PremierWest Bancorp, the parent company of Medford-based PremierWest Bank, will need Federal Reserve approval before it can declare dividends, take on new debt or redeem shares for at least the near future.

PremierWest Bancorp, the parent company of Medford-based PremierWest Bank, will need Federal Reserve approval before it can declare dividends, take on new debt or redeem shares for at least the near future.

Under a June 4 agreement, released Wednesday by the Federal Reserve, PremierWest is required to boost its capital levels and cash flow. The Federal Reserve regulates bank holding companies and took the action in response to PremierWest's struggles after the real estate bubble popped.

PremierWest President Jim Ford characterized the agreement as a routine follow-up to an April consent order from Federal Deposit Insurance Corp., which dealt with similar matters.

"The primary role of a holding company is to provide a source of strength to its subsidiary, the bank," Ford said. "... They want an understanding we will act as a source of strength to the bank."

Ford said PremierWest Bancorp had suspended paying dividends last summer.

Ken Thomas, a Miami-based independent bank consultant and economist, said there were danger signs that spurred the Fed action. Thomas said PremierWest's performance has been near the bottom of its peer group.

Banks typically like to operate at a 1 percent return on assets, while PremierWest recorded a minus-9 percent return, Thomas said. Overall, the 331 banks in PremierWest's peer group (based on size), averaged close to break-even with a 0.35 percent loss.

"You want to be plus one," Thomas said. "PremierWest's return on assets was minus nine."

Oregon was one of 10 states whose 36 banks made money in 2009, he said.

"PremierWest posted a 0.8 percent loss in the first quarter (of 2010) while overall Oregon banks showed a 1.08 percent return. Oregon banks are still making money and PremierWest was losing money."

The good news, however, for PremierWest was its ability to raise capital through two stock offerings.

"It's a feather in their cap that they were able to get private capital," Thomas said. "There are two sources of capital, TARP money and private money. ... In this case, they're getting the traditional private money. That's unusual, because there are banks that are much stronger in every metric, and (PremierWest has) no problem getting $25 million to $30 million in capital."

Ford said the agreement with the Fed would be in effect for an undetermined time.

"There is no defined end," Ford said. "They just determine we've satisfied the requirements and then they formally retire or release the order."

Three other banks and holding companies with offices in Southern Oregon — LibertyBank based-in Eugene, Home Valley Bank in Grants Pass and Bank of the Cascades based in Bend — are operating under similar orders from the Federal Reserve and the FDIC.

The Federal Reserve regulates bank holding companies, and the FDIC oversees banks.

"Obviously, we've seen banks all over the country enter into such agreements and very few released," Ford said. "I think (that will happen) when regulators decide the industry is ready to release the orders."

Reach reporter Greg Stiles at 541-776-4463 or e-mail business@mailtribune.com.