Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Park Sterling Corp | c17210exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Park Sterling Corp | c17210exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Park Sterling Corp | c17210exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Park Sterling Corp | c17210exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
1043 E. Morehead Street, Suite 201 | ||
Charlotte, North Carolina | 28204 | |
(Address of principal executive offices) | (Zip Code) |
(704) 716-2134
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 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 May 12, 2011, the registrant had outstanding 28,619,358 shares of common stock, $1.00 par value per share.
PARK STERLING CORPORATION
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PARK STERLING CORPORATION
Part I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, | December 31, | |||||||
2011 | 2010 * | |||||||
(Dollars in thousands) | ||||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 54,192 | $ | 2,433 | ||||
Interest-earning balances at banks |
3,796 | 5,040 | ||||||
Federal funds sold |
57,525 | 57,905 | ||||||
Investment securities available-for-sale, at fair value |
112,273 | 140,590 | ||||||
Loans |
388,187 | 399,829 | ||||||
Allowance for loan losses |
(11,768 | ) | (12,424 | ) | ||||
Net loans |
376,419 | 387,405 | ||||||
Federal Home Loan Bank stock |
1,910 | 1,757 | ||||||
Premises and equipment, net |
4,525 | 4,477 | ||||||
Accrued interest receivable |
1,469 | 1,640 | ||||||
Other real estate owned |
1,565 | 1,246 | ||||||
Other assets |
14,742 | 13,615 | ||||||
Total assets |
$ | 628,416 | $ | 616,108 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand deposits |
$ | 37,098 | $ | 36,333 | ||||
Money market, NOW and savings deposits |
107,186 | 71,666 | ||||||
Time deposits of less than $100,000 |
70,026 | 78,242 | ||||||
Time deposits of $100,000 through $250,000 |
73,949 | 79,020 | ||||||
Time deposits of more than $250,000 |
133,253 | 142,559 | ||||||
Total deposits |
421,512 | 407,820 | ||||||
Short-term borrowings |
1,213 | 874 | ||||||
Long-term borrowings |
20,000 | 20,000 | ||||||
Subordinated debt |
6,895 | 6,895 | ||||||
Accrued interest payable |
245 | 290 | ||||||
Accrued expenses and other liabilities |
3,781 | 3,128 | ||||||
Total liabilities |
453,646 | 439,007 | ||||||
Shareholders equity: |
||||||||
Preferred stock, no par value
5,000,000 shares authorized; -0- issued and outdstanding at March 31, 2011 and December 31, 2010, respectively |
| | ||||||
Common stock, $1.00 par value
200,000,000 shares authorized at March 31, 2011 and December 31, 2010; 28,619,358 and 28,051,098 shares outstanding at March 31, 2011 and December 31, 2010, respectively |
28,619 | 28,051 | ||||||
Additional paid-in capital |
159,367 | 159,489 | ||||||
Accumulated deficit |
(12,388 | ) | (9,501 | ) | ||||
Accumulated other comprehensive loss |
(828 | ) | (938 | ) | ||||
Total shareholders equity |
174,770 | 177,101 | ||||||
Total liabilities and shareholders equity |
$ | 628,416 | $ | 616,108 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
Table of Contents
PARK STERLING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(Dollars in thousands, except per share data)
(Dollars in thousands, except per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Interest income |
||||||||
Loans, including fees |
$ | 4,758 | $ | 5,143 | ||||
Federal funds sold |
30 | 9 | ||||||
Taxable investment securities |
681 | 326 | ||||||
Tax-exempt investment securities |
171 | 160 | ||||||
Interest on deposits at banks |
14 | 13 | ||||||
Total interest income |
5,654 | 5,651 | ||||||
Interest expense |
||||||||
Money market, NOW and savings deposits |
141 | 83 | ||||||
Time deposits |
1,226 | 1,484 | ||||||
Short-term borrowings |
| 5 | ||||||
Long-term borrowings |
141 | 138 | ||||||
Subordinated debt |
190 | 190 | ||||||
Total interest expense |
1,698 | 1,900 | ||||||
Net interest income |
3,956 | 3,751 | ||||||
Provision for loan losses |
4,462 | 1,531 | ||||||
Net interest income (loss) after
provision for loan losses |
(506 | ) | 2,220 | |||||
Noninterest income |
||||||||
Service charges on deposit accounts |
26 | 14 | ||||||
Gain on sale of securities available-for-sale |
19 | 18 | ||||||
Other noninterest income |
27 | 6 | ||||||
Total noninterest income |
72 | 38 | ||||||
Noninterest expense |
||||||||
Salaries and employee benefits |
2,507 | 1,252 | ||||||
Occupancy and equipment |
256 | 206 | ||||||
Advertising and promotion |
38 | 57 | ||||||
Legal and professional fees |
307 | 76 | ||||||
Deposit charges and FDIC insurance |
287 | 176 | ||||||
Data processing and outside service fees |
123 | 93 | ||||||
Director fees |
41 | | ||||||
Net cost of operation of other real estate |
235 | 36 | ||||||
Other noninterest expense |
440 | 146 | ||||||
Total noninterest expense |
4,234 | 2,042 | ||||||
Income (loss) before income taxes |
(4,668 | ) | 216 | |||||
Income tax expense (benefit) |
(1,781 | ) | 59 | |||||
Net income (loss) |
$ | (2,887 | ) | $ | 157 | |||
Basic earnings (loss) per common share |
$ | (0.10 | ) | $ | 0.03 | |||
Diluted earnings (loss) per common share |
$ | (0.10 | ) | $ | 0.03 | |||
Weighted-average common shares outstanding |
||||||||
Basic |
28,051,098 | 4,951,098 | ||||||
Diluted |
28,051,098 | 4,951,098 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
Table of Contents
PARK STERLING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Unaudited)
Three Months Ended March 31, 2011 and 2010
(Dollars in thousands)
Three Months Ended March 31, 2011 and 2010
(Dollars in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (Loss) | Equity | |||||||||||||||||||
Balance at December 31, 2009 |
4,951,098 | $ | 23,023 | $ | 23,496 | $ | (1,642 | ) | $ | 1,218 | $ | 46,095 | ||||||||||||
Share-based compensation expense |
| | 104 | | | 104 | ||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||
Net income |
| | | 157 | | 157 | ||||||||||||||||||
Unrealized holding gains on
available-for-sale securities,
net of taxes |
| | | | 289 | 289 | ||||||||||||||||||
Unrealized holding losses on
interest rate swaps, net of
taxes |
| | | | (224 | ) | (224 | ) | ||||||||||||||||
Total comprehensive income (loss) |
| | | | | 222 | ||||||||||||||||||
Balance at March 31, 2010 |
4,951,098 | $ | 23,023 | $ | 23,600 | $ | (1,485 | ) | $ | 1,283 | $ | 46,421 | ||||||||||||
Balance at December 31, 2010 |
28,051,098 | $ | 28,051 | $ | 159,489 | $ | (9,501 | ) | $ | (938 | ) | $ | 177,101 | |||||||||||
Issuance of restricted stock
grants |
568,260 | 568 | (568 | ) | | | | |||||||||||||||||
Share-based compensation expense |
| | 446 | | | 446 | ||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||
Net loss |
| | | (2,887 | ) | | (2,887 | ) | ||||||||||||||||
Unrealized holding gains on
available-for-sale securities,
net of taxes |
| | | | 275 | 275 | ||||||||||||||||||
Unrealized holding losses on
interest rate swaps, net of
taxes |
| | | | (165 | ) | (165 | ) | ||||||||||||||||
Total comprehensive income (loss) |
| | | | | (2,777 | ) | |||||||||||||||||
Balance at March 31, 2011 |
28,619,358 | $ | 28,619 | $ | 159,367 | $ | (12,388 | ) | $ | (828 | ) | $ | 174,770 | |||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
Table of Contents
PARK STERLING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
(Dollars in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | (2,887 | ) | $ | 157 | |||
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
||||||||
Depreciation and amortization |
394 | 98 | ||||||
Provision for loan losses |
4,462 | 1,531 | ||||||
Stock option expense |
446 | 104 | ||||||
Income on termination of swap |
| (210 | ) | |||||
Gain on sales of investment securities available-for-sale |
(19 | ) | (18 | ) | ||||
Gain on sales of other real estate |
(24 | ) | | |||||
Change in assets and liabilities: |
||||||||
Decrease in accrued interest receivable |
171 | 76 | ||||||
(Increase) decrease in other assets |
(1,465 | ) | 127 | |||||
Decrease in accrued interest payable |
(45 | ) | (4 | ) | ||||
Increase in accrued expenses and other liabilities |
653 | 142 | ||||||
Net cash provided by operating activities |
1,686 | 2,003 | ||||||
Cash flows from investing activities |
||||||||
Net decrease in loans |
5,480 | 1,109 | ||||||
Purchases of bank premises and equipment |
(139 | ) | (24 | ) | ||||
Purchases of investment securities available-for-sale |
(1,746 | ) | (4,225 | ) | ||||
Proceeds from sales of investment securities available-for-sale |
24,314 | 2,161 | ||||||
Proceeds from maturities and call of investment securities available-for-sale |
5,887 | 1,892 | ||||||
Writedowns (improvements) to other real estate |
241 | (92 | ) | |||||
Proceeds from sale of other real estate |
534 | | ||||||
Purchase of Federal Home Loan Bank stock |
(153 | ) | | |||||
Net cash provided by investing activities |
34,418 | 821 | ||||||
Cash flows from financing activities |
||||||||
Net increase in deposits |
13,692 | 533 | ||||||
Decrease in short-term borrowings |
339 | 157 | ||||||
Net cash provided by financing activities |
14,031 | 690 | ||||||
Net increase in cash and cash equivalents |
50,135 | 3,514 | ||||||
Cash and cash equivalents, beginning |
65,378 | 23,237 | ||||||
Cash and cash equivalents, ending |
$ | 115,513 | $ | 26,751 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest |
$ | 1,743 | $ | 1,904 | ||||
Cash paid for income taxes |
| 64 | ||||||
Supplemental disclosure of noncash investing and financing activities: |
||||||||
Change in unrealized gain on available-for-sale securities, net of tax |
$ | 275 | $ | 289 | ||||
Change in unrealized loss on swap, net of tax |
(165 | ) | (224 | ) | ||||
Loans transferred to other real estate owned |
1,070 | 1,424 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 Basis of Presentation
Park Sterling Corporation (the Company) was formed on October 6, 2010 to serve as the
holding company for Park Sterling Bank (the 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 (the BHC Act). On January 1, 2011, the Company acquired all of the
outstanding stock of the Bank in a statutory exchange transaction (the Reorganization). Prior to
January 1, 2011, the Company conducted no operations other than obtaining regulatory approval for
the Reorganization. The information in the unaudited condensed consolidated financial statements
and accompanying notes for all periods prior to January 1, 2011 is that of the Bank on a
stand-alone basis.
The Bank was incorporated on September 8, 2006, as a North Carolina-chartered commercial bank
and began operations in October 2006. The Banks primary focus is to provide banking services to
small and mid-sized businesses, owner-occupied and income producing real estate owners,
professionals and other clients doing business or residing within its target markets. The Bank
operates under the banking laws of North Carolina and the rules and regulations of the Federal
Deposit Insurance Corporation (the FDIC) and the State of North Carolina Office of the
Commissioner of Banks (the NC Commissioner). The Bank undergoes periodic examinations by those
regulatory authorities.
On March 30, 2011, the Company and Community Capital Corporation (Community Capital) entered
into an Agreement and Plan of Merger, pursuant to which Community Capital will be merged with and
into the Company, with the Company as the surviving entity. The merger has been unanimously
approved by the board of directors of each company and is subject to customary closing conditions,
including regulatory approval and Community Capital shareholder approval. If the merger is
completed, each outstanding share of Community Capital common stock will be exchanged for either
0.6667 of a share of Company common stock or $3.30 in cash, subject to the limitation that the total
consideration will consist of 40.0% in cash and 60.0% in shares of Company
common stock.
The accompanying unaudited condensed consolidated financial statements and notes have been
prepared in accordance with accounting principles generally accepted in the United States (GAAP)
for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information or footnotes necessary for a complete
presentation of financial position, results of operations and cash flows in conformity with GAAP.
Because the accompanying unaudited condensed consolidated financial statements do not include all
of the information and footnotes required by GAAP, they should be read in conjunction with the
Companys audited consolidated financial statements and accompanying footnotes (the 2010 Audited
Financial Statements) included in the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2010 filed with the Securities and Exchange Commission (SEC) on March 31, 2011
(the 2010 Form 10-K).
In managements opinion, the accompanying unaudited condensed consolidated financial
statements reflect all normal, recurring adjustments necessary to present fairly the financial
position of the Company as of March 31, 2011, and the results of operations and cash flows for the
three months ended March 31, 2011 and 2010. Operating results for the three-month period ended
March 31, 2011 are not necessarily indicative of the results that may be expected for the year or
for other interim periods.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated
financial statements and accompanying notes. Actual results could differ from those estimates.
Material estimates that are susceptible to significant change in the near term are the valuation of
the allowance for loan losses and the fair value of financial instruments and other accounts.
Certain amounts reported in prior periods have been reclassified to conform to the current
period presentation.
6
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 2 Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurement (ASU No. 2010-06). ASU No. 2010-06 requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in FASB Accounting
Standards Codification Subtopic 820-10. The FASBs objective is to improve these disclosures and,
thus, increase transparency in financial reporting.
Specifically, ASU No. 2010-06 amends Codification Subtopic 820-10 to now require that: (1) a
reporting entity disclose separately the amounts of significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe the reasons for the transfers; and (2) a reporting
entity present separately information about purchases, sales, issuances, and settlements in the
reconciliation for fair value measurements using significant unobservable inputs (Level 3). In
addition, ASU No. 2010-06 clarifies the requirements for purposes of reporting fair value
measurement for each class of assets and liabilities, and that a reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities and should provide
disclosures about the valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements. ASU No. 2010-06 became effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements which are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company adopted the fair value disclosures guidance
on January 1, 2010, except for the gross presentation of the Level 3 rollforward information, which
was adopted by the Company on January 1, 2011. The adoption of the gross presentation disclosures
did not have an impact on the Companys financial position or results of operations.
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses (Topic 310) (ASU No. 2010-20). ASU No.
2010-20 will require the Company to provide a greater level of disaggregated information about the
credit quality of the Companys loans and the Allowance for Loan Losses (the Allowance). ASU No.
2010-20 requires the Company to disclose additional information related to credit quality
indicators, past due information, and information related to loans modified in a troubled debt
restructuring. The provisions of ASU No. 2010-20 are effective for the Companys reporting period
ending December 31, 2010. As this ASU amends only the disclosure requirements for loans and the
Allowance, the adoption will have no material impact on the Companys financial condition or
results of operations.
In April 2011, the FASB issued ASU No. 2011-02, A Creditors Determination of Whether a
Restructuring Is a Troubled Debt Restructuring (Topic 310) (ASU No. 2011-02). ASU No. 2011-02
provides greater clarity and guidance to assist creditors in determining whether a creditor has
granted a concession and whether a debtor is experiencing financial difficulties for purposes of
determining whether a restructuring constitutes a troubled debt restructuring. As a result of
applying these amendments, the Company may identify receivables that are newly considered impaired.
For purposes of measuring impairment of those receivables, the amendments will be applied
prospectively for the first interim or annual period beginning on or after June 15, 2011. The
Company will be required to disclose the total amount of receivables and the allowance for credit
losses as of the end of the period of adoption related to those receivables that are newly
considered impaired under Section 310-10-35 (FAS 114) for which impairment was previously measured
under Subtopic 450-20, Contingencies: Loss Contingencies (FAS 5). The provisions of ASU No. 2011-02
are effective for the Companys reporting period ending September 30, 2011. Management is still
evaluating the impact of this ASU on the Companys financial condition.
7
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 3 Shareholders Equity
Common Stock
On May 4, 2010, the Banks shareholders approved an amendment to the Articles of Incorporation
of the Bank to increase the number of authorized shares of common stock to 200,000,000.
On August 18, 2010, in connection with its public offering of common stock (the Public
Offering), the Bank consummated the issuance and sale of 23,100,000 shares of common stock at
$6.50 per share, for a gross aggregate offering price of $150.2 million. The Bank incurred
underwriting fees of $6.0 million and related expenses of $0.9 million resulting in net proceeds of
$143.2 million being received by the Bank of which $140.2 was recorded in shareholders equity.
Additional underwriting fees equal to $3.0 million will be payable in the future if the common
stock price closes at a price equal to or above 125% of the offering price, or $8.125 per share,
for a period of 30 consecutive days. A liability for the $3.0 million contingent underwriting fee
has been accrued and is included in other liabilities in the accompanying balance sheet at March
31, 2011.
On January 1, 2011, in conjunction with the Companys acquisition of the Bank in a statutory
exchange transaction, the par value of authorized common stock of the Company, which was
established in the Companys Articles of Incorporation at $1.00 per share, replaced the previously
reported par value of $4.65 per share of common stock of the Bank. This transaction was given
retroactive effect in the financial statements. As such, the par value of the common stock reflected
in the audited consolidated balance sheet as of December 31, 2010 reflects a $102.8 million
reclassification from common stock to additional paid-in capital because of the Reorganization.
Share-Based Plans
The Company may grant share-based compensation to employees and non-employee
directors in the form of stock options, restricted stock or other stock-based awards. Share-based
compensation expense is measured based on the fair value of the award at the date of grant and is
charged to earnings on a straight-line basis over the requisite service period, which is currently
up to seven years. The fair value of stock options is estimated at the date of grant using a
Black-Scholes option-pricing model and related assumptions. The amortization of share-based
compensation reflects estimated forfeitures, adjusted for actual forfeiture experience. The fair
value of restricted stock awards is estimated using a Monte Carlo simulation and related estimated
assumptions for volatility and a risk free interest rate.
The Company maintains equity-based compensation plans for directors and employees. During
2010, the Board of Directors of the Bank adopted and shareholders approved, the Park Sterling Bank
2010 Stock Option Plan for Directors and the Park Sterling Bank 2010 Employee Stock Option Plan
(the 2010 Plans). The 2010 Plans are substantially similar to the Banks 2006 option plans for
directors and employees, which provided for an aggregate of 990,000 of common shares reserved for
options. The 2010 Plans provide for an aggregate of 1,859,550 of common shares reserved for
options. Upon effectiveness of the Reorganization, the Company assumed all outstanding options
under the 2010 plans and the 2006 plans, and the Companys common stock was substituted as the
stock issuable upon the exercise of options under these plans.
Also during 2010, the Board of Directors of the Company adopted and shareholders approved, the
Park Sterling Corporation 2010 Long-Term Incentive Plan for directors and employees (the LTIP),
which was effective upon the Reorganization. The LTIP provides for an aggregate of 1,016,400 of
common shares reserved for issuance to employees and directors in connection with stock options,
stock appreciation rights and other stock-based awards (including, without limitation, restricted
stock awards).
8
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Activity in the Companys shared based plans is summarized in the following table:
Outstanding Options | Nonvested Restricted Shares | |||||||||||||||||||||||||||||||
Options | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
Available | Average | Average | Average | Aggregate | ||||||||||||||||||||||||||||
for Future | Number | Exercise | Contractual | Intrinsic | Number | Grant Date | Intrinsic | |||||||||||||||||||||||||
Grants | Outstanding | Price | Term (Years) | Value | Outstanding | Fair Value | Value | |||||||||||||||||||||||||
At December 31, 2010 |
525,918 | 2,323,632 | $ | 7.83 | 8.50 | $ | | | $ | | $ | | ||||||||||||||||||||
Approved for issuance |
1,016,400 | | | | | | | | ||||||||||||||||||||||||
Options Granted |
(82,340 | ) | 82,340 | 5.74 | | | | | | |||||||||||||||||||||||
Restricted Shares Granted |
(568,260 | ) | | | | | 568,260 | 3.91 | 2,756,061 | |||||||||||||||||||||||
Exercised |
| | | | | | | | ||||||||||||||||||||||||
Expired and forfeited |
176,083 | (176,083 | ) | 6.50 | 2.62 | | | | | |||||||||||||||||||||||
At March 31, 2011 |
1,067,801 | 2,229,889 | $ | 7.86 | 8.23 | $ | | 568,260 | $ | 3.91 | $ | 2,756,061 | ||||||||||||||||||||
Exercisable at March 31, 2011 |
785,902 | $ | 10.38 | 6.01 | $ | |
The fair value of options is estimated at the date of the grant using the Black-Scholes
option-pricing model and expensed over the options vesting periods. The following weighted-average
assumptions were used in valuing options issued during the three months ended March 31, 2011.
Assumptions in Estimating Option Values
Weighted-average volatility |
36.86 | % | ||
Expected dividend yield |
0 | % | ||
Risk-free interest rate |
4.40 | % | ||
Expected life |
7 years |
No options vested during the three months ended March 31, 2011 and 2010. The compensation
expense for stock option plans was $310 thousand and $104 thousand for the three months ended March
31, 2011 and 2010, respectively. At March 31, 2011, unrecognized compensation cost related to
nonvested stock options of $3.0 million is expected to be recognized over a weighted-average period
of 1.43 years.
No shares of restricted stock vested during the three months ended March 31, 2011 and 2010.
The compensation expense for restricted shares was $136 thousand for the three months ended March
31, 2011. At March 31, 2011, unrecognized compensation cost related to nonvested restricted shares
of $2.7 million is expected to be recognized over a weighted-average period of 3.48 years.
9
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 4 Investment Securities
The amortized cost, unrealized gains, losses, and estimated fair value of securities
available-for-sale at March 31, 2011 and December 31, 2010 are as follows:
Amortized Cost and Fair Value of Investment Portfolio
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
March 31, 2011 |
||||||||||||||||
Securities available-for-sale: |
||||||||||||||||
U.S. Government agencies |
$ | 10,526 | $ | 44 | $ | (152 | ) | $ | 10,418 | |||||||
Residential mortgage-backed securities |
30,960 | 447 | (408 | ) | 30,999 | |||||||||||
Collateralized agency mortgage obligations |
55,285 | 120 | (1,879 | ) | 53,526 | |||||||||||
Municipal securities |
15,515 | 439 | (23 | ) | 15,931 | |||||||||||
Corporate and other securities |
1,523 | 24 | (148 | ) | 1,399 | |||||||||||
Total investment securities |
$ | 113,809 | $ | 1,074 | $ | (2,610 | ) | $ | 112,273 | |||||||
December 31, 2010 |
||||||||||||||||
Securities available-for-sale: |
||||||||||||||||
U.S. Government agencies |
$ | 13,075 | $ | 181 | $ | (96 | ) | $ | 13,160 | |||||||
Residential mortgage-backed securities |
52,342 | 495 | (438 | ) | 52,399 | |||||||||||
Collateralized agency mortgage obligations |
60,711 | 111 | (2,103 | ) | 58,719 | |||||||||||
Municipal securities |
13,771 | 183 | (146 | ) | 13,808 | |||||||||||
Corporate and other securities |
2,675 | 5 | (176 | ) | 2,504 | |||||||||||
Total investment securities |
$ | 142,574 | $ | 975 | $ | (2,959 | ) | $ | 140,590 | |||||||
The amortized cost and fair values of securities available-for-sale at March 31, 2011 and
December 31, 2010 by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Maturities of Investment Portfolio
March 31, 2011 | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
(Dollars in thousands) | ||||||||
U.S. Government agencies |
||||||||
Due after one year through five years |
$ | 10,000 | $ | 9,848 | ||||
Due after five years through ten years |
526 | 570 | ||||||
Residential mortgage-backed securities |
||||||||
Due after five years through ten years |
1,341 | 1,351 | ||||||
Due after ten years |
29,619 | 29,648 | ||||||
Collateralized agency mortgage obligations |
||||||||
Due after ten years |
55,285 | 53,526 | ||||||
Municipal securities |
||||||||
Due after ten years |
15,515 | 15,931 | ||||||
Corporate and other securities |
||||||||
Due after five years through ten years |
500 | 352 | ||||||
Due after ten years |
1,023 | 1,047 | ||||||
Total
investment securites |
$ | 113,809 | $ | 112,273 | ||||
10
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Management periodically evaluates each investment security for other than temporary
impairment, relying primarily on industry analyst reports, observation of market conditions and
interest rate fluctuations. The following table shows gross unrealized losses and fair value,
aggregated by investment category and length of time that the individual securities have been in a
continuous unrealized loss position, for investment securities with unrealized losses at March 31,
2011 and December 31, 2010. The unrealized losses relate to debt securities that have incurred fair
value reductions due to market volatility and uncertainty since the securities were purchased.
Management believes that the unrealized losses are more likely than not to reverse as confidence
returns to investment markets. Since none of the unrealized losses relate to the marketability of
the securities or the issuers ability to honor redemption obligations, and it is more likely than
not that the Company will not have to sell the investments before recovery of their amortized cost
basis, none of the securities are deemed to be other than temporarily impaired. One corporate debt
security has been in a loss position for twelve months or more at March 31, 2011. At December 31,
2010, two corporate debt securities were in a loss position for twelve months or more.
Investment Portfolio Gross Unrealized Losses and Fair Value
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||||||
U.S. Government agencies |
$ | 9,848 | $ | (152 | ) | $ | | $ | | $ | 9,848 | $ | (152 | ) | ||||||||||
Residential Mortgage-backed securities |
19,607 | (408 | ) | | | 19,607 | (408 | ) | ||||||||||||||||
Collateralized mortgage obligations |
49,541 | (1,879 | ) | | | 49,541 | (1,879 | ) | ||||||||||||||||
Municipal securities |
814 | (23 | ) | | | 814 | (23 | ) | ||||||||||||||||
Corporate and other securities |
| | 353 | (148 | ) | 353 | (148 | ) | ||||||||||||||||
Total temporarily impaired
securities |
$ | 79,810 | $ | (2,462 | ) | $ | 353 | $ | (148 | ) | $ | 80,163 | $ | (2,610 | ) | |||||||||
December 31, 2010 |
||||||||||||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||||||
U.S. Government agencies |
$ | 9,904 | $ | (96 | ) | $ | | $ | | $ | 9,904 | $ | (96 | ) | ||||||||||
Residential Mortgage-backed securities |
37,052 | (438 | ) | | | 37,052 | (438 | ) | ||||||||||||||||
Collateralized mortgage obligations |
53,232 | (2,103 | ) | | | 53,232 | (2,103 | ) | ||||||||||||||||
Municipal securities |
6,215 | (146 | ) | | | 6,215 | (146 | ) | ||||||||||||||||
Corporate and other securities |
| | 1,475 | (176 | ) | 1,475 | (176 | ) | ||||||||||||||||
Total temporarily impaired
securities |
$ | 106,403 | $ | (2,783 | ) | $ | 1,475 | $ | (176 | ) | $ | 107,878 | $ | (2,959 | ) | |||||||||
Securities with a fair value of $4.8 million and $4.2 million at March 31, 2011 and
December 31, 2010, respectively, were pledged to secure an interest rate swap and securities sold
under agreements to repurchase. During the three months ended March 31, 2011, the Company sold
$24.3 million of securities available-for-sale, resulting in a gross gain of $0.02 million.
Securities available-for-sale with a book value of $2.1 million were sold in the three months ended
March 31, 2010 resulting in a gross gain of $0.02 million.
11
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
The aggregate cost of the Companys cost method investments totaled $2.0 million at March 31,
2011 and $2.3 million at December 31, 2010. Cost method investments at March 31, 2011 included $1.9
million in Federal Home Loan Bank (FHLB) stock and $0.1 million of other investments which are
included in other assets. All cost method investments were evaluated for impairment as of March 31,
2011 and December 31, 2010. The following factors have been considered in determining the carrying
amount of FHLB stock: 1) managements current belief that the Company has sufficient liquidity to
meet all operational needs in the foreseeable future and would not need to dispose of the stock
below recorded amounts, 2) managements belief that the FHLB has the ability to absorb economic
losses given the expectation that the FHLB has a high degree of government support and 3)
redemptions and purchases of the stock are at the discretion of the FHLB. At March 31, 2011 and
December 31, 2010, the Company estimated that the fair values of cost method investments equaled or
exceeded the cost of each of these investments, and, therefore, the investments were not impaired.
Note 5 Loans and Allowance for Loan Losses
The following is a summary of the loan portfolio at March 31, 2011 and December 31, 2010:
2011 | 2010 | |||||||
Commercial: |
||||||||
Commercial and industrial |
$ | 48,107 | $ | 48,401 | ||||
Commercial real estate owner-occupied |
52,764 | 55,089 | ||||||
Commercial real estate investor income producing |
113,612 | 110,407 | ||||||
Acquisition, construction and development |
75,977 | 87,846 | ||||||
Other commercial |
5,232 | 3,225 | ||||||
Total commercial loans |
295,692 | 304,968 | ||||||
Consumer: |
||||||||
Residential mortgage |
25,034 | 21,716 | ||||||
Home equity lines of credit |
53,725 | 56,968 | ||||||
Residential construction |
7,018 | 9,051 | ||||||
Other loans to individuals |
6,811 | 7,245 | ||||||
Total consumer loans |
92,588 | 94,980 | ||||||
Total loans |
388,280 | 399,948 | ||||||
Deferred fees |
(93 | ) | (119 | ) | ||||
Total loans, net of deferred fees |
$ | 388,187 | $ | 399,829 | ||||
At March 31, 2011 and December 31, 2010, the carrying value of loans pledged as
collateral on FHLB borrowings totaled $43.8 million.
Concentrations of Credit Loans are primarily made in the Charlotte and Wilmington regions of
North Carolina. Real estate loans can be affected by the condition of the local real estate market.
Commercial and industrial loans can be affected by the local economic conditions. The commercial
loan portfolio has concentrations in business loans secured by real estate and real estate
development loans. Primary concentrations in the consumer loan portfolio include home equity lines of credit and residential mortgages. At March 31,
2011 and December 31, 2010, we had no loans outstanding with non-U.S. entities.
12
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Allowance for Loan Losses The following table presents, by portfolio segment, the activity
in the allowance for loan losses for the quarter ended March 31, 2011. The following table also
presents, by portfolio segment, the balance in the allowance for loan losses disaggregated based on
the Companys impairment measurement method and the related recorded investment in loans at March
31, 2011 and December 31, 2010.
Commercial | Consumer | Unallocated | Total | |||||||||||||
For the quarter ended March 31, 2011 |
||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||
Balance, beginning of period |
$ | 9,165 | $ | 1,375 | $ | 1,884 | $ | 12,424 | ||||||||
Provision for loan losses |
2,705 | 1,782 | (25 | ) | 4,462 | |||||||||||
Charge-offs |
(4,296 | ) | (1,285 | ) | | (5,581 | ) | |||||||||
Recoveries |
460 | 3 | | 463 | ||||||||||||
Net charge-offs |
(3,836 | ) | (1,282 | ) | | (5,118 | ) | |||||||||
Ending balance |
$ | 8,034 | $ | 1,875 | $ | 1,859 | $ | 11,768 | ||||||||
At March 31, 2011 |
||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||
Individually evaluated for impairment |
$ | 1,410 | $ | 450 | $ | | $ | 1,860 | ||||||||
Collectively evaluated for impairment |
6,624 | 1,425 | 1,859 | 9,908 | ||||||||||||
Total |
$ | 8,034 | $ | 1,875 | $ | 1,859 | $ | 11,768 | ||||||||
Recorded Investment in Loans: |
||||||||||||||||
Individually evaluated for impairment |
$ | 29,832 | $ | 4,195 | $ | | $ | 34,027 | ||||||||
Collectively evaluated for impairment |
265,860 | 88,393 | | 354,253 | ||||||||||||
Total |
$ | 295,692 | $ | 92,588 | $ | | $ | 388,280 | ||||||||
At December 31, 2010 |
||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||
Individually evaluated for impairment |
$ | 4,092 | $ | 115 | $ | | $ | 4,207 | ||||||||
Collectively evaluated for impairment |
5,073 | 1,260 | 1,884 | 8,217 | ||||||||||||
Total |
$ | 9,165 | $ | 1,375 | $ | 1,884 | $ | 12,424 | ||||||||
Recorded Investment in Loans: |
||||||||||||||||
Individually evaluated for impairment |
$ | 37,451 | $ | 3,460 | $ | | $ | 40,911 | ||||||||
Collectively evaluated for impairment |
267,517 | 91,520 | | 359,037 | ||||||||||||
Total |
$ | 304,968 | $ | 94,980 | $ | | $ | 399,948 | ||||||||
A summary of the activity in the allowance for loan losses for the three-month periods
ended March 31, 2011 and 2010 follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Balance, beginning of period |
$ | 12,424 | $ | 7,402 | ||||
Provision for loan losses |
4,462 | 1,531 | ||||||
Charge-offs |
(5,581 | ) | (554 | ) | ||||
Recoveries |
463 | 1 | ||||||
Net charge-offs |
(5,118 | ) | (553 | ) | ||||
Balance, end of period |
$ | 11,768 | $ | 8,380 | ||||
The Company introduced refinements to its loan loss allowance methodology in the third
quarter of 2010. The principal refinement was the addition of a more comprehensive qualitative
component. Qualitative reserves represent an estimate of the amount for which it is probable that
environmental factors will cause the quantitatively determined loss contingency estimate to differ
from historical results or other assumptions. The Company has identified six environmental factors
for inclusion in our allowance methodology at this time, aggregating $1.8 million at March 31, 2011
and December 31, 2010, including (i) portfolio trends, (ii) portfolio concentrations, (iii)
economic and market trends, (iv) changes in lending practices, (v) regulatory environment, and (vi)
other factors. The first three factors are believed by management to present the most significant
risk to the portfolio, and are therefore associated with both higher absolute and range of
potential reserve percentages. The reserve percentages for each of the six factors are derived
from available industry information combined with management judgment. The Company may consider
both trends and absolute levels of such factors, if applicable.
13
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company evaluates and estimates off-balance sheet credit exposure at the same time it
estimates credit losses for loans by a similar process. These estimated credit losses are not
recorded as part of the allowance for loan losses, but are recorded to a separate liability account
by a charge to income, if material. Loan commitments, unused lines of credit and standby letters
of credit make up the off-balance sheet items reviewed for potential credit losses. These
estimated credit losses were not material at March 31, 2011 and December 31, 2010.
Credit Quality Indicators The Company uses several credit quality indicators to manage
credit risk in an ongoing manner. The Companys primary credit quality indicator is an internal
credit risk rating system that categorizes loans into pass, special mention, or classified
categories. Credit risk ratings are applied individually to those classes of loans that have
significant or unique credit characteristics that benefit from a case-by-case evaluation. These are
typically loans to businesses or individuals in the classes that comprise the commercial portfolio
segment. Groups of loans that are underwritten and structured using standardized criteria and
characteristics, such as statistical models (e.g., credit scoring or payment performance), are
typically risk rated and monitored collectively. These are typically loans to individuals in the
classes that comprise the consumer portfolio segment.
The following are the definitions of the Companys credit quality indicators:
Pass: | Loans in classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low likelihood of loss related to those loans that are considered pass. | |
Special Mention: |
Loans in classes that comprise the commercial and consumer portfolio segments that have potential weaknesses that deserve managements close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. Management believes there is a moderate likelihood of some loss related to those loans that are considered special mention. | |
Classified: | Loans in the classes that comprise the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Classified loans are also those in the classes that comprise the consumer portfolio segment that are past due 90 days or more as to principal or interest. Residential mortgage and home equity loans may be current as to principal and interest, but may be considered classified for a period of up to six months. Following a period of demonstrated performance in accordance with contractual terms, the loan may be removed from classified status. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans are not corrected in a timely manner. |
14
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Companys credit quality indicators are periodically updated on a case-by-case basis. The
following tables present the recorded investment in the Companys loans as of March 31, 2011 and
December 31, 2010, by loan class and by credit quality indicator.
As of March 31, 2011 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial | Real Estate | CRE-Investor | Acquisition, | |||||||||||||||||||||
and | (CRE)-Owner | Income | Construction | Other | Total | |||||||||||||||||||
Industrial | Occupied | Producing | and Development | Commercial | Commercial | |||||||||||||||||||
Pass |
$ | 44,718 | $ | 46,542 | $ | 99,857 | $ | 26,277 | $ | 5,232 | $ | 222,626 | ||||||||||||
Special mention |
2,767 | 1,892 | 4,893 | 18,016 | | 27,568 | ||||||||||||||||||
Classified |
622 | 4,330 | 8,862 | 31,684 | | 45,498 | ||||||||||||||||||
Total |
$ | 48,107 | $ | 52,764 | $ | 113,612 | $ | 75,977 | $ | 5,232 | $ | 295,692 | ||||||||||||
Residential | Home Equity | Residential | Other Loans to | Total | ||||||||||||||||||||
Mortgage | Lines of Credit | Construction | Individuals | Consumer | ||||||||||||||||||||
Pass |
$ | 20,002 | $ | 51,050 | $ | 6,077 | $ | 6,723 | $ | 83,852 | ||||||||||||||
Special mention |
1,368 | 1,081 | | | 2,449 | |||||||||||||||||||
Classified |
3,664 | 1,594 | 941 | 88 | 6,287 | |||||||||||||||||||
Total |
$ | 25,034 | $ | 53,725 | $ | 7,018 | $ | 6,811 | $ | 92,588 | ||||||||||||||
Total
Recorded Investment
in Loans |
$ | 388,280 | ||||||||||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial | Real Estate | CRE-Investor | Acquisition, | |||||||||||||||||||||
and | (CRE)-Owner | Income | Construction | Other | Total | |||||||||||||||||||
Industrial | Occupied | Producing | and Development | Commercial | Commercial | |||||||||||||||||||
Pass |
$ | 46,888 | $ | 52,746 | $ | 98,195 | $ | 37,435 | $ | 3,225 | $ | 238,489 | ||||||||||||
Special mention |
262 | | 9,520 | 14,289 | | 24,071 | ||||||||||||||||||
Classified |
1,251 | 2,343 | 2,692 | 36,122 | | 42,408 | ||||||||||||||||||
Total |
$ | 48,401 | $ | 55,089 | $ | 110,407 | $ | 87,846 | $ | 3,225 | $ | 304,968 | ||||||||||||
Residential | Home Equity | Residential | Other Loans to | Total | ||||||||||||||||||||
Mortgage | Lines of Credit | Construction | Individuals | Consumer | ||||||||||||||||||||
Pass |
$ | 19,160 | $ | 53,839 | $ | 7,951 | $ | 7,245 | $ | 88,195 | ||||||||||||||
Special mention |
1,359 | 1,607 | | | 2,966 | |||||||||||||||||||
Classified |
1,197 | 1,522 | 1,100 | | 3,819 | |||||||||||||||||||
Total |
$ | 21,716 | $ | 56,968 | $ | 9,051 | $ | 7,245 | $ | 94,980 | ||||||||||||||
Total
Recorded Investment
in Loans |
$ | 399,948 | ||||||||||||||||||||||
15
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Aging Analysis of Accruing and Non-Accruing Loans The following presents by class, an
aging analysis of the Companys accruing and non-accruing loans as of March 31, 2011 and December
31, 2010.
30-59 | 60-89 | Past Due | ||||||||||||||||||
Days | Days | 90 Days | ||||||||||||||||||
(dollars in thousands) | Past Due | Past Due | or More | Current | Total Loans | |||||||||||||||
As of March 31, 2011 |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
$ | | $ | | $ | 327 | $ | 47,780 | $ | 48,107 | ||||||||||
Commercial real estate owner-occupied |
| | 581 | 52,183 | 52,764 | |||||||||||||||
Commercial real estate investor income
producing |
| | | 113,612 | 113,612 | |||||||||||||||
Acquisition, construction and development |
5,264 | 524 | 11,036 | 59,153 | 75,977 | |||||||||||||||
Other commercial |
| | | 5,232 | 5,232 | |||||||||||||||
Total commercial loans |
5,264 | 524 | 11,944 | 277,960 | 295,692 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Residential mortgage |
| | | 25,034 | 25,034 | |||||||||||||||
Home equity lines of credit |
| | | 53,725 | 53,725 | |||||||||||||||
Residential construction |
| | 843 | 6,175 | 7,018 | |||||||||||||||
Other loans to individuals |
| | | 6,811 | 6,811 | |||||||||||||||
Total consumer loans |
| | 843 | 91,745 | 92,588 | |||||||||||||||
Total loans |
$ | 5,264 | $ | 524 | $ | 12,787 | $ | 369,705 | $ | 388,280 | ||||||||||
As of December 31, 2010 |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
$ | | $ | 593 | $ | 111 | $ | 47,697 | $ | 48,401 | ||||||||||
Commercial real estate owner-occupied |
717 | | | 54,372 | 55,089 | |||||||||||||||
Commercial real estate investor income
producing |
| | 261 | 110,146 | 110,407 | |||||||||||||||
Acquisition, construction and development |
4,025 | 4,188 | 5,676 | 73,957 | 87,846 | |||||||||||||||
Other commercial |
| | | 3,225 | 3,225 | |||||||||||||||
Total commercial loans |
4,742 | 4,781 | 6,048 | 289,397 | 304,968 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Residential mortgage |
| | 374 | 21,342 | 21,716 | |||||||||||||||
Home equity lines of credit |
1,000 | | | 55,968 | 56,968 | |||||||||||||||
Residential construction |
| 1,000 | | 8,051 | 9,051 | |||||||||||||||
Other loans to individuals |
| | | 7,245 | 7,245 | |||||||||||||||
Total consumer loans |
1,000 | 1,000 | 374 | 92,606 | 94,980 | |||||||||||||||
Total loans |
$ | 5,742 | $ | 5,781 | $ | 6,422 | $ | 382,003 | $ | 399,948 | ||||||||||
Impaired Loans All classes of loans are considered impaired when, based on current
information and events, it is probable the Company will be unable to collect all amounts due in
accordance with the original contractual terms of the loan agreement, including scheduled principal
and interest payments. Impaired loans may include all classes of nonaccruing loans and loans
modified in a troubled debt restructuring (TDR). If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated
future cash flows using the loans existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Interest payments on impaired loans are typically applied to
principal unless collectability of the principal amount is reasonably assured, in which case
interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when
deemed uncollectible.
16
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Information for impaired loans, none of which are accruing interest, at and for the period
ended March 31, 2011 is set forth in the following table:
Unpaid | Related | Average | Interest | |||||||||||||||||
Recorded | Principal | Allowance For | Recorded | Income | ||||||||||||||||
Investment | Balance | Loan Losses | Investment | Recognized | ||||||||||||||||
Impaired Loans with No Related
Allowance Recorded: |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
$ | 30 | $ | 821 | $ | | $ | 144 | $ | | ||||||||||
CRE owner-occupied |
581 | 741 | | 705 | | |||||||||||||||
CRE investor income producing |
575 | 841 | | 531 | | |||||||||||||||
Acquisition, construction and
development |
22,575 | 32,088 | | 25,475 | | |||||||||||||||
Other commercial |
| | | | | |||||||||||||||
Total commercial loans |
23,761 | 34,491 | | 26,855 | | |||||||||||||||
Consumer: |
||||||||||||||||||||
Residential mortgage |
811 | 823 | | 819 | | |||||||||||||||
Home equity lines of credit |
| 1,700 | | | | |||||||||||||||
Residential construction |
941 | 2,175 | | 1,092 | | |||||||||||||||
Other loans to individuals |
| 10 | | | | |||||||||||||||
Total consumer loans |
1,752 | 4,708 | | 1,911 | | |||||||||||||||
Total impaired loans with no related
allowance recorded |
$ | 25,513 | $ | 39,199 | $ | | $ | 28,766 | $ | | ||||||||||
Impaired Loans with an
Allowance Recorded: |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
$ | 500 | $ | 625 | $ | 152 | $ | 501 | $ | | ||||||||||
CRE owner-occupied |
| | | | | |||||||||||||||
CRE investor income producing |
783 | 792 | 137 | 577 | | |||||||||||||||
Acquisition, construction and
development |
4,788 | 4,828 | 1,121 | 2,662 | | |||||||||||||||
Other commercial |
| | | | | |||||||||||||||
Total commercial loans |
6,071 | 6,245 | 1,410 | 3,740 | | |||||||||||||||
Consumer: |
||||||||||||||||||||
Residential mortgage |
2,443 | 2,560 | 450 | 1,609 | | |||||||||||||||
Home equity lines of credit |
| | | | | |||||||||||||||
Residential construction |
| | | | | |||||||||||||||
Other loans to individuals |
| | | | | |||||||||||||||
Total consumer loans |
2,443 | 2,560 | 450 | 1,609 | | |||||||||||||||
Total impaired loans with an
allowance recorded |
$ | 8,514 | $ | 8,805 | $ | 1,860 | $ | 5,349 | $ | | ||||||||||
Impaired Loans: |
||||||||||||||||||||
Commercial |
$ | 29,832 | $ | 40,736 | $ | 1,410 | $ | 30,595 | $ | | ||||||||||
Consumer |
4,195 | 7,268 | 450 | 3,520 | | |||||||||||||||
Total impaired loans |
$ | 34,027 | $ | 48,004 | $ | 1,860 | $ | 34,115 | $ | | ||||||||||
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Information for impaired loans, none of which are accruing interest, at and for the year
ended December 31, 2010 is set forth in the following table:
Unpaid | Related | Average | Interest | |||||||||||||||||
Recorded | Principal | Allowance For | Recorded | Income | ||||||||||||||||
Investment | Balance | Loan Losses | Investment | Recognized | ||||||||||||||||
Impaired Loans with No Related
Allowance Recorded: |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
$ | 722 | $ | 913 | $ | | $ | 69 | $ | | ||||||||||
CRE owner-occupied |
| | | | | |||||||||||||||
CRE investor income producing |
583 | 841 | | 15 | | |||||||||||||||
Acquisition, construction and
development |
19,054 | 25,909 | | 3,753 | | |||||||||||||||
Other commercial |
| | | | | |||||||||||||||
Total commercial loans |
20,359 | 27,663 | | 3,837 | | |||||||||||||||
Consumer: |
||||||||||||||||||||
Residential mortgage |
1,197 | 1,255 | | 111 | | |||||||||||||||
Home equity lines of credit |
164 | 165 | | 3 | | |||||||||||||||
Residential construction |
1,100 | 2,174 | | 27 | | |||||||||||||||
Other loans to individuals |
| | | | ||||||||||||||||
Total consumer loans |
2,461 | 3,594 | | 141 | | |||||||||||||||
Total impaired loans with no related
allowance recorded |
$ | 22,820 | $ | 31,257 | $ | | $ | 3,978 | $ | | ||||||||||
Impaired Loans with an
Allowance Recorded: |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
$ | 437 | $ | 437 | $ | 280 | $ | 2 | $ | | ||||||||||
CRE owner-occupied |
717 | 741 | 136 | 393 | | |||||||||||||||
CRE investor income producing |
1,119 | 1,209 | 277 | 404 | | |||||||||||||||
Acquisition, construction and
development |
14,818 | 14,828 | 3,399 | 328 | | |||||||||||||||
Other commercial |
| | | | ||||||||||||||||
Total commercial loans |
17,091 | 17,215 | 4,092 | 1,127 | | |||||||||||||||
Consumer: |
||||||||||||||||||||
Residential mortgage |
| | | | | |||||||||||||||
Home equity lines of credit |
1,000 | 1,000 | 115 | 22 | | |||||||||||||||
Residential construction |
| | | | | |||||||||||||||
Other loans to individuals |
| | | | | |||||||||||||||
Total consumer loans |
1,000 | 1,000 | 115 | 22 | | |||||||||||||||
Total impaired loans with an
allowance recorded |
$ | 18,091 | $ | 18,215 | $ | 4,207 | $ | 1,149 | $ | | ||||||||||
Impaired Loans: |
||||||||||||||||||||
Commercial |
$ | 37,450 | $ | 44,878 | $ | 4,092 | $ | 4,964 | $ | | ||||||||||
Consumer |
3,461 | 4,594 | 115 | 163 | | |||||||||||||||
Total impaired loans |
$ | 40,911 | $ | 49,472 | $ | 4,207 | $ | 5,127 | $ | | ||||||||||
During the three months ended March 31, 2011 and 2010, the Company did not recognize any
interest income, including interest income recognized on a cash basis, within the period that loans
were impaired.
18
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Nonaccrual and Past Due Loans It is the general policy of the Company to stop accruing
interest income when a loan is placed on nonaccrual status and any interest previously accrued but
not collected is reversed against current income. Generally, a loan is placed on nonaccrual status
when it is over 90 days past due and there is reasonable doubt that all principal will be
collected. The recorded investment in nonaccrual loans at March 31, 2011 and December 31, 2010
follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Commercial: |
||||||||
Commercial and industrial |
$ | 530 | $ | 1,159 | ||||
CRE owner-occupied |
581 | 717 | ||||||
CRE investor income producing |
1,358 | 1,702 | ||||||
Acquisition, construction and development |
27,363 | 33,872 | ||||||
Other commercial |
| | ||||||
Total commercial loans |
29,832 | 37,450 | ||||||
Consumer: |
||||||||
Residential mortgage |
3,254 | 1,197 | ||||||
Home equity lines of credit |
| 1,164 | ||||||
Residential construction |
941 | 1,100 | ||||||
Other loans to individuals |
| | ||||||
Total consumer loans |
4,195 | 3,461 | ||||||
Total nonaccrual loans |
$ | 34,027 | $ | 40,911 | ||||
Nonaccrual
loans at March 31, 2011 include $19.7 million of TDR
loans of which $17.2 million is in the acquisition, construction and development portfolio. The
March 31, 2011 recorded allowance for these loans was $0.4 million. Nonaccrual loans at December
31, 2010 include $24.9 million of TDR loans of which $23.7 million is in the
acquisition, construction and development portfolio. The December 31, 2010 recorded allowance for
these loans was $2.4 million.
At March 31, 2011 and December 31, 2010, there were no loans 90 days or more past due and
accruing interest.
Related Party Loans From time to time, the Company engages in loan transactions with its
directors, executive officers and their related interests (collectively referred to as related
parties). Such loans are made in the ordinary course of business and on substantially the same
terms and collateral as those for comparable transactions prevailing at the time and do not involve
more than the normal risk of collectability or present other unfavorable features. A summary of
activity in loans to related parties is as follows:
Three Months Ended | ||||
March 31, | ||||
2011 | ||||
(Dollars in thousands) | ||||
Beginning balance |
$ | 5,075 | ||
Disbursements |
368 | |||
Repayments |
(719 | ) | ||
Ending balance |
$ | 4,724 | ||
At March 31, 2011 and December 31, 2010, the Company had pre-approved but unused lines of
credit totaling $2.0 million to related parties.
19
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 6 Per Share Results
Basic and diluted net earnings (loss) per common share are computed based on the
weighted-average number of shares outstanding during each period. Diluted net earnings (loss) per
common share reflect the potential dilution that could occur if all dilutive stock options were
exercised and all restricted shares were vested.
Basic and diluted net earnings (loss) per common share have been computed based upon net
income (loss) as presented in the accompanying consolidated statements of income (loss) divided by
the weighted-average number of common shares outstanding or assumed to be outstanding as summarized
below:
Weighted-Average Shares for Earnings Per Share Calculation
Three Months Ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
Weighted-average number of common
shares outstanding |
28,051,098 | 4,951,098 | ||||||
Effect of dilutive stock options and
restricted shares |
| | ||||||
Weighted-average number of common
shares and dilutive potential common
shares outstanding |
28,051,098 | 4,951,098 | ||||||
For the three-month period ended March 31, 2011, 2,229,889 outstanding options were
anti-dilutive due to the loss for the first quarter of 2011 and 568,260 outstanding restricted
shares were anti-dilutive due to the vesting price exceeding the average market price for the
period, and were omitted from the calculation. The restricted shares will vest one-third each when
the Companys share price achieves, for 30 consecutive trading days, $8.125, $9.10 and $10.40,
respectively.
For
the three-month period ended March 31, 2010, 788,652 outstanding options were anti-dilutive
due to the exercise price exceeding the average market price for the period and were omitted from
the calculation. There were outstanding restricted shares for the three-month period ended March
31, 2010.
20
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 7 Total Comprehensive Income (Loss)
The components of comprehensive income (loss) and related tax effects for the three-month
periods ended March 31, 2011 and 2010 are as follows:
Comprehensive Income (Loss)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Net income (loss) |
(2,887 | ) | 157 | |||||
Unrealized holding gains on
available-for-sale securities |
$ | 467 | $ | 488 | ||||
Tax effect |
(180 | ) | (188 | ) | ||||
Reclassification of gain recognized
in net income |
(19 | ) | (18 | ) | ||||
Tax effect |
7 | 7 | ||||||
275 | 289 | |||||||
Unrealized holding loss on swaps |
(270 | ) | (155 | ) | ||||
Tax effect |
105 | (69 | ) | |||||
(165 | ) | (224 | ) | |||||
. | ||||||||
Total comprehensive income (loss) |
$ | (2,777 | ) | $ | 222 | |||
Note 8 Derivative Financial Instruments and Hedging Activities
During May 2008, the Company entered into an interest rate swap agreement with a notional
amount of $40.0 million. The derivative instrument is used to protect certain designated variable
rate loans from the downward effects of their repricing in the event of a decreasing rate
environment for a period of three years ending May 16, 2011 and is accounted for as a cash flow
hedge. If the USD-Prime-H.15 rate (Prime Rate) remains below 6.22%, the Company receives the
difference between 6.22% and the daily weighted-average Prime Rate for each period. If the Prime
Rate increases above 6.22% during the term of the contract, the Company will pay the difference
between 6.22% and the daily weighted-average Prime Rate for each period. At March 31, 2011, the
derivative instrument is carried at the fair market value of $0.2 million and is included in other
assets. The fair market value of this swap at December 31, 2010 was $0.5 million. Changes in fair
value of the swap that are deemed effective are recorded in other comprehensive income net of tax.
Changes in fair value for the ineffective portion of the swap are recorded in interest income; such
amounts were insignificant for each of the three months ended March 31, 2011 and 2010. The Company
recorded interest income on the swap of $0.3 million for the three months ended March 31, 2011 and
2010, respectively.
At March 31, 2011, the Company had six loan swaps. The total original notional amount of these
loan swaps was $13.8 million. These derivative instruments are used to protect the Company from
interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed
rate loans and are accounted for as fair value hedges. The derivative instruments are used to
convert these fixed rate loans to an effective floating rate. If the LIBOR rate is below the stated
fixed rate of the loan for a given period, the Company will owe the floating rate payer the notional amount times the difference between LIBOR and the stated fixed rate.
If LIBOR is above the stated rate for any given period during the term of the contract, the Company
will receive payments based on the notional amount times the difference between LIBOR and the
stated fixed rate. These derivative instruments are carried at a fair market value of $(0.5)
million and $(0.5) million and are included in loans at March 31, 2011 and December 31, 2010,
respectively. The loans being hedged are also recorded at fair value. The Company recorded interest
expense on these loan swaps of $0.1 million in each of the three months ended March 31, 2011 and
2010.
21
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
See table below for the information on the individual loan swaps at March 31, 2011:
Individual Loan Swap Information
(Dollars in thousands)
(Dollars in thousands)
Floating | ||||||||||||||||||||||
Original | Current | Rate | ||||||||||||||||||||
Notional | Notional | Termination | Fixed | Floating | Payer | |||||||||||||||||
Amount | Amount | Date | Rate | Rate | Spread | |||||||||||||||||
$ | 2,670 | $ | 2,447 | 04/10/13 | 5.85 | % | USD-LIBOR-BBA | 0.238 | % | |||||||||||||
1,800 | 437 | 04/09/13 | 5.80 | % | USD-LIBOR-BBA | 0.233 | % | |||||||||||||||
1,100 | 1,010 | 05/11/13 | 6.04 | % | USD-LIBOR-BBA | 0.227 | % | |||||||||||||||
3,775 | 3,552 | 02/15/13 | 5.90 | % | USD-LIBOR-BBA | 0.220 | % | |||||||||||||||
1,870 | 1,608 | 02/15/13 | 5.85 | % | USD-LIBOR-BBA | 0.225 | % | |||||||||||||||
2,555 | 2,555 | 10/15/15 | 5.50 | % | USD-LIBOR-BBA | 0.288 | % | |||||||||||||||
$ | 13,770 | $ | 11,609 | |||||||||||||||||||
Note 9 Fair Value Measurements
The Company is required to disclose the estimated fair value of financial instruments, both
assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair
value. These fair value estimates are made at each balance sheet date, based on relevant market
information and information about the financial instruments. Fair value estimates are intended to
represent the price at which an asset could be sold or the price for which a liability could be
settled in an orderly transaction between market participants at the measurement date. However,
given there is no active market or observable market transactions for many of the Companys
financial instruments, the Company has made estimates of many of these fair values which are
subjective in nature, involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the
estimated values. The methodologies used for estimating the fair value of financial assets and
financial liabilities are discussed below:
Cash and Cash Equivalents |
The carrying amounts of cash and short-term instruments including due from banks and federal funds sold approximate their fair value. |
Investment Securities
Fair value for investment securities is based on the quoted market price if such information is available. If a quoted market price is not available, fair values are based on quoted market prices of comparable instruments. |
FHLB Stock |
The Bank, as a member of the FHLB, is required to maintain an investment in FHLB capital stock and the carrying amount is estimated to be fair value. |
22
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Loans, net of allowance
For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Further adjustments are made to reflect current market conditions. There is no discount for liquidity included in the expected cash flow assumptions. |
Accrued Interest Receivable
The carrying amount is a reasonable estimate of fair value. |
Deposits
The fair value of deposits that have no stated maturities, including demand deposits, savings, money market and NOW accounts, is the amount payable on demand at the reporting date. The fair value of deposits that have stated maturity dates, primarily time deposits, is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities. |
Borrowings
The fair values of short-term and long-term borrowings are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements. |
Accrued Interest Payable
The carrying amount is a reasonable estimate of fair value. |
Derivative Instruments
Derivative instruments, including interest rate swaps and swap fair value hedges, are recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash flow models. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. |
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk discussed in Note K of the 2010 Audited Financial Statements, it is not practicable to estimate the fair value of future financing commitments. |
The carrying amounts and estimated fair values of the Companys financial instruments, none of
which are held for trading purposes, at March 31, 2011 and December 31, 2010 are as follows:
Financial Instruments Carrying Amounts and Estimated Fair Values
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Financial
assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 115,513 | $ | 115,513 | $ | 65,378 | $ | 65,378 | ||||||||
Investment securities |
112,273 | 112,273 | 140,590 | 140,590 | ||||||||||||
FHLB stock |
1,910 | 1,910 | 1,757 | 1,757 | ||||||||||||
Loans, net of allowance |
376,419 | 372,183 | 387,405 | 382,854 | ||||||||||||
Interest rate swap |
188 | 188 | 459 | 459 | ||||||||||||
Accrued interest receivable |
1,469 | 1,469 | 1,640 | 1,640 | ||||||||||||
Financial
liabilities: |
||||||||||||||||
Deposits with no stated maturity |
$ | 144,284 | $ | 144,284 | $ | 107,999 | $ | 107,999 | ||||||||
Deposits with stated maturities |
277,228 | 278,067 | 299,821 | 300,393 | ||||||||||||
Swap fair value hedge |
491 | 491 | 569 | 569 | ||||||||||||
Borrowings |
28,108 | 27,365 | 27,769 | 26,913 | ||||||||||||
Accrued interest payable |
245 | 245 | 290 | 290 |
23
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company utilizes fair value measurements to record fair value adjustments to certain
assets and liabilities and to determine fair value disclosures. Securities available-for-sale are
recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be
required to record other assets at fair value on a nonrecurring basis. These nonrecurring fair
value adjustments typically involve application of lower of cost or market accounting or
write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based on the markets
in which the assets and liabilities are traded and the reliability of the assumptions used to
determine fair value.
Level 1 | Valuation is based upon quoted prices for identical instruments traded in active markets. |
Level 2 | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market. |
Level 3 | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include the use of option pricing models, discounted cash flow models and similar techniques. |
Following is a description of valuation methodologies used for assets and liabilities recorded
at fair value:
Investment Securities Available-for-Sale |
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the securitys credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government-sponsored entities, municipal bonds and corporate debt securities that are valued using quoted prices for similar instruments in active markets. Securities classified as Level 3 include a corporate debt security in a less liquid market whose value is determined by reference to the going rate of a similar debt security if it were to enter the market at period end. The derived market value requires significant management judgment and is further substantiated by discounted cash flow methodologies. |
Derivative Instruments |
Derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company uses a third party to measure the fair value. The Company classifies derivatives instruments held or issued for risk management purposes as Level 2. As of March 31, 2011 and December 31, 2010, the Companys derivative instruments consist of interest rate swaps and swap fair value hedges. |
24
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Loans
Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures it for the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, a loans observable market price and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value exceeds the recorded investments in such loans. Impaired loans where a specific allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price for the collateral, the Company records the impaired loan as nonrecurring Level 3. |
At March 31, 2011 and December 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. The Company recorded the six loans involved in fair value hedges at fair market value on a recurring basis. The Company does not record other loans at fair value on a recurring basis. |
Other real estate owned
Other real estate owned (OREO) is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or managements estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is not an observable market price for the collateral, the Company records the OREO as nonrecurring Level 3. |
25
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents, by level, the recorded amount of assets and liabilities at March 31,
2011 and December 31, 2010 measured at fair value on a recurring basis:
Fair Value on a Recurring Basis
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | Assets/Liabilities | |||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | at Fair Value | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
March 31, 2011 |
||||||||||||||||
U.S. Government agencies |
$ | | $ | 10,418 | $ | | $ | 10,418 | ||||||||
Residential mortgage-backed securities |
| 30,999 | | 30,999 | ||||||||||||
Collateralized agency mortgage obligations |
| 53,526 | | 53,526 | ||||||||||||
Municipal securities |
| 15,931 | | 15,931 | ||||||||||||
Debt Securities |
| | 353 | 353 | ||||||||||||
Corporate and other Securities |
| 1,046 | | 1,046 | ||||||||||||
Interest rate swap |
| 188 | | 188 | ||||||||||||
Fair value loans |
| 12,100 | | 12,100 | ||||||||||||
Swap fair value hedge |
| (491 | ) | | (491 | ) | ||||||||||
December 31, 2010 |
||||||||||||||||
U.S. Government agencies |
$ | | $ | 13,160 | $ | | $ | 13,160 | ||||||||
Residential mortgage-backed securities |
| 52,399 | | 52,399 | ||||||||||||
Collateralized agency mortgage obligations |
| 58,719 | | 58,719 | ||||||||||||
Municipal securities |
| 13,808 | | 13,808 | ||||||||||||
Debt Securities |
| | 350 | 350 | ||||||||||||
Corporate and other Securities |
| 2,154 | | 2,154 | ||||||||||||
Interest rate swap |
| 459 | | 459 | ||||||||||||
Fair value loans |
| 9,702 | | 9,702 | ||||||||||||
Swap fair value hedge |
| (569 | ) | (569 | ) |
There
were no transfers between valuation levels during the three months ended March
31, 2011.
The following are reconciliations of the beginning and ending balances for assets measured at
fair value on a recurring basis using significant unobservable inputs (Level 3) during the three
months ended March 31, 2011 and March 31, 2010. The ending balances for Level 3 assets during the
three months ended March 31, 2010 remained unchanged from December 31, 2009 at $0.4 million.
Level 3 Assets Reconciliation
(Dollars in thousands)
(Dollars in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Debt Securities: |
||||||||
Balance, beginning of period |
$ | 350 | $ | 400 | ||||
Decrease in unrealized loss |
3 | | ||||||
Balance, end of period |
$ | 353 | $ | 400 | ||||
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Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Assets Recorded at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis at March 31, 2011 and December 31, 2010
are included in the table below by level:
Fair Value on a Nonrecurring Basis
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | Assets/ | |||||||||||||
Assets | Inputs | Inputs | (Liabilities) | |||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | at Fair Value | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
March 31, 2011 |
||||||||||||||||
OREO |
$ | | $ | 1,565 | $ | | $ | 1,565 | ||||||||
Impaired loans |
$ | | $ | | $ | 25,832 | $ | 25,832 | ||||||||
December 31, 2010 |
||||||||||||||||
OREO |
$ | | $ | 1,246 | $ | | $ | 1,246 | ||||||||
Impaired loans |
$ | | $ | | $ | 37,724 | $ | 37,724 |
In accordance with accounting for foreclosed property, the carrying value of OREO is
periodically reviewed and written down to fair value and any loss is included in earnings. During
the three months ended March 31, 2011, OREO with a carrying value of $0.9 million was written down
by $0.3 million to $0.6 million.
There were no transfers between valuation levels for any accounts for the quarter ended March
31, 2011. If different valuation techniques are deemed necessary, we would consider those transfers
to occur at the end of the period that the accounts are valued.
Note 10 Commitments and Contingencies
In the normal course of business, there are various outstanding commitments and contingent
liabilities, such as commitments to extend credit, which are not reflected in the accompanying
unaudited condensed consolidated financial statements. At March 31, 2011, we had $11.5 million of
loan commitments outstanding, $62.4 million of pre-approved but unused lines of credit and $2.9
million of standby letters of credit and financial guarantees. At December 31, 2010, we had $3.8
million of loan commitments outstanding, $69.6 million of pre-approved but unused lines of credit
and $2.9 million of standby letters of credit and financial guarantees. In managements opinion,
these commitments represent no more than normal lending risk to us and will be funded from normal
sources of liquidity.
As of March 31, 2011 and December 31, 2010, the Company has a commitment to fund $0.6 million
related to an agreement with the Small Business Investment Corporation.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains, and Park Sterling Corporation (the Company) and its management
may make, certain statements that 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 express managements current expectations, plans or
forecasts of future events, results and condition, including expectations regarding the proposed
merger with Community Capital, the general business strategy of engaging in bank mergers, organic
growth and anticipated asset size, additional branch openings, 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, net interest income, credit trends and conditions, including loan losses, allowance,
charge-offs, delinquency trends and nonperforming loan and asset levels, and other similar matters.
These statements are not guarantees of future results or performance and by their nature involve
certain risks and uncertainties that are based on managements beliefs and assumptions and on the
information available to management 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 all
of the following uncertainties and risks, as well as those more fully discussed in the 2010 Form
10-K and in any of the Companys subsequent filings with the SEC: inability to obtain regulatory
approvals of the Community Capital merger on the proposed terms and schedule; failure of Community
Capitals shareholders to approve the merger; failure to realize synergies and other financial
benefits from the proposed Community Capital merger within the expected time frame; increases in
expected costs or difficulties related to integration of the Community Capital merger; fluctuation
in the trading price of the Companys stock prior to the closing of the proposed Community Capital
merger, which would affect the total value of the proposed merger transaction; inability to
successfully open new branches or loan production offices, including the Companys inability to
attract and maintain customers; inability to identify and successfully negotiate and complete
additional combinations with potential merger partners or to successfully integrate such businesses
into the Company, including the Companys ability to realize the benefits and cost savings from and
limit any unexpected liabilities acquired as a result of any such business combination; 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 Companys financial statements; the Companys ability to attract new employees; and
managements 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.
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Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The purpose of this discussion and analysis is to focus on significant changes in our
financial condition as of and results of operations during the three month period ended March 31,
2011. This discussion and analysis highlights and supplements information contained elsewhere in
this Quarterly Report on Form 10-Q, particularly the preceding unaudited condensed consolidated
financial statements and accompanying notes.
Overview
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
Companys primary operations and business are that of owning the Bank, its sole subsidiary. The
Companys offices are located at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina,
28204 and its 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 NC Commissioner in March 2011 to open a branch in Charleston,
South Carolina. The Bank currently anticipates that it will open additional branch offices and/or
loan production offices in its target markets this year.
On January 1, 2011, the Company acquired all of the outstanding common stock of the Bank in
the Reorganization, which was 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. This agreement
and the Reorganization were approved by the Banks shareholders at a special meeting of the Banks
shareholders held on November 23, 2010. Pursuant to the Reorganization, shares of the Banks
common stock were exchanged for shares of the Companys 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 shareholders of the Bank became shareholders of the Company. The unaudited
condensed consolidated financial statements, discussions of those statements, market data and all
other operating data presented herein for periods prior to January 1, 2011 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. The Company intends 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. The Company is committed to building a banking
franchise that is noted for sound risk management, superior client service and exceptional client
relationships.
As part of the Banks 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.
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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 rule, the Company expects to publicly announce material transactions when a
definitive agreement has been reached.
On March 30, 2011, the Company and Community Capital entered into an Agreement and Plan of
Merger, pursuant to which Community Capital will be merged with and into the Company, with the
Company as the surviving entity. The merger has been unanimously approved by the board of directors
of each company and is subject to customary closing conditions, including regulatory approval and
Community Capital shareholder approval. If the merger is completed, each outstanding share of
Community Capital common stock will be exchanged for either 0.6667 of
a share of Company common stock or
$3.30 in cash, subject to the limitation that the total consideration will consist of 40.0% in cash
and 60.0% in shares of Company common stock. As of March 31, 2011, Community Capital, which is headquartered in
Greenwood, South Carolina, had $649.1 million in assets and operated 17 full service branches and
one drive-through facility throughout South Carolina. For additional information, please see the
Companys Current Report on Form 8-K filed on March 31, 2011.
The Company provides 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 its target markets. Through its 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. The Companys lending
activities include a range of short to medium-term commercial, real estate, residential mortgage
and home equity and personal loans. Its 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. The Company strives to develop a personal relationship with its
clients while at the same time offering traditional deposit and loan banking services.
Our primary market area consists of the Charlotte and Wilmington, North Carolina metropolitan
statistical areas (MSAs). The Charlotte-Gastonia-Concord MSA consists of five counties in North
Carolina (Anson, Cabarrus, Gaston, Mecklenburg and Union) and one county in South Carolina (York).
The Wilmington MSA consists of New Hanover, Brunswick, and Pender counties in Southeast North
Carolina.
Commercial banking in the Charlotte and Wilmington markets and in the Carolinas and Virginia
generally is extremely competitive. We compete for deposits in our banking markets with other
commercial banks, savings banks and other thrift institutions, credit unions, brokerage firms and
all other organizations and institutions engaged in money market transactions. In our lending
activities, the Company competes with all other financial institutions, as well as consumer finance
companies, mortgage companies and other lenders engaged in the business of extending credit.
Interest rates, both on loans and deposits, and prices of fee-based services, are significant
competitive factors among financial institutions. Other important competitive factors include
office location, office hours, the quality of customer service, community reputation, continuity of
personnel and services, and in the case of larger commercial customers, 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. To
counter these competitive disadvantages, we depend on our reputation as a community bank in our
local markets, our direct customer contact, our ability to make credit and other business decisions
locally, and personalized customer service.
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Recent Accounting Pronouncements
See Note 2 to the unaudited condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q for a description of recent accounting pronouncements including the
respective expected dates of adoption and effects on results of operations and financial condition.
Critical Accounting Policies and Estimates
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 the notes to the 2010 Audited Financial Statements.
Certain accounting policies involve significant judgment and assumptions by us 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.
We believe our critical accounting policies and estimates include the allowance for loan
losses and the fair value of financial instruments and other accounts. Based on managements
calculation, an allowance of $11.8 million, or 3.03% of total loans, net of unearned interest, was
an adequate estimate of potential losses within the loan portfolio at March 31, 2011. If the mix
and amount of future charge-off percentages differ significantly from those assumptions used by
management in making its determination, the allowance for loan losses and provision for loan losses
on the income statement could be significantly affected and could have a material adverse impact on
our results of operations and financial condition.
Financial Condition at March 31, 2011 and December 31, 2010
Total assets grew by $12.3 million, or 2.0%, from $616.1 million at December 31, 2010 to
$628.4 million at March 31, 2011. At March 31, 2011, interest-earning assets were $561.8 million,
which included $388.2 million in gross loans, $112.3 million in investment securities
available-for-sale, $57.5 million in overnight investments and $3.8 million in interest-bearing
deposits in other banks. Interest-earning assets at December 31, 2010 totaled $603.3 million and
consisted of $399.8 million in gross loans, $140.6 million in investment securities
available-for-sale, $57.9 million in overnight investments and $5.0 million in interest-bearing
deposits in other banks.
Shareholders equity equaled $174.8 million at March 31, 2011 compared to $177.1 million at
December 31, 2010. This decrease of $2.3 million was a result of the first quarter loss of $2.9
million offset by a $0.1 million decrease, net of taxes, in accumulated other comprehensive loss
relating to unrealized gains on investments available-for-sale and swaps and $0.5 million of
additional paid in capital relating to the share-based compensation expense.
The following table reflects selected ratios for the Company for the three months ended March
31, 2011 and 2010:
Selected Ratios
Three months ended | ||||||||||||
March 31, | ||||||||||||
(annualized and unaudited) | At December 31, | |||||||||||
2011 | 2010 | 2010* | ||||||||||
Return on Average Assets |
-1.93 | % | 0.13 | % | -2.81 | % | ||||||
Return on Average Equity |
-6.60 | % | 1.36 | % | -9.75 | % | ||||||
Period End Equity to Total Assets |
27.81 | % | 9.77 | % | 28.75 | % |
* | Derived from audited financial statements. |
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Loans
At March 31, 2011, total loans were $388.2 million compared to $399.8 million at December 31,
2010. This decrease included a $13.9 million reduction in the construction and development
portfolio, consistent with our general intention to reduce residential construction and development exposure in our portfolio.
Substantially all of our loans are to clients in our immediate markets. In the Charlotte
market, we have a diversified mix of commercial real estate, owner-occupied commercial real estate,
commercial and small business loans, and a significant portfolio of home equity lines of credit.
Our Wilmington operation has a heavier concentration of real estate related loans with a smaller
proportion of construction and development loans than Charlotte. Wilmington, like most coastal
markets, is heavily dependent on real estate and tourism to drive its economy. We believe we are
not dependent on any single customer or group of customers whose insolvency would have a material
adverse effect on our financial condition or results of operations.
Asset Quality and Allowance for Loan Losses
Due to unprecedented asset quality challenges and the global economic recession, the U.S.
banking industry has been experiencing significant financial challenges. Our senior management
works closely with credit administration, third-party credit review specialists, and lending staff
to ensure that adequate resources are in place to proactively manage through the current slowdown
in the real estate market and overall economy. When a problem is identified, management is
committed to assessing the situation and moving quickly to minimize losses, while being sensitive
to the borrowers effectiveness as an operator, the long-term viability of the business or project
and the borrowers commitment to working with the Company to achieve an acceptable resolution of
the credit.
We consider asset quality to be of primary importance, and employ a formal internal loan
review process to ensure adherence to the lending policy as approved by our board of directors. It
is the responsibility of each loan officer to assign an appropriate risk grade to loans when
originated. Our credit administration function, through the loan review process with periodic
assistance from third party credit review specialists, validates the accuracy of the initial risk
grade assessment. In addition, as a given loans credit quality changes, it is the responsibility
of our credit administration department to change the borrowers risk grade accordingly. The
process of determining the allowance for loan losses is fundamentally driven by the risk grade
system. In determining the allowance for loan losses, and any resulting provision to be charged
against earnings, particular emphasis is placed on the results of the loan review process.
Consideration is also given to historical loan loss experience, the value and adequacy of
collateral, economic conditions in our market areas and other factors. During the third quarter of
2010, the Company introduced refinements to its loan loss allowance methodology. The principal
change was the addition of a more comprehensive qualitative component, which evaluates six
environmental factors, including portfolio trends, portfolio concentrations, general economic and
market trends, changes in lending practices, regulatory environment and other factors. These
refinements are intended to help management recognize expected losses that may not be identified
through the quantitative analysis of our historical loss experience. For loans determined to be
impaired, the allowance is based on discounted cash flows using the loans initial effective
interest rate or the fair value of the collateral for certain collateral dependent loans. This
evaluation is inherently subjective, as it requires material estimates, including the amounts and
timing of future cash flows expected to be received on impaired loans that may be susceptible to
significant change. The allowance for loan losses represents managements estimate of the
appropriate level of reserve to provide for the risk inherent in our loan portfolio.
Our policy regarding past due loans normally requires a nonaccrual at 90 days past due.
Charge-off to the allowance for loan losses may ensue following timely collection efforts and a
thorough review of payment sources. Further efforts are then pursued through various means
available. Loans carried in a nonaccrual status are generally secured by collateral, which is
considered in the determination of the allowance for loan losses, through the impaired loan
process.
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The allowance for loan losses as a percentage of total loans increased to 3.03% at March 31,
2011 from 2.12% at March 31, 2010. The increase related to a refinement in allowance methodology
to incorporate a more comprehensive qualitative component, the effects of extended economic
weakness on portfolio trends, and specific reserves related to impaired loans. The allowance for
loan losses as a percentage of total loans decreased from 3.11% at December 31, 2010, due to the
recognition of loss on loans. We had net charge-offs of $5.1 million in the first three months of
2011 compared to $0.6 million in the same period of 2010 and $8.9 million for the three months
ended December 31, 2010.
Nonperforming Assets
Nonperforming assets, which consist of accruing loans for which payments are 90 days or more
past due, accruing troubled debt restructurings (TDRs), nonaccrual loans, and OREO decreased $6.6
million, or 15.1%, to $36.8 million at March 31, 2011 from $43.4 million at December 31, 2010.
There were no loans past due 90 days or more and still accruing interest at March 31, 2011 and
December 31, 2010. Loans past due 90 days or more and still accruing interest totaled $0.6 million
at March 31, 2010. Accruing TDRs totaled $1.2 million at March 31, 2011 and December 31, 2010,
compared to $2.8 million at March 31, 2010.
Nonaccrual loans were $34.0 million at March 31, 2011, a decrease of $6.9 million, or 16.9%,
from nonaccrual loans of $40.9 million at December 31, 2010. These nonaccrual loans consisted
primarily of loans involving acquisition, construction and development activity, which totaled
$28.3 million, or 83.2%, of total nonaccrual loans at March 31, 2011 compared to $35.0 million, or
85.5%, of total nonaccrual loans at December 31, 2010. Nonaccrual loans increased significantly in
2010 compared to prior years as a result of the negative impact on our loan portfolio from
increased unemployment, the slow-down in housing, depressed real estate values in our markets, and
other similar factors. At March 31, 2010, nonaccrual loans were $1.7 million.
We grade loans with a risk grade scale of 1-9, with grades 1-5 representing pass credits, and
grades 6, 7, 8, and 9 representing special mention, substandard, doubtful, and loss credit
grades, respectively. Loans are reviewed on a regular basis internally and at least annually by an
external loan review group to ensure loans are graded appropriately. Credits are reviewed for past
due trends, declining cash flows, significant decline in collateral value, weakened guarantor
financial strength, management concerns, market conditions, and other factors that could jeopardize
the repayment performance of the loan. Documentation deficiencies, to include collateral perfection
and outdated or inadequate financial information, are also considered in grading loans.
All loans graded 6 or worse, as well as those graded 5 and with a balance of $250 thousand or
more, are included on our list of watch loans, which is updated and reported to both the
management and Board of Directors committees and the full board of directors on a monthly basis.
Additionally, other loans with more favorable ratings may be placed on the watch list if there are
concerns that the loan may become a problem in the future. Impairment analysis has been performed
on all loans graded substandard and selected other loans as deemed appropriate. At March 31,
2011, we maintained watch loans totaling $108.1 million compared to $102.9 million at December
31, 2010. Currently all loans on our watch list carry a risk grade of 6 or worse. The future level
of watch loans cannot be predicted, but rather will be determined by several factors, including
overall economic conditions in the markets served.
At March 31, 2011, OREO totaled $1.6 million, which represented two residential lots, six
residential properties and one nonresidential property, all of which are recorded at values based
on our most recent appraisals. At December 31, 2010, OREO was $1.2 million. All OREO properties have been written down to
their respective fair values.
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Investments and Other Interest-earning Assets
Investment securities were $112.3 million at March 31, 2011. This was a $28.3 million decrease
from the $140.6 million balance at December 31, 2010 and is a result of the sale of $24.4 million
of securities available for sale related to the upstream of capital from the Bank to the Company as
well as to normal amortization of residential mortgage-backed securities. Our investment portfolio
consists of U.S. government agency securities, residential mortgage-backed securities, municipal
securities and other debt instruments. At the end of the first quarter of 2011, our portfolio had a
net unrealized loss of $1.5 million compared to a $2.0 million net unrealized loss at December 31,
2010. We have no securities with an unrealized loss deemed to be other than temporary at March 31,
2011. In addition, there were no securities with an unrealized loss deemed to be other than
temporary at December 31, 2010.
At March 31, 2011, we had $57.5 million in federal funds sold, and $3.8 million in
interest-bearing deposits with other FDIC-insured financial institutions. This compares with $57.9
million in federal funds and $5.0 million in interest-bearing deposits at other FDIC-insured
financial institutions at December 31, 2010.
Deposits and Other Borrowings
Total deposits increased by $13.7 million, or 3.4%, from December 31, 2010 to March 31, 2011.
Core deposits (excluding brokered time deposits) increased $28.0 million, or 15.0%, while brokered
time deposits decreased by $5.1 million, or 4.8%. The increase in core deposits resulted from a
continued effort by management to obtain additional deposits from existing relationships and
shareholders along with targeted calling efforts by associates and board members.
Borrowed funds totaled $28.1 million at March 31, 2011, compared to $28.0 million at December
31, 2010.
Results of Operations
Comparison of Results of Operations for the Three Months Ended March 31, 2011 and March 31, 2010
The following table summarizes components of income and expense and the changes in those
components for the three months ended March 31, 2011 and 2010:
Condensed Consolidated Statements of Income (Loss)
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | Change | ||||||||||||||
(Unaudited) | $ | % | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Gross interest income |
$ | 5,654 | $ | 5,651 | $ | 3 | 0.1 | % | ||||||||
Gross interest expense |
1,698 | 1,900 | (202 | ) | -10.6 | % | ||||||||||
Net interest income |
3,956 | 3,751 | 205 | 5.5 | % | |||||||||||
Provision for loan losses |
4,462 | 1,531 | 2,931 | 191.4 | % | |||||||||||
Noninterest income |
72 | 38 | 34 | 89.5 | % | |||||||||||
Noninterest expense |
4,234 | 2,042 | 2,192 | 107.3 | % | |||||||||||
Net income (loss) before taxes |
(4,668 | ) | 216 | (4,884 | ) | -2261.1 | % | |||||||||
Income tax expense (benefit) |
(1,781 | ) | 59 | (1,840 | ) | -3118.6 | % | |||||||||
Net income (loss) |
$ | (2,887 | ) | $ | 157 | $ | (3,044 | ) | -1938.9 | % | ||||||
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Net Income (Loss). The net loss for the three months ended March 31, 2011 was $2.9
million compared to net income of $0.2 million for the same period in 2010. This decrease of $3.0
million resulted primarily from a $2.9 million increase in provision for loan losses and an
increase in noninterest expense of $2.2 million, partially offset by a $1.8 million tax benefit.
Annualized return on average assets decreased during the three-month period ended March 31, 2011 to
(1.93)% from .13% for the same period ended March 31, 2010. Annualized return on average equity
also decreased from 1.36% for the three-month period ended March 31, 2010 to (6.60)% for the same
period in 2011.
Net Interest Income. Our largest source of earnings is net interest income, which is the
difference between interest income on interest-earning assets and interest 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 managements responses to changes in interest rates through asset/liability management.
During the three-month period ended March 31, 2011, net interest income was $4.0 million as
compared to $3.8 million in 2010, an increase of $0.2 million, or 5.5%.
Total average interest-earning assets increased by $134.5 million, or 29.5%, to $590.5 million
for the three months ended March 31, 2011 from $456.0 million for the same period in the previous
year. We experienced growth in the average balances of interest-earning assets, specifically
federal funds sold and investment securities available-for-sale, due to the investment of the net
proceeds from the Public Offering. The average balance of federal funds sold increased $37.5
million along with an increase in average balance of investment securities available-for-sale of
$93.6 million.
Average balances of total interest-bearing liabilities decreased in the first three months of
2011, with average total interest-bearing deposit balances decreasing by $1.5 million, or 0.4%, to
$364.3 million in 2011 from $365.8 million for the same period in 2010. Average brokered deposits
declined by $31.3 million from the previous year as management reduced the Companys wholesale
funding. This decline in brokered deposits was more than offset by an increase in other average
deposits of $41.0 million in the first three months of 2011 as compared to the same period in 2010.
This increase in other average deposits includes an increase in average noninterest-bearing
deposits of $11.1 million, or 43.0%, to $37.0 million at March 31, 2011. Our net interest margin
decreased from 3.29% in the three-month period ended March 31, 2010 to 2.68% in the same period in
2011 as a result of lower yields on investments and the loss of income on nonaccrual loans.
Interest paid on funding sources for the three months ended March 31, 2011 totaled $1.7 million,
reflecting a 1.73% cost of interest-bearing liabilities. For the same period in 2010, interest of
$1.9 million was paid at a cost of interest-bearing liabilities of 1.90%.
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The following tables summarize net interest income and average yields and rates paid for the
periods indicated:
Average Balance Sheets and Net Interest Analysis
For the Three Months Ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans, including fees (1) |
$ | 397,066 | $ | 4,758 | 4.79 | % | $ | 395,441 | $ | 5,143 | 5.20 | % | ||||||||||||
Federal funds sold |
52,726 | 30 | 0.23 | % | 15,267 | 9 | 0.24 | % | ||||||||||||||||
Taxable investment securities |
121,424 | 681 | 2.24 | % | 28,441 | 326 | 4.58 | % | ||||||||||||||||
Tax-exempt investment securities |
14,698 | 171 | 4.65 | % | 14,082 | 160 | 4.54 | % | ||||||||||||||||
Other interest-earning assets |
4,572 | 14 | 1.22 | % | 2,759 | 13 | 1.88 | % | ||||||||||||||||
Total interest-earning assets |
590,486 | 5,654 | 3.83 | % | 455,990 | 5,651 | 4.96 | % | ||||||||||||||||
Allowance for loan losses |
(12,343 | ) | (7,686 | ) | ||||||||||||||||||||
Cash and due from banks |
8,530 | 7,683 | ||||||||||||||||||||||
Premises and equipment |
4,474 | 4,641 | ||||||||||||||||||||||
Other assets |
18,829 | 12,468 | ||||||||||||||||||||||
Total assets |
$ | 609,976 | $ | 473,096 | ||||||||||||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing demand |
$ | 55,393 | $ | 3 | 0.02 | % | $ | 36,609 | $ | 2 | 0.02 | % | ||||||||||||
Savings and money market |
24,778 | 138 | 2.23 | % | 11,659 | 81 | 2.78 | % | ||||||||||||||||
Time deposits core |
182,405 | 739 | 1.62 | % | 184,487 | 935 | 2.03 | % | ||||||||||||||||
Time deposits brokered |
101,696 | 487 | 1.92 | % | 133,028 | 549 | 1.65 | % | ||||||||||||||||
Total interest-bearing deposits |
364,272 | 1,367 | 1.50 | % | 365,783 | 1,567 | 1.71 | % | ||||||||||||||||
Federal Home Loan Bank advances |
20,000 | 141 | 2.82 | % | 25,000 | 143 | 2.29 | % | ||||||||||||||||
Other borrowings |
8,029 | 190 | 9.47 | % | 9,108 | 190 | 8.34 | % | ||||||||||||||||
Total borrowed funds |
28,029 | 331 | 4.72 | % | 34,108 | 333 | 3.91 | % | ||||||||||||||||
Total interest-bearing liabilities |
392,301 | 1,698 | 1.73 | % | 399,891 | 1,900 | 1.90 | % | ||||||||||||||||
Net interest rate spread |
3,956 | 2.10 | % | 3,751 | 3.06 | % | ||||||||||||||||||
Noninterest-bearing demand deposits |
37,048 | 25,904 | ||||||||||||||||||||||
Other liabilities |
3,612 | 572 | ||||||||||||||||||||||
Stockholders equity |
177,015 | 46,729 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 609,976 | $ | 473,096 | ||||||||||||||||||||
Net interest margin |
2.68 | % | 3.29 | % | ||||||||||||||||||||
(1) | Average loan balances include nonaccrual loans. |
Provision for Loan Losses. Our provision for loan losses increased $2.9 million, or
191.4%, to $4.5 million during the three months ended March 31, 2011, from $1.5 million during the
corresponding period in 2010. The increase in the provision resulted from the credit deterioration
due to the continuing softening economy, significant decline in real estate values and a refinement
to our allowance for loan loss methodology, which introduced a more comprehensive qualitative
component. We had $5.2 million in net charge-offs during the first three months of 2011, compared
to $0.6 million during the corresponding period in 2010. Nonperforming loans to total assets were
5.61% at March 31, 2011, compared to 0.95% at March 31, 2010.
36
Table of Contents
The ratio of the allowance for loan losses to total loans was 3.03% and 2.12% at March 31,
2011 and 2010, respectively. Management periodically evaluates our credit policies and procedures
to confirm that they effectively manage risk and facilitate appropriate internal controls.
Noninterest Income. Noninterest income has not historically been a major component of our
earnings. We have a minimal amount of noninterest income from service charges. Noninterest income
increased from $38 thousand for the three months ended March 31, 2010 to $72 thousand for the same
period in 2011. The growth in non-interest income was primarily related to gains on the sale of
OREO totaling $24,000 and on sale of securities available for sale totaling
$19,000.
Noninterest Expense. The level of noninterest expense substantially affects our profitability.
Total noninterest expense was $4.2 million for the three months ended March 31, 2011 compared to
$2.0 million for the same period in 2010. The increase of $2.2 million, or 107.4%, in the three
months ended March 31, 2011 compared to 2010 includes an increase in salaries and benefits in the
amount of $1.3 million as a result of an increase in full time equivalent employees (FTEs),
reflecting our change in strategy. We employed 67 FTEs at March
31, 2011 compared to 46 at March 31, 2010. Additionally, OREO expense increased $0.2 million due to
additional write-downs on properties, legal and professional fees increased by $0.2 million as
a result of the Company becoming a public entity, and FDIC insurance and director fees increased.
The following table presents components of noninterest expense for the three months ended
March 31, 2011 and 2010:
Noninterest Expense
Three months ended | ||||||||||||||||
March 31, | ||||||||||||||||
2011 | 2010 | Change | ||||||||||||||
(Unaudited) | $ | % | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Salaries and benefits |
$ | 2,507 | $ | 1,252 | $ | 1,255 | 100.2 | % | ||||||||
Occupancy and equipment |
256 | 206 | 50 | 24.3 | % | |||||||||||
Advertising and promotion |
38 | 57 | (19 | ) | -33.3 | % | ||||||||||
Legal and professional fees |
307 | 76 | 231 | 303.9 | % | |||||||||||
Deposit charges and FDIC insurance |
287 | 176 | 111 | 63.1 | % | |||||||||||
Data processing and outside service fees |
123 | 93 | 30 | 32.3 | % | |||||||||||
Directors fees |
41 | | 41 | 100.0 | % | |||||||||||
Other real estate owned expense |
235 | 36 | 199 | 552.8 | % | |||||||||||
Other expenses |
440 | 146 | 294 | 201.4 | % | |||||||||||
Total noninterest expense |
$ | 4,234 | $ | 2,042 | $ | 2,192 | 107.3 | % | ||||||||
Income Taxes. We generate significant amounts of non-taxable income from tax-exempt
investment securities. Accordingly, the level of such income in relation to income before taxes
significantly affects our effective tax rate. For the three months ended March 31, 2011, we recognized an income tax
benefit of $1.8 million compared to an income tax expense of $0.06 million for the same period in
2010. The effective tax rate for the three months ended March 31, 2011 is 38.20% compared to 27.30%
for the same period in 2010. The change in the effective tax rate was due to the amount of tax-
exempt income relative to the size of pre-tax income. A tax benefit is recorded if non-taxable
income exceeds income before taxes, resulting in a reduction of total income subject to income
taxes.
37
Table of Contents
In evaluating whether we will realize the full benefit of our net deferred tax asset, we
considered projected earnings, asset quality, liquidity, capital position, which will enable us to
deploy capital to generate taxable income, growth plans, etc. In addition, we also considered the
previous twelve quarters of income (loss) before income taxes in determining the need for a
valuation allowance, which is called the cumulative loss test. In the first quarter of 2011 and for
the year ended 2010, we incurred a loss, primarily as a result of the increased provision for loan
losses, which resulted in the failure of the cumulative loss test. Significant negative trends in
credit quality, losses from operations, etc. could impact the realizability of the deferred tax
asset in the future. After considering the above factors, both positive and negative, management
believes that our deferred assets are more likely than not to be realized.
Liquidity and Capital Resources
Liquidity refers to the ability to manage future cash flows to meet the needs of depositors
and borrowers and to fund operations. Management strives to maintain sufficient liquidity to fund
future loan demand and to satisfy fluctuations in deposit levels. This is achieved primarily in the
form of available lines of credit from various correspondent banks, the FHLB, the Federal Reserve
Discount Window, and through an investment portfolio. In addition, we occasionally have short-term
investments at our primary correspondent bank in the form of federal funds sold. Liquidity is
governed by a board of directors approved Asset Liability Policy, administered by an internal
Senior Management Risk Committee. The Committee reports on a monthly basis asset/liability related
matters to the Board of Directors Loan and Risk Committee.
Our internal liquidity ratio was 49.2% at March 31, 2011 compared to 50.5% at December 31,
2010, in each case exceeding our minimum internal target of 10%. In addition, at March 31, 2011, we
had an additional $20.1 million of credit available from the FHLB, $43.8 million from the Federal
Reserve Discount Window, and available lines of credit totaling $70.0 million from correspondent
banks.
At March 31, 2011, we had $11.5 million of loan commitments outstanding and had pre-approved
but unused lines of credit totaling $76.8 million. In managements opinion, these commitments
represent no more than normal lending risk to the Company and will be funded from normal sources of
liquidity. At December 31, 2010, we had $3.8 million of loan commitments outstanding, $69.6 million
of pre-approved but unused lines of credit and $2.9 million of standby letters of credit and
financial guarantees.
Our capital position is reflected in our shareholders equity, subject to certain adjustments
for regulatory purposes. Shareholders equity, or capital, is a measure of our net worth, soundness
and viability. Shareholders equity on March 31, 2011 was $174.8 million compared to the December
31, 2010 balance of $177.1 million. In August 2010, we completed our public offering of 23,100,000
shares of common stock at an initial purchase price of $6.50 per share for an aggregate offering
price of approximately $150.2 million. As a result of the offering, we received net proceeds of
approximately $140.2 million, after $9.0 million in underwriting fees, including the $3.0 million
in contingent fees (described in Note 3 to the unaudited condensed consolidated financial
statements included in this Form 10-Q), and approximately $0.9 million in related expenses.
Remaining proceeds have been invested in accordance with the Companys investment policies.
Risk based capital regulations adopted by the FDIC require banks to achieve and maintain
specified ratios of capital to risk weighted assets. The risk based capital rules are designed to
measure Tier 1 capital (consisting of common equity, retained earnings and a limited amount of
qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other
intangible assets and accumulated other comprehensive income) and total capital in relation to the credit risk of both on- and off-balance sheet items. Under
the guidelines, one of four risk weights is applied to the different on-balance sheet items.
Off-balance sheet items, such as loan commitments, are also subject to risk weighting after
conversion to balance sheet equivalent amounts. All banks must maintain a minimum total capital to
total risk weighted assets ratio of 8.00%, at least half of which must be in the form of core, or
Tier 1, capital. These guidelines also specify that banks that are experiencing internal growth or
making acquisitions will be expected to maintain capital positions substantially above the minimum
supervisory levels. At March 31, 2011, we satisfied the respective minimum regulatory capital
requirements, and we were well capitalized within the meaning of federal regulatory requirements.
Our risk-weighted assets at March 31, 2011 and December 31, 2010 were $411.7 million and $431.3
million, respectively. Actual capital levels and minimum levels at March 31, 2011 and December 31,
2010 were:
38
Table of Contents
Capital Ratios
To Be Well | ||||||||||||||||||||||||
For Capital | Capitalized Under | |||||||||||||||||||||||
Adequacy | Prompt Corrective | |||||||||||||||||||||||
Actual | Purposes | Actions Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Park Sterling Corporation |
||||||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||
Total Risk-Based Capital Ratio |
$ | 182,243 | 44.27 | % | $ | 32,935 | 8.00 | % | $ | 41,169 | 10.00 | % | ||||||||||||
Tier 1 Capital Ratio |
170,120 | 41.32 | % | 16,468 | 4.00 | % | 24,701 | 6.00 | % | |||||||||||||||
Tier 1 Leverage Ratio |
170,120 | 28.14 | % | 24,180 | 4.00 | % | 30,225 | 5.00 | % | |||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Total Risk-Based Capital Ratio |
$ | 185,768 | 43.06 | % | $ | 34,035 | 8.00 | % | $ | 42,543 | 10.00 | % | ||||||||||||
Tier 1 Capital Ratio |
173,395 | 40.20 | % | 17,017 | 4.00 | % | 25,525 | 6.00 | % | |||||||||||||||
Tier 1 Leverage Ratio |
173,395 | 27.39 | % | 22,227 | 4.00 | % | 27,784 | 5.00 | % | |||||||||||||||
Park Sterling Bank |
||||||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||
Total Risk-Based Capital Ratio |
$ | 106,280 | 25.74 | % | $ | 33,037 | 8.00 | % | $ | 41,297 | 10.00 | % | ||||||||||||
Tier 1 Capital Ratio |
94,141 | 22.80 | % | 16,519 | 4.00 | % | 24,778 | 6.00 | % | |||||||||||||||
Tier 1 Leverage Ratio |
94,141 | 15.78 | % | 23,862 | 4.00 | % | 29,828 | 5.00 | % | |||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Total Risk-Based Capital Ratio |
$ | 185,768 | 43.06 | % | $ | 34,035 | 8.00 | % | $ | 42,543 | 10.00 | % | ||||||||||||
Tier 1 Capital Ratio |
173,395 | 40.20 | % | 17,017 | 4.00 | % | 25,525 | 6.00 | % | |||||||||||||||
Tier 1 Leverage Ratio |
173,395 | 27.39 | % | 22,227 | 4.00 | % | 27,784 | 5.00 | % |
The Company has committed to our regulators to maintain a Tier 1 Leverage Ratio of
at least 10.00% for the three years following the Public Offering.
Disclosure of Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
In the ordinary course of operations, we enter into certain contractual obligations. Such
obligations include the funding of operations through debt issuances as well as leases for premises
and equipment.
Information about our off-balance sheet risk exposure is presented in Note K of the 2010
Audited Financial Statements. As part of ongoing business, we have not participated in transactions
that generate relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as special purpose entities (SPEs), which generally are established for
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As
of March 31, 2011, we were not involved in any unconsolidated SPE transactions.
39
Table of Contents
Interest Rate Sensitivity
Our Asset Liability Committee (ALCO) actively measures and manages interest rate risk using
a process developed by the Company. The Committee is also responsible for approving our
asset/liability management policies, overseeing the formulation and implementation of strategies to
improve balance sheet positioning and earnings, and reviewing our interest rate sensitivity
position.
The primary tool that management uses to measure short-term interest rate risk is a net
interest income simulation model prepared by an independent correspondent bank. These simulations
estimate the impact that various changes in the overall level of interest rates over a one- and
two- year time horizon would have on net interest income. The results help us develop strategies
for managing exposure to interest rate risk.
Like any forecasting technique, interest rate simulation modeling is based on a large number
of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset
and liability prepayments, interest rates and balance sheet management strategies. Management
believes that both individually and taken together the assumptions are reasonable. Nevertheless,
the simulation modeling process produces only a sophisticated estimate, not a precise calculation
of exposure. In addition, the overall interest rate risk management process is subject to annual
review by an outside professional services firm to ascertain its effectiveness as required by
federal regulations.
Our current guidelines for risk management call for preventive measures if a 300 basis point
shock or immediate increase or decrease in short term rates over the next 12 months would affect
net interest income over the same period by more than 30.0%. We currently are operating well within
these guidelines. As of March 31, 2011, based on the results of the simulation model, we could
expect net interest income to decrease by approximately 7.1% over 12 months if short-term interest
rates immediately decreased by 300 basis points, which is unlikely based on current rate levels. If
short-term interest rates increased by 300 basis points, net interest income could be expected to
increase by approximately 6.5% over 12 months. At December 31, 2010, the simulation model results
showed that we could expect net interest income to decrease by approximately 4.8% over 12 months if
short-term interest rates decreased by 300 basis points, and if short-term interest rates increased
by 300 basis points, net interest income could be expected to increase by approximately 6.6% over
12 months.
We use multiple interest rate swap agreements, accounted for as either cash flow or fair value
hedges, as part of the management of interest rate risk. At March 31, 2011, we had an interest rate
swap, accounted for as a cash flow hedge, with a notional amount of $40.0 million that was
purchased on May 16, 2008 to protect the Company from falling rates. We receive 6.22% fixed for a
period of three years, and pay prime rate for the same period, currently at 3.25%. During the three
months ended March 31, 2011 and 2010, we recorded $0.3 million of income from this instrument. The
unrealized gain on this instrument at December 31, 2010 was $0.3 million.
During the year ended December 31, 2008, we entered into five loan swaps accounted for as fair
value hedges. The total original notional amount of these swaps was $11.2 million. These derivative
instruments are used to protect the Company from interest rate risk caused by changes in the LIBOR
curve in relation to certain designated fixed rate loans. These derivative instruments are carried
at a fair market value of $0.5 million at March 31, 2011. We recorded interest expense on these
loan swaps of $0.1 million for the three months ended March 31, 2011 and 2010.
For cash flow hedges, we use the dollar-offset method for assessing effectiveness using the
cumulative approach. The dollar-offset method compares the dollar amount of the change in
anticipated future cash flows of the hedging instrument with the dollar amount of the changes in
anticipated future cash flows of the risk being hedged over the assessment period. The cumulative
approach involves comparing the cumulative changes in the hedging instruments anticipated future
cash flows to the cumulative changes in the hedged transactions anticipated future cash flows.
Because the floating index and reset dates are based on identical terms, management believes that
the hedge relationship of the cumulative changes in expected future cash flow from the hedging derivative and the cumulative changes in expected interest cash flows from the hedged exposure
will be highly effective.
40
Table of Contents
Consistent with the risk management objective and the hedge accounting designation, management
measures the degree of hedge effectiveness by comparing the cumulative change in anticipated
interest cash flows from the hedged exposure over the hedging period to the cumulative change in
anticipated cash flows from the hedging derivative. Any difference between these two measures will
be deemed hedge ineffectiveness and recorded in current earnings. Management utilizes the
Hypothetical Derivative Method to compute the cumulative change in anticipated interest cash
flows from the hedged exposure. To the extent that the cumulative change in anticipated cash flows
from the hedging derivative offsets from 80% to 125% of the cumulative change in anticipated
interest cash flows from the hedged exposure, the hedge is deemed effective.
For fair value hedges, Accounting Standards Codification (ASC) Topic 815 requires that
the method selected for assessing hedge effectiveness must be reasonable, be defined at the
inception of the hedging relationship and be applied consistently throughout the hedging
relationship. We use the dollar-offset method for assessing effectiveness using the cumulative
approach. The dollar-offset method compares the fair value of the hedging derivative with the fair
value of the hedged exposure. The cumulative approach involves comparing the cumulative changes in
the hedging derivatives fair value to the cumulative changes in the hedged exposures fair value.
The calculation of dollar offset is the change in clean fair value of hedging derivative, divided
by the change in fair value of the hedged exposure attributable to changes in the LIBOR curve. To
the extent that the cumulative change in fair value of the hedging derivative offsets from 80% to
125% of the cumulative change in fair value of the hedged exposure, the hedge will be deemed
effective. The change in fair value of the hedging derivative and the change in fair value of the
hedged exposure are recorded in earnings. Any hedge ineffectiveness is also reflected in current
earnings.
Fair value hedges (pay floating, received fixed) are recorded on the balance sheet in other
assets or liabilities at fair market value. Loan swaps (pay fixed, receive floating) are carried at
fair market value and are included in loans. Changes in fair value of the hedged loans have been
completely offset by the fair value changes in the derivatives, which are in contra asset accounts
included in loans.
See Note L of the 2010 Audited Financial Statements and Note 8 of our unaudited condensed
financial statements included in this Quarterly Report on Form 10-Q for further discussion on our
derivative financial instruments and hedging activities.
Financial institutions are subject to interest rate risk to the degree that their
interest-bearing liabilities, primarily deposits, mature or reprice more or less frequently, or on
a different basis, than their interest-earning assets, primarily loans and investment securities.
The match between the scheduled repricing and maturities of our interest-earning assets and
liabilities within defined periods is referred to as gap analysis. At March 31, 2011, our
cumulative one-year gap was a positive, or asset sensitive, $66.9 million, or 10.7% of total
assets, well within our ALCO policy guideline of 35%. Our cumulative one-year gap at December 31,
2010 was $42.9 million, or 7.0%, of total assets.
The following table reflects our rate sensitive assets and liabilities by maturity as of March
31, 2011. Variable rate loans are shown in the category of due within three months because they
reprice with changes in the prime lending rate. Fixed rate loans are presented assuming the entire
loan matures on the final due date, although payments are actually made at regular intervals and
are not reflected in this schedule.
41
Table of Contents
Interest Rate Gap Sensitivity
Within | Three | One Year | ||||||||||||||||||
Three | Months to | to Five | After | |||||||||||||||||
Months | One Year | Years | Five Years | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
At March 31, 2011: |
||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||
Interest-bearing deposits |
$ | 3,796 | $ | | $ | | $ | | $ | 3,796 | ||||||||||
Federal funds sold |
57,525 | | | | 57,525 | |||||||||||||||
Securities |
2,407 | 17,405 | 46,953 | 45,508 | 112,273 | |||||||||||||||
Loans |
240,816 | 26,428 | 120,913 | 30 | 388,187 | |||||||||||||||
Other interest-earning assets |
| | | | | |||||||||||||||
Total interest-earning assets |
304,544 | 43,833 | 167,866 | 45,538 | 561,781 | |||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
Demand deposits |
2,722 | | 6,224 | 4,666 | 13,612 | |||||||||||||||
MMDA and savings |
93,574 | | | | 93,574 | |||||||||||||||
Time deposits |
73,484 | 123,668 | 80,076 | | 277,228 | |||||||||||||||
Short term borrowings |
1,213 | | | | 1,213 | |||||||||||||||
Long term borrowings |
| | 20,000 | 6,895 | 26,895 | |||||||||||||||
Total interest-bearing liabilities |
170,993 | 123,668 | 106,300 | 11,561 | 412,522 | |||||||||||||||
Derivatives |
10,684 | 2,555 | (13,239 | ) | | | ||||||||||||||
Interest sensitivity gap |
$ | 144,235 | $ | (77,280 | ) | $ | 48,327 | $ | 33,977 | $ | 149,259 | |||||||||
Cummulative interest sensitivity gap |
$ | 144,235 | $ | 66,955 | $ | 115,282 | $ | 149,259 | ||||||||||||
Percentage of total assets |
10.65 | % | ||||||||||||||||||
At December 31, 2010: |
||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||
Interest bearing deposits |
$ | 5,040 | $ | | $ | | $ | | $ | 5,040 | ||||||||||
Federal funds sold |
57,905 | | | | 57,905 | |||||||||||||||
Securities |
| | 12,590 | 128,000 | 140,590 | |||||||||||||||
Loans |
245,364 | 16,532 | 133,416 | 4,517 | 399,829 | |||||||||||||||
Other interest-earning assets |
| | | 2,275 | 2,275 | |||||||||||||||
Total interest-earning assets |
308,309 | 16,532 | 146,006 | 134,792 | 605,639 | |||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
Demand deposits |
9,372 | | | | 9,372 | |||||||||||||||
MMDA and savings |
62,293 | | | | 62,293 | |||||||||||||||
Time deposits |
74,505 | 145,549 | 79,767 | | 299,821 | |||||||||||||||
Short term borrowings |
874 | | | | 874 | |||||||||||||||
Long term borrowings |
| | 20,000 | 6,895 | 26,895 | |||||||||||||||
Total interest-bearing liabilities |
147,044 | 145,549 | 99,767 | 6,895 | 399,255 | |||||||||||||||
Derivatives |
(29,316 | ) | 40,000 | (7,036 | ) | (3,648 | ) | | ||||||||||||
Interest sensitivity gap |
$ | 131,949 | $ | (89,017 | ) | $ | 39,203 | $ | 124,249 | $ | 206,384 | |||||||||
Cummulative interest sensitivity gap |
$ | 131,949 | $ | 42,932 | $ | 82,135 | $ | 206,384 | ||||||||||||
Percentage of total assets |
6.97 | % | ||||||||||||||||||
42
Table of Contents
Impact of Inflation and Changing Prices
A commercial bank has an asset and liability make-up that is distinctly different from that of
a company with substantial investments in plant and inventory because the major portions of a
commercial banks assets are monetary in nature. As a result, a banks performance may be
significantly influenced by changes in interest rates. Although the banking industry is more
affected by changes in interest rates than by inflation in the prices of goods and services,
inflation is a factor that may influence interest rates. However, the frequency and magnitude of
interest rate fluctuations do not necessarily coincide with changes in the general inflation rate.
Inflation does affect operating expenses in that personnel expenses and the cost of supplies and
outside services tend to increase more during periods of high inflation.
43
Table of Contents
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
See Interest Rate Sensitivity in the Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part I, Item 2 for disclosures about market risk.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the management of
the Company, under the supervision and with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the
Companys disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls
and procedures were effective as of such date.
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred
during the first fiscal quarter of 2011 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. | Legal Proceedings |
In the ordinary course of business, we may be a party to various legal proceedings from time
to time. In the opinion of management, we are not a party to, nor is any of our property the
subject of, any pending or to our knowledge threatened proceeding, the outcome of which would have
a material impact on the Companys financial condition or results of operations.
Item 1A Risk Factors
As previously discussed in this report, on March 30, 2011, the Company and Community Capital
entered into an Agreement and Plan of Merger, pursuant to which Community Capital will be merged
with and into the Company, with the Company as the surviving entity. The merger remains subject to
various conditions, including the approval by Community Capital shareholders and the receipt of
customary bank regulatory approvals. The following risk factors are being provided in addition to
the risk factors previously disclosed in the 2010 Form 10-K.
The Community Capital merger will not be completed unless important conditions to the merger are
satisfied, including the receipt of regulatory approvals.
Completion of the Community Capital merger is subject to certain conditions, including
regulatory approvals and approval of the Community Capital shareholders. If these conditions are
not satisfied or waived (to the extent permitted by law), the merger may be delayed or may not
occur, and we could lose some or all of the intended benefits of the merger. We may not receive the
applicable regulatory approvals, or governmental authorities may impose conditions upon the
completion of the merger or require changes in the terms of the merger. These conditions or changes
could result in the termination of the merger agreement or could have the effect of delaying the
completion of the merger or imposing additional costs or limiting the possible revenues of the
combined company.
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We expect to incur significant transaction and merger-related integration costs in connection with
the merger with Community Capital and, even if completed, we may not realize all of the anticipated
benefits of the merger.
We expect to incur significant costs associated with completing the Community Capital merger
and integrating the businesses. It is possible that the integration process could result in the
loss of key employees, the disruption of our ongoing businesses or inconsistencies in standards,
controls, procedures and policies that adversely affect our ability to maintain relationships with
clients, depositors and employees or to achieve the anticipated benefits of the merger. Integration
efforts will also divert management attention and resources. These integration issues could have an
adverse effect on the Company during the transition period. Accordingly, the anticipated benefits
and cost savings of the merger may not be realized fully or at all or may take longer to realize
than expected.
The Community Capital merger may distract our management from other responsibilities.
The Community Capital merger could cause our management to focus its time and energies on
matters related to the transaction that otherwise would be directed to our business and operations.
Any such distraction, if significant, could affect our ability to fully realize the expected
financial benefits from this transaction if the merger takes place. Additionally, our strategic
plan is, in part, to grow through acquisitions of other financial institutions and/or the assets of
other financial institutions, such as branches or lines of business. If we announce another
acquisition before the completion of the Community Capital merger, that merger may be more
difficult to complete due to potential delays in obtaining regulatory or shareholder approval and
our focus on a new acquisition may limit our ability to fully realize the expected benefits from
the merger, if the merger takes place.
Sales of substantial amounts of our common stock in the open market by former Community Capital
shareholders could depress the stock price.
Shares of the Companys common stock that are issued to Community Capital shareholders will be
freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, except for
shares issued to any shareholder who may be deemed to be an affiliate of the Company. We currently
expect to issue approximately 4,024,550 shares of the Companys common stock in connection with the
merger. If the merger is completed and if Community Capitals shareholders sell substantial amounts
of our common stock in the public market following completion of the merger, the market price of
our common stock may decrease.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the three months ended March 31, 2011, the Company did not have any unregistered sales
of equity securities or repurchases of its common stock.
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
Not applicable.
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Item 6. | Exhibits |
The following documents are filed or furnished as exhibits to this report:
Exhibit | ||||
Number | Description of Exhibits | |||
2.1 | Agreement and Plan of Merger dated March 31, 2011 by and
between Park Sterling Corporation and Community Capital
Corporation, incorporated by reference to Exhibit 2.1 of
the Companys Current Report on Form 8-K (File No.
001-35032) filed April 5, 2011 |
|||
3.1 | Articles of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 of the Companys Current Report on
Form 8-K (File No. 001-35032) filed January 13, 2011 |
|||
3.2 | Bylaws of the Company, incorporated by reference to Exhibit
3.2 of the Companys Current Report on Form 8-K (File No.
001-35032) filed January 13, 2011 |
|||
31.1 | Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
PARK STERLING CORPORATION |
||||
Date: May 13, 2011 | By: | /s/ James C. Cherry | ||
James C. Cherry | ||||
Chief Executive Officer (authorized officer) | ||||
Date: May 13, 2011 | By: | /s/ David L. Gaines | ||
David L. Gaines | ||||
Chief Financial Officer |
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Exhibit Index
Exhibit | ||||
Number | Description of Exhibits | |||
2.1 | Agreement and Plan of Merger dated March 31, 2011 by and
between Park Sterling Corporation and Community Capital
Corporation, incorporated by reference to Exhibit 2.1 of
the Companys Current Report on Form 8-K (File No.
001-35032) filed April 5, 2011 |
|||
3.1 | Articles of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 of the Companys Current Report on
Form 8-K (File No. 001-35032) filed January 13, 2011 |
|||
3.2 | Bylaws of the Company, incorporated by reference to Exhibit
3.2 of the Companys Current Report on Form 8-K (File No.
001-35032) filed January 13, 2011 |
|||
31.1 | Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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