since its organization in 1990. Mr. Duke also served as a director for Jefferson State Bank, Medford, Oregon, until it was acquired by First Interstate Bank. For over five years Mr. Duke has been self-employed, managing his investments, including real estate, Superior Health Club and Superior Air Center, Inc., a Medford, Oregon based Aviation Company that provides services for privately owned aircraft and is the parent company of Million Air Medford a full service fixed base operator.
Patrick G. Huycke, age 63, is the Chairman of the Board and has served as a director of PremierWest Bancorp since its formation, and served as a director of its predecessor, Bank of Southern Oregon, since 1994. For over five years Mr. Huycke has been a partner in the law firm, Huycke, O’Connor & Jarvis, LLP. Mr. Huycke received his law degree from Willamette University and has practiced law since 1975.
Rickar D. Watkins, age 67, previously served as a director of United Bancorp and its subsidiary, Douglas National Bank, from 1993 until its merger with PremierWest Bancorp in May 2000, at which time he joined the Board of PremierWest Bancorp. Mr. Watkins is the Chief Executive Officer of Rick’s Medical Supply, Inc., a company he founded in 1974.
Brian R. Pargeter, age 69, previously served as a director of United Bancorp and its subsidiary, Douglas National Bank, until its merger with PremierWest Bancorp in May 2000, at which time he joined the Board of PremierWest Bank. Mr. Pargeter was elected to the Board of PremierWest Bancorp in 2002. Mr. Pargeter is President and majority owner of Umpqua Insurance Agency, where he has been employed since 1967.
Dennis N. Hoffbuhr, age 64, has served as a director of PremierWest Bancorp since its formation and served as a director of its predecessor, Bank of Southern Oregon, since its formation in 1990. Mr. Hoffbuhr has owned and operated Hoffbuhr and Associates, Inc., a land surveying and land use planning firm in Medford, Oregon for over five years. Mr. Hoffbuhr is a registered land surveyor certified by the Oregon State Board of Engineering Examiners.
Thomas R. Becker, age 61, is the Vice-Chairman of the Board and was a director of United Bancorp, which was acquired through a merger with PremierWest Bancorp in May 2000, and joined the Board as a result of that merger. Mr. Becker served as Executive Director of the Rogue Valley Manor, a continuing care retirement community in Medford, Oregon from 1978 through mid-year 2010. From 1990 to 2010, he was the Chief Executive Officer of Pacific Retirement Services, Inc., the parent corporation for 58 organizations providing housing and related services to over 3,000 seniors in Oregon, California, Wisconsin and Texas. Mr. Becker also serves as a director of Lithia Motors, Inc., a public corporation headquartered in Medford, Oregon.
James L. Patterson, age 73, has served as a director of PremierWest Bancorp since its formation and served as a director of its predecessor, Bank of Southern Oregon, since 1999. Mr. Patterson retired from Pacific Power & Light in 1998 with thirty-four years of service. Since his retirement, he has worked as a self-employed business consultant.
John B. Dickerson, age 72, previously served as a director of Mid Valley Bank until its merger with PremierWest Bank in January 2004, at which time he joined the Board of PremierWest Bancorp and PremierWest Bank. Mr. Dickerson served as Chief Executive Officer of Mid Valley Bank from 1990 until its merger with PremierWest in January 2004, at which time he retired.
Georges C. St. Laurent, Jr., age 76, joined PremierWest Bancorp’s and PremierWest Bank’s Board of Directors in September 2009. Mr. St Laurent, a seasoned business executive has for over five years been self-employed managing a portfolio of diverse investments in financial services, real estate and agricultural operations. Mr. St. Laurent served as Chairman and CEO and controlling shareholder of Western Bank, Oregon’s largest independent public bank during the 1990’s prior to its acquisition by Washington Mutual. Mr. St. Laurent’s business interests have spanned a wide variety of industries including serving as the CEO of GS Containers, the manufacturer of Sterno Canned Heat prior to its sale to Colgate Palmolive. Mr. St. Laurent is a graduate of Yale University and holds an MBA degree from Harvard.
Mary Carryer, age 65, was elected to the PremierWest Bancorp Board of Directors in December 2011 and appointed to Bancorp’s subsidiary PremierWest Bank’s Board of Directors in January 2012. Ms. Carryer has an extensive background in the financial services industry spanning three decades and three continents. Prior to her retirement, she held executive management positions with Bank of Hawaii, Westpac Banking Corporation, and Wells Fargo and Company. Ms. Carryer holds a Bachelor’s degree from Concordia University in Montreal and an MBA from the University of California, Berkeley.
Bruce Currier, age 65, was elected to the PremierWest Bancorp Board of Directors in March 2012, and appointed to the PremierWest Bank Board of Directors in March 2012. Mr. Currier is the retired Coordinating Partner, Assurance and Advisory Business Services, for Ernst & Young, a position he held from July 1984 to June 2007.
The U.S. Treasury is the sole holder of our Series B Preferred Stock. Pursuant to the terms of the Series B Preferred Stock, the U.S. Treasury is currently entitled to elect two directors to our Board of Directors.
Ms. Carryer and Mr. Currier were elected as the two Series B Directors at the 2012 Annual Meeting and continue to serve as the appointees of the holder of our Series B Preferred Stock. Holders of our Common Stock are not entitled to vote on the election of the two directors appointed by the holder of our Series B Preferred Stock.
EXECUTIVE OFFICERS
Tom Anderson, age 62, serves as Executive Vice President & Chief Administrative Officer for PremierWest Bancorp and its subsidiary, PremierWest Bank, a position he has held since 2008; prior to 2008 Mr. Anderson served as Executive Vice President & Chief Financial Officer for PremierWest Bancorp and PremierWest Bank. Prior to joining PremierWest in 2002 Mr. Anderson served in various senior executive positions, including Chief Operating Officer and Chief Financial Officer, and a member of the Board of Directors with a Southern Oregon headquartered community bank prior to its sale in 2000. Mr. Anderson’s career spans 40 years in the banking field.
Douglas Biddle, age 59, was named Executive Vice President & Chief Financial Officer of PremierWest Bancorp and its subsidiary, PremierWest Bank in January 2011. From 2005 thru 2010 Mr. Biddle served as President & Chief Executive Officer of Plumas Bancorp, a California community bank. During his twenty year career at Plumas Bancorp, Mr. Biddle served in increasing senior positions including Chief Administrative Officer, Chief Financial Officer and Chief Operating Officer. Mr. Biddle earned a BA in Political Science from the University of California-Davis, an MBA from UCLA, and is a Certified Management Accountant.
Joe Danelson, age 55, joined PremierWest Bank in April 2008 and served as Executive Vice President & Chief Banking Officer through December 2011, at which time he assumed the role of Chief Credit Officer. Prior to joining PremierWest Mr. Danelson held various positions with U.S. Bank where he spent 21 years. From 2003 through March 2008 Mr. Danelson served as Regional President for U.S. Bank’s Oregon Valley Coast Region. Mr. Danelson earned degrees from Montana State, Washington State, and the Pacific Coast Banking School at University of Washington. He also earned an MBA from Colorado State University.
Steven R. Erb, age 50, serves as Executive Vice President and Head of Community Banking of PremierWest Bancorp’s subsidiary PremierWest Bank. Mr. Erb joined PremierWest Bank in 2008 and served as Senior Vice President and Director of Operations through January 2012. Mr. Erb has in excess of 27 years of banking experience. Prior to joining PremierWest, Mr. Erb was Senior Vice President & Area Manager of Bank of the Cascades with responsibilities for the Southern Oregon market. Mr. Erb spent 21 years with First Interstate Bank/ Wells Fargo in a variety of operational, line and administrative roles including his most recent assignment as Vice President and Community Banking District Manager for the Southern Oregon operation. Mr. Erb holds a Bachelor of Science degree from the University of Oregon and is a graduate of the Pacific Coast Banking School at the University of Washington.
Kenneth A. Wells, age 62, serves as Executive Vice President and Chief Marketing Officer of PremierWest Bancorp’s subsidiary, PremierWest Bank. Mr. Wells served as Senior Vice President & General Manager for Software.Com, LLC from January 2007 until joining PremierWest Bank in June 2008. He served as Vice President of Marketing for Big Fish Games, Inc. during 2005 and 2006. From 2003 to 2005 Mr. Wells was a self-employed marketing consultant. Mr. Wells has over 30 years of increasingly senior leadership roles in marketing, brand management, and community relations with major multinational brands. Mr. Wells is a graduate of The American University, Washington, D.C., with a BA in Government Administration.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16 of the Securities Exchange Act of 1934 requires that all executive officers, directors, and persons who beneficially own more than 10 percent of our common stock file an initial report of their beneficial ownership of common stock and periodically report changes in their ownership. The reports must be made with the Securities and Exchange Commission with a copy sent to PremierWest Bancorp.
Based solely on the review of Forms 3, 4 and 5, and amendments thereto, furnished to us and the representations by the reporting persons, we believe, to the best of our knowledge, that all Section 16(a) filing requirements were met in a timely manner for fiscal year ended December 31, 2012.
CODE OF ETHICS
Our Board of Directors has adopted and approved a Code of Conduct and Ethics, which is publicly available on our website at www.PremierWestBank.com and applies to, among others, our principal executive, financial and accounting officers and all other officers serving in a finance, accounting, tax or investor relations role. We intend to disclose all amendments to and waivers of this code on our website. The code requires our employees to avoid conflicts of interest, comply with all laws and regulations and conduct business in an honest and ethical manner. The code is also intended to promote full and accurate financial reporting.
NOMINATING PROCEDURES
There have been no material changes to the procedures by which shareholders may recommend nominees to our board of directors since our procedures were disclosed in the proxy statement for the 2012 annual meeting.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
We have a separately-designated standing audit committee of the Board of Directors. The Audit Committee is responsible for oversight of the accounting, auditing and financial reporting processes, including the review and preparation of financial information disclosed to the public; monitoring the internal controls over financial accounting; and the performance and selection of the independent auditors. The Audit Committee is also responsible for receiving and investigating all inquiries and complaints relating to the Company’s accounting and auditing procedures and policies. The members of the Audit Committee are directors Brian Pargeter, James Patterson, John Dickerson, Mary Carryer and Bruce Currier. The Board of Directors has determined that each member of the Audit Committee is an independent director, as defined in the NASDAQ listing standards. We have determined that Mr. Currier has the requisite education and experience to qualify as an “Audit Committee Financial Expert.”
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
The Board of Directors is responsible for establishing and administering our executive compensation program. The Board delegates responsibility for reviewing compensation and recommending benefit programs and compensation levels to the Compensation Committee (referred to in this discussion and analysis as the “Committee”). The Committee operates under a charter, reviewed annually and posted on our website, and annually recommends to the Board the compensation packages for our Chief Executive Officer and other executive officers. The Committee considered the results of the 2012 say-on-pay vote, which resulted in 87% of the votes cast approving executive officer compensation. Each year, the Board reviews the Committee’s recommendation and makes a final decision on executive officer compensation.
Executive Compensation Philosophy and Objectives
Our compensation program is intended to provide competitive, comprehensive compensation packages that will attract, retain and motivate highly-qualified and talented people at all levels of our organization, but most importantly, the executive management team. To accomplish this objective, we try to provide compensation packages that are competitive within our industry segment and market, while maintaining and promoting the interests of the Company and our shareholders. We believe in rewarding executives based on the Company’s performance.
The specific levels of compensation reflect the comparative level of job responsibility, the value of the job in the marketplace, and the competition for quality, key personnel in our industry. We have historically provided long-term and short-term incentives to meet certain strategic and financial goals and objectives that are integral to the success of the Company. Therefore, in addition to a competitive base salary, we have considered annual cash bonus plans, as well as equity-based incentives. We offer equity-based incentives that encourage our executive officers to focus on maximizing long-term shareholder value. We believe that executives with a significant equity interest have a vested interest in the long-term growth and financial success of the Company. Our equity award practices typically include an initial stock option or restricted stock award to executives at the commencement of employment as both an incentive and inducement to join the Company. These awards are always made at fair market value on the date of grant, which generally is the first day of employment. The Compensation Committee reviews and approves awards at regularly scheduled meetings in the first half of the year and sets a specific future date on which the awards will be granted.
Our Incentive Compensation Policy, adopted in 2011, provides that Company practices will be guided by the following objectives:
•
Balanced risk-taking. Incentive compensation arrangements balance potential risks and financial benefits associated with the employee’s activities and the potential impact on the Company’s safety and soundness.
•
Effective controls and management. Incentive compensation arrangements are designed and operated in a manner compatible with strong internal controls and risk management.
•
Strong and effective governance. The Company will maintain active oversight of incentive compensation programs by the Committee and the Board.
As a community banking organization, business relationships throughout the communities we serve are important at all levels within the Company, making loyalty to the Company and longevity of employment important elements of our growth and success. We believe providing supplemental retirement programs and equity awards that vest over time, together with the ability for executives to choose to defer compensation, encourages long-term employment with the Company.
As a participant in the U.S. Treasury’s TARP Capital Purchase Program, we are required to comply with compensation rules established by the Treasury. In addition to the Treasury’s rules, the federal banking agencies that regulate and supervise the Company and the Bank have adopted guidance with respect to incentive compensation. One of our objectives is to ensure our compensation programs do not encourage excessive or imprudent risk taking and comply with the rules and guidance.
Establishing Compensation and Role of the Chief Executive Officer
The Committee is responsible for recommending the compensation package of our Chief Executive Officer and other executive officers. Our Chief Executive Officer proposes compensation packages for each executive officer to the Committee, which reviews and finalizes the compensation packages. Based on the recommendations of the Committee, the Board reviews and approves the final compensation for all executive officers.
Although we do not benchmark salaries, we try to ensure that our executive compensation program as a whole, and individual compensation packages, are competitive with pay for similar positions with similar companies or groups of companies within our industry. Individual compensation is established in accordance with the comparative information, experience, and individual performance evaluations for the respective executive. No one particular element or factor is weighed more heavily than another; rather, the compensation package is based on the collective judgment and discretion of the Committee members. We did not engage a compensation consultant to review salary data or total compensation in 2012, but have done so in the past.
The Committee and the Board periodically complete a written evaluation of Mr. Ford, with input from each of the directors. Mr. Ford evaluates the performance of the other named executive officers. The evaluations include a review of Company and individual objectives as well as a variety of subjective, non-financial criteria, such as leadership and development, quality and service delivery, board relations, employee relations, community relations, industry-related political effectiveness, and individual strengths and also include an assessment of individual development needs. The objective and subjective evaluation criteria reflect goals and objectives that are important to the implementation and execution of the Company’s strategic plan.
When determining the amount and form of annual compensation for the executive officers, the Committee reviews the total compensation earned by the executive and periodically compares total compensation to total compensation earned by counterparts at other companies. The Committee considers total compensation in the context of current fixed annual compensation, incentive compensation in the form of cash or equity and retirement benefits and other compensation. The mix of these elements is considered in the context of the reasonableness of the compensation package relative to comparative companies, Company goals and financial performance and the results of internal performance evaluations. Base salary is determined by competitive market factors, job description and relative pay within the Company as well as consideration of Company and individual performance. When the Committee does not engage a consultant, comparative information is taken from publicly available information.
The Chief Executive Officer recommends a strategic plan to the Board that identifies specific financial goals and often includes: non-interest deposit growth, the level of non-performing assets and overall credit quality, amounts of loan charge-offs and recoveries, capital levels, non-interest income and non-interest expense levels, net interest margin and business development or growth targets. The Committee establishes target performance thresholds for cash or equity-based incentive plans based on these goals, and reviews results of operations relative to performance criteria. The Committee’s focus, while operating under TARP rules, is on performance based incentive plans that result in the issuance of long-term restricted stock grants if the Company is profitable and meets other financial targets.
Although tax considerations are not the compelling factor in determining the annual compensation package, the Company attempts to maximize the tax benefits related to compensation expense. Further, the Company is cognizant of the compensation expense associated with all equity awards. The Committee intends all compensation to be Internal Revenue Code section 162(m) compliant to permit the Company to realize the tax benefits of all compensation paid to executive officers to the extent permissible under the Internal Revenue Code. Currently, none of our executive officers are expected to receive compensation in excess of the $500,000 section 162(m) threshold for TARP participants. Additionally, agreements with executives limit benefits to Internal Revenue Code section 280G limits and encourage cooperation between the Company and the executive in minimizing the tax impact of payments in the event of a change-in-control.
The Company has entered into employment and benefit agreements with executive officers that set forth the terms and conditions of employment, benefits provided and rights of the executive in the event of death, disability, termination of employment and change-in-control. After the expiration of the initial term, subject to certain circumstances in which the agreement may not be terminated, the agreements automatically renew annually unless the Board elects not to renew the term. The Committee is guided in part by the terms of these arrangements in adopting new benefit plans and establishing salary and incentive compensation.
Components of 2012 Compensation
Base Salary
Solely based on the Company’s 2011 performance, the Committee recommended no change in Mr. Ford’s salary, and Mr. Ford recommended no salary increases for executive officers. The Board concurred. Effective January 15, 2012 Steve Erb was promoted to Executive Vice President - Head of Community Banking. Mr. Erb’s
base salary was increased effective with the promotion. The Committee continued to monitor market data, with attention to maintaining equitable and competitive compensation packages focused on retaining qualified executives. The Company’s lack of profitability during 2011 was the overriding factor in the Committee’s decision to not recommend changes in base salary for Mr. Ford and the executive officers, and did not reflect the individual performance of any of the executives.
Bonus Compensation
In past years, the Board established a bonus plan based on the annual budget and strategic objectives with the amounts payable in cash if performance levels relative to the budgeted net profit were achieved. TARP Capital Purchase Program restrictions on incentive bonuses limit incentive compensation to long-term restricted stock grants.
Equity-Based Compensation
At the 2011 annual meeting, shareholders approved the 2011 Stock Incentive Plan, which provides for the issuance of incentive and non-qualified stock options, restricted stock awards and restricted stock units. Historically, we issued stock options as the primary form of equity compensation as an incentive to focus on increasing long-term shareholder value. The Committee has recommended moving to restricted stock or restricted stock unit grants, which we believe will provide more tangible value to employees, result in using fewer shares than option grants, and comply with TARP compensation rules.
The Committee approved a Restricted Share Award Plan for executive officers in 2010, using shares under, and subject to the terms of, our shareholder-approved stock incentive plan. The Committee recommended a similar plan for 2011, with restricted shares to be granted to executive officers in an amount not to exceed thirty-three percent (33%) of the officer’s base salary conditioned on achievement of predetermined performance targets. The maximum award, equal in value to 33% of base salary, would be payable only if achievement exceeds 125% of the established targets. No awards were paid under the plan for 2011. The Committee considered a similar plan for 2012, but Chief Executive Ford recommended, and the Committee and the Board approved suspending grants under the Restricted Share Award due to the projected net loss for the year. However, the Committee established, and the Board approved, performance targets for 2012 based on:
•
Net Income/Loss
•
Classified Asset Coverage Ratio
•
Non-Interest Expense
•
Net Interest Margin
•
Bank Tier 1 Leverage Ratio (Capital Levels)
The Committee established the performance targets as objective criteria on which performance of executives could be evaluated. No Awards were made to executive officers for 2012.
Retirement Compensation
Supplemental Executive Retirement Plans (“SERPs”). The Company provides SERPs for selected executive officers. The SERPs provide retirement benefits in addition to any benefit the executive might receive through a Deferred Compensation Agreement or participation in the Company’s 401(k) Plan. We provide SERPs as a means of promoting long-term employment and rewarding the executive for their commitment and loyalty to the Company. The amount an executive may receive under a SERP is directly tied to base salary at retirement and years of service. In 2007, the Committee adopted a policy to standardize SERPs to contain the following provisions:
•
Generally, executive must be employed for 3 years before becoming eligible;
•
Annual benefits may not exceed 42% of base salary at normal retirement; and
•
Benefits are paid for 15 years beginning at termination of employment following retirement age.
No executives became eligible for a SERP in 2012. As of the end of 2012, the Company’s accrued liability obligation under the existing SERPs for all of the named executive officers was $1,035,486.
See the Pension Benefits Table and the more detailed discussion of SERP benefits in the narrative below regarding post-termination benefits.
Employment Agreements: The Company includes post-retirement health insurance benefits in the employment agreement of certain officers. These agreements provide to the officer and their spouse subsidized medical, dental, vision and other healthcare coverage or equivalent monetary compensation for a period of 15 years. The Company pays 100% of the premiums for the coverage provided. As of the end of 2012, the Company’s accrued liability obligation under the existing Continuing Benefit Agreements for all of the named executives and directors was $351,658.
Deferred Compensation Agreements: The Company offers executive officers the opportunity to enter into a Deferred Compensation Agreement and elect to defer receipt of up to 75% of their salaries in any given year, which allows the executive to defer payment of income taxes on earned income to a later date. Based on the performance of the Company during 2012 no earnings were credited to previously deferred amounts. The deferred amounts plus accrued interest are paid out over a pre-determined period following termination of employment. In the event of a change-in-control or after payments have started under the agreement, the rate of interest adjusts to the prime rate as published in The Wall Street Journal.
Although the Company has a future obligation to make payments in accordance with the terms of the Deferred Compensation Agreement, the executive is considered an unsecured creditor of the Company. During 2012, no executive elected to defer compensation. The balance of deferred compensation accounts attributable to named executive officers at December 31, 2012 was $193,139. See the Non-Qualified Deferred Compensation Table for additional information.
Savings Plan and Other Benefits: We maintain a tax-qualified 401(k) plan in which executive officers may participate under the same terms as all eligible employees of the Company. Executives may contribute up to the maximum amount permitted by law and during 2012 the Company matched up to the lesser of 25% of the executive’s contribution or 1.5% of the executive’s compensation, unchanged from 2011’s match. Additionally, the Company has entered into agreements that provide a death benefit to beneficiaries of certain executives and other key employees. These agreements provide for full death benefits to the executive’s named beneficiary in the event of death during or after termination of employment, provided the termination is not for cause and does not occur prior to normal retirement. The Company maintains life insurance on the executives and key employees to cover the cost of these obligations. Employment agreements with executive officers Ford and Anderson provide for retiree health care coverage for the executive and their spouse for 15 years following termination.
Other Compensation
We also provide certain named executive officers country club memberships, use of a Company-owned vehicle, general disability insurance and long-term care insurance. The Company reimburses the executive for the individual cost of disability insurance and pays the premiums for the long-term care insurance. The Company either pays directly or reimburses the executive for the costs associated with the use of a vehicle, including maintenance, monthly payment and gas. The club memberships are paid directly by the Company and used by the executives for business entertainment and development. Executives are reimbursed for expenses incurred for business purposes.
Summary
Although the Company made substantial improvements to its financial condition in 2012 and executed strategic initiatives to improve the Bank’s safety and soundness, the Company did not attain profitability for 2012. The overall performance of Mr. Ford and executive officers reflected attainment of elements associated with our strategic plan. Given the challenging economic conditions in 2012, we believe the overall executive compensation package for 2012 was appropriate for a Company of our size with our financial performance.
Compensation Consultants
During 2012 the Committee did not engage a compensation consultant.
Effect of the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009
On October 14, 2008, the U.S. Department of the Treasury (“Treasury”) announced the Capital Purchase Program (“CPP”) under the EESA. We participated in the CPP by selling preferred stock and a warrant to purchase common stock to the Treasury on February 13, 2009. As a result, we became subject to executive compensation requirements. On February 17, 2009, President Obama signed into law the ARRA. ARRA contained new restrictions on executive compensation for CPP participants, and amended the executive compensation and corporate governance provisions of EESA.
Our executives are subject to agreements that are designed to ensure compliance with Treasury rules and remain effective for so long as Treasury owns any of our CPP equity securities. The material executive compensation requirements of EESA, ARRA and Treasury regulations are as follows:
•
ARRA prohibits bonus and similar payments to top employees. We cannot pay any “bonus, retention award, or incentive compensation” to our top five most highly-compensated employees for as long as any CPP-related obligations are outstanding. “Long-term” restricted stock is excluded from ARRA’s bonus prohibition, but only to the extent the value of the stock does not exceed one-third of the total amount of annual compensation of the employee receiving the stock, the stock does not “fully vest” until after all CPP-related obligations have been satisfied, and any other conditions which the Treasury may specify have been met.
•
Prohibition on compensation that provides an incentive to take unnecessary and excessive risks and that encourage earnings manipulation. The Committee reviews our named executive officers’ incentive compensation arrangements with our senior risk officers to ensure that such officers are not encouraged to take these risks.
•
Clawback. We are required to recover any bonus or incentive compensation paid to a senior executive officer (“SEO”) or one of the next 20 most highly compensated employees where the payment was later found to have been based on statements of earnings, gains or other criteria which prove to be materially inaccurate.
•
Golden parachutes. ARRA prohibits any payment to a senior executive officer or any of the next five most highly-compensated employees upon termination of employment for any reason for as long as any CPP-related obligations remain outstanding.
•
Limit on tax deduction. EESA and Treasury regulations limit our tax deduction for compensation paid to any named executive officer to $500,000 annually.
All of our Committee’s actions and decisions are made in the context of compliance with TARP compensation rules and we have focused our incentive programs for named executive officers on long-term restricted stock.
EXECUTIVE COMPENSATION
The following table summarizes the total compensation earned by the named individuals for the fiscal years ended December 31, 2012, 2011 and 2010. The table includes information for the President & Chief Executive Officer, Chief Financial Officer and the next three highest compensated executive officers that earned total compensation for 2012 in excess of $100,000. These individuals are referred to as the “named executive officers”. Please refer to the narrative discussion of executive compensation arrangements.
SUMMARY COMPENSATION TABLE FOR 2012
(1) Includes club memberships (where appropriate), 401(k) matching contributions and personal use of automobile.
(2) Mr. Biddle was hired on 12/15/10, and his salary reflects actual amount paid in 2010, on a base annual salary of $175,000.
(3) In addition to items included in footnote (1), includes long-term care insurance premiums and director fees of $30,000 in 2012, 2011 and 2010.
(4) In addition to items included in footnote (1), includes long-term care insurance premiums and reimbursement of long-term disability insurance premiums paid by the executive.
(5) In addition to the items included in footnote (1), includes reimbursement of relocation expenses in the amount of $40,000.
(6) For a discussion of valuation assumptions, see Note 21 of the Notes to Consolidated Financial Statements in PremierWest’s Annual Report on Form 10-K for the year ended December 31, 2012.
(7) The amounts disclosed for 2010 and 2011 solely include the change in present value of the SERP. For 2012, the disclosed amounts include both the change in present value of the SERP as well as the change in present value of post-retirement health insurance benefits for Messrs. Ford and Anderson. The amount disclosed for 2012 for Mr. Danelson solely includes the change in present value of his SERP.
Employment, Compensation and Benefit Agreements
The Company has entered into employment agreements with each of the named executive officers which provide for certain payments and continued benefits after termination of employment and in the event of a change-in-control. The Company also has entered into SERP agreements with three of the named executive officers which obligate the Company to make future payments after termination of employment. The SERP agreements are fully explained in the section titled
“SERP Agreements.” The amount of payment due on separation varies depending on whether the separation was a voluntary or involuntary termination, retirement, disability or death. The amounts set forth in the tables, displayed in “Potential Payments Upon Termination,” assume the termination of employment or change-in-control occurred on December 31, 2012. Each of these executives has executed a Compensation Modification Agreement, which among other things prohibits the acceleration of benefits and limits certain payments during the period which the company continues to be a TARP recipient. While certain payments are prohibited and the executives have each executed modification agreements, the payments displayed in the tables assume the Company is not a TARP recipient and that payments would be made under the terms of the original respective agreements.
Employment Agreement Provisions
The employment agreements for Messrs. Ford, Anderson, Biddle, Danelson and Erb all provide the following benefits, either under the terms of the employment agreement or a separate agreement referenced in the employment agreement. The employment agreements automatically renew at the end of the initial term and each year thereafter, unless the Company provides ninety (90) days’ notice of their intent not to renew the agreement. In the event of a change-in-control (as described below), the employment agreements become perpetual and the Company may not unilaterally cancel the agreement.
Upon termination of employment for any reason, including voluntary resignation or early retirement, the executive officers are entitled to receive: their base salary through the date of termination and, except if terminated for cause (as defined in the employment agreement) or executive voluntarily resigns, the executive officer is entitled to receive all unpaid bonuses and incentive compensation due executive officer; amounts accrued under any deferred compensation program in which the executives participated, unless terminated for cause; amounts payable under the 401(k) Plan and Supplemental Executive Retirement Plan; and the right to exercise all vested, unexercised stock options
Additionally, upon retirement or execution of a Separation Agreement in the event of termination without cause, termination for good reason, or termination (other than for cause) six months after a change-in-control, the executive officer shall receive the following: all unvested equity awards shall vest; the Company shall pay the 401(k) match equal to the amount due if the executive had remained employed through the end of the year; the Company shall continue to pay premiums on the Long Term Care Insurance Policy for Mr. Ford and his spouse; and the Company shall provide health care coverage for executive officer and spouse for 15 years following termination of employment for Messrs. Ford and Anderson.
Under the Separation Agreement, the executive officer may elect not to compete with the Company, in which case the executive officer will continue to receive a monthly payment equal to one-twelfth (1/12th) of the executive officer’s base salary, for each month executive officer satisfies the terms of non-compete. Messr. Ford may receive such payments for up to two years after the separation date, while the time period for such payments to Messrs. Anderson, Biddle, Erb, and Danelson is one year.
Benefits if Termination is result of Death
The Company maintains life insurance policies on Messrs. Ford and Anderson and has entered into agreements to provide a death benefit to the executive’s estate in the amount of $150,000 and $250,000 for Messrs. Ford and Anderson, respectively. In addition to these insurance benefits and the other benefits to which the executive generally is entitled upon termination, agreements for Messrs. Ford and Anderson state that the Company will maintain health insurance for the deceased executive’s spouse for a period of 15 years after the date of death, if death occurred before retirement; or for 15 years after the date of separation if death occurred at or after retirement. The spouse may elect to continue the Long-Term Care Insurance, in which case the additional premiums paid by the Company shall reduce any death benefit.
Supplemental Executive Retirement Plan
Messrs. Ford, Danelson, and Anderson are parties to Supplemental Employee Retirement Plan (“SERP”) agreements with the Company. The benefits under these agreements are outlined under the section titled “SERP Agreements.” Mr. Erb became eligible for and a party to a Supplemental Employee Retirement Plan (“SERP”) in January 2013.
Change-In-Control
Under the employment agreements and SERP agreements, a “change-in-control” is defined as any of the following events: a corporate transaction in which more than 50% of the voting power after such transaction is held by persons other than persons holding such voting power before the transaction; a person or designated group of persons pursuant to Rule 13D of the Securities Exchange Act of 1934, acquires 25% or more of Company’s voting securities; a person or group acquires 10% of the voting securities and such person or the group’s nominee becomes Chairman of the Board; within a two-year period a majority of the Board of Directors changes; or the Company sells substantially all of its assets.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2012
The following table summarizes the outstanding equity awards as of December 31, 2012.
(1) These options are fully vested.
(2) These options vest on each anniversary of the grant date over seven (7) years as follows: 5%, 5%, 10%, 10%, 20%, 20% and 30%, and will be fully vested 4/21/15.
(3) These options vest on each anniversary of the grant date over seven (7) years as follows: 5%, 5%, 10%, 10%, 20%, 20% and 30% and will be fully vested 9/2/15.
(4) These stock awards vest on each anniversary of the grant date over seven (7) years as follows: 5%, 5%, 10%, 10%, 20%, 20% and 30% and will be fully vested 2/8/18.
(5) These options vest on each anniversary of the grant date over seven (7) years as follows: 5%, 5%, 10%, 10%, 20%, 20% and 30%, and will be fully vested 5/01/14.
(6) These options vest on each anniversary of the grant date over seven (7) years as follows: 5%, 5%, 10%, 10%, 20%, 20% and 30%, and will be fully vested 5/01/15.
SERP AGREEMENTS
The Company has Supplemental Employee Retirement Plan Agreements (“SERP”) with three (3) of the named executive officers. The following table summarizes the benefits available to each named executive officer under his respective SERP as of December 31, 2012.
PENSION BENEFITS
The present value of the accumulated benefit for each of the named executive officers is the accrual balance as of December 31, 2012. A discount rate of 4.77% was used in calculating the accrual balance.
Mr. Ford, Mr. Anderson, and Mr. Danelson each are parties to a SERP Agreement. The agreements provide for a maximum benefit of 15 years. The benefit is calculated as a percentage of their annual base salary at the time of separation from service. The benefit is payable at the latter of reaching normal retirement age or separation of service. Based on a separation of service at age sixty five (65), Mr. Ford’s, Mr. Anderson’s, and Mr. Danelson’s agreements provide for benefits equal to 42%, 40%, and 38%, respectively of their base salary. The agreements for Mr. Ford and Mr. Anderson accelerate vesting in the event of involuntary termination without cause or voluntary termination with cause. However, Mr. Ford and Mr. Anderson have each executed Compensation Modification Agreements, which among other things does not allow for the acceleration of benefits during the period which the Company continues to be a TARP recipient.
NONQUALIFIED DEFERRED COMPENSATION
The Company provides a Deferred Compensation Program in which each named executive may elect to participate. The Company’s Deferred Compensation Plan provides for each participant to defer receipt of up to 75% of their annual salary and bonus. Until a change-in-control or distributions begin, the Company is obligated to pay interest on balances in the account at an annual interest rate equal to the Return on Equity for the prior fiscal year. No earnings were credited to the accounts for 2012. After payments begin or after a change-in-control event, the account balance accrues interest at a rate equal to the then current Prime Rate as published in the Wall Street Journal’s, “Money Rate” section. Each participant has pre-elected a form of distribution as either a lump sum distribution or equal monthly installments over a set period of time. Participants are deemed unsecured creditors of the Company. No executives participated in any such program for the fiscal-year ended December 31, 2012.
NONQUALIFIED DEFERRED COMPENSATION FOR
Potential Payments Upon Termination
The following tables estimate the benefits that each named executive would receive in the event of termination and/or change-in-control. For purposes of this table, the termination event or change-in-control is deemed to have occurred on December 31, 2012. While payments may contractually be made on a monthly basis, the following tables present the information as annual payments. These tables also assume the Company is not a TARP recipient and that payments would be made under the terms of the original respective agreements and not subject to the CPP Compensation Regulations. Under the terms of the employment agreements with certain named executives and under certain termination scenarios, unvested stock options accelerate; however, the closing price of PremierWest Bancorp securities on December 31, 2012, was substantially below the exercise price of all stock options. Therefore, no value is attributed to acceleration upon termination in the table below.
(1) Payments for Messrs. Ford, Danelson, and Anderson are for a period of fifteen (15) years following separation of service and are based on a percentage of their respective base salary at the time of termination. The percentage is determined based on the reason for termination. Messrs. Biddle and Erb were not eligible to participate in a SERP agreement at December 31, 2012.
(2) The Company has agreed to provide the executives and their spouse health insurance coverage for a period of fifteen (15) years following termination. The Company has also agreed to continue making long term care premium payments under certain termination scenarios.
(3) The deferred compensation payments are payments on amounts of income previously earned for which receipt was deferred for tax purposes, plus interest accrued. The annual payment indicated in the table represents the balance of the executives account divided by the previously elected term for distribution.
(4) Each executive, under certain termination scenarios, may elect to enter into a non-compete agreement for a period of one or two years. The executive would receive one-twelfth (1/12th) of his annual base salary for each month that he abides by the terms of the non-compete agreement. The Agreements for Messr. Ford provides for a non-compete period of up to two years. Agreements for Messrs. Danelson, Anderson, Erb, and Biddle provide for a non-compete period of up to one year.
(5) The Company maintains life insurance policies on Messrs. Ford and Anderson and has entered into agreements to provide a death benefit to the executives’ beneficiaries in the amount of $150,000 and $250,000 Messrs. Ford and Anderson, respectively. The executive is fully vested in this benefit if termination is a result of a disability; without cause; with good reason or the result of a change in control. All executives also participate in a group life insurance program available to all employees. The group program provides for a death benefit equal to one times the employee’s base salary with a maximum benefit of $100,000, provided death occurs prior to termination of employment.
(6) Amount shown represents annual payment.
(7) Amount shown is one-time lump sum payment.
(8) Payment shown would be made at time of death if death occurred following termination.
DIRECTOR COMPENSATION
During 2012, each director of Bancorp, including employee-directors, received a flat fee based on Board position and number of committees each sits on. See Director Compensation table below.
The Compensation Committee evaluated the director compensation practices of Bancorp compared to those of other similar sized banking entities and public companies in the Pacific Northwest and determined that Bancorp’s director compensation for 2012 was appropriate.
Pursuant to the terms of the Continuing Benefit Agreements and Director Deferred Compensation Agreements, each director may defer all or any portion of his director fees, which will accrue interest prior to distribution upon termination of service. Also, at the director’s expense, the director, their spouse and dependents may participate in group medical, dental, vision and accidental death and dismemberment insurance generally available to Bancorp employees.
In addition to the terms of the Continuing Benefit Agreements described above, the Company also provides post-retirement health insurance benefits to certain current directors and their spouses. These agreements provide for subsidized medical, dental, vision and other healthcare coverage or equivalent monetary compensation for life. The Company pays 100% of the premiums for the coverage provided. As of the end of 2012, the Company’s accrued liability obligation under the existing Continuing Benefit Agreements for the covered directors was $1,668,909.
DIRECTOR COMPENSATION
Directors listed below individually hold the following number of outstanding (vested and unvested) stock options as of December 31, 2012:
COMPENSATION COMMITTEE REPORT
The Compensation Committee is responsible for establishing and administering our executive compensation program. Within the parameters of the current program, as described in the Compensation Discussion and Analysis, the Committee annually reviews executive compensation and recommends to the Board for its approval appropriate modifications, including specific amounts and types of compensation for the executive officers. The Committee is responsible for establishing the compensation of the Chief Executive Officer and reviews for consideration by the Board the annual compensation of the other executive officers.
The Compensation Committee has met with management to review and discuss the content of the Compensation Discussion and Analysis. Based on our review and discussion, the Compensation Committee recommended to the full Board that the Compensation Discussion and Analysis be included in the annual report on Form 10-K and, as applicable, the Company proxy or information statement.
In accordance with the TARP Compensation Standards, the Committee must certify the completion of SEO and employee compensation reviews. The Compensation Committee certifies that:
1. It has reviewed with the senior risk officer the SEO compensation plans and has made all reasonable efforts to ensure that these plans do not encourage SEOs to take unnecessary and excessive risks that threaten the value of the Company;
2. It has reviewed with the senior risk officer the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to the Company; and
3. It has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of the Company to enhance the compensation of any employee.
Compensation Risk Narrative
In accordance with the TARP Compensation Standards, the Compensation Committee must also provide a narrative regarding risks associated with the Company’s compensation programs. The following describes compensation programs in place, a discussion of potential risks, and elements of the program that mitigate risk:
•
Stock Options/Restricted Share Awards: Employees, generally supervisory, may be awarded options to purchase stock or receive Restricted Share Awards, generally with a vesting period of seven years, with 50% of the vesting occurring during years six and seven.
Potential Risks: Equity based compensation could encourage actions to focus solely on stock price appreciation and, therefore, could encourage risk-taking.
Key Risk Related Mitigating Features: The vesting structure of the options is heavily weighted towards the latter years, thereby encouraging decisions that benefit the Company and its shareholders on a long term basis versus any specific, short-term period.
•
Deferred Compensation Agreements: Executive officers are eligible to participate in a Deferred Compensation Program. Under the terms of the agreements parties may defer receipt of a portion of their annual cash compensation. Compensation deferred is placed in a deferred compensation account for the benefit of the participant, and is not available for distribution until six months following a separation of service. The account is paid a rate of return equal to the average ROE achieved by the Company for the immediately preceding year. The participant is considered an unsecured creditor of the Company.
Potential Risks: The rate of return on amounts deferred is tied to an average ROE of the Company, which could cause the participant to focus on this financial measure to improve the annual return in a specific year.
Key Risk Related Mitigating Features: The ROE measure represents a small portion of the benefit in that it is only an annual interest component. Further, the participant is considered an unsecured creditor and has a vested interest in the long term success of the Company to ensure receipt of the stream of payments or lump sum payment following separation of service.
•
Supplemental Executive Retirement Plans (SERP): Executives may participate, subject to meeting Compensation Committee and Board approved participation criteria, in a SERP following completion of three years of service. A SERP provides for the executive to receive a percentage of their base salary for a specific period following normal retirement. The period is generally fifteen years and the percentage of base salary is generally up to 42% of base salary at the time of separation of service. The executive is considered an unsecured creditor of the Company.
Potential Risks: The SERP does not include features that are directly tied to any performance metric that would encourage an executive to manipulate results or to take on activity that threatens the long-term value of the institution.
Key Risk Related Mitigating Features: The payment is calculated on base salary at the time of separation of service and under most scenarios payments do not begin until the executive reaches normal retirement age and separates from service. The executive is considered an unsecured creditor. The executive has a vested interest in the long term success of the Company to ensure receipt of the fifteen year stream of payments. The long-term nature of the compensation is a key mitigating feature of SERP compensation.
The Committee does not believe that current compensation agreements or incentive programs encourage undue risk and in fact have been structured to encourage a long term stream of strong sustainable earnings. This conclusion is predicated on the fact agreements for executives are based on both net income achieved by the Company from year to year and that executives are considered unsecured creditors with a vested long term interest in the success of the Company. For those executives with SERP agreements this interest extends well past (15 years) separation of service. Additionally, the Board previously approved a Stock Ownership Policy requiring executive officers to hold a specified number of shares in the Company with restrictions on sales, thereby increasing their long term interest in the success of the Company. The Committee closely monitors compensation programs and has adopted an Incentive Compensation Policy that emphasizes strong oversight of and careful review of risk in incentive compensation programs.
Submitted by Compensation Committee Members:
Patrick G. Huycke, Chairman
John A. Duke
James L. Patterson
Brian R. Pargeter
Georges C. St. Laurent, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2012, none of PremierWest’s executive officers served as a member of the Board of Directors or Compensation Committee of any other entity that has one or more executive officers serving as a member of PremierWest Bancorp’s Board of Directors or Compensation Committee.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The table below sets forth, as of February 13, 2013, the number of shares of PremierWest capital stock beneficially owned by each person or entity known by PremierWest to own beneficially more than 5% of the outstanding shares of any class of stock, each director, each executive officer, shares held in the PremierWest 401(k) plan and all directors and executive officers as a group. The address for each of Georges St. Laurent and John Duke is c/o PremierWest Bancorp, 503 Airport Road, Medford, Oregon 97504.
(1) Represents shares deemed beneficially owned, including shares held in trusts, Individual Retirement accounts, SEP Accounts or by the individual’s spouse.
(2) Represents those shares held in the PremierWest Bancorp 401K Profit Sharing Plan for the benefit of the executive officer.
(3) Represents the total number of shares owned, and includes stock options and restricted shares exercisable within sixty (60) days.
(4) * indicates less than 1.0 percent
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, 2012:
Equity Compensation Plan Information
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
TRANSACTIONS WITH RELATED PERSONS
PremierWest Bank has deposit and lending relationships with many of its directors and officers, as well as with their affiliates. All loans to directors, officers and their affiliates were made in the ordinary course of business, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal credit risk or present other unfavorable features. All of the loans are current and all required payments thereon have been made. As of December 31, 2012, the aggregate outstanding amount of all loans to officers and directors was approximately $18.7 million.
Director Dennis Hoffbuhr was a borrower of PremierWest Bank with a variable rate commercial real estate secured loan originated in December 2001 in the amount of $900,000. During 2011 Mr. Hoffbuhr’s recurring income supporting this loan fell outside of our internal risk guidelines and as a result the rating was changed to “substandard”. The loan was never more than thirty (30) days past due, was on accrual status, and reported as a troubled debt restructuring (TDR). After consultation with bank regulators, the board of directors (with Mr. Hoffbuhr excused) approved an extension of the loan maturity to June 2012 to give the borrower additional time to resolve the issue. The loan was subsequently paid off on July 20, 2012.
The Company has a conflict of interest provision in its Code of Ethics, which requires all officers and directors to present potential conflicts of interest before the Board of Directors for review. Such conflicts routinely arise as a result of potential business relationships between the Bank and its officers and directors. The Company has adopted a written policy to address and review certain business relationships with officers and directors arising in the ordinary course of business with the Bank and its affiliates that could potentially be a conflict of interest or otherwise compromise the independent judgment of the Board members. The policy expressly exempts review of lending activities that are otherwise reviewed and approved by the Board of Directors and are on terms no more favorable than would be afforded an unrelated third party. Additionally, non-loan related transactions are reviewed if they exceed $5,000 in value.
The individual officer or director is required to bring all reviewable transactions to the attention of the Audit Committee, which makes an initial evaluation. In addition to Audit Committee members, any other Board member may participate in the evaluation process and may vote on the matter (other than the director party to the
transaction). Annually, the Company issues questionnaires to all of its executive officers and directors, inquiring as to any business relationships existing or entered into in the past fiscal year, or contemplated for the coming fiscal year.
During 2012, the law firm of Huycke, O’Connor, Jarvis & Lohman, LLP of which director Patrick Huycke is a partner was utilized for various legal issues by PremierWest Bank. It was determined that the use of the law firm that director Huycke is associated with did not jeopardize his ability to remain independent when carrying out his duties as a director of PremierWest Bancorp or its subsidiary, PremierWest Bank.
On December 28, 2012, PremierWest Bank sold real property classified as Other Real Estate Owned (OREO) to an entity controlled by the adult son of Director Georges C. St. Laurent, Jr., for $1.2 million. The transaction was not brought before the Audit Committee prior to closing, but the Audit Committee subsequently reviewed the transaction and recommended that the Board of Directors ratify the transaction. The Board of Directors, with Director St. Laurent not voting, ratified the transaction.
DIRECTOR INDEPENDENCE
The Board of Directors currently is comprised of fourteen members. In compliance with the NASDAQ listing standards, a majority of members of the Board of Directors are independent. The Board of Directors reviewed the relationships between non-management directors and PremierWest Bancorp or PremierWest Bank. Based on its review, the Board determined that John A. Duke, Patrick G. Huycke, Rickar D. Watkins, Brian R. Pargeter, Dennis N. Hoffbuhr, James L. Patterson, John B. Dickerson, Georges C. St. Laurent, Jr., Mary Carryer and Bruce Currier are all independent directors, as defined in the NASDAQ listing standards.
Because we are a community bank, one of the more important criteria for serving on the Board of Directors is a director’s active involvement in the communities in our markets. Consequently, many directors are actively involved in businesses in the communities in which they live. In making its determination of independence, the Board of Directors considered the various business relationships that exist between the Company and affiliates of individual directors and determined that each of these business relationships is in the ordinary course of business and any payment made was nominal in amount, immaterial, and did not affect the ability of each individual to exercise independent judgment in carrying out the responsibilities as a director.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
FEES PAID TO AUDITORS
1) Includes fees incurred for employee benefit plan audit services and out-of-pocket expenses.
2) Includes fees billed for the preparation of state and federal income tax returns, tax planning, tax credit research and analysis for tax reporting purposes.
3) Includes assistance with regulatory matters and interest rate risk review.
A) Accrual basis fees related to year-end audit, whether paid prior or subsequent to December 31.
B) Modified cash-basis fees represent all billings during the 12 month periods ended December 31.
PRE-APPROVAL POLICIES
All audit and non-audit services performed by Moss Adams LLP, and all audit services performed by other independent auditors, must be pre-approved by the Audit Committee. These services include, but are not limited to, the annual financial statement audit, audits of employee benefit plans, tax compliance assistance, tax consulting and assistance with executing our acquisition strategy. Moss Adams LLP, may not perform any prohibited services as defined by the Sarbanes-Oxley Act of 2002 including, but not limited to, any bookkeeping or related services, internal audit outsourcing, legal services, and performing any management or human resources functions.
The services performed by Moss Adams for the 2011 audit engagement were pre-approved by the Audit Committee at its March 15, 2011 meeting, in accordance with the Committee’s pre-approval policy and procedures. This policy describes the permitted audit, audit-related, tax, and other services (collectively, the “Disclosure Categories”) that the independent auditor may perform. The policy requires that a description of the services (the “Service List”) expected to be performed by the independent auditor in each of the Disclosure Categories be pre-approved annually by the Committee.
Services provided by the independent auditor during the following year that are included in the Service List were pre-approved following the policies and procedures of the Committee.
Any requests for audit, audit-related, tax, and other services not contemplated on the Service List must be submitted to the Committee for specific pre-approval and cannot commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings. However, the authority to grant specific pre-approval between meetings, as necessary, has been delegated to the Chair of the Audit and Compliance Committee. The Chair must update the Committee at the next regularly scheduled meeting of any services that were granted specific pre-approval.
In addition, although not required by the rules and regulations of the SEC, the Committee generally requests a range of fees associated with each proposed service on the Service List and any services that were not originally included on the Service List. Providing a range of fees for a service incorporates appropriate oversight and control of the independent auditor relationship, while permitting the Company to receive immediate assistance from the independent auditor when time is of the essence.
The policy contains a de minimis provision that operates to provide retroactive approval for permissible non-audit services under certain circumstances. The provision allows for the pre-approval requirement to be waived if all of the following criteria are met:
1. The service is not an audit, review or other attest service;
2. The aggregate amount of all such services provided under this provision does not exceed $5,000 per fiscal year if approved by management or $50,000 per fiscal year if approved by the Chair of the Committee;
3. Such services were not recognized at the time of the engagement to be non-audit services (to date the SEC has not provided any guidance with respect to determining whether or not a service was “recognized” at the time of the engagement. We believe that the SEC intended the term “recognized” to mean “identified”);
4. Such services are promptly brought to the attention of the Audit and Compliance Committee and approved by the Audit and Compliance Committee or its designee; and
5. The service and fee are specifically disclosed in the Proxy Statement as meeting the de minimis requirements.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
The consolidated financial statements for the fiscal years ended December 31, 2012, 2011 and 2010, are included as Item 8 of this report.
(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
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, 2012, 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.
# 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.
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/ JAMES M. FORD
Date: March 18, 2013
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.