Park Sterling Corp. Reports Q2 Net Income of $678K

7/26/12


Park Sterling Corporation (Nasdaq:PSTB), the holding company for Park Sterling Bank, released unaudited results of operations and other financial information for the second quarter of 2012. Highlights for the quarter compared to the three months and period ended March 31, 2012 include:
? Reported net income of $678,000, or $0.02 per share
? Increased non-acquired loan portfolio $15.5 million, or 4%, to $402.4 million
? Increased noninterest income, excluding gain on sale of securities, $148,000, or 8%, to $2.1 million
? Decreased nonperforming loans $1.5 million, or 7%, to 2.85% of total loans
? Decreased nonperforming assets $3.5 million, or 9%, to 3.13% of total assets
? Maintained strong capitalization, with tangible common equity to tangible assets of 17.02%
? Entered into definitive merger agreement with Citizens South Banking Corporation

"Park Sterling's second quarter was marked by a return to net loan growth in our metro markets, continued improvement in asset quality and continued profitability," said James C. Cherry, Chief Executive Officer. "We reported net income of $678,000, or $0.02 per share, for the quarter, compared to net income of $1.7 million, or $0.05 per share, in the first quarter. The decrease from the prior period resulted primarily from quarter-to-quarter fluctuations associated with both acquired loan accounting and cyclical loan collection and OREO expenses, which were partially offset by a gain on the sale of securities. We are very pleased with the company's financial results for both the quarter and the first six months of the year.
We are particularly pleased that each of our metro markets, as well as our asset-based lending team, was able to generate net loan growth this quarter despite what appears to be a continued deleveraging trend among borrowers. Our origination efforts also remain somewhat tempered by increasingly aggressive rates and term structures available in our markets. This aggressive environment, however, has contributed to our remediating problem assets more quickly than originally anticipated as a result of the refinancing options available to borrowers, as evidenced by the improvement in both nonperforming loans and nonperforming assets during the quarter. Other measures of asset quality also improved during the period and, assuming we do not experience a "double-dip" recession, we expect asset quality, in general, to either remain stable or improve throughout the remainder of the year.
Finally, let me again share my excitement about Park Sterling's proposed merger with Citizens South. Our combined management team is working extremely well together towards closing the transaction so that we can then focus on building the premier community bank in the Charlotte-Gastonia-Rock Hill MSA, and expanding our growing presence in other attractive markets across the Carolinas and North Georgia. Our integration teams are working diligently to ensure we meet our merger timeframes and objectives. Efforts to date have included filing a preliminary joint proxy statement and prospectus with the Securities and Exchange Commission, filing applications for approval of both the holding company merger and the subsidiary bank merger with the appropriate federal and state regulators, and working toward completion of our integration plans. This work has reinforced our belief in the strong business and cultural fits between our two companies. We remain confident, subject to receipt of applicable regulatory and shareholder approvals, that this transformational partnership will be positive for our shareholders, customers, communities and employees."
Second Quarter 2012 Financial Results
Net Income (Loss)
Three Month Results

Park Sterling reported net income of $678,000, or $0.02 per share, for the three months ended June 30, 2012. This compares to net income of $1.7 million, or $0.05 per share, for the three months ended March 31, 2012 and a net loss of $3.1 million, or $0.11 per share, for the three months ended June 30, 2011. The decrease in net income from the prior quarter primarily reflects quarter-to-quarter fluctuations both from accounting for acquired loans and from expenses associated with problem assets, partially offset by a gain on the sale of securities. The increase in net income from the prior year resulted primarily from the inclusion of Community Capital Corporation ("Community Capital"), which was merged into Park Sterling in the fourth quarter of 2011, and the company's organic growth initiatives.
Net interest income totaled $10.1 million for the three months ended June 30, 2012, which represented a $1.6 million, or 14%, decrease from the first quarter of 2012 and a $6.3 million, or 168%, increase from the second quarter of 2011. The decrease from the three months ended March 31, 2012 resulted from a $1.7 million, or 14%, decline in interest income from loans, which more than offset improved funding costs. The largest contributor to this drop in loan interest income was lower accelerated accretion from credit and interest rate marks associated with acquisition accounting adjustments for performing acquired loans, as accounted for under the contractual cash flow method of accounting. Accelerated mark accretion decreased $1.2 million, or 81%, for the three months ended June 30, 2012 compared to the three months ended March 31, 2012. The higher accelerated accretion in the first quarter of 2012 resulted from more borrowers repaying loans faster than required by their contractual terms and/or restructuring loans in such a way as to effectively result in a new loan under the contractual cash flow method of accounting, both of which result in the associated remaining credit and interest rate marks being fully accreted into interest income. The increase in net interest income from the three months ended June 30, 2011 was due to higher average earning balances and net interest margin resulting from the merger with Community Capital and the company's organic growth initiatives.  
Net interest margin was 4.01% in the second quarter of 2012, representing a 64 basis point decrease from 4.65% in the first quarter of 2012 and a 141 basis point improvement from 2.60% in the second quarter of 2011. The decrease in accelerated accretion accounted for 48 basis points, or 75%, of the total decline in net interest margin compared to the first quarter of 2012. A decrease in yields on investments and expected contraction in normal accretion from acquired loans accounted for the remaining difference. The increase in net interest margin from the second quarter of 2011 reflects the inclusion of higher rate loans acquired in the Community Capital merger, normal accretion from credit and interest rate marks associated with acquisition accounting adjustments, and reduced funding costs due, primarily, to lower pricing on interest bearing deposits and improved deposit mix. Excluding the effects of accelerated accretion, net interest margin was 3.90% for the three months ended June 30, 2012, compared to 4.07% for the three months ended March 31, 2012 and compared to 2.60% for the three months ended June 30, 2011.
Provision for loan losses was $899,000 for the three months ended June 30, 2012, compared to $123,000 in the first quarter of 2012 and $3.2 million in the second quarter of 2011. The increase from the first quarter included $450,000 of provision expense associated with acquired loans, comprised of a $195,000 specific reserve associated with an acquired performing loan and a $255,000 impairment in one of the company's six purchase credit impaired (PCI) loan pools. This impairment occurred despite an overall increase in expected cash flows associated with PCI loans of $5.1 million during the quarter. The decrease in provision expense from the second quarter of 2011 resulted from improvement in asset quality.
Noninterest income increased $637,000, or 33%, from the first quarter of 2012 to $2.6 million for the three months ended June 30, 2012. This increase included a $489,000 gain on the sale of securities, which partially offset merger-related expenses, volatility from acquired loan accounting and cyclical loan collection and OREO expenses. Excluding the gain on sale of securities, noninterest income increased $148,000, or 8%, to $2.1 million in the second quarter of 2012 compared to the first quarter of 2012. This improvement in core operations reflects continued strength in both the company's mortgage operations, which reported a $79,000, or 17%, increase in revenues to $540,000, and its wealth management activities, which reported a $62,000, or 10%, increase in revenues to $661,000. Noninterest income was a modest $44,000 for the three months ended June 30, 2011 due to the company's more limited product capabilities prior to the merger with Community Capital.
Noninterest expenses totaled $10.9 million for the second quarter of 2012, which represented a $140,000, or 1%, decrease compared to $11.0 million for the first quarter of 2012 and a $5.4 million, or 98%, increase compared to $5.5 million for the second quarter of 2011. Excluding merger-related expenses of $434,000 and $930,000, respectively, noninterest expenses increased $356,000, or 4%, to $10.4 million for the three months ended June 30, 2012, compared to $10.1 million for the three months ended March 31, 2012. This increase resulted primarily from cyclical loan collection and OREO expenses, which together grew $338,000, or 44%, to $1.1 million in the second quarter of 2012, compared to $766,000 in the first quarter of 2012. Data processing and service fees, occupancy and equipment, and other expenses also increased during the second quarter, but were generally offset by a decrease in personnel expenses. The increase in noninterest expense from the second quarter of 2011 resulted from the merger with Community Capital and the company's growth initiatives.        
Six Month Results
Park Sterling reported net income of $2.4 million, or $0.07 per share, for the six months ended June 30, 2012 compared to a net loss of $6.0 million, or $0.21 per share, for the six months ended June 30, 2011. Net interest income increased $14.1 million, or 182%, to $21.8 million as a result of higher earning assets and improved margins resulting from the merger with Community Capital and the company's growth initiatives. Provision expense decreased $6.7 million, or 87%, to $1.0 million as a result of improved asset quality. Noninterest income increased from $116,000 to $4.5 million as a result of new product capabilities from the merger with Community Capital. Noninterest expense increased from $9.7 million to $21.9 million due to the merger with Community Capital, the company's growth initiatives and increased OREO expenses.
Balance Sheet and Capital
Linked-Quarter Comparisons

Total assets decreased $11.6 million, or 1%, to $1.1 billion at June 30, 2012 compared to the total assets at March 31, 2012. Cash and investments increased $11.2 million, or 4%, to $297.4 million as a result of cash generated during the second quarter from declining loan balances. Total loans, which exclude loans held for sale, decreased $15.4 million, or 2%, to $712.5 million at June 30, 2012. This decrease included a $30.9 million, or 9%, reduction in acquired loans to $310.1 million, which was partially offset by a $15.5 million, or 4%, increase in non-acquired loans to $402.4 million. The decrease in acquired loans reflects both targeted reductions by the company and repayments resulting from improved borrower conditions. The net increase in non-acquired loans was driven by both new loan originations and transfers from performing acquired loan pools (due to restructurings). New loan origination remains somewhat tempered as a result of aggressive competition in the market with respect to interest rate and term structures. However, the company posted net loan growth in each of its metropolitan markets of Charlotte, Raleigh and Wilmington, North Carolina, and Greenville and Charleston, South Carolina, as well as in its asset-based lending group, during the second quarter, excluding loans managed in the company's special assets group.   
Loan mix shifted modestly during the second quarter. The combination of commercial and industrial and owner-occupied real estate loans decreased $8.9 million, or 4%, to $229.3 million, due to lower usage under lines of credit and aggressive competition for owner-occupied loans. This component of the portfolio represented 32.2% of total loans at June 30, 2012 compared to 32.7% at March 31, 2012. Investor owned real estate loans increased $3.7 million, or 2%, to $197.4 million, and represented 27.7% of total loans at June 30, 2012 compared to 26.6% at March 31, 2012. Construction and development loans increased $436,000 to $112.2 million, due to non-speculative origination activity, and represented 15.7% of total loans at June 30, 2012 compared to 15.4% at March 31, 2012. Home equity lines of credit decreased $2.4 million, or 3%, to $83.7 million during the second quarter, due in part to lower usage, and represented 11.7% of total loans at June 30, 2012 compared to 11.8% at March 31, 2012. Finally, 1-4 family loans decreased $8.5 million, or 11%, to $66.9 million, as the company deemphasized balance sheet mortgage products and remediated problem assets, and represented 9.4% of total loans compared to 10.4% in the prior quarter.  
Total deposits decreased $14.4 million, or 2%, during the second quarter to $842.0 million, reflecting lower funding needs. Deposit mix continued to improve.  Demand deposits increased $9.9 million, or 7%, during the second quarter due primarily to continued emphasis in this area and represented 18.9% of total deposits at June 30, 2012, compared to 17.4% at March 31, 2012. Money market, NOW and savings deposits increased $3.0 million, or 1%, during the second quarter and represented 39.5% of total deposits at June 30, 2012 compared to 38.5% at March 31, 2012. Non-brokered time deposits decreased $14.4 million, or 6%, during the second quarter due primarily to re-pricing strategies intended to enhance profitability. As a result, non-brokered time deposits declined to 24.9% of total deposits at June 30, 2012 from 26.2% at March 31, 2012. Finally, brokered deposits decreased $12.9 million, or 8%, to $140.5 at June 30, 2012 million due to lower funding needs. Brokered deposits represented 16.7% of total deposits at June 30, 2012, compared to 17.9% at March 31, 2012.
Modestly higher short-term borrowings led to a $924,000, or 1%, increase in total funded debt to $69.2 million at June 30, 2012, compared to $68.2 million at March 31, 2012. Borrowings currently include $5.6 million of Tier 1-eligible subordinated debt and $6.9 million of Tier 2-eligible subordinated debt. Shareholders' equity increased $1.4 million, or 1%, to $194.2 million at June 30, 2012. Tangible common equity as a percentage of tangible assets remained very strong at 17.02%. Tier 1 leverage ratio also remained very strong at 14.92%.
Prior Year Comparisons
Total assets increased $508.5 million, or 83%, to $1.1 billion at June 30, 2012, compared to $610.7 million at June 30, 2011. This increase reflects both the merger with Community Capital and the company's organic growth initiatives. Cash and investments increased $83.7 million, or 39%, and total loans increased $332.1 million, or 87%, net of acquisition accounting fair market value adjustments, compared to the prior year period. Loan mix improved over the twelve months, with exposure to construction and development loans declining from 18.6% of total loans at June 30, 2011 to 15.7% of total loans at June 30, 2012. In addition, from June 30, 2011 to June 30, 2012, the combination of commercial and industrial and owner-occupied real estate increased from 29.2% to 32.2% of total loans, 1-4 family increased from 5.7% to 9.4% of total loans, and HELOC decreased from 14.8% to 11.7% of total loans. 
Total deposits increased $438.1 million, or 108%, to $842.0 million at June 30, 2011, compared to $403.9 million at June 30, 2011. This increase reflects both the merger with Community Capital and the company's organic growth initiatives. Deposit mix improved over the prior twelve months, with demand deposits increasing from 10.4% to 18.9% of total deposits, MMDA, NOW and savings increasing from 27.5% to 39.5% of total deposits, and brokered deposits decreasing from 23.7% of total deposits at June 30, 2011 to 16.7% of total deposits at June 30, 2012. 
Total borrowings increased $40.6 million, or 142%, to $69.2 million at June 30, 2012, compared to $28.6 million at June 30, 2011 due to the assumption of debt, net of acquisition accounting fair market value adjustments, at Community Capital. Shareholders' equity increased $20.6 million, or 12%, to $194.2 million due primarily to the issuance of 4,024,269 shares as consideration in the Community Capital merger, which represented approximately $15.5 million of equity capital.
Asset Quality
Asset quality continued to improve during the second quarter of 2012, reflecting stabilizing economic conditions in the company's markets, continued management focus on problem assets and continued discipline in the origination of new loans.  Pass grade loans increased to 94.0% of total loans (excluding loans held for sale and deferred fees) at June 30, 2012, up from 92.6% at March 31, 2012 and 83.0% at June 30, 2011. Nonperforming loans decreased $1.5 million, or 7%, during the second quarter, to $20.3 million, or 2.85% of total loans, at June 30, 2012. This compares to 3.00% of total loans at March 31, 2012 and 7.25% of total loans at June 30, 2011. Nonperforming assets decreased $3.5 million, or 9%, during the second quarter, to $35.1 million and represented 3.13% of total assets at June 30, 2012. This compares to 3.41% of total assets at March 31, 2012 and 5.34% of total assets at June 30, 2011. Within nonperforming assets, OREO decreased $1.9 million, or 12%, to $14.7 million during the second quarter as sales of properties outpaced new foreclosures. 
Net charge-offs increased $303,000, or 42%, to $1.0 million in the second quarter of 2012, representing 0.56% of average loans (annualized). This compares to net charge-offs of $721,000, or 0.39% of average loans (annualized) in the first quarter of 2012, and compares to net charge-offs of $3.7 million, or 3.87% of total loans (annualized) in the second quarter of 2011. The allowance for loan losses was $9.4 million, or 1.32% of total loans at June 30, 2012. This compares to $9.6 million, or 1.31% of total loans, at March 31, 2012, and $11.3 million, or 2.96% of total loans, at June 30, 2011. The reduction in the total allowance at June 30, 2012 reflects the overall decline in total loans during the second quarter, while the slight increase in the allowance percentage reflects the provision expense driven by the accounting for acquired loans. Adjusting for acquired loans, the allowance for loan losses represented 2.23% of non-acquired loans at June 30, 2012, compared to 2.47% of non-acquired loans at March 31, 2012.
During the first quarter of 2011, and as contemplated in the 2010 equity offering, 568,260 shares of restricted stock were issued but will not vest until the company's share price achieves certain performance thresholds above the equity offering price (these restricted stock awards vest one-third each at $8.125, $9.10 and $10.40 per share, respectively). Accordingly, these additional shares have been excluded from earnings and tangible book value per share calculations.
About Park Sterling Corporation
Park Sterling Corporation is the holding company for Park Sterling Bank, headquartered in Charlotte, North Carolina. Park Sterling's primary focus is to provide financial services to small and mid-sized businesses, owner-occupied and income producing real estate owners, professionals and consumers doing business or residing within its target markets. Park Sterling offers a full array of banking services, including a diverse wealth management group. Park Sterling is focused on building a banking franchise across the Carolinas and Virginia that is noted for sound risk management, superior customer service and exceptional client relationships. For more information, visit www.parksterlingbank.com. Park Sterling's shares are traded on NASDAQ under the symbol PSTB.
 

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