Third Capital-Raise Attempt Could Prove Toughest for PremierWest

Going to the same well a third time in a drought might be difficult — but that is what PremierWest Bancorp may have to do.

The Medford, Ore., company raised $18.7 million in a rights offering in March and $14.6 million in a public offering in April. Yet it warned when announcing its second-quarter results late last week that it needs even more capital to comply with an enforcement action it received in April, and that making the October deadline will be tough.

Analysts said the $1.4 billion-asset PremierWest was fortunate to raise the money when it did, and it could be even tougher this time — especially in the stressed markets in the Pacific Northwest.

"There's money out there for institutions with a clear strategy, if investors can see what pro forma earnings power might be," said Brett Rabatin, an analyst with Sterne Agee & Leach. "If you're looking to fill a big hole with cash — either a lot of chargeoffs to be taken or the loan portfolio still needs significant work — and the core operating income just looks weak, then that obviously would be a situation where you're less likely to be able to get a capital raise done."

Tim O'Brien, an analyst with Sandler O'Neill & Partners LP, said another successful capital-raising effort will depend on how much improvement Premier makes with its credit-quality issues. Nonperforming assets continued to rise in the second quarter — by 15% to $144.8 million as of June 30, after a $23 million group of real estate loans went south. Yet working through problem loans appears to be the top priority, O'Brien said.

"Management's tack is to do what they can on things that they can affect," he said. "It's a work in progress. They raised some capital, they were successful there — remarkably successful — which is a feather in their cap. And now they're working on credit."

PremierWest sold $6.7 million in bank-owned properties in the second quarter, for a $1.1 million net sales gain. Its chief executive, James Ford, said he expects to resolve another $25 million of nonperforming loans in the second half of the year.

Ford said that by that focusing on problem loans, he hopes to persuade regulators to give PremierWest additional time to meet the capital requirements.He said it already has complied with most of the order's requirements, but remains shy of the 10% leverage ratio spelled out in the order. As of June 30 the company had a leverage ratio of 8.43%. PremierWest hasn't yet decided on a capital-raising plan, the CEO said.

"What they've [regulators] indicated to us is, even though the order has a specific number in it, they're looking for progress on all the fronts," Ford said in an interview Monday. "And given how much progress we've made on the other fronts, our expectation is that" missing the capital-raising deadline "will not be an issue for us."

Like other banks in the Pacific Northwest, PremierWest has run into trouble with commercial real estate loans, which make up 65% of its loan portfolio. Although the recession hit this region later than other parts of the country, it has struggled for some time with souring construction loans, especially in overbuilt vacation and retirement communities such as Bend, Ore., and Boise, Idaho.

While neighboring Washington still has more troubled banks, stress in Oregon is palatable. Foresight Analytics, a unit of Trepp LLC, expects seven Oregon banks to fail this year, and has put 18 of the state's 36 banks on its quarterly watch list.

The state had its second failure of the year Friday when regulators shut down the $251 million-asset Home Valley Bank of Cave Junction. South Valley Bank and Trust of Klamath Falls took over the bank, paying a 1.05% premium to buy its $229.6 million in deposits and most of its assets.

PremierWest, whose branches are mostly in southern Oregon and the Sacramento area, experienced the biggest deterioration in its southern Oregon assets. Nonperforming loans originated there have doubled from a year earlier, to $62 million as of June 30.

Jeffrey Rulis, an analyst at D.A. Davidson & Co., said the stressed markets in which the company operates could be a factor in trying to raise more capital. "I'm sure that would be an element," he said. "You'd have to be comfortable with investing in a bank operating in that footprint."

Working in its favor is that the company has a loyal shareholder base and that it isn't heavily held by institutional investors, Rulis said. And it is encouraging that PremierWest's management is addressing the credit-quality problems in a straightforward manner, he said.

Looking at recent credit-quality trends, however, it appears the company isn't gaining on its problem loans, Rulis said.

"Our approach to this stock is it appears that there's future losses and a need to raise capital," he said. "That generally has a negative impact on tangible book value, not to mention the situation is more risky than a healthy bank with a lot of capital that's profitable."