UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-35032

PARK STERLING CORPORATION

(Exact name of registrant as specified in its charter)

NORTH CAROLINA		27-4107242
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1043 E. Morehead Street, Suite 201
Charlotte, North Carolina		28204
(Address of principal executive offices)		(Zip Code)

(704) 716-2134

Title of each class		Name of each exchange on which registered
Common Stock, $1.00 par value		NASDAQ Global Market

Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1943: None

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

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 o No þ

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 þ No o

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 o No o

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. o

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 o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

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

As of June 30, 2010, the aggregate market value of the common stock of the registrant held by non-affiliates was approximately $30,334,000 (based on the average bid and asked price of $7.00 per share on June 30, 2010). For purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates.

The number of shares of common stock of the registrant outstanding as of March 31, 2011 was 28,619,358.

Documents Incorporated by Reference

Portions of the registrant’s Definitive Proxy Statement for its 2011 Annual Meeting of Shareholders scheduled to be held on May 25, 2011 are incorporated by reference into Part III, Items 10-14.

 

 

PARK STERLING CORPORATION

TABLE OF CONTENTS

PART I
Item 1. Business			5
Item 1A. Risk Factors			14
Item 1B. Unresolved Staff Comments			25
Item 2. Properties			25
Item 3. Legal Proceedings			25
Item 4. Submission of Matters to a Vote of Security Holders			25
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			26
Item 6. Selected Financial Data			27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			48
Item 8. Financial Statements and Supplementary Data			49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures			78
Item 9A. Controls and Procedures			78
Item 9B. Other Information			78
PART III
Item 10. Directors, Executive Officers and Corporate Governance			78
Item 11. Executive Compensation			79
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			80
Item 13. Certain Relationships and Related Transactions, and Director Independence			80
Item 14. Principal Accounting Fees and Services			80
PART IV
Item 15. Exhibits and Financial Statement Schedules			80
Signatures			81
Exhibit Index			82
Exhibit 10.5
Exhibit 10.12
Exhibit 10.13
Exhibit 10.14
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

EXPLANATORY NOTE

On January 1, 2011 (the “Effective Date”), Park Sterling Corporation (the “Company”) acquired all of the outstanding stock of Park Sterling Bank (the “Bank”) in a statutory share exchange transaction (the “Reorganization”) effected under North Carolina law and in accordance with the terms of an Agreement and Plan of Reorganization and Share Exchange dated October 22, 2010 (the “Agreement”). The Reorganization and the Agreement were approved by the Bank’s stockholders at a special meeting of the Bank’s stockholders held on November 23, 2010. Pursuant to the Reorganization, shares of the Bank’s common stock were exchanged for shares of the Company’s common stock on a one-for-one basis. As a result, the Bank became the sole subsidiary of the Company, the Company became the holding company for the Bank and the stockholders of the Bank became stockholders of the Company.

Prior to the Effective Date, the Bank’s common stock was registered under Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and the Bank was subject to the information requirements of the Exchange Act and, in accordance with Section 12(i) thereof, filed quarterly reports, proxy statements and other information with the Federal Deposit Insurance Corporation (“FDIC”). As of the Effective Date, pursuant to Rule 12g-3 under the Exchange Act the Company is the successor registrant to the Bank, the Company’s common stock is deemed to be registered under Section 12(b) of the Exchange Act, and the Company has become subject to the information requirements of the Exchange Act and files reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”).

Prior to the Effective Date, the Company conducted no operations other than obtaining regulatory approval for the Reorganization. The consolidated financial statements, discussions of those statements, market data and all other information presented herein, are those of the Bank.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information set forth in this Annual Report on Form 10-K, including information incorporated by reference in this document may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts and often use words such as “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” “goal,” “target” and similar expressions. The forward-looking statements made represent the Company’s current expectations, plans or forecasts of its future results and condition, including expectations regarding its new business strategy of engaging in bank mergers and organic growth and anticipated asset size, the proposed merger with Community Capital Corporation, the future growth in the markets in which the Company operates, refinement of the loan loss allowance methodology, recruiting of key leadership positions, decreases in construction and development loans and other changes in loan mix, changes in deposit mix, capital and liquidity levels, emerging regulatory expectations and measures, net interest income, credit trends and conditions, including loan losses, allowance, charge-offs, delinquency trends and nonperforming asset levels, and other similar matters. These statements are not guarantees of future results or performance and involve certain risks and uncertainties that are based on our beliefs and assumptions and on the information available to us at the time that these disclosures were prepared. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties more fully discussed elsewhere in this report, including Item 1A. “Risk Factors,” and in any of the Company’s subsequent filings with the SEC: the Company’s inability to identify and successfully negotiate and complete combinations with potential merger partners, including Community Capital, or to successfully integrate such businesses into the Company, including the Company’s ability to realize the benefits and cost savings from and limit any unexpected liabilities acquired as a result of any such business combination including the proposed Community Capital merger; inability to obtain governmental approvals of the proposed Community Capital Corporation merger on the proposed terms and schedule; failure of Community Capital’s shareholders to approve the proposed merger; fluctuation in the trading price of Park Sterling’s stock prior to the closing of the proposed Community Capital merger, which would affect the total value of the proposed merger transaction; the effects of negative economic conditions, including stress in the commercial real estate markets or delay or failure of recovery in the residential real estate markets; changes in consumer and investor confidence and the related impact on financial markets and institutions; changes in interest rates; failure of assumptions underlying the establishment of our allowance; deterioration in the credit quality of our loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in our investment securities portfolio; legal and regulatory developments; increased competition from both banks and nonbanks; changes in accounting standards, rules and interpretations, inaccurate estimates or assumptions in accounting and the impact on the Company’s financial statements; the Company’s ability to attract new employees; and management’s ability to effectively manage credit risk, market risk, operational risk, legal risk, and regulatory and compliance risk.

Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

Item 1.		Business

General

Park Sterling Corporation (the “Company”) was formed on October 6, 2010 to serve as the holding company for Park Sterling Bank and is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company’s primary operations and business are its ownership of Park Sterling Bank (the “Bank”), its sole subsidiary. Our offices are located at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina, 28204 and our phone number is (704) 716-2134.

The Bank was incorporated on September 8, 2006 as a North Carolina-chartered commercial bank and is the wholly-owned subsidiary of the Company. The Bank opened for business on October 25, 2006 at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina. The Bank opened a branch in Wilmington, North Carolina, in October 2007 and in the SouthPark neighborhood of Charlotte in July 2008, and received approval from the State of North Carolina Office of the Commissioner of Banks (the “NC Commissioner”) in March 2011 to open a branch in Charleston, South Carolina.

We provide banking services to small and mid-sized businesses, owner-occupied and income producing real estate owners, real estate developers and builders, professionals and consumers doing business or residing within our target markets. Through our branches, the Bank provides a wide range of banking products, including personal and business checking accounts, individual retirement accounts, business and personal money market accounts, certificates of deposit, overdraft protection, safe deposit boxes and online banking. Our lending activities include a range of short-to medium-term commercial, real estate, residential mortgage and home equity and personal loans. Our objective since inception has been to provide the strength and product diversity of a larger bank and the service and relationship attention that characterizes a community bank. We strive to develop a personal relationship with our clients while at the same time offering traditional deposit and loan banking services. At December 31, 2010, we had approximately $616.1 million in assets, $399.8 million in loans, $407.8 million in deposits, and $177.1 million in shareholders’ equity.

Due to the diverse economic base of the markets in which it operates, the Company believes it is not dependent on any one or a few customers or types of commerce whose loss would have a material adverse effect on the Company.

As part of its operations, the Company regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions eligible for bank holding company ownership or control. As a general rule, the Company expects to publicly announce material transactions when a definitive agreement has been reached.

Recent Developments

In August 2010, the Bank conducted a public offering of common stock (the “Public Offering”) which raised gross proceeds of $150.2 million to facilitate a change in its business plan from primarily organic growth at a moderate pace over the next few years to seeking to acquire regional and community banks in the Carolinas and Virginia. We intend to become a regional-sized multi-state banking franchise through acquisitions and organic growth, seeking to reach a consolidated asset size of between $8 billion and $10 billion over the next several years. We are committed to building a banking franchise that is noted for sound risk management, superior client service and exceptional client relationships.

On January 1, 2011 (the “Effective Date”), the Company acquired all of the outstanding stock of the Bank in a statutory share exchange transaction (the “Reorganization”) effected under North Carolina law and in accordance with the terms of an Agreement and Plan of Reorganization and Share Exchange dated October 22, 2010 (the “Agreement”). The Reorganization and the Agreement were approved by the Bank’s stockholders at a special meeting of the Bank’s stockholders held on November 23, 2010. Pursuant to the Reorganization, shares of the Bank’s common stock were exchanged for shares of the Company’s common stock on a one-for-one basis. As a result, the Bank became the sole subsidiary of the Company, the Company became the holding company for the Bank and the stockholders of the Bank became stockholders of the Company.

As part of the Bank’s change in strategy, immediately following the Public Offering, the Bank reduced the size of its board of directors from thirteen members to six members, maintaining two of the sitting directors, Larry W. Carroll and Thomas B. Henson, and adding four new directors, Walter C. Ayers, Leslie M. (Bud) Baker, James C. Cherry and Jeffrey S. Kane. Mr. Baker was named Chairman of the board of directors upon becoming a member. In March 2011, the board of directors of the Company, which mirrors that of the Bank, approved expanding its membership to seven and appointed Jean E. Davis as a director.

The Bank also reorganized its management team following the Public Offering. The new executive management team includes James C. Cherry, who became the Chief Executive Officer; David L. Gaines, who became the Chief Financial Officer; Nancy J. Foster, who became the Chief Risk Officer; and Bryan F. Kennedy, III, who was the President and Chief Executive Officer and remains the President.

On March 30, 2011, the Company and Community Capital Corporation (“Community Capital”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Community Capital will be merged with and into the Company, with the Company as the surviving entity (the “Merger”). Pursuant to the terms of the Merger Agreement, the Company will pay $3.30 per share of Community Capital common stock, with the consideration to be in the form of approximately 40% cash and approximately 60% in shares of the Company’s common stock. The Merger Agreement has been approved by the boards of directors of both the Company and Community Capital. The Merger is subject to customary closing conditions, including regulatory approval and Community Capital shareholder approval. As of December 31, 2010, Community Capital, which is headquartered in Greenwood, South Carolina, had $655.9 million in assets and operated 17 full service branches and one drive-through facility throughout South Carolina. For additional information, please see the Company’s Current Report on Form 8-K filed March 31, 2011.

Market Area

Our current primary market area consists of the Charlotte and Wilmington, North Carolina metropolitan statistical areas, or MSAs. During 2011, we intend to open a branch office in Charleston, South Carolina and have employed a veteran banker to serve as the South Carolina Market President. We plan to open additional branch offices and/or loan production offices in our target markets this year. Additional information regarding each of the existing locations is provided below.

Charlotte. Charlotte, the largest city in North or South Carolina, anchors an MSA with a total population of approximately 1.8 million in 2010, according to the Charlotte Chamber of Commerce. According to the U.S. Census Bureau, the population for the Charlotte-Gastonia-Rock Hill MSA increased 34.8% from 2000 to 2010. This population is expected to grow 14.8% between 2010 and 2015. Charlotte is a significant financial center and is currently home to nine Fortune 500 companies. Charlotte also has concentrations in the transportation, utilities, education, professional services and construction sectors. The 2010 median household income for the Charlotte MSA was $62,215 and is projected to grow 13.2% over the next five years.

Wilmington. Wilmington, a historic seaport and the largest city on the coast of North Carolina, anchors a metropolitan area covering New Hanover, Brunswick and Pender counties with a 2010 population of 367,101. The U.S. Census Bureau estimates that Wilmington’s MSA is expected to grow 13.2% from 2010 to 2015. Wilmington’s economy is diversified and includes tourism, shipping, pharmaceutical development, chemical and aircraft component manufacturing, and fiber optic industries. Wilmington is also a regional retail and medical center, with the New Hanover Regional Medical Center/Cape Fear Hospital ranking in the top ten largest medical facilities in the state. The median household income in 2010 for the Wilmington MSA was $49,403 and is projected to increase 13.2% over the next five years.

Charleston. Charleston, the second largest city in South Carolina, is located on the state’s coastline. According to the U.S. Census Bureau, the population for the Charleston-North Charleston-Summerville MSA was 671,833, a 22.3% increase since 2000. The area’s population is projected to grow 10.3% from 2010 to 2015. Charleston is the largest business and financial center for the southeastern section of South Carolina. The city is a popular tourist destination, with a large number of restaurants, hotels and retail stores. The manufacturing, shipping and medical industries are also key economic sectors in Charleston. The 2010 median household income for the Charleston MSA was $51,065 and is expected to grow 12.6% from 2010 to 2015.

Competition

We compete for deposits in our banking markets with other commercial banks, savings banks and other thrift institutions, credit unions, agencies issuing United States government securities, and all other organizations and institutions engaged in money market transactions. In our lending activities, we compete with all other financial institutions as well as consumer finance companies, mortgage companies and other lenders. Commercial banking in the Charlotte and Wilmington markets, and in our targeted markets of the Carolinas and Virginia generally, is extremely competitive.

There were a total of 48 FDIC-insured institutions operating in the Charlotte MSA as of June 30, 2010. Those institutions operated 447 offices within the Charlotte MSA, holding approximately $90 billion in deposits. Of those institutions, the Company ranked twelfth in deposit market share, holding 0.43% of the total dollar amount of deposits held in the market.

The Wilmington MSA, although smaller than the Charlotte market, is also very competitive. As of June 30, 2010, a total of 23 institutions operated 138 offices within the MSA, holding approximately $6 billion in deposits. The Bank ranked eighteenth in deposit market share in the Wilmington MSA with 0.58% of the total dollar amount of deposits in the market.

Interest rates, both on loans and deposits, and prices of fee-based services are significant competitive factors among financial institutions generally. Other important competitive factors include office location, office hours, the quality of client service, community reputation, continuity of personnel and services, and, in the case of larger commercial clients, relative lending limits and the ability to offer sophisticated cash management and other commercial banking services. Many of our competitors have greater resources, broader geographic markets and higher lending limits than we do, and they can offer more products and services and can better afford and make more effective use of media advertising, support services and electronic technology than we can. To counter these competitive disadvantages, we depend on our reputation as a community bank in our local market, our direct client contact, our ability to make credit and other business decisions locally, and our personalized service.

In recent years, federal and state legislation has heightened the competitive environment in which all financial institutions conduct their business, and the potential for competition among financial institutions of all types has increased significantly. Additionally, with the elimination of restrictions on interstate banking, a North Carolina commercial bank may be required to compete not only with other North Carolina-based financial institutions, but also with out-of-state financial institutions which may acquire North Carolina institutions, establish or acquire branch offices in North Carolina, or otherwise offer financial services across state lines, thereby adding to the competitive atmosphere of the industry in general. In terms of assets, we are currently one of the smaller commercial banks in North Carolina.

Employees

As of February 28, 2011, we employed a total of 65 people and had 63 full time equivalent employees. We are not a party to a collective bargaining agreement, and we consider our relations with employees to be good.

Supervision and Regulation

Bank holding companies and commercial banks are subject to extensive supervision and regulation by federal and state agencies. Regulation of bank holding companies and banks is intended primarily for the protection of consumers, depositors, borrowers, the federal Deposit Insurance Fund (the “DIF”) and the banking system as a whole and not for the protection of shareholders or creditors. The following is a brief summary of certain statutory and regulatory provisions applicable to the Company and the Bank. This discussion is qualified in its entirety by reference to such regulations and statutes.

Financial Reform Legislation. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will have a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things: (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the FDIC. The following items provide brief descriptions of certain provisions of the Dodd-Frank Act.

Increased Capital Standards and Enhanced Supervision. The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no lower than existing regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies. The Dodd-Frank Act also increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

The Bureau of Consumer Financial Protection. The Dodd-Frank Act creates the Bureau within the Federal Reserve System. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions.

Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated. Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act also provides that, effective one year after the date of enactment, depository institutions may pay interest on demand deposits.

Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

Transactions with Insiders. Insider transaction limitations are expanded through the strengthening on loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower. Current banking law limits a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

Corporate Governance. The Dodd-Frank Act addresses many corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act, among other things: (i) grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation; (ii) enhances independence requirements for compensation committee members; (iii) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers; and (iv) provides the SEC with authority to adopt proxy access rules that would allow shareholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company’s proxy materials.

Many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

General. As a registered bank holding company, the Company is subject to regulation under BHC Act and to inspection, examination and supervision by the Federal Reserve Board. In general, the Federal Reserve Board may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices. The Federal Reserve Board may assess civil money penalties, issue cease and desist or removal orders and require that a bank holding company divest subsidiaries, including subsidiary banks. The Company is also required to file reports and other information with the Federal Reserve Board regarding its business operations and those of the Bank.

The Bank is a North Carolina-chartered commercial nonmember bank subject to regulation, supervision and examination by its chartering regulator, the North Carolina Commissioner of Banks (the “NC Commissioner”), and by the FDIC, as deposit insurer and primary federal regulator. As an insured depository institution, numerous federal and state laws, as well as regulations promulgated by the FDIC and the NC Commissioner, govern many aspects of the Bank’s operations. The NC Commissioner and the FDIC regulate and monitor compliance with these state and federal laws and regulations, as well as the Bank’s operations and activities including, but not limited to, loan and lease loss reserves, lending and mortgage operations, interest rates paid on deposits and received on loans, the payment of dividends to the Company, and the establishment of branches. The Bank is a member of the Federal Home Loan Bank of Atlanta, which is one of the 12 regional banks comprising the FHLB system.

In addition to state and federal banking laws, regulations and regulatory agencies, the Company and the Bank are subject to various other laws, regulations and supervision and examination by other regulatory agencies, including with respect to the Company the SEC and NASDAQ.

Bank Holding Companies. The Federal Reserve Board is authorized to adopt regulations affecting various aspects of bank holding companies. In general, the BHC Act limits the business of bank holding companies and its subsidiaries to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto.

The BHC Act requires prior Federal Reserve Board approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. The BHC Act also prohibits a bank holding company from acquiring direct or indirect control of more than 5% of the outstanding voting stock of any company engaged in a non-banking business unless such business is determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto.

The Company also is subject to the North Carolina Bank Holding Company Act of 1984. This state legislation requires the Company, by virtue of its ownership of the Bank, to register as a bank holding company with the NC Commissioner.

The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Graham-Leach-Bliley Act”) amended a number of federal banking laws affecting the Company and the Bank. In particular, the Graham-Leach-Bliley Act permits a bank holding company to elect to become a “financial holding company,” provided certain conditions are met. A financial holding company, and the companies it controls, are permitted to engage in activities considered “financial in nature”, as defined by the Graham-Leach-Bliley Act and Federal Reserve Board interpretations (including, without limitation, insurance and securities activities), and therefore may engage in a broader range of activities than permitted by bank holding companies and their subsidiaries. We remain a bank holding company, but may at some time in the future elect to become a financial holding company.

Interstate Banking and Branching. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Banking and Branching Act”), a bank holding company may acquire banks in states other than its home state, without regard to the permissibility of those acquisitions under state law, subject to certain exceptions. The Interstate Banking and Branching Act also authorized banks to merge across state lines, thereby creating interstate branches, unless a state determined to “opt out” of coverage under this provision. Furthermore, pursuant to the Interstate Banking and Branching Act, a bank may open new branches in a state in which it does not already have banking operations, if the laws of such state permit such de novo branching. North Carolina opted in to the provision of the Interstate Banking and Branching Act that allows out-of-state banks to branch into their state by establishing a de novo branch in the state, but only on a reciprocal basis. This means that an out-of-state bank could establish a de novo branch in North Carolina only if the home state of such bank would allow North Carolina banks to establish de novo branches in that state under substantially the same terms as allowed in North Carolina. Virginia also amended its laws to provide for de novo branching of out-of-state banks in Virginia on a reciprocal basis. South Carolina law was amended to permit interstate branching through acquisitions but not de novo branching by an out-of-state bank.

The Dodd-Frank Act removes previous state law restrictions on de novo interstate branching in states such as North Carolina, South Carolina and Virginia. This law effectively permits out-of-state banks to open de novo branches in states where the laws of the state where the do novo branch to be opened would permit a bank chartered by that state to open a de novo branch.

Safety and Soundness Regulations. The Federal Reserve Board has enforcement powers over bank holding companies and has authority to prohibit activities that represent unsafe or unsound practices or constitute violations of law, rule, regulation, administrative order or written agreement with a federal regulator. These powers may be exercised through the issuance of cease and desist orders, civil monetary penalties or other actions.

There also are a number of obligations and restrictions imposed on bank holding companies and their depositary institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the DIF in the event the depository institution is insolvent or is in danger of becoming insolvent. For example, under requirements of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary bank. Under this policy, the Federal Reserve Board may require a holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to the holding company’s shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice.

In addition, the “cross guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the DIF as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interests of the DIF. The FDIC’s claim for reimbursement under the cross-guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled depository institution.

Federal and state banking regulators also have broad enforcement powers over the Bank, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator (with the approval of the Governor in the case of a North Carolina state bank) in order to conserve the assets of any such institution for the benefit of depositors and other creditors. The NC Commissioner also has the authority to take possession of a North Carolina state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock.

Capital Adequacy Guidelines. The various federal bank regulators, including the Federal Reserve Board and the FDIC, have adopted substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations, including bank holding companies and banks. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum prescribed levels, whether because of its financial condition or actual or anticipated growth. The risk-based guidelines define a three-tier capital framework: Tier 1 capital is defined to include the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than certain servicing assets), certain credit-enhancing interest-only strips, deferred tax assets in excess of certain thresholds and certain other items. Tier 2 capital includes qualifying subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the allowance for loan losses. Tier 3 capital includes primarily qualifying unsecured subordinated debt. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries is equal to qualifying total capital. Under the risk-based guidelines, the Company and the Bank are required to maintain a minimum ratio of Tier 1 capital to total risk-weighted assets of 4% and a minimum ratio of Total Capital to risk-weighted assets of 8%.

Each of the federal bank regulatory agencies, including the Federal Reserve Board and the FDIC, also has established minimum leverage capital requirements for banking organizations. These requirements provide that banking organizations that meet certain criteria, including excellent asset quality, high liquidity, low interest rate exposure and good earnings, and that have received the highest regulatory rating must maintain a ratio of Tier 1 capital to total adjusted average assets of at least 3%. All other institutions must maintain a minimum leverage capital ratio of not less than 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the institution. Holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. As a condition of its non-objection to our notice filed under the Change in Bank Control Act in connection with the Bank’s Public Offering, the FDIC has required that the Bank maintain a minimum leverage capital ratio of not less than 10% for three years following the completion of this offering.

To assess a bank’s capital adequacy, federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of exposure to declines in the economic value of a bank’s capital due to changes in interest rates. Under such a risk assessment, examiners will evaluate a bank’s capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. Applicable considerations include the quality of the bank’s interest rate risk management process, the overall financial condition of the bank and the level of other risks at the bank for which capital is needed. Institutions with significant interest rate risk may be required to hold additional capital. The agencies also issued a joint policy statement providing guidance on interest rate risk management, including a discussion of the critical factors affecting the agencies’ evaluation of interest rate risk in connection with capital adequacy.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. In addition, pursuant to FDICIA, the various regulatory agencies have prescribed certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation, and such agencies may take action against a financial institution that does not meet the applicable standards.

The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital, and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Generally, an institution will be treated as “well capitalized” if its ratio of total capital to risk-weighted assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by any such regulatory authority to meet a specific capital level. An institution will be treated as “adequately capitalized” if its ratio of total capital to risk-weighted assets is at least 8%, its ratio of Tier 1 capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital to total assets is at least 4% (3% in some cases) and it is not considered a well-capitalized institution. An institution that has total risk-based capital of less than 8%, Tier 1 risk-based-capital of less than 4% or a leverage ratio that is less than 4% will be treated as “undercapitalized.” An institution that has total risk-based capital ratio of less than 6%, Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% will be treated as “significantly undercapitalized,” and an institution that has a tangible capital to assets ratio equal to or less than 2% will be deemed to be “critically undercapitalized.”

Under these guidelines, the Bank was considered “well capitalized” as of December 31, 2010.

Deposit Insurance and Assessments. The Bank’s deposits are insured by the DIF as administered by the FDIC, up to the applicable limits set by law, and are subject to the deposit insurance premium assessments of the DIF. The DIF imposes a risk-based deposit insurance premium system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”) and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. In addition, insured deposits have been required to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (“FICO”) to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation.

In the second quarter of 2009, the FDIC levied a special assessment on all insured depository institutions totaling five basis points of each institution’s total assets less Tier 1 capital on June 30, 2009. The special assessment was part of the FDIC’s efforts to rebuild the DIF following a series of bank failures and a projection of future failures. In November 2009, the FDIC published a final rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly assessments in December 2009 for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Our prepayment amount was approximately $2.3 million. This prepayment was booked a prepaid expense and is being expensed based upon the regular quarterly assessments.

On January 12, 2010, the FDIC’s board of directors approved an Advance Notice of Proposed Rulemaking, or ANPR, entitled “Incorporating Executive Compensation Criteria into the Risk Assessment System.” The ANPR requests comment on ways in which the FDIC can amend its risk-based deposit insurance assessment system to account for risks posed by certain employee compensation programs. The FDIC’s goals include providing an incentive for insured depository institutions to adopt compensation programs that align employee interest with the long-term interests of the institution and its stakeholders, including the FDIC. In order to accomplish this goal, the FDIC would adjust assessment rates in a manner commensurate with the risks presented by an institution’s compensation program. Examples of compensation program features that meet the FDIC’s goals include: (i) providing significant portions of performance-based compensation in the form of restricted, non-discounted company stock to those employees whose activities present a significant risk to the institution; (ii) vesting significant awards of company stock over multiple years and subject to some form of claw-back mechanism to account for the outcome of risks assumed in earlier periods; and (iii) administering the program through a board committee composed of independent directors with input from independent compensation professionals.

The Dodd-Frank Act amends the manner in which deposit insurance assessments are calculated. As opposed to a percentage of total deposits, the Dodd-Frank Act provides that assessments will be calculated as a percentage of average consolidated total assets less average tangible equity during the assessment period.

Dividends and Repurchase Limitations. The payment of dividends and repurchase of stock by the Company are subject to certain requirements and limitations of North Carolina corporate law. In addition, as a bank holding company, the Company must obtain Federal Reserve Board approval prior to repurchasing its Common Stock in excess of 10% of its consolidated net worth during any twelve-month period unless the Company (i) both before and after the repurchase satisfies capital requirements for “well capitalized” bank holding companies; (ii) is well managed; and (iii) is not the subject of any unresolved supervisory issues.

The Company is a legal entity separate and apart from the Bank. The primary source of funds for distributions paid by the Company is dividends from the Bank, and the Bank is subject to laws and regulations that limit the amount of dividends it can pay. North Carolina law provides that, subject to certain capital requirements, the Bank generally may declare a dividend out of undivided profits as the board of directors deems expedient.

In addition to the foregoing, the ability of either the Company or the Bank to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. Furthermore, if in the opinion of a federal regulatory agency, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such agency may require, after notice and hearing, that such bank cease and desist from such practice. The right of the Company, its shareholders and its creditors to participate in any distribution of assets or earnings of the Bank is further subject to the prior claims of creditors against the Bank.

Transactions with Affiliates of the Bank. Transactions between an insured bank and any of its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls or is under common control with the bank. Sections 23A and 23B, as implemented by the Federal Reserve Board’s Regulation W, (i) limit the extent to which a bank or its subsidiaries may engage in covered transactions (including extensions of credit) with any one affiliate to an amount equal to 10% of such bank’s capital stock and retained earnings, and limit such transactions with all affiliates to an amount equal to 20% of capital stock and retained earnings; (ii) require collateralization of between 100 and 130% for extensions of credit to an affiliate; and (iii) require that all affiliated transactions be on terms that are consistent with safe and sound banking practices. The term “covered transaction” includes the making of loans, purchasing of assets, issuing of guarantees and other similar types of transactions and pursuant to the Dodd-Frank Act includes derivative securities lending and similar transactions. In addition, any covered transaction by a bank with an affiliate and any purchase of assets or services by a bank from an affiliate must be on terms that are substantially the same, or at least as favorable to the bank, as those that prevailing at the time for similar transactions with non-affiliates.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), any insured depository institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA neither establishes specific lending requirements or programs for institutions nor limits an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain bank applications, including applications for additional branches and acquisitions. Failure to adequately meet the credit needs of the community it serves could impose additional requirements or limitations on a bank or delay action on an application to the FDIC. The Bank received a “satisfactory” rating in its most recent CRA examination, dated October 22, 2008.

Loans to Insiders. Federal law also constrains the types and amounts of loans that the Bank may make to its executive officers, directors and principal shareholders. Among other things, these loans are limited in amount, must be approved by the Bank’s board of directors in advance, and must be on terms and conditions as favorable to the Bank as those available to an unrelated person.

Bank Secrecy Act. We are subject to the Bank Secrecy Act, or BSA, as amended by the USA PATRIOT Act. The BSA gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The BSA takes measures intended to encourage information sharing among institutions, bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on a broad range of financial institutions, including the Company. The following obligations are among those imposed by the BSA:

• Financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program.

• Financial institutions must satisfy minimum standards with respect to customer identification and verification, including adoption of a written customer identification program appropriate for the institution’s size, location and business.

• Financial institutions that establish, maintain, administer or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) must establish appropriate, specific and where necessary, enhanced due diligence policies, procedures and controls designed to detect and report money laundering through these accounts.

• Financial institutions may not establish, maintain, administer or manage correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country).

• Bank regulators are directed to consider a bank’s effectiveness in combating money laundering when ruling on certain applications.

CRE and C&D Concentration Guidance. In 2006 and again in 2008, federal banking agencies, including the FDIC, issued guidance designed to emphasize risk management for institutions with significant commercial real estate (“CRE”) and construction and development (“C&D”) loan concentrations. The guidance reinforces and enhances the FDIC’s existing regulations and guidelines for real estate lending and loan portfolio management and emphasizes the importance of strong capital and loan loss allowance levels and robust credit risk- management practices for institutions with significant CRE and C&D exposure. While the defined thresholds past which a bank is deemed to have a concentration in CRE loans prompt enhanced risk management protocols, the guidance does not establish specific lending limits. Rather, the guidance seeks to promote sound risk management practices that will enable banks to continue to pursue CRE and C&D lending in a safe and sound manner. In addition, a bank should perform periodic market analyses for the various property types and geographic markets represented in its portfolio and perform portfolio level stress tests or sensitivity analyses to quantify the impact of changing economic conditions on asset quality, earnings and capital.

Consumer Laws and Regulations. Banks are also subject to certain laws and regulations that are designed to protect consumers. Among the more prominent of such laws and regulations are the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Housing Act and consumer privacy protection provisions of the Gramm-Leach-Bliley Act and comparable state laws. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions deal with consumers. With respect to consumer privacy, the Gramm-Leach-Bliley Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) comprehensively revised the laws affecting corporate governance, accounting obligations and corporate reporting for companies with equity or debt securities registered under the Exchange Act. In particular, the Sarbanes-Oxley Act established: (1) new requirements for audit committees, including independence, expertise, and responsibilities; (2) new certification responsibilities for the Chief Executive Officer and the Chief Financial Officer with respect to the Company’s financial statements; (3) new standards for auditors and regulation of audits; (4) increased disclosure and reporting obligations for reporting companies and their directors and executive officers; and (5) new and increased civil and criminal penalties for violation of the federal securities laws.

Proposed Legislation and Regulatory Action. Rules and statutes are frequently promulgated and enacted that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions. Included among current proposals are discussions around the restructuring of the regulatory framework in which we operate. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Website Access to the Company’s SEC Filings

The Company maintains an Internet website at www.parksterlingbank.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate the Company’s website into this Annual Report on Form 10-K). The Company makes available, free of charge on or through this website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the Company electronically files each such report or amendment with, or furnishes it to, the SEC.

Item 1A.		Risk Factors

In addition to the other information included and incorporated by reference in this Annual Report on Form 10-K, you should carefully consider the risk factors and uncertainties described below in evaluating an investment in the Company’s common stock. Additional risks and uncertainties not currently known to the Company, or which the Company currently deems not material, also may adversely impact the Company’s business operations. The value or market price of the Company’s common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.

Risks Associated with Our Growth Strategy

We may not be able to implement aspects of our growth strategy.

Our growth strategy contemplates the future expansion of our business and operations both organically and by acquisitions such as through the establishment or acquisition of banks and banking offices in our market area and other markets in the Carolinas and Virginia. Implementing these aspects of our growth strategy depends, in part, on our ability to successfully identify acquisition opportunities and strategic partners that will complement our operating philosophy and to successfully integrate their operations with ours as well as generate loans and deposits of acceptable risk and expense. To successfully acquire or establish banks or banking offices, we must be able to correctly identify profitable or growing markets, as well as attract the necessary relationships and high caliber banking personnel to make these new banking offices profitable. In addition, we may not be able to identify suitable opportunities for further growth and expansion, or if we do, we may not be able to successfully integrate these new operations into our business.

As consolidation of the financial services industry continues, the competition for suitable acquisition candidates may increase. We will compete with other financial services companies for acquisition opportunities, and many of these competitors have greater financial resources than we do and may be able to pay more for an acquisition than we are able or willing to pay.

We cannot assure you that we will have opportunities to acquire other financial institutions or acquire or establish any new branches or loan production offices, or that we will be able to negotiate, finance and complete any opportunities available to us.

If we are unable to effectively implement our growth strategies, our business and results of operations may be materially and adversely affected.

Future expansion involves risks.

The acquisition of other financial institutions or parts of those institutions, or the establishment of de novo branch offices and loan production offices involves a number of risks, including the risk that:

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we may incur substantial costs in identifying and evaluating potential acquisitions and merger partners, or in evaluating new markets, hiring experienced local managers, and opening new offices;

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our estimates and judgments used to evaluate credit, operations, management and market risks relating to target institutions may not be accurate;

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the institutions we acquire may have distressed assets and there can be no assurance that we will be able to realize the value we predict from those assets or that we will make sufficient provisions or have sufficient capital for future losses;

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we may be required to take write-downs or write-offs, restructuring and impairment, or other charges related to the institutions we acquire that could have a significant negative effect on our financial condition and results of operations;

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there may be substantial lag-time between completing an acquisition or opening a new office and generating sufficient assets and deposits to support costs of the expansion;

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we may not be able to finance an acquisition, or the financing we obtain may have an adverse effect on our results of operations or result in dilution to our existing shareholders;

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our management’s attention in negotiating a transaction and integrating the operations and personnel of the combining businesses may be diverted from our existing business and we may not be able to successfully integrate such operations and personnel;

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we may not be able to obtain regulatory approval for an acquisition;

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we may enter new markets where we lack local experience or which introduce new risks to our operations, or which otherwise result in adverse effects on our results of operations;

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we may introduce new products and services we are not equipped to manage or which introduce new risks to our operations, or which otherwise result in adverse effects on our results of operations;

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we may incur intangible assets in connection with an acquisition, or the intangible assets we incur may become impaired, which results in adverse short-term effects on our results of operations;

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we may assume liabilities in connection with an acquisition, including unrecorded liabilities that are not discovered at the time of the transaction, and the repayment of those liabilities may have an adverse effect on our results of operations and financial condition; or

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we may lose key employees and clients.

We cannot assure you that we will be able to successfully integrate any banking offices that we acquire into our operations or retain the clients of those offices. If any of these risks occur in connection with our expansion efforts, it may have a material and adverse effect on our results of operations and financial condition.

We may not be able to maintain and manage our organic growth, which may adversely affect our results of operations and financial condition.

We have grown rapidly since we commenced operations in October 2006, and our modified business strategy contemplates significant acceleration in such growth, both organically and through acquisitions. We can provide no assurance that we will continue to be successful in increasing the volume of loans and deposits or in introducing new products and services at acceptable risk levels and upon acceptable terms while managing the costs and implementation risks associated with our historical or modified organic growth strategy. We may be unable to continue to increase our volume of loans and deposits or to introduce new products and services at acceptable risk levels for a variety of reasons, including an inability to maintain capital and liquidity sufficient to support continued growth. If we are successful in continuing our growth, we cannot assure you that further growth would offer the same levels of potential profitability or that we would be successful in controlling costs and maintaining asset quality. Accordingly, an inability to maintain growth, or our inability to effectively manage our growth, could adversely affect our results of operations and financial condition.

New bank office facilities and other facilities may not be profitable.

We may not be able to organically expand into new markets that are profitable for our franchise. The costs to start up new bank branches and loan production offices in new markets, other than through acquisitions, and the additional costs to operate these facilities would increase our noninterest expense and may decrease our earnings. It may be difficult to adequately and profitably manage our growth through the establishment of bank branches or loan production offices in new markets. In addition, we can provide no assurance that our expansion into any such new markets will successfully attract enough new business to offset the expenses of their operation. If we are not able to do so, our earnings would be negatively impacted.

Acquisition of assets and assumption of liabilities may expose us to intangible asset risk which could impact our results of operations and financial condition.

In connection with any acquisitions, as required by U.S. generally accepted accounting principles (“GAAP”), we will record assets acquired and liabilities assumed at their fair value, and, as such, acquisitions may result in our recording intangible assets, including deposit intangibles and goodwill. We will perform a goodwill valuation at least annually to test for goodwill impairment. Impairment testing is a two step process that first compares the fair value of goodwill with its carrying amount, and second measures impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. Adverse conditions in our business climate, including a significant decline in future operating cash flows, a significant change in our stock price or market capitalization, or a deviation from our expected growth rate and performance may significantly affect the fair value of any goodwill and may trigger impairment losses, which could be materially adverse to our results of operations and financial condition.

The success of our growth strategy depends on our ability to identify and retain individuals with experience and relationships in the markets in which we intend to expand.

Our growth strategy contemplates that we will expand our business and operations to other markets in the Carolinas and Virginia. We intend to primarily target market areas which we believe possess attractive demographic, economic or competitive characteristics. To expand into new markets successfully, we must identify and retain experienced key management members with local expertise and relationships in these markets. Competition for qualified personnel in the markets in which we may expand may be intense, and there may be a limited number of qualified persons with knowledge of and experience in the commercial banking industry in these markets. Even if we identify individuals that we believe could assist us in establishing a presence in a new market, we may be unable to recruit these individuals away from other banks or be unable to do so at a reasonable cost. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit, and retain talented personnel to manage new offices effectively would limit our growth and could materially adversely affect our business, financial condition, and results of operations.

We may need additional access to capital, which we may be unable to obtain on attractive terms or at all.

We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments, for future growth, or to fund losses or additional provision for loan losses in the future. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may be unable to raise additional capital, if and when needed, on terms acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.

Risks Associated with Our Business

The current economic environment poses significant challenges for us and could adversely affect our financial condition and results of operations.

Although we remain well capitalized and have not suffered from liquidity issues, we are operating in an economic environment that remains challenging and uncertain. Financial institutions continue to be affected by declines in the real estate market and constrained financial markets. We retain direct exposure to the residential and commercial real estate markets, and we could be affected by these events. Continued declines in real estate values, home sales volumes, and financial stress on borrowers as a result of the uncertain economic environment, including continued job losses, could have an adverse affect on our borrowers, or their clients, which could adversely affect our financial condition and results of operations. In addition, an extended deterioration in local economic conditions in our markets and target markets could drive losses beyond those which are or will be provided for in our allowance for loan losses and result in the following consequences:

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increases in loan delinquencies;

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increases in nonperforming assets and foreclosures;

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decreases in demand for our products and services, which could adversely affect our liquidity position;

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decreases in the value of the collateral securing our loans, especially real estate, which could reduce clients’ borrowing power; and

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decreases in our ability to raise additional capital on terms acceptable to us or at all

Until conditions improve, we expect our business, financial condition and results of operations to continue to be adversely affected.

Our estimated allowance for loan losses may not be sufficient to cover actual loan losses, which could adversely affect our earnings.

We maintain an allowance for loan losses in an attempt to cover loan losses inherent in our loan portfolio. The determination of the allowance for loan losses, which represents management’s estimate of probable losses inherent in our credit portfolio, involves a high degree of judgment and complexity. Our policy is to establish reserves for estimated losses on delinquent and other problem loans when it is determined that losses are expected to be incurred on such loans. Management’s determination of the adequacy of the allowance is based on various factors, including an evaluation of the portfolio, current economic conditions, the volume and type of lending conducted by us, composition of the portfolio, the amount of our classified assets, seasoning of the loan portfolio, the status of past due principal and interest payments and other relevant factors. Changes in such estimates may have a significant impact on our financial statements. If our assumptions and judgments prove to be incorrect, our current allowance may not be sufficient and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Federal and state regulators also periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. The risks inherent in our loan portfolio have been exacerbated by the negative developments in the financial markets and the economy in general, and additional loan losses will likely occur in the future and may occur at a rate greater than we have experienced to date. We significantly increased our allowance for loan losses in 2010. However, no assurance can be given that the allowance will be adequate to cover loan losses inherent in our loan portfolio, and we may experience losses in our loan portfolio or perceive adverse conditions and trends that may require us to significantly increase our allowance for loan losses in the future. Any increase in our allowance for loan losses would have an adverse effect on our results of operations and financial condition.

If our nonperforming assets increase, our earnings will suffer.

At December 31, 2010, our nonperforming assets totaled approximately $42.2 million, or 6.84% of total assets. Our nonperforming assets adversely affect our earnings in various ways. We do not record interest income on nonaccrual loans or other real estate owned. We must reserve for probable losses, which is established through a current period charge to the provision for loan losses as well write-downs from time to time, as appropriate, of the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance, and maintenance related to our other real estate owned. Further, the resolution of nonperforming assets requires the active involvement of management, which can distract them from more profitable activity. Finally, if our estimate for the recorded allowance for loan losses proves to be incorrect and our allowance is inadequate, we will have to increase the allowance accordingly and as a result our earnings may be adversely affected.

Our concentration in loans secured by real estate, particularly commercial real estate and construction and development, may increase our loan losses.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer, and other loans. Many of our loans are secured by real estate (both residential and commercial) in our market areas. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse.

At December 31, 2010, approximately 86% of our loans had real estate as a primary or secondary component of collateral and includes a significant portion of loans secured by commercial real estate and construction and development collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. Over the past year, real estate values in our market areas have declined and may continue to decline. Continued declines in real estate values expose us to further deterioration in the value of the collateral for all loans secured by real estate and may adversely affect our results of operations and financial condition.

Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans, particularly when there is a downturn in the business cycle. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. Cash flows may be affected significantly by general economic conditions and a downturn in the local economy or in occupancy rates in the local economy where the property is located, each of which could increase the likelihood of default on the loan. Because our loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in our percentage of nonperforming loans. An increase in nonperforming loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, and an increase in charge-offs, all of which could have a material adverse effect on our results of operations and financial condition.

Banking regulators are examining commercial real estate lending activity with heightened scrutiny and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures, which could have a material adverse effect on our results of operations.

Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs associated with the ownership of real property, which could adversely impact our results of operations.

Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate.

The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to: general or local economic conditions; environmental cleanup liability; neighborhood values; interest rates; real estate tax rates; operating expenses of the mortgaged properties; supply of and demand for rental units or properties; ability to obtain and maintain adequate occupancy of the properties; zoning laws; governmental rules, regulations and fiscal policies; and acts of God.

Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating income producing real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment or we may be required to dispose of the real property at a loss.

We maintain a number of large lending relationships, any of which could have a material adverse effect on our results of operations if our borrowers were not to perform according to the terms of these loans.

We maintain a number of large lending relationships. Our ten largest lending relationships (including aggregate exposure to guarantors) at December 31, 2010, range from $6.2 million to $9.6 million and averaged $7.7 million. One of these lending relationships, representing $6.2 million in loans, was included in nonperforming loans at December 31, 2010. The deterioration of one or more additional large relationship loans could result in a significant increase in our nonperforming loans and our provision for loan losses, which would negatively impact our results of operations.

As a result of our limited operating history, our loan portfolio is unseasoned.

Our loan portfolio consists of loans made by us since we began operations in October 2006. It is difficult to assess the future performance of our loan portfolio due to the recent origination of our loans. Industry experience shows that in most cases it takes several years for loan difficulties to become apparent. At December 31, 2010, 48 loans, with a combined outstanding balance of $40.9 million, were classified as nonaccrual (generally, loans contractually past due 90 days or more as to principal or interest, for which terms are renegotiated below market levels in response to a financially distressed borrower or guarantor, or where substantial doubt about full repayment of principal or interest is evident). At December 31, 2010, we had loans totaling $73.3 million on our watch list, including the $40.9 million in nonaccrual loans. We can give no assurance that other loans, including the remaining loans on our watch list, will not become nonperforming or delinquent, which could adversely affect our results of operations and financial condition.

Our reliance on time deposits, including out-of-market and brokered certificates of deposit, as a source of funds for loans and our other liquidity needs could have an adverse effect on our results of operations.

We rely on deposits for funds to make loans and provide for our other liquidity needs. Our loan demand has exceeded the rate at which we have been able to build core deposits. As a result, we have relied heavily on time deposits, especially brokered certificates of deposit, as a source of funds. Although we have focused recently on decreasing our reliance on brokered deposits, as of December 31, 2010, brokered deposits and other wholesale sources comprised approximately 29.01% of our total liabilities. Such deposits may not be as stable as other types of deposits and, in the future, depositors may not renew those time deposits when they mature, or we may have to pay a higher rate of interest to attract or keep them or to replace them with other deposits or with funds from other sources. Not being able to replace these deposits as they mature would adversely affect our liquidity. Additionally, we are regulated by the FDIC, which requires us to maintain certain capital levels to be considered well capitalized. If we fail to maintain these capital levels, we would lose our ability to obtain funding through brokered deposits, absent receipt of a waiver from the FDIC. Paying higher deposit rates to attract, keep or replace those deposits could have a negative effect on our interest margin and results of operations.

Recent negative developments in the financial industry and the increased level of recent bank failures may lead to regulatory changes that may adversely affect our operations and results.

Recent negative developments in the credit markets and in the general economy have resulted in uncertainty in the financial markets in general with the expectation of the current economic downturn continuing throughout 2011. As a result, commercial as well as consumer loan portfolio performances have deteriorated at many institutions and the competition for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years, and the high rate at which banks have been placed in federal receivership during 2009 and 2010 is unprecedented. As a result, there is a potential for additional federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the domestic and international credit markets, and the impact of new legislation in response to those developments, may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our results of operations and financial condition.

The FDIC deposit insurance assessments that we are required to pay may increase in the future, which would have an adverse effect on our earnings.

As an insured depository institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC. These assessments are required to ensure that the FDIC deposit insurance reserve ratio is at least 1.15% of insured deposits, and the Dodd-Frank Act requires this reserve ratio to increase to 1.35% by 2020. The recent failures of several financial institutions have significantly increased the DIF’s loss provisions, resulting in a decline in the reserve ratio. The FDIC expects a higher rate of insured institution failures in the next few years, which may result in a continued decline in the reserve ratio.

In order to maintain a strong funding position and restore reserve ratios of the DIF, the FDIC has increased assessment rates of insured institutions. In the second quarter of 2009, the FDIC levied a special assessment on insured depository institutions equal to 5 basis points of the institution’s total assets less Tier 1 capital. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the DIF on December 31, 2009.

In addition, on January 12, 2010, the FDIC requested comments on a proposed rule tying assessment rates of FDIC-insured institutions to the institution’s employee compensation programs. The exact requirements of such a rule are not yet known, but such a rule could increase the amount of premiums we must pay for FDIC insurance. Furthermore, the FDIC announced a proposed rule on April 13, 2010, that, if adopted, would alter the initial and total base assessment rates applicable to all insured depository institutions effective January 1, 2011, with actual total assessment rates being set 3 basis points higher than the rates in effect on January 1, 2010, in accordance with the Amended Restoration Plan that the FDIC adopted on September 29, 2009. The Dodd-Frank Act has changed the formula for calculating deposit insurance assessments. Pursuant to the Dodd-Frank Act, assessments are calculated as a percentage of average total consolidated assets less average tangible equity during the assessment period, rather than as a percentage of total deposits. These announced increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings.

During the years ended December 31, 2010 and 2009, we incurred approximately $648,000 and $900,000, respectively, in deposit insurance expense. Due to the recent increases in the assessment rates, and the potential for additional increases due to proposed FDIC rules, as well as our growth strategy, we may be required to pay additional amounts to the DIF. If the deposit insurance premium assessment rate applicable to us increases again, whether because of our risk classification, because of emergency assessments, or because of another uniform increase or prepayment requirements, our earnings could be further adversely impacted.

Recent legislation and administrative actions authorizing the U.S. government to take direct actions within the financial services industry may not stabilize the U.S. financial system.

Numerous actions have been taken by the U.S. Congress, the Federal Reserve Board, the U.S. Treasury, the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime mortgage crisis that commenced in 2007. The Emergency Economic Stabilization Act of 2008, or EESA, was enacted on October 3, 2008. Under EESA, the U.S. Treasury has the authority to, among other things, invest in financial institutions and purchase up to $700 billion of troubled assets and mortgages from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Dodd-Frank Act reduced the size of that program, known as the Troubled Asset Relief Program, or TARP, from $700 billion to $475 billion and prohibits the establishment of additional programs under TARP. Under the U.S. Treasury’s Capital Purchase Program, or CPP, the U.S. Treasury committed to purchase up to $250 billion of preferred stock and warrants in eligible institutions. The EESA also temporarily increased FDIC deposit insurance coverage to $250,000, and the Dodd-Frank Act made the increase permanent.

On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan which, among other things, provides a forward-looking supervisory capital assessment program that is mandatory for banking institutions with over $100 billion of assets and makes capital available to financial institutions qualifying under a process and criteria similar to the CPP. In addition, the American Recovery and Reinvestment Act of 2009, or ARRA, was signed into law on February 17, 2009, and includes, among other things, extensive new restrictions on the compensation and governance arrangements of financial institutions.

In addition, the Secretary of the Treasury proposed fundamental changes to the regulation of financial institutions, markets and products on June 17, 2009. Finally, the Dodd-Frank Act, which was enacted in July 2010, will result in significant regulatory initiatives that could have a significant and possibly adverse impact on the financial services industry, including us.

We cannot predict the actual effects of the Dodd-Frank Act, EESA, the ARRA, future legislative and regulatory reform measures and various governmental, regulatory, monetary, and fiscal initiatives which have been and may be enacted on the economy, the financial markets, or us. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions, could materially and adversely affect our business, financial condition, results of operations, and the trading prices of our securities.

Our net interest income could be negatively affected by further interest rate adjustments by the Federal Reserve Board.

As a financial institution, our earnings are dependent upon our net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes resulting from changes in the Federal Reserve Board’s policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of our assets and liabilities. As a result, an increase or decrease in market interest rates could have a material adverse effect on our net interest margin and results of operations. Actions by monetary and fiscal authorities, including the Federal Reserve Board, could have an adverse effect on our deposit levels, loan demand, business, and results of operations.

In response to the dramatic deterioration of the subprime, mortgage, credit, and liquidity markets, the Federal Reserve Board has taken action on nine occasions to reduce interest rates by a total of 450 basis points since September 2007, which contributed to a decline in our net interest income in 2010. Any reduction in our net interest income will negatively affect our business, financial condition, liquidity, results of operations, cash flows, and/or the price of our securities.

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and currently are subject to examination, supervision, and comprehensive regulation by the NC Commissioner, the FDIC and the Federal Reserve Board. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, locations of offices, and the ability to accept brokered deposits on which we currently rely heavily to fund our operations. We must also meet regulatory capital requirements. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity, deposit funding strategy, and results of operations would be materially and adversely affected. Our failure to remain well capitalized and well managed for regulatory purposes could affect client confidence, our ability to execute our business strategies, our ability to grow assets or establish new branches, our ability to obtain or renew brokered deposits, our cost of funds and FDIC insurance, our ability to pay dividends on our common stock, and our ability to make acquisitions.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. For example, new legislation or regulation could limit the manner in which we may conduct our business, including our ability to obtain financing, attract deposits, and make loans. Many of these regulations are intended to protect depositors, the public and the FDIC, not shareholders. In addition, the burden imposed by these regulations may place us at a competitive disadvantage compared to competitors who are less regulated. The laws, regulations, interpretations, and enforcement policies that apply to us have been subject to significant change in recent years, sometimes retroactively applied, and may change significantly in the future. Our cost of compliance could adversely affect our ability to operate profitably.

Our success depends significantly on economic conditions in our market areas.

Unlike larger organizations that are more geographically diversified, our banking offices are currently concentrated in North Carolina. Even if our change in strategy is successful, we expect that our banking offices will remain primarily concentrated in North Carolina, South Carolina and Virginia. As a result of this geographic concentration, our financial results will depend largely upon economic conditions in these market areas. If the communities in which we operate do not grow or if prevailing economic conditions, locally or nationally, deteriorate further, this may have a significant impact on the amount of loans that we originate, the ability of our borrowers to repay these loans and the value of the collateral securing these loans. Prolonged continuation of the current economic downturn caused by inflation, recession, unemployment, government action, or other factors beyond our control would likely contribute to the deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would have an adverse effect on our business.

In addition, some portions of our target market are in coastal areas which are susceptible to hurricanes and tropical storms. Such weather events can disrupt our operations, result in damage to our properties, decrease the value of real estate collateral for our loans, and negatively affect the local economies in which we operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes or other weather events will affect our operations or the economies in our market areas, but such weather events could result in a decline in loan originations, a decline in the value or destruction of properties securing our loans and an increase in the delinquencies, foreclosures and loan losses. Our business or results of operations may be adversely affected by these and other negative effects of hurricanes or other significant weather events.

Current levels of market volatility are unprecedented.

The capital and credit markets have in recent years been experiencing volatility and disruption. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. 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 and on our business, financial condition, and results of operations.

We rely heavily on the services of key executives and directors, a number of which are new additions to our management team.

Following our Public Offering in August 2010, we changed our management team and reduced the size of and reconstituted our Board of Directors. Our growth strategy contemplates continued services and expertise of these persons in the different markets in which we seek to expand. The loss of the services of any of these persons could have an adverse impact on our ability to execute our growth strategy or on our business, operations and financial condition.

To be profitable, we must compete successfully with other financial institutions which have greater resources and capabilities than we do.

The banking business in our target markets is highly competitive. Many of our existing and potential competitors are larger and have greater resources than we do and have been in existence a longer period of time. We compete with these institutions both in attracting deposits and originating loans. We may not be able to attract clients away from our competition. We compete for loans and deposits with the following types of institutions: `

•

other commercial banks

•

savings banks

•

thrifts

•

trust companies

•

credit unions

•

securities brokerage firms

•

mortgage brokers

•

insurance companies

•

mutual funds

•

industrial loan companies

Competitors that are not depository institutions are generally not regulated as extensively as we are and, therefore, may have greater flexibility in competing for business. Other competitors are subject to similar regulation but have the advantages of larger established client bases, higher lending limits, extensive branch networks, greater advertising and marketing budgets, or other factors.

Our legal lending limit is determined by law and is calculated as a percentage of our capital and unimpaired surplus. The size of the loans which we are able to offer to our clients is less than the size of the loans that larger competitors are able to offer. This limit may affect our success in establishing relationships with the larger businesses in our market. We may not be able to successfully compete with the larger banks in our target markets.

Liquidity needs of the Company could adversely affect our results of operations and financial condition.

The primary sources of funds for the Bank are deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including, but not limited to, changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters, and international instability. Additionally, deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments, and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as additional out-of-market time deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

We depend on the accuracy and completeness of information about clients and counterparties, which, if incorrect or incomplete, could harm our earnings.

In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients, counterparties or other third parties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a client’s audited financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the client. Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. Our financial condition and results of operations could be negatively impacted to the extent we incorrectly assess the creditworthiness of our borrowers, fail to detect or respond to deterioration in asset quality in a timely manner, or rely on information provided to us, such as financial statements that do not comply with GAAP and may be materially misleading.

Negative public opinion could damage our reputation and adversely impact our earnings.

Reputation risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our operations. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients and employees and can expose us to litigation and regulatory action and adversely impact our results of operations. Although we take steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present given the nature of our business.

We are subject to security and operational risks relating to our use of technology that, if not managed properly, could damage our reputation, business or operating results.

To conduct our business, we rely heavily on technology-driven products and services and on communications and information systems. Our future success will depend, in part, on our ability to address our clients’ needs by using technology to provide products and services that will satisfy client demands for convenience as well as to create additional efficiencies in operations. Furthermore, any failure, interruption or breach of the security of our information systems could result in failures or disruptions in our client relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, we cannot assure investors that we can prevent any such failures, interruptions or security breaches or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Risks Related to an Investment in our common stock

We may issue additional shares of stock or equity derivative securities, including awards to current and future executive officers, directors and employees, that could result in dilution of your investment.

Our authorized capital includes 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of March 31, 2011, we had 28,619,358 shares of common stock outstanding and had reserved or otherwise set aside for issuance 2,373,632 shares underlying outstanding options and 412,000 shares that are available for future grants of stock options, restricted stock or other equity-based awards pursuant to the Company’s equity incentive plans. Subject to NASDAQ rules, our Board of Directors generally has the authority to issue all or part of any authorized but unissued shares of common stock or preferred stock for any corporate purpose. We may seek additional equity capital in the future as we develop our business and expand our operations, or we may issue additional equity in connection with the acquisition of strategic partners. These issuances would dilute the ownership interests of current shareholders and may dilute the per share book value of the common stock. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, our then current shareholders.

In addition, the issuance of shares under the equity compensation plans will result in dilution of our shareholder’s ownership of our common stock. The exercise price of stock options could also adversely affect the terms on which we can obtain additional capital. Option holders are most likely to exercise their options when the exercise price is less than the market price for our common stock. They may profit from any increase in the stock price without assuming the risks of ownership of the underlying shares of common stock by exercising their options and selling the stock immediately.

Our stock price may be volatile, which could result in losses to our investors and litigation against us.

Our stock price has been volatile in the past and several factors could cause the price to fluctuate in the future. These factors include, but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, our announcement of developments related to our businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, concerns and other issues related to the financial services industry. Fluctuations in our stock price may be unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of fluctuation in the market price of their securities. We could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from our normal business, which could result in losses to our investors.

Future sales of our common stock by our shareholders or the perception that those sales could occur may cause our common stock price to decline.

Although our common stock is listed for trading in the NASDAQ Global Market, the trading volume in our common stock may be lower than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the potential for lower relative trading volume in our common stock, significant sales of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.

State laws and provisions in our articles of incorporation or bylaws could make it more difficult for another company to purchase us, even though such a purchase may increase shareholder value.

In many cases, shareholders may receive a premium for their shares if we were purchased by another company. State law and our articles of incorporation and bylaws could make it difficult for anyone to purchase us without approval of our Board of Directors. For example, our articles of incorporation divide the Board of Directors into three classes of directors serving staggered three-year terms with approximately one-third of the Board of Directors elected at each annual meeting of shareholders. This classification of directors makes it difficult for shareholders to change the composition of the Board of Directors. As a result, at least two annual meetings of shareholders would be required for the shareholders to change a majority of directors, whether or not a change in the Board of Directors would be beneficial and whether or not a majority of shareholders believe that such a change would be desirable.

We do not currently intend to pay dividends and may be unable to pay dividends in the future.

We do not intend to pay dividends in the foreseeable future. If we determine to pay dividends in the future, holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Our ability to pay dividends also is limited by regulatory restrictions and the need to maintain sufficient capital. If these regulatory requirements are not satisfied, we would be unable to pay dividends on our common stock.

Moreover, Park Sterling Corporation is a bank holding company that is a separate and distinct legal entity from the Bank. As a result, our ability to make dividend payments, if any, on our common stock would depend primarily upon the receipt of dividends and other distributions received from the Bank. Various federal and state regulations limit the amount of dividends that the Bank may pay to the Company.

In addition, our right to participate in any distribution of assets of the Bank or any other subsidiary of the Company from time to time upon the subsidiary’s liquidation or otherwise, and thus the ability of our shareholders to benefit indirectly from such distribution, will be subject to the prior claims of creditors of the subsidiary, except to the extent any of our claims as a creditor of the subsidiary may be recognized. As a result, our common stock effectively will be subordinated to all existing and future liabilities and obligations of the Bank and any other subsidiaries we may have.

Your right to receive liquidation and dividend payments on the common stock is junior to our existing and future indebtedness and to any other senior securities we may issue in the future.

Shares our common stock are equity interests in us and do not constitute indebtedness. This means that shares of our common stock will rank junior to all of our indebtedness and to other non-equity claims against us and our assets available to satisfy claims against us, including in our liquidation. As of December 31, 2010, we had approximately $6.9 million of subordinated debt, in addition to our other liabilities, which would have been senior in right of payment to our common stock and we may incur additional indebtedness from time to time without the approval of the holders of our common stock.

Additionally, our Board of Directors is authorized to issue classes or series of preferred stock in the future without any action on the part of our common shareholders. Our common shareholders would be subject to the prior dividend and liquidation rights of holders of any preferred stock outstanding.

Our common stock is not insured by the FDIC.

Our common stock is not a savings or deposit account, and is not insured by the FDIC or any other governmental agency and is subject to risk, including the possible loss of all or some principal.

Item 1B.		Unresolved Staff Comments

None.

Item 2.		Properties

The Company leases 16,265 square feet in a building located at 1043 E. Morehead Street, Charlotte, North Carolina that serves as its corporate headquarters and a branch office location. In February 2011, the Company leased 7,965 square feet in a building adjacent to the Morehead Street location to accommodate the Company’s expanding operations. Both of the buildings are owned by an entity with respect to which a former director is president.

The Company owns its branch office location in the SouthPark neighborhood of Charlotte, North Carolina and leases a branch office location in Wilmington, North Carolina. In February 2011, the Company leased an office location in Charleston, South Carolina, where we intend to open a branch. Management believes the terms of the various leases are consistent with market standards and were arrived at through arm’s length bargaining.

Item 3.		Legal Proceedings

There are no pending material legal proceedings to which the Company is a party or of which any of its property is subject. In addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on the Company’s business, operating results or financial condition.

Item 4.		Submission of Matters to a Vote of Security Holders [Removed and reserved]

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for the Common Stock of the Company. Since the Public Offering, shares of the Company’s common stock (and prior to the Reorganization, the Bank’s common stock) have been traded on the NASDAQ Global Market (“NASDAQ”) under the symbol “PSTB”. Prior to the Public Offering, shares of the Bank’s common stock were traded on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “PSTB.OB.” The following table sets forth: (i) since August 13, 2010, the date that trading began on NASDAQ, the high and low sales prices for the common stock, as reported on NASDAQ, and (ii) prior to August 13, 2010, the high and low bid information for the common stock, as reported on the OTCBB, in each case for the calendar quarters or shorter period indicated. The OTCBB bid information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. There may have been other transactions in the Bank’s common stock during such periods referenced of which we are not aware.

		Common Stock
2010		High				Low
First Quarter		$	6.50			$	5.80
Second Quarter			8.95				6.24
Third Quarter (through August 12, 2010)			8.91				6.35
Third Quarter (August 13, 2010 through September 30, 2010)			6.45				5.56
Fourth Quarter			6.40				5.03

		Common Stock
2009		High				Low
First Quarter		$	9.00			$	5.50
Second Quarter			7.20				6.00
Third Quarter			7.00				5.50
Fourth Quarter			6.75				6.00

As of March 7, 2011, the Company had approximately 172 shareholders of record.

Dividend Policy. To date, no cash dividends have been paid with respect to our common stock. The current policy of the Board of Directors is to retain any earnings to provide for the growth of the Company, therefore, we do not anticipate paying cash dividends in the foreseeable future. At such time as the Board of Directors contemplates a change in the dividend policy, the Company’s ability to pay dividends will be subject to the restrictions of North Carolina law, various statutory limitations and its organizational documents, and may be dependent on the receipt of dividends from the Bank, payment of which is subject to regulatory restrictions.

Unregistered sales of equity securities. During 2010, the Bank did not have any unregistered sales of equity securities except as previously reported on the Bank’s Current Report on Form 8-K dated August 18, 2010 and filed with the FDIC and did not have any repurchases of its common stock.

Securities authorized for issuance under equity compensation plans. The information required by Item 201(d) is set forth in Part III, Item 12.

Item 6.		— Selected Financial Data

		At or for the Years Ended December 31,
		2010				2009				2008				2007				2006 (1)
		(Dollars in thousands, except per share data)
Operating Data
Total interest income		$	22,642			$	21,668			$	20,102			$	10,988			$	690
Total interest expense			7,607				9,290				10,471				4,837				134
Net interest income			15,035				12,378				9,631				6,151				556
Provision for loan losses			17,005				3,272				2,544				2,758				640
Net interest income (loss) after provision			(1,970	)			9,106				7,087				3,393				(84	)
Noninterest income (loss)			130				(293	)			26				13				1
Noninterest expense			11,057				7,997				7,099				5,278				1,811
Income (loss) before taxes			(12,897	)			816				14				(1,872	)			(1,894	)
Income tax expense (benefit)			(5,038	)			239				(1,532	)			—				—
Net income (loss)		$	(7,859	)		$	577			$	1,546			$	(1,872	)		$	(1,894	)
Per Share Data (2)
Basic earnings (loss) per common share		$	(0.58	)		$	0.12			$	0.31			$	(0.38	)		$	(0.38	)
Diluted earnings (loss) per common share		$	(0.58	)		$	0.12			$	0.31			$	(0.38	)		$	(0.38	)
Weighted-average common shares outstanding:
Basic			13,558,221				4,951,098				4,951,098				4,950,355				4,950,000
Diluted			13,558,221				4,951,098				5,000,933				4,950,355				4,950,000
Balance Sheet Data
Cash and cash equivalents		$	65,378			$	23,238			$	16,511			$	1,423			$	20,371
Investment securities			140,590				42,567				31,588				14,883				4,572
Loans			399,829				397,564				371,272				226,541				42,647
Allowance for loan losses			(12,424	)			(7,402	)			(5,568	)			(3,398	)			(640	)
Total assets			616,108				473,855				428,073				246,667				68,424
Deposits			407,820				392,633				351,327				185,602				25,409
Borrowings			20,874				26,989				27,962				16,804				—
Subordinated debt			6,895				6,895				—				—				—
Stockholders’ equity		$	177,101			$	46,095			$	45,697			$	42,421			$	42,964

(1)		Operating and per share data from September 8, 2006 (date of incorporation) to December 31, 2006.
(2)		Per share data has been adjusted for the effects of an eleven-for-ten stock split in the third quarter of 2008.

		At or for the Years Ended December 31,
		2010				2009				2008				2007				2006 (1)
Profitability Ratios
Return on average total assets			-1.46	%			0.13	%			0.46	%			-1.27	%
Return on average shareholders’ equity			-8.00	%			1.26	%			3.59	%			-4.43	%
Net interest margin (2)			2.95	%			2.76	%			2.88	%			4.22	%
Efficiency ratio (3)			71.39	%			64.19	%			73.51	%			85.62	%
Asset Quality Ratios
Net charge-offs to total loans			3.00	%			0.36	%			0.09	%			0.00	%
Allowance for loan losses to total loans			3.11	%			1.86	%			1.50	%			1.50	%
Nonperforming assets to total loans and OREO			10.51	%			1.06	%			0.38	%			—
Nonperforming assets to total assets			6.84	%			0.89	%			0.33	%			—
Liquidity Ratios
Net loans to total deposits			94.99	%			99.37	%			104.09	%			120.23	%
Liquidity ratio			50.50	%			15.81	%			13.69	%			8.79	%
Equity to total assets			28.75	%			9.73	%			10.67	%			17.20	%
Capital Ratios
Tangible common equity to tangible assets (4)			28.75	%			9.73	%			10.67	%			17.20	%
Tier 1 leverage			27.39	%			9.40	%			10.71	%			19.67	%
Tier 1 risk-based capital			40.20	%			10.66	%			10.92	%			16.84	%
Total risk-based capital			43.06	%			13.55	%			12.71	%			18.09	%

(1)		Bank incorporated on September 8, 2006. Information is not meaningful and has been excluded.
(2)		Net interest margin is presented on a tax equivalent basis.
(3)		Calculated by dividing noninterest expense by the sum of net interest income and noninterest income. Gains and losses on sales of securities and OREO are excluded from the calculation.
(4)		Information regarding the calculation of these non-GAAP measures is included in Results of Operations in Item 7. under the caption “Summary”.

The following tables set forth the unaudited consolidated selected quarterly statement of income (loss) for the years ended December 31:

Consolidated Selected Quarterly Statement of Income (Loss)

		2010 (unaudited)
		4th				3rd				2nd				1st
		Quarter				Quarter				Quarter				Quarter
		(Dollars in thousands, except per share amounts)
Total interest income		$	5,793			$	5,559			$	5,639			$	5,651
Total interest expense			1,896				1,929				1,882				1,900
Net interest income			3,897				3,630				3,757				3,751
Provision for loan losses			8,237				6,143				1,094				1,531
Net interest income (loss) after provision			(4,340	)			(2,513	)			2,663				2,220
Noninterest income			43				26				23				38
Noninterest expense			3,548				2,990				2,477				2,042
Income (loss) before taxes			(7,845	)			(5,477	)			209				216
Income tax expense (benefit)			(3,324	)			(1,809	)			36				59
Net income (loss)		$	(4,521	)		$	(3,668	)		$	173			$	157
Basic earnings (loss) per common share		$	(0.16	)		$	(0.23	)		$	0.03			$	0.03
Diluted earnings (loss) per common share		$	(0.16	)		$	(0.23	)		$	0.03			$	0.03

		2009 (unaudited)
		4th				3rd				2nd				1st
		Quarter				Quarter				Quarter				Quarter
		(Dollars in thousands, except per share amounts)
Total interest income		$	5,650			$	5,568			$	5,389			$	5,061
Total interest expense			2,021				2,283				2,336				2,650
Net interest income			3,629				3,285				3,053				2,411
Provision for loan losses			1,418				1,150				419				285
Net interest income after provision			2,211				2,135				2,634				2,126
Noninterest income (loss)			14				26				(335	)			2
Noninterest expense			2,078				2,018				2,044				1,857
Income before taxes			147				143				255				271
Income tax expense			29				27				97				86
Net income		$	118			$	116			$	158			$	185
Basic earnings per common share		$	0.02			$	0.02			$	0.03			$	0.03
Diluted earnings per common share		$	0.02			$	0.02			$	0.03			$	0.03

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our financial position and results of operations and should be read in conjunction with the information set forth in Part I, Item 1A. “Risk Factors” and in the Company’s consolidated financial statements and notes thereto (“Consolidated Financial Statements”) contained in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Report.

Summary of Recent Events

The Company was formed on October 6, 2010 to serve as the holding company for the Bank and is a bank holding company registered with the Federal Reserve Board under the BHC Act. At present, the Company’s primary operations and business are that of owning the Bank.

The Bank was incorporated on September 8, 2006 as a North Carolina-chartered commercial bank and is a subsidiary of the Company. The Bank opened for business on October 25, 2006 at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina. The Bank opened a branch in Wilmington, North Carolina, in October 2007 and in the SouthPark neighborhood of Charlotte in July 2008, and received approval from the NC Commissioner in March 2011 to open a branch in Charleston, South Carolina.

On January 1, 2011, the Company acquired all of the outstanding common stock of the Bank, on a one-for-one basis, in a statutory share exchange transaction effected under North Carolina law and in accordance with the terms of an Agreement and Plan of Reorganization and Share Exchange dated October 22, 2010. Prior to the January 1, 2011, the Company conducted no operations other than obtaining regulatory approval for the Reorganization. The consolidated financial statements, discussions of those statements, market data and all other operating information presented herein, are those of the Bank on a stand-alone basis.

In August 2010, the Bank conducted the Public Offering which raised gross proceeds of $150.2 million to facilitate a change in its business plan from primarily organic growth at a moderate pace over the next few years to seeking to acquire regional and community banks in the Carolinas and Virginia. We intend to become a regional-sized multi-state banking franchise through acquisitions and organic growth, seeking to reach a consolidated asset size of between $8 billion and $10 billion over the next several years. We are committed to building a banking franchise that is noted for sound risk management, superior client service and exceptional client relationships.

As part of the Bank’s change in strategy, immediately following the Public Offering, the Bank reduced the size of its board of directors from thirteen members to six members, maintaining two of the sitting directors, Larry W. Carroll and Thomas B. Henson, and adding four new directors, Walter C. Ayers, Leslie M. (Bud) Baker, James C. Cherry and Jeffrey S. Kane. Mr. Baker was named Chairman of the board of directors upon becoming a member. In March 2011, the board of directors of the Company, which mirrors that of the Bank, approved expanding its membership to seven and appointed Jean E. Davis as a director.

The Bank also reorganized its management team following the Public Offering. The new executive management team includes James C. Cherry, who became the Chief Executive Officer; David L. Gaines, who became the Chief Financial Officer; Nancy J. Foster, who became the Chief Risk Officer; and Bryan F. Kennedy, III, who was the President and Chief Executive Officer and remains the President.

On March 30, 2011, the Company and Community Capital Corporation (“Community Capital”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Community Capital will be merged with and into the Company, with the Company as the surviving entity (the “Merger”). Pursuant to the terms of the Merger Agreement, the Company will pay $3.30 per share of Community Capital common stock, with the consideration to be in the form of approximately 40% cash and approximately 60% in shares of the Company’s common stock. The Merger Agreement has been approved by the boards of directors of both the Company and Community Capital. The Merger is subject to customary closing conditions, including regulatory approval and Community Capital shareholder approval. As of December 31, 2010, Community Capital, which is headquartered in Greenwood, South Carolina, had $655.9 million in assets and operated 17 full service branches and one drive-through facility throughout South Carolina. For additional information, please see the Company’s Current Report on Form 8-K filed March 31, 2011.

Critical Accounting Policies

In the preparation of our financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and in accordance with general practices within the banking industry. Our significant accounting policies are described in Note B — Summary of Significant Accounting Policies to the Consolidated Financial Statements. While all of these policies are important to understanding the consolidated financial statements, certain accounting policies described below involve significant judgment and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and assumptions that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

Allowance for Loan Losses. The allowance for loan losses is based upon management’s ongoing evaluation of the loan portfolio and reflects an amount considered by management to be its best estimate of known and inherent losses in the portfolio as of the balance sheet date. The determination of the allowance for loan losses involves a high degree of judgment and complexity. In making the evaluation of the adequacy of the allowance for loan losses, management gives consideration to current economic conditions, statutory examinations of the loan portfolio by regulatory agencies, independent loan reviews performed periodically by third parties, delinquency information, management’s internal review of the loan portfolio, and other relevant factors. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require the Company to recognize changes to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Although provisions have been established by loan segments based upon management’s assessment of their differing inherent loss characteristics, the entire allowance for losses on loans is available to absorb further loan losses in any segment. Further information regarding the Company’s policies and methodology used to estimate the allowance for possible loan losses is presented in Note D — Loans to the Consolidated Financial Statements.

Income Taxes. Income taxes are provided based on the liability method of accounting, which includes the recognition of deferred tax assets and liabilities for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. In general, The Company records deferred tax assets when the event giving rise to the tax benefit has been recognized in the consolidated financial statements.

A valuation allowance is recognized to reduce any deferred tax assets for which, based upon available information, it is more-likely-than-not that all or any portion will not be realized. Assessing the need for, and amount of, a valuation allowance for deferred tax assets requires significant judgment and evaluation. In most cases, the realization of deferred tax assets is dependent upon the Company generating a sufficient level of taxable income in future periods, which can be difficult to predict. Management has prepared a forecast which includes judgmental and quantitative elements that may be subject to significant change. If our forecast of taxable income within the carryforward periods available under applicable law is not sufficient to cover the amount of net deferred assets, such assets may be impaired. Based on our forecast and other judgmental elements, management determined no valuation allowances were needed at either December 31, 2010 or 2009.

Fair Value Measurements. As a financial services company, the carrying value of certain financial assets and liabilities is impacted by the application of fair value measurements, either directly or indirectly. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as available-for-sale investment securities. In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established. Given the inherent volatility, the use of fair value measurements may have a significant impact on the carrying value of assets or liabilities, or result in material changes to the financial statements, from period to period.

Detailed information regarding fair value measurements can be found in Note M — Fair Value of Financial Instruments to the Consolidated Financial Statements. The following is a summary of those assets that may be affected by fair value measurements, as well as a brief description of the current accounting practices and valuation methodologies employed by the Company:

Available-for-Sale Investment Securities. Investment securities classified as available-for-sale are measured and reported at fair value on a recurring basis. For most securities, the fair value is based upon quoted market prices or determined by pricing models that consider observable market data. However, the fair value of certain investment securities must be based upon unobservable market data, such as non-binding broker quotes and discounted cash flow analysis or similar models, due to the absence of an active market for these securities. As a result, management’s determination of fair value for these securities is highly dependent on subjective or complex judgments, estimates and assumptions, which could change materially between periods.

Impaired loans. For loans considered impaired, the amount of impairment loss recognized is determined based on a discounted cash flow analysis or the fair value of the underlying collateral if repayment is expected solely from the sale of the collateral. The vast majority of the collateral securing impaired loans is real estate, although it may also include accounts receivable and equipment, inventory or similar personal property.

Results of Operations

Summary. The Company recorded a net loss of $7.9 million, or $(0.58) per diluted share, for the year ended December 31, 2010, compared to net income of $577 thousand, or $0.12 per diluted share, for the year ended December 31, 2009 and net income of $1.5 million, or $0.31 per diluted share, for the year ended December 31, 2008.

The net loss for the fourth quarter of 2010 was $4.5 million, or $(0.16) per share, compared to the fourth quarter of 2009 net income of $118 thousand, or $0.02 per diluted share, and a net loss of $3.7 million, or $(0.23) per diluted share, for the third quarter of 2010.

As a result of the Public Offering, diluted weighted average shares increased from 4,951,098 in 2009 to 13,558,221 in 2010. Diluted weighted average shares for the fourth quarter of 2009 and the third and fourth quarters of 2010 were 4,951,098, 15,998,924 and 28,051,098, respectively.

The return on average assets in 2010 was (1.46)% compared to 0.13% in 2009 and 0.46% in 2008. The return on average shareholders’ equity was (8.0)% in 2010 compared to 1.26% in 2009 and 3.59% in 2008.

In addition to traditional capital measurements, management uses tangible equity and related ratios, which are non-GAAP financial measures, to evaluate the adequacy of shareholders’ equity and to facilitate comparisons with peers. The following table presents these non-GAAP financial measures and reconciles the calculation of tangible assets and tangible equity to the related amounts as reported in the Company’s Consolidated Financial Statements at December 31:

Non-GAAP Financial Measures

		2010				2009				2008
		(Dollars in thousands, except share and per share amounts)
Tangible assets:
Total assets		$	616,108			$	473,855			$	428,073
Less: intangible assets			—				—				—
Tangible assets		$	616,108			$	473,855			$	428,073
Tangible common equity:
Total common equity		$	177,101			$	46,095			$	45,697
Less: intangible assets			—				—				—
Tangible common equity		$	177,101			$	46,095			$	45,697
Tangible common equity to tangible assets:
Tangible common equity		$	177,101			$	46,095			$	45,697
Divided by: tangible assets			616,108				473,855				428,073
Tangible common equity to tangible assets			28.75	%			9.73	%			10.68	%
Tangible book value per share:
Tangible common equity		$	177,101			$	46,095			$	45,697
Divided by: period end outstanding shares			28,051,098				4,951,098				4,951,098
Tangible common book value per share		$	6.31			$	9.31			$	9.23

Net Income (Loss). The following table summarizes components of net income (loss) and the changes in those components for the years ended December 31:

Components of Net Income (Loss)

		2010				2009				2008				Change 2010 vs. 2009								Change 2009 vs. 2008
		(Dollars in thousands)
Interest income		$	22,642			$	21,668			$	20,102			$	974				4.5	%		$	1,566				7.8	%
Interest expense			7,607				9,290				10,471				(1,683	)			-18.1	%			(1,181	)			-11.3	%
Net interest income			15,035				12,378				9,631				2,657				21.5	%			2,747				28.5	%
Provision for loan losses			17,005				3,272				2,544				13,733				419.7	%			728				28.6	%
Noninterest income			130				(293	)			26				423				-144.4	%			(319	)			-1226.9	%
Noninterest expense			11,057				7,997				7,099				3,060				38.3	%			898				12.6	%
Net income (loss) before taxes			(12,897	)			816				14				(13,713	)			-1680.5	%			802				5728.6	%
Income tax expense (benefit)			(5,038	)			239				(1,532	)			(5,277	)			-2207.9	%			1,771				-115.6	%
Net income (loss)		$	(7,859	)		$	577			$	1,546			$	(8,436	)			-1462.0	%		$	(969	)			-62.7	%

The Company incurred a net loss of $7.9 million for the year ended December 31, 2010, compared to net income of $577 thousand for the year ended December 31, 2009. The change in our results of operations in 2010 includes an increase of $2.7 million in net interest income, offset primarily by increases of $13.7 million in the provision for loan losses, $1.7 million in salary and benefit costs and other noninterest expenses such as legal and due diligence expenses incurred in connection with the Bank becoming a public company and engaging in the process of acquiring regional and community banks, less a $5.0 million tax benefit recorded as a result of the loss for the year.

Net income for the year ended December 31, 2009 was $577 thousand, compared to $1.5 million for the year ended December 31, 2008. Net income for 2008 increased by $1.5 million as a result of a deferred tax allowance that was released during 2008. During 2009, our results of operations includes a $2.7 million increase in net interest income compared to 2008 and is offset primarily by increases of $728 thousand in the provision for loan losses, impairment charges related to an investment in a large correspondent bank in the amount of $698 thousand and an increase in FDIC assessments of $765 thousand.

Details of the changes in the various components of net income (loss) are further discussed below.

Net Interest Income and Expense. Our largest source of earnings is net interest income, which is the difference between interest income on interest-earning assets and interest expense paid on deposits and other interest-bearing liabilities. The primary factors that affect net interest income are changes in volume and yields of earning assets and interest-bearing liabilities, which are affected in part by management’s responses to changes in interest rates through asset/liability management.

Net interest income for 2010 totaled $15.0 million compared to $12.4 million in 2009, an increase of $2.6 million, or 21.5%. This increase is primarily attributable to a reduction in interest expense due to a decrease in the cost of funds for time deposits along with an increase in average investments and federal funds sold of $61.4 million as a result of investing the proceeds received from the Public Offering. Net interest income increased $2.7 million in 2009 to $12.4 million from $9.6 in 2008. The increase in 2009 is primarily a result of an increase in average loan balances and a reduction in interest expense due to a decrease in the cost of funds for time deposits.

The following table summarizes the average volume of interest-earning assets and interest-bearing liabilities and average yields and rates for the years ended December 31:

Net Interest Margin

		2010												2009												2008
		Average				Income/				Yield/				Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate				Balance				Expense				Rate
		(Dollars in thousands)
Assets
Interest-earning assets:
Loans with fees (1)		$	399,965			$	20,260				5.07	%		$	389,036			$	19,710				5.07	%		$	307,665			$	18,767				6.10	%
Federal funds sold			45,794				107				0.23	%			19,274				41				0.21	%			3,677				60				1.63	%
Investment securities — taxable			57,877				1,567				2.71	%			26,153				1,365				5.22	%			19,345				1,112				5.75	%
Investment securities — tax-exempt (2)			14,378				1,045				7.27	%			11,264				867				7.70	%			2,336				174				7.45	%
Other interest-earning assets			6,341				66				1.04	%			3,314				19				0.57	%			1,847				56				3.03	%
Total interest-earning assets			524,355				23,045				4.39	%			449,041				22,002				4.90	%			334,870				20,169				6.02	%
Allowance for loan losses			(9,556	)											(6,307	)											(4,517	)
Cash and due from banks			7,340												4,695												1,866
Premises and equipment			4,602												4,788												4,647
Other assets			10,496												7,462												2,030
Total assets		$	537,237											$	459,679											$	338,896
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand		$	9,831			$	10				0.10	%		$	8,205			$	6				0.07	%		$	4,374			$	8				0.18	%
Savings and money market			50,954				398				0.78	%			42,249				347				0.82	%			44,202				989				2.24	%
Time deposits — core			189,841				3,615				1.90	%			146,109				4,086				2.80	%			82,384				3,338				4.05	%
Time deposits — brokered			125,123				2,254				1.80	%			161,331				3,882				2.41	%			124,123				5,481				4.42	%
Total interest-bearing deposits			375,749				6,277				1.67	%			357,894				8,321				2.32	%			255,083				9,816				3.85	%
Federal Home Loan Bank advances			22,110				572				2.59	%			25,000				590				2.36	%			20,164				535				2.65	%
Other borrowings			8,755				758				8.66	%			6,124				379				6.19	%			5,598				120				2.14	%
Total borrowed funds			30,865				1,330				4.31	%			31,124				969				3.11	%			25,762				655				2.54	%
Total interest-bearing liabilities			406,614				7,607				1.87	%			389,018				9,290				2.39	%			280,845				10,471				3.73	%
Net interest rate spread							15,438				2.52	%							12,712				2.51	%							9,698				2.29	%
Noninterest-bearing demand deposits			30,462												22,039												12,438
Other liabilities			1,735												2,685												2,552
Shareholders’ equity			98,426												45,937												43,061
Total liabilities and shareholders’ equity		$	537,237											$	459,679											$	338,896
Net interest margin											2.94	%											2.83	%											2.90	%

(1)		Nonaccrual loans are included in the average loan balances.
(2)		Interest income and yields are presented on a fully tax-equivalent basis.

The following table details the calculation of fully tax-equivalent net interest income for the years ended December 31:

Tax Equivalent Adjustments

		2010				2009				2008
		(Dollars in thousands)
Net interest income, as reported		$	15,035			$	12,378			$	9,631
Tax equivalent adjustments			403				334				67
Fully tax equivalent net interest income		$	15,438			$	12,712			$	9,698

Changes in interest income and interest expense can result from variances in both volume and rates. The following table presents the relative impact on tax-equivalent net interest income to changes in the average outstanding balances of interest-earning assets and interest-bearing liabilities and the rates earned and paid by us on such assets and liabilities:

Volume and Rate Variance Analysis

		Year Ended December 31,
		2010 vs. 2009												2009 vs. 2008
		Increase/(Decrease) Due to
		Volume				Rate				Total				Volume				Rate				Total
		(Dollars in thousands)
Interest-earning assets:
Loans		$	554			$	(4	)		$	550			$	4,543			$	(3,600	)		$	943
Federal funds sold			59				7				66				144				(163	)			(19	)
Investment securities — taxable			1,257				(1,055	)			202				373				(120	)			253
Investment securities — tax-exempt			233				(56	)			177				676				17				693
Other interest-earning assets			24				23				47				26				(63	)			(37	)
Total earning assets			2,128				(1,085	)			1,043				5,763				(3,930	)			1,833
Interest-bearing liabilities:
Interest bearing demand			1				3				4				5				(7	)			(2	)
Savings and money market			70				(19	)			51				(30	)			(612	)			(642	)
Time deposits — core			1,028				(1,499	)			(471	)			2,182				(1,434	)			748
Time deposits — brokered			(762	)			(866	)			(1,628	)			1,269				(2,868	)			(1,599	)
Total interest bearing deposits			337				(2,381	)			(2,044	)			3,426				(4,921	)			(1,495	)
Federal Home Loan Bank advances			(71	)			53				(18	)			121				(66	)			56
Other borrowings			195				184				379				22				237				259
Total borrowed funds			124				237				361				143				171				314
Total interest-bearing liabilities			461				(2,144	)			(1,683	)			3,569				(4,750	)			(1,181	)
Increase in net interest income		$	1,668			$	1,059			$	2,726			$	2,194			$	820			$	3,014

Net interest income on a tax equivalent basis totaled $15.4 million in 2010 as compared to $12.7 million in 2009. The interest rate spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 2.52% in 2010, a slight increase from the 2009 net interest spread of 2.51%. The net yield on interest-earning assets in 2010 increased to 2.94% from the 2009 net interest margin of 2.83%.

Tax equivalent interest income increased $1.0 million, or 4.7%, in 2010 primarily due to an increase in the average balance of loans, investments and federal funds sold. The yield on interest-earning assets decreased to 4.39% in 2010 from 4.90% in 2009 as a result of a decrease in the average yield received on investments. Average interest-earning assets increased $75.3 million primarily as the result of a $10.9 million increase in average loans and a $61.4 million increase in average investment securities over 2009.

Interest expense decreased $1.7 million, or 18%, in 2010 due to a decrease in the average rate paid on interest-bearing liabilities. The cost of funds decreased to 1.87% in 2010 from 2.39% in 2009. This decrease in the cost of funds was primarily attributable to decreases in the average rate paid on time deposits. The $17.6 million growth in average interest-bearing liabilities was primarily attributable to an increase in interest-bearing savings and money market accounts and core time deposits offset by a $36.0 million decrease in brokered certificates of deposit.

In 2009, net interest income on a tax equivalent basis increased $3.0 million, or 31%, to $12.7 million from $9.7 million in 2008. The net interest margin was 2.83% in 2009, a slight decrease from the 2008 net interest margin of 2.90%. The net yield on interest-earning assets in 2009 decreased to 4.90% from the 2008 net interest margin of 6.02%.

The Company’s hedging policies permit the use of various derivative financial instruments to manage exposure to changes in interest rates. Details of derivatives and hedging activities are set forth in Note L — Derivative Financial Instruments and Hedging Activities to the Consolidated Financial Statements. Information regarding the impact of fluctuations in interest rates on the Corporation’s derivative financial instruments is set forth below in the section entitled “Interest Rate Sensitivity”.

Provision for Loan Losses. The provision for loan losses was $17.0 million, $3.3 million and $2.5 million for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in the 2010 and the 2009 provisions resulted from the negative impact on our loan portfolio of the continued economic downturn that persists across our markets and a 2010 refinement to our allowance for loan loss methodology which introduced a more comprehensive qualitative component. We had $12.0 million in net charge-offs during 2010, compared to $1.4 million and $374 thousand during 2009 and 2008, respectively. Please see the section below entitled “Financial Condition —Allowance for Loan Losses” for a more complete discussion of our policy for addressing potential loan losses.

Noninterest Income. Noninterest income is not a major component of our earnings. We have a minimal amount of noninterest income from service charges. In 2010 and 2008, noninterest income of $130 thousand and $26 thousand, respectively, consisted primarily of the sales and calls of available-for-sale securities. In 2009, noninterest income of $(293) thousand included impairment charges on an investment in a large correspondent bank totaling $698 thousand which offset income of $405 thousand consisting primarily of the sales and calls of available-for-sale securities.

Noninterest Expense. Total noninterest expense was $11.0 million for 2010, an increase of 38% from 2009. Noninterest expense for 2009 increased 13% to $8.0 million from $7.1 million in 2008.

Salaries and employee benefits expenses were $6.4 million in 2010, compared to $4.7 million during 2009, an increase of $1.7 million, or 36%, following a $34 thousand, or (.7)%, decrease in salaries and employee benefits expenses in 2009 compared to 2008. The increase in salaries and employee benefits in 2010 is primarily due to an increase in compensation and related benefits for additional employees as we expanded our management team and added other personnel to pursue the change in business plan following our Public Offering of common stock. This included compensation expense for share-based compensation plans of $810 thousand, $642 thousand and $665 thousand for the years ended December 31, 2010, 2009 and 2008, respectively.

Occupancy expenses were $916 thousand in 2010, compared to $820 thousand during 2009, an increase of $96 thousand, or 12%, following an increase of $100 thousand, or 14%, in occupancy expenses in 2009 over 2008. The increase in 2010 is primarily due to an increase in expenses associated with additional corporate office space and in 2009, the increase is primarily related to a full year’s expenses associated with a new branch opened in 2008.

Legal and professional fees were $445 thousand in 2010, compared to $212 thousand during 2009, an increase of $233 thousand, or 110%, and did not change in 2009 compared to 2008. This 2010 increase is a result of legal and consulting fees associated with being a publicly held company.

Deposit charges and FDIC insurance decreased $237 thousand in 2010 compared to 2009, primarily as a result of a special assessment levied by the FDIC in the second quarter of 2009 in an effort to rebuild the DIF. Deposit charges and FDIC insurance increased $774 thousand in 2009 compared to 2008, primarily as a result of a special assessment levied by the FDIC in the second quarter of 2009 in an effort to rebuild the DIF. We were required to prepay $2.3 million for the fourth quarter of 2009 and for the years of 2010, 2011 and 2012. This prepayment is being expensed based upon our regular quarterly assessments.

Directors’ fees totaling $392 thousand were paid to directors for the first time in 2010 and included ongoing payments of directors’ fees to current directors of $67 thousand subsequent to the Public Offering and payments of directors’ fees of $325 thousand to directors prior to the Public Offering.

Other real estate owned expense increased $250 thousand in 2010 and $156 thousand in 2009 compared to the respective prior years. These increases for both 2010 and 2009 are primarily a result of losses incurred on the sale of other real estate owned.

The total of all other noninterest expense increased $540 thousand, or 111%, to $1.0 million during 2010 and 2009 remained comparable to 2008. The 2010 increase was primarily a result of $169 thousand in due diligence expenses incurred in connection with potential acquisitions, increased costs for directors’ and officers’ insurance, a State of North Carolina assessment fee and expenses associated with being a public company.

The following table summarizes components of noninterest expense for the years ended December 31:

Noninterest Expense

		2010				2009				2008				Change 2010 vs. 2009								Change 2009 vs. 2008
		(Dollars in thousands)
Salaries and employee benefits		$	6,442			$	4,723			$	4,757			$	1,719				36	%		$	(34	)			-1	%
Occupancy and equipment			916				820				720				96				12	%			100				14	%
Advertising and promotion			287				236				335				51				22	%			(99	)			-30	%
Legal and professional fees			445				212				229				233				110	%			(17	)			-7	%
Deposit charges and FDIC insurance			728				965				191				(237	)			-25	%			774				405	%
Data processing and outside service fees			411				395				350				16				4	%			45				13	%
Director fees			392				—				—				392				0	%			—				0	%
Other real estate owned expense			411				161				5				250				155	%			156				3120	%
Other noninterest expense			1,025				485				512				540				111	%			(27	)			-5	%
Total noninterest expense		$	11,057			$	7,997			$	7,099			$	3,060				38	%		$	898				13	%