SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
--------------
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
---------- ----------
Commission File Number 333-96209
-----------
PREMIERWEST BANCORP
(Exact name of registrant as specified in its charter)
OREGON 93-1282171
(State of Incorporation) (I.R.S. Employer
Identification Number)
503 Airport Road
P.O. Box 40
Medford, Oregon 97504
(Address of principal executive offices)
(Zip Code)
(541) 618-6003
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of latest practicable date: 11,528,193 shares as of July 31,
2002.
Disclosure Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of Section
21D of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are based on the beliefs of the Company's management and on
assumptions made by and information currently available to management. All
statements other than statements of historical fact regarding the Company's
financial position, business strategy and plans and objectives of management for
future operations of the Company are forward-looking statements. When used
herein, the words "expect to", "plan", "anticipate", "believe", "estimate", and
"intend" and words or phrases of similar predictive nature, as they relate to
the Company or management, are intended in part to identify forward-looking
statements. Examples of forward-looking statements include, but are not limited
to (i) projections of revenues, income or expenses, earnings per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management, or
Board of Directors, including the introduction of new products or services,
plans for expansion, acquisitions or future growth, or estimates or predictions
of actions by customers, vendors, competitors or regulatory authorities, (iii)
statements about future economic performance and potential economic conditions,
and (iv) statements of assumptions underlying other statements about the Company
and its business. Although management believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Forward-looking statements
are subject to various risks and uncertainties, which could cause actual results
to differ materially and adversely from those indicated by the forward-looking
statements. These risks and uncertainties include the Company's ability to
maintain or expand its market share and net interest margins, or to implement
its marketing and growth strategies. Further, actual results may be affected by
the Company's ability to compete on price and other factors with other financial
institutions; customer acceptance of new products and services; general trends
in the banking industry and the regulatory environment, as they relate to the
Company's cost of funds and returns on assets. In addition, there are risks
inherent in the banking industry relating to collectibility of loans and changes
in interest rates. The reader is advised that this list of risks is not
exhaustive and should not be construed as any prediction by the Company as to
which risks would cause actual results to differ from those indicated by the
forward-looking statements.
Form 10-Q
Table of Contents
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.....................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................13
Part II OTHER INFORMATION
Item 1. Legal Proceedings..............................................16
Item 4. Submission of Matters to a Vote of Securities Holders..........16
Item 6. Exhibits and Reports on Form 8-K...............................17
Signatures................................................................17
Certifications............................................................18
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
PREMIERWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in 000's)
(UNAUDITED)
June 30, December 31,
2002 2001
---------- ----------
ASSETS
CASH AND DUE FROM BANKS $ 25,070 $ 19,731
FEDERAL FUNDS SOLD AND INTEREST-BEARING DEPOSITS 6,474 15,000
---------- ----------
Total cash and cash equivalents 31,544 34,731
INVESTMENT SECURITIES AVAILABLE-FOR-SALE 43,029 65,328
LOANS, NET OF ALLOWANCE FOR LOAN LOSSES 379,134 352,791
FEDERAL HOME LOAN BANK STOCK 1,643 1,595
PREMISES AND EQUIPMENT, NET 18,518 18,286
ACCRUED INTEREST AND OTHER ASSETS 16,407 15,579
---------- ----------
TOTAL ASSETS $ 490,275 $ 488,310
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
DEPOSITS:
Non-interest-bearing checking $ 85,683 $ 82,685
Savings and interest-bearing demand 206,474 187,372
Time 128,488 159,998
---------- ----------
Total deposits 420,645 430,055
FEDERAL HOME LOAN BANK BORROWINGS 10,746 5,566
REPURCHASE AGREEMENTS 9,526 5,480
EMPLOYEE STOCK OWNERSHIP PLAN NOTES PAYABLE 64 162
---------- ----------
Total borrowings 20,336 11,208
OTHER LIABILITIES 2,945 3,353
---------- ----------
Total liabilities 443,926 444,616
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - no par value; 1,000,000 shares authorized;
none issued - -
Common stock - no par value; 20,000,000 shares authorized;
and 11,527,193 and 11,397,468 shares issued and outstanding
in 2002 and 2001, respectively 33,493 29,480
Retained earnings 12,402 14,008
Unearned Employee Stock Ownership Plan compensation (64) (162)
Accumulated other comprehensive income 518 368
---------- ----------
Total shareholders' equity 46,349 43,694
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 490,275 $ 488,310
========== ==========
See accompanying notes
4
PREMIERWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in 000's, Except for Earnings per Share Data)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------- ------------ ----------- -----------
Interest income:
Interest and fees on loans $ 7,330 $ 6,739 $ 14,628 $ 12,451
Interest-earning deposits 12 353 64 481
Investment securities 691 1,008 1,491 2,021
------------- ------------ ----------- -----------
Total interest income 8,033 8,100 16,183 14,953
Interest expense:
Deposits 1,981 3,513 4,337 6,453
Other borrowings 126 126 228 309
------------- ------------ ----------- -----------
Total interest expense 2,107 3,639 4,565 6,762
------------- ------------ ----------- -----------
Net interest income 5,926 4,461 11,618 8,191
Loan loss provision 295 193 587 355
------------- ------------ ----------- -----------
Net interest income after
loan loss provision 5,631 4,268 11,031 7,836
Non-interest income
Service fees 576 372 1,103 762
Mortgage loan brokerage fees 410 427 868 666
Commissions from investment services 208 29 314 67
Net gains on sale of investment securities 141 11 285 35
Other 33 112 76 127
------------- ------------ ----------- -----------
1,368 951 2,646 1,657
Non-interest expense:
Salaries and employee benefits 3,114 2,476 6,265 4,440
Occupancy & equipment, net 1,022 779 2,007 1,334
Communications 274 191 570 319
Professional fees 215 95 389 175
Supplies 101 124 244 191
Other 600 649 1,145 1,155
------------- ------------ ----------- -----------
Total non-interest expense 5,326 4,314 10,620 7,614
------------- ------------ ----------- -----------
Income before income taxes 1,673 905 3,057 1,879
Provision for income taxes 546 305 1,023 629
------------- ------------ ----------- -----------
Net income before cumulative effect
of an accounting change 1,127 600 2,034 1,250
Cumulative effect of an accounting change,
net of tax (99) - (99) -
------------- ------------ ----------- -----------
Net income $ 1,028 $ 600 $ 1,935 $ 1,250
============= ============ =========== ===========
Earnings per common share:
Basic $ 0.10 $ 0.05 $ 0.18 $ 0.12
============= ============ =========== ===========
Diluted $ 0.10 $ 0.05 $ 0.18 $ 0.12
============= ============ =========== ===========
Per share cumulative effect of an
accounting change, net of tax $ (0.01) $ - $ (0.01) $ -
============= ============ =========== ===========
Basic $ 0.09 $ 0.05 $ 0.17 $ 0.12
============= ============ =========== ===========
Diluted $ 0.09 $ 0.05 $ 0.17 $ 0.12
============= ============ =========== ===========
See accompanying notes
5
PREMIERWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in 000's)
(UNAUDITED)
Accumulated
Unearned other Total
Comprehensive Retained ESOP comprehensive Common shareholders'
income earnings compensation income (loss) stock equity
------------ ----------- ------------ ------------ ---------- -----------
BALANCE - JANUARY 1, 2001 $ 14,514 $ (383) $ (368) $ 18,679 $ 32,442
Comprehensive income:
Net income $ 1,250 1,250 - - - 1,250
Unrealized gains
on investment securities
available-for-sale,
net of taxes 658 - - 658 - 658
------------
Comprehensive income $ 1,908
============
Common stock issued to
shareholders of Timberline Bancshares, Inc. - - - 7,995 7,995
Stock dividend paid (5%) (2,546) - - 2,546 -
ESOP compensation expense - 111 - 34 145
Tax benefit of stock options exercised - - - 31 31
Stock options exercised - - - 106 106
----------- ------------ ------------ ---------- -----------
BALANCE - JUNE 30, 2001 $ 13,218 $ (272) $ 290 $ 29,391 $ 42,627
=========== ============ ============ ========== ===========
BALANCE - JANUARY 1, 2002 $ 14,008 $ (162) $ 368 $ 29,480 $ 43,694
Comprehensive income:
Net income $ 1,935 1,935 - - - 1,935
Unrealized gains
on investment securities
available-for-sale (net of taxes),
net of reclassification adjustment
for gains included in the income
statement of approximately $188
(net of $97 in taxes) 150 - - 150 - 150
------------
Comprehensive income $ 2,085
============
Stock dividend paid (5%) (3,541) - - 3,541 -
ESOP compensation expense - 98 - 43 141
Tax benefit of stock
options exercised - - - 162 162
Stock options exercised - - - 267 267
----------- ------------ ------------ ---------- -----------
BALANCE - JUNE 30, 2002 $ 12,402 $ (64) $ 518 $ 33,493 $ 46,349
=========== ============ ============ ========== ===========
See accompanying notes
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in 000's)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
------------------------
June 30, June 30,
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,935 $ 1,250
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 984 661
Amortization of premiums
on investment securities, net 28 25
Dividends on Federal Home Loan Bank stock (48) (50)
Net securities gains (285) (35)
Net (gain) loss on sale of property (43) 57
Loan loss provision 587 355
Recognition of deferred compensation relating to ESOP 141 145
(Increase) decrease in accrued interest and other assets (51) 20
Decrease in accrued interest and other liabilities (459) (194)
---------- ----------
Net cash provided by operating activities 2,789 2,234
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities, available-for-sale (7,056) (19,867)
Proceeds from sales of investment securities, available-for-sale 12,482 -
Proceeds from calls and maturities of investment
securities, available-for-sale 16,602 35,190
Loan originations, net (26,813) (32,125)
Proceeds from sale of property 75 815
Purchase of premises and equipment (1,248) (3,158)
Acquired net assets of Timberline, net of cash and cash
equivalents acquired of $24,314 - 17,835
---------- ----------
Net cash used by investing activities (5,958) (1,310)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (9,410) 22,928
Net borrowings 9,125 683
Proceeds from exercise of stock options 267 106
---------- ----------
Net cash (used) provided by financing activities (18) 23,717
---------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,187) 24,641
CASH AND CASH EQUIVALENTS - Beginning of the period 34,731 18,036
---------- ----------
CASH AND CASH EQUIVALENTS - End of the period $ 31,544 $ 42,677
========== ==========
See accompanying notes
7
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2002
1. SUMMARY OF ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------------------
Organization and merger: PremierWest Bancorp was incorporated in the
state of Oregon on November 26, 1999. Effective on May 8, 2000, in a
reorganization and merger accounted for as a pooling-of-interests,
PremierWest Bancorp became the holding company for PremierWest Bank
(formerly, Bank of Southern Oregon); United Bancorp ("United") merged
with and into PremierWest Bancorp and United's wholly-owned subsidiary,
Douglas National Bank, merged with and into PremierWest Bank.
On April 16, 2001, PremierWest Bancorp completed the acquisition of
Timberline Bancshares, Inc. and its wholly-owned subsidiary, Timberline
Community Bank ("Timberline"). The acquisition was accounted for using
the purchase method of accounting. Accordingly, PremierWest Bancorp has
recorded the assets and liabilities of Timberline at their respective
fair values at the time of the completion of the merger and the results
of Timberline have been included with those of PremierWest Bancorp since
the date of the acquisition. The financial statement data for the periods
presented are not comparable as a result of the acquisition of Timberline
using the purchase method of accounting (see Note 8).
PremierWest Bank, including its subsidiaries, serves Jackson, Josephine,
Douglas, and Klamath counties of Southern Oregon and Siskiyou and Shasta
counties of Northern California.
Basis of presentation: The condensed consolidated financial statements
include the accounts of PremierWest Bancorp and its wholly owned
subsidiary, PremierWest Bank, and the PremierWest Bank's wholly owned
subsidiaries, PremierWest Investment Services, Premier Finance Company,
and Blue Star Properties, Inc. (collectively, "the Company" or "the
Bank"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The interim condensed consolidated financial statements are not audited,
but include all adjustments that management considers necessary for a
fair presentation of the results of operations for such interim periods.
In preparing the condensed consolidated financial statements, management
is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance sheets
and income and expenses for the periods. Actual results could differ from
those estimates.
Balance sheet data as of December 31, 2001 was derived from audited
financial statements and does not include all disclosures contained in
the 2001 Annual Report on Form 10-K. The interim condensed consolidated
financial statements should be read in conjunction with the Company's
2001 consolidated financial statements, including the notes thereto,
included in the 2001 Annual Report to Shareholders. The reader should
keep in mind that the results of operations for the interim periods shown
in the accompanying condensed consolidated financial statements are not
necessarily indicative of results for any future interim periods or the
entire fiscal year.
Method of accounting: The Company prepares its financial statements in
conformity with accounting principles generally accepted in the United
States. The Company utilizes the accrual method of accounting, which
recognizes income when earned and expenses when incurred. The preparation
of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of income and
expenses during the reporting period. Actual results could differ from
those estimates.
Stock dividends: On April 19, 2001, the Company declared a 5% stock
dividend payable to its shareholders of record June 1, 2001. On March 28,
2002, the Board of Directors of the Company declared a 5% stock dividend
payable to its shareholders of record June 1, 2002. All share and per
share data in the accompanying condensed consolidated financial
statements have been retroactively restated to reflect the stock
dividends.
8
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2002
2. INVESTMENT SECURITIES
---------------------
Investment securities available-for-sale at June 30, 2002 and December
31, 2001 consisted of the following:
2002
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
(Dollars in 000's) cost gains losses value
---------------- ---------------- --------------- ----------------
U.S. agency securities $ 19,004 $ 337 $ - $ 19,341
Mortgage-backed securities
and collateralized mortgage obligations 2,171 28 1 2,198
Obligations of states and
political subdivisions 16,623 413 2 17,034
Corporate bonds 3,968 64 - 4,032
Other securities 424 - - 424
---------------- ---------------- --------------- ----------------
Total $ 42,190 $ 842 $ 3 $ 43,029
================ ================ =============== ================
2001
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
(Dollars in 000's) cost gains losses value
---------------- ---------------- --------------- ----------------
U.S. agency securities $ 31,263 $ 453 $ 35 $ 31,681
Mortgage-backed securities
and collateralized mortgage obligations 11,669 161 11 11,819
Obligations of states and
political subdivisions 16,255 162 84 16,333
Corporate bonds 3,971 - 50 3,921
Other securities 1,574 - - 1,574
---------------- ---------------- --------------- ----------------
Total $ 64,732 $ 776 $ 180 $ 65,328
================ ================ =============== ================
At June 30, 2002, approximately $42.6 million in investment securities
available-for-sale were pledged to secure public deposits and nonpublic
deposits and borrowings.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
-----------------------------------
The composition of the loan portfolio at June 30, 2002 and December 31, 2001 was
as follows:
(Dollars in 000's) 2002 2001
---------- ----------
Commercial $ 101,561 $ 80,866
Real estate - construction 57,199 59,754
Real estate - other 189,648 175,047
Consumer installment 34,224 36,110
Other 2,807 6,616
---------- ----------
385,439 358,393
Less:
Allowance for loan losses 5,202 4,825
Deferred loan fees 1,103 777
---------- ----------
Loan, net $ 379,134 $ 352,791
========== ==========
Impaired loans, on which the accrual of interest had been discontinued,
were approximately $3.8 million and $3.7 million at June 30, 2002 and
December 31, 2001, respectively.
9
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2002
A summary of changes in the allowance for loan losses for the six months ended
June 30, 2002 and 2001 were as follows:
(Dollars in 000's) 2002 2001
-------- --------
Balance - Beginning of the period $ 4,825 $ 3,476
Loans charged-off (266) (77)
Loan recoveries 56 36
Loan loss provision 587 355
Allowance for loan losses acquired from Timberline - 676
-------- --------
Balance - End of the period $ 5,202 $ 4,466
======== ========
4. LINE OF CREDIT AND OTHER BORROWINGS
-----------------------------------
The Company has a line of credit available with the Federal Home Loan
Bank of Seattle (FHLB) for up to approximately $73 million as of June 30,
2002. This line of credit is secured by restricted FHLB stock owned by
the Company and is limited to 15% of the Bank's total assets and by the
amount of FHLB stock held by the Bank. Interest and principal payments
are due monthly on any outstanding borrowings. As of June 30, 2002, the
Company had $5.5 million in advances on short-term advances from FHLB
under the line of credit. As of December 31, 2001, the Company had no
advances from the FHLB under the line of credit. The Company has also
borrowed long-term funds from the FHLB against this line of credit,
aggregating approximately $5.2 million and $5.6 million as of June 30,
2002 and December 31, 2001, respectively. As of June 30, 2002, $4.7
million is due August 28, 2008, and the remaining $500,000 is due at
various times through February 2014. The Company is making monthly
principal payments of approximately $53,000 plus interest at rates of
5.82% to 7.63%.
Borrowings of approximately $9.5 million and $5.5 million at June 30,
2002 and December 31, 2001, relate to repurchase agreements used for
customer overnight sweep accounts. The cost of these funds at June 30,
2002 is an average annual rate of interest of approximately 1.34%.
Certain investment securities, as required, have been pledged as
collateral to fully secure the long-term debt and the repurchase
agreements.
Additionally, as of June 30, 2002, the Company has approximately $20
million in available borrowings through lines of credit with
correspondent banks and through the Federal Reserve Bank's discount
window.
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
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 condensed 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. As of June 30, 2002, the Company has $57.7 million
of commitments to extend credit to customers and $3 million of standby
letters of credit.
In the ordinary course of business, the Bank becomes involved in various
litigation arising from normal banking activities. In the opinion of
management, the ultimate disposition of these actions will not have a
material adverse effect on the Bank's consolidated financial position or
results of operations.
6. EARNINGS PER SHARE
------------------
The Company's basic earnings per common share is computed by dividing net
income by the weighted average number of common shares outstanding during
the period, retroactively adjusted for all stock dividends. The Company's
diluted earnings per common share is computed by dividing net income by
the weighted-average number of common shares outstanding plus dilutive
common shares related to stock options, retroactively adjusted for all
stock dividends.
10
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2002
Three-months ended June 30, 2002 and 2001:
------------------------------------------
Weighted average number of common shares: 2002 2001
----------- -----------
Basic earnings per common share 11,467,000 11,012,000
Diluted earnings common per share 11,554,000 11,110,000
Six-months ended June 30, 2002 and 2001:
------------------------------------------
Weighted average number of common shares: 2002 2001
----------- -----------
Basic earnings per common share 11,486,000 10,250,000
Diluted earnings common per share 11,548,000 10,348,000
7. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 discontinues the practice of
amortizing goodwill and requires that goodwill be continually evaluated
for impairment and be written-down when appropriate. SFAS No. 142 also
requires that other intangible assets that have been separately
identified and accounted for continue to be amortized over a determinable
useful life. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Application of the non-amortization provisions of SFAS
No. 142 have eliminated the Bank's amortization of goodwill beginning
with the six months ended June 30, 2002. In June 2002, the Bank performed
the first of the required goodwill impairment tests to determine if an
impairment loss should be recognized. Adoption of SFAS No. 142 requires
that a review be performed of the valuation of goodwill at all relevant
business unit levels. Management determined the effect of these
impairment tests on the Bank's consolidated financial position and
results of operations recognizing a $99,000 goodwill impairment loss, net
of $51,000 in related taxes, due to an acquisition of a finance company
in October 2000. Analyses of other recorded goodwill components indicate
that no additional impairment of asset values exists.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of long-lived assets
and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. Management does not expect
that the adoption of SFAS No. 143 will have a material effect on the
Bank's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," and provides guidance on the classification and accounting
for such assets when held for sale or abandonment. SFAS No. 144 became
effective for fiscal years beginning after December 15, 2001. The Bank's
adoption of SFAS No. 144 did not have a material effect on its
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." This Statement rescinds FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an
amendment of that Statement, FASB Statement No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." This Statement also
rescinds FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting
for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. Management does not expect that the adoption of SFAS
No. 145 will have a material effect on the Bank's consolidated financial
statements.
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." This Statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
statement is effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. Management
does not expect that the adoption of SFAS No. 146 will have a material
effect on the Bank's consolidated financial statements.
11
PREMIERWEST BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2002
8. ACQUISITION OF TIMBERLINE BANSCHARES, INC.
------------------------------------------
On April 16, 2001, the Company completed the acquisition of Timberline
Bancshares, Inc. and its wholly-owned subsidiary, Timberline Community
Bank. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities of Timberline have
been recorded by the Company at their respective estimated fair values at
the time of the completion of the transaction and the results of
Timberline have been included with those of the Company since the date of
the acquisition. As of June 30, 2002, the accompanying condensed
consolidated balance sheet included approximately $6.0 million in
goodwill related to this acquisition.
The estimated fair values of net assets acquired at the acquisition date
are summarized as follows:
(Dollars in 000's)
Cash and due from banks $ 4,614
Federal funds sold 19,700
Investment securities 10,159
Loans, net of allowance for loan losses 56,040
Property and equipment 2,847
Other assets 8,604
-----------------
Total assets acquired $ 101,964
=================
Deposits $ 86,800
Other liabilities 783
-----------------
Total liabilities assumed 87,583
Net assets acquired 14,381
-----------------
$ 101,964
=================
The following pro forma information presents the Company's consolidated
results of operations as if the acquisition of Timberline had occurred at
the beginning of the six-month period ended June 30, 2001 presented
below. The pro forma information does not purport to be indicative of the
actual results of operations that would have occurred had the
transactions taken place at the beginning of the six-month period
presented or of future results of operations.
(Dollars in 000's, except earnings per share) Six-months ended June 30,
---------------------------
2002 2001
------------ -----------
Actual Pro Forma
------------ -----------
Total interest and non-interest income $ 18,829 $ 18,700
Net income $ 1,935 $ 1,370
Basic earnings per common share $ 0.17 $ 0.12
Diluted earnings per common share $ 0.17 $ 0.12
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HIGHLIGHTS
- ----------
Effective May 8, 2000, PremierWest Bancorp and its subsidiaries consummated a
merger among Bank of Southern Oregon, which changed its name to PremierWest
Bank, and United Bancorp and its wholly owned subsidiary, Douglas National Bank.
The transaction was accounted for as a pooling of interest.
On April 16, 2001, the Company completed the acquisition of Timberline
Bancshares, Inc. and its wholly-owned subsidiary, Timberline Community Bank
("Timberline"). The acquisition was accounted for using the purchase method of
accounting. Accordingly, the Company has recorded the assets and liabilities of
Timberline )at their fair market value, and the results of Timberline have been
included with those of the Company since the date of the acquisition. The
unidentified intangible assets related to the excess of the Company's purchase
price over the estimated net fair value of the assets acquired and liabilities
assumed is reported as goodwill and is tested periodically for impairment. The
financial statement data for the six-month periods presented are not comparable
as a result of the acquisition of Timberline using the purchase method of
accounting.
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
- -------------------------------------------------
The Company had net income of $1,028,000, after a $99,000 goodwill impairment
charge (net of tax), for the three months ended June 30, 2002, which was an
increase of $428,000 (or 71.3%) compared to the same period in 2001. This
increase is due mainly to a $1.9 million increase in net interest income and
non-interest income offset by an increase of $1.0 million in non-interest
expense and applicable income taxes over the comparative three-month period
ended June 30, 2001.
The following table presents information regarding yields on interest-earning
assets, expense on interest-bearing liabilities, net interest spread, net yields
on average interest-earning assets, return on average assets and return on
average equity for the periods indicated (dollars in thousands):
Analysis for the three-month period ended Increase
June 30, 2002 and 2001 2002 2001 (Decrease) %Change
- ---------------------- ------------ ----------- ------------ ------------
Average fed funds sold and investments $ 58,549 $ 103,719 $ (45,170) -43.6%
Average gross loans 375,696 297,968 77,728 26.1%
Average interest earning assets 434,245 401,687 32,558 8.1%
Average interest bearing liabilities 437,674 411,865 25,809 6.3%
Average total assets 485,096 455,245 29,851 6.6%
Average equity 45,699 37,500 8,199 21.9%
Average yield earned (1) 7.47% 8.14% -0.7% -8.2%
Average rate paid 1.93% 3.54% -1.6% -45.5%
------------ ----------- ------------
Net interest spread 5.54% 4.60% 0.9% 20.4%
============ =========== ============
Net interest income to average
interest earning assets 5.47% 4.45% 1.0% 22.9%
Return on average assets 0.85% 0.53% 0.3% 60.4%
Return on average equity 9.02% 6.42% 2.6% 40.5%
Efficiency ratio (2) 73.01% 79.71% -6.7% -8.4%
Notes:
- ------
(1) Tax equivalent at a 34% rate
(2) Non-interest expense divided by net interest income plus non-interest
income
NET INTEREST INCOME. Net interest income before the loan loss provision
increased $1.5 million for the three-month period ended June 30, 2002 over the
same period in 2001. The increase was mainly due to an increase of $32.6 million
in the volume of average earning assets offset by a 70 basis point decrease in
overall yields. Though the Company's cost of funds decreased to 1.93%, the
volume of its interest-bearing liabilities increased $25.8 million during the
three-month period ended June 30, 2002 compared to the comparative period ended
June 30, 2001. As a result, the Company's interest rate margin increased 102
basis points.
LOAN LOSS PROVISION. The loan loss provision during the three-month periods
ended June 30, 2002 was $295,000 compared to $193,000 for the three-month period
ended June 30, 2001. The Company had net charge-offs of $235,000 during the
three-month period ended June 30, 2002, compared to net charge-offs of $33,000
for the corresponding period in 2001. Additions to the loan loss provision have
increased the allowance for loan losses to $5.2 million as of June 30, 2002,
compared to $4.5 million as of June 30, 2001. The increase in the allowance for
loan losses is primarily related to specific and inherent losses in the loan
portfolio. The Company's ratio of allowance for loan losses to total loans was
1.35% at June 30, 2002, compared to 1.37% at June 30, 2001. Loans of
approximately $1.7 million were put on non-accrual status during the second
quarter. Management believes that non-performing loans have been adequately
provided for in the allowance for loan losses. Non-performing assets (defined as
loans on non-accrual status, loans 90 days or more past due, and other real
estate owned) either specifically reserved or adequately collateralized totaled
$7.7 million and $6.9 million at June 30, 2002 and 2001, respectively.
13
NON-INTEREST INCOME. Non-interest income increased 43.8% to $1.4 million for the
three months ended June 30, 2002, as compared to $951,000 for the same period in
2001. Of this increase, $130,000 relates to net gains on sale of securities,
$17,000 relates to a decrease in mortgage brokerage fees, $179,000 relates to an
increase in the volume of investment services, and $204,000 relates to increases
in account service fees.
NON-INTEREST EXPENSE. Non-interest expense increased $1.0 million for the three
months ended June 30, 2002 as compared to the corresponding period in 2001.
Salaries and employee benefits increased $638,000 as a result of higher costs
associated with new branch personnel, severance costs incurred, increases in
commissions paid and employee benefits incurred during the three months ended
June 30, 2002 as compared to the corresponding period in 2001. Occupancy and
equipment expenses increased a total of $243,000 for the three months ended June
30, 2002, as compared to the same period in 2001. This increase was attributed
to depreciation and other building charges with new branch and office
facilities. Other non-interest expense increased by $131,000 due to the
Company's increase in loan collection efforts and in its growth in overall
operations.
The Company's efficiency ratio of 73.01% during the second quarter 2002 compared
to 79.71% for the second quarter of 2001 was mainly due to an increase in net
interest income and non-interest income.
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
- -----------------------------------------------
The Company had net income of $1,935,000 for the six months ended June 30, 2002,
which was an increase of $685,000 (or 54.8%) compared to the same period in
2001. This increase is due mainly to a $4.4 million increase in net interest
income and non-interest income offset by an increase of $3.0 million or 39.47%
in non-interest expense and applicable income taxes over the comparative
six-month period ended June 30, 2001.
The following table presents information regarding yields on interest-earning
assets, expense on interest-bearing liabilities, net interest spread, net yields
on average interest-earning assets, return on average assets and return on
average equity for the periods indicated (dollars in thousands):
Analysis for the six-month period ended Increase
June 30, 2002 and 2001 2002 2001 (Decrease) %Change
----------- ----------- ------------ ------------
Average fed funds sold and investments $ 66,098 $ 92,189 $ (26,091) -28.3%
Average gross loans 369,906 267,706 102,200 38.2%
Average interest earning assets 436,004 359,895 76,109 21.1%
Average interest bearing liabilities 438,247 359,461 78,786 21.9%
Average total assets 485,243 396,404 88,839 22.4%
Average equity 45,085 36,000 9,085 25.2%
Average yield earned (1) 7.54% 8.45% -0.9% -10.8%
Average rate paid 2.10% 3.79% -1.7% -44.6%
----------- ----------- ------------
Net interest spread 5.44% 4.66% 0.8% 16.7%
=========== =========== ============
Net interest income to average
interest earning assets 5.37% 4.59% 0.8% 17.0%
Return on average assets 0.80% 0.64% 0.2% 25.0%
Return on average equity 8.65% 7.00% 1.7% 23.6%
Efficiency ratio (2) 74.45% 77.32% -2.9% -3.7%
Notes:
(1) Tax equivalent at a 34% rate
(2) Non-interest expense divided by net interest income plus non-interest
income
NET INTEREST INCOME. Net interest income before the loan loss provision
increased $3.4 million for the six-month period ended June 30, 2002 over the
same period in 2001. Of this increase, $680,000 was contributed from the
Timberline operations. The remaining increase was mainly due to an increase of
$76 million in the volume of average interest earning assets offset by a
decrease of 91 basis points in the total yield on average interest earning
assets. Of the increase in average earning assets, $25 million relates to the
acquired Timberline operations. The Company's cost of funds decreased to 2.10%
with the volume of its interest-bearing liabilities increasing $78.8 million
($37 million relating to the acquired Timberline operations) during the six
months ended June 30, 2002 as compared to the corresponding period in 2001.
These factors caused the Company's interest rate margin to increase 78 basis
points to 5.37% from 4.59% for the comparative two periods. The decline in yield
was more than offset by decline in cost of funds.
LOAN LOSS PROVISION. The loan loss provision during the six-month periods ended
June 30, 2002 was $587,000 compared to $355,000 for the six-month period ended
June 30, 2001. The Company had net charge-offs of $210,000 during the six-month
period ended June 30, 2002, compared to net charge-offs of $41,000 for the
corresponding period in 2001. Additions to the loan loss provision have
increased the allowance for loan losses by $736,000 as of June 30, 2002 compared
to June 30, 2001, $676,000 of which relates to $56 million of loans acquired in
the Timberline transaction. The remaining increase in the allowance for loan
losses is primarily related to
14
specific and inherent losses in the loan portfolio.
NON-INTEREST INCOME. Non-interest income increased 59.7% to $2.6 million for the
six months ended June 30, 2002, as compared to $1.7 million for the same period
in 2001. Of this increase, $250,000 relates to net gains on sale of securities,
$202,000 relates to an increase in mortgage loan brokerage fees, $247,000
relates to an increase in the volume of investment services, $43,000 relates to
net gains on sale of property, and $341,000 relates to increases in account
service fees.
NON-INTEREST EXPENSE. Non-interest expense increased $3.0 million for the six
months ended June 30, 2002 as compared to the corresponding period in 2001.
Salaries and employee benefits increased $1.8 million ($384,000 of salaries
relates to Timberline, including $47,000 of non-compete payments) as a result of
higher costs associated with new branch personnel, severance and non-compete
payments, increases in commissions paid and employee benefits incurred during
the six months ended June 30, 2002 as compared to the corresponding period in
2001. Occupancy and equipment expenses increased a total of $673,000 ($142,000
relates to Timberline) for the six months ended June 30, 2002 as compared to the
same period in 2001 as a result of new branch and office facility charges. Other
non-interest expense increased by $508,000 due to the Company's increase in loan
collection efforts and costs associated with improved customer service efforts
in the northern California market.
The Company's efficiency ratio of 74.45% during the six-month period ended June
30, 2002 compared to 77.32% for the comparative period of 2001. If Timberline's
results of operations had been combined with PremierWest's as of the beginning
of 2001, the combined efficiency ratio would have been 78.0% for the six-month
period ended June 30, 2001.
FINANCIAL CONDITION. Total assets at June 30, 2002 increased slightly to $490
million since December 31, 2001. Loans grew $26.7 million to $384 million
accounting for 78% of total assets. Total deposits declined $9.4 million or
2.19% when compared to December 31, 2001 total deposits of $430.1 million. The
decline was primarily attributable to a $31.5 million reduction in certificates
of deposit, which was partially offset by increased volumes in both non-interest
bearing demand, savings and other interest bearing demand deposits. The
Company's loan to deposit ratio increased to 91.4% as of June 30, 2002 compared
to 80.1% as of June 30, 2001. With the acquisition of Timberline in April 2001,
the Company added approximately $8 million to capital. Adding net income from
PremierWest's operations, the Company's capital to assets ratio was 9.45% as of
June 30, 2002.
LIQUIDITY. Liquidity enables the Company to meet withdrawals of its deposits and
borrowing needs of its loan customers. The Company maintains its liquidity
position through maintenance of cash resources and the stability of its core
deposit base. Liquidity declined slightly during this quarter as a result of the
increase in loan volume. Excess cash was invested on a short-term basis into
federal funds sold and interest-earning deposits with the FHLB. As of June 30,
2002, the Company had $6.5 million in federal funds sold.
A further source of liquidity is the Company's ability to borrow funds by
maintaining a secured line-of-credit with the FHLB up to 15% of the Bank's total
assets. As of June 30, 2002, the Company had $5.5 in overnight borrowings and
$5.2 million in long-term borrowings from the FHLB against the Company's credit
line. Other borrowings of approximately $9.5 million relate to repurchase
agreements for customer overnight sweep accounts. The cost of all borrowed funds
was approximately 3.12% as of June 30, 2002. The Company also has established
credit lines of approximately $20 million through correspondent banks and
through the "discount window" with the Federal Reserve Bank of San Francisco.
At June 30, 2002, the Company had approximately $57.7 million in outstanding
commitments to extend credit for newly approved loans and available funds for
construction projects. Under the terms of construction loan commitments,
completion of specified project benchmarks must be certified before funds may be
drawn. In addition, it is anticipated that a portion of other commitments will
expire or terminate without funding. Management believes that the Company's
available resources will be sufficient to fund these commitments in the normal
course of business.
CAPITAL RESOURCES. Federal regulators require the calculation of risk-based
capital. This is an analysis that weights balance sheet and off-balance sheet
items for their inherent risk. It requires minimum standards for risk-based
capital-by-capital tier. As a minimum requirement, total risk-based capital
ratio should be at least 8.00%, Tier 1 capital ratio should be at least 4.00%,
and a leverage capital ratio should be at least 4.00%. At June 30, 2002, the
Company's estimated regulatory capital ratios were as follows: total risk-based
capital ratio of 10.38%, Tier 1 capital ratio of 9.14%, and a leverage capital
ratio of 8.03%. If the Company were fully leveraged, further growth could be
restricted to the level attainable through generation and retention of net
income or the Company could seek additional capital from outside sources.
MARKET RISK. Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises principally from interest
rate risk in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, as in credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be a significant
market risk, which could have the largest material effect on the Company's
financial condition and results of operations. Other types of market risks, such
as foreign currency exchange rate risk and commodity price risk, do not arise in
the normal course of the Company's business activities. The Company had not
experienced a significant change in market risk at June 30, 2002 as compared to
December 31, 2001. The Company is experiencing a reduction in cost of deposits
due to the increase in non-interest bearing deposits and a repricing opportunity
for previously acquired high-cost transactional time deposits, resulting in an
improvement in its interest rate margin.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. From time to time PremierWest or its wholly owned
subsidiary, PremierWest Bank (the "Bank"), is involved in various legal
proceedings that are incident to its business. The following information is
given with respect to the more significant pending matters.
Bernard J. Woodward, et al vs. Bank of Southern Oregon (nka PremierWest Bank),
Black Oak Construction, Inc., et al; Jackson County Circuit Court, Oregon filed
March 1, 2001.
This matter involves a claim that the Bank deposited checks payable to the
plaintiff and Black Oak Construction, a bank customer, in the amount of
$930,840, without plaintiff's consent. Plaintiff is seeking return of the
proceeds, interest and costs, and has indicated intent to seek punitive damages.
The Bank has denied liability and filed a counterclaim for approximately $1.16
million for losses incurred on other loans to Black Oak Construction. The
dispute involves the right of the Bank depositing proceeds from checks payable
to Black Oak Construction thereby repaying certain outstanding loans of Black
Oak Construction in connection with a joint construction project between the
plaintiff and Black Oak Construction. The Bank's counterclaim alleges the
plaintiff intentionally caused Black Oak Construction to under-bid other
construction contracts. Discovery in the case is not yet completed. No trial
date has been set. Management believes its actions were proper; however, a
favorable outcome in the litigation cannot be assured.
Bank of Southern Oregon (nka PremierWest Bank) vs. Barry Fronek, Stanley Kelly,
et al; Jackson County Circuit Court, Oregon filed in 1998; on Appeal to the
Court of Appeals, State of Oregon.
The Bank brought suit against the defendant borrowers and guarantors for
collection of a loan owing to the Bank. After a trial in 2001, the Bank was
awarded an amount of $1,200,000 plus interest and attorney fees. When the Bank's
borrowers failed to pay the loan, defendant Stanley Kelly, as guarantor, paid
the total judgment in the amount of $1,475,000. However, Mr. Kelly has appealed
the judgment as it applied to him arguing, among other things, that his guaranty
was obtained by the Bank fraudulently. Management believes the judgment will be
affirmed though no assurances can be given that the appellate court will uphold
the decision of the trial court judge.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Annual Shareholders' Meeting held May 23, 2002
Results of Shareholder Votes
Proposal 1: Percent Voting for
- ----------- ------------------
Election of Board Directors Yes No Abstain Director/Proposal
- --------------------------- --- -- ------- -----------------
John L. Anhorn 8,902,100 -0- 5,998 81.2%
Richard Hieb 8,902,100 -0- 5,998 81.2%
John A. Duke 8,902,405 -0- 5,693 81.2%
Patrick G. Huycke 8,902,405 -0- 5,693 81.2%
Thomas Becker 8,902,405 -0- 5,693 81.2%
Don L. Hilton 8,902,405 -0- 5,693 81.2%
Dennis N. Hoffbuhr 8,902,405 -0- 5,693 81.2%
Pete Martini 8,902,405 -0- 5,693 81.2%
James L. Patterson 8,900,025 -0- 8,073 81.2%
Rickar D. Watkins 8,902,405 -0- 5,693 81.2%
Jeffrey Chamberlain 8,902,405 -0- 5,693 81.2%
David Emmett 8,902,405 -0- 5,693 81.2%
Brian Pargeter 8,902,405 -0- 5,693 81.2%
Norman Fiock 8,898,330 -0- 9,768 81.2%
Richard Karchmer 8,902,405 -0- 5,693 81.2%
Proposal 2:
- -----------
Approval of 2002 Stock Option Plan 6,907,601 315,877 49,400 63.0%
- Broker non-votes - - 2,925,350
Quorum:
Allowed shares to vote: 10,964,339
Responded: 8,917,866
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) June 27, 2002 - Change in Certifying Public Accountants
(c) Certification Pursuant to Sarbanes-Oxley Act
SIGNATURES: Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: August 12, 2002
PREMIERWEST BANCORP
/s/ TOM ANDERSON
- -------------------------------------------------------------------
Tom Anderson, Chief Financial Officer
/s/ JOHN L. ANHORN
- -------------------------------------------------------------------
John L. Anhorn, Chief Executive Officer
17
Exhibit c
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This certification is given by the undersigned Chief Financial Officer and Chief
Executive Officer of PremierWest Bancorp ("PremierWest") in connection with the
Quarterly Report of PremierWest on Form 10-Q for the period ended June 30, 2002,
as filed with the United States Securities and Exchange Commission on the date
therein specified (the "Report"). Each of the undersigned hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of PremierWest.
/S/ TOM ANDERSON
Tom Anderson,
Senior Vice President and Chief Financial Officer
August 12, 2002
/s/ JOHN L. ANHORN
John L Anhorn,
President and Chief Executive Officer
August 12, 2002
18