XNAS:PSTB Park Sterling Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 August 7, 2012, the registrant had outstanding 32,706,627 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 June 30, 2012 and December 31, 2011
2
       
   
Condensed Consolidated Statements of Income (Loss) Three and Six Months Ended June 30, 2012 and 2011
3
       
   
Condensed Consolidated Statements of Other Comprehensive Income (Loss) Three and Six Months Ended June 30, 2012 and 2011
4
       
   
Condensed Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2012 and 2011
4
       
   
Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 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
42
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
65
       
Item 4.
Controls and Procedures
65
       
Part II.
Other Information
 
       
Item 1.
Legal Proceedings
65
       
Item 1A.
Risk Factors
65
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
66
       
Item 3.
Defaults Upon Senior Securities
66
       
Item 4.
Mine Safety Disclosures
66
     
Item 5.
Other Information
66
       
Item 6.
Exhibits
66
 
 
 

 
 
PARK STERLING CORPORATION

Part I.   FINANCIAL INFORMATION
Item 1.   Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
 
   
June 30,
2012
   
December 31,
2011 *
 
             
ASSETS
 
 
       
             
Cash and due from banks
  $ 15,898     $ 18,426  
Interest-earning balances at banks
    29,795       10,115  
Federal funds sold
    29,455       -  
Investment securities available-for-sale, at fair value
    222,221       210,146  
Nonmarketable equity securities
    5,470       8,510  
Loans held for sale
    5,331       6,254  
Loans
    712,506       759,047  
Allowance for loan losses
    (9,431 )     (10,154 )
Net loans
    703,075       748,893  
                 
Premises and equipment, net
    24,619       24,515  
Accrued interest receivable
    2,557       3,216  
Other real estate owned
    14,744       14,403  
Bank-owned life insurance
    26,689       26,223  
Goodwill
    622       428  
Core deposit intangible
    3,817       4,022  
Deferred tax asset
    29,841       31,131  
Other assets
    4,985       6,940  
                 
Total assets
  $ 1,119,119     $ 1,113,222  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Deposits:
               
Noninterest-bearing
  $ 158,838     $ 142,652  
Interest-bearing
    683,196       703,985  
Total deposits
    842,034       846,637  
                 
Short-term borrowings
    1,678       9,765  
FHLB advances
    55,000       40,000  
Subordinated debt
    12,494       12,296  
Accrued interest payable
    253       1,561  
Accrued expenses and other liabilities
    13,474       12,909  
Total liabilities
    924,933       923,168  
                 
Shareholders' equity:
               
Preferred stock, no par value 5,000,000 shares authorized; -0- issued and outstanding at June 30, 2012 and December 31, 2011
    -       -  
Common stock, $1.00 par value 200,000,000 shares authorized at June 30, 2012 and December 31, 2011; 32,706,627 and 32,643,627 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
    32,707       32,644  
Additional paid-in capital
    173,318       172,390  
Accumulated deficit
    (15,459 )     (17,860 )
Accumulated other comprehensive income
    3,620       2,880  
Total shareholders' equity
    194,186       190,054  
                 
Total liabilities and shareholders' equity
  $ 1,119,119     $ 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
June 30
   
Six Months Ended
June 30
 
   
2012
   
2011
   
2012
   
2011
 
Interest income
                       
Loans, including fees
  $ 10,416     $ 4,450     $ 22,524     $ 9,208  
Federal funds sold
    15       33       23       63  
Taxable investment securities
    996       684       2,081       1,365  
Tax-exempt investment securities
    186       181       372       352  
Interest on deposits at banks
    28       11       38       25  
Total interest income
    11,641       5,359       25,038       11,013  
                                 
Interest expense
                               
Money market, NOW and savings deposits
    333       176       659       317  
Time deposits
    720       1,080       1,541       2,306  
Short-term borrowings
    -       1       3       1  
FHLB advances
    148       141       309       282  
Subordinated debt
    341       189       707       379  
Total interest expense
    1,542       1,587       3,219       3,285  
Net interest income
    10,099       3,772       21,819       7,728  
                                 
Provision for loan losses
    899       3,245       1,022       7,707  
Net interest income after provision for loan losses
    9,200       527       20,797       21  
                                 
Noninterest income
                               
Service charges on deposit accounts
    299       25       612       51  
Income from fiduciary activities
    555       -       1,095       -  
Commissions from sales of mutual funds
    106       -       165       -  
Gain on sale of securities available for sale
    489       1       489       20  
Mortgage banking income
    540       -       1,001       -  
Income from bank-owned life insurance
    260       -       519       -  
Other noninterest income
    343       18       665       45  
Total noninterest income
    2,592       44       4,546       116  
                                 
Noninterest expense
                               
Salaries and employee benefits
    5,882       2,975       12,005       5,482  
Occupancy and equipment
    860       301       1,680       557  
Advertising and promotion
    108       87       269       125  
Legal and professional fees
    603       1,205       915       1,512  
Deposit charges and FDIC insurance
    270       196       560       483  
Data processing and outside service fees
    752       128       2,101       251  
Communication fees
    196       36       429       62  
Postage and supplies
    125       47       321       86  
Core deposit intangible amortization
    102       -       204       -  
Net cost of operation of other real estate owned
    809       93       1,331       328  
Loan and collection expense
    295       110       539       195  
Other noninterest expense
    861       296       1,512       627  
Total noninterest expense
    10,863       5,474       21,866       9,708  
                                 
Income (loss) before income taxes
    929       (4,903 )     3,477       (9,571 )
                                 
Income tax expense (benefit)
    251       (1,789 )     1,076       (3,570 )
                                 
Net income (loss)
  $ 678     $ (3,114 )   $ 2,401     $ (6,001 )
                                 
Basic earnings (loss) per common share
  $ 0.02     $ (0.11 )   $ 0.07     $ (0.21 )
                                 
Diluted earnings (loss) per common share
  $ 0.02     $ (0.11 )   $ 0.07     $ (0.21 )
                                 
Weighted-average common shares outstanding
                         
Basic
    32,120,367       28,051,098       32,097,867       28,051,098  
Diluted
    32,120,402       28,051,098       32,097,900       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
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income (loss)
  $ 678     $ (3,114 )     2,401       (6,001 )
                                 
Unrealized holding gains on available-for-sale securities     749       2,476       1,593       2,943  
Tax effect
    (219 )     (954 )     (525 )     (1,134 )
Reclassification of gain recognized in net income     (489 )     (1 )     (489 )     (20 )
Tax effect
    143       -       161       8  
      184       1,521       740       1,797  
                                 
Unrealized holding loss on swaps
    -       (188 )     -       (458 )
Tax effect
    -       72       -       176  
      -       (116 )     -       (282 )
                                 
Total other comprehensive income (loss)
    184       1,405       740       1,515  
              .               .  
Total comprehensive income (loss)
  $ 862     $ (1,709 )   $ 3,141     $ (4,486 )
 
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)
Six Months Ended June 30, 2012 and 2011
(Dollars in thousands)

   
Common Stock
   
Additional
Paid-In
    Accumulated    
Accumulated
Other
Comprehensive
Income
   
Total
Shareholders'
 
   
Shares
   
Amount
   
Capital
   
Deficit
   
(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
    -       -       969       -       -       969  
                                                 
Comprehensive income (loss):
                                               
Net loss
    -       -       -       (6,001 )     -       (6,001 )
Unrealized holding gains on available-for-sale securities, net of taxes
    -       -       -       -       1,797       1,797  
Unrealized holding losses on interest rate swaps, net of taxes     -               -       -       (282 )     (282 )
                                                 
Total comprehensive income (loss)
    -       -       -       -       -       (4,486 )
                                                 
Balance at June 30, 2011
    28,619,358     $ 28,619     $ 159,890     $ (15,502 )   $ 577     $ 173,584  
                                                 
Balance at December 31, 2011
    32,643,627     $ 32,644     $ 172,390     $ (17,860 )   $ 2,880     $ 190,054  
                                                 
Issuance of restricted stock grants     63,000       63       (63 )     -       -       -  
                                                 
Share-based compensation expense
    -       -       991       -       -       991  
                                                 
Comprehensive income:
                                               
Net income
    -       -       -       2,401       -       2,401  
Unrealized holding gains on available-for-sale securities, net of taxes
    -       -       -       -       740       740  
                                                 
Total comprehensive income
    -       -       -       -       -       3,141  
                                                 
Balance at June 30, 2012
    32,706,627     $ 32,707     $ 173,318     $ (15,459 )   $ 3,620     $ 194,186  
 
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)
 
   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
 Cash flows from operating activities
           
 Net income (loss)
  $ 2,401     $ (6,001 )
 Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
 Accretion on acquired loans
    (3,692 )     -  
 Net (accretion) amortization on investments
    (129 )     492  
 Other depreciation and amortization
    865       279  
 Provision for loan losses
    1,022       7,707  
 Share-based compensation expense
    991       969  
 Deferred income taxes
    926       -  
 Net gains on sales of investment securities available-for-sale
    (489 )     (20 )
 Net gains on sales of other real estate
    (159 )     (3 )
 Net losses on sales of premises and equipment
    9       -  
 Writedowns on other real estate owned
    1,042       301  
 Income from bank-owned life insurance
    (519 )     -  
 Proceeds from loans held for sale
    30,151       -  
 Disbursements for loans held for sale
    (29,228 )     (1,600 )
 Change in assets and liabilities:
               
 Decrease in accrued interest receivable
    659       178  
 (Increase) decrease in other assets
    2,284       (2,383 )
 Decrease in accrued interest payable
    (1,308 )     (89 )
 Increase in accrued expenses and other liabilities
    763       1,293  
 Net cash provided by operating activities
    5,589       1,123  
                 
 Cash flows from investing activities
               
 Net decrease in loans
    41,840       6,924  
 Purchases of premises and equipment
    (777 )     (573 )
 Proceeds from sales of premises and equipment
    4       -  
 Purchases of investment securities available-for-sale
    (51,719 )     (46,940 )
 Proceeds from sales of investment securities available-for-sale
    22,537       24,316  
 Proceeds from maturities and call of investment securities available-for-sale
    18,829       18,931  
 Proceeds from sale of other real estate
    4,954       1,073  
 Net sales (purchases) of nonmarketable equity securities
    3,040       (125 )
 Net cash provided by investing activities
    38,708       3,606  
                 
 Cash flows from financing activities
               
 Net decrease in deposits
    (4,603 )     (3,914 )
 Net increase in FHLB advances
    15,000       -  
 Increase (decrease) in short-term borrowings
    (8,087 )     787  
 Net cash provided (used) by financing activities
    2,310       (3,127 )
                 
 Net increase in cash and cash equivalents
    46,607       1,602  
                 
 Cash and cash equivalents, beginning
    28,541       65,378  
                 
 Cash and cash equivalents, ending
  $ 75,148     $ 66,980  
                 
 Supplemental disclosures of cash flow information:
               
 Cash paid for interest
  $ 2,850     $ 3,374  
 Cash paid for income taxes
    60       -  
                 
Supplemental disclosure of noncash investing and financing activities:
         
 Change in unrealized gain on available-for-sale securities, net of tax
  $ 740     $ 1,797  
 Change in unrealized loss on swap, net of tax
    -       (282 )
 Loans transferred to other real estate owned
    6,178       3,595  
                 
 
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”).
 
On May 13, 2012, the Company and Citizens South Banking Corporation (“Citizens South”) entered into an Agreement and Plan of Merger, pursuant to which Citizens South will be merged with and into the Company, with the Company as the surviving entity.  The merger has been unanimously approved by the board of directors of each company and  is subject to customary closing conditions, including regulatory approval and shareholder approval from both the Company and Citizens South.  In addition, the Company’s obligation to complete the merger is conditioned on the FDIC’s consent to the assignment of certain existing FDIC loss-share agreements to which Citizens South is a party.  If the merger is completed, each outstanding share of Citizens South common stock will be exchanged for either 1.4799 of a share of Common Stock or $7.00 in cash subject to the limitation that the total consideration will consist of 30.0% in cash and 70.0% in shares of Common Stock.  
 
The accompanying unaudited condensed consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Because the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the Company’s audited consolidated financial statements and accompanying footnotes (the “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 June 30, 2012 and December 31, 2011, and the results of its operations and cash flows for the three- and six-months ended June 30, 2012 and 2011. Operating results for the three- or six-month period ended June 30, 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.
 
 
7

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
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, the 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.

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 become available.
 
 
8

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
On November 1, 2011, 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 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.
 
Goodwill of $622 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, and an adjustment of $3 thousand related to overpayments associated with the payment of cash for fractional shares in the merger, goodwill as indicated below is $194 thousand greater than the goodwill estimated in the 2011 Audited Financial Statements. 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.
 
 
9

 
 
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
by
Community Capital
   
Fair Value and Other
Merger Related
Adjustments
   
As Recorded
by the Company
 
Consideration Paid
                 
Cash
              $ 13,279  
Common shares issued (4,024,269 shares)
                15,564  
                     
Fair Value of Total Consideration Transferred
              $ 28,843  
                     
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       11,021       19,067  
Other assets
    6,677       (1,220 )     5,457  
                         
Total assets acquired
  $ 627,305     $ (14,842 )   $ 612,463  
                         
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     $ (18,748 )   $ 28,221  
                         
Goodwill resulting from acquisition
                  $ 622  
 
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.  The fair value of restricted stock awards, not subject to share price performance, is estimated at the date of the grant based on the grant date closing stock price.  As of June 30, 2012, there were 243,300 shares available for future grant.

 
10

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
The following weighted-average There were 10,000 stock options granted during the six months ended June 30, 2012.  There were 41,447 options which vested during the six months ended June 30, 2012, and 7,750 options which vested during the six months ended June 30, 2011. The compensation expense for stock option plans was $323 thousand and $256 thousand for the three months ended June 30, 2012 and 2011, respectively, and $646 thousand and $566 thousand for the six months ended June 30, 2012 and 2011, respectively. At June 30, 2012, unrecognized compensation cost related to nonvested stock options of $1.5 million is expected to be recognized over a weighted-average period of .72 years.
 
There were 63,000 shares of restricted stock granted during the six months ended June 30, 2012, of which a third of the shares will vest on the grant anniversary date for each of the next three years.  There were 568,260 shares of restricted stock granted during the six months ended June 30, 2011.  These grants will vest in approximately one-third increments when the trading price of the Common Stock is equal to or greater than $8.125, $9.10, and $10.40 per share, respectively, in each case for a period of 30 consecutive trading days.  The compensation expense for restricted shares was $185 thousand and $267 thousand for the three months ended June 30, 2012 and 2011, respectively, and $345 thousand and $403 thousand for the six months ended June 30, 2012 and 2011, respectively. At June 30, 2012, unrecognized compensation cost related to nonvested restricted shares of $1.6 million is expected to be recognized over a weighted-average period of 2.19 years.
 
 
11

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Note 5 - Investment Securities
 
The amortized cost, unrealized gains and losses, and estimated fair value of securities available-for-sale at June 30, 2012 and December 31, 2011 are as follows:
 
 Amortized Cost and Fair Value of Investment Portfolio
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(Dollars in thousands)
 
June 30, 2012
                       
Securities available-for-sale:
                       
U.S. Government agencies
  $ 520     $ 60     $ -     $ 580  
Residential agency mortgage-backed securities
    159,773       3,471       (132 )     163,112  
Collateralized agency mortgage obligations
    39,595       940       -       40,535  
Municipal securities
    16,038       1,548       -       17,586  
Corporate and other securities
    500       -       (92 )     408  
Total investment securities
  $ 216,426     $ 6,019     $ (224 )   $ 222,221  
                                 
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 June 30, 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 June 30, 2012 or December 31, 2011.
 
 
12

 
 
PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Maturities of Investment Portfolio
 
   
June 30, 2012
 
   
Amortized
Cost
   
Fair
Value
 
   
(Dollars in thousands)
 
             
U.S. Government agencies
           
Due after one year through five years
  $ 520     $ 580  
Residential agency mortgage-backed securities
               
Due after five years through ten years
    30,378       30,517  
Due after ten years
    129,395       132,595  
Collateralized agency mortgage obligations
               
Due after ten years
    39,595       40,535  
Municipal securities
               
Due under one year
    140       142  
Due after one year through five years
    400       403  
Due after ten years
    15,498       17,041  
Corporate and other securities
               
Due after five years through ten years
    500       408  
Due after ten years
    -       -  
Total investment securities
  $ 216,426     $ 222,221  
 
Management periodically evaluates each investment security for other than temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, for investment securities with unrealized losses at June 30, 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 June 30, 2012 and December 31, 2011.
 
 
13

 
 
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
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
   
(Dollars in thousands)
 
June 30, 2012
                                   
Securities available-for-sale:
                                   
Residential agency mortgage-backed securities
  $ 22,704     $ (132 )   $ -     $ -     $ 22,704     $ (132 )
Corporate and other securities
    -       -       408       (92 )     408       (92 )
                                                 
Total temporarily impaired securities
  $ 22,704     $ (132 )   $ 408     $ (92 )   $ 23,112     $ (224 )
                                                 
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 $43.6 million and $38.0 million at June 30, 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. During the six months ended June 30, 2012, the Company sold $22.5 million of securities available-for-sale, resulting in a gross gain of $0.5 million. Securities available-for-sale of $24.3 million were sold in the six months ended June 30, 2011 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 $5.5 million at June 30, 2012 and $8.0 million December 31, 2011. Included in these amounts at June 30, 2012 and December 31, 2011 was $5.0 million and $8.0 million, respectively, of Federal Home Loan Bank (“FHLB”) stock. All nonmarketable equity securities were evaluated for impairment as of June 30, 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 June 30, 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.
 
 
14

 
 
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:
 
   
June 30, 2012
   
December 31, 2011
 
   
PCI loans
   
All other loans
   
Total
   
PCI loans
   
All other loans
   
Total
 
   
(dollars in thousands)
 
Commercial:
                                   
Commercial and industrial
  $ 1,642     $ 66,179     $ 67,821     $ 4,276     $ 76,470     $ 80,746  
Commercial real estate (CRE) - owner-occupied
    8,637       152,830       161,467       9,953       159,710       169,663  
CRE - investor income producing
    11,478       185,890       197,368       14,006       180,454       194,460  
Acquisition, construction and development (AC&D)
    19,242       67,370       86,612       24,243       68,106       92,349  
Other commercial
    51       13,435       13,486       57       15,601       15,658  
Total commercial loans
    41,050       485,704       526,754       52,535       500,341       552,876  
                                                 
Consumer:
                                               
Residential mortgage
    5,643       61,233       66,876       9,447       70,065       79,512  
Home equity lines of credit
    341       83,320       83,661       343       90,065       90,408  
Residential construction
    922       24,637       25,559       1,351       23,775       25,126  
Other loans to individuals
    89       10,030       10,119       142       11,354       11,496  
Total consumer loans
    6,995       179,220       186,215       11,283       195,259       206,542  
Total loans
    48,045       664,924       712,969       63,818       695,600       759,418  
Deferred fees
    -       (463 )     (463 )     -       (371 )     (371 )
Total loans, net of deferred fees
  $ 48,045     $ 664,461     $ 712,506     $ 63,818     $ 695,229     $ 759,047  
 
At both June 30, 2012 and December 31, 2011, the Company had sold participations in loans aggregating $4.0 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 Bank executes all of its loan sales agreements under best efforts contracts with investors.  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 in making loans held for sale as it does for on-balance sheet instruments.  Total loans sold with limited recourse in the six months ended June 30, 2012 were $42.5 million. There were no loans sold in the six months ended June 30, 2011.
 
At June 30, 2012 and December 31, 2011, the carrying value of loans pledged as collateral on FHLB borrowings totaled $149.2 million and $135.5 million, respectively.
 
 
15

 
 
PARK STERLING CORPORATION

 
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 June 30, 2012 and December 31, 2011, the Company had no loans outstanding with non-U.S. entities.
 
 
16

 
 
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 six months ended June 30, 2012. 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 were not changed. These reclassifications are reflected in the beginning balances in the table below.
 
   
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
   
Total
 
                                                             
    (dollars in thousands)  
For the three months ended June 30, 2012
                               
 
                         
Allowance for Loan Losses:
                                                           
Balance, beginning of period
  $ 980     $ 804     $ 1,872     $ 3,218     $ 18     $ 326     $ 1,717     $ 580     $ 41     $ 9,556  
Provision for loan losses
    420       (333 )     (32 )     310       (8 )     310       (375 )     354       (1 )     645  
PCI provision for loan losses
    -       -       -       -       -       254       -       -       -       254  
Charge-offs
    (228 )     (74 )     (521 )     (12 )     -       (99 )     -       (328 )     -       (1,262 )
Recoveries
    8       -       7       194       -       1       28       -       -       238  
Net charge-offs
    (220 )     (74 )     (514 )     182       -       (98 )     28       (328 )     -       (1,024 )
Ending balance
  $ 1,180     $ 397     $ 1,326     $ 3,710     $ 10     $ 792     $ 1,370     $ 606     $ 40     $ 9,431  
                                                                                 
                                                                                 
For the six months ended June 30, 2012
                                                                               
Allowance for Loan Losses:
                                                                               
Balance, beginning of period
  $ 703     $ 740     $ 2,106     $ 3,883     $ 17     $ 309     $ 1,898     $ 455     $ 43     $ 10,154  
Provision for loan losses
    855       (277 )     (205 )     (91 )     87       326       (391 )     479       (15 )     768  
PCI provision for loan losses
    -       -       -       -       -       254       -       -       -       254  
Charge-offs
    (397 )     (74 )     (575 )     (357 )     (94 )     (99 )     (165 )     (328 )     (1 )     (2,090 )
Recoveries
    19       8       -       275       -       2       28       -       13       345  
Net charge-offs
    (378 )     (66 )     (575 )     (82 )     (94 )