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EXCEL - IDEA: XBRL DOCUMENT - Park Sterling Corp | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - Park Sterling Corp | c24058exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Park Sterling Corp | c24058exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - Park Sterling Corp | c24058exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Park Sterling Corp | c24058exv31w2.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 September 30, 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 | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
1043 E. Morehead Street, Suite 201 | ||
Charlotte, North Carolina | 28204 | |
(Address of principal executive offices) | (Zip Code) |
(704) 716-2134
(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
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 November 10, 2011, the registrant had outstanding 32,643,627 shares of common stock, $1.00
par value per share.
PARK STERLING CORPORATION
Table of Contents
Table of Contents
PARK STERLING CORPORATION
Part I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
September 30, | December 31, | |||||||
2011 | 2010 * | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 14,962 | $ | 2,433 | ||||
Interest-earning balances at banks |
36,311 | 5,040 | ||||||
Federal funds sold |
5,295 | 57,905 | ||||||
Investment securities available-for-sale, at fair value |
130,667 | 140,590 | ||||||
Loans held for sale |
1,559 | | ||||||
Loans |
367,412 | 399,829 | ||||||
Allowance for loan losses |
(9,833 | ) | (12,424 | ) | ||||
Net loans |
357,579 | 387,405 | ||||||
Federal Home Loan Bank stock |
1,866 | 1,757 | ||||||
Premises and equipment, net |
5,335 | 4,477 | ||||||
Accrued interest receivable |
1,441 | 1,640 | ||||||
Other real estate owned |
5,691 | 1,246 | ||||||
Bank-owned life insurance |
8,052 | | ||||||
Other assets |
13,625 | 13,615 | ||||||
Total assets |
$ | 582,383 | $ | 616,108 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand deposits |
$ | 42,890 | $ | 36,333 | ||||
Money market, NOW and savings deposits |
120,017 | 71,666 | ||||||
Time deposits of less than $100,000 |
50,220 | 78,242 | ||||||
Time deposits of $100,000 through $250,000 |
54,240 | 79,020 | ||||||
Time deposits of more than $250,000 |
107,625 | 142,559 | ||||||
Total deposits |
374,992 | 407,820 | ||||||
Short-term borrowings |
1,083 | 874 | ||||||
FHLB advances |
20,000 | 20,000 | ||||||
Subordinated debt |
6,895 | 6,895 | ||||||
Accrued interest payable |
109 | 290 | ||||||
Accrued expenses and other liabilities |
4,687 | 3,128 | ||||||
Total liabilities |
407,766 | 439,007 | ||||||
Shareholders equity: |
||||||||
Preferred stock, no par value
5,000,000 shares authorized; -0- issued and outstanding at September 30, 2011 and
December 31, 2010 |
| | ||||||
Common stock, $1.00 par value
200,000,000 shares authorized at
September 30, 2011 and December 31, 2010;
28,619,358 and 28,051,098 shares issued and outstanding at September 30, 2011 and
December 31, 2010, respectively |
28,619 | 28,051 | ||||||
Additional paid-in capital |
160,368 | 159,489 | ||||||
Accumulated deficit |
(16,878 | ) | (9,501 | ) | ||||
Accumulated other comprehensive income (loss) |
2,508 | (938 | ) | |||||
Total shareholders equity |
174,617 | 177,101 | ||||||
Total liabilities and shareholders equity |
$ | 582,383 | $ | 616,108 | ||||
* | Derived from audited financial statements. |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
Table of Contents
PARK STERLING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest income |
||||||||||||||||
Loans, including fees |
$ | 4,283 | $ | 4,963 | $ | 13,491 | $ | 15,275 | ||||||||
Federal funds sold |
22 | 42 | 85 | 60 | ||||||||||||
Taxable investment securities |
681 | 370 | 2,046 | 981 | ||||||||||||
Tax-exempt investment securities |
181 | 161 | 533 | 481 | ||||||||||||
Interest on deposits at banks |
44 | 23 | 69 | 51 | ||||||||||||
Total interest income |
5,211 | 5,559 | 16,224 | 16,848 | ||||||||||||
Interest expense |
||||||||||||||||
Money market, NOW and savings deposits |
158 | 104 | 475 | 276 | ||||||||||||
Time deposits |
868 | 1,490 | 3,174 | 4,434 | ||||||||||||
Short-term borrowings |
1 | 1 | 2 | 9 | ||||||||||||
FHLB advances |
140 | 144 | 422 | 423 | ||||||||||||
Subordinated debt |
190 | 190 | 569 | 569 | ||||||||||||
Total interest expense |
1,357 | 1,929 | 4,642 | 5,711 | ||||||||||||
Net interest income |
3,854 | 3,630 | 11,582 | 11,137 | ||||||||||||
Provision for loan losses |
568 | 6,143 | 8,275 | 8,768 | ||||||||||||
Net interest income (loss) after provision for loan losses |
3,286 | (2,513 | ) | 3,307 | 2,369 | |||||||||||
Noninterest income |
||||||||||||||||
Service charges on deposit accounts |
23 | 18 | 74 | 47 | ||||||||||||
Gain on sale of securities available-for-sale |
| | 20 | 19 | ||||||||||||
Other noninterest income |
88 | 8 | 133 | 22 | ||||||||||||
Total noninterest income |
111 | 26 | 227 | 88 | ||||||||||||
Noninterest expense |
||||||||||||||||
Salaries and employee benefits |
3,051 | 1,777 | 8,533 | 4,328 | ||||||||||||
Occupancy and equipment |
369 | 236 | 926 | 666 | ||||||||||||
Advertising and promotion |
115 | 84 | 240 | 237 | ||||||||||||
Legal and professional fees |
721 | 78 | 2,233 | 237 | ||||||||||||
Deposit charges and FDIC insurance |
134 | 184 | 617 | 543 | ||||||||||||
Data processing and outside service fees |
142 | 109 | 393 | 302 | ||||||||||||
Director fees |
45 | 164 | 131 | 211 | ||||||||||||
Net cost of operation of other real estate |
101 | 120 | 429 | 395 | ||||||||||||
Loan and collection expense |
180 | 82 | 375 | 161 | ||||||||||||
Shareholder reporting expense |
36 | 8 | 194 | 24 | ||||||||||||
Other noninterest expense |
322 | 148 | 853 | 406 | ||||||||||||
Total noninterest expense |
5,216 | 2,990 | 14,924 | 7,510 | ||||||||||||
Loss before income taxes |
(1,819 | ) | (5,477 | ) | (11,390 | ) | (5,053 | ) | ||||||||
Income tax benefit |
(443 | ) | (1,809 | ) | (4,013 | ) | (1,714 | ) | ||||||||
Net loss |
$ | (1,376 | ) | $ | (3,668 | ) | $ | (7,377 | ) | $ | (3,339 | ) | ||||
Basic loss per common share |
$ | (0.05 | ) | $ | (0.23 | ) | $ | (0.26 | ) | $ | (0.38 | ) | ||||
Diluted loss per common share |
$ | (0.05 | ) | $ | (0.23 | ) | $ | (0.26 | ) | $ | (0.38 | ) | ||||
Weighted-average common shares outstanding |
||||||||||||||||
Basic |
28,051,098 | 15,998,924 | 28,051,098 | 8,674,175 | ||||||||||||
Diluted |
28,051,098 | 15,998,924 | 28,051,098 | 8,674,175 | ||||||||||||
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)
Nine Months Ended September 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 | ||||||||||||
Issuance of common stock
net of costs |
23,100,000 | 107,415 | 32,796 | | | 140,211 | ||||||||||||||||||
Share-based compensation expense |
| | 486 | | | 486 | ||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||
Net loss |
| | | (3,339 | ) | | (3,339 | ) | ||||||||||||||||
Unrealized holding gains on
available-for-sale securities,
net of taxes |
| | | | 888 | 888 | ||||||||||||||||||
Unrealized holding losses on
interest rate swaps, net of
taxes |
| | | | (494 | ) | (494 | ) | ||||||||||||||||
Total comprehensive income (loss) |
| | | | | (2,945 | ) | |||||||||||||||||
Balance at September 30, 2010 |
28,051,098 | $ | 130,438 | $ | 56,778 | $ | (4,981 | ) | $ | 1,612 | $ | 183,847 | ||||||||||||
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 |
| | 1,447 | | | 1,447 | ||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||
Net loss |
| | | (7,377 | ) | | (7,377 | ) | ||||||||||||||||
Unrealized holding gains on
available-for-sale securities,
net of taxes |
| | | | 3,728 | 3,728 | ||||||||||||||||||
Unrealized holding losses on
interest rate swaps, net of
taxes |
| | | | (282 | ) | (282 | ) | ||||||||||||||||
Total comprehensive income (loss) |
| | | | | (3,931 | ) | |||||||||||||||||
Balance at September 30, 2011 |
28,619,358 | $ | 28,619 | $ | 160,368 | $ | (16,878 | ) | $ | 2,508 | $ | 174,617 | ||||||||||||
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)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | (7,377 | ) | $ | (3,339 | ) | ||
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,221 | 443 | ||||||
Provision for loan losses |
8,275 | 8,768 | ||||||
Share-based compensation expense |
1,447 | 486 | ||||||
Income on termination of swap |
| (353 | ) | |||||
Deferred income taxes |
(4,062 | ) | 576 | |||||
Gain on sales of investment securities available-for-sale |
(20 | ) | (19 | ) | ||||
(Gain) loss on sales of other real estate |
(59 | ) | 342 | |||||
Writedowns to other real estate |
374 | | ||||||
Income from bank owned life insurance |
(52 | ) | | |||||
Change in assets and liabilities: |
||||||||
Decrease (increase) in accrued interest receivable |
199 | (118 | ) | |||||
Decrease (increase) in other assets |
1,433 | (2,296 | ) | |||||
Decrease in accrued interest payable |
(181 | ) | (154 | ) | ||||
Increase in accrued expenses and other liabilities |
1,559 | 2,552 | ||||||
Net cash provided by operating activities |
2,757 | 6,888 | ||||||
Cash flows from investing activities |
||||||||
Net decrease (increase) in loans |
12,978 | (5,963 | ) | |||||
Purchases of bank premises and equipment |
(1,168 | ) | (169 | ) | ||||
Purchases of investment securities available-for-sale |
(46,940 | ) | (81,268 | ) | ||||
Proceeds from sales of investment securities available-for-sale |
24,316 | 2,155 | ||||||
Proceeds from maturities and call of investment securities available-for-sale |
37,871 | 7,590 | ||||||
Proceeds from sale of other real estate |
2,104 | 2,724 | ||||||
Improvements to other real estate |
| (93 | ) | |||||
(Purchase) redemption of Federal Home Loan Bank stock |
(109 | ) | 71 | |||||
Purchase of bank owned life insurance |
(8,000 | ) | | |||||
Net cash provided by (used in) investing activities |
21,052 | (74,953 | ) | |||||
Cash flows from financing activities |
||||||||
Net (decrease) increase in deposits |
(32,828 | ) | 24,516 | |||||
Increase (decrease) in short-term borrowings |
209 | (5,889 | ) | |||||
Proceeds from issuance of common stock, net of costs |
| 140,211 | ||||||
Net cash (used by) provided by financing activities |
(32,619 | ) | 158,838 | |||||
Net (decrease) increase in cash and cash equivalents |
(8,810 | ) | 90,773 | |||||
Cash and cash equivalents, beginning |
65,378 | 23,237 | ||||||
Cash and cash equivalents, ending |
$ | 56,568 | $ | 114,010 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid for interest |
$ | 4,823 | $ | 5,865 | ||||
Cash paid for income taxes |
| 950 | ||||||
Supplemental disclosure of noncash investing and financing activities: |
||||||||
Change in unrealized gain on available-for-sale securities, net of tax |
$ | 3,728 | $ | 888 | ||||
Change in unrealized loss on swap, net of tax |
(282 | ) | (494 | ) | ||||
Loans transferred to other real estate owned |
6,864 | 2,864 |
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. 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 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 North Carolina Office of the
Commissioner of Banks. The Bank undergoes periodic examinations by those
regulatory authorities.
On November 1, 2011, Community Capital Corporation (Community Capital) was merged with and
into the Company, with the Company as the surviving legal entity, in accordance with an Agreement
and Plan of Merger dated as of March 30, 2011. Under the terms of the merger agreement, Community
Capital shareholders will receive either $3.30 in cash or 0.6667 of a share of the
Companys common stock, par value $1.00 (Common Stock) for each share of Community Capital common
stock they owned immediately prior to the merger, subject to the limitation that the total
consideration would consist of 40.0% in cash and 60.0% in Common Stock. The merger was structured
to be tax-free to Community Capital shareholders with respect to the shares of Common Stock
received in the merger and taxable with respect to the cash received in the merger. Cash was paid
in lieu of fractional shares. The aggregate merger consideration
consisted of 4,024,269 shares of Common Stock and approximately $13.3
million in cash. The final transaction value was $28.8 million based on the $3.85 per
share closing price of the Common Stock on October 31, 2011.
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 September 30, 2011, and the results of its operations and cash flows
for the three- and nine-months ended September 30, 2011 and 2010. Operating results for the
nine-month period ended September 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.
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 (ASU) 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 (ASC) 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 condition 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 required 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 were 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 had 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. The provisions of
ASU No. 2011-02 were effective for the Companys reporting period ending September 30, 2011. The
adoption had no material impact on the Companys financial condition or results of operations.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASU No. 2011-04). ASU No. 2011-04
results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. ASU
2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011.
Adoption of ASU 2011-04 is not expected to have a significant impact on the Companys financial
statement disclosures.
7
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 Companys
consolidated financial statements.
In September 2011, the FASB issued ASU No 2011-08, Intangibles Goodwill and Other (Topic
350) (ASU No. 2011-08). ASU 2011-08 allows companies to waive comparing the fair value of a
reporting unit to its carrying amount in assessing the recoverability of goodwill if, based on
qualitative factors, it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount. ASU 2011-08 will be effective for annual and interim goodwill impairment
tests performed for fiscal years beginning after December 15, 2011. Management is evaluating the
impact of this ASU on the Companys consolidated financial statements.
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
September 30, 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 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 and expensed over each options vesting
period. 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.
8
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company maintains share-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 provided 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. As a
result, there will be no further awards granted under the 2010 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 Companys share-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 |
(115,840 | ) | 115,840 | 5.51 | | | | | | |||||||||||||||||||||||
Restricted Shares Granted |
(568,260 | ) | | | | | 568,260 | 3.91 | 1,943,449 | |||||||||||||||||||||||
Exercised |
| | | | | | | |||||||||||||||||||||||||
Expired and forfeited |
| (242,908 | ) | 7.21 | | | | | | |||||||||||||||||||||||
At September 30, 2011 |
332,300 | 2,196,564 | $ | 7.77 | 7.84 | $ | | 568,260 | $ | 3.91 | $ | 1,943,449 | ||||||||||||||||||||
Exercisable at September 30, 2011 |
1,099,333 | $ | 9.14 | 6.68 | $ | |
The following weighted-average assumptions were used in valuing options issued during
the nine months ended September 30, 2011.
Assumptions in Estimating Option Values
Weighted-average volatility |
29.38 | % | ||
Expected dividend yield |
0 | % | ||
Risk-free interest rate |
3.86 | % | ||
Expected life |
7 years |
Approximately 380,000 options vested during the nine months ended September 30, 2011; no
options vested for the nine months ended September 30, 2010. The compensation expense for stock
option plans was $319 thousand and $295 thousand for the three months ended September 30, 2011 and
2010, respectively, and $884 thousand and $486 thousand for the nine months ended September 30,
2011 and 2010, respectively. At September 30, 2011, unrecognized compensation cost related to
nonvested stock options of $2.4 million is expected to be recognized over a weighted-average period
of 1.33 years.
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
No shares of restricted stock vested during the nine months ended September 30, 2011. The
compensation expense for restricted shares was $160 thousand and $563 thousand for the three and
nine months ended September 30, 2011, respectively. At September 30, 2011, unrecognized
compensation cost related to nonvested restricted
shares of $1.8 million is expected to be recognized over a weighted-average period of 2.98
years. There were no shares of restricted stock outstanding as of September 30, 2010.
Note 4 Investment Securities
The amortized cost, unrealized gains and losses, and estimated fair value of securities
available-for-sale at September 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 | |||||||||||||
September 30, 2011 |
||||||||||||||||
Securities available-for-sale: |
||||||||||||||||
U.S. Government agencies |
$ | 524 | $ | 66 | $ | | $ | 590 | ||||||||
Residential mortgage-backed
securities |
56,598 | 1,658 | | 58,256 | ||||||||||||
Collateralized agency
mortgage obligations |
53,457 | 1,397 | | 54,854 | ||||||||||||
Municipal securities |
15,508 | 1,059 | | 16,567 | ||||||||||||
Corporate and other securities |
500 | | (100 | ) | 400 | |||||||||||
Total investment securities |
$ | 126,587 | $ | 4,180 | $ | (100 | ) | $ | 130,667 | |||||||
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 September 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 Companys 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 September 30, 2011 or December 31, 2010.
10
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Maturities of Investment Portfolio
September 30, 2011 | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
U.S. Government agencies |
||||||||
Due after one year through five years |
$ | 524 | $ | 590 | ||||
Residential mortgage-backed securities |
||||||||
Due after five years through ten years |
1,127 | 1,161 | ||||||
Due after ten years |
55,471 | 57,095 | ||||||
Collateralized agency mortgage obligations |
||||||||
Due after ten years |
53,457 | 54,854 | ||||||
Municipal securities |
||||||||
Due after ten years |
15,508 | 16,567 | ||||||
Corporate and other securities |
||||||||
Due after five years through ten years |
500 | 400 | ||||||
Due after ten years |
| | ||||||
Total investment securites |
$ | 126,587 | $ | 130,667 | ||||
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 September
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 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 continuous loss position for twelve months or more at September 30, 2011. At
December 31, 2010, two corporate debt securities were in a continuous loss position for twelve
months or more.
11
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 | |||||||||||||||||||
September 30, 2011 |
||||||||||||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||||||
Corporate and other securities |
$ | | $ | | $ | 400 | $ | (100 | ) | $ | 400 | $ | (100 | ) | ||||||||||
Total temporarily impaired
securities |
$ | | $ | | $ | 400 | $ | (100 | ) | $ | 400 | $ | (100 | ) | ||||||||||
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 $4.1 million and $4.2 million at September 30, 2011 and
December 31, 2010, respectively, were pledged to secure an interest rate swap and securities sold
under agreements to repurchase. During the nine months ended September 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 $2.2 million were sold in the nine months ended
September 30, 2010, resulting in a gross gain of $0.02 million.
The aggregate cost of the Companys cost method investments totaled $2.4 million at September
30, 2011 and $2.3 million at December 31, 2010. Cost method investments at September 30, 2011
included $1.9 million in Federal Home Loan Bank (FHLB) stock and $0.5 million of other
investments which are included in other assets. Cost method investments at December 31, 2010
included $1.8 million in FHLB stock and $0.5 million of other
investments which are included in other assets. All cost method investments were evaluated for
impairment as of September 30, 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 September 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.
12
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 5 Loans and Allowance for Loan Losses
The following is a summary of the loan portfolio at September 30, 2011 and December 31, 2010:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Commercial: |
||||||||
Commercial and industrial |
$ | 44,939 | $ | 48,401 | ||||
Commercial real estate owner-occupied |
66,979 | 55,089 | ||||||
Commercial real estate investor income
producing |
108,558 | 110,407 | ||||||
Acquisition, construction and development |
51,522 | 87,846 | ||||||
Other commercial |
7,763 | 3,225 | ||||||
Total commercial loans |
279,761 | 304,968 | ||||||
Consumer: |
||||||||
Residential mortgage |
19,816 | 21,716 | ||||||
Home equity lines of credit |
56,787 | 56,968 | ||||||
Residential construction |
4,787 | 9,051 | ||||||
Other loans to individuals |
6,530 | 7,245 | ||||||
Total consumer loans |
87,920 | 94,980 | ||||||
Total loans |
367,681 | 399,948 | ||||||
Deferred fees |
(269 | ) | (119 | ) | ||||
Total loans, net of deferred fees |
$ | 367,412 | $ | 399,829 | ||||
At September 30, 2011 and December 31, 2010, the carrying value of loans pledged as
collateral on FHLB borrowings totaled $56.5 million and $43.8 million, respectively.
Concentrations of Credit - Loans are primarily made in the Charlotte, Research Triangle and
Wilmington regions of North Carolina, and the Charleston and Greenville/Spartanburg regions of
South 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 September 30, 2011 and December 31, 2010, the Company had
no loans outstanding with non-U.S. entities.
13
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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 three and nine months ended September 30, 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 September 30, 2011 and December 31, 2010.
Commercial | Consumer | Unallocated | Total | |||||||||||||
For the three months ended
September 30, 2011 |
||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||
Balance, beginning of period |
$ | 8,036 | $ | 1,378 | $ | 1,863 | $ | 11,277 | ||||||||
Provision for loan losses |
104 | 587 | (123 | ) | 568 | |||||||||||
Charge-offs |
(2,113 | ) | | | (2,113 | ) | ||||||||||
Recoveries |
86 | 15 | | 101 | ||||||||||||
Net charge-offs |
(2,027 | ) | 15 | | (2,012 | ) | ||||||||||
Ending balance |
$ | 6,113 | $ | 1,980 | $ | 1,740 | $ | 9,833 | ||||||||
For the nine months ended
September 30, 2011 |
||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||
Balance, beginning of period |
$ | 9,165 | $ | 1,375 | $ | 1,884 | $ | 12,424 | ||||||||
Provision for loan losses |
5,947 | 2,472 | (144 | ) | 8,275 | |||||||||||
Charge-offs |
(9,894 | ) | (1,895 | ) | | (11,789 | ) | |||||||||
Recoveries |
895 | 28 | | 923 | ||||||||||||
Net charge-offs |
(8,999 | ) | (1,867 | ) | | (10,866 | ) | |||||||||
Ending balance |
$ | 6,113 | $ | 1,980 | $ | 1,740 | $ | 9,833 | ||||||||
At September 30, 2011 |
||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||
Individually evaluated for
impairment |
$ | 375 | $ | 670 | $ | | $ | 1,045 | ||||||||
Collectively evaluated for
impairment |
5,738 | 1,310 | 1,740 | 8,788 | ||||||||||||
Total |
$ | 6,113 | $ | 1,980 | $ | 1,740 | $ | 9,833 | ||||||||
Recorded Investment in Loans: |
||||||||||||||||
Individually evaluated for
impairment |
$ | 17,863 | $ | 1,585 | $ | | $ | 19,448 | ||||||||
Collectively evaluated for
impairment |
261,898 | 86,335 | | 348,233 | ||||||||||||
Total |
$ | 279,761 | $ | 87,920 | $ | | $ | 367,681 | ||||||||
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 nine-month
periods ended September 30, 2011 and 2010 follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance, beginning of period |
$ | 11,277 | $ | 8,974 | $ | 12,424 | $ | 7,402 | ||||||||
Provision for loan losses |
568 | 6,143 | 8,275 | 8,768 | ||||||||||||
Charge-offs |
(2,113 | ) | (1,986 | ) | (11,789 | ) | (3,042 | ) | ||||||||
Recoveries |
101 | 19 | 923 | 22 | ||||||||||||
Net charge-offs |
(2,012 | ) | (1,967 | ) | (10,866 | ) | (3,020 | ) | ||||||||
Balance, end of period |
$ | 9,833 | $ | 13,150 | $ | 9,833 | $ | 13,150 | ||||||||
14
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Companys 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 $1.7 million at September 30,
2011 and $1.9 million at 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 portfolio,
industry and economic 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 September 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 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. 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. |
15
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 September 30, 2011
and December 31, 2010, by loan class and by credit quality indicator.
As of September 30, 2011 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial | Real Estate | CRE-Investor | Acquisition, | |||||||||||||||||||||
and | (CRE)-Owner | Income | Construction | Other | Total | |||||||||||||||||||
Industrial | Occupied | Producing | and Development | Commercial | Commercial | |||||||||||||||||||
Pass |
$ | 43,244 | $ | 61,626 | $ | 96,555 | $ | 23,541 | $ | 7,763 | $ | 232,729 | ||||||||||||
Special mention |
984 | 772 | 4,443 | 9,807 | | 16,006 | ||||||||||||||||||
Classified |
711 | 4,581 | 7,560 | 18,174 | | 31,026 | ||||||||||||||||||
Total |
$ | 44,939 | $ | 66,979 | $ | 108,558 | $ | 51,522 | $ | 7,763 | $ | 279,761 | ||||||||||||
Residential | Home Equity | Residential | Other Loans to | Total | ||||||||||||||||||||
Mortgage | Lines of Credit | Construction | Individuals | Consumer | ||||||||||||||||||||
Pass |
$ | 17,378 | $ | 53,633 | $ | 3,985 | $ | 6,414 | $ | 81,410 | ||||||||||||||
Special mention |
2,035 | 1,269 | 708 | | 4,012 | |||||||||||||||||||
Classified |
403 | 1,885 | 94 | 116 | 2,498 | |||||||||||||||||||
Total |
$ | 19,816 | $ | 56,787 | $ | 4,787 | $ | 6,530 | $ | 87,920 | ||||||||||||||
Total Recorded
Investment
in Loans |
$ | 367,681 | ||||||||||||||||||||||
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 | ||||||||||||||||||||||
16
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Aging Analysis of Accruing and Non-Accruing Loans - The Company considers a loan to be
past due or delinquent when the terms of the contractual obligation are not met by the borrower.
The following presents by class, an aging analysis of the Companys accruing and non-accruing loans
as of September 30, 2011 and December 31, 2010.
30-59 | 60-89 | Past Due | ||||||||||||||||||
Days | Days | 90 Days | ||||||||||||||||||
Past Due | Past Due | or More | Current | Total Loans | ||||||||||||||||
As of September 30, 2011 |
||||||||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
$ | 217 | $ | 5 | $ | | $ | 44,717 | $ | 44,939 | ||||||||||
Commercial real estate owner-occupied |
155 | | | 66,824 | 66,979 | |||||||||||||||
Commercial real estate investor income
producing |
196 | | 825 | 107,537 | 108,558 | |||||||||||||||
Acquisition, construction and development |
587 | 3,551 | 4,511 | 42,873 | 51,522 | |||||||||||||||
Other commercial |
| | | 7,763 | 7,763 | |||||||||||||||
Total commercial loans |
1,155 | 3,556 | 5,336 | 269,714 | 279,761 | |||||||||||||||
Consumer: |
||||||||||||||||||||
Residential mortgage |
| | 403 | 19,413 | 19,816 | |||||||||||||||
Home equity lines of credit |
| | | 56,787 | 56,787 | |||||||||||||||
Residential construction |
| | 95 | 4,692 | 4,787 | |||||||||||||||
Other loans to individuals |
| | | 6,530 | 6,530 | |||||||||||||||
Total consumer loans |
| | 498 | 87,422 | 87,920 | |||||||||||||||
Total loans |
$ | 1,155 | $ | 3,556 | $ | 5,834 | $ | 357,136 | $ | 367,681 | ||||||||||
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.
17
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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 three- and
nine-month periods ended September 30, 2011 is set forth in the following table:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||||||||||||||
Unpaid | Related | Average | Interest | Average | Interest | |||||||||||||||||||||||
Recorded | Principal | Allowance For | Recorded | Income | Recorded | Income | ||||||||||||||||||||||
Investment | Balance | Loan Losses | Investment | Recognized | Investment | Recognized | ||||||||||||||||||||||
Impaired Loans with No Related
Allowance Recorded: |
||||||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||
Commercial and industrial |
$ | 229 | $ | 1,307 | $ | | $ | 531 | $ | | $ | 683 | $ | | ||||||||||||||
CRE owner-occupied |
155 | 213 | | 23 | | 291 | | |||||||||||||||||||||
CRE investor income producing |
519 | 746 | | 474 | | 809 | | |||||||||||||||||||||
Acquisition, construction and
development |
15,406 | 24,769 | | 18,569 | | 25,407 | | |||||||||||||||||||||
Other commercial |
| | | | | | | |||||||||||||||||||||
Total commercial loans |
16,309 | 27,035 | | 19,597 | | 27,190 | | |||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Residential mortgage |
| | | | | 1,160 | | |||||||||||||||||||||
Home equity lines of credit |
| 1,700 | | | | 218 | | |||||||||||||||||||||
Residential construction |
95 | 380 | | 95 | | 682 | | |||||||||||||||||||||
Other loans to individuals |
| 10 | | | | | | |||||||||||||||||||||
Total consumer loans |
95 | 2,090 | | 95 | | 2,060 | | |||||||||||||||||||||
Total impaired loans with no
related
allowance recorded |
$ | 16,404 | $ | 29,125 | $ | | $ | 19,692 | $ | | $ | 29,250 | $ | | ||||||||||||||
Impaired Loans with an
Allowance Recorded: |
||||||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||
Commercial and industrial |
$ | 63 | $ | 63 | $ | 63 | $ | | $ | | $ | | $ | | ||||||||||||||
CRE owner-occupied |
| | | | | | | |||||||||||||||||||||
CRE investor income producing |
443 | 460 | 112 | 448 | | 464 | | |||||||||||||||||||||
Acquisition, construction and
development |
1,048 | 1,080 | 200 | 1,065 | | 763 | | |||||||||||||||||||||
Other commercial |
| | | | | | | |||||||||||||||||||||
Total commercial loans |
1,554 | 1,603 | 375 | 1,513 | | 1,227 | | |||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||
Residential mortgage |
403 | 407 | 10 | 404 | | 182 | | |||||||||||||||||||||
Home equity lines of credit |
1,087 | 1,089 | 660 | 368 | | 124 | | |||||||||||||||||||||
Residential construction |
| | | | | | | |||||||||||||||||||||
Other loans to individuals |
| | | | | | | |||||||||||||||||||||
Total consumer loans |
1,490 | 1,496 | 670 | 772 | | 306 | | |||||||||||||||||||||
Total impaired loans with an
allowance recorded |
$ | 3,044 | $ | 3,099 | $ | 1,045 | $ | 2,285 | $ | | $ | 1,533 | $ | | ||||||||||||||
Impaired Loans: |
||||||||||||||||||||||||||||
Commercial |
$ | 17,863 | $ | 28,638 | $ | 375 | $ | 21,110 | $ | | $ | 28,417 | $ | | ||||||||||||||
Consumer |
1,585 | 3,586 | 670 | 867 | | 2,366 | | |||||||||||||||||||||
Total impaired loans |
$ | 19,448 | $ | 32,224 | $ | 1,045 | $ | 21,977 | $ | | $ | 30,783 | $ | | ||||||||||||||
18
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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 and nine months ended September 30, 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.
19
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 there is probable loss or when there is reasonable doubt that all principal will be collected,
or when it is over 90 days past due. At September 30, 2011 and December 31, 2010, there were no
loans 90 days or more past due and accruing interest. The recorded investment in nonaccrual loans
at September 30, 2011 and December 31, 2010 follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Commercial: |
||||||||
Commercial and industrial |
$ | 292 | $ | 1,159 | ||||
CRE owner-occupied |
155 | 717 | ||||||
CRE investor income producing |
962 | 1,702 | ||||||
Acquisition, construction and
development |
16,454 | 33,872 | ||||||
Other commercial |
| | ||||||
Total commercial loans |
17,863 | 37,450 | ||||||
Consumer: |
||||||||
Residential mortgage |
403 | 1,197 | ||||||
Home equity lines of credit |
1,087 | 1,164 | ||||||
Residential construction |
95 | 1,100 | ||||||
Other loans to individuals |
| | ||||||
Total consumer loans |
1,585 | 3,461 | ||||||
Total nonaccrual loans |
$ | 19,448 | $ | 40,911 | ||||
Approximately 53.6% and 56.1% of nonaccrual loans were current at September 30, 2011 and
December 31, 2010, respectively.
Troubled Debt Restructuring - In situations where, for economic or legal reasons related to a
borrowers financial difficulties, management may grant a concession for other than an
insignificant period of time to the borrower that would not otherwise be considered, the related
loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early
and work with them to modify to more affordable terms. These modified terms may include rate
reductions, principal forgiveness, payment forbearance and other actions intended to minimize the
economic loss and to avoid foreclosure or repossession of the collateral. All loan modifications
are made on a case-by-case basis.
As of September 30, 2011, the Company had 13 TDR loans totaling $10.0 million of which $8.0
million are nonaccrual loans. All of the nonaccrual TDR loans are in the acquisition, construction
and development portfolio and the $2.0 million of accruing TDR loans are in the residential
mortgage portfolio. There was no specific allowance for these loans as of September 30, 2011.
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.
20
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the three and nine months ended September 30, 2011, the following table presents a
breakdown of the types of concessions made by loan class:
Three months ended | Nine months ended | |||||||||||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||
loans | Investment | Investment | loans | Investment | Investment | |||||||||||||||||||
Below market interest rate |
||||||||||||||||||||||||
Acquisition, construction and
development |
| $ | | $ | | 2 | $ | 3,120 | $ | 689 | ||||||||||||||
| | | 2 | 3,120 | 689 | |||||||||||||||||||
Forgiveness of principal |
||||||||||||||||||||||||
CRE investor income producing |
| | | 1 | 208 | | ||||||||||||||||||
Acquisition, construction and
development |
| | | 7 | 3,578 | 200 | ||||||||||||||||||
Residential mortgage |
| | | 2 | 722 | 38 | ||||||||||||||||||
| | | 10 | 4,508 | 238 | |||||||||||||||||||
Total |
| $ | | $ | | 12 | $ | 7,628 | $ | 927 | ||||||||||||||
The following table presents loans that were modified as TDRs within the 12
months ended September 30, 2011 and for which there was a payment default during the three and nine
months ended September 30, 2011.
Three months ended | Nine months ended | |||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||
Number of | Number of | |||||||||||||||
loans | Recorded Investment | loans | Recorded Investment | |||||||||||||
Below market interest rate |
||||||||||||||||
Acquisition, construction and
development |
| $ | | 4 | $ | 634 | ||||||||||
| | 4 | 634 | |||||||||||||
Forgiveness of principal |
||||||||||||||||
Commercial real estate owner-occupied |
| | 1 | | ||||||||||||
Acquisition, construction and
development |
| | 6 | | ||||||||||||
Residential mortgage |
| | 1 | | ||||||||||||
| | 8 | | |||||||||||||
Total |
| $ | | 12 | $ | 634 | ||||||||||
21
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company does not deem a TDR to be successful until it has been re-established as an
accruing loan. Therefore, all TDRs are disclosed as nonaccrual in the table below. The
following table presents the successes and failures of the types of modifications within the
previous 12 months as of September 30, 2011:
Paying as restructured | Nonaccrual | Foreclosure/Default | ||||||||||||||||||||||
Number of | Recorded | Number of | Recorded | Number of | Recorded | |||||||||||||||||||
loans | Investment | loans | Investment | loans | Investment | |||||||||||||||||||
Below market interest rate |
1 | $ | 803 | 4 | $ | 1,323 | 2 | $ | | |||||||||||||||
Forgiveness of principal |
| | 2 | 238 | 8 | | ||||||||||||||||||
Total |
1 | $ | 803 | 6 | $ | 1,561 | 10 | $ | | |||||||||||||||
There were no loans identified as a result of adopting ASU 2011-02, that were previously
measured under a general allowance for loan loss methodology.
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:
Nine Months Ended | ||||
September 30, | ||||
2011 | ||||
Beginning balance |
$ | 5,075 | ||
Disbursements |
574 | |||
Repayments |
(1,317 | ) | ||
Ending balance |
$ | 4,332 | ||
At September 30, 2011 and December 31, 2010, the Company had pre-approved but unused
lines of credit totaling $3.5 million to related parties.
Note 6 Income Taxes
Income taxes are provided based on the asset-liability method of accounting, which includes
the recognition of deferred tax assets (DTAs) and liabilities for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. In
general, the Company records a DTA when the event giving rise to the tax benefit has been
recognized in the consolidated financial statements.
As of September 30, 2011 and December 31, 2010, the Company had a DTA in the amount of
approximately $10.9 million and $7.4 million, respectively. The Company evaluates the carrying
amount of its DTA on a quarterly basis in accordance with the
guidance provided in FASB ASC Topic
740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is
more likely than not (i.e., a likelihood of more than 50%) that some portion, or all, of the DTA
will not be realized within its life cycle, based on the weight of available evidence. In most
cases, the realization of the DTA is dependent upon the Company generating a sufficient level of
taxable income in future periods, which can be difficult to predict. If the Companys forecast of
taxable income within the carryforward periods available under applicable law is not sufficient to
cover the amount of net deferred assets, such assets may be impaired. Based on the weight of
available evidence, the Company has determined, as of September 30,
2011 and December 31, 2010, that it is more likely than not that it will be able
to fully realize the existing DTA and therefore
considers it appropriate not to establish a DTA valuation allowance at either September 30,
2011 or December 31, 2010.
22
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company considers all available evidence, positive and negative, to determine whether a
DTA allowance is appropriate. In conducting the DTA analysis, the Company believes it is essential
to differentiate between the unique characteristics of each industry or business. In particular,
characteristics such as business model, level of capital and reserves held by financial
institutions and their ability to absorb potential losses are important distinctions to be
considered for bank holding companies like the Company.
Negative Evidence. Park Sterling considered the following five areas of potential
negative evidence identified in ASC 740 as part of its DTA analysis:
1. | Rolling twelve-quarter cumulative loss. |
The Company commenced operations in late 2006, attained profitability in the third quarter of
2008 and remained profitable through the second quarter of 2010 before its business was materially
impacted by the recent significant economic downturn. As a result, the Company moved into a rolling
twelve-quarter cumulative pre-tax loss position during the third quarter of 2010. ASC 740 states
that a cumulative loss in recent years is a significant piece of negative evidence that is
difficult to overcome. However, the Company evaluates the circumstances behind those losses and
considers them in the context of the current economic environment and the significant changes it
has made over the past year to address the circumstances underlying the losses.
As of September 30, 2011, the Companys cumulative pre-tax loss position was $23.4 million and
was driven, in large part, by rolling twelve-quarter cumulative provision expenses of $29.2
million. This high level of provision expense reflects the negative impact on the Companys loan
portfolio from the effects of the extended economic downturn. The risk of loan loss is inherent to
the banking industry. The Company considered the special circumstances of the economic environment
of the last few years, which led to these high historical provision
levels and currently believes they are
unlikely to be repeated going forward, given changes in the Companys lending practices, business
strategy, risk tolerance, capital levels and operating practices.
Based on current internal loss data analysis, approximately 80% of the Companys rolling
twelve-quarter cumulative provision expense of $29.5 million is associated with construction &
development (C&D) lending (which was impacted the most by the economic downturn), of which at
least 70% is related to residential-oriented exposures. Prior to the Public Offering in August
2010, the Company had allowed an excessive concentration to build in C&D exposures, which peaked at
$159 million, or 43% of total loans, in the fourth quarter of 2008. Shortly prior to the Public
Offering in the second quarter of 2010, C&D exposures were $124 million, or 31% of total loans.
Following the Public Offering, Park Sterling reconstituted its executive management team with
significant new hires, immediately curtailed originating new residential C&D exposures and
significantly tightened standards for all other types of C&D lending. These changes reflect both
the Companys new business strategies and risk tolerance, which include building a more diversified
loan portfolio both by geography and product type. As of September 30, 2011, C&D exposures had been
reduced to $56.3 million, or 15% of total loans.
The Company has also significantly strengthened its lending practices since the Public
Offering including the additions of a new chief risk officer, chief credit officer, head of special
assets, manager of credit underwriting and additional credit
underwriters. The Company currently believes it
has remediated many of the circumstances that led to the rolling twelve-quarter cumulative pre-tax
loss position and does not expect these losses to continue in the future.
23
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. | History of operating loss or tax credit carryforwards expiring unused. | ||
The Company has no history of operating loss or tax carryforwards expiring unused. |
3. | Losses expected in early future years. | ||
The Company currently expects to be profitable in early future years, as described in detail below. |
4. | Unsettled circumstances that would adversely affect future operations and profit levels. |
The Company is not currently aware of any unsettled circumstances that, if unfavorably
resolved, would adversely affect future operations and profit levels on a continuing basis in
future years.
5. | Carryback or carryforward period that is so brief it would limit realization of tax benefits. |
The earliest expiration date for the Companys net operating loss carryforwards is December
31, 2030, leaving over nineteen years for recognition.
Positive Evidence. The Company considered the following sources of future taxable
income identified in
ASC 740 as positive evidence to weigh against the negative evidence described above.
1. | Future reversals of existing taxable temporary differences and carryforwards. |
The Companys largest future reversal relates to its allowance for loan losses, which totaled
$9.8 million as of September 30, 2011. Current tax, accounting and regulatory treatment of the
allowance generally results in substantial taxable temporary differences for financial institutions
engaged in lending activities. The following is a brief description
of the Companys current expectations
regarding recognition or reversal of the major components of the allowance:
| Specific reserves, which totaled $1.0 million at September 30, 2011, relate to identified impairments and are based on individual loan-collectability analyses. The Company currently estimates that specific reserves will generally reverse within two quarters of establishment, and currently believes these reserves are very unlikely to remain unaddressed after three quarters of establishment. To be conservative, specific reserves are currently assumed to reverse within one year. |
| Quantitative reserves, which totaled $7.0 million at September 30, 2011, are based on model-driven estimates of inherent loss content in the performing loan portfolio. The Company currently estimates that the average life of the underlying loan pool is approximately three years and quantitative reserves are currently assumed to reverse within approximately three years. |
| Qualitative reserves, which totaled $1.7 million at September 30, 2011, are based on framework-driven estimates of inherent loss content in the performing loan portfolio not captured by the quantitative reserves identified above. The Company currently estimates that the average life of the underlying loan pool is approximately three years and qualitative reserves are currently assumed to reverse within approximately three years. |
Given
these assumptions, the Company currently expects the full allowance-driven component of its DTA to
reverse within approximately three years, meaning either (i) the Company will generate sufficient
taxable income to fully utilize these reversals through reduced tax payments or (ii) these
reversals will shift to net operating loss carryforwards with an expected 20-year life, which would
be utilized as the Company generates sufficient taxable income over that period.
24
Table of Contents
PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. | Future taxable income, exclusive of reversing temporary differences and carryforwards. |
Projecting future taxable income requires estimates and judgments about future events that may
be predictable, but that are less certain than past events that can be objectively measured. In
projecting future taxable income, the Company considered the significant change in its strategy
that occurred in mid-2010, from previously growing organically at a moderate pace to creating a
regional bank across Virginia and the Carolinas through a combination of mergers and acquisitions
and accelerated organic growth. This transition was facilitated by the completion of its $150.2
million Public Offering in August 2010 and the addition of new executive management and additional
independent board members. The Company is focused on long-term results and has taken actions to
achieve this objective, including:
| Addressing legacy problem assets, particularly C&D-related exposures, to move more rapidly through the cycle; |
| Consummating the merger with Community Capital to expand its market into South Carolina and to enter into new business lines, such as wealth management; |
| Hiring experienced bankers and opening de novo offices in three new markets (Charleston, South Carolina, the Upstate region of South Carolina and the Research Triangle region of North Carolina); |
| Hiring bankers to begin a new asset-based lending line of business; and |
| Significantly strengthening the leadership team with the addition of a new chief credit officer, head of special assets, head of managerial reporting, chief accounting officer and other positions. |
The progress already made indicates that the new strategy is well on track to achieve its
intended objectives. Management presents, generally on a monthly basis, a financial forecast to the
board of directors that incorporates current assumptions and
timelines regarding the Companys baseline
activities, including assumptions regarding loan and deposit growth.
These assumptions and timelines are periodically evaluated both in
terms of their historical trends and absolute levels. Prior to the consummation of
the merger with Community Capital, the forecast was presented on both a stand-alone Company and
combined Company-and-Community-Capital basis, including adjustments for certain merger related
items. Under each scenario, the Company currently expects its pre-tax profitability to build to levels
sufficient to fully absorb the existing DTA over approximately three years.
3. | Tax-planning strategies that could, if necessary, be implemented. |
As provided by ASC 740, the Company considers certain prudent and feasible tax-planning
strategies that, if implemented, could prevent an operating loss or tax credit carryforward from
expiring unused and could result in realization of the existing DTA. These strategies include
increasing assets by leveraging existing capital held in excess of
regulatory requirements and redeployment of existing assets into
either higher yielding or taxable instruments. The Company
currently expects that these tax-planning
strategies could generate pre-tax profitability at levels sufficient to fully absorb the
existing DTA over approximately three years. The Company has no present intention to implement such
strategies.
Based on the weight of available evidence, the Company has determined that it is more likely
than not that it will be able to fully realize the existing DTA. Specifically, the negative
evidence is tempered by the unusual and temporary circumstances created by the recent significant
economic downturn and significant changes in the Companys lending practices, management, capital
levels, growth strategy, risk tolerance, and operating practices. The implementation of such
changes has already led to improved asset quality measures since the fourth quarter of 2010.
Further, the positive evidence currently indicates that the Company has opportunities through various means
to generate income at a sufficient enough level to fully absorb the DTA within approximately three
years, which is well within the life of the existing DTA, portions of which expire at the earliest
in 2030.
Management, in conjunction with the board of directors, will continue to evaluate the carrying
value of the Companys DTA on a quarterly basis, in accordance
with ASC 740, and will determine any need for a valuation allowance
based upon circumstances and expectations then in existence.
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 7 Per Share Results
Basic and diluted net loss per common share are computed based on the weighted-average number
of shares outstanding during each period. Diluted net 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 loss per common share have been computed based upon net loss as
presented in the accompanying consolidated statements of 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 | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted-average number of common
shares outstanding |
28,051,098 | 4,951,098 | 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 | 28,051,098 | 4,951,098 | ||||||||||||
There were 2,196,564 outstanding stock options that were anti-dilutive for each of the
three- and nine-month periods ended September 30, 2011. For the three- and nine-month periods ended
September 30, 2010, 2,097,252 outstanding stock options were anti-dilutive. In all periods, the
anti-dilution was due to the net loss for the periods and all such options were omitted from the
calculation of diluted earnings per share for their respective periods.
There were 568,260 outstanding restricted shares that were anti-dilutive for each of the
three- and nine-month periods ended September 30, 2011, due to the vesting price exceeding the
average market price for the period, and were omitted from the calculation. One third of the
restricted shares will vest when the Companys share price meets or exceeds each of $8.125, $9.10
and $10.40 for 30 consecutive trading days.
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 8 Total Comprehensive Income (Loss)
The components of comprehensive income (loss) and related tax effects during the three- and
nine-month periods ended September 30, 2011 and 2010 are as follows:
Comprehensive Income (Loss)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
(1,376 | ) | (3,668 | ) | (7,377 | ) | (3,339 | ) | ||||||||
Unrealized holding gains on
available-for-sale securities |
$ | 3,141 | $ | 683 | $ | 6,084 | $ | 1,465 | ||||||||
Tax effect |
(1,210 | ) | (264 | ) | (2,344 | ) | (565 | ) | ||||||||
Reclassification of gain recognized
in net income |
| | (20 | ) | (19 | ) | ||||||||||
Tax effect |
| | 8 | 7 | ||||||||||||
1,931 | 419 | 3,728 | 888 | |||||||||||||
Unrealized holding loss on swaps |
| (164 | ) | (458 | ) | (453 | ) | |||||||||
Tax effect |
| 63 | 176 | (41 | ) | |||||||||||
| (101 | ) | (282 | ) | (494 | ) | ||||||||||
Total comprehensive income (loss) |
$ | 555 | $ | (3,350 | ) | $ | (3,931 | ) | $ | (2,945 | ) | |||||
Note 9 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 that matured on May 16, 2011. The derivative instrument was used to protect
certain designated variable rate loans from the downward effects of their repricing in the event of
a decreasing rate environment. It had been accounted for as a cash flow hedge and the Company
recognized no additional gain as a result of this maturity. 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 and nine months ended September 30, 2010. Due to the maturity of the swap agreement,
there was no interest income recorded in the three months ended September 30, 2011. The Company
recorded interest income on the swap of $0.4 million in the nine months ended September 30, 2011,
and $0.3 million and $0.9 million in each of the three and nine months ended September 30, 2010,
respectively.
At September 30, 2011, the Company had seven loan swaps, including one forward-starting swap.
The fair value mark on that swap, which was $(0.2) million as of September 30, 2011, will be offset
when the associated loan closes and is marked to fair value in the fourth quarter of 2011. The
total original notional amount of these loan swaps was $17.4 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 $(0.7)
and $(0.5) million and are included in loans at September 30, 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 $0.2 million and $0.4 million in each of the three and nine months
ended September 30, 2011, respectively, and $0.1 million and $0.3 million in each of the three and
nine months ended September 30, 2010, respectively.
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below presents information regarding the individual loan swaps at September 30,
2011:
Individual Loan Swap Information
Floating | ||||||||||||||||||||
Original | Current | Rate | ||||||||||||||||||
Notional | Notional | Termination | Fixed | Floating | Payer | |||||||||||||||
Amount | Amount | Date | Rate | Rate | Spread | |||||||||||||||
$ | 2,670 | $ | 2,406 | 04/10/13 |
5.85 | % | USD-LIBOR-BBA | 2.38 | % | |||||||||||
1,800 | 430 | 04/09/13 |
5.80 | % | USD-LIBOR-BBA | 2.33 | % | |||||||||||||
1,100 | 993 | 03/10/13 |
6.04 | % | USD-LIBOR-BBA | 2.27 | % | |||||||||||||
3,775 | 3,512 | 02/15/13 |
5.90 | % | USD-LIBOR-BBA | 2.20 | % | |||||||||||||
1,870 | 1,561 | 02/15/13 |
5.85 | % | USD-LIBOR-BBA | 2.25 | % | |||||||||||||
2,555 | 2,555 | 10/10/15 |
5.50 | % | USD-LIBOR-BBA | 2.88 | % | |||||||||||||
3,595 | 3,541 | 04/27/17 |
5.25 | % | USD-LIBOR-BBA | 2.73 | % | |||||||||||||
$ | 17,365 | $ | 14,998 | |||||||||||||||||
Note 10 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. |
Loan Held for Sale |
The fair value of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted prices exist, the fair value of the loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of the loan. |
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. |
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. |
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 September 30, 2011 and December 31, 2010 are as follows:
Financial Instruments Carrying Amounts and Estimated Fair Values
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 56,568 | $ | 56,568 | $ | 65,378 | $ | 65,378 | ||||||||
Investment securities |
130,667 | 130,667 | 140,590 | 140,590 | ||||||||||||
Loans held for sale |
1,559 | 1,559 | | | ||||||||||||
Loans, net of allowance |
357,579 | 352,979 | 387,405 | 382,854 | ||||||||||||
FHLB stock |
1,866 | 1,866 | 1,757 | 1,757 | ||||||||||||
Interest rate swap |
| | 459 | 459 | ||||||||||||
Accrued interest receivable |
1,441 | 1,441 | 1,640 | 1,640 | ||||||||||||
Bank owned life insurance |
8,052 | 8,052 | | | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits with no stated
maturity |
$ | 162,907 | $ | 162,907 | $ | 107,999 | $ | 107,999 | ||||||||
Deposits with stated maturities |
212,085 | 212,878 | 299,821 | 300,393 | ||||||||||||
Swap fair value hedge |
738 | 738 | 569 | 569 | ||||||||||||
Borrowings |
27,978 | 27,382 | 27,769 | 26,913 | ||||||||||||
Accrued interest payable |
109 | 109 | 290 | 290 |
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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. |
The 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 September 30, 2011 and December 31, 2010, the Companys derivative instruments consist of interest rate swaps and swap fair value hedges. |
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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 for identical collateral, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available for identical collateral 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 September 30, 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. |
Loans held for sale
Loans held for sale are adjusted to fair value upon transfer from the loan portfolio to loans held for sale. Subsequently, loans held for sale are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, managements estimation of the value of the collateral or commitments on hand from investors within the secondary market for loans with similar characteristics. The fair value adjustments for loans held for sale are recorded as nonrecurring Level 2. |
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 for identical collateral, the Company records the foreclosed asset as nonrecurring Level 3. When an appraised value is not available for identical collateral 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. |
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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 September
30, 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 | ||||||||||||
September 30, 2011 |
||||||||||||||||
U.S. Government agencies |
$ | | $ | 590 | $ | | $ | 590 | ||||||||
Residential mortgage-backed securities |
| 58,256 | | 58,256 | ||||||||||||
Collateralized agency mortgage
obligations |
| 54,854 | | 54,854 | ||||||||||||
Municipal securities |
| 16,567 | | 16,567 | ||||||||||||
Debt Securities |
| | 400 | 400 | ||||||||||||
Loans held for sale |
| 1,559 | | 1,559 | ||||||||||||
Fair value loans |
| 13,181 | | 13,181 | ||||||||||||
Swap fair value hedge |
| (738 | ) | | (738 | ) | ||||||||||
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 or nine months ended
September 30, 2011 or September 30, 2010.
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
and nine months ended September 30, 2011 and September 30, 2010.
Level 3 Assets Reconciliation
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Debt Securities: |
||||||||||||||||
Balance, beginning of period |
$ | 400 | $ | 408 | $ | 350 | $ | 400 | ||||||||
(Increase) decrease in
unrealized loss |
| (13 | ) | 50 | (5 | ) | ||||||||||
Balance, end of period |
$ | 400 | $ | 395 | $ | 400 | $ | 395 | ||||||||
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Assets Recorded at Fair Value on a Nonrecurring Basis
Upon further review of the classification of assets recorded at fair value on a nonrecurring
basis within the fair value hierarchy, the Company determined that
OREO that was previously
classified as Level 2 assets given that estimated fair value was based on current appraisals
should be considered Level 3 assets rather than Level 2 assets. Therefore, $5.7 million in OREO has
been reclassified from Level 2 to Level 3 as of September 30,
2011 and $1.2 million in OREO from Level 2 to Level 3 as of December 31, 2010. The table below presents, by level,
the recorded amounts of assets at September 30, 2011 and December 31, 2010 measured at fair value
on a nonrecurring basis:
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 | ||||||||||||
September 30, 2011 |
||||||||||||||||
OREO |
$ | | $ | | $ | 5,691 | $ | 5,691 | ||||||||
Impaired loans: |
||||||||||||||||
CRE investor income
producing |
| | 331 | 331 | ||||||||||||
Acquisition, construction and
development |
| | 848 | 848 | ||||||||||||
Residential mortgage |
| | 393 | 393 | ||||||||||||
Home equity lines of credit |
| | 427 | 427 | ||||||||||||
December 31, 2010 |
||||||||||||||||
OREO |
$ | | $ | | $ | 1,246 | $ | 1,246 | ||||||||
Impaired loans: |
||||||||||||||||
Commercial and industrial |
| | 157 | 157 | ||||||||||||
CRE owner-occupied |
| | 581 | 581 | ||||||||||||
CRE investor income
producing |
| | 842 | 842 | ||||||||||||
Acquisition, construction and
development |
| | 11,419 | 11,419 | ||||||||||||
Home equity lines of credit |
| | 885 | 885 |
The carrying value of OREO is periodically reviewed and written down to fair value and
any loss is included in earnings. During the nine months ended September 30, 2011, OREO with a
carrying value of $1.4 million was written down by $0.4 million to $1.0 million. There were no
write downs of OREO during the nine months ended September 30, 2010.
There were no transfers between valuation levels for any accounts for the three and nine
months ended September 30, 2011 and September 30, 2010. If different valuation techniques are
deemed necessary, the Company would consider those transfers to occur at the end of the period that
the accounts are valued.
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PARK STERLING CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 11 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 September 30, 2011, the Company had $31.8
million of loan commitments outstanding, $69.1 million of pre-approved but unused lines of credit
and $3.7 million of standby letters of credit and financial guarantees. At December 31, 2010, the
Company 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 the Company
and will be funded from normal sources of liquidity.
As of September 30, 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.
Note 12 Subsequent Event
Business Combinations
On November 1, 2011, the Company acquired 100% of the common stock outstanding of Community
Capital. Community Capital, based in Greenwood, South Carolina, was the bank holding company of
CapitalBank, which is located throughout the Upstate and central region of South Carolina.
Under the terms of the merger agreement, Community Capital shareholders could elect to receive
either $3.30 in cash or 0.6667 of a share of Common Stock for each share of Community Capital they
owned immediately prior to the merger, subject to the limitation that the total consideration would
consist of 40.0% in cash and 60.0% in Common Stock. This share consideration resulted in the
issuance of 4,024,269 shares of Common Stock. The final transaction value was $28.8 million based
on the $3.85 per share closing price of the Common Stock on October 31, 2011.
The Community Capital acquisition will be accounted for under the acquisition method of
accounting with the Company treated as the acquirer. Under the acquisition method of
accounting, the assets and liabilities of Community Capital, as of November 1, 2011, will be
recorded by the Company at their respective fair values and the excess of the merger consideration
over the fair value of Community Capitals net assets will be allocated to goodwill.
The calculations to determine fair values were incomplete at the time of filing of this
Current Report on Form 10-Q. Until the determination of the fair values is complete, it is impractical to
include disclosures related to the fair value of the assets acquired and liabilities
assumed as required by the accounting guidance.
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Table of Contents
CAUTIONARY STATEMENT 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. These forward-looking statements express managements current expectations, plans or
forecasts of future events, results and condition, including financial and other estimates and
expectations regarding the proposed merger with Community Capital Corporation (Community
Capital), the general business strategy of engaging in bank mergers, organic growth and anticipated asset size, additional branch openings, expansion of
product capabilities, anticipated loan growth, refinement of the loan loss allowance methodology,
recruiting of key leadership positions, decreases in construction and development loans and other
changes in loan mix, changes in deposit mix, capital and liquidity levels, emerging regulatory
expectations and measures, net interest income, credit trends and conditions, including loan
losses, allowance, charge-offs, delinquency trends and nonperforming loan and asset levels,
residential sales activity, valuation of the deferred tax asset 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, the Companys Quarterly Reports on Form 10-Q for the quarters ended March 31, 2011 and June
30, 2011 and in any of the Companys subsequent filings with the SEC: failure to realize synergies
and other financial benefits from the Community Capital merger within the expected time frame;
increases in expected costs or difficulties related to integration of the Community Capital merger;
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 impact of deterioration of the United States credit standing; 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 its allowance; deterioration in the credit
quality of its loan portfolios or in the value of the collateral securing those loans or in the
value of guarantor support for those loans, where applicable; deterioration in the value of
securities held in its investment securities portfolio; failure of assumptions underlying the
utilization of the Companys deferred tax asset, 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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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 the
financial condition as of and results of operations of Park Sterling Corporation (the Company)
during the three- and nine-month periods ended September 30, 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.
Executive Overview
The Company reported a $1.4 million loss, or $(0.05) per share, for the three months ended
September 30, 2011, compared to a $3.1 million loss, or $(0.11) per share, for the three months
ended June 30, 2011. Net interest income increased by $82,000, or 2%, from the prior quarter as a
9 basis point improvement in net interest margin, to 2.69%, more than offset a 2% decline in
average interest-earning assets during the period. The provision for loan losses decreased from
$3.2 million in the second quarter of 2011 to $568,000 in the third quarter of 2011 as a result of
continuing improvement in asset quality and a decrease in total loans. Noninterest income more
than doubled from $44,000 to $111,000, primarily as a result of earnings from the Companys
purchase of bank-owned life insurance during the third quarter of 2011. Noninterest expense
decreased by $258,000, or 5%, from $5.5 million in the second quarter of 2011 to $5.2 million in
the third quarter of 2011, as lower legal and professional fees, primarily associated with the
Companys merger with Community Capital, more than offset increases in personnel, occupancy and
loan collection expenses.
Average interest-earning assets declined by $13.4 million, or 2%, from June 30, 2011 to
September 30, 2011, driven by two ongoing management initiatives. First, the Company continued to
allow lower-yielding cash and investments to contract to fund a managed run-off of brokered
deposits and higher-priced time deposits. This action helped both to produce a more attractive
deposit mix and to eliminate negative-carry, which, in turn, contributed to an improved net
interest margin. Second, the Company continued to reduce its exposure to residential construction
and development (C&D) loans, which contributed to an improvement in both loan mix and asset
quality. Total C&D loans decreased to 15.3% of total loans at September 30, 2011, compared to
18.6% at June 30, 2011 and 27.4% at September 30, 2010. Commercial and industrial (C&I) loans
and owner-occupied commercial real estate loans together increased 5% compared to the second
quarter of 2011. C&I and owner-occupied loans represented 30.4% of total loans at September 30,
2011, compared to 28.1% at June 30, 2011 and 24.9% at September 30, 2011. Non-owner-occupied
commercial real estate loans and 1-4 family loans remained fairly steady compared to the second
quarter of 2011 at 29.5% and 5.4% of total loans, respectively. Home equity lines of credit
(HELOC) increased slightly from 14.8% to 15.4% of total loans on a linked-quarter basis.
Asset quality continued to improve in the third quarter. Nonperforming loans, which include
$2.0 million in successfully remediated troubled debt restructurings (TDRs), decreased 22%, to
$21.4 million, or 5.84% of total loans, compared to $27.6 million, or 7.25% of total loans, as of
June 30, 2011. Nonperforming assets, which included $1.6 million in loans held for sale, decreased
12%, to $28.7 million, or 4.93% of total assets, down from $32.6 million, or 5.34% of total assets,
as of June 30, 2011. Net charge-offs decreased $1.7 million, or 46%, to $2.0 million, representing
2.19% of average loans on an annualized basis, compared to $3.7 million, or 3.87% of average loans
(annualized) in the prior quarter. The allowance for loan losses was $9.8 million, or 2.68% of
total loans, at September 30, 2011, a decrease from $11.3 million, or 2.96% of total loans, at June
30, 2011. This decrease in the allowance resulted both from positive credit quality trends in the
loan portfolio and from the recognition of losses on previously identified impaired loans and a
related reduction in specific reserves.
Total deposits decreased $28.9 million, or 7%, compared to the second quarter of 2011, but
improved in mix. The decrease was primarily due to the previously mentioned managed contraction in
brokered and higher-priced time deposits. This decrease was partially offset by continued growth
in money market, NOW and savings deposits, which increased by 8% in the period, and demand
deposits, which increased by 2%. Compared to the third quarter of 2010, total deposits decreased
$42.4 million, or 10%, resulting from a 32% decrease in time deposits, offset by a 65% increase in
money market, NOW and savings deposits, and a 41% increase in demand deposits. Core deposits,
which exclude brokered
deposits, as a percentage of total deposits were 77%, compared to 76% in the first quarter of
2011 and 72% in the third quarter of 2010.
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Shareholders equity increased $1.0 million to $174.6 million compared to $173.6 million at
June 30, 2011, as an increase in accumulated other comprehensive income offset the third quarter
2011 net loss of $1,376,000. Shareholders equity decreased $9.2 million compared to the third
quarter of 2010 as a result of $11.9 million in accumulated net losses. Tangible common equity as
a percentage of tangible assets remains strong, posting a slight increase to 29.98% from 28.43% at
June 30, 2011 and from 29.06% at September 30, 2010. Tier 1 leverage ratio also remains strong at
27.13%, a slight increase from 27.07% at June 30, 2011.
Tangible common equity and tangible assets are non-GAAP financial measures. Management uses
these measures and related ratios to evaluate to the adequacy of shareholders equity and to
facilitate comparisons with peers. The following table provides a reconciliation of these non-GAAP
measures to the most directly comparable GAAP measures.
Reconciliation of Non-GAAP Financial Measures
Three months ended | ||||||||||||
September 30, | June 30, | September 30, | ||||||||||
2011 | 2011 | 2010 | ||||||||||
Tangible Assets (1) |
||||||||||||
Total Assets |
$ | 582,383 | $ | 610,668 | $ | 632,630 | ||||||
Less: Intangible assets |
| | | |||||||||
Tangible Assets |
$ | 582,383 | $ | 610,668 | $ | 632,630 | ||||||
Tangible Common Equity (2) |
||||||||||||
Total Common Equity |
$ | 174,617 | $ | 173,584 | $ | 183,847 | ||||||
Less: Intangible assets |
| | | |||||||||
Tangible Assets |
$ | 174,617 | $ | 173,584 | $ | 183,847 | ||||||
(1) | Tangible assets equals period end total assets less intangible assets. | |
(2) | Tangible common equity equals period end common shareholders equity less intangible assets. |
Business Overview
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 Federal Reserve Board under the
Bank Holding Company Act. On January 1, 2011, the Company acquired all of the outstanding stock of
the Bank in a statutory exchange transaction (the Reorganization). At September 30, 2011, the
Companys primary operations and business were that of owning the Bank, its sole subsidiary with
its main office in Charlotte, North Carolina. On November 1, 2011, the Company completed its merger
with Community Capital Corporation (Community Capital), pursuant to which CapitalBank, with its
main office in Greenwood, South Carolina, became a wholly owned subsidiary of the Company (the
Merger). 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 a 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, in the SouthPark neighborhood of Charlotte in July
2008 and in Charleston, South Carolina in June 2011. Also in June 2011, the Company opened loan
production offices in Raleigh, North Carolina and Greenville, South Carolina. In September 2011,
the Bank received regulatory approval to open full service branches in Greenville, South Carolina
and Raleigh, North Carolina. The Bank currently anticipates that it will open additional branch
offices and/or loan production offices in its target markets in the future.
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.
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In
August 2010, the Bank conducted an equity raise (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 expects that typically it would fund any such acquisitions through a combination
of the issuance of stock and cash as payment of the consideration in such acquisition. Depending on
the timing and magnitude of any particular future acquisition, the Company anticipates that in the
future it likely will seek additional equity capital or issue indebtedness at some point to fund
its growth strategy, although it currently has no plans with respect to any such issuance. As part
of its operations, the Company regularly evaluates the potential acquisition of, and holds
discussions with, various financial institutions eligible for bank holding company ownership or
control. As a general rule, the Company expects to publicly announce material transactions when a
definitive agreement has been reached.
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.
On
November 1, 2011, Community Capital Corporation (Community
Capital) was merged with and into the Company, with the Company
as the surviving legal entity, in accordance with an Agreement and Plan of Merger dated as of March
30, 2011. Under the terms of the merger agreement, Community Capital
shareholders will
receive either $3.30 in cash or 0.6667 of a share of the
Companys common stock, par value $1.00 (Common
Stock) for each share of
Community Capital common stock they owned immediately prior to the merger, subject to the
limitation that the total consideration would consist of 40.0% in
cash and 60.0% in Common Stock.
The merger was structured to be tax-free to Community Capital shareholders with respect to the
shares of Common Stock received in the merger and taxable with respect to the cash received in the
merger. Cash was paid in lieu of fractional shares. The aggregate
merger consideration consisted of 4,024,269 shares of Common Stock
and approximately $13.3 million in cash. The final transaction value was $28.8 million
based on the $3.85 per share closing price of Common Stock on October 31, 2011.
In connection with the Merger, in November 2011, the board of directors of the Company
was expanded to eight members and Patricia C. Hartung (formerly the Chairperson
of the board of directors of Community Capital) was appointed as a director.
Market Area
The
Bank 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 Bank 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 Bank strives to develop a personal relationship with its
customers while at the same time offering traditional deposit and loan banking services.
The
Banks primary market areas consists of the Charlotte and Wilmington, North Carolina
metropolitan statistical areas (MSAs). The Bank also operates a branch office in Charleston,
South Carolina and loan production offices in Raleigh, North Carolina and Greenville, South
Carolina. Additional information regarding each of these locations is provided below.
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Charlotte. Charlotte, the largest city in North or South Carolina, anchors an MSA with a total
population of approximately 1.8 million in 2010, according to the Charlotte Chamber of Commerce.
According to the U.S. Census Bureau, the population for the Charlotte-Gastonia-Rock Hill MSA
increased 34.8% from 2000 to
2010. This population is expected to grow 14.8% between 2010 and 2015. Charlotte is a significant
financial center and is currently home to nine Fortune 500 companies. Charlotte also has
concentrations in the transportation, utilities, education, professional services and construction
sectors. The 2010 median household income for the Charlotte MSA was $62,215 and is projected to
grow 13.2% over the next five years.
Wilmington. Wilmington, a historic seaport and the largest city on the coast of North
Carolina, anchors a metropolitan area covering New Hanover, Brunswick and Pender counties with a
2010 population of 367,101. The U.S. Census Bureau estimates that Wilmingtons MSA is expected to
grow 13.2% from 2010 to 2015. Wilmingtons economy is diversified and includes tourism, shipping,
pharmaceutical development, chemical and aircraft component manufacturing, and fiber optic
industries. Wilmington is also a regional retail and medical center, with the New Hanover Regional
Medical Center/Cape Fear Hospital ranking in the top ten largest medical facilities in the state.
The median household income in 2010 for the Wilmington MSA was $49,403 and is projected to increase
13.2% over the next five years.
Charleston. Charleston, the second largest city in South Carolina, is located on the states
coastline. According to the U.S. Census Bureau, the population for the Charleston-North
Charleston-Summerville MSA was 671,833, a 22.3% increase since 2000. The areas population is
projected to grow 10.3% from 2010 to 2015. Charleston is the largest business and financial center
for the southeastern section of South Carolina. The city is a popular tourist destination, with a
large number of restaurants, hotels and retail stores. The manufacturing, shipping and medical
industries are also key economic sectors in Charleston. The 2010 median household income for the
Charleston MSA was $51,065 and is expected to grow 12.6% from 2010 to 2015.
Raleigh. Raleigh, the capital city of North Carolina, is located in the metropolitan area
covering Wake, Johnston, and Franklin counties. The Raleigh-Cary MSA had a total population of
approximately 1.2 million in 2010, and is expected to grow 19.4% over the next five years. Raleigh
is part of North Carolinas Research Triangle, an eight-county region that is home to numerous
high-tech companies and enterprises. Other industries present in the economy include
banking/financial services, electrical and medical equipment, wholesale distribution, and
pharmaceuticals. The median household income in 2010 for the Raleigh-Cary MSA was $68,373 and is
projected to increase 15.4% over the next five years.
Greenville. Greenville, located within the largest county in South Carolina, is on the
Interstate 85 corridor, approximately halfway between Atlanta and Charlotte. According to the U.S.
Census Bureau, the population for the Greenville-Mauldin-Easley MSA was 644,096, a 15.0% increase
since 2000. The areas population is projected to grow 7.4% between 2010 and 2015. Greenvilles
economy, formerly based largely around textiles, is now dominated by the manufacturing, automotive
research, and healthcare industries. The city is the home of Michelins North American
headquarters. The 2010 median household income for the Greenville MSA was $50,114 and is expected
to grow 11.4% by 2015.
Competition
The Company competes for deposits in its banking markets with other commercial banks, savings
banks and other thrift institutions, credit unions, agencies issuing U.S. government securities and
all other organizations and institutions engaged in money market transactions. In its lending
activities, the Company competes with all other financial institutions, as well as consumer finance
companies, mortgage companies and other. Commercial banking in its markets is extremely
competitive.
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Interest rates, both on loans and deposits, and prices of fee-based services, are significant
competitive factors among financial institutions generally. Other important competitive factors
include office location, office hours, the quality of 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 the Banks competitors have greater resources,
broader geographic markets and higher lending limits than the Bank does, and they can offer more
products and services and can better afford and make more effective use of media advertising,
support services and electronic technology than can the Bank. To counter these competitive
disadvantages, the Bank depends on its reputation as a community bank in its local markets, its
direct customer contact, its ability to make credit and other business decisions locally, and its
personalized customer service.
In recent years, Federal and state legislation has heightened the competitive environment in
which all financial institutions conduct their business, and the potential for competition among
financial institutions of all types has increased significantly. Additionally, with the elimination
of restrictions on interstate banking, a North Carolina commercial bank may be required to compete
not only with other North Carolina-based financial institutions, but also with out-of-state
financial institutions which may acquire North Carolina institutions, establish or acquire branch
offices in North Carolina, or otherwise offer financial services across state lines, thereby adding
to the competitive atmosphere of the industry in general. In terms of assets, the Bank is currently
one of the smaller commercial banks in North Carolina.
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 its financial statements, the Company has 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. The Companys
significant accounting policies are described in Note B Summary of Significant Accounting
Policies to the Companys audited consolidated 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 on March 31, 2011 (the 2010 Audited Financial Statements). While all of
these policies are important to understanding the Companys financial statements, certain
accounting policies described below involve significant judgment and assumptions by management of
the Company that have a material impact on the carrying value of certain assets and liabilities.
The Company considers these accounting policies to be critical accounting policies. The judgment
and assumptions the Company uses are based on historical experience and other factors, which it
believes to be reasonable under the circumstances. Because of the nature of the judgment and
assumptions the Company makes, actual results could differ from these judgments and assumptions
that could have a material impact on the carrying values of its assets and liabilities and its
results of operations.
Allowance for Loan Losses. The allowance for loan losses is based upon managements ongoing
evaluation of the loan portfolio and reflects an amount considered by management to be its best
estimate of known and inherent losses in the portfolio as of the balance sheet date. The
determination of the allowance for loan losses involves a high degree of judgment and complexity.
In making the evaluation of the adequacy of the allowance for loan losses, management considers
current economic conditions, statutory examinations of the loan portfolio by regulatory agencies,
independent loan reviews performed periodically by third parties, delinquency information,
managements internal review of the loan portfolio, and other relevant factors. While management
uses the best information available to make evaluations, future adjustments to the allowance may be
necessary if conditions differ substantially from the assumptions used in making the evaluations.
In addition, regulatory examiners may require the Company to recognize changes to the allowance for
loan losses based on their judgments about information available to them at the time of their
examination. Although provisions have been established by loan segment, based upon managements
assessment of their differing inherent loss characteristics, the entire allowance for losses on
loans is available to absorb further loan losses in any segment. Further information regarding the
Companys policies and methodology used to estimate the allowance for possible loan losses is
presented in Note D Loans to the 2010 Audited Financial Statements.
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Income Taxes. Income taxes are provided based on the asset-liability method of accounting,
which includes the recognition of deferred tax assets (DTAs) and liabilities for the temporary
differences between carrying amounts and tax bases of assets and liabilities, computed using
enacted tax rates. In general, the Company records a DTA when the event giving rise to the tax
benefit has been recognized in the consolidated financial statements.
As of September 30, 2011 and December 31, 2010, the Company had a DTA in the amounts of
approximately $10.8 million and $7.4 million, respectively. The Company evaluates the carrying
amount of its DTA on a quarterly basis in accordance with the guidance provided in Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 (ASC 740), in
particular, applying the criteria set forth therein to determine whether it is more likely than not
(i.e., a likelihood of more than 50%) that some portion, or all, of the DTA will not be realized
within its life cycle, based on the weight of available evidence. In most cases, the realization of
the DTA is dependent upon the Company generating a sufficient level of taxable income in future
periods, which can be difficult to predict. If the Companys forecast of taxable income within the
carryforward periods available under applicable law is not sufficient to cover the amount of net
deferred assets, such assets may be impaired. Based on the weight of available evidence, the
Company has determined that it is more likely than not that it will be able to fully realize the
existing DTA within approximately three years and therefore considers it appropriate not to
establish a DTA valuation allowance at either September 30, 2011 or December 31, 2010.
Further information regarding the Companys income taxes, including the methodology used to
determine the need for a valuation allowance for the existing DTA, if any, is presented in Note 6
Income Taxes to the unaudited condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q.
Fair Value Measurements. As a financial services company, the carrying value of certain
financial assets and liabilities is impacted by the application of fair value measurements, either
directly or indirectly. In certain cases, an asset or liability is measured and reported at fair
value on a recurring basis, such as available-for-sale investment securities. In other cases,
management must rely on estimates or judgments to determine if an asset or liability not measured
at fair value warrants an impairment write-down or whether a valuation reserve should be
established. Given the inherent volatility, the use of fair value measurements may have a
significant impact on the carrying value of assets or liabilities, or result in material changes to
the financial statements, from period to period.
Detailed information regarding fair value measurements can be found in Note M Fair Value of
Financial Instruments to the Companys 2010 Audited Financial Statements. The following is a
summary of those assets that may be affected by fair value measurements, as well as a brief
description of the current accounting practices and valuation methodologies employed by the
Company:
Available-for-Sale Investment Securities. Investment securities classified as
available-for-sale are measured and reported at fair value on a recurring basis. For most
securities, the fair value is based upon quoted market prices or determined by pricing models that
consider observable market data. However, the fair value of certain investment securities must be
based upon unobservable market data, such as nonbinding broker quotes and discounted cash flow
analysis or similar models, due to the absence of an active market for these securities. As a
result, managements determination of fair value for these securities is highly dependent on
subjective or complex judgments, estimates and assumptions, which could change materially between
periods.
Impaired Loans. For loans considered impaired, the amount of impairment loss recognized is
determined based on a discounted cash flow analysis or the fair value of the underlying collateral
if repayment is expected solely from the sale of the collateral. The vast majority of the
collateral securing impaired loans is real estate, although it may also include accounts receivable
and equipment, inventory or similar personal property.
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Financial Condition at September 30, 2011 and December 31, 2010
Total assets declined by $33.7 million, or 5.5%, from $616.1 million at December 31, 2010 to
$582.4 million at September 30, 2011. At September 30, 2011, interest-earning assets were $549.3
million, which included
$367.4 million in gross loans, $130.7 million in investment securities available-for-sale,
$36.3 million in interest-bearing deposits in other banks,
$8.0 million of bank-owned life
insurance, (comprised of $4.0 million of general account life
insurance and $4.0 million of hybrid account life insurance), $5.3 million in overnight investments and $1.6 million in loans held for sale.
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 $174.6 million at September 30, 2011 compared to $177.1 million
at December 31, 2010. This decrease of $2.5 million was a result of the year-to-date loss of $7.4
million, offset by a $3.5 million increase, net of taxes, in accumulated other comprehensive income
relating to unrealized gains on investments available-for-sale and swaps and $1.4 million of
additional paid in capital relating to the share-based compensation expense.
The following table reflects selected ratios for the Company for the nine months ended
September 30, 2011 and 2010 and for the year ended December 31, 2010:
Selected Ratios
Nine months ended | ||||||||||||
September 30, | For the year | |||||||||||
(annualized and unaudited) | ended December 31, | |||||||||||
2011 | 2010 | 2010* | ||||||||||
Return on Average Assets |
-1.60 | % | -0.88 | % | -2.81 | % | ||||||
Return on Average Equity |
-5.61 | % | -6.39 | % | -9.75 | % | ||||||
Period End Equity to
Total Assets |
29.98 | % | 29.06 | % | 28.75 | % |
* | Derived from audited financial statements. |
Investments and Other Interest-earning Assets
The Companys investment portfolio consists of U.S. government agency securities, residential
mortgage-backed securities, municipal securities and other debt instruments. All of the residential
mortgage-backed securities held by the Company are backed by an agency of the U.S. government. All
of the Companys investment securities are categorized as available-for-sale. Securities
available-for-sale are carried at market value, with unrealized holding gains and losses reported
in other comprehensive income, net of tax. Investment securities were $130.7 million at September
30, 2011. This was a $9.9 million decrease from the $140.6 million balance at December 31, 2010 and
is a result of the net maturities and sales of $16.0 million of securities available for sale and a
$6.1 million improvement in the fair market value of the portfolio.
At the end of the third quarter of 2011, the Companys portfolio had a net unrealized gain of
$4.1 million compared to a $2.0 million net unrealized loss at December 31, 2010. The Company had
no securities with an unrealized loss deemed to be other than temporary at September 30, 2011 or
December 31, 2010.
At September 30, 2011, the Company had $5.3 million in Federal funds sold, and $36.3 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.
Loans
The Company considers asset quality to be of primary importance, and employs a formal internal
loan review process to ensure adherence to the lending policy as approved by its board of
directors. Since its inception, the Company has promoted the separation of loan underwriting from
the loan production staff through its credit department. Currently, credit administration analysts
are responsible for underwriting and assigning proper risk grades for all loans with a total
exposure in excess of $500,000.
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Underwriting is completed on standardized forms including a loan approval form and separate
credit memorandum. The credit memorandum includes a summary of the loans structure and a detailed
analysis of loan purpose, borrower strength (including individual and global cash flow worksheets),
repayment sources, collateral positions and guarantor strength. The memorandum further identifies
exceptions to policy and/or regulatory limits, total exposure, loan to value and risk grades. Loans
are approved or denied by varying levels of signature authority based on total exposure. Prior to
December 31, 2010, the Company employed an approval system consisting of individual signature
authorities, dual-signature authorities and a board-level loan committee. The approval structure
was revised as of January 1, 2011 to rely more heavily on approvals from a loan committee.
The Companys loan underwriting policy contains loan-to-value (LTV) limits that are at or
below levels required under regulatory guidance, when such guidance is available, including
limitations for non-real estate collateral, such as accounts receivable, inventory and marketable
securities. When applicable, the Company compares LTV with loan-to-cost guidelines and
ultimately limits loan amounts to the lower of the two ratios. The Company also considers FICO
scores and strives to uphold a high standard when extending loans to individuals. LTV limits have
been selectively reduced in response to the recent economic cycle. In particular, loans
collateralized with 1-4 family properties have seen a reduction in their maximum LTV. The Company
has not underwritten any subprime, hybrid, no-documentation or low-documentation products.
All acquisition, construction and development loans, commercial and consumer, are subject to
the Companys policy, guidelines and procedures specifically designed to properly identify, monitor
and mitigate the risk associated with these loans. Loan officers receive and review a cost budget
from the borrower at the time a construction and development loan is originated. Loan draws are
monitored against the budgeted line items during the development period in order to identify
potential cost overruns. Individual draw requests are verified through review of supporting
invoices as well as site inspections performed by an external inspector. Additional periodic site
inspections are performed by loan officers at times that do not coincide with draw requests in
order to keep abreast of ongoing project conditions. Project status is reported to senior
management on an ongoing basis via the Companys monthly C&D and watch meetings. Reports generated
regarding acquisition, construction and development loans include status of the project, summary of
customer correspondence, site visit update when performed, review of risk grade and impairment
analysis, if applicable. As of September 30, 2011, approximately 43% of the Companys acquisition,
construction and development loan portfolio, commercial and consumer, falls under the watch list.
The Companys second mortgage exposure is primarily attributable to its HELOC portfolio, which totals approximately $57 million as of September 30, 2011, of
which approximately 60% is secured by second mortgages and approximately 40% is secured by first
mortgages. For HELOCs in North Carolina, which comprise the majority of the portfolio, the Company
records a Request for Copy of Notice of Sale with the county in which the property is located.
All loans are assigned an internal risk grade by the loan officer and monitored by the credit
administration function in the same fashion as commercial loans. Aside from loan committee, loan
review and watch list meetings, loans are also monitored for delinquency through bi-weekly past due
meetings. As of September 30, 2011, there were no accruing delinquent HELOCs in the Companys
portfolio.
At September 30, 2011, total loans were $367.7 million compared to $399.9 million at December
31, 2010. This decrease included a $40.6 million reduction in the construction and development
portfolio, consistent with the Companys general intention and actions over the past year to reduce
residential construction and development exposure in its portfolio.
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The following table presents a summary of the loan portfolio at September 30, 2011 and at
December 31, 2010, 2009, 2008, 2007 and 2006 (dollars in thousands).
Summary of Loans By Segment and Class
September 30, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2011 | % | 2010 | % | 2009 | % | 2008 | % | 2007 | % | 2006* | % | |||||||||||||||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and
industrial |
$ | 44,939 | 12 | % | $ | 48,401 | 12 | % | $ | 41,980 | 11 | % | $ | 37,266 | 10 | % | $ | 23,011 | 10 | % | $ | 5,044 | 12 | % | ||||||||||||||||||||||||
Commercial real estate -
owner occupied |
66,979 | 18 | % | 55,089 | 14 | % | 50,693 | 13 | % | 29,734 | 8 | % | 7,181 | 3 | % | 48 | 0 | % | ||||||||||||||||||||||||||||||
Commercial real estate -
investor income
producing |
108,558 | 30 | % | 110,407 | 28 | % | 112,508 | 28 | % | 90,172 | 24 | % | 55,759 | 25 | % | 11,403 | 27 | % | ||||||||||||||||||||||||||||||
Acquisition,
construction
and development |
51,522 | 14 | % | 87,846 | 22 | % | 100,668 | 25 | % | 123,759 | 33 | % | 88,666 | 39 | % | 17,887 | 42 | % | ||||||||||||||||||||||||||||||
Other commercial |
7,763 | 2 | % | 3,225 | 1 | % | 1,115 | 0 | % | 257 | 0 | % | 6,189 | 3 | % | | 0 | % | ||||||||||||||||||||||||||||||
Total commercial loans |
279,761 | 76 | % | 304,968 | 77 | % | 306,964 | 77 | % | 281,188 | 75 | % | 180,806 | 80 | % | 34,382 | 81 | % | ||||||||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage |
19,816 | 5 | % | 21,716 | 5 | % | 20,577 | 5 | % | 13,916 | 4 | % | 2,490 | 1 | % | 522 | 1 | % | ||||||||||||||||||||||||||||||
Home equity lines of
credit |
56,787 | 16 | % | 56,968 | 14 | % | 52,026 | 13 | % | 48,625 | 13 | % | 25,829 | 11 | % | 6,800 | 16 | % | ||||||||||||||||||||||||||||||
Residential construction |
4,787 | 1 | % | 9,051 | 2 | % | 11,639 | 3 | % | 19,873 | 6 | % | 9,816 | 4 | % | 575 | 1 | % | ||||||||||||||||||||||||||||||
Other loans to
individuals |
6,530 | 2 | % | 7,245 | 2 | % | 6,471 | 2 | % | 7,888 | 2 | % | 7,809 | 4 | % | 392 | 1 | % | ||||||||||||||||||||||||||||||
Total consumer loans |
87,920 | 24 | % | 94,980 | 23 | % | 90,713 | 23 | % | 90,302 | 25 | % | 45,944 | 20 | % | 8,289 | 19 | % | ||||||||||||||||||||||||||||||
Total loans |
367,681 | 100 | % | 399,948 | 100 | % | 397,677 | 100 | % | 371,490 | 100 | % | 226,750 | 100 | % | 42,671 | 100 | % | ||||||||||||||||||||||||||||||
Deferred fees |
(269 | ) | 0 | % | (119 | ) | 0 | % | (113 | ) | 0 | % | (218 | ) | 0 | % | (209 | ) | 0 | % | (24 | ) | 0 | % | ||||||||||||||||||||||||
Total loans, net of
deferred fees |
$ | 367,412 | 100 | % | $ | 399,829 | 100 | % | $ | 397,564 | 100 | % | $ | 371,272 | 100 | % | $ | 226,541 | 100 | % | $ | 42,647 | 100 | % | ||||||||||||||||||||||||
* | Park Sterling Bank commenced operations on October 25, 2006. |
Substantially all of the Companys loans are to customers in its immediate markets. In
the Charlotte market, the Company has a diversified mix of commercial real estate, owner-occupied
commercial real estate, commercial and small business loans, and a significant portfolio of HELOCs.
The Companys 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. The Company
expects future growth in its newer markets of Charleston, Greenville and Raleigh. The Company
believes it is not dependent on any single customer or group of customers whose insolvency would
have a material adverse effect on its 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. The Companys senior
management works closely with credit administration 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.
44
Table of Contents
As a given loans credit quality changes, the responsibility for changing the borrowers risk
grade accordingly lies first with the Companys lending staff, and second with the credit
administration department. 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 the value and adequacy of collateral,
economic conditions in the Companys market areas and other factors.
The Companys loan loss allowance methodology consists of a 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. Further details about this component of the Companys loan loss
allowance are outlined below. These factors are intended to help management recognize expected
losses that may not be identified through the quantitative analysis of the Companys 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 discounted cash flow analysis 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 the Companys loan portfolio. The determination of the allowance for loan losses
involves a high degree of judgment and complexity.
The evaluation of the allowance for loan losses, which generally occurs at the end of each
quarter, consists of three components, as follows:
1) Specific Reserve Component. Specific reserves represent the current impairment estimate
on specific loans, which is an estimate of the amount for which it is probable that the
Company will be unable to collect all amounts due on such loans, if any, according to
contractual terms based on current information and events. Impairment measurement reflects
only a deterioration of credit quality and not changes in market rates that may cause a
change in the fair value of the impaired loan. The amount of impairment may be measured in
one of three ways, including (i) calculating the present value of expected future cash
flows, discounted at the loans interest rate and deducting estimated selling costs, if any;
(ii) observing quoted market prices for identical or similar instruments traded in active
markets, or employing model-based valuation techniques for which all significant assumptions
are observable in the market; and (iii) determining the fair value of collateral, for both
collateral dependent loans and for loans when foreclosure is probable.
2) Quantitative Reserve Component. Quantitative reserves represent the current loss
contingency estimate on pools of loans, which is an estimate of the amount for which it is
probable that the Company will be unable to collect all amounts due on homogeneous groups of
loans according to contractual terms should one or more events occur, excluding those loans
specifically identified above. Given the limited operating history of the Company, this
component of the allowance for loan losses is currently based on the historical loss
experience of comparable institutions. This comparable institution loss experience was
obtained by surveying peer group institutions, which include North Carolina-based community
banks that management believes originate similar types of loans to those originated by the
Company, as supplemented by discussions with peers and industry professionals. The estimated
historical loss rates are grouped into loans with similar risk characteristics by utilizing
the Companys internal risk grades applied on a consistent basis across all loan types.
Management is in the process of collecting and evaluating internal loan loss data for the
purpose of validating and/or modifying the current quantitative reserve calculation and
expects to have completed and implemented revised methodology by the end of 2011.
45
Table of Contents
3) Qualitative Reserve Component. Qualitative reserves represent an estimate of the amount
for which it is probable that environmental factors will cause the aforementioned loss
contingency estimate to differ from historical results or other assumptions. The Company has
identified the following six environmental factors for inclusion in its allowance
methodology at this time:
i. | Portfolio trends, which may relate to such factors as type or level of loan origination activity, changes in asset quality (i.e., past due, special mention, non-performing) and/or changes in collateral values; |
ii. | Portfolio concentrations, which may relate to individual borrowers and/or guarantors, geographic regions, industry sectors, loan types and/or other factors; |
iii. | Economic and market trends, which may relate to trends and/or levels of gross domestic production, unemployment, bankruptcies, foreclosures, housing starts, housing prices, equity prices, competitor activities and/or other factors; |
iv. | Changes in lending practices, which may relate to changes in credit policies, procedures, systems or staff; |
v. | Regulatory environment, which may relate to modification and/or expansion of regulatory requirements or supervisory practices; and |
vi. | Other factors, which is intended to capture environmental factors not specifically identified above. |
Management believes that each of the above environmental factors addresses and provides for
the additional uncertainty when current conditions are not consistent with the conditions
prevailing in the prior periods utilized in the calculation of historical loss estimates. This
additional uncertainty may be heightened during periods of unusual market and/or economic
volatility, such as exists today.
Each qualitative component is evaluated on at least a quarterly basis by the Companys
Allowance Committee and is ranked as being Low, Moderate, High, or Very High. The first
three factors portfolio trends, portfolio concentrations and economic and market trends 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 percentage (from 0.05% to 0.15%
of outstanding performing loans). The last three factors changes in lending practices,
regulatory environment and other factors carry a slightly lower absolute and range of potential
reserve percentage (from 0.025% to 0.10% of outstanding performing loans). 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.
Before 2010, the Company did not include qualitative factors in its allowance model. During
the first quarter of 2010, the Company introduced its first qualitative factor by including an
estimate of $477,792, reflecting managements judgment that, given the uncertain economic outlook,
historical peer group data did not appropriately recognize loss content in the portfolio, despite
an improvement in net charge-offs from the previous quarter. This estimate for environmental
factors was reduced to $100,000 in the second quarter of 2010, reflecting managements assessment
that asset quality had stabilized, given two quarters of improvement in net charge-offs, and that
the general economic outlook was expected to stabilize or improve over the second half of 2010.
During the third quarter of 2010, the Company introduced refinements to the qualitative
components of its allowance model. The aggregate qualitative factor, which was previously $100,000,
was increased to 0.475% of nonimpaired loans, or $1.8 million. The following is a breakdown of the
ranking of each factor and its contribution to the aggregate qualitative component of the
allowance:
| Portfolio Trends High (0.100%, or $0.4 million). |
| Portfolio Concentrations High (0.100%, or $0.4 million). |
| Economic and Market Trends High (0.100%, or $0.4 million). |
| Changes in Lending Practices Low (0.025%, or $0.1 million). |
| Regulatory Environment High (0.075%, or $0.3 million). |
| Other Factors Moderate (0.075%, or $0.3 million). |
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Table of Contents
During the fourth quarter of 2010, management increased the aggregate estimate for
environmental factors to 0.525% of nonimpaired loans, or $1.9 million. This change was driven by a
0.050% increase in the Portfolio Trends factor from a rating of High (0.100%) to a rating of Very
High (0.150%). This increase reflected a rise in classified loans from 7.09% to 11.56% of total
loans and a concurrent five-fold increase in nonperforming loans to 10.23% of total loans following
a detailed portfolio review of all loans except the Companys HELOC exposures. Uncertainty around
the HELOC exposures was the key driver for increasing the Portfolio Trend qualitative factor. All
other factors remained unchanged from the prior period. There were no further changes in the
Companys environmental factors during the first nine months of 2011.
Qualitative reserves represented 0.500% of outstanding performing loans as of September 30,
2011, accounting for $1.7 million, or 18%, of the Companys allowance for loan losses. There was no
provision expense related to this component of allowance for the first nine months of 2011 given
that outstanding performing loans declined during the period. Qualitative reserves represented
0.525% of outstanding performing loans as of December 31, 2010, accounting for $1.9 million, or
15%, of the Companys allowance for loan losses.
The Companys policy regarding past due loans normally requires a loan be placed on nonaccrual
status when there is probable loss or when there is a reasonable doubt that all principal will be
collected, or when it is over 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.
The allowance for loan losses is increased by provisions charged to operations and reduced by
loans charged off, net of recoveries. The allowance for loan losses as a percentage of total loans
decreased to 2.68% at September 30, 2011 from 3.31% at September 30, 2010. The decrease in the
allowance is a result of both improvement in portfolio trends and the recognition of loss on loans.
The allowance for loan losses as a percentage of total loans decreased from 3.11% at December 31,
2010, due to improvement in portfolio trends and the recognition of loss on loans. The Company had
net charge-offs of $10.9 million in the first nine months of 2011 compared to $1.1 million in the
same period of 2010 and $12.0 million for the year ended December 31, 2010.
While management believes that it uses the best information available to determine the
allowance for loan losses, and that its allowance for loan losses is maintained at a level
appropriate in light of the risk inherent in the Companys loan portfolio based on an assessment of
various factors affecting the loan portfolio, unforeseen market conditions could result in
adjustments to the allowance for loan losses, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the final determination. The
allowance for loan losses to total loans may increase if the Companys loan portfolio deteriorates
due to economic conditions or other factors.
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Table of Contents
The following table presents a summary of changes in the allowance for loan losses and
includes information regarding charge-offs, and selected coverage ratios for the nine-month period
ended September 30, 2011 and the years ended December 31, 2010, 2009, 2008, 2007 and 2006 (dollars
in thousands):
Allowance for Loan Losses
September 30, | December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2006* | |||||||||||||||||||
Balance, beginning of period |
$ | 12,424 | $ | 7,402 | $ | 5,568 | $ | 3,398 | $ | 640 | $ | | ||||||||||||
Provision for loan losses |
8,275 | 17,005 | 3,272 | 2,544 | 2,758 | 640 | ||||||||||||||||||
Charge-offs: |
||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial and industrial |
$ | (724 | ) | $ | (1,338 | ) | $ | (8 | ) | $ | | $ | | $ | | |||||||||
Commercial real estate owner-occupied |
(194 | ) | (105 | ) | | | | | ||||||||||||||||
Commercial real estate investor income
producing |
(87 | ) | (840 | ) | | | | | ||||||||||||||||
Acquisition, construction and development |
(6,760 | ) | (7,752 | ) | (631 | ) | (374 | ) | | | ||||||||||||||
Other commercial |
(2,129 | ) | | | | | | |||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Residential mortgage |
(571 | ) | (154 | ) | (720 | ) | | | | |||||||||||||||
Home equity lines of credit |
(1,102 | ) | (1,496 | ) | (33 | ) | | | | |||||||||||||||
Residential construction |
(222 | ) | (347 | ) | | | | | ||||||||||||||||
Other loans to individuals |
| (10 | ) | (46 | ) | | | | ||||||||||||||||
Total Charge-offs |
(11,789 | ) | (12,042 | ) | (1,438 | ) | (374 | ) | | | ||||||||||||||
Recoveries: |
||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial and industrial |
$ | 240 | $ | 2 | $ | | $ | | $ | | $ | | ||||||||||||
Commercial real estate owner-occupied |
3 | 16 | | | | | ||||||||||||||||||
Commercial real estate investor income
producing |
178 | 1 | | | | | ||||||||||||||||||
Acquisition, construction and development |
474 | 35 | | | | | ||||||||||||||||||
Other commercial |
| | | | | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Residential mortgage |
5 | 4 | | | | | ||||||||||||||||||
Home equity lines of credit |
4 | 1 | | | | | ||||||||||||||||||
Residential construction |
| | | | | | ||||||||||||||||||
Other loans to individuals |
19 | | | | | | ||||||||||||||||||
Total Recoveries |
923 | 59 | | | | | ||||||||||||||||||
Net charge-offs |
(10,866 | ) | (11,983 | ) | (1,438 | ) | (374 | ) | | | ||||||||||||||
Balance, end of period |
$ | 9,833 | $ | 12,424 | $ | 7,402 | $ | 5,568 | $ | 3,398 | $ | 640 | ||||||||||||
Net charge-offs to total loans |
3.94 | % | 3.00 | % | 0.36 | % | 0.10 | % | 0.00 | % | 0.00 | % | ||||||||||||
Allowance for loan losses to total loans |
2.68 | % | 3.11 | % | 1.86 | % | 1.50 | % | 1.50 | % | 1.50 | % |
* | Park Sterling Bank commenced operations on October 25, 2006 |
48
Table of Contents
Allocation of the Allowance for Loan Losses
September 30, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2011 | % | 2010 | % | 2009 | % | 2008 | % | 2007 | % | 2006 | % | |||||||||||||||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and
industrial |
$ | 687 | 12 | % | $ | 896 | 12 | % | $ | 529 | 11 | % | $ | | 10 | % | $ | | 10 | % | $ | | 12 | % | ||||||||||||||||||||||||
Commercial real estate
owner-occupied |
1,453 | 18 | % | 1,061 | 14 | % | 627 | 13 | % | | 8 | % | | 3 | % | | 0 | % | ||||||||||||||||||||||||||||||
Commercial real estate
investor income
producing |
2,572 | 30 | % | 2,105 | 28 | % | 1,496 | 28 | % | | 24 | % | | 25 | % | | 27 | % | ||||||||||||||||||||||||||||||
Acquisition,
construction
and development |
1,314 | 14 | % | 4,695 | 22 | % | 3,149 | 25 | % | | 33 | % | | 39 | % | | 42 | % | ||||||||||||||||||||||||||||||
Other commercial |
87 | 2 | % | 408 | 1 | % | | 0 | % | | 0 | % | | 3 | % | | 0 | % | ||||||||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage |
327 | 5 | % | 320 | 5 | % | 547 | 5 | % | | 4 | % | | 1 | % | | 1 | % | ||||||||||||||||||||||||||||||
Home equity lines of
credit |
1,477 | 16 | % | 871 | 14 | % | 835 | 13 | % | | 13 | % | | 11 | % | | 16 | % | ||||||||||||||||||||||||||||||
Residential construction |
90 | 1 | % | 98 | 2 | % | 144 | 3 | % | | 6 | % | | 4 | % | | 1 | % | ||||||||||||||||||||||||||||||
Other loans to
individuals |
86 | 2 | % | 86 | 2 | % | 75 | 2 | % | | 2 | % | | 4 | % | | 1 | % | ||||||||||||||||||||||||||||||
Unallocated |
1,740 | 0 | % | 1,884 | 0 | % | | 0 | % | 5,568 | 0 | % | 3,398 | 0 | % | 640 | 0 | % | ||||||||||||||||||||||||||||||
$ | 9,833 | 100 | % | $ | 12,424 | 100 | % | $ | 7,402 | 100 | % | $ | 5,568 | 100 | % | $ | 3,398 | 100 | % | $ | 640 | 100 | % | |||||||||||||||||||||||||
* | Park Sterling Bank commenced operations on October 25, 2006 |
Nonperforming Assets
The Company grades 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 are included on the Companys list of watch loans, which
represent potential problem loans, and are updated and reported to both management and the loan and
risk committee of the board of directors on a monthly basis. Additionally, the watch list committee
may review other loans with more favorable ratings if there are concerns that the loan may become a
problem in the future. Due to unfavorable economic conditions, the Company currently includes a
special review of all grade 5 loans greater than $250,000 in its watch list committee. Impairment
analysis has been performed on all loans graded substandard (risk grade of 7 or worse) and
selected other loans as deemed appropriate. At September 30, 2011, the Company maintained watch
loans totaling $77.9 million, including $24.3 million of grade 5 loans, compared to $102.9 million
at December 31, 2010, including $33.6 million of grade 5 loans. Currently all loans on the
Companys watch list carry a risk grade of 5 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. 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.
49
Table of Contents
The Company employs one of three potential methods to determine the fair value of impaired
loans.
1) Fair value of collateral method. This is the most common method and is used when the
loan is collateral dependent. In most cases, the Company will obtain an as is appraisal
from a third-party appraisal group. The fair value from that appraisal may be adjusted
downward for liquidation discounts for foreclosure or quick sale scenarios, as well as any
applicable selling costs.
2) Cash flow method. This method is used when the loan is not collateral dependent and
involves the calculation of the net present value of the expected future cash flow from the loan,
discounted at the nominal interest rate of the loan.
3) Loan market value method. This is the method used least often by the Company. Fair value is
based on the offering price from a note buyer, in either the local community or a national loan
sale advisor.
With respect to nonaccruing commercial and consumer acquisition, construction and development
loans, the Company typically utilizes an as-is, or discounted, value to determine an
appropriate fair value. When appraising projects with an expected cash flow to be received over a
period of time, such as acquisition and development/land development loans, fair value is
determined using a discounted cash flow methodology. When appropriate, the Company also requests
that the appraiser include a three- or six-month liquidation value in order to examine quick sale
scenario proceeds. The Company also accounts for expected selling cost when determining an
appropriate property value.
Nonperforming loans, which consist of nonaccrual loans, accruing TDRs and accruing loans
for which payments are 90 days or more past due, decreased $20.7 million, or 49.1%, to $21.4
million, or 5.84% of total loans at September 30, 2011, compared to $42.1 million, or 10.53%, of
total loans at December 31, 2010. Nonperforming assets, which consist of nonperforming loans, OREO
and loans held for sale decreased $14.7 million, or 33.9%, to $28.7 million at September 30, 2011
from $43.4 million at December 31, 2010. There were no loans past due 90 days or more and still
accruing interest at September 30, 2011 or December 31, 2010.
Nonaccrual loans were $19.4 million at September 30, 2011, a decrease of $21.5 million, or
52.6%, from nonaccrual loans of $40.9 million at December 31, 2010. These nonaccrual loans
consisted primarily of loans involving commercial and consumer acquisition, construction and
development activity, which totaled $16.5 million, or 84.6%, of total nonaccrual loans at September
30, 2011 compared to $35.0 million, or 85.5%, of total nonaccrual loans at December 31, 2010.
Nonaccruing TDRs are included in the nonaccrual loan amounts noted. At September 30, 2011,
nonaccruing TDR loans were $8.0 million and had no recorded allowance. At December 31,
2010, nonaccruing TDR loans were $24.9 million and had a recorded allowance of $2.4 million.
Accruing TDRs totaled $2.0 million at September 30, 2011, and $1.2 million at December 31, 2010.
Prior to being discontinued in the second half of 2010, the Companys underwriting policy
permitted interest reserves to be partially or fully funded by loan proceeds as a means to support
acquisition, construction and development loans. As of September 30, 2011, there were no
acquisition, construction and development loans kept current with bank-funded reserves.
At September 30, 2011, OREO totaled $5.7 million all of which is recorded at values based on
the Companys 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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Table of Contents
The following table summarizes nonperforming assets at September 30, 2011 and December 31,
2010, 2009, 2008, 2007 and 2006 (dollars in thousands):
Nonperforming Assets
September 30, | December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2006* | |||||||||||||||||||
Nonaccrual loans |
$ | 19,448 | $ | 40,911 | $ | 2,688 | $ | | $ | | $ | | ||||||||||||
Past due 90 days or more and accruing |
| | | | | | ||||||||||||||||||
Troubled debt restructuring |
2,001 | 1,198 | | | | | ||||||||||||||||||
Total nonperforming loans |
21,449 | 42,109 | 2,688 | | | | ||||||||||||||||||
Other real estate owned |
5,691 | 1,246 | 1,550 | 1,431 | | | ||||||||||||||||||
Loans held for sale |
1,559 | | | | | | ||||||||||||||||||
Total nonperforming assets |
$ | 28,699 | $ | 43,355 | $ | 4,238 | $ | 1,431 | $ | | $ | | ||||||||||||
Nonperforming loans to total loans |
5.84 | % | 10.53 | % | 0.68 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||
Nonperforming assets to total assets |
4.93 | % | 7.04 | % | 0.89 | % | 0.33 | % | 0.00 | % | 0.00 | % | ||||||||||||
Allowance for loan losses to
nonperforming assets |
34.26 | % | 28.66 | % | 175.00 | % | 389.00 | % | 0.00 | % | 0.00 | % |
* | Park Sterling Bank commenced operations on October 25, 2006 |
Deposits and Other Borrowings
The Company offers a broad range of deposit instruments, including personal and business
checking accounts, individual retirement accounts, business and personal money market accounts and
certificates of deposit at competitive interest rates. Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit and the interest rate,
among other factors. The Company regularly evaluates the internal cost of funds, surveys rates
offered by competing institutions, reviews cash flow requirements for lending and liquidity and
executes rate changes when deemed appropriate.
Total deposits decreased by $32.8 million, or 8.0%, from December 31, 2010 to September 30,
2011. Core deposits (excluding brokered time deposits) decreased $12.5 million, or 4.1%, while
brokered time deposits decreased by $20.3 million, or 19.2%. The decrease in core deposits resulted
from a shift in pricing to reduce interest expense.
Borrowed funds totaled $28.0 million at September 30, 2011, compared to $27.8 million at
December 31, 2010.
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Results of Operations
The following table summarizes components of income and expense and the changes in those
components for the three and nine months ended September 30, 2011 and 2010 (dollars in thousands):
Condensed Consolidated Statements of Loss
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||||||||
2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||||||||||
(Unaudited) | $ | % | (Unaudited) | $ | % | |||||||||||||||||||||||||||
Gross interest income |
$ | 5,211 | $ | 5,559 | $ | (348 | ) | -6.3 | % | $ | 16,224 | $ | 16,848 | $ | (624 | ) | -3.7 | % | ||||||||||||||
Gross interest expense |
1,357 | 1,929 | (572 | ) | -29.7 | % | 4,642 | 5,711 | (1,069 | ) | -18.7 | % | ||||||||||||||||||||
Net interest income |
3,854 | 3,630 | 224 | 6.2 | % | 11,582 | 11,137 | 445 | 4.0 | % | ||||||||||||||||||||||
Provision for loan
losses |
568 | 6,143 | (5,575 | ) | -90.8 | % | 8,275 | 8,768 | (493 | ) | -5.6 | % | ||||||||||||||||||||
Noninterest income |
111 | 26 | 85 | 326.9 | % | 227 | 88 | 139 | 158.0 | % | ||||||||||||||||||||||
Noninterest expense |
5,216 | 2,990 | 2,226 | 74.4 | % | 14,924 | 7,510 | 7,414 | 98.7 | % | ||||||||||||||||||||||
Net loss before taxes |
(1,819 | ) | (5,477 | ) | 3,658 | -66.8 | % | (11,390 | ) | (5,053 | ) | (6,337 | ) | 125.4 | % | |||||||||||||||||
Income tax benefit |
(443 | ) | (1,809 | ) | 1,366 | -75.5 | % | (4,013 | ) | (1,714 | ) | (2,299 | ) | 134.1 | % | |||||||||||||||||
Net loss |
$ | (1,376 | ) | $ | (3,668 | ) | $ | 2,292 | -62.5 | % | $ | (7,377 | ) | $ | (3,339 | ) | $ | (4,038 | ) | 120.9 | % | |||||||||||
Net Income (Loss). The net loss for the three months ended September 30, 2011 was $1.4
million compared to net loss of $3.7 million for the same period in 2010. This decrease in net loss
of $2.3 million resulted primarily from a $5.6 million decrease in provision for loan losses
partially offset by an increase in noninterest expense of $2.2 million and a decrease in tax
benefit of $1.4 million. The net loss for the nine months ended September 30, 2011 was $7.4 million
compared to net loss of $3.3 million for the same period in 2010. This increase of $4.1 million
resulted primarily from a $7.4 million increase in noninterest expense offset by a $2.2 million
increase in tax benefits.
Annualized return on average assets decreased during the nine-month period ended September 30,
2011 to (1.60)% from (.88)% for the same period in 2010. Annualized return on average equity
increased from (6.39)% for the nine-month period ended September 30, 2010 to (5.61)% for the same
period in 2011.
Net Interest Income. The Companys 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.
Net interest income increased modestly to $3.9 million for the three-month periods ended September
30, 2011 from $3.6 million for the same period in 2010. During the nine-month period ended
September 30, 2011, net interest income was $11.6 million as compared to $11.1 million for the same
period in 2010, an increase of $0.5 million, or 4.0%.
Total average interest-earning assets increased by $29.0 million, or 5.4%, to $568.7 million
for the three months ended September 30, 2011 from $539.7 million for the same period in the
previous year. The Company experienced significant movement in average balances of interest-earning
assets. Average Federal funds sold decreased by $33.9 million driven by lower of levels of
deposits. Average loans declined by $32.5 million, a function of maturities, normal amortization
and charge-offs, net of production. The declines were offset by $69.9 million increase in
investment securities due to the investment of the net proceeds from the Public Offering and a
$25.5 million increase in interest-earning balance at banks in preparation for cash needs related
to the Community Capital merger.
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Table of Contents
Average balances of total interest-bearing liabilities decreased by $24.8 million in the third
quarter of 2011, with average total interest-bearing deposit balances decreasing by $24.6 million,
or 6.5%, to $354.9 million from $379.5 million for the same period in 2010. Average brokered
deposits declined by $31.1 million from the previous year as management reduced the Companys
wholesale funding. This decline in brokered deposits was partially offset by an increase in other
average deposits of $19.8 million in the third quarter of 2011 as compared to the same period in
2010. This increase in other average deposits included an increase in average noninterest-bearing
deposits
of $13.3 million, or 43.1%, to $44.1 million at September 30, 2011 and an increase in average
savings and money market deposits of $54.9 million, or 105.4%, to $107.1 million at September 30,
2011.
The Companys net interest margin increased from 2.67% in the three-month period ended
September 30, 2010 to 2.69% in the same period in 2011 as a result of lower yields on
interest-bearing liabilities declining more than lower yields on interest-earning assets. Interest
paid on funding sources for the three months ended September 30, 2011 totaled $1.4 million,
reflecting a 1.40% 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 1.88%.
Total average interest-earning assets increased by $94.3 million, or 19.4%, to $580.4 million
for the nine months ended September 30, 2011 from $486.1 million for the same period in the
previous year. The Company experienced growth in the average balances of interest-earning assets,
specifically investment securities available-for-sale and Federal funds sold due to the investment
of the net proceeds from the Public Offering. The average balance of investment securities
available-for-sale increased by $84.8 million along with a $14.1 million increase in the average
balance of Federal funds sold.
Average balances of total interest-bearing liabilities decreased for the nine months ended
September 30, 2011, with average total interest-bearing deposit balances decreasing by $6.8
million, or 1.8%, to $365.1 million in 2011 from $371.9 million for the same period in 2010.
Average brokered deposits declined by $31.8 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 $36.7 million in the first nine 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 $11.8 million, or 41.1%, to $40.3 million at September 30, 2011 and
an increase in average savings and money market deposits of $44.9 million, or 97.5%, to $90.9
million at September 30, 2011.
The Companys net interest margin decreased from 3.06% in the nine-month period ended
September 30, 2010 to 2.67% 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 nine months
ended September 30, 2011 totaled $4.6 million, reflecting a 1.58% cost of interest-bearing
liabilities. For the same period in 2010, interest of $5.7 million was paid at a cost of
interest-bearing liabilities of 1.89%.
53
Table of Contents
The following tables summarize net interest income and average yields and rates paid for the
periods indicated (dollars in thousands):
Average Balance Sheets and Net Interest Analysis
For the Three Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans, including fees (1) |
$ | 367,096 | $ | 4,283 | 4.63 | % | $ | 399,580 | $ | 4,963 | 4.93 | % | ||||||||||||
Federal funds sold |
36,505 | 22 | 0.24 | % | 70,388 | 42 | 0.24 | % | ||||||||||||||||
Taxable investment securities |
118,445 | 681 | 2.30 | % | 50,216 | 370 | 2.95 | % | ||||||||||||||||
Tax-exempt investment securities |
16,201 | 181 | 4.47 | % | 14,570 | 161 | 4.42 | % | ||||||||||||||||
Other interest-earning assets |
30,496 | 44 | 0.57 | % | 4,971 | 23 | 1.84 | % | ||||||||||||||||
Total interest-earning assets |
568,743 | 5,211 | 3.64 | % | 539,725 | 5,559 | 4.09 | % | ||||||||||||||||
Allowance for loan losses |
(10,698 | ) | (9,061 | ) | ||||||||||||||||||||
Cash and due from banks |
14,315 | 8,061 | ||||||||||||||||||||||
Premises and equipment |
5,087 | 4,596 | ||||||||||||||||||||||
Other assets |
29,607 | 12,339 | ||||||||||||||||||||||
Total assets |
$ | 607,054 | $ | 555,660 | ||||||||||||||||||||
Liabilities and shareholders equity |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing demand |
$ | 12,770 | $ | 3 | 0.09 | % | $ | 9,695 | $ | 3 | 0.12 | % | ||||||||||||
Savings and money market |
107,069 | 155 | 0.57 | % | 52,138 | 101 | 0.77 | % | ||||||||||||||||
Time deposits core |
141,154 | 487 | 1.37 | % | 192,666 | 909 | 1.87 | % | ||||||||||||||||
Time deposits brokered |
93,906 | 381 | 1.61 | % | 125,007 | 581 | 1.84 | % | ||||||||||||||||
Total interest-bearing deposits |
354,899 | 1,026 | 1.15 | % | 379,506 | 1,594 | 1.67 | % | ||||||||||||||||
Federal Home Loan Bank advances |
20,000 | 140 | 2.78 | % | 20,000 | 144 | 2.86 | % | ||||||||||||||||
Other borrowings |
8,418 | 191 | 9.00 | % | 8,490 | 191 | 8.93 | % | ||||||||||||||||
Total borrowed funds |
28,418 | 331 | 4.62 | % | 28,490 | 335 | 4.67 | % | ||||||||||||||||
Total interest-bearing liabilities |
383,317 | 1,357 | 1.40 | % | 407,996 | 1,929 | 1.88 | % | ||||||||||||||||
Net interest rate spread |
3,854 | 2.23 | % | 3,630 | 2.21 | % | ||||||||||||||||||
Noninterest-bearing demand deposits |
44,130 | 30,833 | ||||||||||||||||||||||
Other liabilities |
5,210 | 2,168 | ||||||||||||||||||||||
Shareholders equity |
174,397 | 114,663 | ||||||||||||||||||||||
Total liabilities and shareholders
equity |
$ | 607,054 | $ | 555,660 | ||||||||||||||||||||
Net interest margin |
2.69 | % | 2.67 | % | ||||||||||||||||||||
(1) | Average loan balances include nonaccrual loans. |
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Table of Contents
Average Balance Sheets and Net Interest Analysis
For the Nine Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans, including fees (1) |
$ | 383,242 | $ | 13,491 | 4.71 | % | $ | 398,381 | $ | 15,275 | 5.13 | % | ||||||||||||
Federal funds sold |
48,555 | 85 | 0.23 | % | 34,358 | 60 | 0.23 | % | ||||||||||||||||
Taxable investment securities |
119,084 | 2,046 | 2.29 | % | 35,664 | 981 | 3.67 | % | ||||||||||||||||
Tax-exempt investment securities |
15,634 | 533 | 4.55 | % | 14,304 | 481 | 4.48 | % | ||||||||||||||||
Other interest-earning assets |
13,877 | 69 | 0.66 | % | 3,431 | 51 | 1.99 | % | ||||||||||||||||
Total interest-earning assets |
580,392 | 16,224 | 3.74 | % | 486,138 | 16,848 | 4.63 | % | ||||||||||||||||
Allowance for loan losses |
(11,569 | ) | (8,408 | ) | ||||||||||||||||||||
Cash and due from banks |
17,424 | 7,915 | ||||||||||||||||||||||
Premises and equipment |
4,757 | 4,619 | ||||||||||||||||||||||
Other assets |
22,674 | 12,847 | ||||||||||||||||||||||
Total assets |
$ | 613,678 | $ | 503,111 | ||||||||||||||||||||
Liabilities and shareholders equity |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest-bearing demand |
$ | 11,737 | $ | 11 | 0.13 | % | $ | 9,440 | $ | 6 | 0.08 | % | ||||||||||||
Savings and money market |
90,918 | 464 | 0.68 | % | 46,039 | 270 | 0.78 | % | ||||||||||||||||
Time deposits core |
164,059 | 1,870 | 1.52 | % | 186,272 | 2,718 | 1.95 | % | ||||||||||||||||
Time deposits brokered |
98,356 | 1,304 | 1.77 | % | 130,114 | 1,716 | 1.76 | % | ||||||||||||||||
Total interest-bearing deposits |
365,070 | 3,649 | 1.34 | % | 371,865 | 4,710 | 1.69 | % | ||||||||||||||||
Federal Home Loan Bank advances |
20,000 | 422 | 2.82 | % | 22,820 | 423 | 2.48 | % | ||||||||||||||||
Other borrowings |
8,276 | 571 | 9.22 | % | 8,747 | 578 | 8.83 | % | ||||||||||||||||
Total borrowed funds |
28,276 | 993 | 4.70 | % | 31,567 | 1,001 | 4.24 | % | ||||||||||||||||
Total interest-bearing liabilities |
393,346 | 4,642 | 1.58 | % | 403,432 | 5,711 | 1.89 | % | ||||||||||||||||
Net interest rate spread |
11,582 | 2.16 | % | 11,137 | 2.74 | % | ||||||||||||||||||
Noninterest-bearing demand deposits |
40,322 | 28,571 | ||||||||||||||||||||||
Other liabilities |
4,527 | 1,475 | ||||||||||||||||||||||
Shareholders equity |
175,483 | 69,633 | ||||||||||||||||||||||
Total liabilities and shareholders
equity |
$ | 613,678 | $ | 503,111 | ||||||||||||||||||||
Net interest margin |
2.67 | % | 3.06 | % | ||||||||||||||||||||
(1) | Average loan balances include nonaccrual loans. |
55
Table of Contents
Provision for Loan Losses. The Companys provision for loan losses decreased $5.6
million, or 90.7%, to $0.6 million during the three months ended September 30, 2011, from $6.1
million during the corresponding period in 2010 and $0.5 million, or 5.6%, to $8.3 million during
the nine months ended September 30, 2011, from $8.7 million during the corresponding period in
2010. The decrease in the provision is a result of a reduction in
outstanding loans and improvement in the quality of the Companys
loans. The Company had $2.0 million in net charge-offs during the three months ended September 30,
2011 compared to $0.5 million during the corresponding period in 2010. Year-to-date net charge-offs
were $10.9 million compared to $1.1 million during the first nine months of 2010.
The ratio of the allowance for loan losses to total loans was 2.68% and 3.11% at September 30,
2011 and December 31, 2010, respectively. Management periodically evaluates its 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 the
Companys earnings, being primarily comprised of service charges and gains on sales of securities.
During the third quarter, the Company purchased $8 million of
bank-owned life insurance to offset
the costs of employer provided benefit plans. Noninterest income increased from $26 thousand for
the three months ended September 30, 2010 to $111 thousand for the same period in 2011. The growth
in non-interest income was primarily related to the increase in the
cash surrender value of bank-owned life insurance of $52 thousand and a $25 thousand annual dividend on the Companys SBIC
investment.
Noninterest income increased from $88 thousand for the nine months ended September 30, 2010 to
$227 thousand for the same period in 2011. The growth in non-interest income was primarily related
to the increase in the cash surrender value of bank-owned life insurance of $52 thousand for the
nine months ended September 30, 2011.
Noninterest Expense. The level of noninterest expense substantially affects the Companys
profitability. Total noninterest expense was $5.2 million for the three months ended September 30,
2011 compared to $3.0 million for the same period in 2010. The increase of $2.2 million, or 74.4%,
included 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 the Companys change in strategy
and expansion into de novo markets. FTEs increased from 82 at June 30, 2011 to 83 at September 30,
2011, compared to an increase of 5 from 49 at June 30, 2010 to 54 at September 30, 2011. The
increase in noninterest expense also included a $0.6 million increase in legal and professional fees
of which approximately $0.5 million was merger-related.
Total noninterest expense was $14.9 million for the nine months ended September 30, 2011
compared to $7.5 million for the same period in 2010. The increase of $7.4 million, or 98.7%,
included an increase in salaries and benefits in the amount of $4.2 million as a result of an
increase in FTEs, reflecting the Companys change in strategy and expansion into de novo markets.
FTEs increased from 62 at December 31, 2010 to 83 September 30, 2011, compared to an increase of 11
from 43 at December 31, 2009 to 54 at September 30, 2010. Legal and professional fees also
increased by $2.0 million primarily as a result of the Company becoming a public entity.
Approximately $1.2 million of these fees was merger-related.
56
Table of Contents
The following table presents components of noninterest expense for the three and nine months
ended September 30, 2011 and 2010 (dollars in thousands):
Noninterest Expense
Three months ended | Nine months ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||||||||||
2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||||||||||
(Unaudited) | $ | % | (Unaudited) | $ | % | |||||||||||||||||||||||||||
Salaries and employee benefits |
$ | 3,051 | $ | 1,777 | $ | 1,274 | 71.7 | % | $ | 8,533 | $ | 4,328 | $ | 4,205 | 97.2 | % | ||||||||||||||||
Occupancy and equipment |
369 | 236 | 133 | 56.4 | % | 926 | 666 | 260 | 39.0 | % | ||||||||||||||||||||||
Advertising and promotion |
115 | 84 | 31 | 36.9 | % | 240 | 237 | 3 | 1.3 | % | ||||||||||||||||||||||
Legal and professional fees |
721 | 78 | 643 | 824.4 | % | 2,233 | 237 | 1,996 | 842.2 | % | ||||||||||||||||||||||
Deposit charges and FDIC insurance |
134 | 184 | (50 | ) | -27.2 | % | 617 | 543 | 74 | 13.6 | % | |||||||||||||||||||||
Data processing and outside
service fees |
142 | 109 | 33 | 30.3 | % | 393 | 302 | 91 | 30.1 | % | ||||||||||||||||||||||
Director fees |
45 | 164 | (119 | ) | -72.6 | % | 131 | 211 | (80 | ) | -37.9 | % | ||||||||||||||||||||
Net cost of operation of other
real estate |
101 | 120 | (19 | ) | -15.8 | % | 429 | 395 | 34 | 8.6 | % | |||||||||||||||||||||
Loan and collection expense |
180 | 82 | 98 | 119.5 | % | 375 | 161 | 214 | 132.9 | % | ||||||||||||||||||||||
Shareholder reporting expense |
36 | 8 | 28 | 350.0 | % | 194 | 24 | 170 | 708.3 | % | ||||||||||||||||||||||
Other noninterest expense |
322 | 148 | 174 | 117.6 | % | 853 | 406 | 447 | 110.1 | % | ||||||||||||||||||||||
Total noninterest expense |
$ | 5,216 | $ | 2,990 | $ | 2,226 | 74.4 | % | $ | 14,924 | $ | 7,510 | $ | 7,414 | 98.7 | % | ||||||||||||||||
Income Taxes. The Company generates 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 the Companys effective tax rate. For the three months ended
September 30, 2011, the Company recognized an income tax benefit of $0.4 million compared to a
benefit of $1.8 million for the same period in 2010. For the nine months ended September 30, 2011,
the Company recognized an income tax benefit of $4.0 million compared to a benefit of $1.7 million
for the same period in 2010. The effective tax rate for the nine months ended September 30, 2011
was 35.22% compared to 33.92% for the same period in 2010.
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, the Company occasionally has
short-term investments at its primary correspondent bank in the form of Federal funds sold.
Liquidity is governed by an asset/liability policy approved by the board of directors and
administered by an internal Senior Management Risk Committee (the Committee). The Committee
reports on a monthly basis asset/liability related matters to the
Loan and Risk Committee of the board of directors.
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Table of Contents
The Companys internal liquidity ratio was 49.7% at September 30, 2011 compared to 50.5% at
December 31, 2010. In addition, at September 30, 2011, the Company had an additional $36.5 million
of credit available from the FHLB, $23.9 million from the Federal Reserve Discount Window and
available lines of credit totaling $70.0 million from correspondent banks.
At September 30, 2011, the Company had $31.8 million of loan commitments outstanding, $69.1
million of pre-approved but unused lines of credit and $3.7 million of standby letters of credit
and financial guarantees. 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, the Company 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.
The Companys capital position is reflected in its shareholders equity, subject to certain
adjustments for regulatory purposes. Shareholders equity, or capital, is a measure of the
Companys net worth, soundness and viability. Shareholders equity on September 30, 2011 was $174.6
million compared to the December 31, 2010 balance of $177.1 million. In August 2010, the Company
completed its 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, the Company 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 Quarterly Report on 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 Federal Reserve Board and the FDIC require bank
holding companies and 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 generally
of common shareholders equity, a limited amount of qualifying perpetual preferred stock and trust
preferred securities, and minority interests in consolidated subsidiaries, net of goodwill and
other intangible assets and certain other items) and total capital (consisting of Tier 1 capital
and Tier 2 capital, which generally includes certain preferred stock, mandatory convertible debt
securities and term subordinated debt) 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 September 30, 2011, the Company and the Bank satisfied the
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Table of Contents
respective minimum regulatory capital requirements, and were well capitalized within the meaning
of Federal regulatory requirements. The Companys risk-weighted assets at September 30, 2011 and
December 31, 2010 were $428.6 million and $431.3 million, respectively. Actual capital levels and
minimum levels at September 30, 2011 and December 31, 2010 were (dollars in thousands):
Capital Ratios
To Be Well | ||||||||||||||||||||||||
For Capital | Capitalized Under | |||||||||||||||||||||||
Adequacy | Prompt Corrective | |||||||||||||||||||||||
Actual | Purposes | Actions Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Park Sterling Corporation |
||||||||||||||||||||||||
September 30, 2011 |
||||||||||||||||||||||||
Total Risk-Based Capital
Ratio |
$ | 174,273 | 40.66 | % | $ | 34,288 | 8.00 | % | $ | 42,860 | 10.00 | % | ||||||||||||
Tier 1 Capital Ratio |
161,965 | 37.79 | % | 17,144 | 4.00 | % | 25,716 | 6.00 | % | |||||||||||||||
Tier 1 Leverage Ratio |
161,965 | 27.13 | % | 23,876 | 4.00 | % | 29,846 | 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 |
||||||||||||||||||||||||
September 30, 2011 |
||||||||||||||||||||||||
Total Risk-Based Capital
Ratio |
$ | 98,855 | 23.80 | % | $ | 33,225 | 8.00 | % | $ | 41,532 | 10.00 | % | ||||||||||||
Tier 1 Capital Ratio |
86,711 | 20.88 | % | 16,613 | 4.00 | % | 24,919 | 6.00 | % | |||||||||||||||
Tier 1 Leverage Ratio |
86,711 | 16.67 | % | 20,812 | 4.00 | % | 26,015 | 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 consolidated capital ratios presented herein, as of December 31, 2010, are those of the Bank, prior to the effectiveness of the Reorganization on January 1, 2011. |
The Bank has committed to its 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, the Company enters into certain contractual obligations.
Such obligations include the funding of operations through debt issuances as well as leases for
premises and equipment.
Information about the Companys off-balance sheet risk exposure is presented in Note K of the
2010 Audited Financial Statements. As part of ongoing business, the Company has 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 are generally
established for facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As of September 30, 2011, the Company was not involved in any unconsolidated SPE
transactions.
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Table of Contents
Impact of Inflation and Changing Prices
The Company has an asset and liability make-up that is distinctly different from that of an
entity with substantial investments in plant and inventory because the major portions of a
commercial banks assets are monetary in nature. As a result, the Companys performance may be
significantly influenced by changes in interest rates. Although the Company and the banking
industry are 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.
Interest Rate Sensitivity
The Committee actively evaluates and manages interest rate risk using a process developed by
the Company. The Committee is also responsible for approving the Companys asset/liability
management policies, overseeing the formulation and implementation of strategies to improve balance
sheet positioning and earnings, and reviewing the Companys interest rate sensitivity position.
The primary measures that management uses to evaluate short-term interest rate risk include
(i) cumulative gap summary, which measures potential changes in cash flows should interest rates
rise or fall; (ii) net interest income at risk, which projects the impact of different interest
rate scenarios on net interest income over one-year and two-year time horizons; (iii) net income at
risk, which projects the impact of different interest rate scenarios on net income over one-year
and two-year time horizons; and (iv) economic value of equity at risk, which measures potential
long-term risk in the balance sheet by valuing the Companys assets and liabilities at market
under different interest rate scenarios.
These measures have historically been calculated under a simulation model prepared by an
independent correspondent bank assuming incremental 100 basis point shocks (or immediate shifts) in
interest rates up to a total increase or decrease of 300 basis points. 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 the Company 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 the assumptions are reasonable, both individually
and in the aggregate. Nevertheless, the simulation modeling process produces only a sophisticated
estimate, not a precise calculation of exposure. 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.
The Companys 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%. The Company currently
operates well within these guidelines. As of September 30, 2011, based on the results of the
simulation model, the Company could expect net interest income to decrease by approximately 2.7%
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 6.3% over 12 months. At December
31, 2010, the simulation model results showed that the Company 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.
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Table of Contents
The Company uses multiple interest rate swap agreements, accounted for as either cash flow or
fair value hedges, as part of the management of interest rate risk. In May 2011, the Companys
interest rate swap that was accounted for as a cash flow hedge terminated. The swap had a notional
amount of $40.0 million that was
purchased on May 16, 2008 to protect the Company from falling rates. The Company received
6.22% fixed for a period of three years, and paid prime rate for the same period, currently at
3.25%. As a result of the termination, there was no income recorded in the three months ended
September 30, 2011. During the three months ended September 2010, the Company recorded $0.5 million
of income from this instrument. During the nine months ended September 30, 2011 and 2010, the
Company recorded $0.3 million and $0.9 million of income, respectively, from this instrument.
The Company has entered into seven loan swaps, including one forward-starting swap, accounted
for as fair value hedges. The fair value mark on the forward-starting swap will be offset when the
associated loan closes and is marked to fair value in the fourth quarter of 2011. The total
original notional amount of these swaps was $17.4 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 $(0.7) million at September 30, 2011. The Company recorded interest expense on these loan
swaps of $0.2 million and $0.4 million in each of the three and nine months ended September 30,
2011, and $0.1 million and $0.3 million in each of the three and nine months ended September 30,
2010.
For cash flow hedges, the Company uses 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.
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, 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. The Company uses 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.
Prime rate swaps (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 9 of the Companys unaudited
condensed financial statements included in this Quarterly Report on Form 10-Q for further
discussion of the Companys derivative financial instruments and hedging activities.
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Table of Contents
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 the Companys interest-earning assets
and liabilities within defined periods is referred to as gap analysis. At September 30, 2011, the
Companys cumulative one-year gap was a positive, or asset sensitive, $121.8 million, or 20.9% of
total assets. The Companys cumulative one-year gap at December 31, 2010 was $42.9 million, or
7.0%, of total assets.
The following table reflects the Companys rate sensitive assets and liabilities by maturity
as of September 30, 2011 (dollars in thousands). 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.
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Table of Contents
Interest Rate Gap Sensitivity
Within | Three | One Year | ||||||||||||||||||
Three | Months to | to Five | After | |||||||||||||||||
Months | One Year | Years | Five Years | Total | ||||||||||||||||
At September 30, 2011: |
||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||
Interest-bearing deposits |
$ | 36,311 | $ | | $ | | $ | | $ | 36,311 | ||||||||||
Federal funds sold |
5,295 | | | | 5,295 | |||||||||||||||
Securities |
6,185 | 17,280 | 60,117 | 47,085 | 130,667 | |||||||||||||||
Loan held for sale |
| | | 1,559 | 1,559 | |||||||||||||||
Loans |
207,724 | 53,348 | 105,766 | 574 | 367,412 | |||||||||||||||
Bank owned life insurance |
8,052 | | | | 8,052 | |||||||||||||||
Total interest-earning assets |
263,567 | 70,628 | 165,883 | 49,218 | 549,296 | |||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
Demand deposits |
3,106 | | 7,100 | 5,328 | 15,534 | |||||||||||||||
MMDA and savings |
104,483 | | | | 104,483 | |||||||||||||||
Time deposits |
29,516 | 91,046 | 91,523 | | 212,085 | |||||||||||||||
Short term borrowings |
1,083 | | | | 1,083 | |||||||||||||||
Long term borrowings |
| | 20,000 | 6,895 | 26,895 | |||||||||||||||
Total interest-bearing liabilities |
138,188 | 91,046 | 118,623 | 12,223 | 360,080 | |||||||||||||||
Derivatives |
16,834 | | (13,238 | ) | (3,596 | ) | | |||||||||||||
Interest sensitivity gap |
$ | 142,213 | $ | (20,418 | ) | $ | 34,022 | $ | 33,399 | $ | 189,216 | |||||||||
Cummulative interest sensitivity
gap |
$ | 142,213 | $ | 121,795 | $ | 155,817 | $ | 189,216 | ||||||||||||
Percentage of total assets |
20.89 | % | ||||||||||||||||||
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 | % | ||||||||||||||||||
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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 third 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, the Company may be a party to various legal proceedings from
time to time. There are no material pending legal proceedings to which the Company is a party or of
which any of its property is subject. In addition, the Company is not aware of any threatened
litigation, unasserted claims or assessments that could have a material adverse effect on its
business, operating results or financial condition.
Item 1A | Risk Factors |
Not applicable.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the three months ended September 30, 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.
64
Table of Contents
Item 6. | Exhibits |
The following documents are filed or furnished as exhibits to this report:
Exhibit | ||||
Number | Description of Exhibits | |||
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 |
|||
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i)
Condensed Consolidated Balance Sheets as of September 30, 2011 and
December 31, 2010; (ii) Condensed Consolidated Statements of
Income (Loss) for the three and nine months ended September 30,
2011 and 2010; (iii) Condensed Consolidated Statements of Changes
in Shareholders Equity for the nine months ended September 30,
2011 and 2010; (iv) Condensed Consolidated Statements of Cash
Flows for the nine months ended September 30, 2011 and 2010; and
(v) Notes to Condensed Consolidated Financial Statements* |
* | The information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 |
65
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
PARK STERLING CORPORATION |
||||
Date: November 14, 2011 | By: | /s/ James C. Cherry | ||
James C. Cherry | ||||
Chief Executive Officer (authorized officer) | ||||
Date: November 14, 2011 | By: | /s/ David L. Gaines | ||
David L. Gaines | ||||
Chief Financial Officer (principal financial officer) | ||||
66
Table of Contents
Exhibit Index
Exhibit | ||||
Number | Description of Exhibits | |||
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 |
|||
101 | Interactive data files pursuant to Rule 405 of Regulation
S-T: (i) Condensed Consolidated Balance Sheets as of
September 30, 2011 and December 31, 2010; (ii) Condensed
Consolidated Statements of Income (Loss) for the three and
nine months ended September 30, 2011 and 2010; (iii)
Condensed Consolidated Statements of Changes in
Shareholders Equity for the nine months ended September
30, 2011 and 2010; (iv) Condensed Consolidated Statements
of Cash Flows for the nine months ended September 30, 2011
and 2010; and (v) Notes to Condensed Consolidated Financial
Statements* |
* | The information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 |
67