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EX-3.2 - AMENDED AND RESTATED BYLAWS - PREMIERWEST BANCORPdex32.htm
EX-3.1 - ARTICLES OF INCORPORATION, AS AMENDED - PREMIERWEST BANCORPdex31.htm
EX-21.1 - SUBSIDIARIES - PREMIERWEST BANCORPdex211.htm
EX-31.2 - 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER - PREMIERWEST BANCORPdex312.htm
EX-99.1 - FIRST FISCAL YEAR CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO TARP - PREMIERWEST BANCORPdex991.htm
EX-32.1 - 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - PREMIERWEST BANCORPdex321.htm
EX-31.1 - 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - PREMIERWEST BANCORPdex311.htm
EX-99.2 - FIRST FISCAL YEAR CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO TARP - PREMIERWEST BANCORPdex992.htm
EX-32.2 - 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER - PREMIERWEST BANCORPdex322.htm
EX-23.1 - CONSENT OF MOSS ADAMS LLP - PREMIERWEST BANCORPdex231.htm
EX-10.34 - RESTRICTED SHARE AWARD AGREEMENT - PREMIERWEST BANCORPdex1034.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2009

Commission file number: 000-50332

 

 

PREMIERWEST BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

Oregon   93-1282171
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

503 Airport Road—Suite 101

Medford, Oregon

  97504
(Address of principal executive offices)   (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value

(title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

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

 

Large accelerated filer  ¨

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

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

As of June 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was based on the closing price as reported on the National Association of Securities Dealers Automated Quotation System National Market System.

The number of shares outstanding of Registrant’s common stock as of March 15, 2010 was 24,771,928.

Documents Incorporated by Reference

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the 2010 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

 

 


Table of Contents

PREMIERWEST BANCORP

FORM 10-K

TABLE OF CONTENTS

 

         PAGE

Disclosure Regarding Forward-Looking Statements

  1

PART I

    

Item 1.

   Business   2 - 13

Item 1A.

   Risk Factors   14 - 20

Item 1B.

   Unresolved Staff Comments   21

Item 2.

   Properties   21

Item 3.

   Legal Proceedings   21

Item 4.

   (Removed and Reserved).   21

PART II

    

Item 5.

   Market for Registrant’s Common Equity and Related Stockholder Matters   22 - 23

Item 6.

   Selected Financial Data   24

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations   25 - 52

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk   52 - 54

Item 8.

   Financial Statements and Supplementary Data   55

Item 9.

   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure   56

Item 9A.

   Controls and Procedures   56 - 57

Item 9B.

   Other Information   57

PART III

    

Item 10.

   Directors, Executive Officers and Corporate Governance   58

Item 11.

   Executive Compensation   58

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  58

Item 13.

   Certain Relationships and Related Transactions, and Director Independence   58

Item 14.

   Principal Accounting Fees and Services   58

PART IV

    

Item 15.

   Exhibits and Financial Statement Schedules   59 - 62

SIGNATURES

  63


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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of the “safe-harbor” provisions of Sections 21D and 21E of the Securities Exchange Act of 1934, as amended. Other than statements of historical fact, all statements about our financial position and results of operations, business strategy and Management’s plans and objectives for future operations are forward-looking statements. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” and “intend” and words or phrases of similar meaning, in part help identify forward-looking statements. Examples of forward-looking statements include, but are not limited to: statements that include projections or Management’s expectations for revenues, income or expenses, earnings per share, capital expenditures, dividends, capital structure and other financial items; statements of the plans and objectives of the Company, its Management or its Board of Directors, including the introduction of new products or services, plans for expansion, acquisitions or future growth and estimates or predictions of actions by customers, vendors, competitors or regulatory authorities; statements about future economic performance; statements of assumptions underlying other statements about the Company and its business; statements regarding the adequacy of the allowance for loan losses; and descriptions of assumptions underlying or relating to any of the foregoing. Although Management believes that the expectations reflected in forward-looking statements are reasonable, we can make no assurance that such expectations will prove correct. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. For a more comprehensive discussion of the risk factors impacting our business refer to Item 1A Risk Factors in this report beginning on page 14. These risks and uncertainties include the effect of competition and our ability to compete on price and other factors; deterioration in credit quality, or in the value of the collateral securing our loans, due to higher interest rates, increased unemployment, further or continued disruptions in the credit markets, or other economic factors; customer acceptance of new products and services; economic conditions and events that disproportionately affect our business due to regional concentration; general business and economic conditions, including the residential and commercial real estate markets; interest rate changes; regulatory and legislative changes; changes in the demand for loans and changes in consumer spending, borrowing and savings habits; changes in accounting policies; our ability to maintain or expand our market share or our net interest margin; factors that could limit or delay implementation of our marketing and growth strategies; and our ability to integrate acquired branches or banks. Other risks include those identified from time to time in our past and future filings with the Securities and Exchange Commission. Note that this list of risks is not exhaustive, and risks identified are applicable as of the date made and cannot be updated. You should not unduly rely on forward-looking statements. They give our expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made, and we do not undertake to update them to reflect changes that occur after the date they are made. This report includes information about our historical financial performance, and this information should not be considered as an indication or projection of future results.

 

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PART I

 

ITEM 1. BUSINESS

INTRODUCTION

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 recorded a net loss available to common shareholders of $148.6 million for the year ended December 31, 2009, compared to a net loss of $7.8 million in 2008, and net income of $14.8 million in 2007. Our diluted earnings (loss) per common share were ($6.01), ($0.34) and $0.78 for the years ended 2009, 2008 and 2007, respectively. Return on average common equity was -93.07% for the year ended December 31, 2009 compared to the return on average shareholders’ equity of -4.41% and 12.25% for 2008 and 2007, respectively.

SUBSIDIARIES

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, 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. This acquisition was accounted for as a purchase; accordingly, the consolidated financial statements of PremierWest Bancorp include the results of operation of Mid Valley Bank since the date of acquisition. 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 2008 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 2009 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. The Bank has three subsidiaries: Premier Finance Company, PremierWest Investment Services, Inc., and Blue Star Properties, Inc. Premier Finance Company originates consumer loans from offices located in Medford, Grants Pass, Klamath Falls, Roseburg, Eugene and Portland, Oregon and Redding, California. PremierWest Investment Services, Inc., provides investment brokerage services to customers throughout the Bank’s market. Blue Star Properties, Inc. serves solely to hold real estate properties for PremierWest and presently has no properties under its ownership.

PRODUCTS AND SERVICES

PremierWest Bank offers a broad range of banking services to its customers, principally to 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.

 

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Commercial lending—PremierWest Bank offers specialized loans for business and commercial customers, including equipment and inventory financing, accounts receivable financing, operating lines of credit and real estate construction loans. PremierWest Bank also makes certain Small Business Administration loans to qualified businesses. A substantial portion of the Bank’s commercial loans are designated as real estate loans for regulatory reporting purposes because they are secured by mortgages and trust deeds on real property, even if the loans are made for the purpose of financing commercial activities, such as inventory and equipment purchases and leasing, and even if they are secured by other assets such as equipment or accounts receivable.

One of the primary risks associated with commercial loans is the risk that the commercial borrower might not generate sufficient cash flows to repay the loan. PremierWest Bank’s underwriting guidelines require secondary sources of repayment, such as real estate collateral, and generally require personal guarantees from the borrower’s principals.

Real estate lending—Real estate is commonly a material component of collateral for PremierWest Bank’s loans. Although the expected source of repayment for these loans is generally business or personal income, real estate collateral provides an additional measure of security. Risks associated with loans secured by real estate include fluctuating property values, changing local economic conditions, changes in tax policies and a concentration of real estate loans within a limited geographic area.

Commercial real estate loans primarily include owner-occupied commercial and agricultural properties and other income-producing properties. The primary risks of commercial real estate loans are the potential loss of income for the borrower and the ability of the market to sustain occupancy and rent levels. PremierWest Bank’s underwriting standards limit the maximum loan-to-value ratio on real estate held as collateral and require a minimum debt service coverage ratio for each of its commercial real estate loans.

Although commercial loans and commercial real estate loans generally are accompanied by somewhat greater risk than single-family residential mortgage loans, commercial loans and commercial real estate loans tend to be higher yielding, have shorter terms and generally provide for interest-rate adjustments as prevailing rates change. Accordingly, commercial loans and commercial real estate loans facilitate interest-rate risk management and, historically, have contributed to strong asset and income growth.

PremierWest Bank originates several different types of construction loans, including residential construction loans to borrowers who will occupy the premises upon completion of construction, residential construction loans to builders, commercial construction loans, and real estate acquisition and development loans. Because of the complex nature of construction lending, these loans have a higher degree of risk than other forms of real estate lending. Generally, the Bank mitigates its risk on construction loans by lending to customers who have been pre-qualified with performance conditions for long-term financing and who are using contractors acceptable to PremierWest Bank.

Consumer lending—PremierWest Bank and Premier Finance Company, make secured and unsecured loans to individual borrowers for a variety of purposes including personal loans, revolving credit lines and home equity loans, as well as consumer loans secured by autos, boats and recreational vehicles. Besides targeting non-bank customers in PremierWest Bank’s immediate markets, Premier Finance Company also makes loans to Bank customers where the loans may carry a higher risk than permitted under the Bank’s lending criteria.

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

 

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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, 2009, the Company had a network of 48 full service bank branches. The Bank has evolved over the past nine years through a combination of acquisitions and de novo branch openings and its geographic footprint can be subdivided into several key market areas that are generally identifiable by a specific community, county or combination thereof.

The Company serves Jackson County, Oregon, from its main office facility in Medford with six branch offices in Medford and a branch office in each of the surrounding communities of Central Point, Eagle Point, Ashland and Shady Cove. Medford is the seventh largest city in Oregon and is the center for commerce, medicine and transportation in southwestern Oregon. PremierWest Bank also serves 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 growing retirement community.

Another primary market area is in Douglas County with four branches in Roseburg, Oregon, and four branches located in the communities of Winston, Glide, Sutherlin and Drain. The economy in Douglas County has historically depended on the forest products industry, as compared to other market areas along the Interstate 5 corridor, including those in Medford and Grants Pass and those in northern California, which are somewhat more economically diversified.

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

As of December 31, 2009, the Bank has established offices within eight counties in California. In Siskiyou County there are eight branch locations in the communities of Dorris, Dunsmuir, Greenview, McCloud, Mt. Shasta, Tulelake, Weed and Yreka. In Shasta County there are three branch locations with two located in Redding and one 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. Placer County has a branch in Roseville and Butte County has two offices in Chico. Nevada County has a branch in Grass Valley. The economy of northern California from Siskiyou County south to Butte County is primarily involved in government services, retail trade and services, education, healthcare, agriculture, recreation and tourism.

As a result of the January 2008 acquisition of Stockmans Bank, the Company now has five branch locations in Sacramento County. These branches are located in the greater Sacramento area in the communities of Elk Grove, Folsom, Galt, Natomas and Rocklin. These branches have established PremierWest Bank’s most southern 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.

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

 

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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 undergo increased competition, 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 ultimate impact on the commercial banking industry of the economic downturn experienced in 2008 and 2009 cannot be predicted with meaningful accuracy, but it is reasonable to assume that consolidation and the level of regulation will both increase in the short run.

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 efficiency and 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, 2009, PremierWest Bank had 494 full-time equivalent employees compared to 509 at December 31, 2008. 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 Securities and Exchange Commission (“SEC”). PremierWest Bank’s website address is www.PremierWestBank.com. The contents of our website are not incorporated into this report or into our other filings with the SEC.

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 national and state regulatory agencies.

 

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SUPERVISION AND REGULATION

Based on the results of an examination completed during the third quarter of 2009, the Company expects to enter into a formal regulatory agreement (the “Agreement”) with the FDIC and the Oregon Division of Finance and Corporate Securities, the Bank’s principal regulators, primarily as a result of recent significant operating losses and increasing levels of non-performing assets. The Agreement is expected to impose certain operating restrictions on the Bank, many of which have already been implemented by the Bank.

General—In 2008 and 2009, the banking industry, as well as other sectors of the United States economy, saw a number of unprecedented and wide sweeping changes in federal regulation. The most significant of these changes resulted from the passage of the Emergency Economic Stabilization Act of 2008 (“EESA”) and the American Recovery and Reinvestment Act of 2009 (“ARRA”). EESA and ARRA were enacted to strengthen our financial markets and promote the flow of credit to businesses and consumers.

PremierWest is extensively regulated under federal and state law. These laws and regulations are generally intended to protect depositors, 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 statutory or regulatory provisions. 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 and the FDIC. These agencies may prohibit the Company from engaging in what they believe constitutes unsafe or unsound banking practices.

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 also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interest 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 present 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 and 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. Management believes that the Company is in compliance with these standards.

 

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FDICIA included provisions to reform the federal deposit insurance system, including the implementation of risk-based deposit insurance premiums. FDICIA also permits the FDIC to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary. Pursuant to FDICIA, the FDIC implemented a transitional risk-based insurance premium system on January 1, 1993. Under this system, banks are assessed insurance premiums according to how much risk they are deemed to present to the Deposit Insurance Fund (“DIF”). Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or involving a higher degree of supervisory concern. While PremierWest Bank has historically qualified for the lowest premium level, losses incurred during 2008 and 2009 have reduced the Company’s capital levels and increased supervisory concerns and our insurance premium assessments.

In 2008 and 2009, 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. As of the date of this report, the Transaction Account Guarantee Program is set to expire on June 30, 2010.

Term Auction Facility Program (“TAF”)—On December 12, 2007, the Federal Reserve announced the TAF program. The TAF program allows a depository institution, judged to be in generally sound financial condition and eligible to borrow under the primary credit discount window program, to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. These advances must be fully collateralized.

By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, the Federal Reserve hopes to ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress.

Troubled Asset Relief Program (“TARP”)—On October 14, 2008, the U.S. Department of Treasury announced the TARP Capital Purchase Program. The TARP Capital Purchase Program contemplates the U.S. Treasury purchasing senior preferred shares in qualified U.S. financial institutions. The program is intended to encourage participating financial institutions to build capital in order 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. The Company sold $41.4 million of its preferred stock to the U.S. Treasury under the TARP Capital Purchase Program.

Deposit Insurance—As part of the EESA, the basic limit on federal deposit insurance coverage was temporarily increased by the FDIC from $100,000 to $250,000 per depositor and recently extended through December 31, 2013, through the Helping Families Save Their Homes Act of 2009 (“HFSHA”). Deposit insurance coverage for retirement accounts was not changed and remains at $250,000. The deposits of PremierWest are currently insured to a maximum of $250,000 per depositor through the Deposit Insurance Fund, administered by the FDIC. As part of this program, PremierWest is required to pay quarterly deposit insurance

 

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premium assessments to the FDIC. PremierWest opted to participate in the Transaction Account Guarantee Program (“TAG”), which provides unlimited deposit insurance for non-interest bearing transaction accounts and for regular savings accounts, resulting in a quarterly deposit insurance premium assessment paid to the FDIC. On August 26, 2009, the FDIC extended the TAG portion of the Temporary Liquidity Guarantee Program for six months, through June 30, 2010.

The Bank’s deposits are insured up to applicable limits by the DIF of the FDIC. Accordingly, the Bank is subject to deposit insurance premium assessments by the FDIC to maintain the DIF. The FDIC’s risk-based assessment system is based upon a matrix that takes into account a bank’s capital level and supervisory rating. Under current law, the FDIC is required to maintain the DIF reserve ratio within the range of 1.15% to 1.50% of estimated insured deposits. Because the DIF reserve ratio fell and was expected to remain below 1.15%, the Federal Deposit Insurance Act (FDIA) required the FDIC to establish and implement a restoration plan to restore the DIF reserve ratio to at least 1.15% within eight years, absent extraordinary circumstances. Consequently, and depending upon an institution’s risk category, for the first quarter of 2009 annualized deposit insurance assessments ranged from $0.12 to $0.50 for each $100 of assessable domestic deposits, as compared with $0.05 to $0.43 throughout 2008. Moreover, under a new risk-based assessment system implemented in the second quarter of 2009, annualized deposit insurance assessments range from $0.07 to $0.775 for each $100 of assessable domestic deposits based on the institution’s risk category. On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, not to exceed 10 basis points times the institution’s assessment base as of June 30, 2009. This special assessment was collected on September 30, 2009.

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. 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 constituting an unsafe or unsound banking practice.

 

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Capital Adequacy—The federal and state bank regulatory agencies use capital adequacy guidelines in their examination and regulation of financial 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. The FDIC requires a minimum leverage ratio of 3%. However, for all but the most highly rated bank holding companies and for banks seeking to expand or experiencing or anticipating significant growth, the FDIC requires a minimum leverage ratio of 4%.

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.

 

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

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

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 any 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 FDIA 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

 

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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 Federal Reserve Board 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.

Of particular note is legislation enacted by Congress in 1995 permitting interstate banking and branching, which allows banks to expand nationwide through acquisition, consolidation or merger. Under this law, an adequately capitalized bank holding company may acquire banks in any state or merge banks across state lines if permitted by state law. Further, banks may establish and operate branches in any state subject to the restrictions of applicable state law. Under Oregon law, an out-of-state bank or bank holding company may merge with or

 

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acquire an Oregon state chartered bank or bank holding company if the Oregon bank, or in the case of a bank holding company, the subsidiary bank, has been in existence for a minimum of three years, so long as the laws of the state in which the acquiring bank is located permits such merger. Branches may not be acquired or opened separately, but once an out-of-state bank has acquired branches in Oregon, either through a merger with or acquisition of substantially all the assets of an Oregon bank, the acquirer may open additional branches.

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

 

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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” or “Act”) 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. The Act includes numerous provisions, but in particular, Section 404 that requires PremierWest Bancorp’s Management, to assess the adequacy and effectiveness of its internal controls over financial reporting. As of December 31, 2009, Management believes the Company is in full compliance with the requirements and provisions of Sarbanes-Oxley.

 

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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 in the future, but that capital may not be available when it is needed, or it may only be available on unfavorable terms, which could adversely affect our financial condition and results of operations.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Our risk-based capital ratio is currently below the level required to be considered “well-capitalized” for regulatory purposes. The proceeds of our current rights offering is intended to return our status to “well-capitalized” which requires that we add an additional $19.4 million to the Bank’s capital to exceed the 10.0% risk-based capital level. However, if our existing shareholders do not subscribe for all of the shares being offered in the rights offering, and we do not enter into standby purchase agreements for any unsubscribed shares, we may not have the capital necessary to satisfy our regulatory capital goals. In addition, even if we return to a “well-capitalized” status following the rights offering, future losses could reduce our capital position below levels necessary to maintain such status. It is also likely that the Bank will be required to achieve and maintain capital levels in excess of the minimum “well-capitalized” levels as a result of the pending regulatory agreement. Therefore, if the Bank raises enough capital to meet established regulatory “well-capitalized” levels, it may not be considered sufficient to meet the regulatory agreement requirements.

We may need to raise additional capital in the future to maintain or improve our capital position or to support our operations. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our financial condition and our ability to maintain or improve our capital position, to support our operations and to continue as a going concern could be materially impaired.

We are subject to various regulatory requirements and expect to be subject to future regulatory restrictions including a regulatory agreement.

In light of the current challenging operating environment, along with our elevated level of non-performing assets, delinquencies and adversely classified assets, we are subject to increased regulatory scrutiny, and expect to become subject to a regulatory agreement with the FDIC and Department of Finance and Corporate Securities (“DFCS”) and a similar agreement with the Federal Reserve. Such agreements could place limitations on our business and adversely affect our ability to implement our business plans, including our growth strategy. Regulatory agencies have the authority to restrict our operations to those consistent with adequately capitalize institutions. For example, we would likely have limitations on our lending activities and on the rates paid by the Bank to attract retail deposits in its local markets. We may be required to reduce our levels of non-performing assets within specified time frames. These time frames might not result in maximizing the price that might otherwise be received for underlying properties. In addition, if such restrictions were also imposed upon other institutions that operate in the Bank’s markets, multiple institutions disposing of properties at the same time could further diminish the potential proceeds received from the sale of these properties. If any of these or other additional restrictions are placed on us, it would limit the resources currently available to us.

In this regard, the FDIC recently completed its regularly scheduled examination of the Bank. Based on discussions with the FDIC following the examination, we expect to receive a regulatory agreement from the

 

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FDIC requiring us to take certain steps to further strengthen the Bank, such as reducing the level of classified assets, increasing capital levels, and addressing other criticisms from the examination. The added costs of compliance with additional regulatory requirements could have an adverse effect on our financial condition and earnings.

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 economic factors that relate to regional business conditions. 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. The State of Oregon suffers from one of the nation’s highest unemployment rates and major employers have implemented substantial layoffs or scaled back growth plans. The State of California continues to face significant fiscal challenges, the long-term effects of which cannot be predicted. A further deterioration in the economic and business conditions or a prolonged delay in economic recovery in our primary market areas could result in the following consequences that could materially and adversely affect our business: increased loan delinquencies; increased problem assets and foreclosures; reduced demand for our products and services; reduced demand for low cost or noninterest bearing deposits or customer shifts from low cost or noninterest bearing deposits to high cost accounts; 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.

If we are not able to reduce nonperforming assets and the related losses being recognized, our ability to continue as a going concern becomes doubtful.

Our existing capital levels will not support significant deterioration in asset quality and the corresponding recognition of losses. Additional capital is needed both to meet regulatory “well-capitalized” levels and to support any potential future losses. 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 sale to the public for subscription rights to purchase up to 81,747,362 shares of the Company’s common stock. The capital raised from this subscription rights offering may not be sufficient to compensate for future losses. If capital levels continue to deteriorate, it is likely that we will need to seek to merge with another institution or raise capital through new investors in an extremely dilutive transaction on terms that could be considered unfavorable by current shareholders, or face the prospect of being placed into receivership, resulting in a complete loss of your investment in the Company.

The Company’s common stock may no longer qualify for listing on The NASDAQ Capital Market.

NASDAQ Marketplace Rule 5550(a)(2) requires that primary equity securities listed on The NASDAQ Capital Market continue to have a minimum bid price of at least $1.00 per share. On March 15, 2010, we received notice that we did not meet the requirement for minimum bid price for 30 consecutive business days. In accordance with NASDAQ rules, we received formal notice from NASDAQ and have a period of 180 calendar days to achieve compliance. Compliance can be achieved by meeting the bid price standard for a minimum of ten consecutive business days, unless NASDAQ staff exercises discretion to extend such period. If we are not deemed in compliance before the expiration of the 180 day compliance period, we will be afforded an additional 180 day compliance period, provided that on the 180th day of the first compliance period, we demonstrate that we meet all applicable standards for initial listing on the Capital Market (except the bid price requirement) based on our most recent public filings and market information. If we have publicly announced information indicating that we no longer satisfy applicable initial listing criteria, we will not be eligible for the additional compliance period under this rule. Our stock price may not increase to the $1.00 level for ten consecutive business days and, if it does not during the initial compliance period, we may not qualify for the additional compliance period, and our common stock would then be subject to delisting. Should our shares be subject to delisting from the Capital

 

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Market, there is no assurance that a liquid and efficient market for our common stock will be available or develop. Although the shares may be eligible for trading on other exchanges, such as the “OTC Bulletin Board,” it is possible that the ability of a selling shareholder to realize the best market price will be impeded as the result of wider bid-ask spreads.

We are subject to restriction on our ability to declare or pay dividends on and repurchase shares of our common stock.

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 recently announced that we would suspend further dividend payments on the Series B Preferred Stock 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. We also announced 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 $0.057 per share per quarter without the U.S. Treasury’s approval or redemption or transfer of the Series B Preferred Stock.

In addition, our ability to pay dividends, and the Bank’s ability to pay dividends to us, is 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 currently restricted from paying dividends unless we receive prior regulatory approval and we expect to become 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.

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 recent amendments, apply to a number of other employees. The standards include (1) 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, except as otherwise permitted by the rules; (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 (v) 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.

We could realize additional losses because Federal and state governments could pass legislation responsive to current credit conditions.

We could experience high credit losses because of new federal or state legislation or regulatory changes that reduce the amount that the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts. Also, we could experience higher credit losses because of new federal or state legislation or regulatory

 

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changes that limit the Bank’s ability to foreclose on property or other collateral or makes foreclosure less economically feasible.

Our earnings, and further, our ability to continue as a going concern, 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, and 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.

Approximately 74% of our gross loan portfolio is secured by real estate, the majority of which is commercial real estate and continued market deterioration could lead to losses.

Declining real estate values have caused increasing levels of charge-offs and provisions for loan losses. Continued declines in real estate market values may precipitate increased charge-offs and a further increase in the allowance for loan losses, which could have a material adverse effect on our business, financial condition and results of operations.

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

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 affect on our business, financial condition and results of operations.

Our business is heavily regulated and the creation of additional regulations may negatively affect our operations.

We are subject to government regulation that could limit or restrict our activities, which in turn could adversely impact our operations. The financial services industry is regulated extensively. Federal and state regulations are designed primarily to protect the deposit insurance funds and consumers, and not to benefit shareholders. These 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 for us.

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

 

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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 is highly dependent on the FHLB of Seattle to provide a source of wholesales 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. Recently the FHLB of Seattle announced that it met all minimum regulatory capital requirements as of September 30, 2009. However, the Federal Housing Finance Agency exercised its discretionary authority to reaffirm FHLB of Seattle’s “undercapitalized” classification as it had at the end of the quarters ended March 31, 2009 and June 30, 2009. The Federal Housing Finance Agency action was reportedly taken because of the possibility that modest declines in the values of FHLB of Seattle’s private-label mortgage-backed securities could cause its risk-based capital to fall below the minimum requirements. As a result, the FHLB of Seattle cannot pay a dividend on their common stock and it cannot repurchase or redeem common stock. While the FHLB of Seattle has announced it does not anticipate that additional capital is immediately necessary, and believes that its capital level is adequate to support realized losses in the future, the FHLB of Seattle could require its members, including the Company, to contribute additional capital in order to return the FHLB of Seattle to compliance with capital guidelines. At December 31, 2009, the Company held a total of approximately $168,000 of cash on deposit with the FHLB of Seattle and FHLB of San Francisco. At December 31, 2009, the Company maintained a line of credit with the FHLB of Seattle for $31.9 million and was in compliance with its related collateral requirements. At December 31, 2009, the Company had a $21.4 million letter of credit and $10.5 million was available for additional borrowing.

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, technological advances and the accelerating pace of consolidation among financial services providers. We face competition both in attracting deposits and in originating loans and providing transactional services.

Our ability to pay dividends, repurchase shares or repay indebtedness depends primarily upon the results of operations of PremierWest Bank.

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 would adversely affect 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.

Various statutory and regulatory provision restrict the amount of dividends the Bank can pay to us without regulatory approval and the Bank is currently restricted from paying dividends without prior regulatory approval until our condition improves. 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;

 

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all other assets charged-off as required by the DFCS or state or federal examiner; and all accrued expenses, interest and taxes.

We may not effectively manage our growth or future acquisitions which could adversely affect the quality of our operations and our costs.

Our financial performance and profitability will depend on our ability to manage recent growth and implement our plans and strategies for future growth. Although Management believes that it has substantially integrated the business and operations of recent acquisitions, there can be no assurance that unforeseen issues relating to the acquisitions will not adversely affect us. In addition, any future acquisitions and continued growth may present operational or other problems that could have an adverse effect on our business, financial condition and results of operations. Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have historically experienced.

Difficult market conditions have adversely affected our industry.

The capital and credit markets have been experiencing volatility and disruption for more than twelve months. Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures and unemployment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry. In particular, we may face the following risks in connection with these events:

 

   

We expect to face increased regulation of our industry, including the results of the EESA and the American Recovery and Reinvestment Act of 2009 (“ARRA”). Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

 

   

Government stimulus packages and other responses to the financial crises may not stabilize the economy or financial system.

 

   

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

 

   

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

 

   

We will be required to pay significantly higher Federal Deposit Insurance Corporation premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.

 

   

There may be continued downward pressure on our stock price.

 

   

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 intensified consolidation of the financial services industry.

 

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If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital, on our business, our financial condition and results of operations.

A significant decline in the market value of our common stock resulted in an impairment of goodwill.

Our common stock has traded at prices below book value, including goodwill and other intangible assets, and the valuation of goodwill is determined using discounted cash flows of forecasted earnings, estimated sales price based on recent observable market transactions and market capitalization based on current stock price. We are required to test for goodwill impairment periodically and if goodwill impairment is deemed to exist, a write-down of the asset would occur with a charge to earnings. After completing the required annual analysis of goodwill, an impairment charge of $74.9 million was taken to write the goodwill balance to zero at December 31, 2009. This write-down had no impact to cash flows or regulatory capital.

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. Interruption or failure of these systems creates a risk of loss of customers if technology fails to work as expected and risk of regulatory scrutiny if security breaches occur. 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.

Changes in accounting standards may impact how we report our financial condition and results of operations.

Our accounting policies and methods are fundamental to how we report our financial condition and results of operations. From time to time the Financial Accounting Standards Board (“FASB”) changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.

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

The market for some of the investment securities held in our portfolio continues to be volatile over the past twelve months. Market conditions may continue to 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, which could have a material adverse effect on our future earnings.

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

 

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If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 or to remedy any future material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.

Any failure to remediate any material weakness that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure also could adversely affect the results of the periodic management evaluations and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that we are required under Section 404 of the Sarbanes-Oxley Act of 2002. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our capital stock.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

As of December 31, 2009, the Company conducted business through 58 offices including the operations of PremierWest Bank, PremierWest Bank’s mortgage division, and also PremierWest Bank’s two subsidiaries – Premier Finance Company and PremierWest Investment Services, Inc. The 58 offices included 48 full service bank branches and 10 other office locations.

PremierWest Bank’s 48 full service branch facilities are located in Oregon and California and more specifically broken down as follows: 24 branches are located in Jackson (10), Josephine (2), Deschutes (2), Douglas (8) and Klamath (2) counties of Oregon and 24 branches located in Siskiyou (8), Shasta (3), Butte (2), Tehama (2), Placer (1), Yolo (2), Nevada (1), and Sacramento (5) counties of California. Of the 48 branch locations, 34 are owned by PremierWest Bank, 14 are leased, and two locations involve long-term land leases where the Bank owns the building.

The Company’s ten other locations house administrative and subsidiary operations. These facilities include one campus located in Medford, Oregon with two owned buildings housing the Company’s administrative head office, operations and data processing facilities; two owned administrative facilities—one in Redding, California housing regional administration, our Premier Finance Company subsidiary, and one in Red Bluff, California housing PremierWest Bank administrative functions, one leased location in Bend, Oregon; two leased locations housing stand-alone Premier Finance Company offices in Portland and Eugene, Oregon; and, three buildings and two owned locations in Medford, Oregon occupied by a Premier Finance Company office, the Bank’s consumer lending group and the Bank’s internal audit department. The Company also leases a storage warehouse in Medford, Oregon.

In addition, to the above, four Premier Finance Company offices are housed within PremierWest Bank full service branch offices, as are various employees of PremierWest Investment Services, Inc., and the Bank’s mortgage division.

The annual rent expense on leased properties was $1.1 million, $1.0 million, and $696,000 in 2009, 2008 and 2007, respectively.

 

ITEM 3. LEGAL PROCEEDINGS

From time to time, in the normal course of business, PremierWest may become 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. (REMOVED AND RESERVED).

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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 the NASDAQ. This information has been adjusted to reflect previous stock dividends paid in 2009 and 2007. No stock dividend was paid in 2008. Bid quotations reflect inter-dealer prices, without adjustment for mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions. On February 28, 2010, the Company had 24,771,928 shares of common stock issued and outstanding, which were held by approximately 663 shareholders of record, a number which does not include approximately 2,500 beneficial owners who hold shares in “street name.” As of March 15, 2010, the most recent date prior to the date of this report, the closing price of the common stock was $0.63 per share.

 

     2009    2008    2007
   Closing
Market Price
   Cash
Dividends

Declared
   Closing
Market Price
   Cash
Dividends

Declared
   Closing
Market Price
   Cash
Dividends

Declared
   High    Low       High    Low       High    Low   

1st Quarter

   $ 6.70    $ 2.62    $ 0.01    $ 11.55    $ 9.62    $ 0.06    $ 16.05    $ 12.77    $ —  

2nd Quarter

   $ 4.67    $ 3.35    $ —      $ 10.40    $ 5.84    $ 0.06    $ 14.44    $ 12.40    $ 0.05

3rd Quarter

   $ 3.67    $ 2.71    $ —      $ 10.10    $ 5.10    $ 0.06    $ 13.64    $ 12.00    $ 0.06

4th Quarter

   $ 2.70    $ 1.30    $ —      $ 8.38    $ 5.15    $ —      $ 12.90    $ 11.16    $ 0.06

In conjunction with declaring the fourth quarter 2007 cash dividend, the Company also announced its intention to institute a quarterly cash dividend program. However, 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.

There were no repurchases of common stock by the Company during 2009.

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, 2009:

Equity compensation plan information

 

Plan category

   Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

(a)
   Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
   Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))

(c)

Equity compensation plans approved by security holders

   957,372    $ 9.02    1,182,751

Equity compensation plans not approved by security holders

   —        —      —  
                

Total

   957,372    $ 9.02    1,182,751
                

 

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Performance Graph

The following graph 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, 2004 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 -85.88% compared to -48.69% and 4.31% for the SNL NASDAQ Bank and NASDAQ Composite indexes, respectively.

LOGO

 

     Period Ending

Index

   12/31/04    12/31/05    12/31/06    12/31/07    12/31/08    12/31/09

PremierWest Bancorp

   $ 100.00    $ 114.58    $ 138.08    $ 105.15    $ 63.20    $ 14.12

NASDAQ Bank

   $ 100.00    $ 95.67    $ 106.20    $ 82.76    $ 62.96    $ 51.31

NASDAQ Composite

   $ 100.00    $ 101.37    $ 111.03    $ 121.92    $ 72.49    $ 104.31

 

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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.

 

     Years Ended December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands except per share data)  

Operating Results

          

Total interest income

   $ 77,915      $ 88,936      $ 82,400      $ 73,212      $ 57,498   

Total interest expense

     19,968        28,573        27,216        19,104        10,785   
                                        

Net interest income

     57,947        60,363        55,184        54,108        46,713   

Provision for loan losses

     88,031        36,500        686        800        150   

Non-interest income

     11,052        10,234        8,880        7,741        7,380   

Non-interest expense

     129,722        47,129        38,973        37,415        33,618   
                                        

Income (loss) before provision for income taxes

     (148,754     (13,032     24,405        23,634        20,325   

Provision (benefit) for income taxes

     (2,282     (5,493     9,303        8,986        7,136   
                                        

Net income (loss)

     (146,472     (7,539     15,102        14,648        13,189   

Preferred stock dividends and discount accretion

     2,171        275        275        275        275   
                                        

Net income (loss) available to common shareholders

   $ (148,643   $ (7,814   $ 14,827      $ 14,373      $ 12,914   
                                        

Per Share Data (1)

          

Basic earnings (loss) per common share

   $ (6.01   $ (0.34   $ 0.83      $ 0.81      $ 0.69   

Diluted earnings (loss) per common share

   $ (6.01   $ (0.34   $ 0.78      $ 0.75      $ 0.65   

Dividends declared per common share

   $ 0.01      $ 0.18      $ 0.17      $ 0.10      $ 0.05   

Ratio of dividends declared to net income (loss)

     nm        nm        19.14     11.07     5.83

Financial Ratios

          

Return on average common equity

     -93.07     -4.41     12.25     13.26     13.59

Return on average assets

     -9.15     -0.52     1.41     1.52     1.52

Efficiency ratio (2)

     187.01     66.76     60.83     60.49     62.15

Net interest margin (3)

     4.10     4.68     5.72     6.25     6.05

Balance Sheet Data at Year End

          

Gross loans

   $ 1,149,027      $ 1,247,988      $ 1,025,329      $ 921,694      $ 807,810   

Allowance for loan losses

   $ 45,903      $ 17,157      $ 11,450      $ 10,877      $ 10,341   

Allowance as percentage of gross loans

     3.99     1.37     1.12     1.18     1.28

Total assets

   $ 1,536,314      $ 1,475,954      $ 1,157,961      $ 1,034,511      $ 913,661   

Total deposits

   $ 1,420,762      $ 1,211,269      $ 935,315      $ 879,350      $ 768,419   

Total equity

   $ 71,535      $ 176,984      $ 127,675      $ 116,259      $ 102,784   

 

Notes:

 

  (1) Per share data have been restated for subsequent stock dividends.
  (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 2009, 34.00% for 2008, 38.25% for 2007, 38.00% for 2006 and 34.00% in prior years.

nm = not meaningful

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

OVERVIEW

The following discussion should be read in conjunction with PremierWest’s audited consolidated financial statements and the notes thereto as of December 31, 2009 and 2008, and for each of the three years in the period ended December 31, 2009, that are included as pages F1-F49 in this report.

PremierWest conducts a general commercial banking business, gathering deposits from the general public 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 and borrowed funds). 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. Financial institutions have traditionally used interest rate spreads as a measure of net interest income. Another indication 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.

To a lesser extent, PremierWest’s profitability is also affected by such factors as the level of non-interest income and expenses and the provision for income taxes. 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, professional fees, equipment expenses, occupancy-related expenses, communications, advertising and other operating expenses.

 

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FINANCIAL HIGHLIGHTS

Net loss available to common shareholders for 2009 was $148.6 million, a 1,805% increase from 2008 net loss available to common shareholders of $7.8 million. Our diluted earnings per common share were ($6.01) and ($0.34) for the years ended 2009 and 2008, respectively. This decline was primarily due to $104.6 million in non-cash write-offs including a $74.9 goodwill impairment, and $29.7 million in a deferred tax asset valuation allowance. Additionally, the Company booked loan loss provision expense of $88.0 million. Net interest income declined $2.4 million primarily due to interest reversed and interest lost on loans on non-accrual status. Return on average common shareholders’ equity was -93.07% and return on average assets was -9.15% for the year ended December 31, 2009. This compared with a return on average shareholders’ equity of -4.41% and a return on average assets of -0.52% for 2008.

 

     Years Ended December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Net income (loss)

   $ (146,472   $ (7,539   $ 15,102      $ 14,648      $ 13,189   

Average assets

   $ 1,600,572      $ 1,456,722      $ 1,073,571      $ 966,786      $ 867,532   

RETURN ON AVERAGE ASSETS

     -9.15     -0.52     1.41     1.52     1.52

Net income (loss) available to common shareholders

   $ (148,643   $ (7,814   $ 14,827      $ 14,373      $ 12,914   

Average equity

   $ 159,717      $ 177,254      $ 113,654      $ 100,864      $ 87,648   

RETURN ON AVERAGE EQUITY AVAILABLE TO COMMON SHAREHOLDERS

     -93.07     -4.41     13.05     14.25     14.73

Cash dividends declared

   $ 236      $ 4,032      $ 2,891      $ 1,621      $ 769   

Net income (loss)

   $ (146,472   $ (7,539   $ 15,102      $ 14,648      $ 13,189   

PAYOUT RATIO

     -0.16     -53.48     19.14     11.07     5.83

Average equity

   $ 194,475      $ 186,032      $ 123,244      $ 110,454      $ 97,058   

Average assets

   $ 1,600,572      $ 1,457,178      $ 1,073,571      $ 966,786      $ 867,532   

AVERAGE EQUITY TO ASSET RATIO

     12.15     12.77     11.48     11.42     11.19

Gross loans outstanding declined $99.0 million, or 8% in 2009 and totaled $1.15 billion at December 31, 2009 compared to $1.25 billion at December 31, 2008. Over the past year, our allowance for loan loss increased 168% to $45.9 million totaling 3.99% of outstanding gross loans at December 31, 2009. The provision expense for loan losses was $88.0 million for 2009 compared to $36.5 million in 2008. Management believes that the allowance for loan and lease losses is adequate as of December 31, 2009, based on our assessment of loan portfolio quality and our judgment of economic conditions that exist.

Total deposits also grew to $1.42 billion at December 31, 2009, an increase of $209.5 million from $1.21 billion at December 31, 2008. The increase was primarily a result of branch acquisitions in Grass Valley and Davis, California in July 2009. Non-interest-bearing demand deposits totaled $256.2 million and accounted for 18% of total deposits at year end compared to 19% at December 31, 2008. The Bank continues to aggressively pursue non-interest-bearing deposit relationships from consumers and businesses.

At December 31, 2009, the Bank was below the “well-capitalized” requirement for its total risk-based capital ratio of 10.00%, with a recorded ratio of 8.53%. The Bank is now classified as “adequately” capitalized and may be subject to regulatory restrictions as discussed below.

During the second quarter of 2009, federal and state bank regulators initiated their annual regulatory examination and completed the examination during the third quarter of 2009. As a result of the examination and capital levels, the Bank expects to become subject to a formal regulatory agreement with the FDIC. In anticipation of any such regulatory action, our Board of Directors has initiated a rights offering, as discussed in

 

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Note 2—Regulatory Agreement, Economic Condition and Management Plan, to increase our risk-based capital ratio to a level well above the regulatory minimum for “well-capitalized.” Additionally, our Board of Directors has approved Management’s recommendations that the following steps be taken:

 

   

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

 

   

Deferring further interest payments on the Company’s trust preferred securities on an interim basis to conserve capital.

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

Any regulatory action related to the formal report associated with the Bank’s annual examination could subject the Bank to mandatory restrictions including requirements to raise additional capital, reduce non-performing asset totals, continue to restrict dividend payments, maintain an adequate allowance for loan losses, hire additional or new management, limit deposit pricing and limit access to brokered deposits or other wholesale funding sources. Our inability to comply with any aspect of the agreement could have an adverse impact on our ability to continue as a going concern.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures included elsewhere in this Form 10-K, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, Management evaluates the estimates used, including the adequacy of the allowance for loan losses, impairment of intangible assets, contingencies and litigation. Estimates are based upon historical experience, current economic conditions and other factors that Management considers reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources as well as assessing and identifying the accounting treatments of commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policies involve the more significant judgments and assumptions used in the preparation of the consolidated financial statements.

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, 2009, approximately 74% 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.

During the fourth quarter ended December 31, 2009, PremierWest conducted an analysis, with the assistance of an independent consulting firm, and recorded goodwill impairment totaling $74.9 million based on a detailed analysis valuing each element of the balance sheet. Annual and periodic analysis of the fair value of

 

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recorded goodwill for impairment involves a substantial amount of judgment, as does establishing and monitoring estimated lives of other amortizable intangible assets.

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

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, 2009, the Company determined that the deferred tax asset would not be realized, and the balance was reduced to zero.

In July 2009, the Company acquired two Wachovia Bank branches in Northern California. This acquisition included a core deposit intangible asset representing the value ascribed to 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. Both of these intangible assets are being amortized over estimated weighted average useful lives of 7.4 years and 11 months, respectively.

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. The Company has determined that it is “more likely than not” that we will not be able to fully recognize all of our deferred tax assets. 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.

 

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RESULTS OF OPERATIONS

Average Balances, Interest Rates and Yields

The following tables set forth certain information relating to PremierWest’s consolidated average interest-earning assets and interest-bearing liabilities and reflect the average yield on assets and average cost of liabilities for the years indicated. The yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans, if any, are included in the net loan category. 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.

 

    Years Ended December 31,  
    2009     2008     2007  
    Average
Balance
    Interest
Income or
Expense
  Average
Yields
or Rates
    Average
Balance
    Interest
Income or
Expense
  Average
Yields or
Rates
    Average
Balance
    Interest
Income or
Expense
  Average
Yields or
Rates
 
    (Dollars in thousands)  

Interest-earning assets:

                 

Loans (1)(2)

  $ 1,221,842      $ 75,078   6.14   $ 1,255,203      $ 87,756   6.99   $ 961,534      $ 82,258   8.55

Investment securities:

                 

Taxable securities

    82,352        2,422   2.94     33,144        1,128   3.40     2,730        66   2.42

Nontaxable securities (3)

    7,647        232   3.03     3,487        227   6.50     5,649        372   6.59

Temporary investments

    106,188        462   0.44     2,802        71   2.53     1,750        95   5.43
                                               

Total interest-earning assets

    1,418,029        78,194   5.51     1,294,636        89,182   6.89     971,663        82,791   8.52

Cash and due from banks

    30,992            33,655            28,073       

Allowance for loan losses

    (37,795         (20,474         (11,174    

Other assets

    189,346            148,905            85,009       
                                   

Total assets

  $ 1,600,572          $ 1,456,722          $ 1,073,571       
                                   

Interest-bearing liabilities:

                 

Interest-bearing checking and savings accounts

  $ 480,760        4,245   0.88   $ 427,646        6,912   1.62   $ 377,550        9,691   2.57

Time deposits

    629,742        13,896   2.21     545,329        19,432   3.56     329,912        15,454   4.68

Other borrowings

    35,737        1,827   5.11     48,258        2,229   4.62     37,571        2,071   5.51
                                               

Total interest-bearing liabilities

    1,146,239        19,968   1.74     1,021,233        28,573   2.80     745,033        27,216   3.65

Noninterest-bearing deposits

    245,829            231,710            194,456       

Other liabilities

    14,029            17,725            10,838       
                                   

Total liabilities

    1,406,097            1,270,668            950,327       

Shareholders’ equity

    194,475            186,054            123,244       
                                   

Total liabilities and shareholders’ equity

  $ 1,600,572          $ 1,456,722          $ 1,073,571       
                                               

Net interest income (3)

    $ 58,226       $ 60,609       $ 55,575  
                             

Net interest spread

      3.77       4.09       4.87

Average yield on earning assets (2)(3)

      5.51       6.89       8.52

Interest expense to earning assets

      1.41       2.21       2.80

Net interest income to earning assets (2)(3)

      4.10       4.68       5.72

 

(1) Average non-accrual loans of approximately $94.3 million for 2009, $41.0 million for 2008, and $3.2 million for 2007 are included in the average loan balances.

 

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(2) Loan interest income includes loan fee income of $1.1 million, $1.9 million, and $2.6 million for 2009, 2008 and 2007, respectively.
(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 40.00% effective rate for 2009, 34.00% effective rate for 2008, and 38.25% effective rate for 2007. The amount of such adjustment was an addition to recorded pre-tax income of $139,000, $149,000, and $230,000 for 2009, 2008 and 2007, respectively.

Net Interest Income

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 and borrowed funds). Net interest income is affected by the difference between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities (the “interest rate spread”), as well as the relative volumes of interest-earning assets and interest-bearing liabilities. Financial institutions have traditionally used interest rate spreads as a measure of net interest income. Another indication 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.

Net interest income on a tax equivalent basis, before provisions for loan losses, for the year ended December 31, 2009, was $58.2 million, a decrease of 4% compared to tax equivalent net interest income of $60.6 million in 2008, which was an increase of 9% compared to tax equivalent net interest income of $55.6 million in 2007. The overall tax-equivalent earning asset yield was 5.51% in 2009 compared to 6.89% in 2008 and 8.52% in 2007. For the years 2009, 2008 and 2007, the cost of interest-bearing liabilities was 1.74%, 2.80% and 3.65%, respectively.

Total interest-earning assets averaged $1.42 billion for the year ended December 31, 2009, compared to $1.30 million for the corresponding period in 2008. The growth in earning assets was primarily the result of the expansion of our investment securities portfolio.

Interest-bearing liabilities averaged $1.15 billion for the year ended December 31, 2009, compared to $1.02 billion for the same period in 2008. Interest expense, as a percentage of average earning assets, decreased to 1.41% in 2009, compared to 2.21% in 2008 and 2.80% in 2007.

Average gross loans, which generally carry a higher yield than investment securities and other earning assets, comprised 86.16% of average earning assets during 2009, compared to 96.95% in 2008 and 98.96% in 2007. During the same periods, average yields on loans were 6.14% in 2009, 6.99% in 2008 and 8.55% in 2007. Average investment securities comprised 6.35% of average earning assets in 2009, which was up from 2.83% in 2008 and 0.86% in 2007. Tax equivalent interest yields on investment securities were 1.59% for 2009, 3.62% for 2008 and 5.26% in 2007.

The short-term interest rate environment, as measured by the Prime lending rate, began to decline during the latter half of 2007 as actions to lower short term rates by the Federal Reserve resulted in a 50 basis point reduction in the Prime Rate in the third quarter of 2007, followed by an aggregate 50 basis point reduction during the fourth quarter of 2007. During 2008, the Prime Rate dropped 400 basis points, including a 225 basis point drop in the first four months of 2008 and a 175 basis point drop during the last quarter of the year. The rate has remained constant with no further reductions in 2009. As a result, our net interest spread decreased by 32 basis points between 2009 and 2008 while declining 78 basis points between 2007 and 2008. From a historical perspective, our balance sheet has been asset sensitive. Accordingly, a declining interest rate environment negatively impacts our net interest income absent increases in unchanged earning asset volumes or decreased interest expense.

 

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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.

 

     2009 vs. 2008
Increase (Decrease) Due To
    2008 vs. 2007
Increase (Decrease) Due To
 
   Volume     Rate     Net
Change
    Volume     Rate     Net
Change
 
            
     (Dollars in thousands)  

Interest-earning assets:

            

Loans

   $ (2,332   $ (10,346   $ (12,678   $ 25,123      $ (19,625   $ 5,498   

Investment securities:

            

Taxable securities

     1,675        (381     1,294        736        326        1,062   

Nontaxable securities

     270        (265     5        (142     (3     (145

Temporary investments

     2,620        (2,229     391        57        (81     (24
                                                

Total

     2,233        (13,221     (10,988     25,774        (19,383     6,391   
                                                

Interest-bearing liabilities:

            

Deposits:

            

Interest-bearing demand and savings

   $ 858        (3,525     (2,667   $ 1,287        (4,066     (2,779

Time deposits

     3,008        (8,544     (5,536     10,082        (6,104     3,978   

Other borrowings

     (578     176        (402     589        (431     158   
                                                

Total

     3,288        (11,893     (8,605     11,958        (10,601     1,357   
                                                

Net increase (decrease) in net interest income

   $ (1,055   $ (1,328   $ (2,383   $ 13,816      $ (8,782   $ 5,034   
                                                

Loan Loss Provision

The loan loss provision represents charges made against earnings to maintain an adequate allowance for loan losses. The allowance is maintained at an amount believed to be sufficient to absorb losses in the loan portfolio and has two components: one of which represents estimated loss reserves based on assigned credit risk ratings for our entire loan portfolio, and the other represents specifically established reserves for individually classified loans. PremierWest applies a systematic process for determining the adequacy of the allowance for loan losses, including an internal loan review program and a quarterly analysis of the adequacy of the allowance. The quarterly analysis includes determination of specific potential loss factors on individual classified loans; historical potential loss factors derived from actual net charge-off experience and trends in nonperforming loans; and potential loss factors for other loan portfolio risks such as loan concentrations, the condition of the local economy, and the nature and volume of loans. The allowance for loan losses correlates to Management’s judgment of the credit risk inherent in the loan portfolio. Factors considered in establishing an appropriate allowance include a careful assessment of the financial condition of the borrower; a realistic determination of the value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; a comprehensive analysis of the levels and trends of loan categories; an assessment of pending legal action for collection of loans and related guarantees; and, a review of delinquent and classified loans. Although Management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan losses, there can be no assurance that actual loan losses will not require significant additional charges to operations in the future.

 

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For the year ended December 31, 2009, the loan loss provision totaled $88.0 million compared to $36.5 million for 2008, and $686,000 for 2007. This represents an increase of 141% between 2009 and 2008 and an increase of 5,221% between 2008 and 2007. During 2009, the Bank continued to increased its allowance for loan losses in response to credit issues experienced with a number of our borrowers, particularly those relying on stable real estate values as an integral component of their individual business strategies. During 2009, there was a $20.3 million increase in OREO due to the continued decline in economic activity and an increase in problem credits. The breadth of the falloff in economic activity was felt throughout the geographic regions in which we conduct our business. In response, Management focused additional resources to proactively deal with credit relationships that showed indications of strain, and sought and obtained independent validation of our internal evaluations of real estate collateral dependent loans. Management has progressively enhanced the Company’s loan policies and procedures to adjust to the rapidly evolving economic and credit environment, conducted an ongoing and comprehensive analysis of loan portfolio quality, increased the number of credit administration to oversee the consistent application and adherence to established loan policies and procedures and provided training to all lending personnel. A more detailed review of the loan loss provision is presented in the table on page 44.

Loan “charge-offs” refer to the recorded values of loans actually removed from the consolidated balance sheet and, after netting out “recoveries” on previously charged-off loans, become “net charge-offs”. PremierWest’s policy is to charge-off loans when, in Management’s opinion, the loan or a portion thereof is deemed uncollectible, although concerted efforts are made to maximize recovery after the charge-off. Management continues to closely monitor the loan quality of new and existing relationships through detailed review and evaluation procedures and by integrating loan officers into such activities.

For the years ended December 31, 2009 and December 31, 2008, loan charge-offs exceeded recoveries by $59.3 million and $39.9, respectively. A more detailed review of charge-offs and recoveries are presented in the table on page 44.

Non-interest Income

Non-interest income is primarily comprised of service charges on deposit accounts; mortgage origination fees; investment brokerage and annuity fees; other commissions and fees; and other non-interest income including gains on sales of investment securities. Deposit account related service charges and fees for other banking services have grown consistently over the past three years as a result of the Bank’s internal growth and also from increases made in our fee schedule for banking services.

During 2009, non-interest income increased from $10.2 million in 2008 to $11.1 million, an increase of $0.9 million or 9%. The increase from the previous year was primarily related to increases in other fee income.

During 2008, non-interest income increased from $8.9 million in 2007 to $10.2 million, an increase of $1.3 million or 15%. Overall, deposit service charge income increased $1.1 million; other commissions and fees increased $475,000; and other non-interest income increased $192,000. The increases in total non-interest income were offset by a decline in mortgage origination income of $209,000 and a decline in investment brokerage and annuity fees of $214,000.

In general, Management prices the Bank’s deposit accounts at rates competitive with those offered by other commercial banks in its market area. Deposit and deposit fee growth have been generated by branch expansion, offering competitive deposit products, cultivating strong customer relationships through competitively superior service and cross-selling deposit products to loan customers.

Non-interest Expense

Non-interest expenses consist principally of salaries and employee benefits, occupancy and equipment costs, communication expenses, professional fees, advertising and other expenses.

 

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During 2009, non-interest expense increased $82.6 million or 175% from $47.1 million in 2008 to $129.7 million in 2009. Increased expenses were primarily driven by the one-time non-cash goodwill impairment expense of $74.9 million. Other increases in non-interest expense included FDIC and state assessments increasing $2.6 million or 244%, salaries and employee benefits increasing $1.5 million or 6%, professional fees increasing $962,000 or 75% and net Other Real Estate Owned (“OREO”) expense increasing $579,000 or 253%.

During 2008, non-interest expense increased $8.2 million or 21% from $39.0 million in 2007 to $47.1 million in 2008. Increased expenses were primarily associated with the acquired operations of Stockmans Financial Group. Increases in non-interest expense were primarily related to salaries and employee benefits increasing $3.1 million or 13%. In addition, communications increased $356,000 or 21%; net occupancy expense increased $1.5 million or 25%; professional fees increased of $432,000 or 50%; and advertising expenditures increased $210,000 or 30%.

Related Party Transactions

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. In addition, the Bank expects to continue to have such banking transactions in the future. 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.

Provision for Income Taxes

The year-over-year decline in PremierWest’s taxable income resulted in an effective tax rate of 1.53%, or a $2.3 million tax benefit in federal and state income taxes for 2009. This compares to effective tax rates of -42.15% for 2008 and 38.12% for 2007. The decrease in the effective tax rate is the result of the deferred tax asset valuation allowance offset by the net deferred tax asset.

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. The Company has determined that it is “more likely than not” that we will not be able to fully recognize all of our deferred tax assets. 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.

Efficiency Ratio

Banks use the term “efficiency ratio” to describe the relationship of administrative and other costs associated with generating revenues to certain elements of income, a concept similar to a measurement of overhead. The efficiency ratio is computed by dividing non-interest expense by the sum of net interest income plus non-interest income. Management views the efficiency ratio as a measure of PremierWest’s ability to control non-interest expenses.

Expenses related to non-cash goodwill impairment, an increase in FDIC assessments and a decrease in loan fee income and interest resulted in an increase in our efficiency ratio to a level in excess of our 60% target. For the year ended December 31, 2009, our efficiency ratio was 188.00% as compared to 66.76%, and 60.83% in 2008 and 2007, respectively. Our efficiency ratio without the goodwill impairment would have been 79.42%.

Generally, lower efficiency ratios reflect greater cost containment; however, the success of PremierWest’s community banking strategy necessitates a balance between heightened expense control and the need to maintain high levels of customer service and effective risk management. Accordingly, PremierWest staffs its branches in a manner to support its high standards for delivering exceptional customer service and maintains the necessary

 

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administrative personnel to support the desired customer service while maintaining effective risk management through internal control functions such as credit administration, internal audit and compliance.

FINANCIAL CONDITION

The table below sets forth certain summary balance sheet information for December 31, 2009, 2008 and 2007.

 

    December 31,   Increase (Decrease) December 31,  
    2009   2008   2007   2009 – 2008     2008 – 2007  
    (Dollars in thousands)  

ASSETS

             

Federal funds sold

  $ 69,855   $ 165   $ 10,350   $ 69,690      42236.36   $ (10,185   (98.41 )% 

Investment securities

    162,321     36,404     6,320     125,917      345.89     30,084      476.01

Restricted equity investments

    3,643     3,643     1,865     —        0.00     1,778      95.34

Loans, net

    1,102,224     1,229,416     1,012,269     (127,192   (10.35 )%      217,147      21.45

Other assets (1)

    198,271     206,326     127,157     (8,055   (3.90 )%      79,169      62.26
                                     

Total assets

  $ 1,536,314   $ 1,475,954   $ 1,157,961   $ 60,360      4.09   $ 317,993      27.46
                                     

LIABILITIES

             

Noninterest-bearing deposits

  $ 256,167   $ 228,788   $ 199,941   $ 27,379      11.97   $ 28,847      14.43

Interest-bearing deposits

    1,164,595     982,481     735,374     182,114      18.54     247,107      33.60
                                     

Total deposits

    1,420,762     1,211,269     935,315     209,493      17.30     275,954      29.50

Other liabilities (2)

    44,017     87,701     94,971     (43,684   (49.81 )%      (7,270   (7.65 )% 
                                     

Total liabilities

    1,464,779     1,298,970     1,030,286     165,809      12.76     268,684      26.08

SHAREHOLDERS’ EQUITY

    71,535     176,984     127,675     (105,449   (59.58 )%      49,309      38.62
                                     

Total liabilities and share-holder’s equity

  $ 1,536,314   $ 1,475,954   $ 1,157,961   $ 60,360      4.09   $ 317,993      27.46
                                     

 

(1) Includes cash and due from banks, mortgage loans held-for-sale, property and equipment, accrued interest receivable, goodwill, intangible assets and other assets.
(2) Includes federal funds purchased, borrowings, accrued interest payable and other liabilities.

Investment Portfolio

Investment securities provide a return on residual funds after lending activities. Investments may be in interest-bearing deposits, U.S. government and agency obligations, state and local government obligations or government-guaranteed, mortgage-backed securities. PremierWest generally does not invest in securities that are rated less than investment grade by a nationally recognized statistical rating organization. All securities-related investment activity is reported to the Board of Directors. Board review is required for significant changes in investment strategy. Certain senior executives have the authority to purchase and sell securities for our portfolio in accordance with PremierWest’s Funds Management policy.

Management determines the appropriate classification of securities at the time of purchase. If Management has the intent and PremierWest has the ability at the time of purchase to hold a security until maturity or on a long-term basis, the security is classified as “held-to-maturity” and is reflected on the balance sheet at historical cost. Securities to be held for indefinite periods and not intended to be held to maturity or on a long-term basis are classified as “available-for-sale.” Available-for-sale securities are reflected on the balance sheet at their estimated fair market value. An outside broker service provides the fair market value for the available-for-sale securities using Level 2 inputs that are fair values for investment securities based on quoted market prices or the market values for comparable securities.

 

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The following table sets forth the carrying value of PremierWest’s investment portfolio at the dates indicated.

 

     December 31,
     2009    2008    2007
     (Dollars in thousands)

Investment securities (available-for sale)

        

U.S. Government and agency securities

   $ 27,794    $ —      $ —  

Mortgage-backed securities and collateralized mortgage obligations

     81,258    $ 188    $ 222

Obligations of states and political subdivisions

     5,885      —        —  
                    
     114,937      188      222

Investment securities (held-to-maturity)

        

U.S. Government and agency securities

     28,238      27,496      1,484

Mortgage-backed securities and collateralized mortgage obligations

     5,807      1,799      —  

Obligations of states and political subdivisions

     9,339      2,921      4,614
                    
     43,384      32,216      6,098

Investment securities—CRA

     4,000      4,000      —  

Restricted equity securities

     3,643      3,643      1,865
                    

Total investment securities

   $ 165,964    $ 40,047    $ 8,185
                    

The contractual maturities of investment securities at December 31, 2009, excluding mortgage-related securities, investment securities—CRA and restricted equity securities for which contractual materials are diverse or nonexistent, are shown below. Expected 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.

 

    December 31,  
  2009     2008     2007  
  Amortized
Cost
  Estimated
Fair Value
  %
Yield (1)
    Amortized
Cost
  Estimated
Fair Value
  %
Yield (1)
    Amortized
Cost
  Estimated
Fair Value
  %
Yield (1)
 
    (Dollars in thousands)  

U.S. Government and agency securities:

                 

One year or less

  $ 3,992   $ 4,035   2.92   $ 12,133   $ 12,309   2.85   $ 1,484   $ 1,484   —     

One to five years

    35,907     36,175   2.20     15,363     15,606   2.85     —       —     —     

Five to ten years

    16,000     15,983   3.75     —       —     —          —       —     —     

Obligations of states and political subdivisions:

                 

One year or less

    261     261   6.03     643     642   6.38     638     638   5.44

One to five years

    3,542     3,600   4.12     906     904   5.68     1,437     1,428   5.73

Five to ten years

    2,775     2,733   4.88     1,372     1,374   6.81     2,539     2,522   6.28

Over ten years

    8,805     8,595   5.02     —       —     —          —       —     —     
                                         

Total debt securities

    71,282     71,382       30,417     30,835       6,098     6,072  

Mortgaged-backed securities and collateralized mortgage obligations

    85,846     87,091   3.07     1,987     2,039   5.51     222     222   5.69

Investment securities—CRA

    4,000     4,000   nm        4,000     4,000   nm        —       —     nm   

Restricted equity securities

    3,643     3,643   nm        3,643     3,643   nm        1,865     1,865   nm   
                                         

Total securities

  $ 164,771   $ 166,116     $ 40,047   $ 40,517     $ 8,185   $ 8,159  
                                         

 

(1) For the purposes of this schedule, weighted average yields are stated on an approximate tax-equivalent basis at a 40.00% rate.
nm = not meaningful

 

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During 2009, we purchased $190.5 million in additional securities as we invested cash related to the acquisition of branches in Davis and Grass Valley, California, in July 2009. During the same year, $64.8 million in securities matured, were called, sold or were paid down. This compares to sales, maturities and/or calls of investment securities of $30.1 million in 2008, and $3.4 million in 2007. During 2009, we reported realized gains of $50,000. No security sales were reported during 2008 and 2007.

At December 31, 2009 PremierWest’s investment portfolio had total net unrealized gains of approximately $1.3 million. This compares to net unrealized losses of approximately $470,000 at December 31, 2008, and $26,000 at December 31, 2007. Unrealized gains and losses reflect the impact of security values from changes in market interest rates and do not represent the amount of actual profits or losses that may be recognized by the Bank. Actual realized gains and losses occur at the time investment securities are sold or called. Because the decline in fair value is attributable to the changes in interest rates and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost bases, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

Securities may be pledged from time-to-time to secure public deposits, secure excess deposit coverage for customers, FHLB borrowings, repurchase agreement deposit accounts, or for other purposes as required or permitted by law. At December 31, 2009, securities with a market value of $157.4 million were pledged for such purposes.

As of December 31, 2009, PremierWest also held 15,881 shares of $100 par value Federal Home Loan Bank of Seattle (FHLB) stock, which is a restricted equity security. FHLB stock represents an equity interest in the FHLB, but it does not have a readily determinable market value. The stock can be sold at its par value only, and only to the FHLB or to another member institution. Member institutions are required to maintain a minimum stock investment in the FHLB based on specific percentages of their outstanding mortgages, total assets or FHLB advances. At December 31, 2009 and 2008, the Bank met its minimum required investment in FHLB. In addition to FHLB stock, PremierWest bank holds 15,170 shares of stock in the Federal Home Loan Bank of San Francisco. This stock was acquired pursuant to the acquisition of Stockmans Bank and reflects its required minimum stock investment in Federal Home Loan Bank of San Francisco, which must be maintained for a four-year period. The company is required to hold FHLB’s stock in order to receive advances and views this investment as long-term.

The Bank also owns stock in Pacific Coast Banker’s Bank (PCBB) with a balance of $529,000 in 2009. The investment in PCBB increased to $529,000 in 2008 from $277,000 in 2007 as a result of the acquisition of Stockmans Bank. This investment is carried at its fair market value at acquisition and is included in restricted equity investments on the balance sheet. PCBB operates under a special purpose charter to provide wholesale correspondent banking services to depository institutions. By statute, 100% of PCBB’s outstanding stock is held by depository institutions that utilize its correspondent banking services.

Loan Portfolio

The most significant asset on our balance sheet in terms of risk and the effect on our earnings is our loan portfolio. On our balance sheet, the term “net loans” refers to total loans outstanding, at their principal balance outstanding, net of the allowance for loan losses and deferred loan fees. 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.

 

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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 Credit Officer has the authority to approve loans up to a $5 million lending limit as set by the Board of Directors. All loans above the lending limit of the Chief Credit Officer, and up to $10 million limit, may be approved jointly by the Chief Credit Officer along with one of the following: Chairman of PremierWest Bank, President and Chief Executive Officer or the Chief Banking Officer. Loans that exceed this limit are subject to the review and approval by the Board’s Loan Committee. PremierWest’s unsecured legal lending limit was approximately $16.9 million and our real estate secured lending limit was approximately $28.1 million at December 31, 2009.

The following table sets forth the composition of the loan portfolio, as of December 31, 2005 through December 31, 2009:

 

    Years Ended December 31,  
    2009     2008     2007     2006     2005  
    Amount   Percen-
tage
    Amount   Percen-
tage
    Amount   Percen-
tage
    Amount   Percen-
tage
    Amount   Percen-
tage
 
    (Dollars in thousands)  

Commercial

  $ 209,538   18.24   $ 252,377   20.22   $ 244,156   23.81   $ 219,426   23.81   $ 186,828   23.13

Real estate—Construction

    211,732   18.43     280,219   22.45     268,254   26.16     259,254   28.13     237,150   29.36

Real Estate—Commercial/ Residential

    596,007   51.86     574,677   46.05     405,663   39.57     360,372   39.09     311,293   38.54

Consumer

    86,504   7.53     89,715   7.19     75,395   7.35     53,542   5.81     49,520   6.13

Other

    45,246   3.94     51,000   4.09     31,861   3.11     29,100   3.16     23,019   2.84
                                                           

Total gross loans

  $ 1,149,027   100.00   $ 1,247,988   100.00   $ 1,025,329   100.00   $ 921,694   100.00   $ 807,810   100.00
                                                           

Gross loans totaled $1.15 billion at December 31, 2009, compared to $1.25 billion as of December 31, 2008 representing an 8% decrease. The decline was primarily a result of $61.1 million in loan charge-offs but also reflected loan paydowns, net of originations, of $37.4 million. Unfunded loan commitments were $125.9 million as of December 31, 2009, representing a decrease of $43.0 million from total unfunded loan commitments at December 31, 2008. For a more detailed discussion of off-balance sheet arrangements, see Note 17 to the financial statements included in this report starting on page F-39.

As indicated above, the Company’s loan portfolio is and has been concentrated in commercial real estate loans during recent years, a common characteristic among community banks due to focused lending for business and consumer needs in communities within the Bank’s market area. Some commercial loans are secured by real estate, but funds are used for purposes other than financing the purchase of real property, such as inventory financing and equipment purchases, where real property serves as collateral for the loan. Loans of this type are characterized as real estate loans because of the real estate collateral.

Since 2006, Management has taken actions in an attempt to reduce higher risk commercial real estate loan volume by directing efforts away from new commercial real estate loan production and by reducing related concentration. However, the volume of commercial real estate loans remains above what Management would otherwise target, 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

 

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appropriate exit strategies for commercial real estate loans that have suffered or are anticipated to encounter difficulties if the economic downturn extends. Notwithstanding measures taken to reduce commercial real estate loan volumes, these loans increased by $11.9 million during 2009, as a result of our funding pre-existing loan commitments, the re-classification of a commercial and industrial loan to commercial real estate due to the nature of its collateral support, and the acquisition of commercial real estate loans with the purchase of Stockmans Financial Group.

The table below shows total loan commitments (funded and unfunded) by loan type and geographic region at December 31, 2009:

 

     December 31, 2009
     Southern
Oregon
   Mid-Central
Oregon
   Northern
California
   Sacramento
Valley
     (Dollars in thousands)

Agricultural/Farm

   $ 11,684    $ 3,899    $ 4,772    $ 29,147

C&I

     140,309      57,698      34,164      60,297

CRE

     342,834      155,376      82,959      177,751

Residential RE construction

     10,250      3,896      10,022      7,234

Residential RE

     10,128      3,294      4,977      13,787

Consumer RE

     29,145      8,438      11,547      2,607

Consumer

     23,457      23,694      5,410      1,083
                           

Total*

   $ 567,807    $ 256,295    $ 153,851    $ 291,906
                           

 

 * Excludes Other category comprised of credit cards, overdrafts, leases and other adjustments such as loan premiums, etc., in the amount of $4.7 million.

The following table presents maturity and re-pricing information for the loan portfolio at December 31, 2009. The table segments the loan portfolio between fixed-rate and adjustable-rate loans and their respective re-pricing intervals based on fixed-rate loan maturity dates and variable-rate loan re-pricing dates for the periods indicated:

 

     December 31, 2009
      Within One
Year(1)
   One to Five
Years
   After Five
Years
   Total
     (Dollars in thousands)

Fixed-rate loan maturities

           

Commercial

   $ 15,289    $ 20,786    $ 353    $ 36,428

Real estate—Construction

     65,437      8,914      —        74,351

Real estate—Commercial/Residential

     59,862      54,841      7,371      122,074

Consumer

     10,203      21,373      22,043      53,619

Other

     5,858      3,462      440      9,760
                           

Total fixed rate loan maturities

     156,649      109,376      30,207      296,232
                           

Adjustable-rate loan maturities

           

Commercial

     111,492      54,303      7,315      173,110

Real estate—Construction

     111,945      23,995      1,441      137,381

Real estate—Commercial/Residential

     211,601      220,250      42,082      473,933

Consumer

     24,354      3,579      23      27,956

Other

     24,531      14,392      1,492      40,415
                           

Total adjustable-rate loan repricings

     483,923      316,519      52,353      852,795
                           

Total maturities and repricings

   $ 640,572    $ 425,895    $ 82,560    $ 1,149,027
                           

 

(1) Loans due on demand and overdrafts are included in the amount due in one year or less. All PremierWest loans have a stated schedule for repayment or a stated maturity.

 

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Credit Quality

Management is committed to a credit culture that emphasizes quality underwriting standards and provides for the effective monitoring of loan quality and aggressive resolution to problem loans once they are identified. Nonperforming assets amounted to 8.37% of total assets outstanding at December 31, 2009, up from 5.90% at December 31, 2008, and are primarily a result of the continued economic disruption that began during 2008. Interest income that would have been recognized on non-accrual loans if such loans had performed in accordance with their contractual terms totaled $9.1 million for the year ended December 31, 2009, $4.7 million for the year ended December 31, 2008, and $243,000 for the year ended December 31, 2007. Actual interest income recognized on such loans on a cash basis during 2009 was approximately $528,000, $626,000 and $429,000 in 2008 and 2007. At December 31, 2009 and 2008, the allowance for loan losses related to impaired loans was $7.7 million and $6.3 million, respectively.

The following table summarizes nonperforming assets by category:

 

     December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Loans on nonaccrual status

   $ 98,497      $ 68,496      $ 8,221      $ 1,430      $ 2,273   

Loans past due greater than 90 days but not on nonaccrual status

     5,420        1,437        147        24        2   

Impaired loans in process of collection

     —          12,682        —          —          —     

Other real estate owned and foreclosed assets

     24,748        4,423        —          —          —     
                                        

Total nonperforming assets

   $ 128,665      $ 87,038      $ 8,368      $ 1,454      $ 2,275   
                                        

Percentage of nonperforming assets to total assets

     8.37     5.90     0.73     0.14     0.25
                                        

Total nonperforming assets were $128.7 million at December 31, 2009, up from $87.0 million as of December 31, 2008. The nonperforming asset total includes $24.7 million in other real estate owned as of December 31, 2009 as compared to $4.4 at the previous year end.

While the Bank significantly increased its resources dedicated to dealing with nonperforming assets in 2009, continued deterioration in appraised values, as a result of the illiquid market for some property types, resulted in lower collateral appraisal values. While the Bank may believe the value at which the loan is ultimately resolved may be higher, regulatory guidance and current practice is to value all non-performing assets at current appraised value without regard to other factors or documentation. The results from these policies have frequently resulted in charges against earnings.

Management continues to work closely with borrowers who are motivated to resolve their financial issues through properly collateralized restructures and workouts. In addition, the team is proactive in contacting distressed asset investors in anticipation of soliciting interest in acquiring notes or foreclosed property. The holding costs of certain other real estate owned are being reviewed as current volatile market conditions may warrant holding some foreclosed assets for future gains. With shareholder value in mind, our team will continue to evaluate these assets and act accordingly.

Nonperforming Loans

Management considers a loan to be nonperforming when it is 90 days or more past due, or sooner if the Bank has determined that repayment of the loan in full is unlikely. Generally, unless collateral for a loan is a one-to-four family residential dwelling, interest accrual ceases when 90 days past due (but no later than the date of acquisition by foreclosure, voluntary deed or other means) and the loan is classified as nonperforming. A loan placed on non-accrual status may or may not be contractually past due at the time the determination is made to

 

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place the loan on non-accrual status, and it may or may not be secured. When a loan is placed on non-accrual status, it is the Bank’s policy to reverse interest previously accrued but uncollected. Interest later collected on the non-accrual loan, for book purposes, is credited to loan principal if, in Management’s opinion, full collectability of principal is doubtful.

In some instances where the loans are well secured and in the process of collection, such loans will not be placed on non-accrual status. In addition, loans that are impaired pursuant to ASC 310-10-35, “Accounting by Creditors for the Impairment of a Loan”, are classified as non-accrual consistent with regulatory guidance. Loans placed on non-accrual status typically remain so until all principal and interest payments are brought current, and the potential for future payments, in accordance with associated loan agreements, appears reasonably certain.

Impaired loans are defined as loans where full recovery of contractual principal and interest is in doubt. Impaired loans include all non-accrual and restructured commercial and real estate loans. The dollar amount of loan impairment is determined using either the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the collateral of an impaired collateral-dependent loan or an observable market price. Current practice and regulatory guidance places primary emphasis on appraised value for collateral dependent loans. Loan impairment is typically recognized through a charge to earnings reflecting any shortfall between the principal balance owing and the net realizable value of the loan.

At December 31, 2009 and 2008, nonperforming loans (loans 90 days or more delinquent and/or on non-accrual status) totaled approximately $103.9 million and $82.6 million, respectively. The large dollar increase in nonperforming loans between 2009 and 2008 is concentrated primarily in real estate collateralized loans, and is primarily comprised of construction and commercial real estate credits. Management has assessed the real estate collateral for impairment and charged off any impairment on real estate collateral dependent loans. On all other real estate collateralized loans, Management believes that, based on current appraisals or estimates based on the most recent available appraisals aggressively discounted for aging, adequate collateral coverage existed as of each year end.

The following table summarizes the Company’s non-performing loans by loan type and geographic region as of December 31, 2009:

 

    December 31, 2009  
  Non-performing Loans     Total
Funded
Loans*
  Percent NPL
to Funded
Loan Totals
by Category
 
  Southern
Oregon
    Mid-Central
Oregon
    Northern
California
    Sacramento
Valley
    Totals      
    (Dollars in thousands)  

Agricultural/Farm

  $ —        $ —        $ 682      $ —        $ 682      $ 43,418   1.6

C&I

    3,208        348        595        3,100        7,251      $ 210,392   3.4

CRE

    18,690        29,609        8,748        13,907        70,954      $ 746,159   9.5

Residential RE construction

    3,292        2,368        8,279        5,911        19,850      $ 28,223   70.3

Residential RE

    980        640        1,381        1,947        4,948      $ 31,991   15.5

Consumer RE

    177        —          —          —          177      $ 33,979   0.5

Consumer

    22        19        14        —          55      $ 50,134   0.1
                                               
    26,369        32,984        19,699        24,865        103,917        1,144,296  

Other*

    —          —          —          —          —          4,731  
                                               

Total non-performing loans by region

  $ 26,369      $ 32,984      $ 19,699      $ 24,865      $ 103,917      $ 1,149,027  
                                               

Non-performing loans to total funded loans

    5.1     14.0     13.7     9.8     9.0    

Total funded loans

  $ 515,491      $ 235,238      $ 143,538      $ 254,760      $ 1,149,027       

 

* Includes overdrafts, leases and other adjustments such as deferred loan fees, etc.

 

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The Company’s principal source of credit stress is real estate related loans, both commercial and residential real estate. Borrowers either involved in real estate or having secured loans with real estate have been vulnerable to both the ongoing economic downturn and to declining real estate collateral values. Approximately 92.1% or $95.8 million of our non-performing loan total of $103.9 million is directly related to real estate in the form of commercial or residential real estate loans. At December 31, 2009, $38.4 million of our real estate related loans remain current as to contractual principal and interest payments, but were placed on non-accrual status due to the absence of evidence supporting the borrowers’ ongoing ability to discharge their loan obligations.

Continuing actions taken to address the troubled credit situation include:

 

   

Escalation of credit monitoring activities since the beginning of the fourth quarter of 2008 to provide early warning of possible borrower distress that could lead to loan payment defaults. Enhanced credit monitoring and early warnings are intended to provide additional time to seek viable alternatives with the borrower. For those borrowers who have experienced payment problems and wish to seek a workable arrangement with the Company, Management and staff are actively involved in seeking loan restructuring and other loan modification options and obtaining additional collateral coverage. More recently during the quarter ended September 30, 2009, the Company reorganized and assigned an Asset Recovery Group (“ARG”) to interface both directly with borrowers and with line managers to expedite resolution of existing and potential troubled credits. As of December 31, 2009, the ARG had 14 staff members. We believe that these actions have and will continue to facilitate recovery strategies with cooperative borrowers. In those instances where alternatives have been exhausted or determined to be impractical and default under the terms of the loans has occurred, foreclosure actions are pursued.

 

   

Evaluation to confirm the reliability of our internal credit reviews was completed on a significant portion of our loan portfolio during 2009 by the independent firm that had previously conducted a similar review of our acquisition and development portfolio during the fourth quarter of 2008. Management engaged this independent firm to perform quarterly reviews during 2009. The quarterly review reports were issued in the third and fourth quarters of 2009.

 

   

Active involvement by senior management has added emphasis to actively guide activities related to resolution of non-performing asset issues.

A continued decline in economic conditions in our market areas and nationally, as well as other factors, could adversely impact individual borrowers or our loan portfolio in general. As a result, we can provide no assurance that additional loans will not become 90 days or more past due, become impaired or be placed on non-accrual status, restructured or transferred to other real estate owned in the future. Additional information regarding our loan portfolio is provided in Note 7 of the Notes to the Condensed Consolidated Financial Statements.

The following table summarizes the Company’s non-accrual loan volume by type and as a percent of the related loan portfolio as of December 31, 2009 and 2008:

 

      December 31,  
   2009     2008  
   Amount    % of
Related
Portfolio
    Amount    % of
Related
Portfolio
 
     (Dollars in thousands)  

Commercial

   $ 5,175    2.47   $ 3,369    1.33

Real estate—Construction

     65,477    30.92     42,332    15.11

Real estate—Commercial/Residential

     26,986    4.53     21,350    3.72

Consumer

     177    0.20     951    1.06

Other

     682    1.51     494    0.97
                  

Total

   $ 98,497    8.57   $ 68,496    5.49
                  

 

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Other Real Estate Owned and Foreclosed Assets

When the Bank acquires real estate through foreclosure, voluntary deed, or similar means, it is classified as OREO until it is sold. On December 31, 2009, and December 31, 2008 there was $24.7 million and $4.4 million in other real estate owned, respectively. When property is acquired in this manner, it is recorded at the lower of cost (the unpaid principal balance at the date of acquisition) or net realizable value (fair value less estimated selling costs). Any further write-down is charged to expense. All costs incurred from the date of acquisition to maintain the property are expensed as incurred. OREO is appraised during the foreclosure process, before acquisition and losses are recognized against the allowance for loan losses in the amount by which the cost value of the related loan exceeds the estimated net realizable value of the property acquired. Subsequent write-downs or losses, net of gains, on sale of OREO are recorded as non-interest expense.

During 2009, the Company acquired collateral as a part of two loan settlements. The collateral included real estate, which was transferred to OREO, a partially completed potable water system including easements, facilities and equipment and an operating senior care facility, both of which are included in the OREO total on the balance sheet at $2.2 million and $3.1 million, respectively. The Company is making capital improvements to complete the water system and upgrade the care facility to place both in condition suitable for sale.

The balance of OREO and foreclosed assets has fluctuated during the year ended December 31, 2009, as illustrated in the table below:

 

     Twelve Months
Ended December 31,
   2009     2008
     (Dollars in thousands)

Other real estate owned and foreclosed assets, beginning of period

   $ 4,423      $ —  

Transfers from outstanding loans

     28,303        4,423

Improvements and other additions

     671        —  

Sales

     (7,142     —  

Impairment charges

     (1,507     —  
              

Total other real estate owned and foreclosed assets

   $ 24,748      $ 4,423
              

Allowance for Loan Losses

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

 

   

The Company classifies loans into relatively homogeneous pools by loan type in accordance with regulatory guidelines for regulatory reporting purposes. The Company regularly reviews all loans within each loan category to establish risk ratings for them that include Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Pursuant to ASC 310-10-35, 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. The loss factors are applied to loan category pools segregated by risk classification to estimate the loss inherent in the Company’s loan portfolio pursuant to “Accounting for Contingencies” ASC 450-10-05.

 

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Additionally, impaired loans are evaluated for loss potential on an individual basis in accordance with “Accounting for Creditors for Impairment of a Loan” ASC 310-10-35, 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, recent comparable sales, etc. In all cases, the costs to sell the subject property are deducted in arriving at the net realizable value of the collateral. Any unpaid property taxes or similar expenses also reduce the net realizable value of collateral.

The table below summarizes the ASC 450-10-05 defined “substandard” loan totals; the ASC 310-10-35 defined “impaired” loan totals (collectively, “adversely classified loans); and other related data at quarter end since December 31, 2008:

 

     December 31,
2009
    September 30,
2009
    June 30,
2009
    March 31,
2009
    December 31,
2008
 
     (Dollars in thousands)  

Rated substandard

   $ 181,675      $ 182,763      $ 192,250      $ 48,432      $ 38,275   

Impaired

     98,497        106,792        103,185        83,252        81,178   
                                        

Total adversely classified loans*

   $ 280,172      $ 289,555      $ 295,435      $ 131,684      $ 119,453   
                                        

Gross loans

   $ 1,149,027      $ 1,184,464      $ 1,201,068      $ 1,238,874      $ 1,247,988   

Adversely classified loans to gross loans

     24.38     24.45     24.60     10.63     9.57

 

 * Adversely classified loans are defined as loans having a well-defined weakness or weaknesses related to the borrower’s financial capacity or to pledged collateral that may jeopardize the repayment of the debt. They are characterized by the possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard classification are not corrected. Note that any loans internally rated worse than substandard are included in the impaired loan totals.

As illustrated above, during the second quarter of 2009, the Company experienced a substantial increase in Adversely Classified Loans. Reserves as a percentage of both categories of loans have also increased from 8.15% at December 31, 2008 to 12.72% at December 31, 2009. The impact of the extended economic downturn is shown in the increase in loans rated substandard and impaired, although data from the most recent two quarters shows some reduction in the overall increasing trend.

In addition, the very recent loss activity of the Company has significantly increased the historical loss components of the loss factors being used in the allowance methodology. Qualitative loss factors have increased as well since year end 2008; however, the historical loss component changes alone have resulted in a material increase to the allowance from December 31, 2008 to December 31, 2009.

In some instances the Company has modified or restructured loans to amend the interest rate and/or to extend the maturity. Through December 31, 2009, any such amendments have generally been consistent with the terms of newly booked loans reflecting current standards for amortization and interest rate and do not represent concessions to such borrowers. In those instances where concessions have been granted meeting the criteria for a

 

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troubled debt restructuring (“TDR”), the related loans have been recorded as TDR’s, placed on non-accrual status and included in the impaired loan totals. TDR’s recorded by the Company at December 31, 2009 totaled $7.2 million and were comprised of 11 loans.

PremierWest’s allowance for loan losses totaled $45.9 million at December 31, 2009, and $17.2 million at December 31, 2008, representing 3.99% of gross loans at December 31, 2009 and 1.37% of gross loans at December 31, 2008. The loan loss allowance represents 44.17% and 20.77% of nonperforming loans at December 31, 2009, and 2008, respectively.

The following is a summary of PremierWest’s loan loss experience and selected ratios for the periods presented:

 

      December 31,  
   2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Gross loans outstanding at end of year

   $ 1,149,027      $ 1,247,988      $ 1,025,329      $ 921,694      $ 807,810   
                                        

Average loans outstanding, gross

   $ 1,221,842      $ 1,255,203      $ 961,534      $ 856,945      $ 756,110   
                                        

Allowance for loan losses, beginning of year

   $ 17,157      $ 11,450      $ 10,877      $ 10,341      $ 9,171   

Loans charged-off:

          

Commercial

     (21,997     (10,366     (134     (100     (13

Real estate

     (36,353     (25,059     —          —          (500

Consumer

     (2,524     (1,879     (539     (271     (147

Other

     (193     (3,611     (154     (125     (111
                                        

Total loans charged-off

     (61,067     (40,915     (827     (496     (771
                                        

Recoveries:

          

Commercial

     143        143        204        95        119   

Real estate

     876        216        —          —          —     

Consumer

     662        229        217        93        50   

Other

     101        422        112        44        1,622   
                                        

Total recoveries

     1,782        1,010        533        232        1,791   
                                        

Net (charge-offs) or recoveries

     (59,285     (39,905     (294     (264     1,020   

Allowance for loan losses transferred from:

          

Stockmans Financial Group

     —          9,112         

Other adjustments (1)

     —          —          181        —          —     

Provision charged to income

     88,031        36,500        686        800        150   
                                        

Allowance for loan losses, end of year

   $ 45,903      $ 17,157      $ 11,450      $ 10,877      $ 10,341   
                                        

Ratio of net loans charged-off to average gross loans outstanding

     4.85     3.18     0.03     0.03     -0.13
                                        

Ratio of allowance for loan losses to gross loans outstanding

     3.99     1.37     1.12     1.18     1.28
                                        

 

(1) Includes a balance sheet reclassification adjustment (decrease) of $255,000 from the allowance for loan losses to other liabilities. The amount reclassified represents the off-balance sheet credit exposure related to unfunded commitments to lend and letters of credit; and a $436,000 increase resulting from the purchase of a consumer finance loan portfolio on June 29, 2007.

The following table shows the allocation of PremierWest’s allowance for loan losses by category and the percent of loans in each category to gross loans at the dates indicated. PremierWest allocates its allowance for loan losses to each loan classification based on relative risk characteristics. General, Specific and Qualitative allocations are made based on estimated losses that are due to current credit circumstances and other available

 

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information for each loan category. General allocations are based on historical loss factors. Specific allocations are related to loans on non-accrual status; estimated reserves based on individual credit risk ratings; loans for which Management believes the borrower might be unable to comply with loan repayment terms, even though the loans are not in non-accrual status; and, loans for which supporting collateral might not be adequate to recover loan amounts if foreclosure and subsequent sale of collateral become necessary. Qualitative allocations include adjustments for economic conditions, concentrations and other subjective factors, and are intended to compensate for the subjective nature of the determination of losses inherent in the overall loan portfolio. Because the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio, the portion of the allowance allocated to each loan category does not necessarily represent the actual losses that may occur within that loan category.

 

     December 31,  
  2009     2008     2007     2006     2005  
  Allowance
for loan
losses
  % of
loans in
each
category
to total
loans
    Allowance
for loan
losses
  % of
loans in
each
category
to total
loans
    Allowance
for loan
losses
  % of
loans in
each
category
to total
loans
    Allowance
for loan
losses
  % of
loans in
each
category
to total
loans
    Allowance
for loan
losses
  % of
loans in
each
category
to total
loans
 
    (Dollars in thousands)  

Type of loan:

                   

Commercial

  $ 6,441   18.24   $ 2,157   20.22   $ 1,684   23.81   $ 1,889   23.81   $ 2,640   23.13

Real estate- Construction

    14,953   18.43     6,015   22.45     3,720   26.16     4,096   28.13     2,295   29.36

Real estate- Commercial/ Residential

    21,958   51.86     7,154   46.05     4,516   39.57     3,820   39.09     4,599   38.54

Consumer and Other

    2,551   11.47     1,831   11.28     1,530   10.46     1,072   8.97     807   8.97
                                                           

Total

  $ 45,903   100.00   $ 17,157   100.00   $ 11,450   100.00   $ 10,877   100.00   $ 10,341   100.00
                                                           

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

As of December 31, 2009, Management believes that the Company’s total allowance for credit losses and its reserve for off-balance sheet commitments are sufficient to absorb the losses inherent in the loan portfolio, related both to funded loans and unfunded commitments. This assessment, based on both historical levels of net charge-offs and continuing detailed reviews of the quality of the loan portfolio and current business, economic and regulatory conditions, involves uncertainty and judgment. As a result, the adequacy of the allowance for loan losses and the reserve for unfunded commitments cannot be determined with inherent accuracy and may change in future periods. Additionally, bank regulatory authorities may require additional charges to the provision for loan losses as a result of their periodic examinations of the Company and their judgment of information available to them at the time of their examination. If actual circumstances and losses differ substantially from Management’s assumptions and estimates, the allowance for loan losses might not be sufficient to absorb all future losses. Net earnings would be adversely affected if that were to occur. Total off-balance sheet financial instruments were $125.9 million and $168.9 million as of December 31, 2009 and 2008, respectively.

Deposits

Deposit accounts are PremierWest’s primary source of funds. PremierWest offers a number of deposit products to attract commercial and consumer customers including regular checking and savings accounts, money market accounts, IRA accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate time deposits with

 

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maturities ranging from seven days to 60 months. These accounts earn interest at rates established by Management based on competitive market factors and Management’s desire to increase certain types or maturities of deposit liabilities.

The distribution of deposit accounts by type and rate is set forth in the following tables as of the indicated dates:

 

     Years Ended December 31,  
  2009     2008     2007  
  Average
Balance
  Interest
Expense
  Average
Rate
    Average
Balance
  Interest
Expense
  Average
Rate
    Average
Balance
  Interest
Expense
  Average
Rate
 
    (Dollars in thousands)  

Savings, money market and interest bearing demand

  $ 480,760   $ 4,245   0.88   $ 427,646   $ 6,912   1.62   $ 377,550   $ 9,691   2.57

Time deposits

    629,742     13,896   2.21     545,329     19,432   3.56     329,912     15,454   4.68
                                         

Total interest-bearing deposits

    1,110,502   $ 18,141   1.63     972,975   $ 26,344   2.71     707,462   $ 25,145   3.55
                             

Non-interest-bearing deposits

    245,829         231,710         194,456    
                             

Total interest-bearing and non-interest-bearing deposits

  $ 1,356,331       $ 1,204,685       $ 901,918    
                             

Total deposits grew $209.5 million during 2009, reaching $1.42 billion at December 31, 2009, compared to $1.21 billion at December 31, 2008, a 17% increase. At December 31, 2008, total deposits were $1.21 billion, an increase of $276.0 million, or 30%, from total deposits of $935.3 million at December 31, 2007. During 2009, non-interest-bearing deposits increased $27.4 million, or 12%, from $228.8 million at December 31, 2008. At December 31, 2009, core deposits, which consist of all demand deposit accounts, savings accounts and time deposits less than $100,000 (excluding brokered deposits), accounted for 81% of total deposits, an increase from 73% as of December 31, 2008.

Interest-bearing deposits consist of money market, NOW, savings and time deposit accounts. Interest-bearing account balances tend to grow or decline as PremierWest adjusts its pricing and product strategies based on market conditions, including competing deposit products. At December 31, 2009, total interest-bearing deposit accounts were $1.16 billion, an increase of $182.1 million, or 19%, from December 31, 2008.

Management has historically utilized brokered deposits with maturities that are typically less than one year as a short-term funding source for loan growth. Brokered deposits are classified as time deposits that are greater than $100,000 but are not considered core deposits. At December 31, 2009, brokered deposits totaled $44.3 million or 3% of total deposits; at December 31, 2008, brokered deposits totaled $123.9 million, or 10% of total deposits. At December 31, 2009, time deposits of $100,000 and over totaled $221.9 million, or 16% of total outstanding deposits, compared to $205.9 million, or 17% of total outstanding deposits at December 31, 2008, and $130.2 million, or 14% of total outstanding deposits at December 31, 2007. The following table sets forth time deposit accounts outstanding at December 31, 2009, by time remaining to maturity:

 

      Time Deposits of
$100,000 or More
    Time Deposits Less
Than $100,000
 
   Amount    Percentage     Amount    Percentage  
     (Dollars in thousands)  

Three months or less

   $ 37,995    17.12   $ 110,798    26.26

Over three months through six months

     39,312    17.71     60,023    14.22

Over six months through 12 months

     66,889    30.14     123,792    29.34

Over 12 months

     77,745    35.03     127,322    30.18
                          

Total

   $ 221,941    100.00   $ 421,935    100.00
                          

 

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Short-term and Long-term Borrowings and Other Contractual Obligations

The following table sets forth certain information with respect to PremierWest’s short-term borrowings from Federal Home Loan Bank (FHLB) Cash Management Advances (CMA) and federal funds purchased:

 

     Years Ended December 31,  
     2009     2008     2007  
     FHLB
CMA
Advances
    Federal
Funds
Purchased
    FHLB
CMA
Advances
    Federal
Funds
Purchased
    FHLB
CMA
Advances
    Federal
Funds
Purchased
 
     (Dollars in thousands)  

Amount outstanding at end of period

   $ —        —        $ 20,000      25,003      $ 13,500      54,019   

Weighted average interest rate at end of period

     n/a      n/a        0.76   1.10     4.35   4.76

Maximum amount outstanding at any month-end during the year

   $ 20,000      12,000      $ 25,000      36,859      $ 17,500      54,019   

Average amount outstanding during the period

   $ 1,973      885      $ 4,183      15,261      $ 8,230      13,082   

Average weighted interest rate during the period

     0.22   1.59     1.37   2.78     5.28   5.47

The Bank participates in the FHLB CMA Program. CMA borrowings outstanding were zero at December 2009 and $20.0 million at December 31, 2008 and $13.5 at December 31, 2007. At December 31, 2009, the Bank had an FHLB letter of credit of $21.4 million against an available line of approximately $31.9 million. PremierWest also had long-term borrowings outstanding with the Federal Home Loan Bank of Seattle (FHLB) totaling $28,000, $42,000 and $508,000 as of December 31, 2009, 2008 and 2007, respectively. The Bank makes monthly principal and interest payments on the long-term borrowings, which mature by 2014 and bear interest at a rate of 6.53%. All outstanding borrowings with the FHLB are collateralized by a blanket pledge agreement principally covering loans in the Bank’s portfolio that are secured by 1st liens against 1-4 family or multi-family residential properties as well as the Bank’s FHLB stock and potentially any funds, investment securities or loans on deposit with the FHLB.

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.

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 in an effort to preserve equity capital pursuant to current regulatory guidance and policy 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.

 

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By issuing trust preferred securities the Company is 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, 2009:

 

Trust Name

   Issue Date    Issue
Amount
   Rate
Type
    Rate   Maturity Date    Redemption
Date

PremierWest Statutory Trust I

   December 2004    $ 7,732,000    Variable (1)    LIBOR+1.75%   December 2034    December 2009

PremierWest Statutory Trust II

   December 2004    $ 7,732,000    Fixed (2)    5.65%   March 2035    March 2010

Stockmans Financial Trust I

   August 2005    $ 15,464,000    Fixed (3)    5.93%   September 2035    September 2010
                   
      $ 30,928,000          
                   

 

(1) PremierWest Statutory Trust I was bearing interest at the fixed rate of 5.65% until mid-December 2009, at which time it changed to a variable rate of LIBOR plus 1.75%, adjusted quarterly, through the maturity date in December 2034.
(2) PremierWest Statutory Trust II bears interest at the fixed rate of 5.65% until March 2010, at which time it converts to the variable rate of LIBOR +1.79%, adjusted quarterly, through the maturity date in March 2035.
(3) Stockmans Financial Trust I bears interest at the fixed rate of 5.93% until September 2010, at which time it converts to the variable rate of LIBOR +1.42%, adjusted quarterly, through the maturity date in September 2035.

PremierWest is a party to numerous contractual financial obligations including repayment of borrowings, operating lease payments and commitments to extend credit under off-balance sheet arrangements. The scheduled repayment of long-term borrowings and other contractual obligations is as follows:

 

     Payments due by period

Contractual Obligations

   Total    < 1 year    1-3 years    3-5 years    > 5 years
     (Dollars in thousands)

Borrowings

   $ 28    $ 7    $ 14    $ 7    $ —  

Operating lease obligations

     6,713      1,068      1,554      980      3,111

Junior subordinated debentures

     30,928      —        —        —        30,928

Other commitments (1)

     8,274      —        —        —        8,274
                                  

Total

   $ 45,943    $ 1,075    $ 1,568    $ 987    $ 42,313
                                  

 

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

Off-Balance Sheet Arrangements

Significant off-balance sheet commitments at December 31, 2009, include commitments to extend credit of $103.6 million and standby letters of credit of $22.3 million. See Note 17 on page F-39 of the Notes to Consolidated Financial Statements included with this report for a discussion on the nature, business purpose and importance of off-balance sheet arrangements.

 

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LIQUIDITY AND CAPITAL RESOURCES; REGULATORY CAPITAL

Shareholders’ equity was $71.5 million at December 31, 2009, a decrease of $105.4 million, or 60%, from December 31, 2008. The most significant factors contributing to the decline were a $74.9 million goodwill impairment charge, establishment of a $29.7 million deferred tax asset valuation reserve and $88.0 million in loan loss provision.

PremierWest has adopted policies to maintain an adequately liquid position to enable it to respond to changes in the financial environment and ensure sufficient funds are available to meet customers’ needs for borrowing and deposit withdrawals. Generally, PremierWest’s major sources of liquidity are customer deposits, sales and maturities of investment securities, the use of borrowings from the FHLB and correspondent banks and net cash provided by operating activities. As of December 31, 2009, unused and available lines of credit totaled $30.5 million of which $10.5 million was available from FHLB’s Cash Management Advance Program and $20.0 million from a correspondent bank. Scheduled loan repayments are a historically stable source of funds, while deposit inflows and unscheduled loan prepayments are not as stable because they are influenced by general interest rate levels, competing interest rates available on other investments, market competition, economic conditions and other factors. Liquid asset balances include cash, amounts due from other banks, federal funds sold, and investment securities available-for-sale. At December 31, 2009, these liquid assets totaled $268.7 million, or 17% of total assets, as compared to $39.1 million, or 3% of total assets, at December 31, 2008.

Our liquidity and access to interbank credit availability remains somewhat limited due to counterparty credit concerns over the Company’s financial performance during 2009. The Wachovia branch acquisition in July 2009 added $342.4 million to our deposit base and improved liquidity which remains evident in our year-end cash and cash equivalent balances. Deposits remain our preferred source of funding. Our securities portfolio has expanded significantly during 2009 but remains largely committed to satisfying pledging requirements for collateralizing public funds deposits that exceed the FDIC insurance limits. A highly competitive marketplace for local deposits will result in a continuing focus on strategies to grow the Bank’s core deposit base to assure primary liquidity. The Bank maintains contingency plans to address its liquidity needs including collateralized borrowing capacity through the Federal Home Loan Bank, other correspondent banks and the Federal Reserve Bank of San Francisco and to support its funding needs that are not covered by our core deposit base. Management has also elected to pursue raising additional equity (see Note 2 – Regulatory Agreement, Economic Condition and Management Plan) and to emphasize strategies for building relationship-oriented core deposits over time rather than aggressively attracting higher cost transactional time deposits from within our local markets.

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, 2009. The statement of cash flows includes operating, investing, and financing categories.

Cash flows used in operating activities was $22.5 million with the difference between cash provided by operating activities and a net loss of $146.5 million consisting primarily of noncash items of $88.0 million in the loan loss provision, $74.9 million for goodwill impairment, $3.9 million in depreciation and amortization and $5.6 million in deferred income taxes. These noncash items were offset by $50.1 million of changes in other assets and liabilities and a $1.5 million write down of OREO due to impairment.

Cash flows provided by investing activities of $224.6 million consisted primarily of $334.7 million of cash received, net of cash paid for the Wachovia asset purchase, $68.6 million in net loan originations, $64.8 million of proceeds from sale of securities, offset by $190.5 million used for purchases of securities and $2.3 million used for purchases of premises and equipment.

Cash flows used in financing activities of $137.7 million consisted primarily of $132.9 million net decrease in deposits, $20.0 million net decrease in FHLB borrowings, $25.0 million net decrease in Federal funds purchased, $1.0 million in dividends paid on preferred stock, offset by $41.4 million in proceeds from the issuance of preferred stock.

 

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At December 31, 2009, PremierWest had outstanding unfunded lending commitments of $125.9 million. Nearly all of these commitments represented unused portions of credit lines available to businesses. Many of these credit lines are not expected to be fully drawn upon and, accordingly, the aggregate commitments do not necessarily represent future cash requirements. Management believes that PremierWest’s sources of liquidity are sufficient to meet likely calls on outstanding commitments, although there can be no assurance in this regard.

The Federal Reserve Board and the Federal Deposit Insurance Corporation have established minimum requirements for capital adequacy for financial holding companies and member banks. The requirements address both risk-based capital and leveraged capital. The regulatory agencies may establish higher minimum requirements if, for example, a corporation has previously received special attention or has a high susceptibility to interest rate risk.

The following table reflects PremierWest Bank’s various capital ratios at December 31,2009 and 2008, as compared to regulatory minimums for capital adequacy purposes:

 

     2009
Actual
    2008
Actual
    Minimum to be
“Adequately Capitalized”
  Minimum to be
“Well-Capitalized”

Total risk-based capital ratio

   8.53   10.92   ³8.00%     ³10.00%

Tier 1 risk-based capital ratio

   7.25   9.67   ³4.00%   ³6.00%

Leverage ratio

   5.70   9.48   ³4.00%   ³5.00%

The various capital ratios for PremierWest Bancorp at December 31, 2009 and 2008, compared to regulatory minimums for capital adequacy purposes are as follows:

 

     2009
Actual
    2008
Actual
    Minimum to be
“Adequately Capitalized”

Total risk-based capital ratio

   8.62   11.05   ³8.00%

Tier 1 risk-based capital ratio

   6.84   9.80   ³4.00%

Leverage ratio

   5.38   9.59   ³4.00%

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 2010, the FASB issued Accounting Standards Update ASU No. 2010-09 “Amendments to Subsequent Events Requirements for SEC Issuers” to amend FASB ASC Topic 855 to exclude SEC reporting entities from the requirement to disclose the date on which subsequent events have been evaluated. In addition, it modifies the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively. The Company does not expect the adoption of ASU No. 2010-09 to have a material impact on the consolidated financial statements.

In December 2009, the FASB issued Accounting Standards Update ASU No. 2009-16 “Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets” to amend the codification of FASB Statement of Financial Accounting Standard (SFAS) No. 166, “Accounting for Transfers of Financial Assets” issued on June 12, 2009. ASU No. 2009-16 amends FASB ASC Subtopic 860-10-15-1, “Transfers and Servicing,” and establishes accounting and reporting standards for transfers and servicing of financial assets. It also establishes the accounting for transfers of servicing rights. The Company does not expect the adoption of ASU No. 2009-16 to have a material impact on the consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update ASU No. 2009-05 “Fair Value Measurement and Disclosures: Measuring Liabilities at Fair Value” to amend FASB ASC 820-10 “Fair Value Measurements and Disclosures-Overall” to add clarity to the measuring of liabilities at fair value when a quoted price in an active market is not available. The adoption of ASU No. 2009-05 did not have a material impact on the consolidated financial statements.

 

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In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168 (ASC 105-10-05), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162” (“SFAS 168 (ASC 105-10-05)”). The FASB Accounting Standards Codification will become the source of authoritative US generally accepted accounting principles (GAAP) recognized by the FASB for nongovernmental entities. SFAS 168 (ASC 105-10-05) will supersede Statement 162 (see below) as all of SFAS 168 (ASC 105-10-05) content will be of the same level of authority, which SFAS 162 previously identified and arranged in a hierarchy. SFAS 168 (ASC 105-10-05) will be effective for all financial statements issued for interim and annual periods ending after September 15, 2009. The Company has adopted the Codification during the quarter ended September 30, 2009 and its adoption did not have a material impact on the consolidated financial statements. References to authoritative U.S. GAAP literature, however, in the Company’s financial statements, notes thereto and Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K have been updated to reflect new Codification references.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R) (ASC 810-10-05)” (“SFAS 167”). Generally, SFAS 167 was issued to improve the financial reporting by companies involved with variable interest entities. Specifically, SFAS 167 addresses the effects on some provisions of FASB Interpretation No. 46 (revised December 2003) (ASC 810-10-05), “Consolidation of Variable Interest Entities,” namely, how to account for the elimination of the qualifying special purpose concept in FASB Statement No. 166, “Accounting for Transfers of Financial Assets” (see below). It also addresses concerns about the accounting and disclosures required by Interpretation 46(R) (ASC 810-10-05), especially the timeliness and usefulness of information about an enterprise’s involvement in a variable interest entity. The adoption of SFAS 167 will be effective as of the beginning of each reporting entity’s first annual reporting period beginning after November 15, 2009, and all interim periods within that fiscal year and interim and annual reporting periods thereafter. The Company does not expect the adoption of SFAS 167 to have a material impact on the consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166 (ASC 860-10-65), “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140” (“SFAS 166”). ASC 860-10-65 improves the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about transfers of financial assets. Furthermore, this Statement will address the effects of a transfer on an entity’s financial position, performance and cash flow, as well as any continuing involvement by the transferor. The adoption of SFAS 166 (ASC 860-10-65), will be effective for the financial statements issued for the first annual reporting period beginning after November 15, 2009, and all interim periods within those fiscal years and interim and annual reporting periods thereafter. The Company does not expect the adoption of SFAS 166 (ASC 860-10-65), to have a material impact on the consolidated financial statements.

In April 2009, the FASB issued Statement of Financial Accounting Standards No. 107-1 (“SFAS 107-1 (ASC 825-10-50)”) and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. The disclosures require publically traded companies to disclose the fair value of financial instruments in interim periods previously required in annual financial statements. These standards are effective for interim and annual periods ending after June 15, 2009. The Company adopted the provisions of SFAS 107-1 (ASC 825-10-50) and APB 28-1 and it did not have a material impact on the consolidated financial statements.

In April 2009, the FASB issued Statement of Financial Accounting Standards No. 115-2 (ASC 320-10-15) and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“SFAS 115-2 (ASC 320-10-15)” and “SFAS 124-2”). These statements amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. These statements are effective for interim and annual periods ending after June 15, 2009. The Company adopted the provisions of SFAS 115-2 (ASC 320-10-15) and SFAS 124-2 and it did not have a material impact on the consolidated financial statements.

 

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In April 2009, the FASB issued Statement of Financial Accounting Standards No. 157-4 (ASC 820-10-05), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“SFAS 157-4 (ASC 820-10-05)”). SFAS 157-4 (ASC 820-10-05) provides additional guidance for estimating fair value in accordance with SFAS 157-4 (ASC 820-10-05), when the volume and level of activity for the asset or liability have significantly decreased. SFAS 157-4 (ASC 820-10-05) also includes guidance on identifying circumstances that indicate a transaction is not orderly. It is effective for interim and annual periods ending after June 15, 2009. The Company adopted the provisions of SFAS 157-4 (ASC 820-10-05) and it did not have a material impact on the consolidated financial statements.

In December 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) 132(R)-1 (ASC 715-20-65), “Employers Disclosures about Postretirement Benefit Plan Assets,” which provides additional guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This interpretation is effective for financial statements issued for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact the adoption of FSP 132(R)-1 (ASC 715-20-65) will have on its consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (ASC 810-10-65), “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160 (ASC 810-10-65)”). SFAS 160 (ASC 810-10-65) establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 (ASC 810-10-65) clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 (ASC 810-10-65) also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 (ASC 810-10-65) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption was prohibited. The Company adopted the provisions of SFAS 160 (ASC 810-10-65) and it did not have a material impact on the consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (revised 2007) (ASC 805-10-05), “Business Combinations” (“SFAS 141R (ASC 805-10-05)”), which replaces SFAS No. 141. SFAS 141R (ASC 805-10-05) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS 141R (ASC 805-10-05) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (on or after June 28, 2009 of fiscal 2010). Early adoption was not permitted. The Company adopted the provisions of SFAS 141R (ASC 805-10-05) and it did not have a material impact on the consolidated financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

 

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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, 2009, based upon the contractual maturity or contractual re-pricing dates of loans (excluding nonperforming loans) and the contractual maturities of time deposits and borrowings. Prepayment assumptions have not been applied to fixed-rate mortgage loans. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

 

     BY REPRICING INTERVAL
     0 – 3
Months
    4 – 12
Months
    1 – 5
Years
    Over 5
Years
    Total
     (Dollars in thousands)

ASSETS

          

Interest-earning assets:

          

Federal funds sold and interest-earning deposits

   $ 80,673      $ 40,000      $ —        $ —        $ 120,673

Investment securities

     8,506        18,542        91,196        46,484        164,728

Loans, net (1)

     285,316        276,230        401,913        81,234        1,044,693
                                      

Total

   $ 374,495      $ 334,772      $ 493,109      $ 127,718      $ 1,330,094
                                      

LIABILITIES

          

Interest-bearing liabilities:

          

Interest-bearing demand and savings

   $ 139,325      $ 48,371      $ 226,059      $ 106,964      $ 520,719

Time deposits

     153,809        285,756        203,796        515        643,876

Borrowings

     1        4        23        —          28

Junior subordinated debentures

     —          —          —          30,928        30,928
                                      

Total

   $ 293,135      $ 334,131      $ 429,878      $ 138,407      $ 1,195,551
                                      

Interest rate sensitivity gap

   $ 81,360      $ 641      $ 63,231      $ (10,689   $ 134,543
              

Cumulative

   $ 81,360      $ 82,001      $ 145,232      $ 134,543     
                                  

Cumulative gap as a % of interest-earning assets

     6.1     6.2     10.9     10.1  
                                  

 

(1) For purposes of the gap analysis, loans are reduced by the allowance for loan losses and nonperforming loans. Unearned discounts and deferred loan fees are included.

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

 

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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.

In addition to a static gap analysis of interest rate sensitivity, PremierWest also attempts to monitor interest rate risk from the perspective of changes in the economic value of equity, also referred to as net portfolio value (NPV), and changes in net interest income. Changes to the NPV and net interest income are simulated using instant and permanent rate shocks of plus and minus 300 basis points, in increments of 100 basis points. These results are then compared to prior periods to determine the effect of previously implemented strategies. If estimated changes to NPV or net interest income are not within acceptable limits, the Board may direct Management to adjust its asset and liability mix to bring interest rate risk within acceptable limits. The NPV calculations are based on the net present value of discounted cash flows, using market prepayment assumptions and market rates of interest for each asset and liability product type based on its characteristics. The theoretical projected change in NPV and net interest income over a 12-month period under each of the instantaneous and permanent rate shocks have been calculated by PremierWest using computer simulation.

PremierWest’s simulation analysis forecasts net interest income and earnings given unchanged interest rates (stable rate scenario). The model then estimates a percentage change from the stable rate scenario under scenarios of rising and falling market interest rates over various time horizons. The simulation model, based on December 31, 2009 data, estimates that if an immediate decline of 300 basis points occurs, net interest income during the subsequent twelve months could be unfavorably affected by approximately 12.95%, while a similar immediate increase in interest rates would result in a favorable change of approximately 22.32% indicative of an asset-sensitive position for the twelve months ending December 31, 2009. Because of uncertainties about customer behavior, refinance activity, absolute and relative loan and deposit pricing levels, competitor pricing and market behavior, product volumes and mix, and other unexpected changes in economic events affecting movements and volatility in market rates, there can be no assurance that simulation results are reliable indicators of earnings under such conditions.

 

     Net Increase (Decrease)
in Net Interest Income
(in thousands)(1)
    Net
Interest
Margin(2)
    Change in
Return on
Equity
 

As of December 31, 2009, the prime rate was 3.25%

     —        4.10   0.00
                    

Prime rate increase of:

      

300 basis points to 6.25%

   $ 12,149      4.96   10.74

200 basis points to 5.25%

   $ 7,838      4.66   7.02

100 basis points to 4.25%

   $ 3,971      4.38   3.60

Prime rate decrease of:

      

300 basis points to 0.25%

   $ (7,050   3.61   -6.61

200 basis points to 1.25%

   $ (5,777   3.70   -5.40

100 basis points to 2.25%

   $ (3,420   3.86   -3.17

 

(1) PremierWest’s interest rate sensitivity gap is asset-sensitive, which in conjunction with the general level of interest rates, yields abnormal changes in net-interest income as further rate declines are modeled. This occurs due to a practical floor of zero for deposit interest rates.
(2) Tax adjusted at a 40.00% rate.

It is PremierWest’s policy to manage interest rate risk to maximize long-term profitability under the range of likely interest rate scenarios.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements called for by this item are included in this report beginning on page F-3.

The following tables set forth the Company’s unaudited consolidated financial data regarding operations for each quarter of 2009 and 2008. 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.

 

     2009  
   First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 
     (Dollars in thousands, except per share data)  

STATEMENT OF OPERATIONS DATA

        

Total interest income

   $ 20,046      $ 19,216      $ 19,155      $ 19,498   

Total interest expense

     5,666        4,920        5,178        4,204   
                                

Net interest income

     14,380        14,296        13,977        15,294   

Provision for loan losses

     10,700        50,390        10,261        16,680   
                                

Net interest income (loss) after provision for loan losses

     3,680        (36,094     3,716        (1,386

Non-interest income

     2,665        2,647        2,788        2,952   

Non-interest expense

     12,787        13,288        14,760        88,887   
                                

Loss before income taxes

     (6,442     (46,735     (8,256     (87,321

Provision (benefit) for income taxes

     (2,835     (18,750     (3,316     22,619   
                                

Net loss

     (3,607     (27,985     (4,940     (109,940

Preferred stock dividends and discount accretion

     372        569        613        617   
                                

Net loss available to common shareholders

   $ (3,979   $ (28,554   $ (5,553   $ (110,557
                                

Basic loss per common share

   $ (0.16   $ (1.16   $ (0.22   $ (4.47
                                

Diluted loss per common share

   $ (0.16   $ (1.16   $ (0.22   $ (4.47
                                
      2008  
   First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 
     (Dollars in thousands, except per share data)  

STATEMENT OF OPERATIONS DATA

        

Total interest income

   $ 22,925      $ 22,704      $ 22,694      $ 20,613   

Total interest expense

     7,871        6,977        7,149        6,576   
                                

Net interest income

     15,054        15,727        15,545        14,037   

Provision for loan losses

     3,075        5,225        4,750        23,450   
                                

Net interest income (loss) after provision for loan losses

     11,979        10,502        10,795        (9,413

Non-interest income

     2,312        2,660        2,595        2,667   

Non-interest expense

     11,523        12,204        11,470        11,932   
                                

Income (loss) before income taxes

     2,768        958        1,920        (18,678

Provision (benefit) for income taxes

     965        313        632        (7,403
                                

Net income (loss)

     1,803        645        1,288        (11,275

Preferred stock dividends and discount accretion

     69        69        69        68   
                                

Net income (loss) available to common shareholders

   $ 1,734      $ 576      $ 1,219      $ (11,343
                                

Basic earnings (loss) per common share

   $ 0.07      $ 0.03