UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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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)
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NORTH CAROLINA
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27-4107242 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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1043 E. Morehead Street, Suite 201 |
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Charlotte, North Carolina
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28204 |
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(Address of principal executive offices)
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(Zip Code) |
(704) 716-2134
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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Title of each class |
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Name of each exchange
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Common Stock, $1.00 par value
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NASDAQ Global Market |
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1943: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of June 30, 2010, the aggregate market value of the common stock of the registrant held by
non-affiliates was approximately $30,334,000 (based on the average bid and asked price of $7.00 per
share on June 30, 2010). For purposes of the foregoing calculation only, all directors and executive
officers of the registrant have been deemed affiliates.
The number of shares of common stock of the registrant outstanding as of March 31, 2011 was 28,619,358.
Documents Incorporated by Reference
Portions of the registrants Definitive Proxy Statement for its 2011 Annual Meeting of Shareholders scheduled
to be held on May 25, 2011 are incorporated by reference into Part III, Items 10-14.
PARK STERLING CORPORATION
TABLE OF CONTENTS
2
PART I
EXPLANATORY NOTE
On January 1, 2011 (the Effective Date), Park Sterling Corporation (the Company) acquired
all of the outstanding stock of Park Sterling Bank (the Bank) in a statutory share exchange
transaction (the Reorganization) effected under North Carolina law and in accordance with the
terms of an Agreement and Plan of Reorganization and Share Exchange dated October 22, 2010 (the
Agreement). The Reorganization and the Agreement were approved by the Banks stockholders at a
special meeting of the Banks stockholders held on November 23, 2010. Pursuant to the
Reorganization, shares of the Banks common stock were exchanged for shares of the Companys common
stock on a one-for-one basis. As a result, the Bank became the sole subsidiary of the Company, the
Company became the holding company for the Bank and the stockholders of the Bank became
stockholders of the Company.
Prior to the Effective Date, the Banks common stock was registered under Section 12(b) of the
Securities Exchange Act of 1934 (the Exchange Act), and the Bank was subject to the information
requirements of the Exchange Act and, in accordance with Section 12(i) thereof, filed quarterly
reports, proxy statements and other information with the Federal Deposit Insurance Corporation
(FDIC). As of the Effective Date, pursuant to Rule 12g-3 under the Exchange Act the Company is
the successor registrant to the Bank, the Companys common stock is deemed to be registered under
Section 12(b) of the Exchange Act, and the Company has become subject to the information
requirements of the Exchange Act and files reports, proxy statements and other information with the
Securities and Exchange Commission (the SEC).
Prior to the Effective Date, the Company conducted no operations other than obtaining
regulatory approval for the Reorganization. The consolidated financial statements, discussions of
those statements, market data and all other information presented herein, are those of the Bank.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K, including information incorporated by
reference in this document may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact
that they do not relate strictly to historical or current facts and often use words such as may,
plan, contemplate, anticipate, believe, intend, continue, expect, project,
predict, estimate, could, should, would, will, goal, target and similar
expressions. The forward-looking statements made represent the Companys current expectations,
plans or forecasts of its future results and condition, including expectations regarding its new
business strategy of engaging in bank mergers and organic growth and anticipated asset size, the
proposed merger with Community Capital Corporation, the future growth in the markets in which the
Company operates, refinement of the loan loss allowance methodology, recruiting of key leadership
positions, decreases in construction and development loans and other changes in loan mix, changes
in deposit mix, capital and liquidity levels, emerging regulatory expectations and measures, net
interest income, credit trends and conditions, including loan losses, allowance, charge-offs,
delinquency trends and nonperforming asset levels, and other similar matters. These statements are
not guarantees of future results or performance and involve certain risks and uncertainties that
are based on our beliefs and assumptions and on the information available to us at the time that
these disclosures were prepared. Actual outcomes and results may differ materially from those
expressed in, or implied by, any of these forward-looking statements.
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You should not place undue reliance on any forward-looking statement and should consider the
following uncertainties and risks, as well as the risks and uncertainties more fully discussed
elsewhere in this report, including Item 1A. Risk Factors, and in any of the Companys
subsequent filings with the SEC: the Companys inability to identify and successfully negotiate and
complete combinations with potential merger partners, including Community Capital, or to
successfully integrate such businesses into the Company, including the Companys ability to realize
the benefits and cost savings from and limit any unexpected liabilities acquired as a result of any
such business combination including the proposed Community Capital merger; inability to obtain
governmental approvals of the proposed Community Capital Corporation merger on the proposed terms
and schedule; failure of Community Capitals shareholders to approve the proposed merger;
fluctuation in the trading price of Park Sterlings stock prior to the closing of the proposed
Community Capital merger, which would affect the total value of
the proposed merger transaction; the effects of negative economic conditions, including stress in
the commercial real estate markets or delay or failure of recovery in the residential real estate
markets; changes in consumer and investor confidence and the related impact on financial markets
and institutions; changes in interest rates; failure of assumptions underlying the establishment of
our allowance; deterioration in the credit quality of our loan portfolios or in the value of the
collateral securing those loans; deterioration in the value of securities held in our investment
securities portfolio; legal and regulatory developments; increased competition from both banks and
nonbanks; changes in accounting standards, rules and interpretations, inaccurate estimates or
assumptions in accounting and the impact on the Companys financial statements; the Companys
ability to attract new employees; and managements ability to effectively manage credit risk,
market risk, operational risk, legal risk, and regulatory and compliance risk.
Forward-looking statements speak only as of the date they are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect the impact of circumstances or events
that arise after the date the forward-looking statement was made.
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General
Park Sterling Corporation (the Company) was formed on October 6, 2010 to serve as the
holding company for Park Sterling 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, as amended (the BHC Act). The Companys primary operations and business are
its ownership of Park Sterling Bank (the Bank), its sole subsidiary. Our offices are located at
1043 E. Morehead Street, Suite 201, Charlotte, North Carolina, 28204 and our phone number is (704)
716-2134.
The Bank was incorporated on September 8, 2006 as a North Carolina-chartered commercial bank
and is the wholly-owned subsidiary of the Company. The Bank opened for business on October 25, 2006
at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina. The Bank opened a branch in
Wilmington, North Carolina, in October 2007 and in the SouthPark neighborhood of Charlotte in July
2008, and received approval from the State of North Carolina Office of the Commissioner of Banks
(the NC Commissioner) in March 2011 to open a branch in Charleston, South Carolina.
We provide banking services to small and mid-sized businesses, owner-occupied and income
producing real estate owners, real estate developers and builders, professionals and consumers
doing business or residing within our target markets. Through our branches, the Bank provides a
wide range of banking products, including personal and business checking accounts, individual
retirement accounts, business and personal money market accounts, certificates of deposit,
overdraft protection, safe deposit boxes and online banking. Our lending activities include a range
of short-to medium-term commercial, real estate, residential mortgage and home equity and personal
loans. Our objective since inception has been to provide the strength and product diversity of a
larger bank and the service and relationship attention that characterizes a community bank. We
strive to develop a personal relationship with our clients while at the same time offering
traditional deposit and loan banking services. At December 31, 2010, we had approximately $616.1
million in assets, $399.8 million in loans, $407.8 million in deposits, and $177.1 million in
shareholders equity.
Due to the diverse economic base of the markets in which it operates, the Company believes it
is not dependent on any one or a few customers or types of commerce whose loss would have a
material adverse effect on the Company.
As part of its operations, the Company regularly evaluates the potential acquisition of, and
holds discussions with, various financial institutions eligible for bank holding company ownership
or control. As a general rule, the Company expects to publicly announce material transactions when
a definitive agreement has been reached.
Recent Developments
In August 2010, the Bank conducted a public offering of common stock (the Public Offering)
which raised gross proceeds of $150.2 million to facilitate a change in its business plan from
primarily organic growth at a moderate pace over the next few years to seeking to acquire regional
and community banks in the Carolinas and Virginia. We intend to become a regional-sized multi-state
banking franchise through acquisitions and organic growth, seeking to reach a consolidated asset
size of between $8 billion and $10 billion over the next several years. We are committed to
building a banking franchise that is noted for sound risk management, superior client service and
exceptional client relationships.
On January 1, 2011 (the Effective Date), the Company acquired all of the outstanding stock
of the Bank in a statutory share exchange transaction (the Reorganization) effected under North
Carolina law and in accordance with the terms of an Agreement and Plan of Reorganization and Share
Exchange dated October 22, 2010 (the Agreement). The Reorganization and the Agreement were
approved by the Banks stockholders at a special meeting of the Banks stockholders held on
November 23, 2010. Pursuant to the Reorganization, shares of the Banks common stock were exchanged
for shares of the Companys common stock on a one-for-one basis. As a result, the Bank became the
sole subsidiary of the Company, the Company became the holding company for the Bank and the
stockholders of the Bank became stockholders of the Company.
As part of the Banks change in strategy, immediately following the Public Offering, the Bank
reduced the size of its board of directors from thirteen members to six members, maintaining two of
the sitting directors, Larry W. Carroll and Thomas B. Henson, and adding four new directors, Walter
C. Ayers, Leslie M. (Bud) Baker, James C. Cherry and
Jeffrey S. Kane. Mr. Baker was named Chairman of the board of directors upon becoming a
member. In March 2011, the board of directors of the Company, which mirrors that of the Bank,
approved expanding its membership to seven and appointed Jean E. Davis as a director.
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The Bank also reorganized its management team following the Public Offering. The new
executive management team includes James C. Cherry, who became the Chief Executive Officer; David
L. Gaines, who became the Chief Financial Officer; Nancy J. Foster, who became the Chief Risk
Officer; and Bryan F. Kennedy, III, who was the President and Chief Executive Officer and remains
the President.
On March 30, 2011, the Company and Community Capital Corporation (Community Capital) entered
into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which Community Capital
will be merged with and into the Company, with the Company as the surviving entity (the Merger). Pursuant to the terms of the Merger Agreement, the
Company will pay $3.30 per share of Community Capital common stock, with the consideration to be in
the form of approximately 40% cash and approximately 60% in shares of the Companys common stock.
The Merger Agreement has been approved by the boards of directors of both the Company and Community
Capital. The Merger is subject to customary closing conditions, including regulatory approval and
Community Capital shareholder approval. As of December 31, 2010, Community Capital, which is
headquartered in Greenwood, South Carolina, had $655.9 million in assets and operated 17 full
service branches and one drive-through facility throughout South Carolina. For additional
information, please see the Companys Current Report on Form 8-K filed March 31, 2011.
Market Area
Our current primary market area consists of the Charlotte and Wilmington, North Carolina
metropolitan statistical areas, or MSAs. During 2011, we intend to open a branch office in
Charleston, South Carolina and have employed a veteran banker to serve as the South Carolina Market
President. We plan to open additional branch offices and/or loan production offices in our target
markets this year. Additional information regarding each of the existing locations is provided
below.
Charlotte. Charlotte, the largest city in North or South Carolina, anchors an MSA with a total
population of approximately 1.8 million in 2010, according to the Charlotte Chamber of Commerce.
According to the U.S. Census Bureau, the population for the Charlotte-Gastonia-Rock Hill MSA
increased 34.8% from 2000 to 2010. This population is expected to grow 14.8% between 2010 and 2015.
Charlotte is a significant financial center and is currently home to nine Fortune 500 companies.
Charlotte also has concentrations in the transportation, utilities, education, professional
services and construction sectors. The 2010 median household income for the Charlotte MSA was
$62,215 and is projected to grow 13.2% over the next five years.
Wilmington. Wilmington, a historic seaport and the largest city on the coast of North
Carolina, anchors a metropolitan area covering New Hanover, Brunswick and Pender counties with a
2010 population of 367,101. The U.S. Census Bureau estimates that Wilmingtons MSA is expected to
grow 13.2% from 2010 to 2015. Wilmingtons economy is diversified and includes tourism, shipping,
pharmaceutical development, chemical and aircraft component manufacturing, and fiber optic
industries. Wilmington is also a regional retail and medical center, with the New Hanover Regional
Medical Center/Cape Fear Hospital ranking in the top ten largest medical facilities in the state.
The median household income in 2010 for the Wilmington MSA was $49,403 and is projected to increase
13.2% over the next five years.
Charleston. Charleston, the second largest city in South Carolina, is located on the states
coastline. According to the U.S. Census Bureau, the population for the Charleston-North
Charleston-Summerville MSA was 671,833, a 22.3% increase since 2000. The areas population is
projected to grow 10.3% from 2010 to 2015. Charleston is the largest business and financial center
for the southeastern section of South Carolina. The city is a popular tourist destination, with a
large number of restaurants, hotels and retail stores. The manufacturing, shipping and medical
industries are also key economic sectors in Charleston. The 2010 median household income for the
Charleston MSA was $51,065 and is expected to grow 12.6% from 2010 to 2015.
Competition
We compete for deposits in our banking markets with other commercial banks, savings banks
and other thrift institutions, credit unions, agencies issuing United States government
securities, and all other organizations and institutions engaged in money market transactions.
In our lending activities, we compete with all other financial institutions as well as consumer
finance companies, mortgage companies and other lenders. Commercial banking in the Charlotte and
Wilmington markets, and in our targeted markets of the Carolinas and Virginia
generally, is extremely competitive.
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There were a total of 48 FDIC-insured institutions operating in the Charlotte MSA as of June
30, 2010. Those institutions operated 447 offices within the Charlotte MSA, holding approximately
$90 billion in deposits. Of those institutions, the Company ranked twelfth in deposit
market share, holding 0.43% of the total dollar amount of deposits held in the market.
The Wilmington MSA, although smaller than the Charlotte market, is also very competitive. As
of June 30, 2010, a total of 23 institutions operated 138 offices within the MSA, holding
approximately $6 billion in deposits. The Bank ranked eighteenth in deposit market share
in the Wilmington MSA with 0.58% of the total dollar amount of deposits in the market.
Interest rates, both on loans and deposits, and prices of fee-based services are significant
competitive factors among financial institutions generally. Other important competitive factors
include office location, office hours, the quality of client service, community reputation,
continuity of personnel and services, and, in the case of larger commercial clients, relative
lending limits and the ability to offer sophisticated cash management and other commercial banking
services. Many of our competitors have greater resources, broader geographic markets and higher
lending limits than we do, and they can offer more products and services and can better afford and
make more effective use of media advertising, support services and electronic technology than we
can. To counter these competitive disadvantages, we depend on our reputation as a community bank in
our local market, our direct client contact, our ability to make credit and other business
decisions locally, and our personalized service.
In recent years, federal and state legislation has heightened the competitive environment in
which all financial institutions conduct their business, and the potential for competition among
financial institutions of all types has increased significantly. Additionally, with the
elimination of restrictions on interstate banking, a North Carolina commercial bank may be
required to compete not only with other North Carolina-based financial institutions, but also
with out-of-state financial institutions which may acquire North Carolina institutions, establish
or acquire branch offices in North Carolina, or otherwise offer financial services across state
lines, thereby adding to the competitive atmosphere of the industry in general. In terms of
assets, we are currently one of the smaller commercial banks in North Carolina.
Employees
As of February 28, 2011, we employed a total of 65 people and had 63 full time equivalent
employees. We are not a party to a collective bargaining agreement, and we consider our relations
with employees to be good.
Supervision and Regulation
Bank holding companies and commercial banks are subject to extensive supervision and
regulation by federal and state agencies. Regulation of bank holding companies and banks is
intended primarily for the protection of consumers, depositors, borrowers, the federal Deposit
Insurance Fund (the DIF) and the banking system as a whole and not for the protection of
shareholders or creditors. The following is a brief summary of certain statutory and regulatory
provisions applicable to the Company and the Bank. This discussion is qualified in its entirety by
reference to such regulations and statutes.
Financial Reform Legislation. On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Dodd-Frank Act will have
a broad impact on the financial services industry, including significant regulatory and compliance
changes including, among other things: (i) enhanced resolution authority of troubled and failing
banks and their holding companies; (ii) increased capital and liquidity requirements; (iii)
increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for
federal deposit insurance; and (v) numerous other provisions designed to improve supervision and
oversight of, and strengthening safety and soundness for, the financial services sector.
Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the
financial system to be distributed among new and existing federal regulatory agencies, including
the Financial Stability Oversight Council, the Federal Reserve Board, the Office of the Comptroller
of the Currency, and the FDIC. The following items provide brief descriptions of certain provisions
of the Dodd-Frank Act.
Increased Capital Standards and Enhanced Supervision. The federal banking agencies are
required to establish minimum leverage and risk-based capital requirements for banks and bank
holding companies. These new standards will be no lower than existing regulatory capital and
leverage standards applicable to insured depository institutions
and may, in fact, be higher when established by the agencies. The Dodd-Frank Act also
increases regulatory oversight, supervision and examination of banks, bank holding companies and
their respective subsidiaries by the appropriate regulatory agency.
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The Bureau of Consumer Financial Protection. The Dodd-Frank Act creates the Bureau within the
Federal Reserve System. The Bureau is tasked with establishing and implementing rules and
regulations under certain federal consumer protection laws with respect to the conduct of providers
of certain consumer financial products and services. The Bureau has rulemaking authority over many
of the statutes governing products and services offered to bank consumers. In addition, the
Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more
stringent than those regulations promulgated by the Bureau and state attorneys general are
permitted to enforce consumer protection rules adopted by the Bureau against state-chartered
institutions.
Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for
insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base
against which an insured depository institutions deposit insurance premiums paid to the DIF will
be calculated. Under the amendments, the assessment base will no longer be the institutions
deposit base, but rather its average consolidated total assets less its average tangible equity
during the assessment period. Additionally, the Dodd-Frank Act makes changes to the minimum
designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of
the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay
dividends to depository institutions when the reserve ratio exceeds certain thresholds. The
Dodd-Frank Act also provides that, effective one year after the date of enactment, depository
institutions may pay interest on demand deposits.
Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain
transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an
expansion of the definition of covered transactions and increasing the amount of time for which
collateral requirements regarding covered transactions must be maintained.
Transactions with Insiders. Insider transaction limitations are expanded through the
strengthening on loan restrictions to insiders and the expansion of the types of transactions
subject to the various limits, including derivative transactions, repurchase agreements, reverse
repurchase agreements and securities lending or borrowing transactions. Restrictions are also
placed on certain asset sales to and from an insider to an institution, including requirements that
such sales be on market terms and, in certain circumstances, approved by the institutions board of
directors.
Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository
institutions credit exposure to one borrower. Current banking law limits a depository
institutions ability to extend credit to one person (or group of related persons) in an amount
exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include
credit exposure arising from derivative transactions, repurchase agreements, and securities lending
and borrowing transactions.
Corporate Governance. The Dodd-Frank Act addresses many corporate governance and executive
compensation matters that will affect most U.S. publicly traded companies, including the Company.
The Dodd-Frank Act, among other things: (i) grants shareholders of U.S. publicly traded companies
an advisory vote on executive compensation; (ii) enhances independence requirements for
compensation committee members; (iii) requires companies listed on national securities exchanges to
adopt incentive-based compensation clawback policies for executive officers; and (iv) provides the
SEC with authority to adopt proxy access rules that would allow shareholders of publicly traded
companies to nominate candidates for election as a director and have those nominees included in a
companys proxy materials.
Many of the requirements called for in the Dodd-Frank Act will be implemented over time, and
most will be subject to implementing regulations over the course of several years. Given the
uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be
implemented by the various regulatory agencies and through regulations, the full extent of the
impact such requirements will have on financial institutions operations is unclear. The changes
resulting from the Dodd-Frank Act may impact the profitability of our business activities, require
changes to certain of our business practices, impose upon us more stringent capital, liquidity and
leverage ratio requirements or otherwise adversely affect our business. These changes may also
require us to invest significant management attention and resources to evaluate and make necessary
changes in order to comply with new statutory and regulatory requirements.
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General. As a registered bank holding company, the Company is subject to regulation under BHC
Act and to inspection, examination and supervision by the Federal Reserve Board. In general, the
Federal Reserve Board may initiate enforcement actions for violations of laws and regulations and
unsafe or unsound practices. The Federal Reserve Board may assess civil money penalties, issue
cease and desist or removal orders and require that a bank holding company divest subsidiaries,
including subsidiary banks. The Company is also required to file reports and other information with
the Federal Reserve Board regarding its business operations and those of the Bank.
The Bank is a North Carolina-chartered commercial nonmember bank subject to regulation,
supervision and examination by its chartering regulator, the North Carolina Commissioner of Banks
(the NC Commissioner), and by the FDIC, as deposit insurer and primary federal regulator. As an
insured depository institution, numerous federal and state laws, as well as regulations promulgated
by the FDIC and the NC Commissioner, govern many aspects of the Banks operations. The NC
Commissioner and the FDIC regulate and monitor compliance with these state and federal laws and
regulations, as well as the Banks operations and activities including, but not limited to, loan
and lease loss reserves, lending and mortgage operations, interest rates paid on deposits and
received on loans, the payment of dividends to the Company, and the establishment of branches. The
Bank is a member of the Federal Home Loan Bank of Atlanta, which is one of the 12 regional banks
comprising the FHLB system.
In addition to state and federal banking laws, regulations and regulatory agencies, the
Company and the Bank are subject to various other laws, regulations and supervision and examination
by other regulatory agencies, including with respect to the Company the SEC and NASDAQ.
Bank Holding Companies. The Federal Reserve Board is authorized to adopt regulations
affecting various aspects of bank holding companies. In general, the BHC Act limits the business of
bank holding companies and its subsidiaries to banking, managing or controlling banks and other
activities that the Federal Reserve Board has determined to be so closely related to banking as to
be a proper incident thereto.
The BHC Act requires prior Federal Reserve Board approval for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of
the voting shares or substantially all the assets of any bank, or for a merger or consolidation of
a bank holding company with another bank holding company. The BHC Act also prohibits a bank holding
company from acquiring direct or indirect control of more than 5% of the outstanding voting stock
of any company engaged in a non-banking business unless such business is determined by the Federal
Reserve Board to be so closely related to banking as to be a proper incident thereto.
The Company also is subject to the North Carolina Bank Holding Company Act of 1984. This state
legislation requires the Company, by virtue of its ownership of the Bank, to register as a bank
holding company with the NC Commissioner.
The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the Graham-Leach-Bliley Act)
amended a number of federal banking laws affecting the Company and the Bank. In particular, the
Graham-Leach-Bliley Act permits a bank holding company to elect to become a financial holding
company, provided certain conditions are met. A financial holding company, and the companies it
controls, are permitted to engage in activities considered financial in nature, as defined by the
Graham-Leach-Bliley Act and Federal Reserve Board interpretations (including, without limitation,
insurance and securities activities), and therefore may engage in a broader range of activities
than permitted by bank holding companies and their subsidiaries. We remain a bank holding company,
but may at some time in the future elect to become a financial holding company.
Interstate Banking and Branching. Pursuant to the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (Interstate Banking and Branching Act), a bank holding company
may acquire banks in states other than its home state, without regard to the permissibility of
those acquisitions under state law, subject to certain exceptions. The Interstate Banking and
Branching Act also authorized banks to merge across state lines, thereby creating interstate
branches, unless a state determined to opt out of coverage under this provision. Furthermore,
pursuant to the Interstate Banking and Branching Act, a bank may open new branches in a state in
which it does not already have banking operations, if the laws of such state permit such de novo
branching. North Carolina opted in to the provision of the Interstate Banking and Branching Act
that allows out-of-state banks to branch into their state by establishing a de novo branch in the
state, but only on a reciprocal basis. This means that an out-of-state bank could establish a de
novo branch in North Carolina only if the home state of such bank would allow North Carolina banks
to establish de novo branches in that state under substantially the same terms as allowed in North
Carolina. Virginia also amended its laws to provide for de novo branching of out-of-state banks in
Virginia on a reciprocal basis. South Carolina law was amended to permit interstate branching
through acquisitions but not de novo branching by an out-of-state bank.
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The Dodd-Frank Act removes previous state law restrictions on de novo interstate branching in
states such as North Carolina, South Carolina and Virginia. This law effectively permits
out-of-state banks to open de novo branches in states where the laws of the state where the do novo
branch to be opened would permit a bank chartered by that state to open a de novo branch.
Safety and Soundness Regulations. The Federal Reserve Board has enforcement powers over bank
holding companies and has authority to prohibit activities that represent unsafe or unsound
practices or constitute violations of law, rule, regulation, administrative order or written
agreement with a federal regulator. These powers may be exercised through the issuance of cease and
desist orders, civil monetary penalties or other actions.
There also are a number of obligations and restrictions imposed on bank holding companies and
their depositary institution subsidiaries by federal law and regulatory policy that are designed to
reduce potential loss exposure to the depositors of such depository institutions and to the DIF in
the event the depository institution is insolvent or is in danger of becoming insolvent. For
example, under requirements of the Federal Reserve Board with respect to bank holding company
operations, a bank holding company is expected to act as a source of financial strength to each
subsidiary bank and to commit resources to support each such subsidiary bank. Under this policy,
the Federal Reserve Board may require a holding company to contribute additional capital to an
undercapitalized subsidiary bank and may disapprove of the payment of dividends to the holding
companys shareholders if the Federal Reserve Board believes the payment of such dividends would be
an unsafe or unsound practice.
In addition, the cross guarantee provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by the DIF as a result of the insolvency of commonly controlled insured depository
institutions or for any assistance provided by the FDIC to commonly controlled insured depository
institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provisions
if it determines that a waiver is in the best interests of the DIF. The FDICs claim for
reimbursement under the cross-guarantee provisions is superior to claims of shareholders of the
insured depository institution or its holding company but is subordinate to claims of depositors,
secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled
depository institution.
Federal and state banking regulators also have broad enforcement powers over the Bank,
including the power to impose fines and other civil and criminal penalties, and to appoint a
conservator (with the approval of the Governor in the case of a North Carolina state bank) in order
to conserve the assets of any such institution for the benefit of depositors and other creditors.
The NC Commissioner also has the authority to take possession of a North Carolina state bank in
certain circumstances, including, among other things, when it appears that such bank has violated
its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner,
is in an unsafe or unsound condition to transact its business or has an impairment of its capital
stock.
Capital Adequacy Guidelines. The various federal bank regulators, including the Federal
Reserve Board and the FDIC, have adopted substantially similar risk-based and leverage capital
guidelines applicable to United States banking organizations, including bank holding companies and
banks. In addition, these regulatory agencies may from time to time require that a banking
organization maintain capital above the minimum prescribed levels, whether because of its financial
condition or actual or anticipated growth. The risk-based guidelines define a three-tier capital
framework: Tier 1 capital is defined to include the sum of common stockholders equity,
noncumulative perpetual preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets (other than certain servicing assets),
certain credit-enhancing interest-only strips, deferred tax assets in excess of certain thresholds
and certain other items. Tier 2 capital includes qualifying subordinated debt, certain hybrid
capital instruments, qualifying preferred stock and a limited amount of the allowance for loan
losses. Tier 3 capital includes primarily qualifying unsecured subordinated debt. The sum of Tier 1
and Tier 2 capital less investments in unconsolidated subsidiaries is equal to qualifying total
capital. Under the risk-based guidelines, the Company and the Bank are required to maintain a
minimum ratio of Tier 1 capital to total risk-weighted assets of 4% and a minimum ratio of Total
Capital to risk-weighted assets of 8%.
Each of the federal bank regulatory agencies, including the Federal Reserve Board and the
FDIC, also has established minimum leverage capital requirements for banking organizations. These
requirements provide that banking organizations that meet certain criteria, including excellent
asset quality, high liquidity, low interest rate exposure and good earnings, and that have received
the highest regulatory rating must maintain a ratio of Tier 1 capital to total adjusted average
assets of at least 3%. All other institutions must maintain a minimum leverage capital ratio of not
less than 4%, unless a higher leverage capital ratio is warranted by the particular circumstances
or risk profile of the institution. Holding companies experiencing internal growth or making
acquisitions are expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance
on intangible assets. As a condition of its non-objection to our notice filed under the Change
in Bank Control Act in connection with the Banks Public Offering, the FDIC has required that the
Bank maintain a minimum leverage capital ratio of not less than 10% for three years following the
completion of this offering.
10
To assess a banks capital adequacy, federal banking agencies, including the FDIC, have also
adopted regulations to require an assessment of exposure to declines in the economic value of a
banks capital due to changes in interest rates. Under such a risk assessment, examiners will
evaluate a banks capital for interest rate risk on a case-by-case basis, with consideration of
both quantitative and qualitative factors. Applicable considerations include the quality of the
banks interest rate risk management process, the overall financial condition of the bank and the
level of other risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies also issued a joint
policy statement providing guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies evaluation of interest rate risk in connection with
capital adequacy.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other
things, identifies five capital categories for insured depository institutions (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective federal regulatory agencies to implement systems for
prompt corrective action for insured depository institutions that do not meet minimum capital
requirements within such categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in which an institution
is classified. Failure to meet the capital guidelines could also subject a banking institution to
capital raising requirements. In addition, pursuant to FDICIA, the various regulatory agencies have
prescribed certain non-capital standards for safety and soundness relating generally to operations
and management, asset quality and executive compensation, and such agencies may take action against
a financial institution that does not meet the applicable standards.
The various regulatory agencies have adopted substantially similar regulations that define the
five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based
capital, and leverage capital ratios as the relevant capital measures. Such regulations establish
various degrees of corrective action to be taken when an institution is considered
undercapitalized. Generally, an institution will be treated as well capitalized if its ratio of
total capital to risk-weighted assets is at least 10%, its ratio of Tier 1 capital to risk-weighted
assets is at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it is not
subject to any order or directive by any such regulatory authority to meet a specific capital
level. An institution will be treated as adequately capitalized if its ratio of total capital to
risk-weighted assets is at least 8%, its ratio of Tier 1 capital to risk-weighted assets is at
least 4%, and its ratio of Tier 1 capital to total assets is at least 4% (3% in some cases) and it
is not considered a well-capitalized institution. An institution that has total risk-based capital
of less than 8%, Tier 1 risk-based-capital of less than 4% or a leverage ratio that is less than 4%
will be treated as undercapitalized. An institution that has total risk-based capital ratio of
less than 6%, Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% will be
treated as significantly undercapitalized, and an institution that has a tangible capital to
assets ratio equal to or less than 2% will be deemed to be critically undercapitalized.
Under these guidelines, the Bank was considered well capitalized as of December 31, 2010.
Deposit Insurance and Assessments. The Banks deposits are insured by the DIF as administered
by the FDIC, up to the applicable limits set by law, and are subject to the deposit insurance
premium assessments of the DIF. The DIF imposes a risk-based deposit insurance premium system,
which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the Reform Act)
and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for
an insured depository institution vary according to the level of risk incurred in its activities.
To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk
categories determined by reference to its capital levels and supervisory ratings. In addition, in
the case of those institutions in the lowest risk category, the FDIC further determines its
assessment rate based on certain specified financial ratios or, if applicable, its long-term debt
ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC,
subject to certain limits. In addition, insured deposits have been required to pay a pro rata
portion of the interest due on the obligations issued by the Financing Corporation (FICO) to fund
the closing and disposal of failed thrift institutions by the Resolution Trust Corporation.
In the second quarter of 2009, the FDIC levied a special assessment on all insured depository
institutions totaling five basis points of each institutions total assets less Tier 1 capital on
June 30, 2009. The special assessment was part of the FDICs efforts to rebuild the DIF following a
series of bank failures and a projection of future failures. In November 2009, the FDIC published a
final rule that required all insured depository institutions, with
limited exceptions, to prepay their estimated quarterly assessments in December 2009 for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012. Our prepayment amount was approximately
$2.3 million. This prepayment was booked a prepaid expense and is being expensed based upon the
regular quarterly assessments.
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On January 12, 2010, the FDICs board of directors approved an Advance Notice of Proposed
Rulemaking, or ANPR, entitled Incorporating Executive Compensation Criteria into the Risk
Assessment System. The ANPR requests comment on ways in which the FDIC can amend its risk-based
deposit insurance assessment system to account for risks posed by certain employee compensation
programs. The FDICs goals include providing an incentive for insured depository institutions to
adopt compensation programs that align employee interest with the long-term interests of the
institution and its stakeholders, including the FDIC. In order to accomplish this goal, the FDIC
would adjust assessment rates in a manner commensurate with the risks presented by an institutions
compensation program. Examples of compensation program features that meet the FDICs goals include:
(i) providing significant portions of performance-based compensation in the form of restricted,
non-discounted company stock to those employees whose activities present a significant risk to the
institution; (ii) vesting significant awards of company stock over multiple years and subject to
some form of claw-back mechanism to account for the outcome of risks assumed in earlier periods;
and (iii) administering the program through a board committee composed of independent directors
with input from independent compensation professionals.
The Dodd-Frank Act amends the manner in which deposit insurance assessments are calculated. As
opposed to a percentage of total deposits, the Dodd-Frank Act provides that assessments will be
calculated as a percentage of average consolidated total assets less average tangible equity during
the assessment period.
Dividends and Repurchase Limitations. The payment of dividends and repurchase of stock by the
Company are subject to certain requirements and limitations of North Carolina corporate law. In
addition, as a bank holding company, the Company must obtain Federal Reserve Board approval prior
to repurchasing its Common Stock in excess of 10% of its consolidated net worth during any
twelve-month period unless the Company (i) both before and after the repurchase satisfies capital
requirements for well capitalized bank holding companies; (ii) is well managed; and (iii) is not
the subject of any unresolved supervisory issues.
The Company is a legal entity separate and apart from the Bank. The primary source of funds
for distributions paid by the Company is dividends from the Bank, and the Bank is subject to laws
and regulations that limit the amount of dividends it can pay. North Carolina law provides that,
subject to certain capital requirements, the Bank generally may declare a dividend out of undivided
profits as the board of directors deems expedient.
In addition to the foregoing, the ability of either the Company or the Bank to pay dividends
may be affected by the various minimum capital requirements and the capital and non-capital
standards established under FDICIA, as described above. Furthermore, if in the opinion of a federal
regulatory agency, a bank under its jurisdiction is engaged in or is about to engage in an unsafe
or unsound practice (which, depending on the financial condition of the bank, could include the
payment of dividends), such agency may require, after notice and hearing, that such bank cease and
desist from such practice. The right of the Company, its shareholders and its creditors to
participate in any distribution of assets or earnings of the Bank is further subject to the prior
claims of creditors against the Bank.
Transactions with Affiliates of the Bank. Transactions between an insured bank and any of its
affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank
is any company or entity that controls or is under common control with the bank. Sections 23A and
23B, as implemented by the Federal Reserve Boards Regulation W, (i) limit the extent to which a
bank or its subsidiaries may engage in covered transactions (including extensions of credit) with
any one affiliate to an amount equal to 10% of such banks capital stock and retained earnings, and
limit such transactions with all affiliates to an amount equal to 20% of capital stock and retained
earnings; (ii) require collateralization of between 100 and 130% for extensions of credit to an
affiliate; and (iii) require that all affiliated transactions be on terms that are consistent with
safe and sound banking practices. The term covered transaction includes the making of loans,
purchasing of assets, issuing of guarantees and other similar types of transactions and pursuant to
the Dodd-Frank Act includes derivative securities lending and similar transactions. In addition,
any covered transaction by a bank with an affiliate and any purchase of assets or services by a
bank from an affiliate must be on terms that are substantially the same, or at least as favorable
to the bank, as those that prevailing at the time for similar transactions with non-affiliates.
Community Reinvestment Act. Under the Community Reinvestment Act (CRA), any insured
depository institution has a continuing and affirmative obligation, consistent with its safe and
sound operation, to help meet the credit needs of its entire community, including low- and
moderate-income neighborhoods. The CRA neither establishes specific lending requirements or
programs for institutions nor limits an institutions discretion to develop
the types of products and services that it believes are best suited to its particular
community. The CRA requires the FDIC, in connection with its examination of a bank, to assess the
institutions record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain bank applications, including applications for additional
branches and acquisitions. Failure to adequately meet the credit needs of the community it serves
could impose additional requirements or limitations on a bank or delay action on an application to
the FDIC. The Bank received a satisfactory rating in its most recent CRA examination, dated
October 22, 2008.
12
Loans to Insiders. Federal law also constrains the types and amounts of loans that the Bank
may make to its executive officers, directors and principal shareholders. Among other things, these
loans are limited in amount, must be approved by the Banks board of directors in advance, and must
be on terms and conditions as favorable to the Bank as those available to an unrelated person.
Bank Secrecy Act. We are subject to the Bank Secrecy Act, or BSA, as amended by the USA
PATRIOT Act. The BSA gives the federal government new powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. The BSA takes measures intended to encourage
information sharing among institutions, bank regulatory agencies and law enforcement bodies and
imposes affirmative obligations on a broad range of financial institutions, including the Company.
The following obligations are among those imposed by the BSA:
Financial institutions must establish anti-money laundering programs that include, at
minimum: (i) internal policies, procedures and controls; (ii) specific designation of an anti-money
laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent
audit function to test the anti-money laundering program.
Financial institutions must satisfy minimum standards with respect to customer
identification and verification, including adoption of a written customer identification program
appropriate for the institutions size, location and business.
Financial institutions that establish, maintain, administer or manage private banking
accounts or correspondent accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United States) must establish
appropriate, specific and where necessary, enhanced due diligence policies, procedures and controls
designed to detect and report money laundering through these accounts.
Financial institutions may not establish, maintain, administer or manage correspondent
accounts for foreign shell banks (foreign banks that do not have a physical presence in any
country).
Bank regulators are directed to consider a banks effectiveness in combating money
laundering when ruling on certain applications.
CRE and C&D Concentration Guidance. In 2006 and again in 2008, federal banking agencies,
including the FDIC, issued guidance designed to emphasize risk management for institutions with
significant commercial real estate (CRE) and construction and development (C&D) loan
concentrations. The guidance reinforces and enhances the FDICs existing regulations and guidelines
for real estate lending and loan portfolio management and emphasizes the importance of strong
capital and loan loss allowance levels and robust credit risk- management practices for
institutions with significant CRE and C&D exposure. While the defined thresholds past which a bank
is deemed to have a concentration in CRE loans prompt enhanced risk management protocols, the
guidance does not establish specific lending limits. Rather, the guidance seeks to promote sound
risk management practices that will enable banks to continue to pursue CRE and C&D lending in a
safe and sound manner. In addition, a bank should perform periodic market analyses for the various
property types and geographic markets represented in its portfolio and perform portfolio level
stress tests or sensitivity analyses to quantify the impact of changing economic conditions on
asset quality, earnings and capital.
Consumer Laws and Regulations. Banks are also subject to certain laws and regulations that are
designed to protect consumers. Among the more prominent of such laws and regulations are the Truth
in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Housing
Act and consumer privacy protection provisions of the Gramm-Leach-Bliley Act and comparable state
laws. These laws and regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions deal with consumers. With respect to consumer privacy, the
Gramm-Leach-Bliley Act generally prohibits disclosure of customer information to non-affiliated
third
parties unless the customer has been given the opportunity to object and has not objected to
such disclosure. Financial institutions are further required to disclose their privacy policies to
customers annually.
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Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act)
comprehensively revised the laws affecting corporate governance, accounting obligations and
corporate reporting for companies with equity or debt securities registered under the Exchange Act.
In particular, the Sarbanes-Oxley Act established: (1) new requirements for audit committees,
including independence, expertise, and responsibilities; (2) new certification responsibilities for
the Chief Executive Officer and the Chief Financial Officer with respect to the Companys financial
statements; (3) new standards for auditors and regulation of audits; (4) increased disclosure and
reporting obligations for reporting companies and their directors and executive officers; and (5)
new and increased civil and criminal penalties for violation of the federal securities laws.
Proposed Legislation and Regulatory Action. Rules and statutes are frequently promulgated and
enacted that contain wide-ranging proposals for altering the structures, regulations and
competitive relationships of financial institutions. Included among current proposals are
discussions around the restructuring of the regulatory framework in which we operate. We cannot
predict whether or in what form any proposed regulation or statute will be adopted or the extent to
which our business may be affected by any new regulation or statute.
Website Access to the Companys SEC Filings
The Company maintains an Internet website at www.parksterlingbank.com (this uniform resource
locator, or URL, is an inactive textual reference only and is not intended to incorporate the
Companys website into this Annual Report on Form 10-K). The Company makes available, free of
charge on or through this website, its annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the Company
electronically files each such report or amendment with, or furnishes it to, the SEC.
In addition to the other information included and incorporated by reference in this Annual
Report on Form 10-K, you should carefully consider the risk factors and uncertainties described
below in evaluating an investment in the Companys common stock. Additional risks and uncertainties
not currently known to the Company, or which the Company currently deems not material, also may
adversely impact the Companys business operations. The value or market price of the Companys
common stock could decline due to any of these identified or other risks, and you could lose all or
part of your investment.
Risks Associated with Our Growth Strategy
We may not be able to implement aspects of our growth strategy.
Our growth strategy contemplates the future expansion of our business and operations both
organically and by acquisitions such as through the establishment or acquisition of banks and
banking offices in our market area and other markets in the Carolinas and Virginia. Implementing
these aspects of our growth strategy depends, in part, on our ability to successfully identify
acquisition opportunities and strategic partners that will complement our operating philosophy and
to successfully integrate their operations with ours as well as generate loans and deposits of
acceptable risk and expense. To successfully acquire or establish banks or banking offices, we must
be able to correctly identify profitable or growing markets, as well as attract the necessary
relationships and high caliber banking personnel to make these new banking offices profitable. In
addition, we may not be able to identify suitable opportunities for further growth and expansion,
or if we do, we may not be able to successfully integrate these new operations into our business.
As consolidation of the financial services industry continues, the competition for suitable
acquisition candidates may increase. We will compete with other financial services companies for
acquisition opportunities, and many of these competitors have greater financial resources than we
do and may be able to pay more for an acquisition than we are able or willing to pay.
We cannot assure you that we will have opportunities to acquire other financial institutions
or acquire or establish any new branches or loan production offices, or that we will be able to
negotiate, finance and complete any opportunities available to us.
14
If we are unable to effectively implement our growth strategies, our business and results of
operations may be materially and adversely affected.
Future expansion involves risks.
The acquisition of other financial institutions or parts of those institutions, or the
establishment of de novo branch offices and loan production offices involves a number of risks,
including the risk that:
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we may incur substantial costs in identifying and evaluating potential acquisitions
and merger partners, or in evaluating new markets, hiring experienced local managers, and
opening new offices; |
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our estimates and judgments used to evaluate credit, operations, management and
market risks relating to target institutions may not be accurate; |
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the institutions we acquire may have distressed assets and there can be no assurance
that we will be able to realize the value we predict from those assets or that we will
make sufficient provisions or have sufficient capital for future losses; |
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we may be required to take write-downs or write-offs, restructuring and impairment,
or other charges related to the institutions we acquire that could have a significant
negative effect on our financial condition and results of operations; |
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there may be substantial lag-time between completing an acquisition or opening a new
office and generating sufficient assets and deposits to support costs of the expansion; |
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we may not be able to finance an acquisition, or the financing we obtain may have an
adverse effect on our results of operations or result in dilution to our existing
shareholders; |
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our managements attention in negotiating a transaction and integrating the
operations and personnel of the combining businesses may be diverted from our existing
business and we may not be able to successfully integrate such operations and personnel; |
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we may not be able to obtain regulatory approval for an acquisition; |
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we may enter new markets where we lack local experience or which introduce new risks
to our operations, or which otherwise result in adverse effects on our results of
operations; |
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we may introduce new products and services we are not equipped to manage or which
introduce new risks to our operations, or which otherwise result in adverse effects on our
results of operations; |
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we may incur intangible assets in connection with an acquisition, or the intangible
assets we incur may become impaired, which results in adverse short-term effects on our
results of operations; |
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we may assume liabilities in connection with an acquisition, including unrecorded liabilities that are not discovered at the time of the
transaction, and the repayment of those liabilities may have an adverse effect on our results of operations and financial condition; or |
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we may lose key employees and clients. |
We cannot assure you that we will be able to successfully integrate any banking offices that
we acquire into our operations or retain the clients of those offices. If any of these risks occur
in connection with our expansion efforts, it may have a material and adverse effect on our results
of operations and financial condition.
We may not be able to maintain and manage our organic growth, which may adversely affect our
results of operations and financial condition.
We have grown rapidly since we commenced operations in October 2006, and our modified business
strategy contemplates significant acceleration in such growth, both organically and through
acquisitions. We can provide no assurance that we will continue to be successful in increasing the
volume of loans and deposits or in introducing new products and services at acceptable risk levels
and upon acceptable terms while managing the costs and implementation risks associated with our
historical or modified organic growth strategy. We may be unable to continue to increase our volume
of loans and deposits or to introduce new products and services at acceptable risk levels for a
variety of reasons, including an inability to maintain capital and liquidity sufficient to support
continued growth. If we are successful in continuing our growth, we cannot assure you that further
growth would offer the same levels of potential profitability or that we would be successful in
controlling costs and maintaining asset
quality. Accordingly, an inability to maintain growth, or our inability to effectively manage
our growth, could adversely affect our results of operations and financial condition.
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New bank office facilities and other facilities may not be profitable.
We may not be able to organically expand into new markets that are profitable for our
franchise. The costs to start up new bank branches and loan production offices in new markets,
other than through acquisitions, and the additional costs to operate these facilities would
increase our noninterest expense and may decrease our earnings. It may be difficult to adequately
and profitably manage our growth through the establishment of bank branches or loan production
offices in new markets. In addition, we can provide no assurance that our expansion into any such
new markets will successfully attract enough new business to offset the expenses of their
operation. If we are not able to do so, our earnings would be negatively impacted.
Acquisition of assets and assumption of liabilities may expose us to intangible asset risk which
could impact our results of operations and financial condition.
In connection with any acquisitions, as required by U.S. generally accepted accounting
principles (GAAP), we will record assets acquired and liabilities assumed at their fair value,
and, as such, acquisitions may result in our recording intangible assets, including deposit
intangibles and goodwill. We will perform a goodwill valuation at least annually to test for
goodwill impairment. Impairment testing is a two step process that first compares the fair value of
goodwill with its carrying amount, and second measures impairment loss by comparing the implied
fair value of goodwill with the carrying amount of that goodwill. Adverse conditions in our
business climate, including a significant decline in future operating cash flows, a significant
change in our stock price or market capitalization, or a deviation from our expected growth rate
and performance may significantly affect the fair value of any goodwill and may trigger impairment
losses, which could be materially adverse to our results of operations and financial condition.
The success of our growth strategy depends on our ability to identify and retain individuals with
experience and relationships in the markets in which we intend to expand.
Our growth strategy contemplates that we will expand our business and operations to other
markets in the Carolinas and Virginia. We intend to primarily target market areas which we believe
possess attractive demographic, economic or competitive characteristics. To expand into new markets
successfully, we must identify and retain experienced key management members with local expertise
and relationships in these markets. Competition for qualified personnel in the markets in which we
may expand may be intense, and there may be a limited number of qualified persons with knowledge of
and experience in the commercial banking industry in these markets. Even if we identify individuals
that we believe could assist us in establishing a presence in a new market, we may be unable to
recruit these individuals away from other banks or be unable to do so at a reasonable cost. In
addition, the process of identifying and recruiting individuals with the combination of skills and
attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit,
and retain talented personnel to manage new offices effectively would limit our growth and could
materially adversely affect our business, financial condition, and results of operations.
We may need additional access to capital, which we may be unable to obtain on attractive terms or
at all.
We may need to incur additional debt or equity financing in the future to make strategic
acquisitions or investments, for future growth, or to fund losses or additional provision for loan
losses in the future. Our ability to raise additional capital, if needed, will depend in part on
conditions in the capital markets at that time, which are outside our control, and on our financial
performance. Accordingly, we may be unable to raise additional capital, if and when needed, on
terms acceptable to us, or at all. If we cannot raise additional capital when needed, our ability
to further expand our operations through internal growth and acquisitions could be materially
impaired.
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Risks Associated with Our Business
The current economic environment poses significant challenges for us and could adversely affect our
financial condition and results of operations.
Although we remain well capitalized and have not suffered from liquidity issues, we are
operating in an economic environment that remains challenging and uncertain. Financial institutions
continue to be affected by declines in the real estate market and constrained financial markets. We
retain direct exposure to the residential and
commercial real estate markets, and we could be affected by these events. Continued declines
in real estate values, home sales volumes, and financial stress on borrowers as a result of the
uncertain economic environment, including continued job losses, could have an adverse affect on our
borrowers, or their clients, which could adversely affect our financial condition and results of
operations. In addition, an extended deterioration in local economic conditions in our markets and
target markets could drive losses beyond those which are or will be provided for in our allowance
for loan losses and result in the following consequences:
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increases in loan delinquencies; |
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increases in nonperforming assets and foreclosures; |
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decreases in demand for our products and services, which could adversely affect our
liquidity position; |
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decreases in the value of the collateral securing our loans, especially real estate,
which could reduce clients borrowing power; and |
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decreases in our ability to raise additional capital on terms acceptable to us or at
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Until conditions improve, we expect our business, financial condition and results of
operations to continue to be adversely affected.
Our estimated allowance for loan losses may not be sufficient to cover actual loan losses, which
could adversely affect our earnings.
We maintain an allowance for loan losses in an attempt to cover loan losses inherent in our
loan portfolio. The determination of the allowance for loan losses, which represents managements
estimate of probable losses inherent in our credit portfolio, involves a high degree of judgment
and complexity. Our policy is to establish reserves for estimated losses on delinquent and other
problem loans when it is determined that losses are expected to be incurred on such loans.
Managements determination of the adequacy of the allowance is based on various factors, including
an evaluation of the portfolio, current economic conditions, the volume and type of lending
conducted by us, composition of the portfolio, the amount of our classified assets, seasoning of
the loan portfolio, the status of past due principal and interest payments and other relevant
factors. Changes in such estimates may have a significant impact on our financial statements. If
our assumptions and judgments prove to be incorrect, our current allowance may not be sufficient
and adjustments may be necessary to allow for different economic conditions or adverse developments
in our loan portfolio. Federal and state regulators also periodically review our allowance for loan
losses and may require us to increase our provision for loan losses or recognize further loan
charge-offs, based on judgments different than those of our management. The risks inherent in our
loan portfolio have been exacerbated by the negative developments in the financial markets and the
economy in general, and additional loan losses will likely occur in the future and may occur at a
rate greater than we have experienced to date. We significantly increased our allowance for loan
losses in 2010. However, no assurance can be given that the allowance will be adequate to cover
loan losses inherent in our loan portfolio, and we may experience losses in our loan portfolio or
perceive adverse conditions and trends that may require us to significantly increase our allowance
for loan losses in the future. Any increase in our allowance for loan losses would have an adverse
effect on our results of operations and financial condition.
If our nonperforming assets increase, our earnings will suffer.
At December 31, 2010, our nonperforming assets totaled approximately $42.2 million, or 6.84%
of total assets. Our nonperforming assets adversely affect our earnings in various ways. We do not
record interest income on nonaccrual loans or other real estate owned. We must reserve for probable
losses, which is established through a current period charge to the provision for loan losses as
well write-downs from time to time, as appropriate, of the value of properties in our other real
estate owned portfolio to reflect changing market values. Additionally, there are legal fees
associated with the resolution of problem assets as well as carrying costs such as taxes,
insurance, and maintenance related to our other real estate owned. Further, the resolution of
nonperforming assets requires the active involvement of management, which can distract them from
more profitable activity. Finally, if our estimate for the recorded allowance for loan losses
proves to be incorrect and our allowance is inadequate, we will have to increase the allowance
accordingly and as a result our earnings may be adversely affected.
17
Our concentration in loans secured by real estate, particularly commercial real estate and
construction and development, may increase our loan losses.
We offer a variety of secured loans, including commercial lines of credit, commercial term
loans, real estate, construction, home equity, consumer, and other loans. Many of our loans are
secured by real estate (both residential and commercial) in our market areas. Consequently, a
decline in local economic conditions may have a greater effect on our earnings and capital than on
the earnings and capital of larger financial institutions whose real estate loan portfolios are
more geographically diverse.
At December 31, 2010, approximately 86% of our loans had real estate as a primary or secondary
component of collateral and includes a significant portion of loans secured by commercial real
estate and construction and development collateral. The real estate collateral in each case
provides an alternate source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. If we are required to liquidate the
collateral securing a loan to satisfy the debt during a period of reduced real estate values, our
earnings and capital could be adversely affected. Over the past year, real estate values in our
market areas have declined and may continue to decline. Continued declines in real estate values
expose us to further deterioration in the value of the collateral for all loans secured by real
estate and may adversely affect our results of operations and financial condition.
Commercial real estate loans are generally viewed as having more risk of default than
residential real estate loans, particularly when there is a downturn in the business cycle. They
are also typically larger than residential real estate loans and consumer loans and depend on cash
flows from the owners business or the property to service the debt. Cash flows may be affected
significantly by general economic conditions and a downturn in the local economy or in occupancy
rates in the local economy where the property is located, each of which could increase the
likelihood of default on the loan. Because our loan portfolio contains a number of commercial real
estate loans with relatively large balances, the deterioration of one or a few of these loans could
cause a significant increase in our percentage of nonperforming loans. An increase in nonperforming
loans could result in a loss of earnings from these loans, an increase in the provision for loan
losses, and an increase in charge-offs, all of which could have a material adverse effect on our
results of operations and financial condition.
Banking regulators are examining commercial real estate lending activity with heightened
scrutiny and may require banks with higher levels of commercial real estate loans to implement
improved underwriting, internal controls, risk management policies and portfolio stress testing, as
well as possibly higher levels of allowances for losses and capital levels as a result of
commercial real estate lending growth and exposures, which could have a material adverse effect on
our results of operations.
Since we engage in lending secured by real estate and may be forced to foreclose on the collateral
property and own the underlying real estate, we may be subject to the increased costs associated
with the ownership of real property, which could adversely impact our results of operations.
Since we originate loans secured by real estate, we may have to foreclose on the collateral
property to protect our investment and may thereafter own and operate such property, in which case
we are exposed to the risks inherent in the ownership of real estate.
The amount that we, as a mortgagee, may realize after a default is dependent upon factors
outside of our control, including, but not limited to: general or local economic conditions;
environmental cleanup liability; neighborhood values; interest rates; real estate tax rates;
operating expenses of the mortgaged properties; supply of and demand for rental units or
properties; ability to obtain and maintain adequate occupancy of the properties; zoning laws;
governmental rules, regulations and fiscal policies; and acts of God.
Certain expenditures associated with the ownership of real estate, principally real estate
taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the
cost of operating income producing real property may exceed the rental income earned from such
property, and we may have to advance funds in order to protect our investment or we may be required
to dispose of the real property at a loss.
We maintain a number of large lending relationships, any of which could have a material adverse
effect on our results of operations if our borrowers were not to perform according to the terms of
these loans.
We maintain a number of large lending relationships. Our ten largest lending relationships
(including aggregate exposure to guarantors) at December 31, 2010, range from $6.2 million to $9.6
million and averaged $7.7 million. One of these lending relationships, representing $6.2 million in
loans, was included in nonperforming loans at December 31, 2010. The deterioration of one or more
additional large relationship loans could result in a significant
increase in our nonperforming loans and our provision for loan losses, which would negatively
impact our results of operations.
18
As a result of our limited operating history, our loan portfolio is unseasoned.
Our loan portfolio consists of loans made by us since we began operations in October 2006. It
is difficult to assess the future performance of our loan portfolio due to the recent origination
of our loans. Industry experience shows that in most cases it takes several years for loan
difficulties to become apparent. At December 31, 2010, 48 loans, with a combined outstanding
balance of $40.9 million, were classified as nonaccrual (generally, loans contractually past due 90
days or more as to principal or interest, for which terms are renegotiated below market levels in
response to a financially distressed borrower or guarantor, or where substantial doubt about full
repayment of principal or interest is evident). At December 31, 2010, we had loans totaling $73.3
million on our watch list, including the $40.9 million in nonaccrual loans. We can give no
assurance that other loans, including the remaining loans on our watch list, will not become
nonperforming or delinquent, which could adversely affect our results of operations and financial
condition.
Our reliance on time deposits, including out-of-market and brokered certificates of deposit, as a
source of funds for loans and our other liquidity needs could have an adverse effect on our results
of operations.
We rely on deposits for funds to make loans and provide for our other liquidity needs. Our
loan demand has exceeded the rate at which we have been able to build core deposits. As a result,
we have relied heavily on time deposits, especially brokered certificates of deposit, as a source
of funds. Although we have focused recently on decreasing our reliance on brokered deposits, as of
December 31, 2010, brokered deposits and other wholesale sources comprised approximately 29.01% of
our total liabilities. Such deposits may not be as stable as other types of deposits and, in the
future, depositors may not renew those time deposits when they mature, or we may have to pay a
higher rate of interest to attract or keep them or to replace them with other deposits or with
funds from other sources. Not being able to replace these deposits as they mature would adversely
affect our liquidity. Additionally, we are regulated by the FDIC, which requires us to maintain
certain capital levels to be considered well capitalized. If we fail to maintain these capital
levels, we would lose our ability to obtain funding through brokered deposits, absent receipt of a
waiver from the FDIC. Paying higher deposit rates to attract, keep or replace those deposits could
have a negative effect on our interest margin and results of operations.
Recent negative developments in the financial industry and the increased level of recent bank
failures may lead to regulatory changes that may adversely affect our operations and results.
Recent negative developments in the credit markets and in the general economy have resulted in
uncertainty in the financial markets in general with the expectation of the current economic
downturn continuing throughout 2011. As a result, commercial as well as consumer loan portfolio
performances have deteriorated at many institutions and the competition for deposits and quality
loans has increased significantly. In addition, the values of real estate collateral supporting
many commercial loans and home mortgages have declined and may continue to decline. Bank and bank
holding company stock prices have been negatively affected, as has the ability of banks and bank
holding companies to raise capital or borrow in the debt markets compared to recent years, and the
high rate at which banks have been placed in federal receivership during 2009 and 2010 is
unprecedented. As a result, there is a potential for additional federal or state laws and
regulations regarding lending and funding practices and liquidity standards, and bank regulatory
agencies are expected to be very aggressive in responding to concerns and trends identified in
examinations, including the expected issuance of many formal enforcement orders. Negative
developments in the financial industry and the domestic and international credit markets, and the
impact of new legislation in response to those developments, may negatively impact our operations
by restricting our business operations, including our ability to originate or sell loans, and
adversely impact our results of operations and financial condition.
The FDIC deposit insurance assessments that we are required to pay may increase in the future,
which would have an adverse effect on our earnings.
As an insured depository institution, we are required to pay quarterly deposit insurance
premium assessments to the FDIC. These assessments are required to ensure that the FDIC deposit
insurance reserve ratio is at least 1.15% of insured deposits, and the Dodd-Frank Act requires this
reserve ratio to increase to 1.35% by 2020. The recent failures of several financial institutions
have significantly increased the DIFs loss provisions, resulting in a decline in the reserve
ratio. The FDIC expects a higher rate of insured institution failures in the next few years, which
may result in a continued decline in the reserve ratio.
19
In order to maintain a strong funding position and restore reserve ratios of the DIF, the FDIC
has increased assessment rates of insured institutions. In the second quarter of 2009, the FDIC
levied a special assessment on insured depository institutions equal to 5 basis points of the
institutions total assets less Tier 1 capital. In addition, on November 12, 2009, the FDIC adopted
a rule requiring banks to prepay three years worth of premiums to replenish the DIF on December
31, 2009.
In addition, on January 12, 2010, the FDIC requested comments on a proposed rule tying
assessment rates of FDIC-insured institutions to the institutions employee compensation programs.
The exact requirements of such a rule are not yet known, but such a rule could increase the amount
of premiums we must pay for FDIC insurance. Furthermore, the FDIC announced a proposed rule on
April 13, 2010, that, if adopted, would alter the initial and total base assessment rates
applicable to all insured depository institutions effective January 1, 2011, with actual total
assessment rates being set 3 basis points higher than the rates in effect on January 1, 2010, in
accordance with the Amended Restoration Plan that the FDIC adopted on September 29, 2009. The
Dodd-Frank Act has changed the formula for calculating deposit insurance assessments. Pursuant to
the Dodd-Frank Act, assessments are calculated as a percentage of average total consolidated assets
less average tangible equity during the assessment period, rather than as a percentage of total
deposits. These announced increases and any future increases or required prepayments of FDIC
insurance premiums may adversely impact our earnings.
During the years ended December 31, 2010 and 2009, we incurred approximately $648,000 and
$900,000, respectively, in deposit insurance expense. Due to the recent increases in the assessment
rates, and the potential for additional increases due to proposed FDIC rules, as well as our growth
strategy, we may be required to pay additional amounts to the DIF. If the deposit insurance premium
assessment rate applicable to us increases again, whether because of our risk classification,
because of emergency assessments, or because of another uniform increase or prepayment
requirements, our earnings could be further adversely impacted.
Recent legislation and administrative actions authorizing the U.S. government to take direct
actions within the financial services industry may not stabilize the U.S. financial system.
Numerous actions have been taken by the U.S. Congress, the Federal Reserve Board, the U.S.
Treasury, the FDIC, the SEC and others to address the current liquidity and credit crisis that has
followed the sub-prime mortgage crisis that commenced in 2007. The Emergency Economic Stabilization
Act of 2008, or EESA, was enacted on October 3, 2008. Under EESA, the U.S. Treasury has the
authority to, among other things, invest in financial institutions and purchase up to $700 billion
of troubled assets and mortgages from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets. The Dodd-Frank Act reduced the size of that
program, known as the Troubled Asset Relief Program, or TARP, from $700 billion to $475 billion and
prohibits the establishment of additional programs under TARP. Under the U.S. Treasurys Capital
Purchase Program, or CPP, the U.S. Treasury committed to purchase up to $250 billion of preferred
stock and warrants in eligible institutions. The EESA also temporarily increased FDIC deposit
insurance coverage to $250,000, and the Dodd-Frank Act made the increase permanent.
On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan which, among
other things, provides a forward-looking supervisory capital assessment program that is mandatory
for banking institutions with over $100 billion of assets and makes capital available to financial
institutions qualifying under a process and criteria similar to the CPP. In addition, the American
Recovery and Reinvestment Act of 2009, or ARRA, was signed into law on February 17, 2009, and
includes, among other things, extensive new restrictions on the compensation and governance
arrangements of financial institutions.
In addition, the Secretary of the Treasury proposed fundamental changes to the regulation of
financial institutions, markets and products on June 17, 2009. Finally, the Dodd-Frank Act, which
was enacted in July 2010, will result in significant regulatory initiatives that could have a
significant and possibly adverse impact on the financial services industry, including us.
We cannot predict the actual effects of the Dodd-Frank Act, EESA, the ARRA, future legislative
and regulatory reform measures and various governmental, regulatory, monetary, and fiscal
initiatives which have been and may be enacted on the economy, the financial markets, or us. The
terms and costs of these activities, or the failure of these actions to help stabilize the
financial markets, asset prices, market liquidity and a continuation or worsening of current
financial market and economic conditions, could materially and adversely affect our business,
financial condition, results of operations, and the trading prices of our securities.
20
Our net interest income could be negatively affected by further interest rate adjustments by the
Federal Reserve Board.
As a financial institution, our earnings are dependent upon our net interest income, which is
the difference between the interest income that we earn on interest-earning assets, such as
investment securities and loans, and the interest expense that we pay on interest-bearing
liabilities, such as deposits and borrowings. Therefore, any change in general market interest
rates, including changes resulting from changes in the Federal Reserve Boards policies, affects us
more than non-financial institutions and can have a significant effect on our net interest income
and total income. Our assets and liabilities may react differently to changes in overall market
rates or conditions because there may be mismatches between the repricing or maturity
characteristics of our assets and liabilities. As a result, an increase or decrease in market
interest rates could have a material adverse effect on our net interest margin and results of
operations. Actions by monetary and fiscal authorities, including the Federal Reserve Board, could
have an adverse effect on our deposit levels, loan demand, business, and results of operations.
In response to the dramatic deterioration of the subprime, mortgage, credit, and liquidity
markets, the Federal Reserve Board has taken action on nine occasions to reduce interest rates by a
total of 450 basis points since September 2007, which contributed to a decline in our net interest
income in 2010. Any reduction in our net interest income will negatively affect our business,
financial condition, liquidity, results of operations, cash flows, and/or the price of our
securities.
We are subject to extensive regulation that could limit or restrict our activities.
We operate in a highly regulated industry and currently are subject to examination,
supervision, and comprehensive regulation by the NC Commissioner, the FDIC and the Federal Reserve
Board. Our compliance with these regulations is costly and restricts certain of our activities,
including payment of dividends, mergers and acquisitions, investments, loans and interest rates
charged, locations of offices, and the ability to accept brokered deposits on which we currently
rely heavily to fund our operations. We must also meet regulatory capital requirements. If we fail
to meet these capital and other regulatory requirements, our financial condition, liquidity,
deposit funding strategy, and results of operations would be materially and adversely affected. Our
failure to remain well capitalized and well managed for regulatory purposes could affect client
confidence, our ability to execute our business strategies, our ability to grow assets or establish
new branches, our ability to obtain or renew brokered deposits, our cost of funds and FDIC
insurance, our ability to pay dividends on our common stock, and our ability to make acquisitions.
The laws and regulations applicable to the banking industry could change at any time, and we
cannot predict the effects of these changes on our business and profitability. For example, new
legislation or regulation could limit the manner in which we may conduct our business, including
our ability to obtain financing, attract deposits, and make loans. Many of these regulations are
intended to protect depositors, the public and the FDIC, not shareholders. In addition, the burden
imposed by these regulations may place us at a competitive disadvantage compared to competitors who
are less regulated. The laws, regulations, interpretations, and enforcement policies that apply to
us have been subject to significant change in recent years, sometimes retroactively applied, and
may change significantly in the future. Our cost of compliance could adversely affect our ability
to operate profitably.
Our success depends significantly on economic conditions in our market areas.
Unlike larger organizations that are more geographically diversified, our banking offices are
currently concentrated in North Carolina. Even if our change in strategy is successful, we expect
that our banking offices will remain primarily concentrated in North Carolina, South Carolina and
Virginia. As a result of this geographic concentration, our financial results will depend largely
upon economic conditions in these market areas. If the communities in which we operate do not grow
or if prevailing economic conditions, locally or nationally, deteriorate further, this may have a
significant impact on the amount of loans that we originate, the ability of our borrowers to repay
these loans and the value of the collateral securing these loans. Prolonged continuation of the
current economic downturn caused by inflation, recession, unemployment, government action, or other
factors beyond our control would likely contribute to the deterioration of the quality of our loan
portfolio and reduce our level of deposits, which in turn would have an adverse effect on our
business.
In addition, some portions of our target market are in coastal areas which are susceptible to
hurricanes and tropical storms. Such weather events can disrupt our operations, result in damage to
our properties, decrease the value of real estate collateral for our loans, and negatively affect
the local economies in which we operate. We cannot predict whether or to what extent damage that
may be caused by future hurricanes or other weather events
will affect our operations or the economies in our market areas, but such weather events could
result in a decline in loan originations, a decline in the value or destruction of properties
securing our loans and an increase in the delinquencies, foreclosures and loan losses. Our business
or results of operations may be adversely affected by these and other negative effects of
hurricanes or other significant weather events.
21
Current levels of market volatility are unprecedented.
The capital and credit markets have in recent years been experiencing volatility and
disruption. In some cases, the markets have produced downward pressure on stock prices and credit
availability for certain issuers without regard to those issuers underlying financial strength. If
current levels of market disruption and volatility continue or worsen, there can be no assurance
that we will not experience an adverse effect, which may be material, on our ability to access
capital and on our business, financial condition, and results of operations.
We rely heavily on the services of key executives and directors, a number of which are new
additions to our management team.
Following our Public Offering in August 2010, we changed our management team and reduced the
size of and reconstituted our Board of Directors. Our growth strategy contemplates continued
services and expertise of these persons in the different markets in which we seek to expand. The
loss of the services of any of these persons could have an adverse impact on our ability to execute
our growth strategy or on our business, operations and financial condition.
To be profitable, we must compete successfully with other financial institutions which have greater
resources and capabilities than we do.
The banking business in our target markets is highly competitive. Many of our existing and
potential competitors are larger and have greater resources than we do and have been in existence a
longer period of time. We compete with these institutions both in attracting deposits and
originating loans. We may not be able to attract clients away from our competition. We compete for
loans and deposits with the following types of institutions: `
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securities brokerage firms |
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industrial loan companies |
Competitors that are not depository institutions are generally not regulated as extensively as
we are and, therefore, may have greater flexibility in competing for business. Other competitors
are subject to similar regulation but have the advantages of larger established client bases,
higher lending limits, extensive branch networks, greater advertising and marketing budgets, or
other factors.
Our legal lending limit is determined by law and is calculated as a percentage of our capital
and unimpaired surplus. The size of the loans which we are able to offer to our clients is less
than the size of the loans that larger competitors are able to offer. This limit may affect our
success in establishing relationships with the larger businesses in our market. We may not be able
to successfully compete with the larger banks in our target markets.
22
Liquidity needs of the Company could adversely affect our results of operations and financial
condition.
The primary sources of funds for the Bank are deposits and loan repayments. While scheduled
loan repayments are a relatively stable source of funds, they are subject to the ability of
borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by
a number of factors, including, but not limited to, changes in economic conditions, adverse trends
or events affecting business industry groups, reductions in real estate values or markets, business
closings or lay-offs, inclement weather, natural disasters, and international instability.
Additionally, deposit levels may be affected by a number of factors, including, but not limited to,
rates paid by
competitors, general interest rate levels, regulatory capital requirements, returns available
to clients on alternative investments, and general economic conditions. Accordingly, we may be
required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or
otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, and
federal funds lines of credit from correspondent banks, as well as additional out-of-market time
deposits. While we believe that these sources are currently adequate, there can be no assurance
they will be sufficient to meet future liquidity demands, particularly if we continue to grow and
experience increasing loan demand. We may be required to slow or discontinue loan growth, capital
expenditures or other investments or liquidate assets should such sources not be adequate.
We depend on the accuracy and completeness of information about clients and counterparties, which,
if incorrect or incomplete, could harm our earnings.
In deciding whether to extend credit or enter into other transactions with clients and
counterparties, we may rely on information furnished to us by or on behalf of clients and
counterparties, including financial statements and other financial information. We also may rely on
representations of clients, counterparties or other third parties as to the accuracy and
completeness of that information and, with respect to financial statements, on reports of
independent auditors. For example, in deciding whether to extend credit to clients, we may assume
that a clients audited financial statements conform to GAAP and present fairly, in all material
respects, the financial condition, results of operations and cash flows of the client. Our earnings
are significantly affected by our ability to properly originate, underwrite and service loans. Our
financial condition and results of operations could be negatively impacted to the extent we
incorrectly assess the creditworthiness of our borrowers, fail to detect or respond to
deterioration in asset quality in a timely manner, or rely on information provided to us, such as
financial statements that do not comply with GAAP and may be materially misleading.
Negative public opinion could damage our reputation and adversely impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative public
opinion, is inherent in our operations. Negative public opinion can result from our actual or
alleged conduct in any number of activities, including lending practices, corporate governance and
acquisitions, and from actions taken by government regulators and community organizations in
response to those activities. Negative public opinion can adversely affect our ability to keep and
attract clients and employees and can expose us to litigation and regulatory action and adversely
impact our results of operations. Although we take steps to minimize reputation risk in dealing
with our clients and communities, this risk will always be present given the nature of our
business.
We are subject to security and operational risks relating to our use of technology that, if not
managed properly, could damage our reputation, business or operating results.
To conduct our business, we rely heavily on technology-driven products and services and on
communications and information systems. Our future success will depend, in part, on our ability to
address our clients needs by using technology to provide products and services that will satisfy
client demands for convenience as well as to create additional efficiencies in operations.
Furthermore, any failure, interruption or breach of the security of our information systems could
result in failures or disruptions in our client relationship management, general ledger, deposit,
loan and other systems. While we have policies and procedures designed to prevent or limit the
effect of the failure, interruption or security breach of our information systems, we cannot assure
investors that we can prevent any such failures, interruptions or security breaches or, if they do
occur, that they will be adequately addressed. The occurrence of any failures, interruptions or
security breaches of our information systems could damage our reputation, result in a loss of
client business, subject us to additional regulatory scrutiny, or expose us to civil litigation and
possible financial liability, any of which could have a material adverse effect on our financial
condition and results of operations.
Risks Related to an Investment in our common stock
We may issue additional shares of stock or equity derivative securities, including awards to
current and future executive officers, directors and employees, that could result in dilution of
your investment.
Our authorized capital includes 200,000,000 shares of common stock and 5,000,000 shares of
preferred stock. As of March 31, 2011, we had 28,619,358 shares of common stock outstanding and had
reserved or otherwise set aside for issuance 2,373,632 shares underlying outstanding options and
412,000 shares that are available for future grants of stock options, restricted stock or other
equity-based awards pursuant to the Companys equity incentive plans. Subject to NASDAQ rules, our
Board of Directors generally has the authority to issue all or part of any
authorized but unissued shares of common stock or preferred stock for any corporate purpose.
We may seek additional equity capital in the future as we develop our business and expand our
operations, or we may issue additional equity in connection with the acquisition of strategic
partners. These issuances would dilute the ownership interests of current shareholders and may
dilute the per share book value of the common stock. New investors also may have rights,
preferences and privileges that are senior to, and that adversely affect, our then current
shareholders.
23
In addition, the issuance of shares under the equity compensation plans will result in dilution of
our shareholders ownership of our common stock. The exercise price of stock options could also
adversely affect the terms on which we can obtain additional capital. Option holders are most
likely to exercise their options when the exercise price is less than the market price for our
common stock. They may profit from any increase in the stock price without assuming the risks of
ownership of the underlying shares of common stock by exercising their options and selling the
stock immediately.
Our stock price may be volatile, which could result in losses to our investors and litigation
against us.
Our stock price has been volatile in the past and several factors could cause the price to
fluctuate in the future. These factors include, but are not limited to: actual or anticipated
variations in earnings, changes in analysts recommendations or projections, our announcement of
developments related to our businesses, operations and stock performance of other companies deemed
to be peers, new technology used or services offered by traditional and non-traditional
competitors, news reports of trends, concerns and other issues related to the financial services
industry. Fluctuations in our stock price may be unrelated to our performance. General market
declines or market volatility in the future, especially in the financial institutions sector, could
adversely affect the price of our common stock, and the current market price may not be indicative
of future market prices.
Stock price volatility may make it more difficult for you to resell your common stock when you
want and at prices you find attractive. Moreover, in the past, securities class action lawsuits
have been instituted against some companies following periods of fluctuation in the market price of
their securities. We could in the future be the target of similar litigation. Securities litigation
could result in substantial costs and divert managements attention and resources from our normal
business, which could result in losses to our investors.
Future sales of our common stock by our shareholders or the perception that those sales could occur
may cause our common stock price to decline.
Although our common stock is listed for trading in the NASDAQ Global Market, the trading
volume in our common stock may be lower than that of other larger financial services companies. A
public trading market having the desired characteristics of depth, liquidity and orderliness
depends on the presence in the marketplace of willing buyers and sellers of our common stock at any
given time. This presence depends on the individual decisions of investors and general economic and
market conditions over which we have no control. Given the potential for lower relative trading
volume in our common stock, significant sales of our common stock in the public market, or the
perception that those sales may occur, could cause the trading price of our common stock to decline
or to be lower than it otherwise might be in the absence of those sales or perceptions.
State laws and provisions in our articles of incorporation or bylaws could make it more difficult
for another company to purchase us, even though such a purchase may increase shareholder value.
In many cases, shareholders may receive a premium for their shares if we were purchased by
another company. State law and our articles of incorporation and bylaws could make it difficult for
anyone to purchase us without approval of our Board of Directors. For example, our articles of
incorporation divide the Board of Directors into three classes of directors serving staggered
three-year terms with approximately one-third of the Board of Directors elected at each annual
meeting of shareholders. This classification of directors makes it difficult for shareholders to
change the composition of the Board of Directors. As a result, at least two annual meetings of
shareholders would be required for the shareholders to change a majority of directors, whether or
not a change in the Board of Directors would be beneficial and whether or not a majority of
shareholders believe that such a change would be desirable.
We do not currently intend to pay dividends and may be unable to pay dividends in the future.
We do not intend to pay dividends in the foreseeable future. If we determine to pay dividends
in the future, holders of our common stock are only entitled to receive such dividends as our Board
of Directors may declare out of funds legally available for such payments. Our ability to pay
dividends also is limited by regulatory restrictions
and the need to maintain sufficient capital. If these regulatory requirements are not
satisfied, we would be unable to pay dividends on our common stock.
24
Moreover, Park Sterling Corporation is a bank holding company that is a separate and distinct
legal entity from the Bank. As a result, our ability to make dividend payments, if any, on our
common stock would depend primarily upon the receipt of dividends and other distributions received
from the Bank. Various federal and state regulations limit the amount of dividends that the Bank
may pay to the Company.
In addition, our right to participate in any distribution of assets of the Bank or any other
subsidiary of the Company from time to time upon the subsidiarys liquidation or otherwise, and
thus the ability of our shareholders to benefit indirectly from such distribution, will be subject
to the prior claims of creditors of the subsidiary, except to the extent any of our claims as a
creditor of the subsidiary may be recognized. As a result, our common stock effectively will be
subordinated to all existing and future liabilities and obligations of the Bank and any other
subsidiaries we may have.
Your right to receive liquidation and dividend payments on the common stock is junior to our
existing and future indebtedness and to any other senior securities we may issue in the future.
Shares our common stock are equity interests in us and do not constitute indebtedness. This
means that shares of our common stock will rank junior to all of our indebtedness and to other
non-equity claims against us and our assets available to satisfy claims against us, including in
our liquidation. As of December 31, 2010, we had approximately $6.9 million of subordinated debt,
in addition to our other liabilities, which would have been senior in right of payment to our
common stock and we may incur additional indebtedness from time to time without the approval of the
holders of our common stock.
Additionally, our Board of Directors is authorized to issue classes or series of preferred
stock in the future without any action on the part of our common shareholders. Our common
shareholders would be subject to the prior dividend and liquidation rights of holders of any
preferred stock outstanding.
Our common stock is not insured by the FDIC.
Our common stock is not a savings or deposit account, and is not insured by the FDIC or any
other governmental agency and is subject to risk, including the possible loss of all or some
principal.
|
|
|
Item 1B. |
|
Unresolved Staff Comments |
None.
The Company leases 16,265 square feet in a building located at 1043 E. Morehead Street,
Charlotte, North Carolina that serves as its corporate headquarters and a branch office location.
In February 2011, the Company leased 7,965 square feet in a building adjacent to the Morehead
Street location to accommodate the Companys expanding operations. Both of the buildings are owned
by an entity with respect to which a former director is president.
The Company owns its branch office location in the SouthPark neighborhood of Charlotte, North
Carolina and leases a branch office location in Wilmington, North Carolina. In February 2011, the
Company leased an office location in Charleston, South Carolina, where we intend to open a branch.
Management believes the terms of the various leases are consistent with market standards and were
arrived at through arms length bargaining.
|
|
|
Item 3. |
|
Legal Proceedings |
There are no pending material legal proceedings to which the Company is a party or of which
any of its property is subject. In addition, the Company is not aware of any threatened litigation,
unasserted claims or assessments that could have a material adverse effect on the Companys
business, operating results or financial condition.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders [Removed and reserved] |
25
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market for the Common Stock of the Company. Since the Public Offering, shares of the Companys
common stock (and prior to the Reorganization, the Banks common stock) have been traded on the
NASDAQ Global Market (NASDAQ) under the symbol PSTB. Prior to the Public Offering, shares of
the Banks common stock were traded on the Over the Counter Bulletin Board (OTCBB) under the
symbol PSTB.OB. The following table sets forth: (i) since August 13, 2010, the date that trading
began on NASDAQ, the high and low sales prices for the common stock, as reported on NASDAQ, and
(ii) prior to August 13, 2010, the high and low bid information for the common stock, as reported
on the OTCBB, in each case for the calendar quarters or shorter period indicated. The OTCBB bid
information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions. There may have been other transactions in the Banks common
stock during such periods referenced of which we are not aware.
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
2010 |
|
High |
|
|
Low |
|
First Quarter |
|
$ |
6.50 |
|
|
$ |
5.80 |
|
Second Quarter |
|
|
8.95 |
|
|
|
6.24 |
|
Third Quarter (through August 12, 2010) |
|
|
8.91 |
|
|
|
6.35 |
|
Third Quarter (August 13, 2010 through
September 30, 2010) |
|
|
6.45 |
|
|
|
5.56 |
|
Fourth Quarter |
|
|
6.40 |
|
|
|
5.03 |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
2009 |
|
High |
|
|
Low |
|
First Quarter |
|
$ |
9.00 |
|
|
$ |
5.50 |
|
Second Quarter |
|
|
7.20 |
|
|
|
6.00 |
|
Third Quarter |
|
|
7.00 |
|
|
|
5.50 |
|
Fourth Quarter |
|
|
6.75 |
|
|
|
6.00 |
|
As of March 7, 2011, the Company had approximately 172 shareholders of record.
Dividend Policy. To date, no cash dividends have been paid with respect to our common stock.
The current policy of the Board of Directors is to retain any earnings to provide for the growth of
the Company, therefore, we do not anticipate paying cash dividends in the foreseeable future. At
such time as the Board of Directors contemplates a change in the dividend policy, the Companys
ability to pay dividends will be subject to the restrictions of North Carolina law, various
statutory limitations and its organizational documents, and may be dependent on the receipt of
dividends from the Bank, payment of which is subject to regulatory restrictions.
Unregistered sales of equity securities. During 2010, the Bank did not have any unregistered
sales of equity securities except as previously reported on the Banks Current Report on Form 8-K
dated August 18, 2010 and filed with the FDIC and did not have any repurchases of its common stock.
Securities authorized for issuance under equity compensation plans. The information required
by Item 201(d) is set forth in Part III, Item 12.
26
|
|
|
Item 6. |
|
Selected Financial Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 (1) |
|
|
|
(Dollars in thousands, except per share data) |
|
Operating Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
22,642 |
|
|
$ |
21,668 |
|
|
$ |
20,102 |
|
|
$ |
10,988 |
|
|
$ |
690 |
|
Total interest expense |
|
|
7,607 |
|
|
|
9,290 |
|
|
|
10,471 |
|
|
|
4,837 |
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
15,035 |
|
|
|
12,378 |
|
|
|
9,631 |
|
|
|
6,151 |
|
|
|
556 |
|
Provision for loan losses |
|
|
17,005 |
|
|
|
3,272 |
|
|
|
2,544 |
|
|
|
2,758 |
|
|
|
640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision |
|
|
(1,970 |
) |
|
|
9,106 |
|
|
|
7,087 |
|
|
|
3,393 |
|
|
|
(84 |
) |
Noninterest income (loss) |
|
|
130 |
|
|
|
(293 |
) |
|
|
26 |
|
|
|
13 |
|
|
|
1 |
|
Noninterest expense |
|
|
11,057 |
|
|
|
7,997 |
|
|
|
7,099 |
|
|
|
5,278 |
|
|
|
1,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
(12,897 |
) |
|
|
816 |
|
|
|
14 |
|
|
|
(1,872 |
) |
|
|
(1,894 |
) |
Income tax expense (benefit) |
|
|
(5,038 |
) |
|
|
239 |
|
|
|
(1,532 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,859 |
) |
|
$ |
577 |
|
|
$ |
1,546 |
|
|
$ |
(1,872 |
) |
|
$ |
(1,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
(0.58 |
) |
|
$ |
0.12 |
|
|
$ |
0.31 |
|
|
$ |
(0.38 |
) |
|
$ |
(0.38 |
) |
Diluted earnings (loss) per common share |
|
$ |
(0.58 |
) |
|
$ |
0.12 |
|
|
$ |
0.31 |
|
|
$ |
(0.38 |
) |
|
$ |
(0.38 |
) |
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
13,558,221 |
|
|
|
4,951,098 |
|
|
|
4,951,098 |
|
|
|
4,950,355 |
|
|
|
4,950,000 |
|
Diluted |
|
|
13,558,221 |
|
|
|
4,951,098 |
|
|
|
5,000,933 |
|
|
|
4,950,355 |
|
|
|
4,950,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
65,378 |
|
|
$ |
23,238 |
|
|
$ |
16,511 |
|
|
$ |
1,423 |
|
|
$ |
20,371 |
|
Investment securities |
|
|
140,590 |
|
|
|
42,567 |
|
|
|
31,588 |
|
|
|
14,883 |
|
|
|
4,572 |
|
Loans |
|
|
399,829 |
|
|
|
397,564 |
|
|
|
371,272 |
|
|
|
226,541 |
|
|
|
42,647 |
|
Allowance for loan losses |
|
|
(12,424 |
) |
|
|
(7,402 |
) |
|
|
(5,568 |
) |
|
|
(3,398 |
) |
|
|
(640 |
) |
Total assets |
|
|
616,108 |
|
|
|
473,855 |
|
|
|
428,073 |
|
|
|
246,667 |
|
|
|
68,424 |
|
Deposits |
|
|
407,820 |
|
|
|
392,633 |
|
|
|
351,327 |
|
|
|
185,602 |
|
|
|
25,409 |
|
Borrowings |
|
|
20,874 |
|
|
|
26,989 |
|
|
|
27,962 |
|
|
|
16,804 |
|
|
|
|
|
Subordinated debt |
|
|
6,895 |
|
|
|
6,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
$ |
177,101 |
|
|
$ |
46,095 |
|
|
$ |
45,697 |
|
|
$ |
42,421 |
|
|
$ |
42,964 |
|
|
|
|
(1) |
|
Operating and per share data from September 8, 2006 (date of incorporation) to December 31,
2006. |
|
(2) |
|
Per share data has been adjusted for the effects of an eleven-for-ten stock split in the
third quarter of 2008. |
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 (1) |
|
Profitability Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
-1.46 |
% |
|
|
0.13 |
% |
|
|
0.46 |
% |
|
|
-1.27 |
% |
|
|
|
|
Return on average shareholders equity |
|
|
-8.00 |
% |
|
|
1.26 |
% |
|
|
3.59 |
% |
|
|
-4.43 |
% |
|
|
|
|
Net interest margin (2) |
|
|
2.95 |
% |
|
|
2.76 |
% |
|
|
2.88 |
% |
|
|
4.22 |
% |
|
|
|
|
Efficiency ratio (3) |
|
|
71.39 |
% |
|
|
64.19 |
% |
|
|
73.51 |
% |
|
|
85.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to total loans |
|
|
3.00 |
% |
|
|
0.36 |
% |
|
|
0.09 |
% |
|
|
0.00 |
% |
|
|
|
|
Allowance for loan losses to total loans |
|
|
3.11 |
% |
|
|
1.86 |
% |
|
|
1.50 |
% |
|
|
1.50 |
% |
|
|
|
|
Nonperforming assets to total loans and OREO |
|
|
10.51 |
% |
|
|
1.06 |
% |
|
|
0.38 |
% |
|
|
|
|
|
|
|
|
Nonperforming assets to total assets |
|
|
6.84 |
% |
|
|
0.89 |
% |
|
|
0.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans to total deposits |
|
|
94.99 |
% |
|
|
99.37 |
% |
|
|
104.09 |
% |
|
|
120.23 |
% |
|
|
|
|
Liquidity ratio |
|
|
50.50 |
% |
|
|
15.81 |
% |
|
|
13.69 |
% |
|
|
8.79 |
% |
|
|
|
|
Equity to total assets |
|
|
28.75 |
% |
|
|
9.73 |
% |
|
|
10.67 |
% |
|
|
17.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets (4) |
|
|
28.75 |
% |
|
|
9.73 |
% |
|
|
10.67 |
% |
|
|
17.20 |
% |
|
|
|
|
Tier 1 leverage |
|
|
27.39 |
% |
|
|
9.40 |
% |
|
|
10.71 |
% |
|
|
19.67 |
% |
|
|
|
|
Tier 1 risk-based capital |
|
|
40.20 |
% |
|
|
10.66 |
% |
|
|
10.92 |
% |
|
|
16.84 |
% |
|
|
|
|
Total risk-based capital |
|
|
43.06 |
% |
|
|
13.55 |
% |
|
|
12.71 |
% |
|
|
18.09 |
% |
|
|
|
|
|
|
|
(1) |
|
Bank incorporated on September 8, 2006. Information is not meaningful and has been
excluded. |
|
(2) |
|
Net interest margin is presented on a tax equivalent basis. |
|
(3) |
|
Calculated by dividing noninterest expense by the sum of net interest income and noninterest
income. Gains and losses on sales of securities and OREO are excluded from the calculation. |
|
(4) |
|
Information regarding the calculation of these non-GAAP measures is included in Results of
Operations in Item 7. under the caption Summary. |
28
The following tables set forth the unaudited consolidated selected quarterly statement of
income (loss) for the years ended December 31:
Consolidated Selected Quarterly Statement of Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 (unaudited) |
|
|
|
4th |
|
|
3rd |
|
|
2nd |
|
|
1st |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Total interest income |
|
$ |
5,793 |
|
|
$ |
5,559 |
|
|
$ |
5,639 |
|
|
$ |
5,651 |
|
Total interest expense |
|
|
1,896 |
|
|
|
1,929 |
|
|
|
1,882 |
|
|
|
1,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
3,897 |
|
|
|
3,630 |
|
|
|
3,757 |
|
|
|
3,751 |
|
Provision for loan losses |
|
|
8,237 |
|
|
|
6,143 |
|
|
|
1,094 |
|
|
|
1,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision |
|
|
(4,340 |
) |
|
|
(2,513 |
) |
|
|
2,663 |
|
|
|
2,220 |
|
Noninterest income |
|
|
43 |
|
|
|
26 |
|
|
|
23 |
|
|
|
38 |
|
Noninterest expense |
|
|
3,548 |
|
|
|
2,990 |
|
|
|
2,477 |
|
|
|
2,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
(7,845 |
) |
|
|
(5,477 |
) |
|
|
209 |
|
|
|
216 |
|
Income tax expense (benefit) |
|
|
(3,324 |
) |
|
|
(1,809 |
) |
|
|
36 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,521 |
) |
|
$ |
(3,668 |
) |
|
$ |
173 |
|
|
$ |
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
(0.16 |
) |
|
$ |
(0.23 |
) |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
Diluted earnings (loss) per common share |
|
$ |
(0.16 |
) |
|
$ |
(0.23 |
) |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (unaudited) |
|
|
|
4th |
|
|
3rd |
|
|
2nd |
|
|
1st |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Total interest income |
|
$ |
5,650 |
|
|
$ |
5,568 |
|
|
$ |
5,389 |
|
|
$ |
5,061 |
|
Total interest expense |
|
|
2,021 |
|
|
|
2,283 |
|
|
|
2,336 |
|
|
|
2,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
3,629 |
|
|
|
3,285 |
|
|
|
3,053 |
|
|
|
2,411 |
|
Provision for loan losses |
|
|
1,418 |
|
|
|
1,150 |
|
|
|
419 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision |
|
|
2,211 |
|
|
|
2,135 |
|
|
|
2,634 |
|
|
|
2,126 |
|
Noninterest income (loss) |
|
|
14 |
|
|
|
26 |
|
|
|
(335 |
) |
|
|
2 |
|
Noninterest expense |
|
|
2,078 |
|
|
|
2,018 |
|
|
|
2,044 |
|
|
|
1,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
147 |
|
|
|
143 |
|
|
|
255 |
|
|
|
271 |
|
Income tax expense |
|
|
29 |
|
|
|
27 |
|
|
|
97 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
118 |
|
|
$ |
116 |
|
|
$ |
158 |
|
|
$ |
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
Diluted earnings per common share |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
|
|
Item 7. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following is a discussion of our financial position and results of operations and should be
read in conjunction with the information set forth in Part I, Item 1A. Risk Factors and in the
Companys consolidated financial statements and notes thereto (Consolidated Financial Statements)
contained in Part II, Item 8, Financial Statements and Supplementary Data, of this Report.
Summary of Recent Events
The Company was formed on October 6, 2010 to serve as the holding company for the Bank and is
a bank holding company registered with the Federal Reserve Board under the BHC Act. At present, the
Companys primary operations and business are that of owning the Bank.
29
The Bank was incorporated on September 8, 2006 as a North Carolina-chartered commercial bank
and is a subsidiary of the Company. The Bank opened for business on October 25, 2006 at 1043 E.
Morehead Street, Suite 201, Charlotte, North Carolina. The Bank opened a branch in Wilmington,
North Carolina, in October 2007 and in the SouthPark neighborhood of Charlotte in July 2008, and
received approval from the NC Commissioner in March 2011 to open a branch in Charleston, South
Carolina.
On January 1, 2011, the Company acquired all of the outstanding common stock of the Bank, on a
one-for-one basis, in a statutory share exchange transaction effected under North Carolina law and
in accordance with the terms of an Agreement and Plan of Reorganization and Share Exchange dated
October 22, 2010. Prior to the January 1, 2011, the Company conducted no operations other than
obtaining regulatory approval for the Reorganization. The consolidated financial statements,
discussions of those statements, market data and all other operating information presented herein,
are those of the Bank on a stand-alone basis.
In August 2010, the Bank conducted the Public Offering which raised gross proceeds of $150.2
million to facilitate a change in its business plan from primarily organic growth at a moderate
pace over the next few years to seeking to acquire regional and community banks in the Carolinas
and Virginia. We intend to become a regional-sized multi-state banking franchise through
acquisitions and organic growth, seeking to reach a consolidated asset size of between $8 billion
and $10 billion over the next several years. We are committed to building a banking franchise that
is noted for sound risk management, superior client service and exceptional client relationships.
As part of the Banks change in strategy, immediately following the Public Offering, the Bank
reduced the size of its board of directors from thirteen members to six members, maintaining two of
the sitting directors, Larry W. Carroll and Thomas B. Henson, and adding four new directors, Walter
C. Ayers, Leslie M. (Bud) Baker, James C. Cherry and Jeffrey S. Kane. Mr. Baker was named Chairman
of the board of directors upon becoming a member. In March 2011, the board of directors of the
Company, which mirrors that of the Bank, approved expanding its membership to seven and appointed
Jean E. Davis as a director.
The Bank also reorganized its management team following the Public Offering. The new
executive management team includes James C. Cherry, who became the Chief Executive Officer; David
L. Gaines, who became the Chief Financial Officer; Nancy J. Foster, who became the Chief Risk
Officer; and Bryan F. Kennedy, III, who was the President and Chief Executive Officer and remains
the President.
On March 30, 2011, the Company and Community Capital Corporation (Community Capital) entered
into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which Community Capital
will be merged with and into the Company, with the Company as the surviving entity (the Merger). Pursuant to the terms of the Merger Agreement, the
Company will pay $3.30 per share of Community Capital common stock, with the consideration to be in
the form of approximately 40% cash and approximately 60% in shares of the Companys common stock.
The Merger Agreement has been approved by the boards of directors of both the Company and Community
Capital. The Merger is subject to customary closing conditions, including regulatory approval and
Community Capital shareholder approval. As of December 31, 2010, Community Capital, which is
headquartered in Greenwood, South Carolina, had $655.9 million in assets and operated 17 full
service branches and one drive-through facility throughout South Carolina. For additional
information, please see the Companys Current Report on Form 8-K filed March 31, 2011.
Critical Accounting Policies
In the preparation of our financial statements, we have adopted various accounting policies
that govern the application of accounting principles generally accepted in the United States and in
accordance with general practices within the banking industry. Our significant accounting policies
are described in Note B Summary of Significant Accounting Policies to the Consolidated Financial
Statements. While all of these policies are important to understanding the consolidated financial
statements, certain accounting policies described below involve significant judgment and
assumptions by management that have a material impact on the carrying value of certain assets and
liabilities. We consider these accounting policies to be critical accounting policies. The judgment
and assumptions we use are based on historical experience and other factors, which we believe to be
reasonable under the circumstances. Because of the nature of the judgment and assumptions we make,
actual results could differ from these judgments and assumptions that could have a material impact
on the carrying values of our assets and liabilities and our results of operations.
30
Allowance for Loan Losses. The allowance for loan losses is based upon managements ongoing
evaluation of the loan portfolio and reflects an amount considered by management to be its best
estimate of known and inherent losses in the portfolio as of the balance sheet date. The
determination of the allowance for loan losses involves a high degree of judgment and complexity.
In making the evaluation of the adequacy of the allowance for loan losses, management gives
consideration to current economic conditions, statutory examinations of the loan portfolio by
regulatory agencies, independent loan reviews performed periodically by third parties, delinquency
information, managements internal review of the loan portfolio, and other relevant factors. While
management uses the best information available to make evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the assumptions used in making
the evaluations. In addition, regulatory examiners may require the Company to recognize changes to
the allowance for loan losses based on their judgments about information available to them at the
time of their examination. Although provisions have been established by loan segments based upon
managements assessment of their differing inherent loss characteristics, the entire allowance for
losses on loans is available to absorb further loan losses in any segment. Further information
regarding the Companys policies and methodology used to estimate the allowance for possible loan
losses is presented in Note D Loans to the Consolidated Financial Statements.
Income Taxes. Income taxes are provided based on the liability method of accounting, which
includes the recognition of deferred tax assets and liabilities for the temporary differences
between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.
In general, The Company records deferred tax assets when the event giving rise to the tax
benefit has been recognized in the consolidated financial statements.
A valuation allowance is recognized to reduce any deferred tax assets for which, based upon
available information, it is more-likely-than-not that all or any portion will not be realized.
Assessing the need for, and amount of, a valuation allowance for deferred tax assets requires
significant judgment and evaluation. In most cases, the realization of deferred tax assets is
dependent upon the Company generating a sufficient level of taxable income in future periods, which
can be difficult to predict. Management has prepared a forecast which includes judgmental and
quantitative elements that may be subject to significant change. If our forecast of taxable income
within the carryforward periods available under applicable law is not sufficient to cover the
amount of net deferred assets, such assets may be impaired. Based on our forecast and other
judgmental elements, management determined no valuation allowances were needed at either December
31, 2010 or 2009.
Fair Value Measurements. As a financial services company, the carrying value of certain
financial assets and liabilities is impacted by the application of fair value measurements, either
directly or indirectly. In certain cases, an asset or liability is measured and reported at fair
value on a recurring basis, such as available-for-sale investment securities. In other cases,
management must rely on estimates or judgments to determine if an asset or liability not measured
at fair value warrants an impairment write-down or whether a valuation reserve should be
established. Given the inherent volatility, the use of fair value measurements may have a
significant impact on the carrying value of assets or liabilities, or result in material changes to
the financial statements, from period to period.
Detailed information regarding fair value measurements can be found in Note M Fair Value of
Financial Instruments to the Consolidated Financial Statements. The following is a summary of those
assets that may be affected by fair value measurements, as well as a brief description of the
current accounting practices and valuation methodologies employed by the Company:
Available-for-Sale Investment Securities. Investment securities classified as
available-for-sale are measured and reported at fair value on a recurring basis. For most
securities, the fair value is based upon quoted market prices or determined by pricing models
that consider observable market data. However, the fair value of certain investment securities
must be based upon unobservable market data, such as non-binding broker quotes and discounted
cash flow analysis or similar models, due to the absence of an active market for these
securities. As a result, managements determination of fair value for these securities is
highly dependent on subjective or complex judgments, estimates and assumptions, which could
change materially between periods.
Impaired loans. For loans considered impaired, the amount of impairment loss recognized is
determined based on a discounted cash flow analysis or the fair value of the underlying
collateral if repayment is expected solely from the sale of the collateral. The vast majority
of the collateral securing impaired loans is real estate, although it may also include accounts
receivable and equipment, inventory or similar personal property.
Results of Operations
Summary. The Company recorded a net loss of $7.9 million, or $(0.58) per diluted share, for
the year ended December 31, 2010, compared to net income of $577 thousand, or $0.12 per diluted
share, for the year ended December 31, 2009 and net income of $1.5 million, or $0.31 per diluted
share, for the year ended December 31, 2008.
31
The net loss for the fourth quarter of 2010 was $4.5 million, or $(0.16) per share, compared
to the fourth quarter of 2009 net income of $118 thousand, or $0.02 per diluted share, and a net
loss of $3.7 million, or $(0.23) per diluted share, for the third quarter of 2010.
As a result of the Public Offering, diluted weighted average shares increased from 4,951,098
in 2009 to 13,558,221 in 2010. Diluted weighted average shares for the fourth quarter of 2009 and
the third and fourth quarters of 2010 were 4,951,098, 15,998,924 and 28,051,098, respectively.
The return on average assets in 2010 was (1.46)% compared to 0.13% in 2009 and 0.46% in 2008.
The return on average shareholders equity was (8.0)% in 2010 compared to 1.26% in 2009 and 3.59%
in 2008.
In addition to traditional capital measurements, management uses tangible equity and related
ratios, which are non-GAAP financial measures, to evaluate the adequacy of shareholders equity and
to facilitate comparisons with peers. The following table presents these non-GAAP financial
measures and reconciles the calculation of tangible assets and tangible equity to the related
amounts as reported in the Companys Consolidated Financial Statements at December 31:
Non-GAAP Financial Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands, except share and per share amounts) |
|
Tangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
616,108 |
|
|
$ |
473,855 |
|
|
$ |
428,073 |
|
Less: intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets |
|
$ |
616,108 |
|
|
$ |
473,855 |
|
|
$ |
428,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Total common equity |
|
$ |
177,101 |
|
|
$ |
46,095 |
|
|
$ |
45,697 |
|
Less: intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity |
|
$ |
177,101 |
|
|
$ |
46,095 |
|
|
$ |
45,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity |
|
$ |
177,101 |
|
|
$ |
46,095 |
|
|
$ |
45,697 |
|
Divided by: tangible assets |
|
|
616,108 |
|
|
|
473,855 |
|
|
|
428,073 |
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets |
|
|
28.75 |
% |
|
|
9.73 |
% |
|
|
10.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible book value per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity |
|
$ |
177,101 |
|
|
$ |
46,095 |
|
|
$ |
45,697 |
|
Divided by: period end outstanding shares |
|
|
28,051,098 |
|
|
|
4,951,098 |
|
|
|
4,951,098 |
|
|
|
|
|
|
|
|
|
|
|
Tangible common book value per share |
|
$ |
6.31 |
|
|
$ |
9.31 |
|
|
$ |
9.23 |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss). The following table summarizes components of net income (loss) and the
changes in those components for the years ended December 31:
Components of Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Change 2010 vs. 2009 |
|
|
Change 2009 vs. 2008 |
|
|
|
(Dollars in thousands) |
|
Interest income |
|
$ |
22,642 |
|
|
$ |
21,668 |
|
|
$ |
20,102 |
|
|
$ |
974 |
|
|
|
4.5 |
% |
|
$ |
1,566 |
|
|
|
7.8 |
% |
Interest expense |
|
|
7,607 |
|
|
|
9,290 |
|
|
|
10,471 |
|
|
|
(1,683 |
) |
|
|
-18.1 |
% |
|
|
(1,181 |
) |
|
|
-11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
15,035 |
|
|
|
12,378 |
|
|
|
9,631 |
|
|
|
2,657 |
|
|
|
21.5 |
% |
|
|
2,747 |
|
|
|
28.5 |
% |
Provision for loan losses |
|
|
17,005 |
|
|
|
3,272 |
|
|
|
2,544 |
|
|
|
13,733 |
|
|
|
419.7 |
% |
|
|
728 |
|
|
|
28.6 |
% |
Noninterest income |
|
|
130 |
|
|
|
(293 |
) |
|
|
26 |
|
|
|
423 |
|
|
|
-144.4 |
% |
|
|
(319 |
) |
|
|
-1226.9 |
% |
Noninterest expense |
|
|
11,057 |
|
|
|
7,997 |
|
|
|
7,099 |
|
|
|
3,060 |
|
|
|
38.3 |
% |
|
|
898 |
|
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes |
|
|
(12,897 |
) |
|
|
816 |
|
|
|
14 |
|
|
|
(13,713 |
) |
|
|
-1680.5 |
% |
|
|
802 |
|
|
|
5728.6 |
% |
Income tax expense (benefit) |
|
|
(5,038 |
) |
|
|
239 |
|
|
|
(1,532 |
) |
|
|
(5,277 |
) |
|
|
-2207.9 |
% |
|
|
1,771 |
|
|
|
-115.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,859 |
) |
|
$ |
577 |
|
|
$ |
1,546 |
|
|
$ |
(8,436 |
) |
|
|
-1462.0 |
% |
|
$ |
(969 |
) |
|
|
-62.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company incurred a net loss of $7.9 million for the year ended December 31, 2010,
compared to net income of $577 thousand for the year ended December 31, 2009. The change in our
results of operations in 2010 includes an increase of $2.7 million in net interest income, offset
primarily by increases of $13.7 million in the provision for loan losses, $1.7 million in salary
and benefit costs and other noninterest expenses such as legal and due diligence expenses incurred
in connection with the Bank becoming a public company and engaging in the process of acquiring
regional and community banks, less a $5.0 million tax benefit recorded as a result of the loss for
the year.
32
Net income for the year ended December 31, 2009 was $577 thousand, compared to $1.5 million
for the year ended December 31, 2008. Net income for 2008 increased by $1.5 million as a result of
a deferred tax allowance that was released during 2008. During 2009, our results of operations
includes a $2.7 million increase in net interest income compared to 2008 and is offset primarily by
increases of $728 thousand in the provision for loan losses, impairment charges related to an
investment in a large correspondent bank in the amount of $698 thousand and an increase in FDIC
assessments of $765 thousand.
Details of the changes in the various components of net income (loss) are further discussed
below.
Net Interest Income and Expense. Our largest source of earnings is net interest income, which
is the difference between interest income on interest-earning assets and interest expense paid on
deposits and other interest-bearing liabilities. The primary factors that affect net interest
income are changes in volume and yields of earning assets and interest-bearing liabilities, which
are affected in part by managements responses to changes in interest rates through asset/liability
management.
Net interest income for 2010 totaled $15.0 million compared to $12.4 million in 2009, an
increase of $2.6 million, or 21.5%. This increase is primarily attributable to a reduction in
interest expense due to a decrease in the cost of funds for time deposits along with an increase in
average investments and federal funds sold of $61.4 million as a result of investing the proceeds
received from the Public Offering. Net interest income increased $2.7 million in 2009 to $12.4
million from $9.6 in 2008. The increase in 2009 is primarily a result of an increase in average
loan balances and a reduction in interest expense due to a decrease in the cost of funds for time
deposits.
33
The following table summarizes the average volume of interest-earning assets and
interest-bearing liabilities and average yields and rates for the years ended December 31:
Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
(Dollars in thousands) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with fees (1) |
|
$ |
399,965 |
|
|
$ |
20,260 |
|
|
|
5.07 |
% |
|
$ |
389,036 |
|
|
$ |
19,710 |
|
|
|
5.07 |
% |
|
$ |
307,665 |
|
|
$ |
18,767 |
|
|
|
6.10 |
% |
Federal funds sold |
|
|
45,794 |
|
|
|
107 |
|
|
|
0.23 |
% |
|
|
19,274 |
|
|
|
41 |
|
|
|
0.21 |
% |
|
|
3,677 |
|
|
|
60 |
|
|
|
1.63 |
% |
Investment securities taxable |
|
|
57,877 |
|
|
|
1,567 |
|
|
|
2.71 |
% |
|
|
26,153 |
|
|
|
1,365 |
|
|
|
5.22 |
% |
|
|
19,345 |
|
|
|
1,112 |
|
|
|
5.75 |
% |
Investment securities tax-exempt (2) |
|
|
14,378 |
|
|
|
1,045 |
|
|
|
7.27 |
% |
|
|
11,264 |
|
|
|
867 |
|
|
|
7.70 |
% |
|
|
2,336 |
|
|
|
174 |
|
|
|
7.45 |
% |
Other interest-earning assets |
|
|
6,341 |
|
|
|
66 |
|
|
|
1.04 |
% |
|
|
3,314 |
|
|
|
19 |
|
|
|
0.57 |
% |
|
|
1,847 |
|
|
|
56 |
|
|
|
3.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
524,355 |
|
|
|
23,045 |
|
|
|
4.39 |
% |
|
|
449,041 |
|
|
|
22,002 |
|
|
|
4.90 |
% |
|
|
334,870 |
|
|
|
20,169 |
|
|
|
6.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(9,556 |
) |
|
|
|
|
|
|
|
|
|
|
(6,307 |
) |
|
|
|
|
|
|
|
|
|
|
(4,517 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
7,340 |
|
|
|
|
|
|
|
|
|
|
|
4,695 |
|
|
|
|
|
|
|
|
|
|
|
1,866 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
4,602 |
|
|
|
|
|
|
|
|
|
|
|
4,788 |
|
|
|
|
|
|
|
|
|
|
|
4,647 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
10,496 |
|
|
|
|
|
|
|
|
|
|
|
7,462 |
|
|
|
|
|
|
|
|
|
|
|
2,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
537,237 |
|
|
|
|
|
|
|
|
|
|
$ |
459,679 |
|
|
|
|
|
|
|
|
|
|
$ |
338,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
$ |
9,831 |
|
|
$ |
10 |
|
|
|
0.10 |
% |
|
$ |
8,205 |
|
|
$ |
6 |
|
|
|
0.07 |
% |
|
$ |
4,374 |
|
|
$ |
8 |
|
|
|
0.18 |
% |
Savings and money market |
|
|
50,954 |
|
|
|
398 |
|
|
|
0.78 |
% |
|
|
42,249 |
|
|
|
347 |
|
|
|
0.82 |
% |
|
|
44,202 |
|
|
|
989 |
|
|
|
2.24 |
% |
Time deposits core |
|
|
189,841 |
|
|
|
3,615 |
|
|
|
1.90 |
% |
|
|
146,109 |
|
|
|
4,086 |
|
|
|
2.80 |
% |
|
|
82,384 |
|
|
|
3,338 |
|
|
|
4.05 |
% |
Time deposits brokered |
|
|
125,123 |
|
|
|
2,254 |
|
|
|
1.80 |
% |
|
|
161,331 |
|
|
|
3,882 |
|
|
|
2.41 |
% |
|
|
124,123 |
|
|
|
5,481 |
|
|
|
4.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
375,749 |
|
|
|
6,277 |
|
|
|
1.67 |
% |
|
|
357,894 |
|
|
|
8,321 |
|
|
|
2.32 |
% |
|
|
255,083 |
|
|
|
9,816 |
|
|
|
3.85 |
% |
Federal Home Loan Bank advances |
|
|
22,110 |
|
|
|
572 |
|
|
|
2.59 |
% |
|
|
25,000 |
|
|
|
590 |
|
|
|
2.36 |
% |
|
|
20,164 |
|
|
|
535 |
|
|
|
2.65 |
% |
Other borrowings |
|
|
8,755 |
|
|
|
758 |
|
|
|
8.66 |
% |
|
|
6,124 |
|
|
|
379 |
|
|
|
6.19 |
% |
|
|
5,598 |
|
|
|
120 |
|
|
|
2.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds |
|
|
30,865 |
|
|
|
1,330 |
|
|
|
4.31 |
% |
|
|
31,124 |
|
|
|
969 |
|
|
|
3.11 |
% |
|
|
25,762 |
|
|
|
655 |
|
|
|
2.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
406,614 |
|
|
|
7,607 |
|
|
|
1.87 |
% |
|
|
389,018 |
|
|
|
9,290 |
|
|
|
2.39 |
% |
|
|
280,845 |
|
|
|
10,471 |
|
|
|
3.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
|
|
|
|
15,438 |
|
|
|
2.52 |
% |
|
|
|
|
|
|
12,712 |
|
|
|
2.51 |
% |
|
|
|
|
|
|
9,698 |
|
|
|
2.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
30,462 |
|
|
|
|
|
|
|
|
|
|
|
22,039 |
|
|
|
|
|
|
|
|
|
|
|
12,438 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
1,735 |
|
|
|
|
|
|
|
|
|
|
|
2,685 |
|
|
|
|
|
|
|
|
|
|
|
2,552 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
98,426 |
|
|
|
|
|
|
|
|
|
|
|
45,937 |
|
|
|
|
|
|
|
|
|
|
|
43,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
537,237 |
|
|
|
|
|
|
|
|
|
|
$ |
459,679 |
|
|
|
|
|
|
|
|
|
|
$ |
338,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
2.94 |
% |
|
|
|
|
|
|
|
|
|
|
2.83 |
% |
|
|
|
|
|
|
|
|
|
|
2.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonaccrual loans are included in the average loan balances. |
|
(2) |
|
Interest income and yields are presented on a fully tax-equivalent basis. |
The following table details the calculation of fully tax-equivalent net interest income
for the years ended December 31:
Tax Equivalent Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Net interest income, as reported |
|
$ |
15,035 |
|
|
$ |
12,378 |
|
|
$ |
9,631 |
|
Tax equivalent adjustments |
|
|
403 |
|
|
|
334 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
Fully tax equivalent net interest income |
|
$ |
15,438 |
|
|
$ |
12,712 |
|
|
$ |
9,698 |
|
|
|
|
|
|
|
|
|
|
|
34
Changes in interest income and interest expense can result from variances in both volume
and rates. The following table presents the relative impact on tax-equivalent net interest income
to changes in the average outstanding balances of interest-earning assets and interest-bearing
liabilities and the rates earned and paid by us on such assets and liabilities:
Volume and Rate Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 vs. 2009 |
|
|
2009 vs. 2008 |
|
|
|
Increase/(Decrease) Due to |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
554 |
|
|
$ |
(4 |
) |
|
$ |
550 |
|
|
$ |
4,543 |
|
|
$ |
(3,600 |
) |
|
$ |
943 |
|
Federal funds sold |
|
|
59 |
|
|
|
7 |
|
|
|
66 |
|
|
|
144 |
|
|
|
(163 |
) |
|
|
(19 |
) |
Investment securities taxable |
|
|
1,257 |
|
|
|
(1,055 |
) |
|
|
202 |
|
|
|
373 |
|
|
|
(120 |
) |
|
|
253 |
|
Investment securities tax-exempt |
|
|
233 |
|
|
|
(56 |
) |
|
|
177 |
|
|
|
676 |
|
|
|
17 |
|
|
|
693 |
|
Other interest-earning assets |
|
|
24 |
|
|
|
23 |
|
|
|
47 |
|
|
|
26 |
|
|
|
(63 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
2,128 |
|
|
|
(1,085 |
) |
|
|
1,043 |
|
|
|
5,763 |
|
|
|
(3,930 |
) |
|
|
1,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand |
|
|
1 |
|
|
|
3 |
|
|
|
4 |
|
|
|
5 |
|
|
|
(7 |
) |
|
|
(2 |
) |
Savings and money market |
|
|
70 |
|
|
|
(19 |
) |
|
|
51 |
|
|
|
(30 |
) |
|
|
(612 |
) |
|
|
(642 |
) |
Time deposits core |
|
|
1,028 |
|
|
|
(1,499 |
) |
|
|
(471 |
) |
|
|
2,182 |
|
|
|
(1,434 |
) |
|
|
748 |
|
Time deposits brokered |
|
|
(762 |
) |
|
|
(866 |
) |
|
|
(1,628 |
) |
|
|
1,269 |
|
|
|
(2,868 |
) |
|
|
(1,599 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
337 |
|
|
|
(2,381 |
) |
|
|
(2,044 |
) |
|
|
3,426 |
|
|
|
(4,921 |
) |
|
|
(1,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances |
|
|
(71 |
) |
|
|
53 |
|
|
|
(18 |
) |
|
|
121 |
|
|
|
(66 |
) |
|
|
56 |
|
Other borrowings |
|
|
195 |
|
|
|
184 |
|
|
|
379 |
|
|
|
22 |
|
|
|
237 |
|
|
|
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds |
|
|
124 |
|
|
|
237 |
|
|
|
361 |
|
|
|
143 |
|
|
|
171 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
461 |
|
|
|
(2,144 |
) |
|
|
(1,683 |
) |
|
|
3,569 |
|
|
|
(4,750 |
) |
|
|
(1,181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net interest income |
|
$ |
1,668 |
|
|
$ |
1,059 |
|
|
$ |
2,726 |
|
|
$ |
2,194 |
|
|
$ |
820 |
|
|
$ |
3,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a tax equivalent basis totaled $15.4 million in 2010 as compared to
$12.7 million in 2009. The interest rate spread, which represents the rate earned on
interest-earning assets less the rate paid on interest-bearing liabilities, was 2.52% in 2010, a
slight increase from the 2009 net interest spread of 2.51%. The net yield on interest-earning
assets in 2010 increased to 2.94% from the 2009 net interest margin of 2.83%.
Tax equivalent interest income increased $1.0 million, or 4.7%, in 2010 primarily due to an
increase in the average balance of loans, investments and federal funds sold. The yield on
interest-earning assets decreased to 4.39% in 2010 from 4.90% in 2009 as a result of a decrease in
the average yield received on investments. Average interest-earning assets increased $75.3 million
primarily as the result of a $10.9 million increase in average loans and a $61.4 million increase
in average investment securities over 2009.
Interest expense decreased $1.7 million, or 18%, in 2010 due to a decrease in the average rate
paid on interest-bearing liabilities. The cost of funds decreased to 1.87% in 2010 from 2.39% in
2009. This decrease in the cost of funds was primarily attributable to decreases in the average
rate paid on time deposits. The $17.6 million growth in average interest-bearing liabilities was
primarily attributable to an increase in interest-bearing savings and money market accounts and
core time deposits offset by a $36.0 million decrease in brokered certificates of deposit.
In 2009, net interest income on a tax equivalent basis increased $3.0 million, or 31%, to
$12.7 million from $9.7 million in 2008. The net interest margin was 2.83% in 2009, a slight
decrease from the 2008 net interest margin of 2.90%. The net yield on interest-earning assets in
2009 decreased to 4.90% from the 2008 net interest margin of 6.02%.
The Companys hedging policies permit the use of various derivative financial instruments to
manage exposure to changes in interest rates. Details of derivatives and hedging activities are set
forth in Note L Derivative Financial Instruments and Hedging Activities to the Consolidated
Financial Statements. Information regarding the impact of fluctuations in interest rates on the
Corporations derivative financial instruments is set forth below in the section entitled Interest
Rate Sensitivity.
Provision for Loan Losses. The provision for loan losses was $17.0 million, $3.3 million and
$2.5 million for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in
the 2010 and the 2009 provisions resulted from the negative impact on our loan portfolio of the
continued economic downturn that persists across our markets and a 2010 refinement to our allowance
for loan loss methodology which introduced a more comprehensive qualitative component. We had $12.0
million in net charge-offs during 2010, compared to $1.4 million and $374 thousand during 2009 and
2008, respectively. Please see the section below entitled Financial Condition Allowance for Loan
Losses for a more complete discussion of our policy for addressing potential loan losses.
35
Noninterest Income. Noninterest income is not a major component of our earnings. We have
a minimal amount of noninterest income from service charges. In 2010 and 2008, noninterest income
of $130 thousand and $26 thousand, respectively, consisted primarily of the sales and calls of
available-for-sale securities. In 2009, noninterest income of $(293) thousand included impairment
charges on an investment in a large correspondent bank totaling $698 thousand which offset income
of $405 thousand consisting primarily of the sales and calls of available-for-sale securities.
Noninterest Expense. Total noninterest expense was $11.0 million for 2010, an increase of 38%
from 2009. Noninterest expense for 2009 increased 13% to $8.0 million from $7.1 million in 2008.
Salaries and employee benefits expenses were $6.4 million in 2010, compared to $4.7 million
during 2009, an increase of $1.7 million, or 36%, following a $34 thousand, or (.7)%, decrease in
salaries and employee benefits expenses in 2009 compared to 2008. The increase in salaries and
employee benefits in 2010 is primarily due to an increase in compensation and related benefits for
additional employees as we expanded our management team and added other personnel to pursue the
change in business plan following our Public Offering of common stock. This included compensation
expense for share-based compensation plans of $810 thousand, $642 thousand and $665 thousand for
the years ended December 31, 2010, 2009 and 2008, respectively.
Occupancy expenses were $916 thousand in 2010, compared to $820 thousand during 2009, an
increase of $96 thousand, or 12%, following an increase of $100 thousand, or 14%, in occupancy
expenses in 2009 over 2008. The increase in 2010 is primarily due to an increase in expenses
associated with additional corporate office space and in 2009, the increase is primarily related to
a full years expenses associated with a new branch opened in 2008.
Legal and professional fees were $445 thousand in 2010, compared to $212 thousand during 2009,
an increase of $233 thousand, or 110%, and did not change in 2009 compared to 2008. This 2010
increase is a result of legal and consulting fees associated with being a publicly held company.
Deposit charges and FDIC insurance decreased $237 thousand in 2010 compared to 2009, primarily
as a result of a special assessment levied by the FDIC in the second quarter of 2009 in an effort
to rebuild the DIF. Deposit charges and FDIC insurance increased $774 thousand in 2009 compared to
2008, primarily as a result of a special assessment levied by the FDIC in the second quarter of
2009 in an effort to rebuild the DIF. We were required to prepay $2.3 million for the fourth
quarter of 2009 and for the years of 2010, 2011 and 2012. This prepayment is being expensed based
upon our regular quarterly assessments.
Directors fees totaling $392 thousand were paid to directors for the first time in 2010 and
included ongoing payments of directors fees to current directors of $67 thousand subsequent to the
Public Offering and payments of directors fees of $325 thousand to directors prior to the Public
Offering.
Other real estate owned expense increased $250 thousand in 2010 and $156 thousand in 2009
compared to the respective prior years. These increases for both 2010 and 2009 are primarily a
result of losses incurred on the sale of other real estate owned.
The total of all other noninterest expense increased $540 thousand, or 111%, to $1.0 million
during 2010 and 2009 remained comparable to 2008. The 2010 increase was primarily a result of $169
thousand in due diligence expenses incurred in connection with potential acquisitions, increased
costs for directors and officers insurance, a State of North Carolina assessment fee and expenses
associated with being a public company.
36
The following table summarizes components of noninterest expense for the years ended December
31:
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Change 2010 vs. 2009 |
|
|
Change 2009 vs. 2008 |
|
|
|
(Dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
6,442 |
|
|
$ |
4,723 |
|
|
$ |
4,757 |
|
|
$ |
1,719 |
|
|
|
36 |
% |
|
$ |
(34 |
) |
|
|
-1 |
% |
Occupancy and equipment |
|
|
916 |
|
|
|
820 |
|
|
|
720 |
|
|
|
96 |
|
|
|
12 |
% |
|
|
100 |
|
|
|
14 |
% |
Advertising and promotion |
|
|
287 |
|
|
|
236 |
|
|
|
335 |
|
|
|
51 |
|
|
|
22 |
% |
|
|
(99 |
) |
|
|
-30 |
% |
Legal and professional fees |
|
|
445 |
|
|
|
212 |
|
|
|
229 |
|
|
|
233 |
|
|
|
110 |
% |
|
|
(17 |
) |
|
|
-7 |
% |
Deposit charges and FDIC insurance |
|
|
728 |
|
|
|
965 |
|
|
|
191 |
|
|
|
(237 |
) |
|
|
-25 |
% |
|
|
774 |
|
|
|
405 |
% |
Data processing and outside service fees |
|
|
411 |
|
|
|
395 |
|
|
|
350 |
|
|
|
16 |
|
|
|
4 |
% |
|
|
45 |
|
|
|
13 |
% |
Director fees |
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
392 |
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
Other real estate owned expense |
|
|
411 |
|
|
|
161 |
|
|
|
5 |
|
|
|
250 |
|
|
|
155 |
% |
|
|
156 |
|
|
|
3120 |
% |
Other noninterest expense |
|
|
1,025 |
|
|
|
485 |
|
|
|
512 |
|
|
|
540 |
|
|
|
111 |
% |
|
|
(27 |
) |
|
|
-5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
11,057 |
|
|
$ |
7,997 |
|
|
$ |
7,099 |
|
|
$ |
3,060 |
|
|
|
38 |
% |
|
$ |
898 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes. The Company recognized an income tax benefit for 2010 and 2008 of $5.0
million and $1.5 million, respectively. Income tax expense for 2009 was $239 thousand. The increase
in the provision for loan losses in 2010 resulted in the pretax loss and the related income tax
benefit. The 2008 income tax benefit of $1.5 million is due to the release of a deferred tax
valuation allowance in that amount. The effective tax rate for the year ended December 31, 2010 was
(39.1)% compared to 29.3% for the same period of 2009. The change in the effective tax rate in 2010
was primarily due to the inability to fully recognize the tax benefit of tax exempt income from
certain securities available for sale.
Our net deferred tax asset was $7.4 million and $2.9 million at December 31, 2010 and 2009,
respectively. The increase is primarily a result of the 2010 provision for loan losses and net
operating loss carryforwards. In evaluating whether we will realize the full benefit of our net
deferred tax asset, we considered projected earnings, asset quality, liquidity, capital position,
which will enable us to deploy capital to generate taxable income, growth plans, etc. In addition,
we also considered the previous twelve quarters of income (loss) before income taxes in determining
the need for a valuation allowance, which is called the cumulative loss test. In 2010, we incurred
a loss, primarily as a result of the increased provision for loan losses, which resulted in the
failure of the cumulative loss test. Significant negative trends in credit quality, losses from
operations, etc. could impact the realizability of the deferred tax asset in the future. After
considering the above factors, both positive and negative, management believes that our deferred
assets are more likely than not to be realized.
Financial Condition
Summary. Total assets at December 31, 2010 were $616.1 million, an increase of $142.2 million,
or 30%, over total assets of $473.9 million at December 31, 2009. This change was primarily due to
increases in investment securities available-for-sale of $98.0 million, federal funds sold of $43.9
million, other assets of $5.5 million and interest-earning assets at banks of $2.3 million. These
increases were partially offset by decreases in cash and due from banks of $4.1 million and loans,
net of allowance for loan losses, of $2.8 million.
Total shareholders equity increased $131.0 million, or 284%, during 2010 to $177.1 million at
December 31, 2010. The increase in shareholders equity is attributable to $140.2 million in net
proceeds from the Public Offering, partially offset by a net loss of $7.9 million and accumulated
other comprehensive loss of $2.1 million in 2010.
Investment Securities. All of the Companys investment securities are categorized as
available-for-sale. Securities available-for-sale are carried at market value, with unrealized
holding gains and losses reported in other comprehensive income, net of tax. At December 31, 2010
the market value of securities totaled $140.6 million, compared to $42.6 million at December 31,
2009. The increase in investment securities at December 31, 2010 is primarily due to the investment
of the net proceeds from the Public Offering.
37
The following table presents a summary of the fair value of investment securities
available-for-sale at December 31:
Fair Value of Investment Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
2010 |
|
|
of Total |
|
|
2009 |
|
|
of Total |
|
|
|
(Dollars in thousands) |
|
U.S. Government agencies |
|
$ |
13,160 |
|
|
|
9 |
% |
|
$ |
5,759 |
|
|
|
14 |
% |
Mortgage-backed securities |
|
|
111,118 |
|
|
|
79 |
% |
|
|
19,994 |
|
|
|
47 |
% |
Municipal securities |
|
|
13,808 |
|
|
|
10 |
% |
|
|
13,884 |
|
|
|
33 |
% |
Corporate and other securities |
|
|
2,504 |
|
|
|
2 |
% |
|
|
2,930 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
140,590 |
|
|
|
100 |
% |
|
$ |
42,567 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the maturity distribution schedule of the amortized cost
of securities available-for-sale with corresponding weighted-average yields at December 31, 2010.
Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of
38.55%. Mortgage-backed securities are included in maturity categories based on their stated
maturity date. Expected maturities may differ from contractual maturities for a variety of reasons,
including the ability of issuers to call or prepay obligations and the ability of borrowers to
prepay underlying mortgage collateral.
Contractual Maturities of Investment Portfolio Amortized Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 years |
|
|
5-10 years |
|
|
Over 10 years |
|
|
Total |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
December 31, 2010 |
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
|
(Dollars in thousands) |
|
U.S. Government agencies |
|
$ |
12,548 |
|
|
|
1.85 |
% |
|
$ |
527 |
|
|
|
4.05 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
13,075 |
|
|
|
1.94 |
% |
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
16,298 |
|
|
|
2.10 |
% |
|
|
96,755 |
|
|
|
2.83 |
% |
|
|
113,053 |
|
|
|
2.73 |
% |
Municipal securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,772 |
|
|
|
6.86 |
% |
|
|
13,772 |
|
|
|
6.86 |
% |
Corporate and other securities |
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
9.14 |
% |
|
|
2,174 |
|
|
|
7.33 |
% |
|
|
2,674 |
|
|
|
7.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
12,548 |
|
|
|
1.85 |
% |
|
$ |
17,325 |
|
|
|
2.36 |
% |
|
$ |
112,701 |
|
|
|
3.41 |
% |
|
$ |
142,574 |
|
|
|
3.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, there were no holdings of any one issuer, other than the U.S.
government and its agencies, in an amount greater than 10% of the Companys total shareholders
equity.
Loans. At December 31, 2010, total loans, net of deferred fees, were $399.8 million compared
to $397.6 million at December 31, 2009. Although there was minimal growth in total loans during
2010, significant changes in the loan portfolio include increases in commercial and industrial
loans of $6.4 million, or 15.3%, owner-occupied commercial real estate loans of $4.4 million, or
8.7%, and home equity lines of credit (HELOC) of $4.9 million, or 9.5%. These increases were offset
by decreases in acquisition, construction and development loans of $12.8 million, or 12.7%, which
is consistent with our strategy to continue reducing these components of our portfolio.
38
The following table presents a summary of the loan portfolio at December 31:
Summary of Loans By Segment and Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
% |
|
|
2009 |
|
|
% |
|
|
|
(Dollars in thousands) |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
48,401 |
|
|
|
12 |
% |
|
$ |
41,980 |
|
|
|
11 |
% |
Commercial real estate owner occupied |
|
|
55,089 |
|
|
|
14 |
% |
|
|
50,693 |
|
|
|
13 |
% |
Commercial real estate investor income producing |
|
|
110,407 |
|
|
|
28 |
% |
|
|
112,508 |
|
|
|
28 |
% |
Acquisition, construction and development |
|
|
87,846 |
|
|
|
22 |
% |
|
|
100,668 |
|
|
|
25 |
% |
Other commercial |
|
|
3,225 |
|
|
|
1 |
% |
|
|
1,115 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans |
|
|
304,968 |
|
|
|
76 |
% |
|
|
306,964 |
|
|
|
77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
21,716 |
|
|
|
5 |
% |
|
|
20,577 |
|
|
|
5 |
% |
Home equity lines of credit |
|
|
56,968 |
|
|
|
14 |
% |
|
|
52,026 |
|
|
|
13 |
% |
Residential construction |
|
|
9,051 |
|
|
|
2 |
% |
|
|
11,639 |
|
|
|
3 |
% |
Other loans to individuals |
|
|
7,245 |
|
|
|
2 |
% |
|
|
6,471 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans |
|
|
94,980 |
|
|
|
24 |
% |
|
|
90,713 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
399,948 |
|
|
|
100 |
% |
|
|
397,677 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred fees |
|
|
(119 |
) |
|
|
0 |
% |
|
|
(113 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of deferred fees |
|
$ |
399,829 |
|
|
|
100 |
% |
|
$ |
397,564 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of our loans are to clients in our immediate markets. In the Charlotte
market, we have a diversified mix of commercial real estate, owner-occupied commercial real estate,
commercial and small business loans, and a significant portfolio of home equity lines of credit
(HELOCs). Our Wilmington operation has a heavier concentration of real estate related loans with
a smaller proportion of construction and development loans than Charlotte. Wilmington, like most
coastal markets, is heavily dependent on real estate and tourism to drive its economy. We believe
we are not dependent on any single client or group of clients whose insolvency would have a
material adverse effect on our financial condition or results of operations.
The following table details loan maturities by loan class and interest rate type at December
31, 2010:
Loan Portfolio Maturities by Loan Class and Rate Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
One |
|
|
|
|
|
|
|
|
|
One |
|
|
Year to |
|
|
After Five |
|
|
|
|
December 31, 2010 |
|
Year |
|
|
Five Years |
|
|
Years |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
22,892 |
|
|
$ |
25,509 |
|
|
$ |
|
|
|
$ |
48,401 |
|
Commercial real estate owner-occupied |
|
|
3,943 |
|
|
|
46,517 |
|
|
|
4,629 |
|
|
|
55,089 |
|
Commercial real estate investor income producing |
|
|
16,439 |
|
|
|
93,740 |
|
|
|
228 |
|
|
|
110,407 |
|
Acquisition, construction and development |
|
|
76,093 |
|
|
|
11,753 |
|
|
|
|
|
|
|
87,846 |
|
Other commercial |
|
|
2,180 |
|
|
|
1,035 |
|
|
|
10 |
|
|
|
3,225 |
|
Residential mortgages |
|
|
4,728 |
|
|
|
14,934 |
|
|
|
2,054 |
|
|
|
21,716 |
|
Home equity lines of credit |
|
|
|
|
|
|
13,842 |
|
|
|
43,126 |
|
|
|
56,968 |
|
Residential construction |
|
|
7,002 |
|
|
|
2,049 |
|
|
|
|
|
|
|
9,051 |
|
Other loans to individuals |
|
|
5,881 |
|
|
|
1,364 |
|
|
|
|
|
|
|
7,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
139,158 |
|
|
$ |
210,743 |
|
|
$ |
50,047 |
|
|
$ |
399,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate |
|
$ |
24,349 |
|
|
$ |
133,522 |
|
|
$ |
4,517 |
|
|
$ |
162,388 |
|
Variable interest rate |
|
|
114,809 |
|
|
|
77,221 |
|
|
|
45,530 |
|
|
|
237,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
139,158 |
|
|
$ |
210,743 |
|
|
$ |
50,047 |
|
|
$ |
399,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses. The allowance for loan losses is based on managements ongoing
evaluation of the loan portfolio and reflects an amount considered by management to be its best
estimate of known and inherent losses in the portfolio as of the reporting date. The determination
of the allowance for loan losses involves a high degree of judgment and complexity. In making the
evaluation of the adequacy of the allowance for loan losses, management gives consideration to
current economic conditions, statutory examinations of the loan portfolio by regulatory agencies,
independent loan reviews performed periodically by third parties, delinquency information,
managements internal review of the loan portfolio, and other relevant factors.
39
In connection with the Banks charter and deposit insurance approval, we committed to the FDIC
and the NC Commissioner to maintain an allowance for loan losses of at least 1.50% of total loans
through December 31, 2008, the first three years of our operation. Following that time, we have
maintained an allowance for loan loss policy and methodology consistent with regulatory guidance
and GAAP. As of December 31, 2010 and December 31, 2009, the allowance for loan losses as a
percentage of total loans was 3.11% and 1.86%, respectively.
The evaluation of the allowance for loan losses, which generally occurs at the end of each
quarter, consists of three components, as follow:
|
1) |
|
Specific Reserve Component. Specific reserves represent the current impairment
estimate on specific loans, which is an estimate of the amount for which it is probable
that the Bank will be unable to collect all amounts due on such loans, if any, according
to contractual terms based on current information and events. Impairment measurement
reflects only a deterioration of credit quality and not changes in market rates that may
cause a change in the fair value of the impaired loan. The amount of impairment may be
measured in one of three ways, including (i) calculating the present value of expected
future cash flows, discounted at the loans interest rate and deducting estimated selling
costs, if any; (ii) observing quoted market prices for identical or similar instruments
traded in active markets, or employing model-based valuation techniques for which all
significant assumptions are observable in the market; and, (iii) determining the fair
value of collateral, for both collateral dependent loans and for loans when foreclosure is
probable. |
|
2) |
|
Quantitative Reserve Component. Quantitative reserves represent the current loss
contingency estimate on pools of loans, which is an estimate of the amount for which it is
probable that the Bank will be unable to collect all amounts due on homogeneous groups of
loans according to contractual terms should one or more events occur, excluding those
loans specifically identified above. This component of the allowance for loan losses is
based on estimates of historical loss rates for groups of loans with similar risk
characteristics utilizing the Banks internal risk grades. The data series for collecting
historical loss rates should generally extend through one full economic cycle, but may be
adjusted through weightings or other means during periods of significant economic
volatility. Given the limited operating history of the Bank, historical loss rates
associated with each loan risk grade are currently based on the loss experience of
comparable institutions. |
|
3) |
|
Qualitative Reserve Component. Qualitative reserves represent an estimate of the
amount for which it is probable that environmental factors will cause the aforementioned
loss contingency estimate to differ from historical results or other assumptions. The
Bank has identified six environmental factors for inclusion in our allowance methodology
at this time including (i) portfolio trends, (ii) portfolio concentrations, (iii) economic
and market trends, (iv) changes in lending practices, (v) regulatory environment, and (vi)
other factors. The first three factors are believed by management to present the most
significant risk to the portfolio, and are therefore associated with both higher absolute
and range of potential reserve percentage. The reserve percentages for each of the six
factors are derived from available industry information combined with management judgment.
The Bank may consider both trends and absolute levels of such factors, if applicable. |
The allowance is increased by provisions charged to operations and reduced by loans charged
off, net of recoveries. The continued economic downturn that has persisted across North Carolina
resulted in net charge-offs increasing to $12.0 million in 2010 compared to $1.4 million in 2009
and $374 thousand in 2008. Net charge-offs to total loans increased to 3.00% in 2010 compared to
0.36% in 2009 and 0.10% and 2008. The allowance for loan losses increased to $12.4 million, or
3.11%, of total loans outstanding at December 31, 2010 compared to $7.4 million, or 1.86%, and $5.6
million, or 1.50%, at December 31, 2009 and 2008, respectively. The allowance for loan losses to
total loans may further increase in 2011 if our loan portfolio deteriorates due to economic
conditions or other factors.
While management believes that it uses the best information available to determine the
allowance for loan losses, and that our allowance for loan losses is maintained at a level
appropriate in light of the risk inherent in the Banks loan portfolio based on an assessment of
various factors affecting the loan portfolio, unforeseen market conditions could result in
adjustments to the allowance for loan losses, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the final determination.
40
The following table presents a summary of changes in the allowance for loan losses and
includes information regarding charge-offs, and selected coverage ratios for the years ended
December 31:
Allowance for Loans Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance, beginning of year |
|
$ |
7,402 |
|
|
$ |
5,568 |
|
|
$ |
3,398 |
|
Provision for loan losses |
|
|
17,005 |
|
|
|
3,272 |
|
|
|
2,544 |
|
Charge-offs |
|
|
(12,042 |
) |
|
|
(1,438 |
) |
|
|
(374 |
) |
Recoveries |
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(11,983 |
) |
|
|
(1,438 |
) |
|
|
(374 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
12,424 |
|
|
$ |
7,402 |
|
|
$ |
5,568 |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to total loans |
|
|
3.00 |
% |
|
|
0.36 |
% |
|
|
0.10 |
% |
Allowance for loan losses to total loans |
|
|
3.11 |
% |
|
|
1.86 |
% |
|
|
1.50 |
% |
The Bank evaluates and estimates off-balance sheet credit exposure at the same time it
estimates credit losses for loans by a similar process. These estimated credit losses are not
recorded as part of the allowance for loan losses, but are recorded to a separate liability account
by a charge to income, if material. Loan commitments, unused lines of credit and standby letters
of credit make up the off-balance sheet items reviewed for potential credit losses. These
estimated credit losses were not material at December 31, 2010 and 2009.
Nonperforming Assets. Nonperforming assets, which consist of nonaccrual loans, term debt
restructurings (TDRs), accruing loans for which payments are 90 days or more past due and other
real estate owned, totaled $42.2 million at December 31, 2010 compared to $4.2 million and $1.4
million at December 31, 2009 and 2008, respectively. Nonaccrual loans were $40.9 million at
December 31, 2010, an increase of $38.2 million over nonaccrual loans of $2.7 million at December
31, 2009. Nonaccrual loans increased significantly in 2010 compared to prior years as a result of
the negative impact on our loan portfolio from increased unemployment, the slow-down in housing,
depressed real estate values in our markets, and other relevant factors. Nonaccrual loans consist
primarily of commercial loans involving acquisition, construction and development activity which
totaled $33.9 million, or 82.8%, of nonaccrual loans, at December 31, 2010.
We grade loans with a risk grade scale of 1 through 9, with grades 1 through 5 representing
pass loans, grade 6 representing special mention loans and 7 through 9 representing
classified loans. Loans are reviewed on a regular basis internally, and at least annually by an
external loan review group, to ensure loans are graded appropriately. Credits are reviewed for past
due trends, declining cash flows, significant decline in collateral value, weakened guarantor
financial strength, management concerns, market conditions and other factors that could jeopardize
the repayment performance of the loan. Documentation deficiencies to include collateral perfection
and outdated or inadequate financial information are also considered in grading loans.
All loans graded 6 or worse are included on our list of watch loans, which is updated and
reported to both management and the Board of Directors on a monthly basis. Additionally, other
loans with more favorable ratings may be placed on the watch list if there are concerns that the
loan may become a problem in the future. Impairment analysis has been performed on all loans graded
substandard (risk grade of 7 or worse) and selected other loans as deemed appropriate. At
December 31, 2010, we maintained watch loans totaling $73.3 million, compared to $36.0 million
and $10.3 at December 31, 2009 and 2008, respectively. The future level of watch loans cannot be
predicted, but rather will be determined by several factors, including overall economic conditions
in the markets served. It is the general policy of the Company to stop accruing interest income
when a loan is placed on nonaccrual status and any interest previously accrued but not collected is
reversed against current income. Generally, a loan is placed on nonaccrual status when it is over
90 days past due and there is reasonable doubt that all principal will be collected.
Interest that would have been recorded on nonaccrual loans for the years ended December 31,
2010, 2009 and 2008, had they performed in accordance with their original terms, totaled $275,000,
$70,000 and $56,000, respectively. Interest income on nonaccrual loans included in the results of
operations for 2010, 2009 and 2008 which were still accruing at that time totaled $1.5 million, $95
thousand and $0, respectively.
41
The following table summarizes nonperforming assets at December 31:
Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Nonaccrual loans |
|
$ |
40,911 |
|
|
$ |
2,688 |
|
|
$ |
|
|
Past due 90 days or more and accruing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
40,911 |
|
|
|
2,688 |
|
|
|
|
|
Other real estate owned |
|
|
1,246 |
|
|
|
1,550 |
|
|
|
1,431 |
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
42,157 |
|
|
$ |
4,238 |
|
|
$ |
1,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
10.23 |
% |
|
|
0.68 |
% |
|
|
|
|
Nonperforming assets to total assets |
|
|
6.84 |
% |
|
|
0.89 |
% |
|
|
0.33 |
% |
Allowance for loan losses to nonperforming assets |
|
|
29.47 |
% |
|
|
175 |
% |
|
|
389 |
% |
Included in non-performing assets are nonaccruing loans whose terms have been modified in
a TDR. At December 31, 2010, nonaccruing TDR loans were $24.9 million and had a recorded allowance
of $2.4 million. During 2010, we recorded charge-offs of $3.9 million related TDRs of acquisition,
construction and development loans. There were no TDRs still accruing interest at December 31,
2009.
Deposits. The Company offers a broad range of deposit instruments, including personal and
business checking accounts, individual retirement accounts, business and personal money market
accounts and certificates of deposit at competitive interest rates. Deposit account terms vary
according to the minimum balance required, the time periods the funds must remain on deposit and
the interest rate, among other factors. The Company regularly evaluates the internal cost of funds,
surveys rates offered by competing institutions, reviews the Companys cash flow requirements for
lending and liquidity and executes rate changes when deemed appropriate.
Total deposits at December 31, 2010 were $407.8 million, an increase of $15.2 million, or
3.9%, from December 31, 2009. Average deposits for 2010 were $406.2 million, an increase of $26.3
million, or 6.9%, from 2009. With the exception of brokered time deposits, the increase in each
category of deposits was primarily related to the competitive pricing of the Companys deposit
products coupled with the continued development of relationships with local small businesses and
the high level of individualized service to clients provided by the Company. With respect to
brokered time deposits, the Company is focused on reducing its reliance on these deposits due to
the limited opportunities to develop a relationship with those depositors. Brokered deposits remain
attractive, however, given their relatively lower interest costs and will continue to be
selectively utilized by the Company.
The following table sets forth the Companys average balance of deposit accounts for the years
ended December 31 and the average cost for each category of deposit:
Average Deposits and Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Average |
|
|
% of |
|
|
Average |
|
|
Average |
|
|
% of |
|
|
Average |
|
|
|
Balance |
|
|
Total |
|
|
Cost |
|
|
Balance |
|
|
Total |
|
|
Cost |
|
|
|
(Dollars in thousands) |
|
Demand deposits |
|
$ |
40,293 |
|
|
|
10 |
% |
|
|
0.02 |
% |
|
$ |
30,244 |
|
|
|
8 |
% |
|
|
0.02 |
% |
Savings and money market |
|
|
50,954 |
|
|
|
13 |
% |
|
|
0.78 |
% |
|
|
42,249 |
|
|
|
11 |
% |
|
|
0.82 |
% |
Time deposits core |
|
|
189,841 |
|
|
|
47 |
% |
|
|
1.90 |
% |
|
|
146,109 |
|
|
|
38 |
% |
|
|
2.80 |
% |
Time deposits brokered |
|
|
125,123 |
|
|
|
31 |
% |
|
|
1.80 |
% |
|
|
161,331 |
|
|
|
42 |
% |
|
|
2.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
406,211 |
|
|
|
100 |
% |
|
|
1.55 |
% |
|
$ |
379,933 |
|
|
|
100 |
% |
|
|
2.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
The following table indicates the amount of the Companys certificates of deposit by time
remaining until maturity as of December 31, 2010:
Maturities of Time Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
3-6 |
|
|
6-12 |
|
|
1-5 |
|
|
|
|
December 31, 2010 |
|
3 Months |
|
|
Months |
|
|
Months |
|
|
Years |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Time deposits of $100,000 or more |
|
$ |
47,698 |
|
|
$ |
45,561 |
|
|
$ |
55,876 |
|
|
$ |
71,695 |
|
|
$ |
220,830 |
|
Other time deposits |
|
|
26,807 |
|
|
|
23,345 |
|
|
|
20,767 |
|
|
|
8,072 |
|
|
|
78,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total time deposits |
|
$ |
74,505 |
|
|
$ |
68,906 |
|
|
$ |
76,643 |
|
|
$ |
79,767 |
|
|
$ |
299,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings. Borrowings totaled $27.8 million at December 31, 2010 compared to $33.9
million and $28.0 million at December 31, 2009 and 2008, respectively. During 2009, $6.9 million
was raised through a subordinated debt offering.
The following table details short and long-term borrowings at December 31:
Schedule of Borrowed Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
|
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
From Prior |
|
|
|
|
|
|
From Prior |
|
|
|
|
|
|
2010 |
|
|
Year |
|
|
2009 |
|
|
Year |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
$ |
874 |
|
|
|
-56.1 |
% |
|
$ |
1,989 |
|
|
|
-32.8 |
% |
|
$ |
2,962 |
|
Federal Home Loan Bank advances |
|
|
|
|
|
|
-100.0 |
% |
|
|
5,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term |
|
|
874 |
|
|
|
-87.5 |
% |
|
|
6,989 |
|
|
|
-12.2 |
% |
|
|
7,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances |
|
|
20,000 |
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
20,000 |
|
Subordinated debt |
|
|
6,895 |
|
|
|
|
|
|
|
6,895 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term |
|
|
26,895 |
|
|
|
0.0 |
% |
|
$ |
26,895 |
|
|
|
34.5 |
% |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds |
|
$ |
27,769 |
|
|
|
-18.0 |
% |
|
$ |
33,884 |
|
|
|
21.2 |
% |
|
$ |
27,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details balances outstanding related to short-term borrowings at
December 31 and annual information for the years presented:
Short-Term Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Maximum |
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
Amount |
|
|
Daily Balance |
|
|
Annual |
|
|
|
Balance at |
|
|
Interest Rate |
|
|
Outstanding |
|
|
Outstanding |
|
|
Interest |
|
|
|
Year end |
|
|
at Year End |
|
|
During Year |
|
|
During Year |
|
|
Rate Paid |
|
|
|
(Dollars in thousands) |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
$ |
874 |
|
|
|
0.15 |
% |
|
$ |
4,722 |
|
|
$ |
2,351 |
|
|
|
0.12 |
% |
Federal funds purchased |
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
1 |
|
|
|
0.09 |
% |
Federal Home Loan Bank |
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
2,110 |
|
|
|
0.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
874 |
|
|
|
0.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
$ |
1,989 |
|
|
|
0.15 |
% |
|
$ |
5,883 |
|
|
$ |
2,614 |
|
|
|
0.15 |
% |
Federal funds purchased |
|
|
|
|
|
|
|
|
|
|
2,503 |
|
|
|
16 |
|
|
|
0.69 |
% |
Federal Home Loan Bank |
|
|
5,000 |
|
|
|
0.25 |
% |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
0.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,989 |
|
|
|
0.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Liquidity refers to the ability to manage future cash flows to meet the needs of depositors
and borrowers and to fund operations. Management strives to maintain sufficient liquidity to fund
future loan demand and to satisfy fluctuations in deposit levels. This is achieved primarily in the
form of available lines of credit from various correspondent banks, the FHLB, the Federal Reserve
Discount Window and through our investment portfolio. In addition, we may have short-term
investments at our primary correspondent bank in the form of federal funds sold. Liquidity is
governed by a Board of Directors-approved Asset Liability Policy, which is administered by an
internal ALCO Committee. The ALCO Committee reports on a monthly basis interest rate sensitivity,
liquidity, capital and investment related matters to the Loan and Risk Committee of the Board of
Directors.
43
Our liquidity ratio at December 31, 2010 was 50.5%, compared to 15.81% at December 31,
2009. Both ratios exceeded our minimum internal target of 10%. In addition, at December 31, 2010,
we had an additional $23.8 million of credit available from the FHLB, $35.7 million from the
Federal Reserve Discount Window, and $70.0 million from correspondent banks.
At December 31, 2010, we had $3.8 million of loan commitments outstanding, $69.6 million of
pre-approved but unused lines of credit and $2.9 million of standby letters of credit and financial
guarantees. In managements opinion, these commitments represent no more than normal lending risk
to us and will be funded from normal sources of liquidity.
Our capital position is reflected in our shareholders equity, subject to certain adjustments
for regulatory purposes. Shareholders equity, or capital, is a measure of our net worth, soundness
and viability. We continue to remain in a well-capitalized position. Shareholders equity on
December 31, 2010 was $177.1 million, compared to $46.1 million at December 31, 2009, an increase
of $131.0 million, and is primarily attributable to $140.2 million in net proceeds from the Public
Offering.
Risk based capital regulations adopted by the Federal Reserve Board and the FDIC require bank
holding companies and banks to achieve and maintain specified ratios of capital to risk weighted
assets. The risk based capital rules are designed to measure Tier 1 capital (generally consisting
of common shareholders equity, qualifying preferred stock and minority interests in consolidated
subsidiaries, net of intangible assets, deferred tax assets in excess of certain thresholds and
certain other items) and total capital (consisting of Tier 1 capital and Tier 2 capital, which
generally includes certain preferred stock, mandatory convertible debt securities and term
subordinated debt) in relation to the credit risk of both on and off balance sheet items. Under the
guidelines, one of four risk weights is applied to the different on balance sheet items.
Off-balance sheet items, such as loan commitments, are also subject to risk weighting after
conversion to balance sheet equivalent amounts. All banks must maintain a minimum total capital to
total risk weighted assets ratio of 8.00%, at least half of which must be in the form of Tier 1
capital. These guidelines also specify that banks that are experiencing internal growth or making
acquisitions will be expected to maintain capital positions substantially above the minimum
supervisory levels. At December 31, 2010, the Bank satisfied its minimum regulatory capital
requirements and was well capitalized within the meaning of federal regulatory requirements.
Actual and required capital levels at December 31 for each of the past 3 years are presented
below:
Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
|
Adequacy |
|
|
Prompt Corrective |
|
|
|
Actual |
|
|
Purposes |
|
|
Actions Provisions |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
|
(Dollars in thousands) |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets) |
|
$ |
185,768 |
|
|
|
43.06 |
% |
|
$ |
34,035 |
|
|
|
8.00 |
% |
|
$ |
42,543 |
|
|
|
10.00 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
173,395 |
|
|
|
40.20 |
% |
|
|
17,017 |
|
|
|
4.00 |
% |
|
|
25,525 |
|
|
|
6.00 |
% |
Tier 1 capital (to average assets) |
|
|
173,395 |
|
|
|
27.39 |
% |
|
|
22,227 |
|
|
|
4.00 |
% |
|
|
27,784 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets) |
|
$ |
57,061 |
|
|
|
13.55 |
% |
|
$ |
33,684 |
|
|
|
8.00 |
% |
|
$ |
42,105 |
|
|
|
10.00 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
44,877 |
|
|
|
10.66 |
% |
|
|
16,842 |
|
|
|
4.00 |
% |
|
|
25,263 |
|
|
|
6.00 |
% |
Tier 1 capital (to average assets) |
|
|
44,877 |
|
|
|
9.40 |
% |
|
|
19,097 |
|
|
|
4.00 |
% |
|
|
23,871 |
|
|
|
5.00 |
% |
The Bank has committed to its regulators to maintain a Tier 1 leverage ratio, calculated
as Tier 1 capital to average assets, of at least 10.00% for the three years following the Public
Offering.
As disclosed in the Companys Consolidated Statements of Cash Flows included in Item 8,
Financial Statements and Supplementary Data, net cash provided by operating activities was $8
thousand during 2010. Net cash used for investing activities of $115.4 million consisted primarily
of purchases of available-for-sale investments totaling $117.0 million, which were partially offset
by maturities, calls and sales of available-for-sale investments totaling $13.7 million. Net cash
provided by financing activities amounted to $149.3 million, primarily from net proceeds of our
Public Offering of $140.2 and the net increase in deposits of $15.2 million and was partially
offset by a reduction in FHLB borrowings of $6.1 million.
44
Off-Balance Sheet Arrangements and Contractual Obligations
In the ordinary course of operations, we may enter into certain contractual obligations that
could include the funding of operations through debt issuances as well as leases for premises and
equipment.
The following table summarizes our significant fixed and determinable contractual obligations
at December 31, 2010:
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
More Than |
|
|
|
|
December 31, 2010 |
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Certificate of deposits |
|
$ |
220,054 |
|
|
$ |
72,677 |
|
|
$ |
7,090 |
|
|
$ |
|
|
|
$ |
299,821 |
|
Deposits without a stated maturity |
|
|
107,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,999 |
|
Repurchase agreements |
|
|
874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
874 |
|
FHLB advances |
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
Subordinated debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,895 |
|
|
|
6,895 |
|
Operating lease obligations |
|
|
496 |
|
|
|
1,328 |
|
|
|
1,392 |
|
|
|
498 |
|
|
|
3,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
329,423 |
|
|
$ |
94,005 |
|
|
$ |
8,482 |
|
|
$ |
7,393 |
|
|
$ |
439,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about our off-balance sheet risk exposure is presented in Note K
Off-Balance Sheet Risk to the Consolidated Financial Statements. As part of ongoing business, we
currently do not participate in transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as special purpose entities,
which generally are established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
In connection with our Public Offering, we issued 23,100,000 shares of common stock at $6.50
per share, for a gross aggregate offering price of $150.2 million. We incurred underwriting fees of
$6.0 million and related expenses of $0.9 million resulting in net proceeds of $143.2 million being
received by the Bank. Additional underwriting fees equal to $3.0 million will be payable in the
future if the Banks common stock price closes at a price equal to or above 125% of the offering
price, or $8.125 per share, for a period of 30 consecutive days. A liability for the contingent
underwriting fees of $3 million has been accrued and is included in other liabilities in the
accompanying consolidated balance sheet at December 31, 2010.
Impact of Inflation and Changing Prices
The Company has an asset and liability make-up that is distinctly different from that of an
entity with substantial investments in plant and inventory because the major portions of a
commercial banks assets are monetary in nature. As a result, the Companys performance may be
significantly influenced by changes in interest rates. Although the Company and the banking
industry are more affected by changes in interest rates than by inflation in the prices of goods
and services, inflation is a factor that may influence interest rates. However, the frequency and
magnitude of interest rate fluctuations do not necessarily coincide with changes in the general
inflation rate. Inflation does affect operating expenses in that personnel expenses and the cost of
supplies and outside services tend to increase more during periods of high inflation.
Interest Rate Sensitivity
Our ALCO Committee actively evaluates and manages interest rate risk to recognize and control
these risks within acceptable levels set by the Board of Directors. The ALCO Committee is also
responsible for approving our asset/liability management policies, overseeing the formulation and
implementation of strategies to improve balance sheet positioning and earnings, and reviewing our
interest rate sensitivity position.
The primary measures that management uses to evaluate short-term interest rate risk include
(i) cumulative gap summary, which measures potential changes in cash flows should interest rates
rise or fall; (ii) net interest income at risk, which projects the impact of different interest
rate scenarios on net interest income over one-year and two-year time horizons; (iii) net income at
risk, which projects the impact of different interest rate scenarios on net income over one-year
and two-year time horizons; and (iv) economic value of equity at risk, which measures potential
long-term risk in the balance sheet by valuing the Companys assets and liabilities at market
under different interest rate scenarios.
45
These measures have historically been calculated under a simulation model prepared by an
independent correspondent bank assuming incremental 100 basis point shocks (or immediate shifts) in
interest rates up to a total increase or decrease of 300 basis points. The results help us develop
strategies for managing exposure to interest rate risk. Like any forecasting technique, interest
rate simulation modeling is based on a large number of assumptions. In this case, the assumptions
relate primarily to loan and deposit growth, asset and liability prepayments, interest rates and
balance sheet management strategies. Management believes that the assumptions are reasonable, both
individually and in the aggregate. Nevertheless, the simulation modeling process produces only a
sophisticated estimate, not a precise calculation of exposure. The overall interest rate risk
management process is subject to annual review by an outside professional services firm to
ascertain its effectiveness as required by federal regulations.
Our current guidelines for risk management call for preventive measures if a 300 basis point
shock, or immediate increase or decrease, in short term interest rates over the next twelve months
would affect net interest income over the same period by more than 20.0%. We have historically
operated well within these guidelines. As of December 31, 2010, based on the results of this
simulation model, we could expect net interest income to decrease by approximately 4.8% over twelve
months if short-term interest rates immediately decreased by 300 basis points, which is unlikely
based on current rate levels. Conversely, if short term interest rates increased by 300 basis
points, net interest income could be expected to increase by approximately 6.6% over twelve months.
We use multiple interest rate swap agreements, accounted for as either cash flow or fair value
hedges, as part of the management of interest rate risk. At December 2010, we had an interest rate
swap, accounted for as a cash flow hedge, with a notional amount of $40 million that was purchased
on May 16, 2008 to protect us from falling rates. We receive a fixed rate of 6.22% for a period of
three years, and pay the prime rate for the same period, currently at 3.25%. At December 31, 2010
and 2009, the unrealized gain on this instrument was $282 thousand and $706 thousand, respectively.
During the years ended December 31, 2010, 2009 and 2008, we recorded $1.2 million, $1.2 million and
$379 thousand of income from this instrument.
During the year ended December 31, 2008, we entered into five loan swaps. The total original
notional amount of these swaps was $11.2 million. These derivative instruments are used to protect
us from interest rate risk caused by changes in the LIBOR curve in relation to certain designated
fixed rate loans. These derivative instruments are carried at a fair market value of $(569)
thousand and $(497) thousand at December 2010 and 2009, respectively. We recorded interest expense
on these loan swaps of $342 thousand, $354 thousand and $85 thousand for the years ended December
31, 2010, 2009 and 2008, respectively.
In addition, income from a swap that was terminated in early 2008 of $353 thousand, $852
thousand and $796 thousand was recorded during the years ended December 2010, 2009 and 2008,
respectively.
For cash flow hedges, we use the dollar-offset method for assessing effectiveness using the
cumulative approach. The dollar-offset method compares the dollar amount of the change in
anticipated future cash flows of the hedging instrument with the dollar amount of the changes in
anticipated future cash flows of the risk being hedged over the assessment period. The cumulative
approach involves comparing the cumulative changes in the hedging instruments anticipated future
cash flows to the cumulative changes in the hedged transactions anticipated future cash flows.
Because the floating index and reset dates are based on identical terms, management believes that
the hedge relationship of the cumulative changes in expected future cash flow from the hedging
derivative and the cumulative changes in expected interest cash flows from the hedged exposure will
be highly effective.
Consistent with the risk management objective and the hedge accounting designation, management
measures the degree of hedge effectiveness by comparing the cumulative change in anticipated
interest cash flows from the hedged exposure over the hedging period to the cumulative change in
anticipated cash flows from the hedging derivative. Any difference between these two measures will
be deemed hedge ineffectiveness and recorded in current earnings. Management utilizes the
Hypothetical Derivative Method to compute the cumulative change in anticipated interest cash
flows from the hedged exposure. To the extent that the cumulative change in anticipated cash flows
from the hedging derivative offsets from 80% to 125% of the cumulative change in anticipated
interest cash flows from the hedged exposure, the hedge is deemed effective.
46
For fair value hedges, Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 815 requires that the method selected for assessing hedge effectiveness
must be reasonable, be defined at the inception of the hedging relationship and be applied
consistently throughout the hedging relationship. We use the dollar-offset method for assessing
effectiveness using the cumulative approach. The dollar-offset method compares the fair value of
the hedging derivative with the fair value of the hedged exposure. The cumulative approach involves
comparing the cumulative changes in the hedging derivatives fair value to the cumulative changes
in the hedged exposures fair value. The calculation of dollar offset is the change in clean fair
value of hedging derivative, divided by the change in fair value of the hedged exposure
attributable to changes in the LIBOR curve. To the extent that the cumulative change in fair value
of the hedging derivative offsets from 80% to 125% of the cumulative change in fair value of the
hedged exposure, the hedge will be deemed effective. The change in fair value of the hedging
derivative and the change in fair value of the hedged exposure are recorded in earnings. Any hedge
ineffectiveness is also reflected in current earnings.
Prime rate swaps (pay floating, received fixed) are recorded on the balance sheet in other
assets or liabilities at fair market value. Loan swaps (pay fixed, receive floating) are carried at
fair market value and are included in loans. Changes in fair value of the hedged loans have been
completely offset by the fair value changes in the derivatives which are in contra asset accounts
included in loans.
See Note L Derivative Financial Instruments and Hedging Activities to the Consolidated
Financial Statements for further discussion on our derivative financial instruments and hedging
activities.
Financial institutions are subject to interest rate risk to the degree that their
interest-bearing liabilities, primarily deposits, mature or reprice more or less frequently, or on
a different basis, than their interest-earning assets, primarily loans and investment securities.
The match between the scheduled repricing and maturities of our interest-earning assets and
liabilities within defined periods is referred to as gap analysis. At December 31, 2010, our
cumulative one year gap was $42.9 million, or 6.97% of total assets, indicating a net
asset-sensitive position that is well within our ALCO policy guideline of 35%.
The following table reflects our rate sensitive assets and liabilities by maturity as of
December 31, 2010. Variable rate loans are shown in the category of due within three months
because they reprice with changes in the prime lending rate. Fixed rate loans are presented
assuming the entire loan matures on the final due date, although payments are actually made at
regular intervals and are not reflected in this schedule.
Interest Rate Gap Sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
Three |
|
|
One Year |
|
|
|
|
|
|
|
|
|
Three |
|
|
Months to |
|
|
to Five |
|
|
After |
|
|
|
|
At December 31, 2010 |
|
Months |
|
|
One Year |
|
|
Years |
|
|
Five Years |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
5,040 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,040 |
|
Federal funds sold |
|
|
57,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,905 |
|
Securities |
|
|
|
|
|
|
|
|
|
|
12,590 |
|
|
|
128,000 |
|
|
|
140,590 |
|
Loans |
|
|
245,364 |
|
|
|
16,532 |
|
|
|
133,416 |
|
|
|
4,517 |
|
|
|
399,829 |
|
Other interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,275 |
|
|
|
2,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
308,309 |
|
|
|
16,532 |
|
|
|
146,006 |
|
|
|
134,792 |
|
|
|
605,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
9,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,372 |
|
MMDA and savings |
|
|
62,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,293 |
|
Time deposits |
|
|
74,505 |
|
|
|
145,549 |
|
|
|
79,767 |
|
|
|
|
|
|
|
299,821 |
|
Short term borrowings |
|
|
874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
874 |
|
Long term borrowings |
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
6,895 |
|
|
|
26,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
147,044 |
|
|
|
145,549 |
|
|
|
99,767 |
|
|
|
6,895 |
|
|
|
399,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
(29,316 |
) |
|
|
40,000 |
|
|
|
(7,036 |
) |
|
|
(3,648 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap |
|
$ |
131,949 |
|
|
$ |
(89,017 |
) |
|
$ |
39,203 |
|
|
$ |
124,249 |
|
|
$ |
206,384 |
|
Cumulative interest sensitivity gap |
|
$ |
131,949 |
|
|
$ |
42,932 |
|
|
$ |
82,135 |
|
|
$ |
206,384 |
|
|
|
|
|
|
Percentage of total assets |
|
|
|
|
|
|
6.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
Item 7A. |
|
Quantitative and Qualitative Disclosures about Market Risk |
Please refer to the section captioned Interest Rate Sensitivity under Part II, Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations of this
report, which section is incorporated herein by reference.
48
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
Park Sterling Corporation
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of Park Sterling Corporation and
subsidiary (the Company) and Park Sterling Bank prior to the formation of the holding company as
of December 31, 2010 and 2009, and the related consolidated statements of income (loss), changes in
shareholders equity and cash flows for each of the years in the three year period ended December
31, 2010. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Park Sterling Corporation and subsidiary and Park
Sterling Bank prior to the formation of the holding company as of December 31, 2010 and 2009 and
the results of its operations and its cash flows for each of the years in the three year period
ended December 31, 2010, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Dixon Hughes PLLC
Charlotte, North Carolina
March 31, 2011
49
PARK STERLING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
2,433 |
|
|
$ |
6,504 |
|
Interest-earning balances at banks |
|
|
5,040 |
|
|
|
2,758 |
|
Federal funds sold |
|
|
57,905 |
|
|
|
13,975 |
|
Investment securities available-for-sale, at fair value |
|
|
140,590 |
|
|
|
42,567 |
|
Loans |
|
|
399,829 |
|
|
|
397,564 |
|
Allowance for loan losses |
|
|
(12,424 |
) |
|
|
(7,402 |
) |
|
|
|
|
|
|
|
Net loans |
|
|
387,405 |
|
|
|
390,162 |
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock |
|
|
1,757 |
|
|
|
1,896 |
|
Premises and equipment, net |
|
|
4,477 |
|
|
|
4,665 |
|
Accrued interest receivable |
|
|
1,640 |
|
|
|
1,614 |
|
Other real estate owned |
|
|
1,246 |
|
|
|
1,550 |
|
Other assets |
|
|
13,615 |
|
|
|
8,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
616,108 |
|
|
$ |
473,855 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
$ |
36,333 |
|
|
$ |
24,085 |
|
Money market, NOW and savings deposits |
|
|
71,666 |
|
|
|
52,308 |
|
Time deposits of less than $100,000 |
|
|
78,242 |
|
|
|
76,456 |
|
Time deposits of $100,000 through $250,000 |
|
|
79,020 |
|
|
|
65,551 |
|
Time deposits of more than $250,000 |
|
|
142,559 |
|
|
|
174,233 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
407,820 |
|
|
|
392,633 |
|
|
Short-term borrowings |
|
|
874 |
|
|
|
6,989 |
|
Long-term borrowings |
|
|
20,000 |
|
|
|
20,000 |
|
Subordinated debt |
|
|
6,895 |
|
|
|
6,895 |
|
Accrued interest payable |
|
|
290 |
|
|
|
436 |
|
Accrued expenses and other liabilities |
|
|
3,128 |
|
|
|
807 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
439,007 |
|
|
|
427,760 |
|
|
|
|
|
|
|
|
|
|
Commitments (Notes J and K) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, no par value
5,000,000 shares authorized; 0 issued and outstanding
at December 31, 2010 and 2009, respectively |
|
|
|
|
|
|
|
|
Common stock, $1.00 par value
200,000,000 and 45,000,000 shares authorized at December 31,
2010 and 2009, respectively; 28,051,098 and 4,951,098
outstanding at December 31, 2010 and 2009, respectively |
|
|
130,438 |
|
|
|
23,023 |
|
Additional paid-in capital |
|
|
57,102 |
|
|
|
23,496 |
|
Accumulated deficit |
|
|
(9,501 |
) |
|
|
(1,642 |
) |
Accumulated other comprehensive income (loss) |
|
|
(938 |
) |
|
|
1,218 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
177,101 |
|
|
|
46,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
616,108 |
|
|
$ |
473,855 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
50
PARK STERLING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands, except per share data) |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
20,260 |
|
|
$ |
19,710 |
|
|
$ |
18,767 |
|
Federal funds sold |
|
|
107 |
|
|
|
41 |
|
|
|
60 |
|
Taxable investment securities |
|
|
1,567 |
|
|
|
1,365 |
|
|
|
1,167 |
|
Tax-exempt investment securities |
|
|
642 |
|
|
|
533 |
|
|
|
107 |
|
Interest on deposits at banks |
|
|
66 |
|
|
|
19 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
22,642 |
|
|
|
21,668 |
|
|
|
20,102 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Money market, NOW and savings deposits |
|
|
408 |
|
|
|
353 |
|
|
|
997 |
|
Time deposits |
|
|
5,869 |
|
|
|
7,968 |
|
|
|
8,819 |
|
Short-term borrowings |
|
|
9 |
|
|
|
25 |
|
|
|
228 |
|
Long-term borrowings |
|
|
563 |
|
|
|
565 |
|
|
|
427 |
|
Subordinated debt |
|
|
758 |
|
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
7,607 |
|
|
|
9,290 |
|
|
|
10,471 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
15,035 |
|
|
|
12,378 |
|
|
|
9,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
17,005 |
|
|
|
3,272 |
|
|
|
2,544 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan losses |
|
|
(1,970 |
) |
|
|
9,106 |
|
|
|
7,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
66 |
|
|
|
38 |
|
|
|
13 |
|
Gain on sale of securities available-for-sale |
|
|
19 |
|
|
|
349 |
|
|
|
|
|
Other than temporary securities impairment loss |
|
|
|
|
|
|
(698 |
) |
|
|
|
|
Other noninterest income |
|
|
45 |
|
|
|
18 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income (loss) |
|
|
130 |
|
|
|
(293 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
6,442 |
|
|
|
4,723 |
|
|
|
4,757 |
|
Occupancy and equipment |
|
|
916 |
|
|
|
820 |
|
|
|
720 |
|
Advertising and promotion |
|
|
287 |
|
|
|
236 |
|
|
|
335 |
|
Legal and professional fees |
|
|
445 |
|
|
|
212 |
|
|
|
229 |
|
Deposit charges and FDIC insurance |
|
|
728 |
|
|
|
965 |
|
|
|
191 |
|
Data processing and outside service fees |
|
|
411 |
|
|
|
395 |
|
|
|
350 |
|
Director fees |
|
|
392 |
|
|
|
|
|
|
|
|
|
Other real estate owned expense |
|
|
411 |
|
|
|
161 |
|
|
|
5 |
|
Other noninterest expense |
|
|
1,025 |
|
|
|
485 |
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
11,057 |
|
|
|
7,997 |
|
|
|
7,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(12,897 |
) |
|
|
816 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
(5,038 |
) |
|
|
239 |
|
|
|
(1,532 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,859 |
) |
|
$ |
577 |
|
|
$ |
1,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
(0.58 |
) |
|
$ |
0.12 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
(0.58 |
) |
|
$ |
0.12 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
13,558,221 |
|
|
|
4,951,098 |
|
|
|
4,951,098 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
13,558,221 |
|
|
|
4,951,098 |
|
|
|
5,000,933 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
51
PARK STERLING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
(Dollars in thousands) |
|
Balance at December 31, 2007 |
|
|
4,501,000 |
|
|
$ |
20,930 |
|
|
$ |
24,282 |
|
|
$ |
(3,765 |
) |
|
$ |
974 |
|
|
$ |
42,421 |
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
665 |
|
|
|
|
|
|
|
|
|
|
|
665 |
|
Eleven-for-ten stock split, effected in
the form of a 10% stock dividend |
|
|
450,098 |
|
|
|
2,093 |
|
|
|
(2,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,546 |
|
|
|
|
|
|
|
1,546 |
|
Unrealized holding losses on
available-for-sale securities,
net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
|
|
(94 |
) |
Unrealized holding gains on
interest rate swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,159 |
|
|
|
1,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
4,951,098 |
|
|
|
23,023 |
|
|
|
22,854 |
|
|
|
(2,219 |
) |
|
|
2,039 |
|
|
|
45,697 |
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
642 |
|
|
|
|
|
|
|
|
|
|
|
642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
577 |
|
|
|
|
|
|
|
577 |
|
Unrealized holding gains on
available-for-sale securities,
net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261 |
|
|
|
261 |
|
Unrealized holding losses on
interest rate swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,082 |
) |
|
|
(1,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
4,951,098 |
|
|
|
23,023 |
|
|
|
23,496 |
|
|
|
(1,642 |
) |
|
|
1,218 |
|
|
|
46,095 |
|
|
Issuance of common stock,
net of costs |
|
|
23,100,000 |
|
|
|
107,415 |
|
|
|
32,796 |
|
|
|
|
|
|
|
|
|
|
|
140,211 |
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
810 |
|
|
|
|
|
|
|
|
|
|
|
810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,859 |
) |
|
|
|
|
|
|
(7,859 |
) |
Unrealized holding losses on
available-for-sale securities,
net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,515 |
) |
|
|
(1,515 |
) |
Unrealized holding losses on
interest rate swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(641 |
) |
|
|
(641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,015 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
28,051,098 |
|
|
$ |
130,438 |
|
|
$ |
57,102 |
|
|
$ |
(9,501 |
) |
|
$ |
(938 |
) |
|
$ |
177,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
52
PARK STERLING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,859 |
) |
|
$ |
577 |
|
|
$ |
1,546 |
|
Adjustments to reconcile net income (loss) to net
cash provided (used for) by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,008 |
|
|
|
563 |
|
|
|
326 |
|
Provision for loan losses |
|
|
17,005 |
|
|
|
3,272 |
|
|
|
2,544 |
|
Stock option expense |
|
|
810 |
|
|
|
643 |
|
|
|
665 |
|
Income on termination of swap |
|
|
(353 |
) |
|
|
(852 |
) |
|
|
(796 |
) |
Deferred income taxes |
|
|
(3,190 |
) |
|
|
(574 |
) |
|
|
(2,976 |
) |
Net gains on sales of investment securities available-for-sale |
|
|
(19 |
) |
|
|
(349 |
) |
|
|
|
|
Net losses on sales of other real estate owned |
|
|
343 |
|
|
|
15 |
|
|
|
|
|
Other than temporary securities impairment loss |
|
|
|
|
|
|
698 |
|
|
|
|
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accrued interest receivable |
|
|
(26 |
) |
|
|
(296 |
) |
|
|
(275 |
) |
Increase in other assets |
|
|
(2,363 |
) |
|
|
(3,632 |
) |
|
|
(1,041 |
) |
Increase (decrease) in accrued interest payable |
|
|
(146 |
) |
|
|
(1,163 |
) |
|
|
617 |
|
Increase (decrease) in accrued expenses and other liabilities |
|
|
3,086 |
|
|
|
(169 |
) |
|
|
2,038 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities |
|
|
8,296 |
|
|
|
(1,267 |
) |
|
|
2,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in loans |
|
|
(17,118 |
) |
|
|
(28,764 |
) |
|
|
(146,545 |
) |
Purchases of premises and equipment |
|
|
(217 |
) |
|
|
(100 |
) |
|
|
(1,053 |
) |
Proceeds from disposals of premises and equipment |
|
|
51 |
|
|
|
|
|
|
|
|
|
Purchases of investment securities available-for-sale |
|
|
(117,000 |
) |
|
|
(26,026 |
) |
|
|
(18,354 |
) |
Proceeds from sales of investment securities available-for-sale |
|
|
2,155 |
|
|
|
11,490 |
|
|
|
|
|
Proceeds from maturities and call of investment securities
available-for-sale |
|
|
13,727 |
|
|
|
3,761 |
|
|
|
1,517 |
|
Improvements to other real estate owned |
|
|
(93 |
) |
|
|
(432 |
) |
|
|
|
|
Proceeds from sale of other real estate owned |
|
|
2,918 |
|
|
|
1,227 |
|
|
|
|
|
Proceeds from sale of interest rate swap |
|
|
|
|
|
|
|
|
|
|
1,987 |
|
Redemption (purchase) of Federal Home Loan Bank stock |
|
|
139 |
|
|
|
(327 |
) |
|
|
(1,446 |
) |
Purchase of other assets |
|
|
|
|
|
|
(65 |
) |
|
|
(549 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(115,438 |
) |
|
|
(39,236 |
) |
|
|
(164,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
15,187 |
|
|
|
41,306 |
|
|
|
165,725 |
|
Net decrease in short-term borrowings |
|
|
(6,115 |
) |
|
|
(972 |
) |
|
|
(8,842 |
) |
Proceeds from long-term borrowings |
|
|
|
|
|
|
|
|
|
|
20,000 |
|
Proceeds from issuance of subordinated debt |
|
|
|
|
|
|
6,895 |
|
|
|
|
|
Proceeds from issuance of common stock, net of costs |
|
|
140,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
149,283 |
|
|
|
47,229 |
|
|
|
176,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
42,141 |
|
|
|
6,726 |
|
|
|
15,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning |
|
|
23,237 |
|
|
|
16,511 |
|
|
|
1,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending |
|
$ |
65,378 |
|
|
$ |
23,237 |
|
|
$ |
16,511 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
7,753 |
|
|
$ |
10,453 |
|
|
$ |
9,853 |
|
Cash paid for income taxes |
|
|
950 |
|
|
|
2,105 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities, net of tax |
|
$ |
(1,515 |
) |
|
$ |
261 |
|
|
$ |
(94 |
) |
Change in unrealized loss on interest rate swaps, net of tax |
|
|
(641 |
) |
|
|
(1,082 |
) |
|
|
1,159 |
|
Loans transferred to other real estate owned |
|
|
2,864 |
|
|
|
982 |
|
|
|
1,431 |
|
53
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
NOTE A ORGANIZATION AND OPERATIONS
Park Sterling Corporation (the Company) was incorporated in North Carolina on October 6,
2010 to serve as a holding company for Park Sterling Bank (the Bank). On January 1, 2011, the
Company acquired all of the outstanding stock of the Bank in a statutory exchange transaction.
Prior to January 1, 2011, the Company conducted no operations other than obtaining regulatory
approval for the reorganization. See Note O Subsequent Events for additional information.
The Bank was incorporated on September 8, 2006, as a North Carolina-chartered commercial bank
and began operations in October 2006. The Banks primary focus is to provide banking services to
small and mid-sized businesses, owner-occupied and income producing real estate owners,
professionals and other clients doing business or residing within its target markets. The Bank
operates under the banking laws of North Carolina and the rules and regulations of the Federal
Deposit Insurance Corporation (the FDIC) and the State of North Carolina Office of the
Commissioner of Banks (the NC Commissioner). The Bank undergoes periodic examinations by those
regulatory authorities.
On August 18, 2010, in connection with its Public Offering, the Bank consummated the issuance
and sale of 23,100,000 shares of common stock at $6.50 per share, for a gross aggregate offering
price of $150.2 million. The Bank incurred underwriting fees of $6.0 million and related expenses
of $0.9 million resulting in net proceeds of $143.2 million being received by the Bank of which
$140.2 was recorded in stockholders equity. Additional underwriting fees equal to $3.0 million
will be payable in the future if the Banks common stock price closes at a price equal to or above
125% of the offering price, or $8.125 per share, for a period of 30 consecutive days. A liability
for the $3.0 million contingent underwriting fees has been accrued and is included in other
liabilities in the accompanying consolidated balance sheet at December 31, 2010.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accounting and reporting policies of the Company conform with U.S.
generally accepted accounting principles (GAAP) and prevailing practices within the banking
industry. The consolidated financial statements include the accounts of the Bank and the Company,
although as the Company had no operations during 2010, they are effectively those of the Bank.
Use of Estimates The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan losses, realization of
deferred tax assets and the fair value of financial instruments and other accounts.
Reclassifications Certain amounts in the prior years financial statements have been
reclassified to conform to the 2010 presentation. The reclassification had no effect on net income
(loss), comprehensive income (loss) or shareholders equity as previously reported.
Cash and Cash Equivalents For the purpose of presentation in the statement of cash flows,
cash and cash equivalents include cash and due from banks, interest-earning balances at banks and
federal funds sold. Generally, federal funds sold are repurchased the following day.
Investment Securities Investment securities available-for-sale are reported at fair value
and consist of debt instruments that are not classified as trading securities or as held to
maturity securities. Unrealized holding gains and losses, net of applicable taxes, on
available-for-sale securities are reported as a net amount in other comprehensive income. Gains
and losses on the sale of available-for-sale securities are determined using the
specific-identification method. Declines in the fair value of individual available-for-sale
securities below their amortized cost that are other than temporary impairments would result in
write-downs of the individual securities to their fair value and would be included in earnings as
realized losses. Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Loans Loans that management has the intent and ability to hold for the foreseeable future
or until maturity are reported at their outstanding principal balances adjusted for any direct
principal charge-offs, the allowance for loan losses, and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans. Interest on loans is calculated by
using the simple interest method on daily balances of the principal amount outstanding. Loan
origination fees are capitalized and recognized as an adjustment of the yield of the related loan.
54
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
Nonperforming Loans For all classes of loans, loans are placed on non-accrual status
upon becoming contractually past due 90 days or more as to principal or interest (unless they
are adequately secured by collateral, are in the process of collection and are reasonably
expected to result in repayment), when terms are renegotiated below market levels in response
to a financially distressed borrower or guarantor, or where substantial doubt about full
repayment of principal or interest is evident.
When a loan is placed on non-accrual status, the accrued and unpaid interest receivable is
reversed and the loan is accounted for on the cash or cost recovery method until qualifying for
return to accrual status. All payments received on non-accrual loans are applied against the
principal balance of the loan. A loan may be returned to accrual status when all delinquent
interest and principal become current in accordance with the terms of the loan agreement and
when doubt about repayment is resolved. Generally, for all classes of loans, a charge-off is
recorded when it is probable that a loss has been incurred and when it is possible to determine
a reasonable estimate of the loss.
Impaired Loans For all classes of loans, loans are considered impaired when, based on
current information and events, it is probable the Company will be unable to collect all
amounts due in accordance with the original contractual terms of the loan agreement, including
scheduled principal and interest payments. Impaired loans may include all classes of
nonaccruing loans and loans modified in a troubled debt restructuring (TDR). If a loan is
impaired, a specific valuation allowance is allocated, if necessary, so that the loan is
reported net, at the present value of estimated future cash flows using the loans existing
rate or at the fair value of collateral if repayment is expected solely from the collateral.
Interest payments on impaired loans are typically applied to principal unless collectability of
the principal amount is reasonably assured, in which case interest is recognized on a cash
basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Loans Modified in a Troubled Debt Restructuring Loans are considered to have been
modified in a TDR when, due to a borrowers financial difficulties, the Company makes certain
concessions to the borrower that it would not otherwise consider. Modifications may include
interest rate reductions, interest forgiveness, forbearance, and other actions intended to
minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a
nonaccrual loan that has been modified in a TDR remains on nonaccrual status for a period of at
least six months to demonstrate that the borrower is able to meet the terms of the modified
loan. However, performance prior to the modification, or significant events that coincide with
the modification, are included in assessing whether the borrower can meet the new terms and may
result in the loan being returned to accrual status at the time of loan modification or after a
shorter performance period. If the borrowers ability to meet the revised payment schedule is
uncertain, the loan remains on nonaccrual status.
Allowance for Loan Losses The allowance for loan losses is based upon managements ongoing
evaluation of the loan portfolio and reflects an amount considered by management to be its best
estimate of known and inherent losses in the portfolio as of the balance sheet date. In making the
evaluation of the adequacy of the allowance for loan losses, management gives consideration to
current economic conditions, statutory examinations of the loan portfolio by regulatory agencies,
delinquency information and managements internal review of the loan portfolio. While management
uses the best information available to make evaluations, future adjustments to the allowance may
be necessary if conditions differ substantially from the assumptions used in making the
evaluations. In addition, regulatory examiners may require the Company to recognize changes to the
allowance for loan losses based on their judgments about information available to them at the time
of their examination. Although provisions have been established by loan segments based upon
managements assessment of their differing inherent loss characteristics, the entire allowance for
losses on loans is available to absorb further loan losses in any segment. Further information
regarding the Companys policies and methodology used to estimate the allowance for loan losses is
presented in Note D Loans.
Other Real Estate Owned Real estate acquired through, or in lieu of, loan foreclosure is
held for sale and is recorded at fair value less estimated selling costs when acquired,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by
management and further write-downs are made based on these valuations. Revenue and expenses from
operations are included in other expense.
55
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
Premises and Equipment Company premises and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on the straight-line method over the estimated useful
lives of the assets, which are 39.5 years for buildings and 3 to 7 years for furniture and
equipment. Leasehold improvements are depreciated over the lesser of the term of the respective
lease or the estimated useful lives of the improvements. Repairs and maintenance costs are charged
to operations as incurred and additions and improvements to premises and equipment are capitalized.
Upon sale or retirement, the cost and related accumulated depreciation are removed from the
accounts and any gains or losses are reflected in current operations.
Federal Home Loan Bank Securities As a condition of membership, the Bank is required to hold
stock in the Federal Home Loan Bank of Atlanta (FHLB). These securities do not have a readily
determinable fair value as their ownership is restricted and there is no market for these
securities. The Bank carries these non-marketable equity securities at cost and periodically
evaluates them for impairment. Management considers these non-marketable equity securities to be
long-term investments. Accordingly, when evaluating these securities for impairment, management
considers the ultimate recoverability of the par value rather than recognizing temporary declines
in value. The primary factor supporting the carrying value of these securities is the commitment of
the FHLB to perform its obligations, which includes providing credit and other services to the
Bank.
Securities Sold Under Agreements to Repurchase The Company sells certain securities under
agreements to repurchase. The agreements are treated as collateralized financing transactions and
the obligations to repurchase securities sold are reflected as a liability in the accompanying
consolidated balance sheets. The dollar amount of the securities underlying the agreements remain
in the asset accounts.
Advertising Costs Advertising costs are expensed as incurred.
Income Taxes Income tax expense is the total of the current year income tax due or
refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and
liabilities related to components of other comprehensive income). Deferred tax assets and
liabilities are the expected future tax amounts for the temporary differences between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the expected amount most likely to be
realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level
of future taxable income and recoverable taxes paid in prior years. Although realization is not
assured, management believes it is more likely than not that all of the deferred tax assets will be
realized.
Per Share Results Basic and diluted earnings (loss) per share are computed based on the
weighted-average number of shares outstanding during each period. Diluted earnings (loss) per
common share reflects the potential dilution that could occur if all dilutive stock options were
exercised.
In August 2010, the Bank issued 23,100,000 shares of common stock in connection with its
Public Offering. On February 24, 2011, the Company issued 554,400 restricted stock awards to
certain officers and directors as contemplated in connection with its Public Offering. See Note O
Subsequent Events for additional information. During 2008, the Bank distributed an
eleven-for-ten stock split effected in the form of a 10% stock dividend. All references herein to
stock options and weighted average shares outstanding have been adjusted for the effects of the
stock split.
Basic and diluted earnings (loss) per common share have been computed based upon net income
(loss) as presented in the accompanying consolidated statements of income (loss) divided by the
weighted-average number of common shares outstanding or assumed to be outstanding as summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Weighted-average number of common
shares outstanding |
|
|
13,558,221 |
|
|
|
4,951,098 |
|
|
|
4,951,098 |
|
Effect of dilutive stock options |
|
|
|
|
|
|
|
|
|
|
49,835 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common
shares and dilutive potential common
shares outstanding |
|
|
13,558,221 |
|
|
|
4,951,098 |
|
|
|
5,000,933 |
|
|
|
|
|
|
|
|
|
|
|
All outstanding options were antidilutive for the years ended December 31, 2010 and 2009.
At December 31, 2008, 268,531 options were antidilutive.
56
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
Share-Based Compensation The Company may grant share-based compensation to employees and
non-employee directors in the form of stock options, restricted stock or other instruments.
Share-based compensation expense is measured based on the fair value of the award at the date of
grant and is charged to earnings on a straight-line basis over the requisite service period which
is currently up to seven years. The fair value of stock options is estimated at the date of grant
using a Black-Scholes option pricing model and related assumptions. The amortization of share-based
compensation reflects estimated forfeitures, adjusted for actual forfeiture experience.
The compensation expense for share-based compensation plans was $810 thousand, $642 thousand
and $665 thousand for the years ended December 31, 2010, 2009 and 2008, respectively.
Comprehensive Income The components of comprehensive income (loss) for the years ended
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(7,859 |
) |
|
$ |
577 |
|
|
$ |
1,546 |
|
Unrealized holding gains (losses) on
available-for-sale securities |
|
|
(2,447 |
) |
|
|
774 |
|
|
|
(153 |
) |
Income tax effect |
|
|
944 |
|
|
|
(299 |
) |
|
|
59 |
|
Reclassification of gains recognized in net income |
|
|
(19 |
) |
|
|
(349 |
) |
|
|
|
|
Income tax effect |
|
|
7 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax amount |
|
|
(1,515 |
) |
|
|
261 |
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (loss) on swaps |
|
|
(1,043 |
) |
|
|
(1,760 |
) |
|
|
1,886 |
|
Income tax effect |
|
|
402 |
|
|
|
678 |
|
|
|
(727 |
) |
|
|
|
|
|
|
|
|
|
|
Net-of-tax amount |
|
|
(641 |
) |
|
|
(1,082 |
) |
|
|
1,159 |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(10,015 |
) |
|
$ |
(244 |
) |
|
$ |
2,611 |
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments and Hedging Activities The Company utilizes interest
rate swap agreements, considered to be cash flow hedges, as part of the management of interest rate
risk to modify the repricing characteristics of certain portions of its portfolios of interest
bearing liabilities. Under the guidelines of FASB ASC 815-10, Derivatives and Hedging, all
derivative instruments are required to be carried at fair value on the balance sheet.
Cash flow hedges are accounted for by recording the fair value of the derivative instrument on
the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded
in other comprehensive income within stockholders equity, net of tax. Amounts are reclassified
from other comprehensive income to the income statement in the period or periods the hedged
forecasted transaction affects earnings. Derivative gains and losses not effective in hedging the
expected cash flows of the hedged item are recognized immediately in the income statement. At the
hedges inception and at least quarterly thereafter, a formal assessment is performed to determine
the effectiveness of the cash flow hedge. If it is determined that a derivative instrument has not
been or will not continue to be highly effective as a hedge, hedge accounting is discontinued.
If a derivative instrument designated as a fair value hedge is terminated or the hedge
designation removed, the difference between a hedged items then carrying amount and its face
amount is recognized into income over the original hedge period. Likewise, if a derivative
instrument designated as a cash flow hedge is terminated or the hedge designation removed, related
amounts accumulated in other accumulated comprehensive income are reclassified into earnings over
the original hedge period during which the hedged item affects income.
Recent Accounting Pronouncements In June 2009, the FASB issued (ASU) No. 2009-16, Transfers
and Servicing (Topic 860)Accounting for Transfers of Financial Assets. ASU 2009-16 amends prior
accounting guidance to enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks related to transferred
financial assets. ASU 2009-16 eliminates the concept of a qualifying special-purpose entity and
changes the requirements for derecognizing financial assets. ASU 2009-16 also requires additional
disclosures about all continuing involvements with transferred financial assets including
information about gains and losses resulting from transfers during the period. The provisions of
ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on the
Companys financial statements.
57
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
In June 2009, the FASB issued ASU No. 2009-17, Consolidations (Topic 810)Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 amends
prior guidance to change how a company determines when an entity that is insufficiently capitalized
or is not controlled through voting (or similar rights) should be consolidated. The determination
of whether a company is required to consolidate an entity is based on, among other things, an
entitys purpose and design and a companys ability to direct the activities of the entity that
most significantly impact the entitys economic performance. ASU 2009-17 requires additional
disclosures about the reporting entitys involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its affect on the entitys
financial statements. The provisions of ASU 2009-17 became effective on January 1, 2010 and did not
have a significant impact on the Companys financial statements.
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,
which requires new disclosures for significant transfers in and out of Level 1 and 2 fair value
measurements and descriptions of the reasons for the transfer, and for level 3 fair value
measurements new disclosures will require entities to present information separately for purchases,
sales, issuances, and settlements. This accounting standard also updates existing disclosures by
providing fair value measurement disclosures for each class of assets and liabilities and
disclosures about valuation techniques and inputs used to measure fair value for both recurring and
nonrecurring fair value measurements. The new disclosures and clarifications on existing
disclosures were effective for interim and annual reporting periods beginning after December 15,
2009, except for disclosures about purchase, sales, issuances, and settlements in the roll forward
activity for Level 3 fair value measurements, which are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU 2010-06
during the period ended December 31, 2010 resulted in new disclosures only.
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments
to Certain Recognition and Disclosure Requirements, which removes some contradictions between the
requirements of GAAP and the rules of the Securities and Exchange Commission (SEC). SEC filers
are required to evaluate subsequent events through the date the financial statements are issued,
and they are no longer required to disclose the date through which subsequent events have been
evaluated. This guidance was effective upon issuance.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses, which requires significant new disclosures about
the allowance for credit losses and the credit quality of financing receivables. The requirements
are intended to enhance transparency regarding credit losses and the credit quality of loan and
lease receivables. Under this statement, allowance for credit losses and fair value are to be
disclosed by portfolio segment, while credit quality information, impaired financing receivables
and nonaccrual status are to be presented by class of financing receivable. The disclosures are to
be presented at the level of disaggregation that management uses when assessing and monitoring the
portfolios risk and performance. This ASU is effective for interim and annual reporting periods
after December 15, 2010. The adoption of ASU 2010-20 during the period ended December 31, 2010
resulted in new disclosures only.
In January 2011, the FASB issued ASU No. 2011-01, Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The provisions of ASU No.
2010-20 required the disclosure of more granular information on the nature and extent of TDRs and
their effect on the Allowance for Loan Losses for the period ending March 31, 2011. The amendments
in this ASU defer the effective date related to these disclosures, enabling creditors to provide
those disclosures after the FASB completes its project clarifying the guidance for determining what
constitutes a TDR. Currently, that guidance is expected to be effective for interim and annual
periods ending after June 15, 2011. The provisions of this ASU only defer the effective date of
disclosure requirements related to TDRs.
58
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
NOTE C INVESTMENTS
The amortized cost and fair value of investment securities available-for-sale, with gross
unrealized gains and losses, at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
13,075 |
|
|
$ |
181 |
|
|
$ |
(96 |
) |
|
$ |
13,160 |
|
Residential mortgage-backed securities |
|
|
52,342 |
|
|
|
495 |
|
|
|
(438 |
) |
|
|
52,399 |
|
Collateralized agency mortgage obligations |
|
|
60,711 |
|
|
|
111 |
|
|
|
(2,103 |
) |
|
|
58,719 |
|
Municipal securities |
|
|
13,771 |
|
|
|
183 |
|
|
|
(146 |
) |
|
|
13,808 |
|
Corporate and other securities |
|
|
2,675 |
|
|
|
5 |
|
|
|
(176 |
) |
|
|
2,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
142,574 |
|
|
$ |
975 |
|
|
$ |
(2,959 |
) |
|
$ |
140,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
5,586 |
|
|
$ |
189 |
|
|
$ |
(16 |
) |
|
$ |
5,759 |
|
Residential mortgage-backed securities |
|
|
16,444 |
|
|
|
396 |
|
|
|
(67 |
) |
|
|
16,773 |
|
Collateralized agency mortgage obligations |
|
|
3,232 |
|
|
|
12 |
|
|
|
(23 |
) |
|
|
3,221 |
|
Municipal securities |
|
|
13,641 |
|
|
|
448 |
|
|
|
(205 |
) |
|
|
13,884 |
|
Corporate and other securities |
|
|
3,182 |
|
|
|
14 |
|
|
|
(266 |
) |
|
|
2,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
42,085 |
|
|
$ |
1,059 |
|
|
$ |
(577 |
) |
|
$ |
42,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities with a fair market value of $4.2 million and $5.2 million were
pledged to secure repurchase agreements and the interest rate swap at December 31, 2010 and 2009,
respectively.
The amortized cost and fair value of investment securities available-for-sale at December 31
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Due after one year through five years |
|
$ |
12,548 |
|
|
$ |
12,590 |
|
|
$ |
5,055 |
|
|
$ |
5,219 |
|
Due after five years through ten years |
|
|
17,325 |
|
|
|
17,126 |
|
|
|
1,685 |
|
|
|
1,606 |
|
Due after ten years |
|
|
112,701 |
|
|
|
110,874 |
|
|
|
35,345 |
|
|
|
35,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
142,574 |
|
|
$ |
140,590 |
|
|
$ |
42,085 |
|
|
$ |
42,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of investment securities available-for-sale for the years ended December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Proceeds from sales |
|
$ |
2,155 |
|
|
$ |
11,490 |
|
|
$ |
|
|
Gross realized gains |
|
|
50 |
|
|
|
349 |
|
|
|
|
|
Gross realized losses |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
On a quarterly basis, management evaluates its investments 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 securities with unrealized losses at December 31, 2010 and
2009. Since none of the unrealized losses relate to the marketability of the securities or the
issuers ability to honor redemption obligations, and it is more likely than not that the Company
will not have to sell the investments before recovery of their amortized cost basis, none of the
securities are deemed to be other than temporarily impaired. At December 31, 2010, two corporate
debt securities have been in a loss position for twelve months or more.
59
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
9,904 |
|
|
$ |
(96 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,904 |
|
|
$ |
(96 |
) |
Mortgage-backed securities |
|
|
37,052 |
|
|
|
(438 |
) |
|
|
|
|
|
|
|
|
|
|
37,052 |
|
|
|
(438 |
) |
Collateralized mortgage obligations |
|
|
53,232 |
|
|
|
(2,103 |
) |
|
|
|
|
|
|
|
|
|
|
53,232 |
|
|
|
(2,103 |
) |
Municipal securities |
|
|
6,215 |
|
|
|
(146 |
) |
|
|
|
|
|
|
|
|
|
|
6,215 |
|
|
|
(146 |
) |
Corporate and other securities |
|
|
|
|
|
|
|
|
|
|
1,475 |
|
|
|
(176 |
) |
|
|
1,475 |
|
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
106,403 |
|
|
$ |
(2,783 |
) |
|
$ |
1,475 |
|
|
$ |
(176 |
) |
|
$ |
107,878 |
|
|
$ |
(2,959 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
984 |
|
|
$ |
(16 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
984 |
|
|
$ |
(16 |
) |
Mortgage-backed securities |
|
|
5,442 |
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
5,442 |
|
|
|
(67 |
) |
Collateralized mortgage obligations |
|
|
2,555 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
2,555 |
|
|
|
(23 |
) |
Municipal securities |
|
|
2,723 |
|
|
|
(22 |
) |
|
|
3,289 |
|
|
|
(183 |
) |
|
|
6,012 |
|
|
|
(205 |
) |
Corporate and other securities |
|
|
400 |
|
|
|
(100 |
) |
|
|
2,016 |
|
|
|
(166 |
) |
|
|
2,416 |
|
|
|
(266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
12,104 |
|
|
$ |
(228 |
) |
|
$ |
5,305 |
|
|
$ |
(349 |
) |
|
$ |
17,409 |
|
|
$ |
(577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, the Company had investments, carried at cost, totaling
$2.3 million and $2.4 million which include $1.8 million and $1.9 million of FHLB stock. These
investments were evaluated for impairment as of December 31, 2010 and management believes the fair
value of these investments exceeded the cost. During 2009, the Company recognized an impairment
loss related to the investments in Silverton Bank subordinated debt and Silverton Bank common
stock, equivalent to 100% of the cost of the investments, in the amount of $500 thousand and $198
thousand, respectively.
NOTE D LOANS
The Companys loan portfolio was comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
48,401 |
|
|
$ |
41,980 |
|
Commercial real estate owner-occupied |
|
|
55,089 |
|
|
|
50,693 |
|
Commercial real estate investor income producing |
|
|
110,407 |
|
|
|
112,508 |
|
Acquisition, construction and development |
|
|
87,846 |
|
|
|
100,668 |
|
Other commercial |
|
|
3,225 |
|
|
|
1,115 |
|
|
|
|
|
|
|
|
Total commercial loans |
|
|
304,968 |
|
|
|
306,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
21,716 |
|
|
|
20,577 |
|
Home equity lines of credit |
|
|
56,968 |
|
|
|
52,026 |
|
Residential construction |
|
|
9,051 |
|
|
|
11,639 |
|
Other loans to individuals |
|
|
7,245 |
|
|
|
6,471 |
|
|
|
|
|
|
|
|
Total consumer loans |
|
|
94,980 |
|
|
|
90,713 |
|
|
|
|
|
|
|
|
Total loans |
|
|
399,948 |
|
|
|
397,677 |
|
Deferred fees |
|
|
(119 |
) |
|
|
(113 |
) |
|
|
|
|
|
|
|
Total loans, net of deferred fees |
|
$ |
399,829 |
|
|
$ |
397,564 |
|
|
|
|
|
|
|
|
At December 31, 2010, the carrying value of loans pledged as collateral on FHLB
borrowings totaled $43.8 million.
Concentrations of Credit Loans are primarily made in the Charlotte and Wilmington regions of
North Carolina. Real estate loans can be affected by the condition of the local real estate market.
Commercial and industrial loans can be affected by the local economic conditions. The commercial
loan portfolio has concentrations in business loans secured by real estate and real estate
development loans. Primary concentrations in the consumer loan portfolio include home equity lines
of credit and residential mortgages. At December 31, 2010 and 2009, we had no loans outstanding
with non-U.S. entities.
60
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
Allowance for Loan Losses The following table presents, by portfolio segment, the activity
in the allowance for loan losses for the year ended December 31, 2010. The following table also
presents, by portfolio segment, the balance in the allowance for loan losses disaggregated on the
basis of the Companys impairment measurement method and the related recorded investment in loans
at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Consumer |
|
|
Unallocated |
|
|
Total |
|
For the year ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
5,799 |
|
|
$ |
1,603 |
|
|
$ |
|
|
|
$ |
7,402 |
|
Provision for loan losses |
|
|
13,336 |
|
|
|
1,785 |
|
|
|
1,884 |
|
|
|
17,005 |
|
Charge-offs |
|
|
(10,025 |
) |
|
|
(2,017 |
) |
|
|
|
|
|
|
(12,042 |
) |
Recoveries |
|
|
54 |
|
|
|
5 |
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(9,971 |
) |
|
|
(2,012 |
) |
|
|
|
|
|
|
(11,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
9,165 |
|
|
$ |
1,375 |
|
|
$ |
1,884 |
|
|
$ |
12,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
4,092 |
|
|
$ |
115 |
|
|
$ |
|
|
|
$ |
4,207 |
|
Collectively evaluated for impairment |
|
|
5,073 |
|
|
|
1,260 |
|
|
|
1,884 |
|
|
|
8,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,165 |
|
|
$ |
1,375 |
|
|
$ |
1,884 |
|
|
$ |
12,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Investment in Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
37,451 |
|
|
$ |
3,460 |
|
|
$ |
|
|
|
$ |
40,911 |
|
Collectively evaluated for impairment |
|
|
267,517 |
|
|
|
91,520 |
|
|
|
|
|
|
|
359,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
304,968 |
|
|
$ |
94,980 |
|
|
$ |
|
|
|
$ |
399,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the activity in the allowance for loan losses for the years ended December
31, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Balance, beginning of year |
|
$ |
5,568 |
|
|
$ |
3,398 |
|
Provision for loan losses |
|
|
3,272 |
|
|
|
2,544 |
|
|
Charge-offs |
|
|
(1,438 |
) |
|
|
(374 |
) |
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(1,438 |
) |
|
|
(374 |
) |
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
7,402 |
|
|
$ |
5,568 |
|
|
|
|
|
|
|
|
The Company introduced refinements to its loan loss allowance methodology in the third
quarter of 2010. The principal refinement was the addition of a more comprehensive qualitative
component. Qualitative reserves represent an estimate of the amount for which it is probable
that environmental factors will cause the quantitatively determined loss contingency estimate to
differ from historical results or other assumptions. The Bank has identified six environmental
factors for inclusion in our allowance methodology at this time, aggregating $1.8 million at
December 31, 2010, including (i) portfolio trends, (ii) portfolio concentrations, (iii) economic
and market trends, (iv) changes in lending practices, (v) regulatory environment, and (vi) other
factors. The first three factors are believed by management to present the most significant risk
to the portfolio, and are therefore associated with both higher absolute and range of potential
reserve percentage. The reserve percentages for each of the six factors are derived from available
industry information combined with management judgment. The Bank may consider both trends and
absolute levels of such factors, if applicable.
The Bank evaluates and estimates off-balance sheet credit exposure at the same time it
estimates credit losses for loans by a similar process. These estimated credit losses are not
recorded as part of the allowance for loan losses, but are recorded to a separate liability account
by a charge to income, if material. Loan commitments, unused lines of credit and standby letters
of credit make up the off-balance sheet items reviewed for potential credit losses. These
estimated credit losses were not material at December 31, 2010 and 2009.
61
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
Credit Quality Indicators The Company uses several credit quality indicators to manage
credit risk in an ongoing manner. The Companys primary credit quality indicator is an internal
credit risk rating system that categorizes loans into pass, special mention, or classified
categories. Credit risk ratings are applied individually to those classes of loans that have
significant or unique credit characteristics that benefit from a case-by-case evaluation. These are
typically loans to businesses or individuals in the classes which comprise the commercial portfolio
segment. Groups of loans that are underwritten and structured using standardized criteria and
characteristics, such as statistical models (e.g., credit scoring or payment performance), are
typically risk rated and monitored collectively. These are typically loans to individuals in the
classes which comprise the consumer portfolio segment.
The following are the definitions of the Companys credit quality indicators:
|
|
|
Pass:
|
|
Loans in classes that comprise the commercial and
consumer portfolio segments that are not adversely rated,
are contractually current as to principal and interest,
and are otherwise in compliance with the contractual
terms of the loan agreement. Management believes that
there is a low likelihood of loss related to those loans
that are considered pass. |
|
|
|
Special Mention:
|
|
Loans in classes that comprise the commercial and
consumer portfolio segments that have potential
weaknesses that deserve managements close attention. If
not addressed, these potential weaknesses may result in
deterioration of the repayment prospects for the loan.
Management believes that there is a moderate likelihood
of some loss related to those loans that are considered
special mention. |
|
|
|
Classified:
|
|
Loans in the classes that comprise the commercial
portfolio segment that are inadequately protected by the
sound worth and paying capacity of the borrower or of the
collateral pledged, if any. Classified loans are also
those in the classes that comprise the consumer portfolio
segment that are past due 90 days or more as to principal
or interest. Residential mortgage and home equity loans
that are past due 90 days or more as to principal or
interest may be considered pass if the Company is in the
process of collection and the current loan-to-value ratio
is 60% or less. Residential mortgage and home equity
loans may be current as to principal and interest, but
may be considered classified for a period of up to six
months. Following a period of demonstrated performance in
accordance with contractual terms, the loan may be
removed from classified status. Management believes that
there is a distinct possibility that the Company will
sustain some loss if the deficiencies related to
classified loans are not corrected in a timely manner. |
The Companys credit quality indicators are periodically updated on a case-by-case basis. The
following table presents the recorded investment in the Companys loans as of December 31, 2010, by
loan class and by credit quality indicator.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Real Estate |
|
|
CRE-Investor |
|
|
Acquisition, |
|
|
|
|
|
|
|
|
|
and |
|
|
(CRE)-Owner |
|
|
Income |
|
|
Construction |
|
|
Other |
|
|
Total |
|
|
|
Industrial |
|
|
Occupied |
|
|
Producing |
|
|
and Development |
|
|
Commercial |
|
|
Commercial |
|
Pass |
|
$ |
46,888 |
|
|
$ |
52,746 |
|
|
$ |
98,195 |
|
|
$ |
37,435 |
|
|
$ |
3,225 |
|
|
$ |
238,489 |
|
Special mention |
|
|
262 |
|
|
|
|
|
|
|
9,520 |
|
|
|
14,289 |
|
|
|
|
|
|
|
24,071 |
|
Classified |
|
|
1,251 |
|
|
|
2,343 |
|
|
|
2,692 |
|
|
|
36,122 |
|
|
|
|
|
|
|
42,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,401 |
|
|
$ |
55,089 |
|
|
$ |
110,407 |
|
|
$ |
87,846 |
|
|
$ |
3,225 |
|
|
$ |
304,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
Home Equity |
|
|
Residential |
|
|
Other Loans to |
|
|
|
|
|
|
Total |
|
|
|
Mortgage |
|
|
Lines of Credit |
|
|
Construction |
|
|
Individuals |
|
|
|
|
|
|
Consumer |
|
Pass |
|
$ |
19,160 |
|
|
$ |
53,839 |
|
|
$ |
7,951 |
|
|
$ |
7,245 |
|
|
|
|
|
|
$ |
88,195 |
|
Special mention |
|
|
1,359 |
|
|
|
1,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,966 |
|
Classified |
|
|
1,197 |
|
|
|
1,522 |
|
|
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
3,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
21,716 |
|
|
$ |
56,968 |
|
|
$ |
9,051 |
|
|
$ |
7,245 |
|
|
|
|
|
|
$ |
94,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recorded Investment in Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
399,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans Loans are considered impaired when, based on current information and events,
it is probable the Company will be unable to collect all amounts due in accordance with the
original contractual terms of the loan agreement, including scheduled principal and interest
payments. Impaired loans may include all classes of nonaccruing loans and loans modified in a TDR.
If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan
is reported net, at the present value of estimated future cash flows using the loans existing rate
or at the fair value of collateral if repayment is expected solely from the collateral. Interest
payments on impaired loans are typically applied to principal unless collectability of the
principal amount is reasonably assured, in which case interest is recognized on a cash basis.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
62
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
Information for impaired loans, none of which are accruing interest, at and for the year
ended December 31, 2010 is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
Related |
|
|
Average |
|
|
Interest |
|
|
|
Recorded |
|
|
Principal |
|
|
Allowance For |
|
|
Recorded |
|
|
Income |
|
|
|
Investment |
|
|
Balance |
|
|
Loan Losses |
|
|
Investment |
|
|
Recognized |
|
Impaired Loans with No Related
Allowance Recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
722 |
|
|
$ |
913 |
|
|
$ |
|
|
|
$ |
69 |
|
|
$ |
|
|
CRE owner-occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE investor income producing |
|
|
583 |
|
|
|
841 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
Acquisition, construction and
development |
|
|
19,054 |
|
|
|
25,909 |
|
|
|
|
|
|
|
3,753 |
|
|
|
|
|
Other commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans |
|
|
20,359 |
|
|
|
27,663 |
|
|
|
|
|
|
|
3,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
1,197 |
|
|
|
1,255 |
|
|
|
|
|
|
|
111 |
|
|
|
|
|
Home equity lines of credit |
|
|
164 |
|
|
|
165 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Residential construction |
|
|
1,100 |
|
|
|
2,174 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
Other loans to individuals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans |
|
|
2,461 |
|
|
|
3,594 |
|
|
|
|
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans with no related
allowance recorded |
|
$ |
22,820 |
|
|
$ |
31,257 |
|
|
$ |
|
|
|
$ |
3,978 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans with an
Allowance Recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
437 |
|
|
$ |
437 |
|
|
$ |
280 |
|
|
$ |
2 |
|
|
$ |
|
|
CRE owner-occupied |
|
|
717 |
|
|
|
741 |
|
|
|
136 |
|
|
|
393 |
|
|
|
|
|
CRE investor income producing |
|
|
1,119 |
|
|
|
1,209 |
|
|
|
277 |
|
|
|
404 |
|
|
|
|
|
Acquisition, construction and
development |
|
|
14,818 |
|
|
|
14,828 |
|
|
|
3,399 |
|
|
|
328 |
|
|
|
|
|
Other commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans |
|
|
17,091 |
|
|
|
17,215 |
|
|
|
4,092 |
|
|
|
1,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
115 |
|
|
|
22 |
|
|
|
|
|
Residential construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans to individuals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
115 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans with an
allowance recorded |
|
$ |
18,091 |
|
|
$ |
18,215 |
|
|
$ |
4,207 |
|
|
$ |
1,149 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
37,450 |
|
|
$ |
44,878 |
|
|
$ |
4,092 |
|
|
$ |
4,964 |
|
|
$ |
|
|
Consumer |
|
|
3,461 |
|
|
|
4,594 |
|
|
|
115 |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
40,911 |
|
|
$ |
49,472 |
|
|
$ |
4,207 |
|
|
$ |
5,127 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
Information for impaired loans at December 31, 2009 is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Recorded |
|
|
Recorded |
|
|
|
Investment |
|
|
Investment |
|
Impaired loans without a related allowance for loan losses |
|
$ |
4,160 |
|
|
$ |
783 |
|
Impaired loans with a related allowance for loan losses |
|
|
1,168 |
|
|
|
496 |
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
5,328 |
|
|
$ |
1,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses related to impaired loans |
|
$ |
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three years ended December 31, 2010, the Company did not recognize any
interest income, including interest income recognized on a cash basis, within the period that loans
were impaired.
Nonaccrual and Past Due Loans The recorded investment in nonaccrual loans at December 31
follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
1,159 |
|
|
$ |
|
|
CRE owner-occupied |
|
|
717 |
|
|
|
|
|
CRE investor income producing |
|
|
1,702 |
|
|
|
|
|
Acquisition, construction and development |
|
|
33,872 |
|
|
|
860 |
|
Other commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans |
|
|
37,450 |
|
|
|
860 |
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
1,197 |
|
|
|
1,520 |
|
Home equity lines of credit |
|
|
1,164 |
|
|
|
|
|
Residential construction |
|
|
1,100 |
|
|
|
308 |
|
Other loans to individuals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans |
|
|
3,461 |
|
|
|
1,828 |
|
|
|
|
|
|
|
|
Total nonaccrual loans |
|
$ |
40,911 |
|
|
$ |
2,688 |
|
|
|
|
|
|
|
|
Interest income on nonaccrual loans included in the results of operations for 2010 and
2009 totaled $1.5 million and $95 thousand, respectively. If interest on these loans would have
been accrued in accordance with their original terms, interest income would have increased by $275
thousand and $70 thousand for the years ended December 31, 2010 and 2009, respectively. There were
no nonaccrual loans during 2008.
Nonaccrual loans at December 31, 2010 include $24.9 million of troubled debt restructured
loans of which $23.7 million is in the acquisition, construction and development portfolio. The
December 31, 2010 recorded allowance for these loans was $2.4 million. There were no TDRs at
December 31, 2009.
At December 31, 2010 and 2009, there were no loans 90 days or more past due and accruing
interest.
Related Party Loans From time to time, the Company engages in loan transactions with its
directors, executive officers and their related interests (collectively referred to as related
parties). Such loans are made in the ordinary course of business and on substantially the same
terms and collateral as those for comparable transactions prevailing at the time and do not involve
more than the normal risk of collectability or present other unfavorable features. A summary of
activity in loans to related parties is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
13,913 |
|
|
$ |
11,789 |
|
Disbursements |
|
|
2,030 |
|
|
|
7,872 |
|
Repayments |
|
|
(2,597 |
) |
|
|
(5,748 |
) |
Loans associated with former board
members and executive officers |
|
|
(8,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
5,075 |
|
|
$ |
13,913 |
|
|
|
|
|
|
|
|
At December 31, 2010, the Company had pre-approved but unused lines of credit totaling
$2.0 million to related parties.
64
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
NOTE E PREMISES AND EQUIPMENT
Following is a summary of premises and equipment at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Buildings |
|
$ |
1,620 |
|
|
$ |
1,620 |
|
Leasehold improvements |
|
|
490 |
|
|
|
437 |
|
Furniture and equipment |
|
|
1,225 |
|
|
|
1,062 |
|
Autos |
|
|
55 |
|
|
|
135 |
|
Land |
|
|
2,368 |
|
|
|
2,368 |
|
Fixed assets in process |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
5,758 |
|
|
|
5,624 |
|
Accumulated depreciation |
|
|
(1,281 |
) |
|
|
(959 |
) |
|
|
|
|
|
|
|
Premises and equipment, net |
|
$ |
4,477 |
|
|
$ |
4,665 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended December 31, 2010, 2009 and
2008 amounted to $354 thousand, $388 thousand and $338 thousand, respectively. These amounts are
included in the occupancy and equipment line item in the Consolidated Statements of Income (Loss).
NOTE F DEPOSITS
Following is a summary of deposits at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Retail certificates of deposit: |
|
|
|
|
|
|
|
|
$100,000 or more |
|
$ |
115,920 |
|
|
$ |
104,854 |
|
Less than $100,000 |
|
|
78,242 |
|
|
|
76,456 |
|
|
|
|
|
|
|
|
Total retail certificates of deposit |
|
|
194,162 |
|
|
|
181,310 |
|
Demand accounts |
|
|
9,372 |
|
|
|
9,650 |
|
Savings and market accounts |
|
|
62,293 |
|
|
|
42,660 |
|
|
|
|
|
|
|
|
Total retail interest-bearing deposits |
|
|
265,827 |
|
|
|
233,620 |
|
Brokered certificates of deposits |
|
|
105,659 |
|
|
|
134,930 |
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
371,486 |
|
|
|
368,550 |
|
Noninterest-bearing deposits |
|
|
36,334 |
|
|
|
24,083 |
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
407,820 |
|
|
$ |
392,633 |
|
|
|
|
|
|
|
|
At December 31, 2010, the scheduled maturities of time deposits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
$100 |
|
|
|
|
|
|
$100 |
|
|
Thousand |
|
|
|
|
|
|
Thousand |
|
|
or More |
|
|
Total |
|
2011 |
|
$ |
70,169 |
|
|
$ |
149,885 |
|
|
$ |
220,054 |
|
2012 |
|
|
6,492 |
|
|
|
41,165 |
|
|
|
47,657 |
|
2013 |
|
|
1,449 |
|
|
|
23,571 |
|
|
|
25,020 |
|
2014 |
|
|
132 |
|
|
|
6,958 |
|
|
|
7,090 |
|
|
|
|
|
|
|
|
|
|
|
Total time deposits |
|
$ |
78,242 |
|
|
$ |
221,579 |
|
|
$ |
299,821 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense on time deposits totaled $5.9 million, $8.0 million and $8.8 million in
the years ended December 31, 2010, 2009 and 2008, respectively.
65
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
NOTE G BORROWINGS
Borrowings outstanding at December 31, 2010 and 2009 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Maturity |
|
|
Rate |
|
|
Balance |
|
|
Interest Rate |
|
|
Balance |
|
|
Interest Rate |
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
various |
|
|
0.15 |
% |
|
$ |
874 |
|
|
|
|
|
|
$ |
1,989 |
|
|
|
|
|
Federal Home Loan Bank |
|
|
01/05/10 |
|
|
|
0.25 |
% |
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings |
|
|
|
|
|
|
|
|
|
|
874 |
|
|
|
0.15 |
% |
|
|
6,989 |
|
|
|
0.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank |
|
|
02/28/13 |
|
|
|
2.5750 |
% |
|
|
5,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
Federal Home Loan Bank |
|
|
02/28/13 |
|
|
|
2.9600 |
% |
|
|
5,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
Federal Home Loan Bank |
|
|
05/22/13 |
|
|
|
3.2625 |
% |
|
|
5,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
Federal Home Loan Bank |
|
|
08/29/13 |
|
|
|
2.3425 |
% |
|
|
5,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal Home Loan Bank |
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
2.79 |
% |
|
|
20,000 |
|
|
|
2.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt |
|
|
06/30/19 |
|
|
|
11.0 |
% |
|
|
6,895 |
|
|
|
11.00 |
% |
|
|
6,895 |
|
|
|
11.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings |
|
|
|
|
|
|
|
|
|
|
26,895 |
|
|
|
4.89 |
% |
|
|
26,895 |
|
|
|
4.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
|
|
|
|
|
|
|
$ |
27,769 |
|
|
|
|
|
|
$ |
33,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the Company had an additional $23.8 million of credit available
from the FHLB, $35.7 million from the Federal Reserve Discount Window, and $70.0 million from
correspondent banks.
FHLB borrowing agreements provide for lines of credit up to 20% of the Banks assets. The FHLB
borrowings are collateralized by a blanket pledge arrangement on all residential first mortgage
loans, home equity lines of credit and loans secured by multi-family real estate that the Bank
owns. At December 31, 2010, the carrying value of loans pledged as collateral totaled $43.8
million.
During 2009, the Bank raised $6.9 million in capital through a Subordinated Notes (the
Notes) offering. The Notes were offered at 11% with a due date of June 30, 2019. Interest is
being paid quarterly in arrears and began on September 30, 2009. The Company may redeem some or all
of the Notes at any time, beginning on June 30, 2014, at a price equal to 100% of the principal
amount of the Notes redeemed plus accrued but unpaid interest to the redemption date. The Notes
were issued under a Notes Agency Agreement between the Bank and First Citizens Bank & Trust
Company.
NOTE H INCOME TAXES
The significant components of the provision for income taxes for the years ended December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current tax provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(1,848 |
) |
|
$ |
648 |
|
|
$ |
1,196 |
|
State |
|
|
|
|
|
|
165 |
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision |
|
|
(1,848 |
) |
|
|
813 |
|
|
|
1,444 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(2,322 |
) |
|
|
(483 |
) |
|
|
(1,108 |
) |
State |
|
|
(868 |
) |
|
|
(91 |
) |
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred tax provision |
|
|
(3,190 |
) |
|
|
(574 |
) |
|
|
(1,350 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense before adjustment
to deferred tax asset valuation allowance |
|
|
(5,038 |
) |
|
|
239 |
|
|
|
94 |
|
Decrease in valuation allowance |
|
|
|
|
|
|
|
|
|
|
(1,626 |
) |
|
|
|
|
|
|
|
|
|
|
Net provision for income taxes |
|
$ |
(5,038 |
) |
|
$ |
239 |
|
|
$ |
(1,532 |
) |
|
|
|
|
|
|
|
|
|
|
Prior to 2008, the Company maintained a deferred tax valuation allowance that offset most
of the Companys net deferred assets. At December 31, 2008, the Company eliminated this valuation
allowance as it was determined that it was more likely than not the deferred tax assets would be
realized.
66
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
The difference between the provision for income taxes and the amounts computed by applying the
statutory federal income tax rate of 34% to income before income taxes for the years ended December
31 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Tax at the statutory federal rate |
|
$ |
(4,385 |
) |
|
$ |
278 |
|
|
$ |
5 |
|
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax effect |
|
|
(573 |
) |
|
|
49 |
|
|
|
4 |
|
Tax exempt income |
|
|
(204 |
) |
|
|
(165 |
) |
|
|
(31 |
) |
Change to deferred tax asset valuation allowance |
|
|
|
|
|
|
|
|
|
|
(1,626 |
) |
Other permanent differences |
|
|
124 |
|
|
|
77 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
(5,038 |
) |
|
$ |
239 |
|
|
$ |
(1,532 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of deferred taxes at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Deferred tax assets relating to: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
4,513 |
|
|
$ |
2,546 |
|
Stock option expense |
|
|
869 |
|
|
|
635 |
|
Pre-opening costs and expenses |
|
|
398 |
|
|
|
435 |
|
Property and equipment |
|
|
105 |
|
|
|
9 |
|
Unrealized gain on interest rate swap |
|
|
|
|
|
|
131 |
|
Net unrealized security losses |
|
|
765 |
|
|
|
|
|
Net operating loss carryforwards |
|
|
1,053 |
|
|
|
|
|
Other |
|
|
157 |
|
|
|
67 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
7,860 |
|
|
|
3,823 |
|
|
|
|
|
|
|
|
Deferred tax liabilities relating to: |
|
|
|
|
|
|
|
|
Net unrealized security gains |
|
|
(177 |
) |
|
|
(765 |
) |
Deferred loan costs |
|
|
(101 |
) |
|
|
(94 |
) |
Prepaid expenses |
|
|
(119 |
) |
|
|
(48 |
) |
Other |
|
|
(26 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(423 |
) |
|
|
(927 |
) |
|
|
|
|
|
|
|
Net recorded deferred tax asset |
|
$ |
7,437 |
|
|
$ |
2,896 |
|
|
|
|
|
|
|
|
The increase in the net deferred tax asset to $7.4 million at December 31, 2010 from $2.9
million at December 31, 2009 is primarily a result of the 2010 provision for loan losses and net
operating loss carryforwards. In evaluating whether the Company will realize the full benefit of
the net deferred tax asset, management considered projected earnings, asset quality, liquidity,
capital position, which will enable us to deploy capital to generate taxable income, growth plans,
etc. In addition, management also considered the previous twelve quarters of income (loss) before
income taxes in determining the need for a valuation allowance, referred to as the cumulative loss
test. In 2010, we incurred a loss, primarily as a result of the provision for loan losses, which
resulted in the failure of the cumulative loss test. Significant negative trends in credit quality,
losses from operations, etc. could impact the realizability of the deferred tax asset in the
future. After considering the above factors, both positive and negative, management believes that
our deferred assets are more likely than not to be realized.
It is the Companys policy to recognize interest and penalties associated with uncertain tax
positions as components of income taxes. There were no interest or penalties accrued during 2010,
2009 and 2008. The Companys federal and state income tax returns are subject to examination for
the years 2007, 2008 and 2009.
The Companys federal and state net operating loss carryforwards expire on December 31, 2030.
67
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
NOTE I REGULATORY MATTERS
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios, as prescribed by regulations, of total and Tier I capital to
risk-weighted assets and of Tier I capital to average assets. Management believes, as of December
31, 2010 and 2009, the Bank meets all capital adequacy requirements to which it is subject, as set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum To Be Well |
|
|
|
|
|
|
|
|
|
|
|
Minimum for |
|
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
|
Adequacy |
|
|
Prompt Corrective |
|
|
|
Actual |
|
|
Purposes |
|
|
Actions Provisions |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets) |
|
$ |
185,768 |
|
|
|
43.06 |
% |
|
$ |
34,035 |
|
|
|
8.00 |
% |
|
$ |
42,543 |
|
|
|
10.00 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
173,395 |
|
|
|
40.20 |
% |
|
|
17,017 |
|
|
|
4.00 |
% |
|
|
25,525 |
|
|
|
6.00 |
% |
Tier 1 capital (to average assets) |
|
|
173,395 |
|
|
|
27.39 |
% |
|
|
22,227 |
|
|
|
4.00 |
% |
|
|
27,784 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets) |
|
$ |
57,061 |
|
|
|
13.55 |
% |
|
$ |
33,684 |
|
|
|
8.00 |
% |
|
$ |
42,105 |
|
|
|
10.00 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
44,877 |
|
|
|
10.66 |
% |
|
|
16,842 |
|
|
|
4.00 |
% |
|
|
25,263 |
|
|
|
6.00 |
% |
Tier 1 capital (to average assets) |
|
|
44,877 |
|
|
|
9.40 |
% |
|
|
19,097 |
|
|
|
4.00 |
% |
|
|
23,871 |
|
|
|
5.00 |
% |
The Bank has committed to the FDIC to maintain a Tier 1 leverage ratio, calculated as
Tier 1 capital to average assets, of at least 10.00% for the three years following the Public
Offering.
Federal regulations require institutions to set aside specified amounts of cash as reserves
against transaction and time deposits. The daily average gross reserve requirement at December 31,
2010 and 2009 was $720 thousand and $308 thousand, respectively.
The payment of dividends and repurchase of stock by the Company are subject to certain
requirements and limitations of North Carolina corporate law. In addition, as a bank holding
company, the Company must obtain Federal Reserve Board approval prior to repurchasing its Common
Stock in excess of 10% of its consolidated net worth during any twelve-month period unless the
Company (i) both before and after the repurchase satisfies capital requirements for well
capitalized bank holding companies; (ii) is well managed; and (iii) is not the subject of any
unresolved supervisory issues.
The Company is a legal entity separate and apart from the Bank. The primary source of funds
for distributions paid by the Company is dividends from the Bank, and the Bank is subject to laws
and regulations that limit the amount of dividends it can pay. North Carolina law provides that,
subject to certain capital requirements, the Bank generally may declare a dividend out of undivided
profits as the board of directors deems expedient.
In addition to the foregoing, the ability of either the Company or the Bank to pay dividends
may be affected by the various minimum capital requirements and the capital and non-capital
standards established under under federal laws and regulations. Furthermore, if
in the opinion of a federal regulatory agency, a bank under its jurisdiction is engaged in or is
about to engage in an unsafe or unsound practice (which, depending on the financial condition of
the bank, could include the payment of dividends), such agency may require, after notice and
hearing, that such bank cease and desist from such practice. The right of the Company, its
shareholders and its creditors to participate in any distribution of assets or earnings of the Bank
is further subject to the prior claims of creditors against the Bank.
Effective with the first quarter of 2009, FDIC deposit insurance rates were significantly
increased. In addition, during 2009 a special 5 basis point FDIC deposit insurance premium was
assessed. As a result, total deposit insurance costs increased from $135 thousand in 2008 to $900
thousand in 2009 and $648 thousand in 2010. In addition, in December of 2009 insured depository
institutions were required to make an advance payment of estimated FDIC deposit insurance premiums
for the years 2010 through 2012. The Bank was required to make an advance payment totaling $2.1
million which is included in other assets at December 31, 2009. The remaining advance payment at
December 31, 2010 of $1.5 million will be expensed based upon regular quarterly assessments.
68
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
NOTE J LEASES
The Company has noncancelable operating leases for its headquarters and a branch location in
Charlotte, North Carolina that expire on October 31, 2016 and a branch location in Wilmington,
North Carolina that expires on April 30, 2012. The leases contain renewal options at substantially
the same basis as current rental terms. In addition, a noncancelable operating lease for additional
Charlotte office space and a noncancelable lease for a branch location in Charleston, South
Carolina were executed in the first quarter of 2011. The Charlotte leases are with an entity with
respect to which one of the Companys former directors is President. Minimum future rentals under
these leases for the years 2011 through 2015 and thereafter, are as follows:
|
|
|
|
|
2011 |
|
$ |
496 |
|
2012 |
|
|
664 |
|
2013 |
|
|
664 |
|
2014 |
|
|
685 |
|
2015 |
|
|
707 |
|
Thereafter |
|
|
498 |
|
|
|
|
|
Total |
|
$ |
3,714 |
|
|
|
|
|
Rent expense for the years ended December 31, 2010, 2009 and 2008 was $376 thousand, $324
thousand and $313 thousand, respectively.
NOTE K OFF-BALANCE SHEET RISK
In the normal course of business, the Company is party to financial instruments with
off-balance sheet risk necessary to meet the financing needs of clients. These financial
instruments include commitments to extend credit, undisbursed lines of credit and letters of
credit. The instruments involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the Consolidated Balance Sheets. The contract amounts of these instruments
express the extent of involvement the Company has in these financial instruments.
Commitments to extend credit and undisbursed lines of credit are agreements to lend to a
client as long as there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a
fee.
Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a client to a third party. Commercial letters of credit are issued specifically to
facilitate commerce and typically result in the commitment being drawn on when the underlying
transaction is consummated between the customer and a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending loan facilities to
clients. The fair value of these commitments is immaterial at December 31, 2010 and 2009.
Since some of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates
each clients creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, upon extension of credit is based on managements credit
evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds,
and certificates of deposit. In managements opinion, these commitments represent no more than
normal lending risk to the Company and will be funded from normal sources of liquidity.
A summary of the contract amount of the Companys exposure to off-balance sheet risk as of
December 31, 2010 is as follows:
|
|
|
|
|
|
|
Contractual |
|
|
|
Amount |
|
Financial instruments whose contract amounts represent credit risk: |
|
|
|
|
Commitments to extend credit |
|
$ |
3,842 |
|
Undisbursed lines of credit |
|
$ |
69,568 |
|
Standby letters of credit |
|
$ |
2,209 |
|
Commercial letters of credit |
|
$ |
710 |
|
69
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
NOTE L DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company entered into an interest rate swap agreement during June 2007 with a notional
amount of $40.0 million. The derivative instrument was used to protect certain designated variable
rate loans from the downward effects of their repricing in the event of a decreasing rate
environment for a period of three years ending June 2010. This swap was terminated on January 29,
2008. The gain on the terminated swap was $2.0 million. The amount of this gain was recognized in
interest income over the remaining term of the swap, as if it had not been terminated, with the
final amount recognized in income during June 2010. The Company recorded income on the terminated
swap of $353 thousand, $852 thousand and $796 thousand for the years ended December 31, 2010, 2009
and 2008, respectively.
The Company entered into an interest rate swap agreement during May 2008 with a notional
amount of $40.0 million. The derivative instrument is used to protect certain designated variable
rate loans from the downward effects of their repricing in the event of a decreasing rate
environment for a period of three years ending May 16, 2011. If the USD-Prime-H.15 rate (Prime
Rate) remains below 6.22%, the Company receives the difference between 6.22% and the daily
weighted-average Prime Rate for each period. If the Prime Rate increases above 6.22% during the
term of the contract, the Company will pay the difference between 6.22% and the daily
weighted-average Prime Rate for each period. The fair market value of this swap, which is included
in other assets, was $459 thousand and $1.1 million at December 31, 2010 and 2009, respectively.
Changes in fair value of the hedge that are deemed effective are recorded in other comprehensive
income net of tax while the ineffective portion of the hedge is recorded in interest income. The
Company recorded interest income on the swap of $1.2 million, $1.2 million and $379 thousand for
the years ended December 31, 2010, 2009 and 2008, respectively.
During the year ended December 31, 2008, the Company entered into five loan swaps. The total
original notional amount of these loan swaps was $11.2 million. These derivative instruments are
used to protect the Company from interest rate risk caused by changes in the LIBOR curve in
relation to certain designated fixed rate loans. The derivative instruments are used to convert
these fixed rate loans to an effective floating rate. If the LIBOR rate is below the stated fixed
rate of the loan for a given period, the Company will owe the floating rate payer the notional
amount times the difference between LIBOR and the stated fixed rate. If LIBOR is above the stated
rate for any given period during the term of the contract, the Company will receive payments based
on the notional amount times the difference between LIBOR and the stated fixed rate. The loan swaps
have a notional amount of $9.1 million, representing the amount of fixed-rate loans outstanding at
December 31, 2010, and are included in loans at a fair market value of $(569) thousand and $(497)
thousand at December 31, 2010 and 2009, respectively. Changes in fair value of the hedged loans
have been completely offset by the fair value changes in the derivatives. The Company recorded
interest expense on these loan swaps of $342 thousand, $354 thousand and $85 thousand as an
adjustment to loan yield for the years ended December 31, 2010, 2009 and 2008, respectively.
Information on the individual loan swaps at December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating |
|
Original |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate |
|
Notional |
|
Notional |
|
|
Termination |
|
|
Fixed |
|
|
Floating |
|
Payer |
|
Amount |
|
Amount |
|
|
Date |
|
|
Rate |
|
|
Rate |
|
Spread |
|
$ |
2,670 |
|
$ |
2,469 |
|
|
|
04/10/13 |
|
|
|
5.85 |
% |
|
USD-LIBOR-BBA |
|
|
0.238 |
% |
|
1,800 |
|
|
441 |
|
|
|
04/09/13 |
|
|
|
5.80 |
% |
|
USD-LIBOR-BBA |
|
|
0.233 |
% |
|
1,100 |
|
|
1,019 |
|
|
|
05/11/13 |
|
|
|
6.04 |
% |
|
USD-LIBOR-BBA |
|
|
0.227 |
% |
|
3,775 |
|
|
3,572 |
|
|
|
02/15/13 |
|
|
|
5.90 |
% |
|
USD-LIBOR-BBA |
|
|
0.220 |
% |
|
1,870 |
|
|
1,631 |
|
|
|
02/15/13 |
|
|
|
5.85 |
% |
|
USD-LIBOR-BBA |
|
|
0.225 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,215 |
|
$ |
9,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE M FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and due from banks, interest-earning balances at banks,
federal funds sold, investments, loans, accrued interest, borrowings, deposit accounts and interest
rate swaps. Fair value estimates are made at a specific moment in time, based on relevant market
information and information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the Companys entire
holdings of a particular financial instrument. Because no active market readily exists for a
portion of the Companys financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
70
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents Cash and cash equivalents, which are comprised of cash and due
from banks, interest-earning balances at banks and federal funds sold, approximate their fair
value.
Investment Securities Fair value for investment securities is based on the quoted market
price if such information is available. If a quoted market price is not available, fair values are
based on quoted market prices of comparable instruments.
Federal Home Loan Bank Stock The Bank, as a member of the FHLB, is required to maintain an
investment in FHLB capital stock and the carrying amount is estimated to be fair value.
Interest Rate Swap Derivative instruments, including interest rate and loan swaps, are
recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash
flow models. All future floating cash flows are projected and both floating and fixed cash flows
are discounted to the valuation date.
Loans, net of allowance For certain homogenous categories of loans, such as residential
mortgages, fair value is estimated using the quoted market prices for securities backed by similar
loans, adjusted for differences in loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same remaining maturities. Further
adjustments are made to reflect current market conditions. There is no discount for liquidity
included in the expected cash flow assumptions.
Accrued Interest Receivable The carrying amount is a reasonable estimate of fair value.
Deposits The fair value of deposits with no stated maturities, including demand deposits,
savings, money market and NOW accounts, is the amount payable on demand at the reporting date. The
fair value of deposits that have stated maturities, primarily time deposits, is estimated by
discounting expected cash flows using the rates currently offered for instruments of similar
remaining maturities.
Borrowings The fair values of short-term and long-term borrowings are based on discounting
expected cash flows at the interest rate for debt with the same or similar remaining maturities and
collateral requirements.
Accrued Interest Payable The carrying amount is a reasonable estimate of fair value.
Financial Instruments with Off-Balance Sheet Risk With regard to financial instruments with
off-balance sheet risk discussed in Note K Off-Balance Sheet Risk, it is not practicable to
estimate the fair value of future financing commitments.
The carrying amounts and estimated fair values of the Companys financial instruments, none of
which are held for trading purposes, are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
65,378 |
|
|
$ |
65,378 |
|
|
$ |
23,237 |
|
|
$ |
23,237 |
|
Investment securities |
|
|
140,590 |
|
|
|
140,590 |
|
|
|
42,567 |
|
|
|
42,567 |
|
FHLB stock |
|
|
1,757 |
|
|
|
1,757 |
|
|
|
1,896 |
|
|
|
1,896 |
|
Loans, net of allowance |
|
|
387,405 |
|
|
|
382,854 |
|
|
|
390,162 |
|
|
|
385,041 |
|
Interest rate swap |
|
|
459 |
|
|
|
459 |
|
|
|
1,149 |
|
|
|
1,149 |
|
Accrued interest receivable |
|
|
1,640 |
|
|
|
1,640 |
|
|
|
1,614 |
|
|
|
1,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no stated maturity |
|
$ |
107,999 |
|
|
$ |
107,999 |
|
|
$ |
76,393 |
|
|
$ |
76,393 |
|
Deposits with stated maturities |
|
|
299,821 |
|
|
|
300,393 |
|
|
|
316,240 |
|
|
|
316,112 |
|
Swap fair value hedge |
|
|
569 |
|
|
|
569 |
|
|
|
496 |
|
|
|
496 |
|
Borrowings |
|
|
27,769 |
|
|
|
26,913 |
|
|
|
33,884 |
|
|
|
33,263 |
|
Accrued interest payable |
|
|
290 |
|
|
|
290 |
|
|
|
436 |
|
|
|
436 |
|
71
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
The Company utilizes fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures. Securities available-for-sale are recorded at fair
value on a recurring basis. Additionally, from time to time, the Company may be required to record
at fair value other assets on a nonrecurring basis, such as impaired loans. These nonrecurring fair
value adjustments typically involve application of lower of cost or market accounting or
write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions
used to determine fair values. These levels are:
Level 1 Valuation is based upon quoted prices for identical instruments traded in active
markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in the
market.
Level 3 Valuation is generated from model-based techniques that use at least one
significant assumption not observable in the market. These unobservable assumptions reflect
estimates of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques included use of option pricing models, discounted cash flow
models and similar techniques.
Following is a description of valuation methodologies used for assets and liabilities recorded
at fair value.
Investment Securities Available-for-Sale Investment securities available-for-sale are
recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices,
if available. If quoted prices are not available, fair values are measured using independent
pricing models or other model-based valuation techniques such as present value of future cash
flows, adjusted for the securitys credit rating, prepayment assumptions and other factors such
as credit loss assumptions. Level 1 securities include those traded on an active exchange, such
as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in
active over-the-counter markets and money market funds. Level 2 securities include
mortgage-backed securities issued by government-sponsored entities, municipal bonds and corporate
debt securities that are valued using quoted prices for similar instruments in active markets.
Securities classified as Level 3 include a corporate debt security in a less liquid market whose
value is determined by reference to the going rate of a similar debt security if it were to enter
the market at period end. The derived market value requires significant management judgment and
is further substantiated by discounted cash flow methodologies.
Derivative Instruments Derivative instruments held or issued by the Company for risk
management purposes are traded in over-the-counter markets where quoted market prices are not
readily available. For those derivatives, the Company uses a third party to measure the fair
value. The Company classifies derivatives instruments held or issued for risk management purposes
as Level 2. The Companys derivative instruments consist of interest rate and loan swaps.
Loans Loans for which it is probable that payment of interest and principal will not be
made in accordance with the contractual terms of the loan agreement are considered impaired. Once
a loan is identified as individually impaired, management measures it for the estimated
impairment. The fair value of impaired loans is estimated using one of several methods, including
collateral value, a loans observable market price or discounted cash flows. Those impaired loans
not requiring a specific allowance represent loans for which the fair value exceeds the recorded
investments in such loans. Impaired loans where a specific allowance is established based on the
fair value of collateral require classification in the fair value hierarchy. When the fair value
of the collateral is based on an observable market price or a current appraised value, the
Company records the impaired loan as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price for the collateral, the Company records
the impaired loan as nonrecurring Level 3.
At December 31, 2010 and December 31, 2009, substantially all of the total impaired loans
were evaluated based on the fair value of the collateral. The Company recorded the five loans
involved in loan swaps at fair market value on a recurring basis. The Company does not record
other loans at fair value on a recurring basis.
Other Real Estate Owned Other real estate owned (OREO) is adjusted to fair value upon
transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or
fair value. Fair value is based upon independent market prices, appraised values of the
collateral or managements estimation of the value of the collateral. When the fair value of the
collateral is based on an observable market price or a current appraised value, the Company
records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below the appraised
value and there is not an observable market price for the collateral, the Company records the
OREO as nonrecurring Level 3.
72
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
The following tables set forth by level, within the fair value hierarchy, the Companys assets
at fair value at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
|
Other |
|
|
Unobservable |
|
|
Assets/ |
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
Liabilities |
|
Description |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
at Fair Value |
|
2010 recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
|
|
|
$ |
13,160 |
|
|
$ |
|
|
|
$ |
13,160 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
52,399 |
|
|
|
|
|
|
|
52,399 |
|
Collateralized agency mortgage obligations |
|
|
|
|
|
|
58,719 |
|
|
|
|
|
|
|
58,719 |
|
Municipal securities |
|
|
|
|
|
|
13,808 |
|
|
|
|
|
|
|
13,808 |
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
350 |
|
|
|
350 |
|
Corporate and other securities |
|
|
|
|
|
|
2,154 |
|
|
|
|
|
|
|
2,154 |
|
Interest rate swap |
|
|
|
|
|
|
459 |
|
|
|
|
|
|
|
459 |
|
Fair value loans |
|
|
|
|
|
|
9,702 |
|
|
|
|
|
|
|
9,702 |
|
Swap fair value hedge |
|
|
|
|
|
|
(569 |
) |
|
|
|
|
|
|
(569 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
|
|
|
$ |
5,759 |
|
|
$ |
|
|
|
$ |
5,759 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
16,773 |
|
|
|
|
|
|
|
16,773 |
|
Collateralized agency mortgage obligations |
|
|
|
|
|
|
3,221 |
|
|
|
|
|
|
|
3,221 |
|
Municipal securities |
|
|
|
|
|
|
13,884 |
|
|
|
|
|
|
|
13,884 |
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
400 |
|
|
|
400 |
|
Corporate and other securities |
|
|
|
|
|
|
2,530 |
|
|
|
|
|
|
|
2,530 |
|
Interest rate swap |
|
|
|
|
|
|
1,149 |
|
|
|
|
|
|
|
1,149 |
|
Fair value loans |
|
|
|
|
|
|
11,180 |
|
|
|
|
|
|
|
11,180 |
|
Swap fair value hedge |
|
|
|
|
|
|
(496 |
) |
|
|
|
|
|
|
(496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 nonrecurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
$ |
|
|
|
$ |
1,246 |
|
|
$ |
|
|
|
$ |
1,246 |
|
Impaired loans |
|
|
|
|
|
|
|
|
|
|
37,724 |
|
|
|
37,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 nonrecurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
$ |
|
|
|
$ |
1,550 |
|
|
$ |
|
|
|
$ |
1,550 |
|
Impaired loans |
|
|
|
|
|
|
|
|
|
|
5,328 |
|
|
|
5,328 |
|
There were no transfers between valuation levels for any accounts. If different valuation
techniques are deemed necessary, we would consider those transfers to occur at the end of the
period that the accounts are valued.
73
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
The following are reconciliations of the beginning and ending balances for assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) during the years ended December 31, 2010 and 2009.
|
|
|
|
|
|
|
Debt |
|
|
|
Securities |
|
2010 |
|
|
|
|
Balance, beginning of year |
|
$ |
400 |
|
Unrealized losses |
|
|
(50 |
) |
|
|
|
|
Balance, end of year |
|
$ |
350 |
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
Balance, beginning of year |
|
$ |
1,000 |
|
Unrealized losses |
|
|
(100 |
) |
Impairment write-down |
|
|
(500 |
) |
|
|
|
|
Balance, end of year |
|
$ |
400 |
|
|
|
|
|
NOTE N EMPLOYEE AND DIRECTOR BENEFIT PLANS
Employment Contracts The Company has entered into employment agreements with each of its
executive officers to ensure a stable and competent management base. The agreements provide for
terms of three years, but the agreements may be extended. The agreements provide for benefits as
spelled out in the contracts and cannot be terminated by the Board of Directors, except for cause,
without prejudicing the officers rights to receive certain vested rights, including compensation.
In the event of a change in control of the Company and in certain other events, as defined in the
agreements, the Company or any successor to the Company will be bound to the terms of the
contracts.
Retirement Savings Plan The Company has a profit sharing and 401(k) plan for the benefit of
substantially all employees subject to certain minimum age and service requirements. Under this
plan, the Company matches 100% of employee contributions to a maximum of 3% of annual compensation
and 50% of employee contributions greater than 3% to a maximum of 6% of annual compensation, up to
an annual compensation generally equal to the Internal Revenue Services compensation threshold in
effect from time to time. The Companys contribution expense under this plan was $149 thousand,
$145 thousand and $151 thousand for the years ended December 31, 2010, 2009 and 2008, respectively.
Stock Option Plans The Company maintains stock option plans for directors and employees.
During 2010, the Board of Directors of the Bank adopted and stockholders approved, the Park
Sterling Bank 2010 Stock Option Plan for Directors and the Park Sterling Bank 2010 Employee Stock
Option Plan (the 2010 Plans). The 2010 Plans are substantially similar to the 2006 option plans
for directors and employees which provided for an aggregate of 990,000 of common shares reserved
for options. The 2010 Plans provide for an aggregate of 1,859,550 of common shares reserved for
options.
The exercise price of each option under these plans is not less than the market price of the
Companys common stock on the date of the grant. The exercise price of all options outstanding at
December 31, 2010 under these plans ranges from $6.50 to $15.45 and the average exercise price was
$7.83. The Company funds the option shares from authorized but unissued shares. The Company does
not typically purchase shares to fulfill the obligations of the stock benefit plans. Options
granted become exercisable in accordance with the plans vesting schedules which are generally
three years. In connection with the retirement of certain directors following the Banks Public
Offering, vesting of their director options previously awarded in December 2007 was accelerated
from December 2010 to August 2010 at their original exercise price of $13.23 per share. All
unexercised options expire ten years after the date of the grant.
74
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
A summary of option activity under the stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options |
|
|
|
Options |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Available |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
for Future |
|
|
Number |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Grants |
|
|
Outstanding |
|
|
Price |
|
|
Term (Years) |
|
|
Value |
|
At December 31, 2007 |
|
|
203,914 |
|
|
|
786,086 |
|
|
$ |
10.37 |
|
|
|
9.25 |
|
|
$ |
|
|
Granted |
|
|
(8,250 |
) |
|
|
8,250 |
|
|
|
13.86 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired and forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
|
195,664 |
|
|
|
794,336 |
|
|
|
10.41 |
|
|
|
8.26 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired and forfeited |
|
|
5,684 |
|
|
|
(5,684 |
) |
|
|
12.43 |
|
|
|
4.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
201,348 |
|
|
|
788,652 |
|
|
|
10.39 |
|
|
|
7.26 |
|
|
|
|
|
Approved for issuance |
|
|
1,859,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
(1,534,980 |
) |
|
|
1,534,980 |
|
|
|
6.51 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired and forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 |
|
|
525,918 |
|
|
|
2,323,632 |
|
|
$ |
7.83 |
|
|
|
8.50 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010 |
|
|
|
|
|
|
785,902 |
|
|
$ |
10.38 |
|
|
|
6.25 |
|
|
$ |
|
|
A summary of non-vested stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Non-vested |
|
|
Grant Date |
|
|
|
Options |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 |
|
|
382,007 |
|
|
$ |
4.48 |
|
Granted |
|
|
8,250 |
|
|
|
4.69 |
|
Vested |
|
|
(164,952 |
) |
|
|
3.50 |
|
Stock dividend |
|
|
38,194 |
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
|
263,499 |
|
|
|
4.16 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(167,704 |
) |
|
|
3.50 |
|
Forfeited |
|
|
(4,584 |
) |
|
|
4.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
91,211 |
|
|
|
4.51 |
|
Granted |
|
|
1,534,980 |
|
|
|
2.62 |
|
Vested |
|
|
(88,461 |
) |
|
|
4.50 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 |
|
|
1,537,730 |
|
|
$ |
2.63 |
|
|
|
|
|
|
|
|
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model. The fair value of options granted in 2010 and 2008 was $2.62
and $4.96, respectively. No options were granted in 2009. Assumptions used for grants in 2010 were:
risk free interest rate of 2.77%, dividend yield of 0%, volatility of 33%, and average lives of 7
years. Assumptions used for grants in 2008 were: risk free interest rate of 3.53%, dividend yield
of 0%, volatility of 22%, and average lives of 7 years.
75
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
The fair value of options vested was $398 thousand, $665 thousand and $652 thousand for the
years ended December 31, 2010, 2009 and 2008, respectively.
The Company recognized compensation expense for stock option plans of $810 thousand, $642
thousand and $665 thousand for the years ended December 31, 2010, 2009 and 2008, respectively.
There were no tax deductions related to this compensation expense in any of those years. At
December 31, 2010, unrecognized compensation expense related to non-vested stock options of $3.5
million is expected to be recognized over a weighted-average period of 1.65 years.
NOTE O SUBSEQUENT EVENTS
On October 22, 2010, the Board of Directors of the Bank approved an Agreement and Plan of
Reorganization and Share Exchange (the Agreement) whereby the Bank would become a subsidiary of
Park Sterling Corporation, a company incorporated in North Carolina on October 6, 2010 for the
purpose of becoming a holding company for the Bank. The Agreement provided for the statutory share
exchange of all of the Banks common stock held by stockholders for the common stock of Park
Sterling Corporation, on a one-for-one basis.
The Agreement was approved by the Banks stockholders at a special meeting of the Banks
stockholders held on November 23, 2010 (the Special Stockholders Meeting). The holding company
reorganization was consummated on January 1, 2011. Prior to the holding company reorganization,
Park Sterling Corporation conducted no operations other than obtaining regulatory approval for the
holding company reorganization. As this subsequent event is considered a reorganization under
common control, the consolidated financial statements, discussion of the statements and all other
information presented herein for the year ending December 31, 2010 are presented for the Company as
a consolidated entity.
In conjunction with the holding company reorganization, the Banks stockholders also approved
the Park Sterling Corporation Long-Term Incentive Plan (the Incentive Plan) at the Special
Stockholders Meeting, which became effective upon the effectiveness of the reorganization. The
Incentive Plan provides for the issuance of various equity incentives by the Company, to certain
officers, employees, directors, consultants and other service providers. No equity incentives were
issued during 2010 under the Incentive Plan. On February 24, 2011, the Board approved the issuance
of 554,400 restricted common stock awards to certain officers and directors as provided for under
the Incentive Plan, and as contemplated in the Public Offering. The shares vest based on the
attainment of designated market prices of the Companys common stock and expire on February 24,
2021.
On March 30, 2011, the Company and Community Capital Corporation (Community Capital) entered
into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which Community Capital
will be merged with and into the Company, with the Company as the surviving entity (the Merger). Pursuant to the terms of the Merger Agreement, the
Company will pay $3.30 per share of Community Capital common stock, with the consideration to be in
the form of approximately 40% cash and approximately 60% in shares of the Companys common stock.
The Merger Agreement has been approved by the boards of directors of both the Company and Community
Capital. The Merger is subject to customary closing conditions, including regulatory approval and
Community Capital shareholder approval.
76
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share and per share amounts)
NOTE P SUMMARIZED QUARTERLY INFORMATION (UNAUDITED)
A summary of selected quarterly financial information for 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 (unaudited) |
|
|
|
4th |
|
|
3rd |
|
|
2nd |
|
|
1st |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Total interest income |
|
$ |
5,793 |
|
|
$ |
5,559 |
|
|
$ |
5,639 |
|
|
$ |
5,651 |
|
Total interest expense |
|
|
1,896 |
|
|
|
1,929 |
|
|
|
1,882 |
|
|
|
1,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
3,897 |
|
|
|
3,630 |
|
|
|
3,757 |
|
|
|
3,751 |
|
Provision for loan losses |
|
|
8,237 |
|
|
|
6,143 |
|
|
|
1,094 |
|
|
|
1,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision |
|
|
(4,340 |
) |
|
|
(2,513 |
) |
|
|
2,663 |
|
|
|
2,220 |
|
Noninterest income |
|
|
43 |
|
|
|
26 |
|
|
|
23 |
|
|
|
38 |
|
Noninterest expense |
|
|
3,548 |
|
|
|
2,990 |
|
|
|
2,477 |
|
|
|
2,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
(7,845 |
) |
|
|
(5,477 |
) |
|
|
209 |
|
|
|
216 |
|
Income tax expense (benefit) |
|
|
(3,324 |
) |
|
|
(1,809 |
) |
|
|
36 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,521 |
) |
|
$ |
(3,668 |
) |
|
$ |
173 |
|
|
$ |
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
(0.16 |
) |
|
$ |
(0.23 |
) |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
Diluted earnings (loss) per common share |
|
$ |
(0.16 |
) |
|
$ |
(0.23 |
) |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (unaudited) |
|
|
|
4th |
|
|
3rd |
|
|
2nd |
|
|
1st |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Total interest income |
|
$ |
5,650 |
|
|
$ |
5,568 |
|
|
$ |
5,389 |
|
|
$ |
5,061 |
|
Total interest expense |
|
|
2,021 |
|
|
|
2,283 |
|
|
|
2,336 |
|
|
|
2,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
3,629 |
|
|
|
3,285 |
|
|
|
3,053 |
|
|
|
2,411 |
|
Provision for loan losses |
|
|
1,418 |
|
|
|
1,150 |
|
|
|
419 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision |
|
|
2,211 |
|
|
|
2,135 |
|
|
|
2,634 |
|
|
|
2,126 |
|
Noninterest income (loss) |
|
|
14 |
|
|
|
26 |
|
|
|
(335 |
) |
|
|
2 |
|
Noninterest expense |
|
|
2,078 |
|
|
|
2,018 |
|
|
|
2,044 |
|
|
|
1,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
147 |
|
|
|
143 |
|
|
|
255 |
|
|
|
271 |
|
Income tax expense |
|
|
29 |
|
|
|
27 |
|
|
|
97 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
118 |
|
|
$ |
116 |
|
|
$ |
158 |
|
|
$ |
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
Diluted earnings per common share |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
77
|
|
|
Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures |
None.
|
|
|
Item 9A. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this
Annual Report on Form 10-K, management of the Company, under the supervision and with the
participation of the Companys Chief Executive Officer and Chief Financial Officer, carried out an
evaluation of the effectiveness of the Companys disclosure controls and procedures as defined in
Rule 13a-15(e) of the Exchange Act. Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective as of such date.
Managements Annual Report on Internal Control Over Financial Reporting. This Annual Report on
Form 10-K does not include a report of managements assessment regarding internal control over
financial reporting due to a transition period established by rules of the SEC for newly public
companies.
Changes in Internal Control Over Financial Reporting. There was no change in the Companys
internal control over financial reporting that occurred during the fourth fiscal quarter of 2010
that has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
|
|
|
Item 9B. |
|
Other Information |
None.
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance |
Board of Directors. The following persons currently serve as members of the Companys Board of
Directors:
Walter C. Ayers, Jr.
Retired President and Chief Executive Officer, Virginia Bankers Association.
Leslie M. (Bud) Baker, Jr.
Chairman of the Board, Park Sterling Corporation and Park Sterling Bank.
Retired Chairman of the Board, Wachovia Corporation.
Larry W. Carroll.
President, Carroll Financial Associates, Inc.
James. C. Cherry.
Chief Executive Officer, Park Sterling Corporation and Park Sterling Bank.
Jean E. Davis.
Retired head of Operations, Technology and e-Commerce, Wachovia Corporation.
Thomas B. Henson.
President and Chief Executive Officer, Henson-Tomlin Interests, LLC.
Senior Managing Partner, Southeastern Private Investment Fund.
Jeffrey S. Kane.
Retired Senior Vice President in charge of Charlotte office, Federal Reserve Bank of
Richmond.
Biographical information for each member of the Board of Directors can be found in the
Companys Proxy Statement for its 2011 Annual Meeting of Shareholders, scheduled to be held on May
25, 2011 (the 2011 Proxy Statement) under the caption Election of Directors, which section is
incorporated herein by reference.
78
Executive Officers. The following persons have been designated as the Companys executive officers:
James C. Cherry. Mr. Cherry, age 60, has been Chief Executive Officer of the Company since
its formation and Chief Executive Officer of the Bank since its Public Offering. Prior
experience includes being Chief Executive Officer for the Mid-Atlantic Banking sector of
Wachovia Bank, N.A. from September 2001 to June 2006, and leading the General Bank merger
integration of First Union National Bank and Wachovia Bank, N.A. and of SouthTrust Bank into
Wachovia Bank, N.A. for the Mid-Atlantic Region. Prior to the merger of Wachovia Corporation
and First Union Corporation, Mr. Cherry was Regional Executive/President of Virginia Banking
at Wachovia from March 1998 through August 2001. Other Wachovia leadership experiences
include serving as Head of Trust and Investment Management for the Wachovia Corporation and
various positions in North Carolina including Regional Executive, Area Executive, City
Executive, Corporate Banking and Loan Administration Manager, and Retail Banking Branch
Manager. In addition, Mr. Cherry served as Chairman of the Virginia Bankers Association from
June 2006 to June 2007. Mr. Cherry has over 31 years of banking experience.
Bryan F. Kennedy III. Mr. Kennedy, age 53, has been President of the Company since its
formation and President of the Bank since its Public Offering. Prior to the Banks Public
Offering, he served as President and Chief Executive Officer of the Bank since its formation
in October 2006. Prior to helping organize the Bank in 2006, he served in various roles at
Regions Bank, including President-North Carolina from November 2004 to January 2006,
President-Charlotte from January 2003 to November 2004, and Executive Vice President from
November 2001 to January 2003. From June 1991 to November 2001 he served initially as Senior
Vice President and then as Executive Vice President of Park Meridian Bank, which was acquired
by Regions Financial Corporation in November 2001. Mr. Kennedy serves on the Board of
Directors of Cato Corporation, a publicly traded company. Mr. Kennedy has over 29 years of
banking experience.
David L. Gaines. Mr. Gaines, age 51, has been Executive Vice President and Chief Financial
Officer of the Company since its formation and Executive Vice President and Chief Financial
Officer of the Bank since its Public Offering. He was the deputy and then Chief Risk Officer
for Corporate and Investment Banking at Wachovia Corporation. from September 2001 to November
2006. Prior to that, he was Senior Vice President and Comptroller of Wachovia Corporation
from July 2000 to September 2001. Other Wachovia experiences include the coordination of the
Merger Integration Project Office for the Wachovia-First Union merger, leadership of Risk
Management for Wachovia Capital Markets and U.S. Corporate Banking and various
geographically-based relationship management positions. Mr. Gaines has over 23 years of
banking experience.
Nancy J. Foster. Ms. Foster, age 49, has been Executive Vice President and Chief Risk
Officer of the Company and the Bank since November 2010. Prior to joining the Bank, she was
first Executive Vice President and Chief Credit Officer and then Executive Vice President and
Chief Risk & Credit Officer of CIT Group from January 2007 to December 2009. She was Group
Senior Vice President, Specialized Lending at LaSalle Bank/ABNAmro from March 2005 to January
2007, Group Senior Vice President, Credit Policy and Portfolio Management from August 2001 to
March 2005, Group Senior Vice President and Chief Credit Officer, Asset Based Lending and
Metropolitan Commercial Banking from 1999 to 2001, and Executive Vice President and Chief
Credit Officer, Community Banks from 1993 to 1999. Ms. Foster previously held various
lending and managerial roles in Middle Market Banking at LaSalle Bank. Ms. Foster has over 27
years of banking experience.
Additional Information. The additional information required by this Item 10 appears under the
captions Election of Directors Committees of the Board of Directors Audit Committee,
Corporate Governance Matters Audit Committee Financial Expert and Code of Ethics, and
Section 16 Beneficial Ownership Reporting Compliance in the 2011 Proxy Statement, which sections
are incorporated herein by reference.
|
|
|
Item 11. |
|
Executive Compensation |
The information required by this Item 11 appears under the captions Election of Directors
Compensation of Directors and Executive Compensation in the 2011 Proxy Statement, which sections
are incorporated herein by reference.
79
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
The information required by this Item 12 regarding the security ownership of certain
beneficial owners and management appears under the caption Beneficial Ownership of Common Stock
in the 2011 Proxy Statement, which section is incorporated herein by reference. The following
table sets forth summary information regarding the Companys equity compensation plans as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
Number of securities remaining |
|
|
|
Number of securities to |
|
|
Weighted-average |
|
|
available for future issuance under |
|
|
|
be issued upon exercise |
|
|
exercise price of |
|
|
equity compensation plans (excluding |
|
Plan category |
|
of outstanding options |
|
|
outstanding options |
|
|
securities reflected in column (a)) |
|
Equity compensation plans
approved by our stockholders |
|
|
2,323,632 |
|
|
$ |
7.83 |
|
|
|
525,918 |
|
Equity compensation plans not
approved by our stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,323,632 |
|
|
$ |
7.83 |
|
|
|
525,918 |
|
|
|
|
|
|
|
|
|
|
|
A description of the Companys equity compensation plans is presented in Note N Employee and
Director Benefit Plan to the Consolidated Financial Statements.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item 13 appears under the captions Corporate Governance
Director Independence and Transactions with Related Persons and Certain Control Persons in the
2011 Proxy Statement, which sections are incorporated herein by reference.
|
|
|
Item 14. |
|
Principal Accounting Fees and Services |
The information required by this Item 14 appears under the captions Ratification of the
Independent Registered Public Accounting Firm Fees and Policy on Audit Committee
Pre-Approval of Audit and Permissible Non-Audit Services by the Independent Registered Public
Accounting Firm in the 2011 Proxy Statement, which sections are incorporated herein by reference.
With the exception of the information expressly incorporated herein by reference, the 2011
Proxy Statement shall not be deemed filed as part of this report.
PART IV
|
|
|
Item 15. |
|
Exhibits and Financial Statement Schedules |
The following documents are filed as part of this report:
(a) Financial statements, included in Part II, Item 8. Financial Statements and
Supplementary Data:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income (Loss)
Consolidated Statements of Changes in Shareholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Schedules: None
(b) Exhibits: The exhibits listed on the Exhibit Index of this Annual Report on Form 10-K are
filed herewith or have been previously filed and are incorporated herein by reference to other
filings.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
Park Sterling Corporation
|
|
March 31, 2011 |
By: |
/S/ JAMES C. CHERRY
|
|
|
|
James C. Cherry |
|
|
|
Chief Executive Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
/S/ JAMES C. CHERRY
James C. Cherry
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
March 31, 2011 |
|
|
|
/S/ DAVID L. GAINES
David L. Gaines
Chief Financial Officer
(Principal Financial Officer)
|
|
March 31, 2011 |
|
|
|
/S/ STEPHEN A. ARNALL
Stephen A. Arnall
Treasurer
(Principal Accounting Officer)
|
|
March 31, 2011 |
|
|
|
/S/ WALTER C. AYERS
Walter C. Ayers
Director
|
|
March 31, 2011 |
|
|
|
/S/ LESLIE M. BAKER JR.
Leslie M. Baker Jr.
Chairman of the Board
|
|
March 31, 2011 |
|
|
|
/S/ LARRY W. CARROLL
Larry W. Carroll
Director
|
|
March 31, 2011 |
|
|
|
/S/ JEAN E. DAVIS
Jean E. Davis
Director
|
|
March 31, 2011 |
|
|
|
/S/ THOMAS B. HENSON
Thomas B. Henson
Director
|
|
March 31, 2011 |
|
|
|
/S/ JEFFREY S. KANE
Jeffrey S. Kane
Director
|
|
March 31, 2011 |
81
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
2.1 |
|
|
Agreement and Plan of Reorganization and Share Exchange
dated October 22, 2010 by and between the Bank and the
Company, incorporated by reference to Exhibit 2.1 of the
Companys Current Report on Form 8-K (File No. 001-35032)
filed January 13, 2011 |
|
|
|
|
|
|
3.1 |
|
|
Articles of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 of the Companys Current Report on
Form 8-K (File No. 001-35032) filed January 13, 2011 |
|
|
|
|
|
|
3.2 |
|
|
Bylaws of the Company, incorporated by reference to Exhibit
3.2 of the Companys Current Report on Form 8-K (File No.
001-35032) filed January 13, 2011 |
|
|
|
|
|
|
4.1 |
|
|
Specimen Stock Certificate of the Company, incorporated by
reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K (File No. 001-35032) filed January 13, 2011 |
|
|
|
|
|
|
4.2 |
|
|
Form of 11% Subordinated Note, due June 30, 2019,
incorporated by reference to Exhibit 4.2 of the Companys
Current Report on Form 8-K (File No. 001-35032) filed
January 13, 2011 |
|
|
|
|
|
|
4.3 |
|
|
Notes Agency Agreement by and between the Bank and
First-Citizens Bank & Trust Company, dated June 29, 2009 in
connection with the 11% Subordinated Notes due June 30,
2019, incorporated by reference to Exhibit 10.5 of the
Banks Registration Statement on Form 10 filed with the
FDIC on April 26, 2010 |
|
|
|
|
|
|
10.1 |
|
|
Underwriting Agreement dated August 12, 2010 between the
Bank and Keefe, Bruyette & Woods, Inc. as representative of
the several underwriters, incorporated by reference to
Exhibit 1.1 of the Banks Current Report on Form 8-K filed
with the FDIC on August 18, 2010 |
|
|
|
|
|
|
10.2 |
|
|
Employment Agreement by and between James C. Cherry and the
Bank effective August 18, 2010, incorporated by reference
to Exhibit 10.1 of the Companys Current Report on Form 8-K
(File No. 001-35032) filed January 13, 2011* |
|
|
|
|
|
|
10.3 |
|
|
Employment Agreement by and between Bryan F. Kennedy III
and the Bank effective August 18, 2010, incorporated by
reference to Exhibit 10.2 of the Companys Current Report
on Form 8-K (File No. 001-35032) filed January 13, 2011* |
|
|
|
|
|
|
10.4 |
|
|
Employment Agreement by and between David L. Gaines and the
Bank effective August 18, 2010, incorporated by reference
to Exhibit 10.3 of the Companys Current Report on Form 8-K
(File No. 001-35032) filed January 13, 2011* |
|
|
|
|
|
|
10.5 |
|
|
Employment Agreement by and between Nancy J. Foster and the
Bank dated November 12, 2010* |
|
|
|
|
|
|
10.6 |
|
|
Employment Agreement by and between Stephen A. Arnall and
the Bank effective October 4, 2006, incorporated by
reference to Exhibit 10.2 of the Banks Registration
Statement on Form 10 filed with the FDIC on April 26, 2010* |
|
|
|
|
|
|
10.7 |
|
|
Park Sterling Bank 2006 Employee Stock Option Plan and
related form of award agreement, incorporated by reference
to Exhibit 10.4 of the Companys Current Report on Form 8-K
(File No. 001-35032) filed January 13, 2011* |
|
|
|
|
|
|
10.8 |
|
|
Park Sterling Bank 2006 Stock Option Plan for Directors and
related form of award agreement, incorporated by reference
to Exhibit 10.5 of the Companys Current Report on Form 8-K
(File No. 001-35032) filed January 13, 2011* |
|
|
|
|
|
|
10.9 |
|
|
Park Sterling Bank 2010 Employee Stock Option Plan and
related form of award agreement, incorporated by reference
to Exhibit 4.3 of the Companys Registration Statement on
Form S-8 (Registration No. 333-172016) filed February 2,
2011* |
82
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
10.10 |
|
|
Park Sterling Bank 2010 Stock Option Plan for Directors and
related form of award agreement, incorporated by reference
to Exhibit 4.4 of the Companys Registration Statement on
Form S-8 (Registration No. 333-172016) filed February 2,
2011* |
|
|
|
|
|
|
10.11 |
|
|
Park Sterling Corporation Long-Term Incentive Plan and
related form of award agreements incorporated by reference
to Exhibit 10.8 of the Companys Current Report on Form 8-K
(File No. 001-35032) filed January 13, 2011* |
|
|
|
|
|
|
10.12 |
|
|
Form of Non-Employee Director Nonqualified Stock Option Award pursuant to the
Park Sterling Corporation Long-Term Incentive Plan * |
|
|
|
|
|
|
10.13 |
|
|
Form of Employee Restricted Stock Award Agreement pursuant
to the Park Sterling Corporation Long-Term Incentive Plan * |
|
|
|
|
|
|
10.14 |
|
|
Form of Non-Employee Director Restricted Stock Award Agreement pursuant
to the Park Sterling Corporation Long-Term Incentive Plan * |
|
|
|
|
|
|
21.1 |
|
|
Subsidiaries of the Company |
|
|
|
|
|
|
23.1 |
|
|
Consent of Dixon Hughes PLLC |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
83