SOURCE: PremierWest Bancorp

July 24, 2012 09:30 ET

PremierWest Bancorp Announces Second Quarter Results

MEDFORD, OR--(Marketwire - Jul 24, 2012) - PremierWest Bancorp (NASDAQ: PRWT) announced results for the second quarter ended June 30, 2012, as follows:

  • Net loss applicable to common shareholders of $2.0 million, compared to a $4.8 million net loss in first quarter 2012 and a $2.7 million net loss in second quarter 2011;
  • Loan loss provision expense of $1.3 million versus $3.5 million in first quarter 2012 and none in second quarter 2011;
  • Net loan charge-offs of $2.1 million compared to net loan charge-offs of $5.9 million in first quarter 2012 and $4.9 million in second quarter 2011;
  • Net OREO and foreclosed asset expenses of $1.2 million, a reduction from $2.4 million in first quarter 2012 and $4.4 million in second quarter 2011;
  • Net interest margin of 4.34%, an increase from 4.10% in first quarter 2012 and 4.19% in second quarter 2011. 
  • Average rate paid on total deposits and borrowings of 0.56%, a decline from 0.62% in the first quarter in 2012 and 0.83% in second quarter 2012.

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

  • Reducing adversely classified loans to $118.1 million, down from $140.0 million at March 31, 2012 and $207.1 million at June 30, 2011;
  • Reducing non-performing assets to $72.3 million, a decline from $91.3 million at March 31, 2012 and $120.1 million at June 30, 2011;
  • Completed the consolidation of nine branches into existing nearby offices and sale of two branches to reduce expenses and improve efficiency with only modest losses in deposits. These branches represented approximately $102.0 million, or less than 10% of total Bank wide deposits as of December 31, 2011. As of June 30, 2012, only $29.1 million in deposits have been lost as a result of this initiative, including $16.3 million located in the two branches sold to another financial institution. This action is projected to result in expense savings of approximately $1.9 million annually;
  • Initiated additional expense control initiatives including a restructuring of staff and processes that are projected to result in annualized savings of approximately $2.5 million. As a result of these changes, some staff positions were eliminated and other vacant positions were not filled in order to create a more efficient organization.
  • Strengthening the Bank's total risk-based and leverage capital ratios to 13.64% and 9.01%, respectively, as compared to 13.23% and 8.78% at March 31, 2012 and 12.65% and 8.71% at June 30, 2011;
  • Maintaining non-interest bearing demand deposits at 26% of total deposits, as compared to 26% in first quarter 2012 and 22% in second quarter 2011. 

James M. Ford, PremierWest's President & Chief Executive Officer, stated, "We made significant progress in reducing problem assets during this current quarter. Adversely classified loans are at the lowest levels in several years. Contributing to this reduction was the sale or payoff of over $10.0 million in adversely classified loans at full principal balance. Our net loss narrowed from the previous quarter and from the same period in 2011, primarily due to a reduction in salary and employee expenses. In addition, credit resolution costs declined, chiefly due to a reduction in OREO impairment charges. We believe this indicates that real estate price declines are beginning to stabilize. 

"We completed the branch consolidation and administrative staffing restructuring announced in the previous quarter. While we incurred one-time costs associated with these endeavors, such efforts have already begun to bear fruit, as mentioned above. Successfully completing such expense control initiatives demonstrates our commitment to implement changes in the operation of the Bank that position us for the future. We are focused on creating a more cost-effective, service-focused organization to prosper in the challenging business environment ahead. 

"In the midst of continued global and national economic uncertainty, our net interest margin improved during this past quarter. We continue to focus on non-interest bearing deposits as a source of funding and reducing our reliance on higher-cost certificates of deposits," observed Ford. "Unfortunately, loan demand remains weak as a result of the continued economic slowdown. As a result, the investment portfolio is providing earnings until loan demand improves. The investment portfolio consists of high quality federal government agency and municipal securities."

Finally, Ford concluded, "Continued deleveraging, reduction in expenses, and improvement in credit quality have resulted in additional improvement in our capital levels. We will continue to pursue strategies to enhance the efficiency and effectiveness of PremierWest. I credit the dedicated commitment of our employees and the support of the shareholders for the improvement we have made."

OPERATING RESULTS

Net Interest Income
Net interest income for the quarter and six months ended June 30, 2012 declined from the three and six months ended June 30, 2011. This is primarily due to a decline in average interest earning assets during these periods as a result of the Company's deleveraging strategy. Correspondingly, average interest bearing liabilities decreased during these same periods. Changes in the balance sheet mix also contributed to declines in net interest income during these periods. Loan balances have declined through payoffs and charge-offs. Investment securities have grown as a proportion of the balance sheet with loan demand continuing to be weak due to the economic slowdown. As such, investment securities, which typically generate a lower yield than loans, comprise a higher percentage of the Bank's earning assets.

Net interest income for the current quarter increased from the quarter ended March 31, 2012 despite the decline in earning assets between the periods. Interest income increased due to the collection of approximately $500,000 in loan interest from the sale of a note and the return of a loan to accruing status. Interest expense continued to decline due to the reduction in the balances of and rates paid on certificates of deposit. 

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

                                           
INCOME STATEMENT OVERVIEW                                          
                                           
                                           
(Dollars in Thousands, Except for Loss per Share Data)                                          
    For the Three Months Ended June 30, 2012     For the Three Months Ended March 31, 2012     $ Change     % Change     For the Three Months Ended June 30, 2011     $ Change     % Change  
                                                     
Interest and dividend income   $ 13,177     $ 13,118     $ 59     0 %   $ 15,697     $ (2,520 )   -16 %
Interest expense     1,543       1,744       (201 )   -12 %     2,571       (1,028 )   -40 %
  Net interest income     11,634       11,374       260     2 %     13,126       (1,492 )   -11 %
Loan loss provision     1,275       3,500       (2,225 )   -64 %     -       1,275     nm  
Non-interest income     2,594       4,483       (1,889 )   -42 %     2,693       (99 )   -4 %
Non-interest expense     14,247       16,536       (2,289 )   -14 %     17,872       (3,625 )   -20 %
LOSS BEFORE PROVISION FOR INCOME TAXES     (1,294 )     (4,179 )     2,885     69 %     (2,053 )     759     37 %
PROVISION FOR INCOME TAXES     37       10       27     270 %     5       32     640 %
  NET LOSS     (1,331 )     (4,189 )     2,858     68 %     (2,058 )     727     35 %
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION     634       628       6     1 %     613       21     3 %
                                                     
  NET LOSS APPLICABLE TO COMMON SHAREHOLDERS   $ (1,965 )   $ (4,817 )   $ 2,852     59 %   $ (2,671 )   $ 706     26 %
                                                     
LOSS PER COMMON SHARE:                                                    
  BASIC (1)   $ (0.20 )   $ (0.48 )   $ 0.28     58 %   $ (0.27 )   $ 0.07     26 %
  DILUTED (1)   $ (0.20 )   $ (0.48 )   $ 0.28     58 %   $ (0.27 )   $ 0.07     26 %
                                                     
Average common shares outstanding - basic (1)     10,034,741       10,034,741       -     0 %     10,034,491       250     0 %
Average common shares outstanding - diluted (1)     10,034,741       10,034,741       -     0 %     10,034,491       250     0 %
                                                     
nm=not meaningful                                                    
                                                     
    For the Six Months Ended June 30, 2012     For the Six Months Ended June 30, 2011     $ Change     % Change                        
                                                     
Interest and dividend income   $ 26,295     $ 30,729     $ (4,434 )   -14 %                      
Interest expense     3,287       5,402       (2,115 )   -39 %                      
  Net interest income     23,008       25,327       (2,319 )   -9 %                      
Loan loss provision     4,775       6,300       (1,525 )   -24 %                      
Non-interest income     7,077       5,794       1,283     22 %                      
Non-interest expense     30,783       33,612       (2,829 )   -8 %                      
LOSS BEFORE PROVISION FOR INCOME TAXES     (5,473 )     (8,791 )     3,318     38 %                      
PROVISION FOR INCOME TAXES     47       21       26     124 %                      
  NET LOSS     (5,520 )     (8,812 )     3,292     37 %                      
PREFERRED STOCK DIVIDENDS AND DISCOUNT ACCRETION     1,262       1,269       (7 )   -1 %                      
                                                     
  NET LOSS APPLICABLE TO COMMON SHAREHOLDERS   $ (6,782 )   $ (10,081 )   $ 3,299     33 %                      
                                                     
LOSS PER COMMON SHARE:                                                    
  BASIC (1)   $ (0.68 )   $ (1.00 )   $ 0.32     32 %                      
  DILUTED (1)   $ (0.68 )   $ (1.00 )   $ 0.32     32 %                      
                                                     
Average common shares outstanding - basic (1)     10,034,741       10,034,656       85     0 %                      
Average common shares outstanding - diluted (1)     10,034,741       10,034,656       85     0 %                      
                                                     
(1) As of June 30, 2012, June 30, 2011, and March 31, 2012, 109,039 common shares related to the potential exercise of the warrant issued to the U.S. Treasury pursuant to the Troubled Asset Relief Program (TARP) Capital Purchase Program were not included in the computation of diluted earnings per share as their inclusion would have been anti-dilutive.    
                 
                 
                 

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

                                           
Reconciliation of Non-GAAP Measure:                                          
Non-GAAP Operating Income                                          
(Dollars in Thousands)                                          
For The Three Months Ended   June 30, 2012     March 31, 2012     $ Change     % Change     June 30, 2011     $ Change     % Change  
                                                     
Net loss applicable to common shareholders   $ (1,965 )   $ (4,817 )   $ 2,852     -59 %   $ (2,671 )   $ 706     -26 %
  Provision for loan losses     1,275       3,500       (2,225 )   -64 %     -       1,275     nm  
  Net cost of operations of other real estate owned and foreclosed assets     1,223       2,424       (1,201 )   -50 %     4,406       (3,183 )   -72 %
  Provision for income taxes     37       10       27     270 %     5       32     640 %
  Preferred stock dividends and discount accretion     634       628       6     1 %     613       21     3 %
Pre-tax, pre-credit cost operating income   $ 1,204     $ 1,745     $ (541 )   -31 %   $ 2,353     $ (1,149 )   -49 %
                                                     
nm=not meaningful                                                    
                                                     
For The Six Months Ended   June 30, 2012     June 30, 2011     $ Change     % Change                        
                                                     
Net loss applicable to common shareholders   $ (6,782 )   $ (10,081 )   $ 3,299     -33 %                      
  Provision for loan losses     4,775       6,300       (1,525 )   -24 %                      
  Net cost of operations of other real estate owned and foreclosed assets     3,647       6,530       (2,883 )   -44 %                      
  Provision for income taxes     47       21       26     124 %                      
  Preferred stock dividends and discount accretion     1,262       1,269       (7 )   -1 %                      
Pre-tax, pre-credit cost operating income   $ 2,949     $ 4,039     $ (1,090 )   -27 %                      
                                                     
                                                     
                                                     
Reconciliation of Non-GAAP Measure:                                                        
Tax Equivalent Net Loss Applicable to Common Shareholders                                                  
(Dollars in Thousands)                                                        
                                                         
For the Three Months ended     June 30, 2012       March 31, 2012       $ Change       % Change       June 30, 2011       $ Change       % Change  
                                                                   
Net interest income     $ 11,634       $ 11,374       $ 260       2 %     $ 13,126       $ (1,492 )     -11 %
Tax equivalent adjustment for municipal loan interest       42         42         -       0 %       45         (3 )     -7 %
Tax equivalent adjustment for municipal bond interest       8         9         (1 )     -11 %       17         (9 )     -53 %
Tax equivalent net interest income       11,684         11,425         259       2 %       13,188         (1,504 )     -11 %
Provision for loan losses       1,275         3,500         (2,225 )     -64 %       -         1,275       nm  
Non-interest income       2,594         4,483         (1,889 )     -42 %       2,693         (99 )     -4 %
Non-interest expense       14,247         16,536         (2,289 )     -14 %       17,872         (3,625 )     -20 %
Provision for income taxes       37         10         27       270 %       5         32       640 %
Tax equivalent net loss       (1,281 )       (4,138 )       2,857       -69 %       (1,996 )       715       -36 %
Preferred stock dividends and discount accretion       634         628         6       1 %       613         21       3 %
Tax equivalent net loss applicable to common shareholders     $ (1,915 )     $ (4,766 )     $ 2,851       -60 %     $ (2,609 )     $ 694       -27 %
                                                                   
nm=not meaningful                                                                  
                                                                   
For the Six Months ended     June 30, 2012       June 30, 2011       $ Change       % Change                              
                                                                   
Net interest income     $ 23,008       $ 25,327       $ (2,319 )     -9 %                            
Tax equivalent adjustment for municipal loan interest       84         89         (5 )     -6 %                            
Tax equivalent adjustment for municipal bond interest       17         47         (30 )     -64 %                            
Tax equivalent net interest income       23,109         25,463         (2,354 )     -9 %                            
Provision for loan losses       4,775         6,300         (1,525 )     -24 %                            
Non-interest income       7,077         5,794         1,283       22 %                            
Non-interest expense       30,783         33,612         (2,829 )     -8 %                            
Provision for income taxes       47         21         26       124 %                            
Tax equivalent net loss       (5,419 )       (8,676 )       3,257       -38 %                            
Preferred stock dividends and discount accretion       1,262         1,269         (7 )     -1 %                            
Tax equivalent net loss applicable to common shareholders     $ (6,681 )     $ (9,945 )     $ 3,264       -33 %                            
                                                                   
                                                                   
                                                                   

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Management believes that presentation of these non-GAAP financial measures provide useful information frequently used by shareholders in the evaluation of a company. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

Noninterest Income
Non-interest income for the quarter ended June 30, 2012 was little changed as compared to the quarter ended June 30, 2011. Service charge income on deposit accounts declined due to a reduction in the amount of non-sufficient check items. Decline in investment brokerage fees due to a drop in sales volume was partially offset by growth in income from increased mortgage banking activity. Less repositioning activity of the investment securities portfolio occurred during the current quarter, resulting in lower gains on sale of securities. Other non-interest income increased due to gains from sale of fixed assets associated with the sale of two branches to another financial institution. 

Non-interest income for the six months ended June 30, 2012 grew as compared to the six months ended June 30, 2011 due to an increase in gains on sales of securities, which were used to offset increased OREO and related third-party expenses and one-time costs associated with a branch consolidation initiative completed during second quarter 2012. Mortgage banking income increased and service charge income on deposits and investment brokerage fee income decreased during the six-month period consistent with the second quarter results.

Non-interest income for the current quarter decreased from the quarter ended March 31, 2012 primarily due to the decrease in gains on sales of securities, as explained above. 

In November 2010, the Federal Deposit Insurance Corporation ("FDIC") issued mandates on overdraft payment programs applicable to its supervised institutions, including the Bank. These restrictions were effective July 1, 2011. The Bank began implementing changes to its overdraft payment program in the second quarter of 2011 to comply with the FDIC's mandates. The Company believes these mandates have continued to adversely affect non-interest income.

                                 
Noninterest income                                    
                                     
(Dollars in Thousands)                                    
                                     
For The Three Months Ended                                    
    June 30, 2012   March 31, 2012   $ Change     % Change     June 30, 2011   $ Change     % Change  
                                               
Service charges on deposit accounts   $ 888   $ 865   $ 23     3 %   $ 921   $ (33 )   -4 %
Other commissions and fees     697     649     48     7 %     671     26     4 %
Net gain on sale of securities, available for sale     227     2,168     (1,941 )   -90 %     423     (196 )   -46 %
Investment brokerage and annuity fees     370     438     (68 )   -16 %     426     (56 )   -13 %
Mortgage banking fees     105     115     (10 )   -9 %     84     21     25 %
Other non-interest income:                                              
  Increase in value of BOLI     118     124     (6 )   -5 %     135     (17 )   -13 %
  Other non-interest income     189     124     65     52 %     33     156     473 %
Total non-interest income   $ 2,594   $ 4,483   $ (1,889 )   -42 %   $ 2,693   $ (99 )   -4 %
                                               
                                               
                                               
For The Six Months Ended                                              
    June 30, 2012   June 30, 2011   $ Change     % Change                      
                                               
Service charges on deposit accounts   $ 1,753   $ 1,876   $ (123 )   -7 %                    
Other commissions and fees     1,346     1,316     30     2 %                    
Net gain on sale of securities, available for sale     2,395     772     1,623     210 %                    
Investment brokerage and annuity fees     808     926     (118 )   -13 %                    
Mortgage banking fees     220     209     11     5 %                    
Other non-interest income:                                              
  Increase in value of BOLI     243     257     (14 )   -5 %                    
  Other non-interest income     312     438     (126 )   -29 %                    
Total non-interest income   $ 7,077   $ 5,794   $ 1,283     22 %                    
                                               
                                               
                                               

Noninterest Expense
Non-interest expense for the three and six months ended June 30, 2012 declined compared to the three and six months ended June 30, 2011. Salaries and employee benefits expense fell primarily due to branch consolidation and sales and administrative restructuring initiatives completed during first and second quarter 2012. This was achieved despite the Company incurring one-time severance costs of approximately $400,000 as part of the restructuring. In addition, net cost of OREO dropped primarily due to a decline in impairment charges taken on OREO assets. A number of expense categories experienced declines due to company-wide efforts to reduce expenses. FDIC assessments dropped commensurate with the decline in total assets over the period, including a one-time reduction of approximately $50,000 in first quarter 2012 to better match assessment amounts going forward. Problem loan expenses increased approximately $800,000 and $500,000 primarily due to payment of delinquent property taxes incurred to acquire OREO properties in first and second quarter 2012, respectively. Other non-interest expenses increased due to one-time costs of approximately $900,000 to retire assets as a result of the branch consolidation initiative referenced above. In addition, a cost of $200,000 was incurred to enhance our provision for off-balance sheet credit risk as part of a revision of the Company's allowance for loan and lease losses methodology.

Non-interest expense for the current quarter decreased from the quarter ended March 31, 2012 primarily due to declines in costs of salaries and employee benefits, impairment charges and losses on sale of OREO, and delinquent property taxes to acquire OREO. In the first quarter of 2012, we incurred one-time costs related to the retirement of fixed assets due to branch consolidation or sale.

                                     
Noninterest expense                                    
                                     
(Dollars in Thousands)                                    
                                     
For The Three Months Ended                                    
    June 30, 2012   March 31, 2012   $ Change     % Change     June 30, 2011   $ Change     % Change  
                                               
Salaries and employee benefits   $ 6,277   $ 6,810   $ (533 )   -8 %   $ 7,113   $ (836 )   -12 %
Net cost of operations of other real estate owned and foreclosed assets     1,223     2,424     (1,201 )   -50 %     4,406     (3,183 )   -72 %
Net occupancy and equipment     1,761     1,812     (51 )   -3 %     1,845     (84 )   -5 %
FDIC and state assessments     711     671     40     6 %     798     (87 )   -11 %
Professional fees     629     408     221     54 %     757     (128 )   -17 %
Communications     453     468     (15 )   -3 %     480     (27 )   -6 %
Advertising     193     198     (5 )   -3 %     207     (14 )   -7 %
Third-party loan costs     314     255     59     23 %     431     (117 )   -27 %
Professional liability insurance     213     213     -     0 %     175     38     22 %
Problem loan expense     789     1,288     (499 )   -39 %     102     687     674 %
Other non-interest expense:                                              
   Director fees     120     109     11     10 %     101     19     19 %
   Internet costs     114     143     (29 )   -20 %     114     -     0 %
   ATM debit card costs     196     140     56     40 %     187     9     5 %
   Business development     71     70     1     1 %     90     (19 )   -21 %
   Amortization     116     116     -     0 %     116     -     0 %
   Supplies     97     136     (39 )   -29 %     117     (20 )   -17 %
   Other non-interest expense     970     1,275     (305 )   -24 %     833     137     16 %
Total non-interest expense   $ 14,247   $ 16,536   $ (2,289 )   -14 %   $ 17,872   $ (3,625 )   -20 %
                                               
                                               
For The Six Months Ended                                              
    June 30, 2012   June 30, 2011   $ Change     % Change                      
                                               
Salaries and employee benefits   $ 13,087   $ 14,139   $ (1,052 )   -7 %                    
Net cost of operations of other real estate owned and foreclosed assets     3,647     6,530     (2,883 )   -44 %                    
Net occupancy and equipment     3,573     3,723     (150 )   -4 %                    
FDIC and state assessments     1,382     1,921     (539 )   -28 %                    
Professional fees     1,037     1,633     (596 )   -36 %                    
Communications     921     955     (34 )   -4 %                    
Advertising     391     452     (61 )   -13 %                    
Third-party loan costs     569     727     (158 )   -22 %                    
Professional liability insurance     426     401     25     6 %                    
Problem loan expense     2,077     190     1,887     993 %                    
Other non-interest expense:                                              
  Director fees     229     201     28     14 %                    
  Internet costs     257     226     31     14 %                    
  ATM debit card costs     335     306     29     9 %                    
  Business development     142     174     (32 )   -18 %                    
  Amortization     232     237     (5 )   -2 %                    
  Supplies     233     266     (33 )   -12 %                    
  Other non-interest expense     2,245     1,531     714     47 %                    
Total non-interest expense   $ 30,783   $ 33,612   $ (2,829 )   -8 %                    
                                               
                                               
                                               

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

As of June 30, 2012, the Company maintained a full valuation allowance of $39.4 million against its deferred tax asset. If the Company returns to sustained profitability, all or a portion of the deferred tax asset valuation allowance would be reversed. A reversal of the deferred tax asset valuation allowance would decrease the Company's income tax expense and increase net income. Currently, the only tax expense the Company is recognizing relates to Oregon minimum tax.

                                           
SUMMARY BALANCE SHEET OVERVIEW                                      
                                           
                                           
(Dollars in Thousands)                                        
    June 30,     March 31,           %     June 30,           %  
    2012     2012     $ Change     Change     2011     $ Change     Change  
Assets:                                                  
  Cash and cash equivalents $ 87,868     $ 102,180     $ (14,312 )   -14 %   $ 71,003     $ 16,865     24 %
  Interest-bearing certificates of deposit   1,500       1,500       -     0 %     1,500       -     0 %
  Investment securities   306,032       289,589       16,443     6 %     290,816       15,216     5 %
                                                   
  Gross loans, net of deferred fees   710,465       743,259       (32,794 )   -4 %     880,853       (170,388 )   -19 %
  Allowance for loan losses   (19,518 )     (20,324 )     806     -4 %     (28,433 )     8,915     -31 %
  Net loans   690,947       722,935       (31,988 )   -4 %     852,420       (161,473 )   -19 %
                                                     
Other assets   109,127       110,720       (1,593 )   -1 %     106,300       2,827     3 %
    Total assets $ 1,195,474     $ 1,226,924     $ (31,450 )   -3 %   $ 1,322,039     $ (126,565 )   -10 %
                                                       
  Liabilities and stockholders' equity                                                  
  Total deposits $ 1,045,602     $ 1,083,033     $ (37,431 )   -3 %   $ 1,177,838     $ (132,236 )   -11 %
  Borrowings   34,496       35,861       (1,365 )   -4 %     37,833       (3,337 )   -9 %
  Other liabilities   36,087       27,596       8,491     31 %     17,963       18,124     101 %
  Stockholders' equity   79,289       80,434       (1,145 )   -1 %     88,405       (9,116 )   -10 %
    Total liabilities and stockholders' equity $ 1,195,474     $ 1,226,924     $ (31,450 )   -3 %   $ 1,322,039     $ (126,565 )   -10 %
                                                       
                                                       
                                                       

The Company's liquidity position remains strong as evidenced by its current level of combined cash and cash equivalents and investment securities. In an effort to support its net interest income and margin, the Company reduced its cash equivalents balances while increasing its investment securities portfolio since March 31, 2011. Cash equivalents as of June 30, 2012 included $15.4 million to be transferred to another financial institution as part of the sale of two branches. Cash equivalents included a temporary increase as of March 31, 2012, due to the sale of investment securities during the quarter. These funds have since been redeployed into higher yielding investment securities. Over the past year, the Company increased its government guaranteed collateralized mortgage obligations, mortgage-backed securities, and municipal securities portfolios. Municipal securities rated AA or better with maturities generally ranging from 5 to 15 years were also purchased during this period. The expected duration of the investment portfolio was 3.7 years at June 30, 2012, compared to 4.1 years at June 30, 2011 and 3.9 years at March 31, 2012.

                                                       
Cash and Cash Equivalents and Investment Securities                                                      
(Dollars in Thousands)                                                      
    June 30, 2012   % of Total     March 31, 2012   % of Total     $ Change     % Change     June 30, 2011   % of Total     $ Change     % Change  
                                                                 
                                                                 
Cash and due from banks   $ 26,522   7 %   $ 38,399   10 %   $ (11,877 )   -31 %   $ 29,535   8 %   $ (3,013 )   -10 %
Cash equivalents:                                                                
  Federal fund sold     8,940   2 %     3,005   1 %     5,935     198 %     3,000   1 %     5,940     198 %
  Interest-bearing deposits     52,406   13 %     60,776   15 %     (8,370 )   -14 %     38,468   11 %     13,938     36 %
    Total cash equivalents     87,868   22 %     102,180   26 %     (14,312 )   -14 %     71,003   20 %     16,865     24 %
                                                                 
Interest-bearing certificates of deposit     1,500   0 %     1,500   0 %     -     0 %     1,500   0 %     -     0 %
                                                                 
Investment securities:                                                                
  Collateralized mortgage obligations     140,797   36 %     126,488   32 %     14,309     11 %     124,360   34 %     16,437     13 %
  Mortgage-backed securities     91,992   23 %     80,936   21 %     11,056     14 %     58,919   16 %     33,073     56 %
  U.S. Governement and agency securities     1,799   0 %     11,219   3 %     (9,420 )   -84 %     65,593   18 %     (63,794 )   -97 %
  Obligations of states and political subdivisions     65,321   17 %     65,745   16 %     (424 )   -1 %     36,579   10 %     28,742     79 %
  Investment securities - Other Community Reinvestment Act     2,975   1 %     2,000   1 %     975     49 %     2,000   1 %     975     49 %
  Restricted equity securities     3,148   1 %     3,201   1 %     (53 )   -2 %     3,365   1 %     (217 )   -6 %
    Total investment securities     306,032   78 %     289,589   74 %     16,443     6 %     290,816   80 %     15,216     5 %
                                                                 
 Total cash and cash equivalents and investments   $ 395,400   100 %   $ 393,269   100 %   $ 2,131     1 %   $ 363,319   100 %   $ 32,081     9 %
                                                                 
Total cash and cash equivalents and investments as a % of total assets         33 %         32 %                       27 %              
                                                                 
                                                                 
                                                                 

LOANS

The Bank's total loan portfolio continues to decline, reflecting the Company's efforts to reduce adversely classified loans. These declines are accentuated by soft loan demand due to continued weakness in the local and national economy. As a result, commercial, real estate construction, and commercial & industrial loan balances declined from year end. Loan totals have also declined because the Company exited a number of higher risk rated loan relationships over the past year which contributed to the contraction in the commercial real estate and construction, land development & other land loan categories over the same period. This included a reduction, after charge-offs, of approximately $15 million in loan balances associated with settlement of the largest non-performing lending relationship in first quarter 2012.

Interest and fees earned on our loan portfolio are our primary source of revenue. Our ability to achieve loan growth will be dependent on many factors, including the ability to raise additional capital, effects of competition, economic conditions in our markets, retention of key personnel and valued customers, and our ability to close loans in the pipeline.

The Company manages new commercial, including agricultural, loan origination volume using concentration limits that establish maximum exposure levels by designated industry segment, real estate product types, geography, and single borrower limits. We expect the commercial loan portfolio to be an important contributor to growth in future revenues as we continue to seek to limit our exposure to construction and development and commercial real estate.

                                                             
Loans by category                                                            
                                                             
(Dollars in Thousands)   June 30, 2012     % of Gross Loans     March 31, 2012     % of Gross Loans     $ Change     % Change     June 30, 2011     % of Gross Loans     $ Change     % Change  
                                                                       
Construction, Land Dev & Other Land   $ 47,968     7 %   $ 57,763     8 %   $ (9,795 )   -17 %   $ 107,624     12 %   $ (59,656 )   -55 %
Commercial & Industrial     116,457     16 %     122,023     16 %     (5,566 )   -5 %     133,356     15 %     (16,899 )   -13 %
Commercial Real Estate Loans     423,569     60 %     433,942     58 %     (10,373 )   -2 %     494,599     56 %     (71,030 )   -14 %
Secured Multifamily Residential     20,604     3 %     22,532     3 %     (1,928 )   -9 %     22,791     3 %     (2,187 )   -10 %
Other Commercial Loans Secured by RE     44,026     6 %     45,674     6 %     (1,648 )   -4 %     50,641     6 %     (6,615 )   -13 %
Loans to Individuals, Family & Personal Expense     9,334     1 %     9,325     1 %     9     0 %     12,203     1 %     (2,869 )   -24 %
Consumer/Finance     36,606     5 %     36,077     5 %     529     1 %     35,561     4 %     1,045     3 %
Other Loans     12,037     2 %     16,090     2 %     (4,053 )   -25 %     25,525     3 %     (13,488 )   -53 %
Overdrafts     227     0 %     234     0 %     (7 )   -3 %     353     0 %     (126 )   -36 %
  Gross loans     710,828             743,660             (32,832 )   -4 %     882,653             (171,825 )   -19 %
    Less: allowance for loan losses     (19,518 )   -3 %     (20,324 )   -3 %     806     -4 %     (28,433 )   -3 %     8,915     -31 %
    Less: deferred fees and restructured loan concessions     (363 )   0 %     (401 )   0 %     38     -9 %     (1,800 )   0 %     1,437     -80 %
  Loans, net   $ 690,947           $ 722,935           $ (31,988 )   -4 %   $ 852,420           $ (161,473 )   -19 %
                                                                       
                                                                       
                                                                       

DEPOSITS

The trend in the decline in total deposits continues from recent quarters. This decrease was mainly due to the decision to continue to reduce higher cost time deposit balances. Time deposits declined as a percentage of the Company's total deposits in the most recent quarter versus the previous quarter and the same quarter last year. In addition, deposits have declined as a result of the branch consolidation and sale of two branches during the second quarter 2012. These branches represented approximately $102.0 million, or less than 10% of total Bank wide deposits as of December 31, 2011. As of June 30, 2012, only $29.1 million in deposits have been lost as a result of this initiative, including $16.3 million located in the two branches sold to another financial institution. This represents a loss of 28.5% of branch deposits prior to consolidation and sale, or 2.6% of total deposits as of December 31, 2011.

The combination of the Company's efforts to reduce higher-cost time deposits and recent deposit pricing strategies to lower interest rates in concert with market conditions has reduced the average rate paid on total deposits in second quarter 2012 from both the previous quarter and the same quarter in 2011. It has also increased the proportion of the Company's funding from non-interest bearing and lower-cost non maturity deposits over this period.

Total brokered deposits were $241,000 at June 30, 2012 and December 31, 2011. These deposits are currently not being replaced as they mature.

                                           
(Dollars in Thousands)   June 30, 2012   Percent of Total     March 31, 2012   Percent of Total     $ Change     June 30, 2011   Percent of Total     $ Change  
                                                     
Interest-bearing demand and money market   $ 313,750   30 %   $ 316,235   29 %   $ (2,485 )   $ 340,538   29 %   $ (26,788 )
Savings     89,426   9 %     90,035   8 %     (609 )     85,828   7 %     3,598  
Time deposits     368,442   35 %     396,830   37 %     (28,388 )     490,532   42 %     (122,090 )
  Total interest-bearing deposits     771,618   74 %     803,100   74 %     (31,482 )     916,898   78 %     (145,280 )
Non-interest bearing demand     273,984   26 %     279,933   26 %     (5,949 )     260,940   22 %     13,044  
  Total deposits   $ 1,045,602   100 %   $ 1,083,033   100 %   $ (37,431 )   $ 1,177,838   100 %   $ (132,236 )
                                                     
                                                     
                                                     

CAPITAL

Capital ratios at the Bank have improved as compared to the previous quarter and the same quarter in 2011, primarily due to the Company's deleveraging strategy and shift in the balance sheet mix to less risk-weighted assets, such as investment securities. PremierWest Bank has met the quantitative thresholds to be considered "Well-Capitalized" under published regulatory standards for total risk-based capital and Tier 1 risk-based capital at June 30, 2012. However, we continue to be subject to the terms of the Consent Order with the FDIC and have not yet reached the 10.00 percent leverage ratio required by the Consent Order, as the Bank's leverage ratio as of June 30, 2012 was 9.01 percent. As such, we are not considered "Well-Capitalized" under all applicable regulatory requirements.

                     
Bancorp:                    
    June 30,
2012
  March 31,
2012
  June 30,
2011
  Regulatory Minimum to be "Adequately Capitalized"    
                greater than or equal to    
                     
Total risk-based capital ratio   12.80%   12.52%   12.26%   8.00%    
Tier 1 risk-based capital ratio   10.87%   10.69%   10.87%   4.00%    
Leverage ratio   7.91%   7.84%   8.32%   4.00%    
                     
Bank:                    
    June 30,
2012
  March 31,
2012
  June 30,
2011
  Regulatory Minimum to be "Adequately Capitalized"   Regulatory Minimum to be "Well-Capitalized"
                greater than or equal to   greater than or equal to
                     
Total risk-based capital ratio   13.64%   13.23%   12.65%   8.00%   10.00%
Tier 1 risk-based capital ratio   12.37%   11.96%   11.38%   4.00%   6.00%
Leverage ratio   9.01%   8.78%   8.71%   4.00%   5.00%
                     
                     
                     

The total risk based capital ratios of Bancorp include $30.9 million of junior subordinated debentures, of which $24.2 million qualified as Tier 1 capital at June 30, 2012, under guidance issued by the Federal Reserve. As provided in the Dodd-Frank Act, which was signed into law on July 21, 2010, Bancorp currently expects to continue to rely on these junior subordinated debentures as part of its regulatory capital. However, Bancorp also expects that future regulations related to Basel III capital standards could impact the continued reliance on junior subordinated debentures. 

                               
                               
                               
FINANCIAL PERFORMANCE OVERVIEW                              
                               
For The Three Months Ended   June 30, 2012     March 31, 2012     Change     June 30, 2011     Change  
Selective quarterly performance ratios                                        
Return on average assets, annualized     -0.66%       -1.56%       0.90       -0.79%       0.13  
Return on average common equity, annualized     -19.26%       -43.02%       23.76       -21.35%       2.09  
Efficiency ratio (1)     100.13%       104.28%       (4.15 )     112.98%       (12.85 )
                                         
Share and per share information                                        
Average common shares outstanding - basic     10,034,741       10,034,741       -       10,034,491       250  
Average common shares outstanding - diluted     10,034,741       10,034,741       -       10,034,491       250  
Basic loss per common share   $ (0.20 )   $ (0.48 )   $ 0.28     $ (0.27 )   $ 0.07  
Diluted loss per common share   $ (0.20 )   $ (0.48 )   $ 0.28     $ (0.27 )   $ 0.07  
Book value per common share (2)   $ 3.85     $ 3.98     $ (0.13 )   $ 4.81     $ (0.96 )
Tangible book value per common share (3)   $ 3.68     $ 3.79     $ (0.11 )   $ 4.59     $ (0.91 )
                                         
                                         
For The Six Months Ended   June 30, 2012     June 30, 2011     Change                  
Selective quarterly performance ratios                                        
Return on average assets, annualized     -1.12%       -1.48%       0.36                  
Return on average common equity, annualized     -31.69%       -38.01%       6.32                  
Efficiency ratio (1)     102.32%       108.00%       (5.68 )                
                                         
Share and per share information                                        
Average common shares outstanding - basic     10,034,741       10,034,656       85                  
Average common shares outstanding - diluted     10,034,741       10,034,656       85                  
Basic loss per common share   $ (0.68 )   $ (1.00 )   $ 0.32                  
Diluted loss per common share   $ (0.68 )   $ (1.00 )   $ 0.32                  
                                         
(1) Non-interest expense divided by net interest income plus non-interest income.  
(2) Book value is calculated as the total common equity (less preferred stock and the discount on preferred stock) divided by the period ending number of common shares outstanding.  
(3) Tangible book value is calculated as the total common equity (less preferred stock and the discount on preferred stock) less core deposit intangibles divided by the period ending number of common shares outstanding.  
                           
                           
                           
                         
(Annualized, tax-equivalent basis)                        
                         
For The Three Months Ended                        
                         
    June 30, 2012   March 31, 2012   Change     June 30, 2011   Change  
Selective quarterly performance ratios                        
Yield on average gross loans (1)   6.32%   5.89%   0.43     6.18%   0.14  
Yield on average investment securities (1)(2)   2.02%   2.22%   (0.20 )   2.01%   0.01  
Cost of average interest bearing deposits   0.70%   0.77%   (0.07 )   1.02%   (0.32 )
Cost of average borrowings   1.93%   1.95%   (0.02 )   1.73%   0.20  
Cost of average total deposits and borrowings   0.56%   0.62%   (0.06 )   0.83%   (0.27 )
                         
Yield on average interest-earning assets   4.91%   4.73%   0.18     5.01%   (0.10 )
Cost of average interest-bearing liabilities   0.75%   0.82%   (0.07 )   1.04%   (0.29 )
Net interest spread   4.16%   3.91%   0.25     3.97%   0.19  
                         
Net interest margin (1)   4.34%   4.10%   0.24     4.19%   0.15  
                         
                         
                         
For The Six Months Ended                        
    June 30, 2012   June 30, 2011   Change            
Selective quarterly performance ratios                        
Yield on average gross loans (1)   6.10%   5.97%   0.13            
Yield on average investment securities (1)(2)   2.12%   1.87%   0.25            
Cost of average interest bearing deposits   0.74%   1.05%   (0.31 )          
Cost of average borrowings   1.94%   1.92%   0.02            
Cost of average total deposits and borrowings   0.59%   0.86%   (0.27 )          
                         
Yield on average interest-earning assets   4.82%   4.86%   (0.04 )          
Cost of average interest-bearing liabilities   0.79%   1.08%   (0.29 )          
Net interest spread   4.03%   3.78%   0.25            
                         
Net interest margin (1)   4.22%   4.01%   0.21            
                         
(1) Tax-exempt income has been adjusted to a tax equivalent basis at a 40% rate.                
(2) Includes interest-bearing cash equivalents.                
                         
                         
                         

Net Interest Margin
Net interest margin for the three and six months ended June 30, 2012 increased as compared to the same periods in 2011, despite the decline in higher yielding loan balances during 2012. This was primarily due to the collection of approximately $500,000 in loan interest from the sale of a note in second quarter 2012. This additional interest income resulted in a 20 and 10 basis points increase in net interest margin for the three and six months ended June 30, 2012, respectively, as compared to similar periods in 2011. Margins were also positively impacted by the continued decline in costs of interest-bearing liabilities caused by the Company's on-going efforts to reduce higher-cost certificates of deposits as a source of funding. The yields on investment securities have remained relatively stable throughout these periods, however declined slightly in second quarter 2012. This was due primarily to an increase in premium amortization on collateralized mortgage obligations as a result of a drop in interest rates to historically low levels during the period. Net interest margin for second quarter 2012 increased as compared to first quarter 2012 for similar reasons noted above. 

                                     
    For the Three Months Ended
    June 30, 2012   March 31, 2012   June 30, 2011
    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)                                                
ASSETS:                                                
Interest earning balances due from banks   $ 43,897   $ 28   0.26%   $ 38,722   $ 19   0.20%   $ 60,236   $ 41   0.27%
Federal funds sold     3,310     2   0.24%     3,033     2   0.27%     3,159     2   0.25%
Investments - taxable     301,681     1,692   2.26%     305,829     1,884   2.48%     285,007     1,680   2.36%
Investments - nontaxable     1,351     19   5.66%     1,068     23   8.66%     2,176     43   7.93%
Investments - equity securities     3,174     17   2.15%     3,252     3   0.37%     3,393     1   0.12%
Gross loans (1)     729,203     11,454   6.32%     766,868     11,222   5.89%     907,055     13,986   6.18%
Mortgages held for sale     1,100     15   5.48%     686     16   9.38%     603     6   3.99%
  Total interest earning assets     1,083,716     13,227   4.91%     1,119,458     13,169   4.73%     1,261,629     15,759   5.01%
Allowance for loan losses     (20,635)               (21,868)               (33,229)          
Other assets     138,948               145,106               129,444          
  Total assets   $ 1,202,029             $ 1,242,696             $ 1,357,844          
                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY:                                                
                                                 
Interest-bearing deposits     402,738     98   0.10%     411,249     103   0.10%     447,650     278   0.25%
Time deposits     384,744     1,277   1.33%     412,135     1,469   1.43%     505,886     2,136   1.69%
Short-term borrowings     4,107     3   0.29%     4,548     4   0.35%     5,503     7   0.51%
Long-term borrowings     30,928     165   2.15%     30,928     168   2.18%     30,940     150   1.94%
Total interest bearing liabilities     822,517     1,543   0.75%     858,860     1,744   0.82%     989,979     2,571   1.04%
Non-interest-bearing deposits     277,983               279,400               259,668          
Other liabilities     19,922               18,943               17,928          
Equity     81,607               85,493               90,269          
  Total liabilities and shareholders' equity   $ 1,202,029             $ 1,242,696             $ 1,357,844          
                                                 
Net interest income (3)         $ 11,684             $ 11,425             $ 13,188    
Net interest spread               4.16%               3.91%               3.97%
                                                 
Average yield on earning assets (2) (3)               4.91%               4.73%               5.01%
Interest expense to earning assets               0.57%               0.63%               0.82%
Net interest income to earning assets (2) (3)               4.34%               4.10%               4.19%
                                                 
Reconciliation of Non-GAAP measure:                                                
Tax Equivalent Net Interest Income                                                
                                                 
Net interest income         $ 11,634             $ 11,374             $ 13,126    
Tax equivalent adjustment for municipal loan interest     42               42               45    
Tax equivalent adjustment for municipal bond interest     8               9               17    
Tax equivalent net interest income         $ 11,684             $ 11,425             $ 13,188    
                                                 
Non-GAAP financial mesures have inherent limitations, are not required to be uniformly applied, and are not audited.                
Management believes that presentation of this non-GAAP measure provides useful information frequently used by shareholders in the evaluation of a company.                
Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitue for analyses of results as reported under GAAP.                
                                                 
(1) Non-performing loans of approximately $38.5 million at 6/30/2012, $55.9 million at 3/31/2012, $92.5 million for 6/30/2011 are included in the average loan balances.                
(2) Loan interest income includes loan fee income of $22,000, $25,000, and $61,000 for the three months ended 06/30/2012, 3/31/2012, and 6/30/2011, respectively.                
(3) Tax-exempt income has been adjusted to a tax equivalent basis at a 40% effective rate. The amount of such adjustment was an increase to recorded pre-tax income of $50,000, $51,000, and $62,000 for the three months ended June 30, 2012, March 31, 2012, and June 30, 2011, respectively.                
                           
                                                 
                                                 
    For the Six Months Ended                
    June 30, 2012   June 30, 2011                
    Average Balance   Interest Income or Expense   Average Yields or Rates   Average Balance   Interest Income or Expense   Average Yields or Rates                
(Dollars in Thousands)                                                
ASSETS:                                                
Interest earning balances due from banks   $ 41,310   $ 47   0.23%   $ 89,708   $ 115   0.26%                
Federal funds sold     3,171     4   0.25%     3,180     4   0.25%                
Investments - taxable     303,755     3,576   2.37%     246,643     2,971   2.43%                
Investments - nontaxable     1,209     42   6.99%     3,528     118   6.74%                
Investments - equity securities     3,213     20   1.25%     3,431     2   0.12%                
Gross loans (1)     748,036     22,676   6.10%     933,544     27,641   5.97%                
Mortgages held for sale     893     31   6.98%     662     14   4.26%                
Total interest earning assets     1,101,587     26,396   4.82%     1,280,696     30,865   4.86%                
Allowance for loan losses     (21,252)               (34,065)                          
Other assets     142,027               131,058                          
Total assets   $ 1,222,362             $ 1,377,689                          
                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY:                                                
                                                 
Interest-bearing deposits     406,993     201   0.10%     455,779     645   0.29%                
Time deposits     398,440     2,746   1.39%     519,683     4,433   1.72%                
Short-term borrowings     4,328     7   0.33%     3,173     8   0.51%                
Long-term borrowings     30,928     333   2.17%     30,944     316   2.06%                
Total interest bearing liabilities     840,689     3,287   0.79%     1,009,579     5,402   1.08%                
Non-interest-bearing deposits     278,691               256,814                          
Other liabilities     19,432               17,762                          
Equity     83,550               93,534                          
Total liabilities and shareholders' equity   $ 1,222,362             $ 1,377,689                          
                                                 
Net interest income (3)         $ 23,109             $ 25,463                    
Net interest spread               4.03%               3.78%                
                                                 
Average yield on earning assets (2) (3)               4.82%               4.86%                
Interest expense to earning assets               0.60%               0.85%                
Net interest income to earning assets (2) (3)               4.22%               4.01%                
                                                 
Reconciliation of Non-GAAP measure:                                                
Tax Equivalent Net Interest Income                                                
                                                 
Net interest income         $ 23,008             $ 25,327                    
Tax equivalent adjustment for municipal loan interest     84               89                    
Tax equivalent adjustment for municipal bond interest     17               47                    
Tax equivalent net interest income         $ 23,109             $ 25,463