XNAS:PSTB Park Sterling Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 

FORM 10-Q 


[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012

or

[  ]  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
(Registrant’s 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 x No ¨
 
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 x No ¨
 
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  x Non-accelerated filer  o Smaller reporting company  o
   (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 ¨ No x
 
As of May 8, 2012, the registrant had outstanding 32,643,627 shares of common stock, $1.00 par value per share. 

 
 
 

 
 
PARK STERLING CORPORATION 

Table of Contents
 

 
      Page No.
Part I. FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
       
 
Condensed Consolidated Balance Sheets March 31, 2012 and December 31, 2011
  2
       
 
Condensed Consolidated Statements of Income (Loss) Three Months Ended March 31, 2012 and 2011
  3
       
 
Condensed Consolidated Statements of Other Comprehensive Income (Loss) Three Months Ended March 31, 2012 and 2011
  4
       
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2012 and 2011
  5
       
 
Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2012 and 2011
  6
       
 
Notes to Condensed Consolidated Financial Statements
  7
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   37
       
Item 3. Quantitative and Qualitative Disclosures about Market Risk   56
       
Item 4. Controls and Procedures   56
       
Part II. OTHER INFORMATION    
       
Item 1. Legal Proceedings   56
       
Item 1A. Risk Factors   56
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   56
       
Item 3. Defaults Upon Senior Securities   56
       
Item 4. Mine Safety Disclosures   56
       
Item 5. Other Information   56
       
Item 6. Exhibits   57
 
 
 

 
 
PARK STERLING CORPORATION

Part I.   FINANCIAL INFORMATION
Item 1.   Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
 
   
March 31,
   
December 31,
 
   
2012
      2011*  
               
ASSETS
 
 
         
               
Cash and due from banks
  $ 18,016     $ 18,426  
Interest-earning balances at banks
    15,567       10,115  
Federal funds sold
    20,085       -  
Investment securities available-for-sale, at fair value
    232,464       210,146  
Nonmarketable equity securities
    8,510       8,510  
Loans held for sale
    8,055       6,254  
Loans
    727,862       759,047  
Allowance for loan losses
    (9,556 )     (10,154 )
Net loans
    718,306       748,893  
                 
Premises and equipment, net
    24,371       24,515  
Accrued interest receivable
    2,604       3,216  
Other real estate owned
    16,674       14,403  
Bank-owned life insurance
    26,456       26,223  
Goodwill
    649       428  
Core deposit intangible
    3,920       4,022  
Deferred tax asset
    30,143       31,131  
Other assets
    4,931       6,940  
                 
Total assets
  $ 1,130,751     $ 1,113,222  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Deposits:
               
Noninterest-bearing
  $ 148,929     $ 142,652  
Interest-bearing
    707,508       703,985  
Total deposits
    856,437       846,637  
                 
Short-term borrowings
    852       9,765  
FHLB advances
    55,000       40,000  
Subordinated debt
    12,396       12,296  
Accrued interest payable
    299       1,561  
Accrued expenses and other liabilities
    12,951       12,909  
Total liabilities
    937,935       923,168  
                 
Shareholders' equity:
               
Preferred stock, no par value 5,000,000 shares authorized; -0- issued and outstanding at March 31, 2012 and December 31, 2011
    -       -  
Common stock, $1.00 par value 200,000,000 shares authorized at March 31, 2012 and December 31, 2011; 32,643,627 shares issued and outstanding at March 31, 2012 and December 31, 2011
    32,644       32,644  
Additional paid-in capital
    172,873       172,390  
Accumulated deficit
    (16,137 )     (17,860 )
Accumulated other comprehensive income
    3,436       2,880  
Total shareholders' equity
    192,816       190,054  
                 
Total liabilities and shareholders' equity
  $ 1,130,751     $ 1,113,222  
* Derived from audited financial statements.
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
2

 
 
PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)
(Dollars in thousands, except per share data)
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Interest income
           
Loans, including fees
  $ 12,110     $ 4,758  
Federal funds sold
    8       30  
Taxable investment securities
    1,084       681  
Tax-exempt investment securities
    185       171  
Interest on deposits at banks
    10       14  
Total interest income
    13,397       5,654  
                 
Interest expense
               
Money market, NOW and savings deposits
    326       141  
Time deposits
    821       1,226  
Short-term borrowings
    3       -  
FHLB advances
    161       141  
Subordinated debt
    367       190  
Total interest expense
    1,678       1,698  
Net interest income
    11,719       3,956  
Provision for loan losses
    123       4,462  
Net interest income (loss) after provision for loan losses
    11,596       (506 )
                 
Noninterest income
               
Service charges on deposit accounts
    314       26  
Income from fiduciary activities
    540       -  
Commissions from sales of mutual funds
    59       -  
Gain on sale of securities available for sale
    -       19  
Mortgage banking income
    461       -  
Income from bank-owned life insurance
    259       -  
Other noninterest income
    322       27  
Total noninterest income
    1,955       72  
                 
Noninterest expense
               
Salaries and employee benefits
    6,124       2,507  
Occupancy and equipment
    820       256  
Advertising and promotion
    161       38  
Legal and professional fees
    312       307  
Deposit charges and FDIC insurance
    291       287  
Data processing and outside service fees
    1,349       123  
Communication fees
    232       26  
Postage and supplies
    196       39  
Core deposit intangible amortization
    102       -  
Net cost of operation of other real estate owned
    522       235  
Loan and collection expense
    244       86  
Other noninterest expense
    650       330  
Total noninterest expense
    11,003       4,234  
Income (loss) before income taxes
    2,548       (4,668 )
Income tax expense (benefit)
    825       (1,781 )
Net income (loss)
  $ 1,723     $ (2,887 )
Basic earnings (loss) per common share
  $ 0.05     $ (0.10 )
Diluted earnings (loss) per common share
  $ 0.05     $ (0.10 )
Weighted-average common shares outstanding
               
Basic
    32,075,367       28,051,098  
Diluted
    32,075,398       28,051,098  
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
3

 
 
PARK STERLING CORPORATION 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
 (Dollars in thousands)

   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Net income (loss)
  $ 1,723     $ (2,887 )
                 
Unrealized holding gains on available-for-sale securities
    844       467  
Tax effect
    (288 )     (180 )
Reclassification of gain recognized in net income
    -       (19 )
Tax effect
    -       7  
      556       275  
                 
Unrealized holding loss on swaps
    -       (270 )
Tax effect
    -       105  
      -       (165 )
                 
                 
Total comprehensive income (loss)
  $ 2,279     $ (2,777 )

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
4

 
 
PARK STERLING CORPORATION 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Three Months Ended March 31, 2012 and 2011
(Dollars in thousands)

   
Common Stock
   
Additional
Paid-In
   
Accumulated
   
Accumulated
Other
Comprehensive
   
Total
Shareholders'
 
   
Shares
   
Amount
   
Capital
   
Deficit
   
Income (Loss)
   
Equity
 
                                     
Balance at December 31, 2010
    28,051,098     $ 28,051     $ 159,489     $ (9,501 )   $ (938 )   $ 177,101  
                                                 
Issuance of restricted stock grants
    568,260       568       (568 )     -       -       -  
                                                 
Share-based compensation expense
    -       -       446       -       -       446  
                                                 
Comprehensive income (loss):
                                               
Net loss
    -       -       -       (2,887 )     -       (2,887 )
Unrealized holding gains on available-for-sale securities, net of taxes
    -       -       -       -       275       275  
Unrealized holding losses on interest rate swaps, net of taxes
    -       -       -       -       (165 )     (165 )
                                                 
Total comprehensive income (loss)
    -       -       -       -       -       (2,777 )
                                                 
Balance at March 31, 2011
    28,619,358     $ 28,619     $ 159,367     $ (12,388 )   $ (828 )   $ 174,770  
                                                 
Balance at December 31, 2011
    32,643,627     $ 32,644     $ 172,390     $ (17,860 )   $ 2,880     $ 190,054  
                                                 
Share-based compensation expense
    -       -       483       -       -       483  
                                                 
Comprehensive income:
                                               
Net income
    -       -       -       1,723       -       1,723  
Unrealized holding gains on available-for-sale securities, net of taxes
    -       -       -       -       556       556  
                                                 
Total comprehensive income
    -       -       -       -       -       2,279  
                                                 
Balance at March 31, 2012
    32,643,627     $ 32,644     $ 172,873     $ (16,137 )   $ 3,436     $ 192,816  
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
5

 
 
PARK STERLING CORPORATION

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

   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Cash flows from operating activities
           
Net income (loss)
  $ 1,723     $ (2,887 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Accretion on acquired loans
    (2,481 )     -  
Net (accretion) amortization on investments
    (536 )     329  
Other depreciation and amortization
    432       65  
Provision for loan losses
    123       4,462  
Share-based compensation
    483       446  
Deferred income taxes
    700       -  
Net gains on sales of investment securities available-for-sale
    -       (19 )
Net (gains) losses on sales of other real estate
    52       (24 )
Net losses on sales of premises and equipment
    9       -  
Writedowns on other real estate owned
    248       -  
Income from bank owned life insurance
    (259 )     -  
Proceeds from loans held for sale
    14,008       -  
Disbursements for loans held for sale
    (15,809 )     -  
Change in assets and liabilities:
               
Decrease in accrued interest receivable
    612       171  
(Increase) decrease in other assets
    2,036       (1,465 )
Decrease in accrued interest payable
    (1,262 )     (45 )
Increase in accrued expenses and other liabilities
    142       653  
Net cash provided by operating activities
    221       1,686  
                 
Cash flows from investing activities
               
Net decrease in loans
    28,323       5,480  
Purchases of premises and equipment
    (195 )     (139 )
Purchases of investment securities available-for-sale
    (29,813 )     (1,746 )
Proceeds from sales of investment securities available-for-sale
    -       24,314  
Proceeds from maturities and call of investment securities available-for-sale
    8,875       5,887  
Improvements to other real estate
    -       241  
Proceeds from sale of other real estate
    1,829       534  
Net purchases of nonmarketable equity securities
    -       (153 )
Net cash provided by investing activities
    9,019       34,418  
                 
Cash flows from financing activities
               
Net increase in deposits
    9,800       13,692  
Net increase in FHLB advances
    15,000       -  
Increase (decrease) in short-term borrowings
    (8,913 )     339  
Net cash provided by financing activities
    15,887       14,031  
                 
Net increase in cash and cash equivalents
    25,127       50,135  
                 
Cash and cash equivalents, beginning
    28,541       65,378  
                 
Cash and cash equivalents, ending
  $ 53,668     $ 115,513  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 2,940     $ 1,743  
Cash paid for income taxes
    257       -  
                 
Supplemental disclosure of noncash investing and financing activities:
         
Change in unrealized gain on available-for-sale securities, net of tax
  $ 556     $ 275  
Change in unrealized loss on swap, net of tax
    -       (165 )
Loans transferred to other real estate owned
    4,400       1,070  
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
6

 
 
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 of 1956. On January 1, 2011, the Company acquired all of the outstanding stock of the Bank in a statutory exchange transaction (the “Reorganization”).
 
The accompanying unaudited condensed consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Because the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the Company’s audited consolidated financial statements and accompanying footnotes (the “2011 Audited Financial Statements”) included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”) on March 14, 2012 (the “2011 Form 10-K”).
 
In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the financial position of the Company as of March 31, 2012 and December 31, 2011, and the results of its operations and cash flows for the three months ended March 31, 2012 and December 31, 2011. Operating results for the three-month period ended March 31, 2012 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 purchased credit-impaired (“PCI”) loans, 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.

Note 2 - Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) 2011-04: Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”). The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Financial Accounting Standards Board (“FASB”) does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820. The Update also reflects the FASB’s consideration of the different characteristics of public and non-public entities and the needs of users of their financial statements. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The required disclosures are included in the accompanying unaudited condensed consolidated financial statements.
 
 
7

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

ASU 2011-05: Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this Update allow an entity the option 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. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. A statement of other comprehensive income is included in the accompanying unaudited condensed consolidated financial statements.

Note 3– Business Combinations

Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with FASB Accounting Standards Codification (“ASC”) 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. Goodwill of $649 thousand was generated in connection with the acquisition, all of which is expected to be deductible for income tax purposes.  As a result of refinements to the fair value mark on loans and other liabilities subsequent to December 31, 2011, goodwill as indicated below is $221 thousand greater than the goodwill estimated in the 2011 Audited Financial Statements.

On November 1, 2011, Community Capital Corporation 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 received either $3.30 in cash or 0.6667 of a share of 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 fair value of the shares of Common Stock issued as part of the consideration paid for Community Capital was determined on the basis of the closing price of the Common Stock on October 31, 2011. On that date, the closing stock price was $3.85 per share, resulting in a final transaction value of approximately $28.8 million.

Community Capital operated 17 full service branches and one drive through facility in South Carolina at the date of acquisition. The acquisition of Community Capital was in furtherance of the Company’s business plan seeking accelerated organic growth and to acquire regional and community banks in the Carolinas and Virginia.

 
8

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
The following table summarizes the consideration paid by the Company in the merger with Community Capital and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date (dollars in thousands):
 
   
As Recorded
   
Fair Value and Other
       
   
by
   
Merger Related
   
As Recorded
 
   
Community Capital
   
Adjustments
   
by the Company
 
Consideration Paid
                 
Cash
              $ 13,282  
Common shares issued (4,024,269 shares)
                15,564  
                     
Fair Value of Total Consideration Transferred
              $ 28,846  
                     
Recognized amounts of identifiable assets acquired and liabilities assumed:
               
                     
Cash and cash equivalents
  $ 97,178     $ -     $ 97,178  
Securities
    45,055       -       45,055  
Nonmarketable equity securities
    8,451       -       8,451  
Loans held for sale
    6,704       -       6,704  
Loans, net of allowance
    413,016       (31,500 )     381,516  
Premises and equipment
    14,841       4,377       19,218  
Core deposit intangibles
    942       3,148       4,090  
Other real estate owned
    8,420       (668 )     7,752  
Bank owned life insurance
    17,975       -       17,975  
Deferred tax asset
    8,046       10,997       19,043  
Other assets
    6,677       (1,220 )     5,457  
                         
Total assets acquired
  $ 627,305     $ (14,866 )   $ 612,439  
                         
Deposits
  $ 466,398     $ 627     $ 467,025  
Federal Home Loan Bank advances
    95,400       5,634       101,034  
Junior Subordinated Debt
    10,310       (4,976 )     5,334  
Other liabilities
    8,228       2,621       10,849  
                         
Total liabilities assumed
  $ 580,336     $ 3,906     $ 584,242  
                         
Total identifiable assets
  $ 46,969     $ (18,772 )   $ 28,197  
                         
Goodwill resulting from acquisition
                  $ 649  
 
Note 4 – Shareholders’ Equity

Share-Based Plans

Pursuant to the Park Sterling Corporation 2010 Long-Term Incentive Plan, 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 option’s 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.
 
 
9

 

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
There were no options or restricted shares issued during the three months ended March 31, 2012. There were 82,340 options and 568,260 restricted shares issued during the three months ended March 31, 2011.
 
Approximately 27,000 options vested during the three months ended March 31, 2012; no options vested during the three months ended March 31, 2011. The compensation expense for stock options was $323 thousand and $310 thousand for the three months ended March 31, 2012 and 2011, respectively. At March 31, 2012, unrecognized compensation cost related to nonvested stock options of $1.8 million is expected to be recognized over a weighted-average period of 0.95 years.
 
No shares of restricted stock vested during the three months ended March 31, 2012. The compensation expense for restricted shares was $160 thousand and $136 for the three months ended March 31, 2012 and 2011, respectively.  At March 31, 2012, unrecognized compensation cost related to nonvested restricted shares of $1.5 million is expected to be recognized over a weighted-average period of 2.48 years.
 
Note 5 - Investment Securities

The amortized cost, unrealized gains and losses, and estimated fair value of securities available-for-sale at March 31, 2012 and December 31, 2011 are as follows:
 
 Amortized Cost and Fair Value of Investment Portfolio
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(Dollars in thousands)
 
March 31, 2012
                       
Securities available-for-sale:
                       
U.S. Government agencies
  $ 521     $ 65     $ -     $ 586  
Residential agency mortgage-backed securities
    158,588       2,798       (2 )     161,384  
Collateralized agency mortgage obligations
    51,142       1,240       -       52,382  
Municipal securities
    16,178       1,527       -       17,705  
Corporate and other securities
    500       -       (93 )     407  
Total investment securities
  $ 226,929     $ 5,630     $ (95 )   $ 232,464  
                                 
December 31, 2011
                               
Securities available-for-sale:
                               
U.S. Government agencies
  $ 523     $ 68     $ -     $ 591  
Residential agency mortgage-backed securities
    135,894       2,313       (14 )     138,193  
Collateralized agency mortgage obligations
    52,354       1,086       -       53,440  
Municipal securities
    16,184       1,333       -       17,517  
Corporate and other securities
    500       -       (95 )     405  
Total investment securities
  $ 205,455     $ 4,800     $ (109 )   $ 210,146  
 
The amortized cost and fair values of securities available-for-sale at March 31, 2012 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of the Company’s residential mortgage-backed securities are backed by an agency of the U.S. government. The Company did not own any commercial mortgage-backed securities as of March 31, 2012 or December 31, 2011.
 
 
10

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Maturities of Investment Portfolio
 
   
March 31, 2012
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
   
(Dollars in thousands)
 
             
U.S. Government agencies
           
Due after one year through five years
  $ 521     $ 586  
Residential agency mortgage-backed securities
               
Due after five years through ten years
    21,083       21,146  
Due after ten years
    137,505       140,238  
Collateralized agency mortgage obligations
               
Due after ten years
    51,142       52,382  
Municipal securities
               
Due under one year
    135       135  
Due after one year through five years
    541       542  
Due after ten years
    15,502       17,028  
Corporate and other securities
               
Due after five years through ten years
    500       407  
Due after ten years
    -       -  
Total investment securities
  $ 226,929     $ 232,464  
 
Management periodically evaluates each investment security for other than temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, for investment securities with unrealized losses at March 31, 2012 and December 31, 2011. The unrealized losses relate to debt securities that have incurred fair value reductions due to market volatility and uncertainty since the securities were purchased. Management believes that the unrealized losses are more likely than not to reverse as confidence returns to investment markets. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, and it is more likely than not that the Company will not have to sell the investments before recovery of their amortized cost basis, none of the securities are deemed to be other than temporarily impaired. One corporate debt security has been in a continuous loss position for twelve months or more at March 31, 2012 and December 31, 2011.
 
 
11

 
 
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
 
   
(Dollars in thousands)
 
March 31, 2012
                                   
Securities available-for-sale:
                                   
Residential agency mortgage-backed securities
  $ 15,209     $ (2 )   $ -     $ -     $ 15,209     $ (2 )
Corporate and other securities
    -       -       407       (93 )     407       (93 )
                                                 
Total temporarily impaired securities
  $ 15,209     $ (2 )   $ 407     $ (93 )   $ 15,616     $ (95 )
                                                 
December 31, 2011
                                               
Securities available-for-sale:
                                               
Residential agency mortgage-backed securities
  $ 5,162     $ (14 )   $ -     $ -     $ 5,162     $ (14 )
Corporate and other securities
    -       -       405       (95 )     405       (95 )
                                                 
Total temporarily impaired securities
  $ 5,162     $ (14 )   $ 405     $ (95 )   $ 5,567     $ (109 )
 
Securities with a fair value of $41.5 million and $38.0 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure repurchase agreements, to secure public and trust deposits, and for other purposes as required and permitted by law. There were no sales of securities during the three months ended March 31, 2012. During the three months ended March 31, 2011, the Company sold $24.3 million of securities available-for-sale, resulting in a gross gain of $0.02 million.
 
The Company has nonmarketable equity securities consisting of investments in several financial institutions and the investment in Community Capital Corporation Statutory Trust I. The aggregate cost of these investments totaled $8.5 million at March 31, 2012 and December 31, 2011. Included in these amounts at March 31, 2012 and December 31, 2011 was $8.0 million of Federal Home Loan Bank (“FHLB”) stock. All nonmarketable equity securities were evaluated for impairment as of March 31, 2012 and December 31, 2011. The following factors have been considered in determining the carrying amount of FHLB stock: (1) management’s current belief that the Company has sufficient liquidity to meet all operational needs in the foreseeable future and would not need to dispose of the stock below recorded amounts, (2) management’s belief that the FHLB has the ability to absorb economic losses given the expectation that the FHLB has a high degree of government support and (3) redemptions and purchases of the stock are at the discretion of the FHLB. At March 31, 2012 and December 31, 2011, the Company estimated that the fair values of nonmarketable equity securities equaled or exceeded the cost of each of these investments, and, therefore, the investments were not impaired.
 
 
12

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Note 6 – Loans and Allowance for Loan Losses

The following is a summary of the loan portfolio at:

   
March 31, 2012
   
December 31, 2011
 
   
PCI loans
   
All other loans
   
Total
   
PCI loans
   
All other loans
   
Total
 
    (dollars in thousands)  
Commercial:
                                   
Commercial and industrial
  $ 2,101     $ 69,993     $ 72,094     $ 4,276     $ 76,470     $ 80,746  
Commercial real estate (CRE) - owner-occupied
    8,964       157,100       166,064       9,953       159,710       169,663  
CRE - investor income producing
    13,662       179,979       193,641       14,006       180,454       194,460  
Acquisition, construction and development (AC&D)
    20,585       66,480       87,065       24,243       68,106       92,349  
Other commercial
    53       13,465       13,518       57       15,601       15,658  
Total commercial loans
    45,365       487,017       532,382       52,535       500,341       552,876  
                                                 
Consumer:
                                               
Residential mortgage
    9,087       66,290       75,377       9,447       70,065       79,512  
Home equity lines of credit
    342       85,687       86,029       343       90,065       90,408  
Residential construction
    922       23,748       24,670       1,351       23,775       25,126  
Other loans to individuals
    127       9,508       9,635       142       11,354       11,496  
Total consumer loans
    10,478       185,233       195,711       11,283       195,259       206,542  
Total loans
    55,843       672,250       728,093       63,818       695,600       759,418  
Deferred fees
    -       (231 )     (231 )     -       (371 )     (371 )
Total loans, net of deferred fees
  $ 55,843     $ 672,019     $ 727,862     $ 63,818     $ 695,229     $ 759,047  
 
On both March 31, 2012 and December 31, 2011, the Company had sold participations in loans aggregating $3.6 million to other financial institutions on a nonrecourse basis.  Collections on loan participations and remittances to participating institutions conform to customary banking practices.
 
The Bank accepts residential mortgage loan applications and funds loans of qualified borrowers.  Funded loans are sold with limited recourse to investors under the terms of pre-existing commitments.  The Company does not service residential mortgage loans for the benefit of others.
 
Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various other financial institutions. Various recourse agreements exist, ranging from thirty days to twelve months. The Company’s exposure to credit loss in the event of nonperformance by the other party to the loan is represented by the contractual notional amount of the loan. Since none of the loans has ever been returned to the Company, the total loans sold with limited recourse amount do not necessarily represent future cash requirements. The Company uses the same credit policies is making loans held for sale as it does for on-balance-sheet instruments.  Total loans sold with limited recourse in the three months ended March 31, 2012 were $21.4 million. There were no loans sold in the three months ended March 31, 2011.
 
At March 31, 2012 and December 31, 2011, the carrying value of loans pledged as collateral on FHLB borrowings totaled $144.2 million and $135.5 million.
 
 
13

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Concentrations of Credit - Loans are primarily made in the Charlotte, Research Triangle and Wilmington regions of North Carolina, and the Charleston, Upstate and Midlands areas 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 March 31, 2012 and December 31, 2011, the Company had no loans outstanding with non-U.S. entities.
 
Allowance for Loan Losses - The following table presents, by portfolio segment, the activity in the allowance for loan losses for the quarter ended March 31, 2012. The use of historical loss factors in the Company’s allowance for loan loss methodology resulted in a reduction in several portfolio segments. The Company reclassified the allowance balance between classes within the CRE portfolio segment at December 31, 2011 from what was previously disclosed. The total allowance at December 31, 2011 and the total CRE portfolio segment allowance was not changed. These reclassifications are presented in the tables to Note 6 – “Loans and Allowance for Loan Losses”.
 
   
Commercial and industrial
   
CRE - owner-occupied
   
CRE - investor income producing
   
AC&D
   
Other commercial
   
Residential mortgage
   
Home equity lines of credit
   
Residential construction
   
Other loans to individuals
   
Unallocated
   
Total
 
    (dollars in thousands)  
For the quarter ended March 31, 2012
                                                                 
Allowance for Loan Losses:
                                                                 
Balance, beginning of year
  $ 703     $ 740     $ 2,106     $ 3,883     $ 17     $ 309     $ 1,898     $ 455     $ 43     $ -     $ 10,154  
Provision for loan losses
    427       18       (208 )     (408 )     88       (10 )     (35 )     117       (16 )     150       123  
Charge-offs
    (169 )     -       (54 )     (345 )     (94 )     -       (165 )     -       (1 )     -       (828 )
Recoveries
    11       -       1       81       -       1       -       -       13       -       107  
Net charge-offs
    (158 )     -       (53 )     (264 )     (94 )     1       (165 )     -       12       -       (721 )
Ending balance
  $ 972     $ 758     $ 1,845     $ 3,211     $ 11     $ 300     $ 1,698     $ 572     $ 39     $ 150     $ 9,556  
 
At March 31, 2011, the allowance methodology considered loans by commercial, consumer and unallocated, as presented in the following table:
 
   
Commercial
   
Consumer
   
Unallocated
   
Total
 
    (dollars in thousands)  
For the quarter ended March 31, 2011
     
Allowance for Loan Losses:
                       
Balance, beginning of year
  $ 9,165     $ 1,375     $ 1,884     $ 12,424  
Provision for loan losses
    2,705       1,782       (25 )     4,462  
Charge-offs
    (4,296 )     (1,285 )     -       (5,581 )
Recoveries
    460       3       -       463  
Net charge-offs
    (3,836 )     (1,282 )     -       (5,118 )
Ending balance
  $ 8,034     $ 1,875     $ 1,859     $ 11,768  
 
14

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
The following table presents, by portfolio segment, the balance in the allowance for loan losses disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans at March 31, 2012 and December 31, 2011. There was no allowance for loan losses recorded for PCI loans.
 
   
Commercial and industrial
   
CRE - owner-occupied
   
CRE - investor income producing
   
AC&D
   
Other commercial
   
Residential mortgage
   
Home equity lines of credit
   
Residential construction
   
Other loans to individuals
   
Unallocated
   
Total
 
    (dollars in thousands)  
At March 31, 2012
                                                                 
Allowance for Loan Losses:
                                                                 
Individually evaluated for impairment
  $ 293     $ -     $ 300     $ 404     $ -     $ 61     $ 157     $ -     $ -     $ -     $ 1,215  
Collectively evaluated for impairment
    679       758       1,545       2,807       11       239       1,541       572       39       150       8,341  
Total
  $ 972     $ 758     $ 1,845     $ 3,211     $ 11     $ 300     $ 1,698     $ 572     $ 39     $ 150     $ 9,556  
                                                                                         
Recorded Investment in Loans:
                                                                                       
Individually evaluated for impairment
  $ 865     $ 746     $ 4,270     $ 11,300     $ -     $ 1,511     $ 1,082     $ 107     $ 8     $ -     $ 19,889  
Collectively evaluated for impairment
    69,128       156,354       175,709       55,180       13,465       64,779       84,605       23,641       9,500       -       652,361  
Purchased credit-impaired
    2,101       8,964       13,662       20,585       53       9,087       342       922       127       -       55,843  
Total
  $ 72,094     $ 166,064     $ 193,641     $ 87,065     $ 13,518     $ 75,377     $ 86,029     $ 24,670     $ 9,635     $ -     $ 728,093  
                                                                                         
At December 31, 2011
                                                                                       
Allowance for Loan Losses:
                                                                                       
Individually evaluated for impairment
  $ 21     $ -     $ 353     $ 436     $ -     $ 61     $ 157     $ -     $ -     $ -     $ 1,028  
Collectively evaluated for impairment
    682       740       1,753       3,447       17       248       1,741       455       43       -       9,126  
Total
  $ 703     $ 740     $ 2,106     $ 3,883     $ 17     $ 309     $ 1,898     $ 455     $ 43     $ -     $ 10,154  
                                                                                         
Recorded Investment in Loans:
                                                                                       
Individually evaluated for impairment
  $ 844     $ 693     $ 1,295     $ 13,788     $ -     $ 1,187     $ 744     $ 95     $ 9     $ -     $ 18,655  
Collectively evaluated for impairment
    75,626       159,017       179,159       54,318       15,601       68,878       89,321       23,680       11,345       -       676,945  
Purchased credit-impaired
    4,276       9,953       14,006       24,243       57       9,447       343       1,351       142       -       63,818