UNITED STATES
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

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

Commission File Number 001-35032

PARK STERLING CORPORATION

(Exact name of registrant as specified in its charter)

NORTH CAROLINA		27-4107242
(State or other jurisdiction of 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)

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 þ 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		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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 August 3, 2011, the registrant had outstanding 28,619,358 shares of common stock, $1.00 par value per share.

 

 

PARK STERLING CORPORATION

Table of Contents

		Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets June 30, 2011 and December 31, 2010			2
Condensed Consolidated Statements of Income (Loss) Three and Six Months Ended June 30, 2011 and 2010			3
Condensed Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2011 and 2010			4
Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures about Market Risk			58
Item 4. Controls and Procedures			58
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			58
Item 1A. Risk Factors			58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			59
Item 3. Defaults Upon Senior Securities			59
Item 4. [Removed and Reserved]			59
Item 5. Other Information			59
Item 6. Exhibits			60
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PARK STERLING CORPORATION

Part I. FINANCIAL INFORMATION

Item 1.		Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)

		June 30,				December 31,
		2011				2010*
ASSETS
Cash and due from banks		$	14,349			$	2,433
Interest-earning balances at banks			8,571				5,040
Federal funds sold			44,060				57,905
Investment securities available-for-sale, at fair value			146,734				140,590
Loans held for sale			1,600				—
Loans			380,365				399,829
Allowance for loan losses			(11,277	)			(12,424	)
Net loans			369,088				387,405
Federal Home Loan Bank stock			1,882				1,757
Premises and equipment, net			4,862				4,477
Accrued interest receivable			1,462				1,640
Other real estate owned			3,470				1,246
Other assets			14,590				13,615
Total assets		$	610,668			$	616,108
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand deposits		$	42,156			$	36,333
Money market, NOW and savings deposits			110,874				71,666
Time deposits of less than $100,000			59,969				78,242
Time deposits of $100,000 through $250,000			68,049				79,020
Time deposits of more than $250,000			122,858				142,559
Total deposits			403,906				407,820
Short-term borrowings			1,661				874
FHLB advances			20,000				20,000
Subordinated debt			6,895				6,895
Accrued interest payable			201				290
Accrued expenses and other liabilities			4,421				3,128
Total liabilities			437,084				439,007
Shareholders’ equity:
Preferred stock, no par value 5,000,000 shares authorized; -0- issued and outdstanding at June 30, 2011 and December 31, 2010, respectively			—				—
Common stock, $1.00 par value 200,000,000 shares authorized at June 30, 2011 and December 31, 2010; 28,619,358 and 28,051,098 shares outstanding at June 30, 2011 and December 31, 2010, respectively			28,619				28,051
Additional paid-in capital			159,890				159,489
Accumulated deficit			(15,502	)			(9,501	)
Accumulated other comprehensive income (loss)			577				(938	)
Total shareholders’ equity			173,584				177,101
Total liabilities and shareholders’ equity		$	610,668			$	616,108

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)
(Dollars in thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Interest income
Loans, including fees		$	4,450			$	5,169			$	9,208			$	10,312
Federal funds sold			33				9				63				18
Taxable investment securities			684				285				1,365				611
Tax-exempt investment securities			181				160				352				320
Interest on deposits at banks			11				15				25				28
Total interest income			5,359				5,638				11,013				11,289
Interest expense
Money market, NOW and savings deposits			176				89				317				172
Time deposits			1,080				1,460				2,306				2,944
Short-term borrowings			1				3				1				8
FHLB advances			141				141				282				279
Subordinated debt			189				189				379				379
Total interest expense			1,587				1,882				3,285				3,782
Net interest income			3,772				3,756				7,728				7,507
Provision for loan losses			3,245				1,094				7,707				2,625
Net interest income (loss) after provision for loan losses			527				2,662				21				4,882
Noninterest income
Service charges on deposit accounts			25				15				51				29
Gain on sale of securities available-for-sale			1				1				20				19
Other noninterest income			18				8				45				14
Total noninterest income			44				24				116				62
Noninterest expense
Salaries and employee benefits			2,975				1,299				5,482				2,551
Occupancy and equipment			301				224				557				430
Advertising and promotion			87				96				125				153
Legal and professional fees			1,205				83				1,512				159
Deposit charges and FDIC insurance			196				182				483				358
Data processing and outside service fees			128				100				251				193
Director fees			45				47				86				47
Net cost of operation of other real estate			93				239				328				275
Other noninterest expense			444				207				884				353
Total noninterest expense			5,474				2,477				9,708				4,519
Income (loss) before income taxes			(4,903	)			209				(9,571	)			425
Income tax expense (benefit)			(1,789	)			36				(3,570	)			95
Net income (loss)		$	(3,114	)		$	173			$	(6,001	)		$	330
Basic earnings (loss) per common share		$	(0.11	)		$	0.03			$	(0.21	)		$	0.07
Diluted earnings (loss) per common share		$	(0.11	)		$	0.03			$	(0.21	)		$	0.07
Weighted-average common shares outstanding
Basic			28,051,098				4,951,098				28,051,098				4,951,098
Diluted			28,051,098				4,951,098				28,051,098				4,951,098

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Six Months Ended June 30, 2011 and 2010
(Dollars in thousands)

																		Accumulated
										Additional								Other				Total
		Common Stock								Paid-In				Accumulated				Comprehensive				Shareholders’
		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			—				—				190				—				—				190
Comprehensive income (loss):
Net income			—				—				—				330				—				330
Unrealized holding gains on available-for-sale securities, net of taxes			—				—				—				—				469				469
Unrealized holding losses on interest rate swaps, net of taxes			—				—				—				—				(394	)			(394	)
Total comprehensive income (loss)			—				—				—				—				—				405
Balance at June 30, 2010			4,951,098			$	23,023			$	23,686			$	(1,312	)		$	1,293			$	46,690
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			—				—				969				—				—				969
Comprehensive income (loss):
Net loss			—				—				—				(6,001	)			—				(6,001	)
Unrealized holding gains on available-for-sale securities, net of taxes			—				—				—				—				1,797				1,797
Unrealized holding losses on interest rate swaps, net of taxes			—				—				—				—				(282	)			(282	)
Total comprehensive income (loss)			—				—				—				—				—				(4,486	)
Balance at June 30, 2011			28,619,358			$	28,619			$	159,890			$	(15,502	)		$	577			$	173,584

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

		Six Months Ended
		June 30,
		2011				2010
Cash flows from operating activities
Net income (loss)		$	(6,001	)		$	330
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			771				233
Provision for loan losses			7,707				2,625
Share-based compensation expense			969				190
Income on termination of swap			—				(352	)
Gain on sales of investment securities available-for-sale			(20	)			(19	)
Gain (loss) on sales of other real estate			(3	)			223
Writedowns to other real estate			301				—
Loans held for sale			(1,600	)			—
Change in assets and liabilities:
Decrease in accrued interest receivable			178				117
Decrease in other assets			(2,383	)			(327	)
Decrease in accrued interest payable			(89	)			(146	)
Increase in accrued expenses and other liabilities			1,293				87
Net cash provided by operating activities			1,123				2,961
Cash flows from investing activities
Net decrease (increase) in loans			6,924				(4,621	)
Purchases of bank premises and equipment			(573	)			(109	)
Purchases of investment securities available-for-sale			(46,940	)			(4,233	)
Proceeds from sales of investment securities available-for-sale			24,316				5,163
Proceeds from maturities and call of investment securities available-for-sale			18,931				2,052
Proceeds from sale of other real estate			1,073				2,655
Improvements to other real estate			—				(93	)
Purchase of Federal Home Loan Bank stock			(125	)			—
Net cash provided by investing activities			3,606				814
Cash flows from financing activities
Net (decrease) increase in deposits			(3,914	)			19,150
Increase (decrease) in short-term borrowings			787				(5,227	)
Net cash (used by) provided by financing activities			(3,127	)			13,923
Net increase in cash and cash equivalents			1,602				17,698
Cash and cash equivalents, beginning			65,378				23,237
Cash and cash equivalents, ending		$	66,980			$	40,935
Supplemental disclosures of cash flow information:
Cash paid for interest		$	3,374			$	3,928
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		$	1,797			$	469
Change in unrealized loss on swap, net of tax			(282	)			(394	)
Loans transferred to other real estate owned			3,595				1,769

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

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 Bank’s primary focus is to provide banking services to small and mid-sized businesses, owner-occupied and income producing real estate owners, professionals and other customers 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 the Company has received approval of the merger from the Federal Reserve Board and the South Carolina State Board of Financial Institutions (the “SC Board”). The merger is subject to customer closing conditions, including 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 Company’s audited consolidated financial statements and accompanying footnotes (the “2010 Audited Financial Statements”) included in the Company’s 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 management’s 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 June 30, 2011, and the results of operations and cash flows for the three- and six-months ended June 30, 2011 and 2010. Operating results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year or for other interim periods.

Tabular information, other than share and per share data, is presented in thousands of dollars.

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, determination of the need for a deferred tax asset valuation allowance 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.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

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 FASB’s 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 Company’s 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 Company’s 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 were effective for the Company’s reporting period ending December 31, 2010. As this ASU amends only the disclosure requirements for loans and the Allowance, the adoption had no material impact on the Company’s financial condition or results of operations.

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s 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 Company’s reporting period ending September 30, 2011. Management is still evaluating the impact of this ASU on the Company’s financial condition.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU No. 2011-05”). ASU No. 2011-05 requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2011, with early adoption permitted. Management is evaluating the impact of this ASU on the Company’s consolidated financial statements.

Note 3 — Shareholders’ Equity

Common Stock

On May 4, 2010, the Bank’s 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 June 30, 2011.

On January 1, 2011, in conjunction with the Company’s acquisition of the Bank in a statutory exchange transaction, the par value of authorized common stock of the Company, which was established in the Company’s 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 consolidated balance sheet as of December 31, 2010 reflects a $102.4 million reclassification from common stock to additional paid-in capital as a result 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, subject to share price performance vesting requirements, is estimated using a Monte Carlo simulation and related estimated assumptions for volatility and a risk free interest rate.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

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 Bank’s 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 Company’s 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 and replaced the 2010 Plans. 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).

Activity in the Company’s shared based plans is summarized in the following table:

						Outstanding Options																Nonvested Restricted Shares
		Shares								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			$	—				—			$	—			$	—
Replacement of 2010 Plans			(525,918	)			—				—				—				—				—				—				—
Approved for issuance			1,016,400				—				—				—				—				—				—				—
Options Granted			(109,340	)			109,340				5.56				—				1,205				—				—				—
Restricted Shares Granted			(568,260	)			—				—				—				—				568,260				3.91				2,818,570
Exercised							—				—				—				—				—				—				—
Expired and forfeited			—				(242,908	)			7.21				—				—				—				—				—
At June 30, 2011			338,800				2,190,064			$	7.78				8.08			$	1,205				568,260			$	3.91			$	2,818,570
Exercisable at June 30, 2011							726,827			$	10.49				5.81			$	—

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 six months ended June 30, 2011.

Assumptions in Estimating Option Values

Weighted-average volatility			31.13	%
Expected dividend yield			0	%
Risk-free interest rate			3.95	%
Expected life		7 years

Approximately 7,750 options vested during the six months ended June 30, 2011; no options vested for the six months ended June 30, 2010. The compensation expense for stock option plans was $256 thousand and $87 thousand for the three months ended June 30, 2011 and 2010, respectively, and $566 thousand and $190 thousand for the six months ended June 30, 2011 and 2010, respectively. At June 30, 2011, unrecognized compensation cost related to nonvested stock options of $2.7 million is expected to be recognized over a weighted-average period of 1.20 years.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

No shares of restricted stock vested during the six months ended June 30, 2011. The compensation expense for restricted shares was $267 thousand and $403 thousand for the three and six months ended June 30, 2011, respectively. At June 30, 2011, unrecognized compensation cost related to nonvested restricted shares of $2.0 million is expected to be recognized over a weighted-average period of 3.23 years. There were no shares of restricted stock granted as of June 30, 2010.

Note 4 — Investment Securities

The amortized cost, unrealized gains and losses, and estimated fair value of securities available-for-sale at June 30, 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
June 30, 2011
Securities available-for-sale:
U.S. Government agencies		$	15,524			$	50			$	—			$	15,574
Residential mortgage-backed securities			59,819				797				(137	)			60,479
Collateralized agency mortgage obligations			54,440				278				(479	)			54,239
Municipal securities			15,512				533				(3	)			16,042
Corporate and other securities			500				—				(100	)			400
Total investment securities		$	145,795			$	1,658			$	(719	)		$	146,734
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 June 30, 2011 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. All of the Company’s residential mortgage-backed securities are backed by an agency of the U.S. government. The Company did not own any commercial mortgage-backed securities as of June 30, 2011 or December 31, 2010.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

Maturities of Investment Portfolio

		June 30, 2011
		Amortized				Fair
		Cost				Value
U.S. Government agencies
Due one year or less		$	14,999			$	15,000
Due after five years through ten years			525				574
Residential mortgage-backed securities
Due after five years through ten years			1,225				1,255
Due after ten years			58,594				59,224
Collateralized agency mortgage obligations
Due after ten years			54,440				54,239
Municipal securities
Due after ten years			15,512				16,042
Corporate and other securities
Due after five years through ten years			500				400
Due after ten years			—				—
Total investment securites		$	145,795			$	146,734

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 June 30, 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 issuer’s 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 June 30, 2011. At December 31, 2010, two corporate debt securities were in a loss position for twelve months or more.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

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
June 30, 2011
Securities available-for-sale:
Residential Mortgage-backed securities		$	17,491			$	(137	)		$	—			$	—			$	17,491			$	(137	)
Collateralized mortgage obligations			24,519				(479	)			—				—				24,519				(479	)
Municipal securities			509				(3	)			—				—				509				(3	)
Corporate and other securities			—				—				400				(100	)			400				(100	)
Total temporarily impaired securities		$	42,519			$	(619	)		$	400			$	(100	)		$	42,919			$	(719	)
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 $4.2 million and $4.2 million at June 30, 2011 and December 31, 2010, respectively, were pledged to secure an interest rate swap and securities sold under agreements to repurchase. During the six months ended June 30, 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 $5.2 million were sold in the six months ended June 30, 2010 resulting in a gross gain of $0.02 million.

The aggregate cost of the Company’s cost method investments totaled $2.0 million at June 30, 2011 and $2.3 million at December 31, 2010. Cost method investments at June 30, 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 June 30, 2011 and December 31, 2010. The following factors have been considered in determining the carrying amount of FHLB stock: 1) management’s 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) management’s 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 June 30, 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.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

Note 5 — Loans and Allowance for Loan Losses

The following is a summary of the loan portfolio at June 30, 2011 and December 31, 2010:

		June 30,				December 31,
		2011				2010
Commercial:
Commercial and industrial		$	45,056			$	48,401
Commercial real estate — owner-occupied			61,878				55,089
Commercial real estate — investor income producing			111,349				110,407
Acquisition, construction and development			64,662				87,846
Other commercial			6,840				3,225
Total commercial loans			289,785				304,968
Consumer:
Residential mortgage			21,767				21,716
Home equity lines of credit			56,481				56,968
Residential construction			6,048				9,051
Other loans to individuals			6,494				7,245
Total consumer loans			90,790				94,980
Total loans			380,575				399,948
Deferred fees			(210	)			(119	)
Total loans, net of deferred fees		$	380,365			$	399,829

At June 30, 2011 and December 31, 2010, the carrying value of loans pledged as collateral on FHLB borrowings totaled $50.5 million and $43.8 million, respectively.

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 June 30, 2011 and December 31, 2010, the Company had no loans outstanding with non-U.S. entities.

Allowance for Loan Losses — The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three and six months ended June 30, 2011. The following table also presents, by portfolio segment, the balance in the allowance for loan losses disaggregated based on the Company’s impairment measurement method and the related recorded investment in loans at June 30, 2011 and December 31, 2010.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

		Commercial				Consumer				Unallocated				Total
For the three months ended June 30, 2011
Allowance for Loan Losses:
Balance, beginning of period		$	8,034			$	1,875			$	1,859			$	11,768
Provision for loan losses			3,138				103				4				3,245
Charge-offs			(3,486	)			(610	)			—				(4,096	)
Recoveries			350				10				—				360
Net charge-offs			(3,136	)			(600	)			—				(3,736	)
Ending balance		$	8,036			$	1,378			$	1,863			$	11,277
For the six months ended June 30, 2011
Allowance for Loan Losses:
Balance, beginning of period		$	9,165			$	1,375			$	1,884			$	12,424
Provision for loan losses			5,842				1,886				(21	)			7,707
Charge-offs			(7,781	)			(1,896	)			—				(9,677	)
Recoveries			810				13				—				823
Net charge-offs			(6,971	)			(1,883	)			—				(8,854	)
Ending balance		$	8,036			$	1,378			$	1,863			$	11,277
At June 30, 2011
Allowance for Loan Losses:
Individually evaluated for impairment		$	1,871			$	80			$	—			$	1,951
Collectively evaluated for impairment			6,108				1,355				1,863				9,326
Total		$	7,979			$	1,435			$	1,863			$	11,277
Recorded Investment in Loans:
Individually evaluated for impairment		$	24,565			$	1,000			$	—			$	25,565
Collectively evaluated for impairment			265,220				89,790				—				355,010
Total		$	289,785			$	90,790			$	—			$	380,575
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- and six-month periods ended June 30, 2011 and 2010 follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Balance, beginning of period		$	11,768			$	8,380			$	12,424			$	7,402
Provision for loan losses			3,245				1,094				7,707				2,625
Charge-offs			(4,096	)			(502	)			(9,677	)			(1,056	)
Recoveries			360				2				823				3
Net charge-offs			(3,736	)			(500	)			(8,854	)			(1,053	)
Balance, end of period		$	11,277			$	8,974			$	11,277			$	8,974

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

The Company’s loan loss allowance methodology includes a 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 its allowance methodology at this time, aggregating $1.9 million at June 30, 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.

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 June 30, 2011 and December 31, 2010.

Credit Quality Indicators — The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s 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 Company’s 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 management’s 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.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)

The Company’s credit quality indicators are periodically updated on a case-by-case basis. The following tables present the recorded investment in the Company’s loans as of June 30, 2011 and December 31, 2010, by loan class and by credit quality indicator.