UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 001-35032
PARK STERLING CORPORATION |
(Exact name of registrant as specified in its charter) |
NORTH CAROLINA | 27-4107242 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
1043 E. Morehead Street, Suite 201 | |
Charlotte, North Carolina | 28204 |
(Address of principal executive offices) | (Zip Code) |
(704) 716-2134
(Registrant’s telephone number, including area code)
___________________________
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | | Name of each exchange on which registered |
Common Stock, $1.00 par value | | NASDAQ Global Select Market |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
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☐ No☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
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 registrant’s 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. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | | Accelerated filer ☑ |
| | |
Non-accelerated filer ☐ | (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
As of June 30, 2013, the aggregate market value of the common stock of the registrant held by non-affiliates was approximately $242,938,133 (based on the closing price of $5.87 per share on June 28, 2013). 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 February 28, 2014 was 44,739,799.
Documents Incorporated by Reference
Portions of the registrant’s Definitive Proxy Statement for its 2014 Annual Meeting of Shareholders scheduled to be held on May 22, 2014 are incorporated by reference into Part III, Items 10-14.
PARK STERLING CORPORATION
Table of Contents | |
| | | Page No. |
Part I | | |
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Item 1. | Business | 2 |
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Item 1A. | Risk Factors | 13 |
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Item 1B. | Unresolved Staff Comments | 24 |
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Item 2. | Properties | 24 |
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Item 3. | Legal Proceedings | 24 |
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Item 4. | Mine Safety Disclosures | 24 |
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Part II | | |
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities | 25 |
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Item 6. | Selected Financial Data | 27 |
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Item 7. | Management’s Discussion and Analysis of Financial Condition andResults of Operations | 28 |
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Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 59 |
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Item 8. | Financial Statements and Supplementary Data | 60 |
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| Item 9. | Changes in and Disagreements with Accountants on Accountingand Financial Disclosure | 123 |
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| Item 9A. | Controls and Procedures | 123 |
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| Item 9B. | Other Information | 124 |
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| Part III | | |
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| Item 10. | Directors, Executive Officers and Corporate Governance | 125 |
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| Item 11. | Executive Compensation | 127 |
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| Item 12. | Security Ownership of Certain Beneficial Owners and ManagementAnd Related Stockholder Matters | 127 |
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| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 127 |
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| Item 14. | Principal Accounting Fees and Services | 127 |
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| Part IV | | |
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| Item 15. | Exhibits and Financial Statement Schedules | 128 |
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| | Signatures | 129 |
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| | Exhibit Index | 131 |
PART I
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 express management’s current expectations or forecasts of future events, results and conditions, the general business strategy of engaging in bank mergers, organic growth, branch openings and closings, expansion or addition of product capabilities, expected footprint of the banking franchise and anticipated asset size; anticipated loan growth; changes in loan mix and deposit mix; capital and liquidity levels; net interest income; provision expense; noninterest income and noninterest expenses; realization of deferred tax asset; credit trends and conditions, including loan losses, allowance for loan loss, charge-offs, delinquency trends and nonperforming asset levels; the amount, timing and prices of share repurchases; the payment of common stock dividends; and other similar matters. These forward-looking statements are not guarantees of future results or performance and by their nature involve certain risks and uncertainties that are based on management’s beliefs and assumptions and on the information available to management at the time that these disclosures were prepared. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.
You should not place undue reliance on any forward-looking statement and should consider all of the following uncertainties and risks, as well as those more fully discussed elsewhere in this report, including Item 1A. “Risk Factors,” and in any of the Company’s subsequent filings with the SEC: inability to identify and successfully negotiate and complete additional combinations with potential merger partners or to successfully integrate such businesses into the Company, including the Company’s ability to adequately estimate or to realize the benefits and cost savings from and limit any unexpected liabilities acquired as a result of any such business combination; failure to effectively redeploy resources from custody business to the core asset management business; failure to generate an adequate return on investment related to the Richmond loan production office or other hiring initiatives; failure to generate future growth in metropolitan market loan balances; the effects of negative or soft 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 allowances for loan losses; deterioration in the credit quality of the loan portfolio or in the value of the collateral securing those loans; deterioration in the value of securities held in the investment securities portfolio; the possibility of recognizing other than temporary impairments on holdings of collateralized loan obligation securities as a result of the Volcker Rule; the impacts on the Company of a potential increasing rate environment; the potential impacts of any additional government shutdown and further debt ceiling impasses, including the risk of a United States credit rating downgrade or default, or continued global economic instability, which would cause disruptions in the financial markets, impact interest rates, and cause other potential unforeseen consequences; fluctuations in the market price of the common stock, regulatory, legal and contractual requirements, other uses of capital, the Company’s financial performance, market conditions generally, and future actions by the board of directors, in each case impacting repurchases of common stock or declaration of dividends; legal and regulatory developments including changes in the federal risk-based capital rules; increased competition from both banks and nonbanks; changes in accounting standards, rules and interpretations, inaccurate estimates or assumptions in accounting, including acquisition accounting fair market value assumptions and accounting for purchased credit-impaired loans, and the impact on the Company’s financial statements; and management’s 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.
Item 1. Business
General
Park Sterling Corporation (the “Company”) was formed on October 6, 2010 to serve as the holding company for Park Sterling Bank (the “Bank”) and is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). At December 31, 2013, the Company’s primary operations and business were that of owning the Bank, with its main office located in Charlotte, North Carolina. The Company’s main office is located at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina, 28204 and its phone number is (704) 716-2134.
The Bank was incorporated in September 2006 as a North Carolina-chartered commercial nonmember bank and is a wholly owned subsidiary of the Company. The Bank opened for business on October 25, 2006 at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina and subsequently opened additional branches in Charlotte and Wilmington, North Carolina. In August 2010, the Bank conducted an equity offering (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 to creating a regional community bank through a combination of mergers and acquisitions and accelerated organic growth. As part of the Bank’s change in strategy, immediately following the Public Offering, the Bank reconstituted its board of directors and reorganized its management team adding three new executive officers.
On January 1, 2011, the Company acquired all of the outstanding common stock of the Bank in exchange for shares of the Company’s Common Stock, on a one-for-one basis, in a statutory share exchange transaction effected under North Carolina law pursuant to which the Company became the bank holding company for the Bank. Prior to January 1, 2011, the Company conducted no operations other than obtaining regulatory approval for the holding company reorganization.
The Company intends to become a regional-sized multi-state banking franchise through acquisitions and organic growth over the next several years. The Company expects that typically it would fund any such acquisitions through a combination of the issuance of stock and cash as payment of the consideration in such acquisition. Depending on the timing and magnitude of any particular future acquisition, the Company anticipates that in the future it likely will seek additional equity capital or issue indebtedness at some point to fund its growth strategy, although it currently has no plans with respect to any such issuance. As part of its operations, the Company regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions eligible for bank holding company ownership or control. As a general rule, the Company expects to publicly announce material transactions when a definitive agreement has been reached.
Since the Public Offering, consistent with our growth strategy, the Bank has opened additional branches in North Carolina and South Carolina, and in January 2014 expanded into the Virginia market through the opening of a loan production office in Richmond. In addition, the Company acquired Community Capital Corporation (“Community Capital”) in November 2011 and Citizens South Banking Corporation (“Citizens South”) in October 2012. The aggregate merger consideration in the Community Capital acquisition consisted of 4,024,269 shares of Common Stock and approximately $13.3 million in cash, with a final transaction value of approximately $28.8 million based on the closing price of the Common Stock on October 31, 2011. The aggregate merger consideration in Citizens South acquisition consisted of 11,857,226 shares of Common Stock and approximately $24.3 million in cash, with a final transaction value of approximately $82.9 million based on the closing price of the Common Stock on September 28, 2012.
Through our branches and offices, we provide banking services to small and mid-sized businesses, owner-occupied and income-producing real estate owners, residential builders, institutions, professionals and consumers doing business or residing within our target markets. We provide a wide range of banking products, including personal, business and non-profit checking accounts, IOLTA accounts, individual retirement accounts, business and personal money market accounts, certificates of deposit, overdraft protection, safe deposit boxes and online and mobile banking. Our lending activities include a range of short-to medium-term commercial (including asset-based lending), real estate, construction, residential mortgage and home equity and consumer loans, as well as long-term residential mortgages. Our wealth management activities include investment management, personal trust services, and investment brokerage services. Our cash management activities include remote deposit capture, lockbox services, sweep accounts, purchasing cards, ACH and wire payments. 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 customers so that we are positioned to anticipate and address their financial needs.
Market Area
We conduct our business through the Bank from eighteen full-service branches in seven counties in North Carolina, twenty full-service branches and one drive-through facility in twelve counties in South Carolina, five full-service branches in four counties in North Georgia and a loan production office in Virginia. Seventeen of our branches are located in the Charlotte-Concord-Gastonia Metropolitan Statistical Area (“MSA”); nine are in the Greenville-Anderson-Mauldin MSA; six are in the Greenwood MSA; two are in the Newberry MSA; and one each is in the Raleigh MSA, Wilmington MSA, Charleston-North Charleston MSA, Spartanburg MSA and Columbia MSA. Our Loan Production Office is located in the Richmond MSA. Our five North Georgia branches are not located in an identified MSA. Due to the diverse economic base of the markets in which we operate, we do not believe we are dependent on any one or a few customers or types of commerce whose loss would have a material adverse effect on us.
Competition
Commercial banking and other financial activities in all of our market areas are highly competitive, and there are numerous branches of national, regional and local institutions in each of these markets. 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. In our wealth management activities, we compete with commercial and investment banking firms, investment advisory firms and brokerage firms.
Interest rates, both on loans and deposits, and prices of fee-based services are significant competitive factors among financial institutions generally. Other important competitive factors include office location, office hours, the quality of customer service, community reputation, continuity of personnel and services, and, in the case of larger commercial customers, relative lending limits and the ability to offer sophisticated cash management and other commercial banking services. Many of 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 markets, our direct customer contact, our ability to make credit and other business decisions locally, our wide range of banking products 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, commercial banks operating in our market areas may be required to compete not only with other financial institutions based in the states in which we operate, but also with out-of-state financial institutions which may acquire institutions, or establish or acquire branch offices in these states, or otherwise offer financial services across state lines, thereby adding to the competitive atmosphere of the industry in general.
Employees
As of February 28, 2014, we employed 490 people and had 466 full time equivalent employees. Each of these individuals is an employee of the Bank. There are no employees at the bank holding company level. We are not a party to a collective bargaining agreement, and we consider our relations with employees to be good.
Subsidiaries
The Company’s primary subsidiary is the Bank. In addition, the Company has two wholly owned non-consolidated subsidiaries, Community Capital Corporation Statutory Trust I and CSBC Statutory Trust I, which were used to issue $10.3 million and $15.5 million (before related acquisition accounting fair market value adjustments) , respectively, of trust preferred securities by these predecessor companies. The Company has fully and unconditionally guaranteed each trust’s obligations under the preferred securities. Proceeds from these securities were used by the predecessor companies to purchase junior subordinated notes in Community Capital and Citizens South, respectively, which constitute Tier I capital of the Company.
The Bank has two subsidiaries, Park Sterling Financial Services, Inc., and Citizens Properties, LLC. Park Sterling Financial Services, Inc., originally Citizens South Financial Services, Inc., primarily owns stock in a title insurance company which was used by Citizens South Bank for certain real estate transactions and continues to operate as such. CitizensProperties, LLC was formed in January 2012 for the purpose of holding, managing and resolving certain real estate that was acquired through foreclosure, or other nonperforming and substandard assets, and continues to operate as such.
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.The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in July 2010, has had and will continue to 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 Federal Deposit Insurance Corporation (“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 established 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.
Many of the requirements called for in the Dodd-Frank Act continue to be implemented, and/or are 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, 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.
In addition, from time to time, various other legislative and regulatory initiatives are introduced in Congress and state legislatives, as well as regulatory agencies, that may impact the Company or the Bank. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change bank statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. We cannot predict whether any such legislation or regulatory policies will be enacted or, if enacted, the effect that such would have on our financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on our business. The following items provide brief descriptions of certain provisions of the Dodd-Frank Act:
Increased Capital Standards and Enhanced Supervision. The Dodd-Frank Act includes certain provisions concerning the capital regulations of United States banking regulatory agencies. These provisions are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. In accordance with such provisions, in July 2013, the federal banking regulatory agencies adopted final regulatory capital rules applicable to United States banking organizations. See “—Capital Adequacy Guidelines” below. The Dodd-Frank Act also increased regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.
Volcker Rule. The Dodd-Frank Act amended the Bank Holding Company Act (the “BHC Act”) to require the federal banking regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring a covered fund (such as a hedge fund and or private equity fund), commonly referred to as the “Volcker Rule.” In December 2013, the federal banking regulatory agencies adopted a final rule construing the Volcker Rule, which is effective April 1, 2014. Banking entities will have until July 21, 2015 to conform their activities to the requirements of the rule.
The Bureau of Consumer Financial Protection.The Dodd-Frank Act created the Bureau of Consumer Financial Protection (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. The Bureau has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Depository institutions with less than $10 billion in assets are subject to rules promulgated by the Bureau, but continue to be examined and supervised by federal banking regulatory agencies for consumer compliance purposes.
Deposit Insurance.The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits that was first introduced as part of the emergency economic stabilization legislation enacted in 2008. The Dodd-Frank Act also revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated, increased the minimum designated reserve ratio of the DIF (subsequently set at 2% by the FDIC) from 1.15% to 1.35% of the estimated amount of total insured deposits and eliminated payment of dividends to depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act also permits depository institutions to now pay interest on demand deposits.
Transactions with Affiliates.The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.
Transactions with Insiders.Insider transaction limitations were expanded through strengthening restrictions on loans 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 were 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 institution’s board of directors.
Enhanced Lending Limits.The Dodd-Frank Act strengthened the existing limits on a depository institution’s credit exposure to one borrower. Historically, banking law has limited a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expanded the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
Interchange Fees. The Dodd-Frank Act amended the Electronic Fund Transfer Act to require that the amount of any interchange fee charged for electronic debit transactions by debit card issuers having assets over $10 billion must be reasonable and proportional to the actual cost of a transaction to the issuer, commonly referred to as the “Durbin Amendment”. The Federal Reserve Board adopted final rules effective October 1, 2011, which limit the maximum permissible interchange fees that such issuers can receive for an electronic debit transaction. Although the restrictions on interchange fees do not apply to institutions with less than $10 billion in assets, the price controls could negatively impact bankcard services income for smaller banks if the reductions that are required of larger banks cause industry-wide reduction of swipe fees.
Corporate Governance.The Dodd-Frank Act addressed many corporate governance and executive compensation matters that will affect most United States publicly traded companies, including the Company. The Dodd-Frank Act, among other things: (i) granted shareholders of United States publicly traded companies an advisory vote on executive compensation; (ii) enhanced independence requirements for compensation committee members; (iii) required companies listed on national securities exchanges to adopt incentive-based compensation claw back policies for executive officers; and (iv) provided the Securities and Exchange Commission (“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 company’s proxy materials.
General.As a registered bank holding company, the Company is subject to regulation under the 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 Bank’s operations. The NC Commissioner and the FDIC regulate and monitor compliance with these state and federal laws and regulations, as well as the Bank’s 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 Federal Home Loan Bank (“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 the NASDAQ Global Stock Market (“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 “Gramm-Leach-Bliley Act”) amended a number of federal banking laws affecting the Company and the Bank. In particular, the Gramm-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 Gramm-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. The Company remains a bank holding company, but may at some time in the future elect to become a financial holding company. If the Company were to do so, the Bank would have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (“CRA”), which is discussed below.
Interstate Banking and Branching. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “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, the Interstate Banking and Branching Act provided that 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 suchde 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 ade novo branch in the state, but only on a reciprocal basis. This means that an out-of-state bank could establish ade novo branch in North Carolina only if the home state of such bank would allow North Carolina banks to establishde novo branches in that state under substantially the same terms as allowed in North Carolina. Virginia also allowedde novo branching of out-of-state banks in Virginia on a reciprocal basis, but South Carolina and Georgia law only permitted interstate branching through acquisitions and notde novo branching by an out-of-state bank. The Dodd-Frank Act removed previous state law restrictions onde novo interstate branching in states such as North Carolina, South Carolina, Georgia and Virginia. This law effectively now permits out-of-state banks to opende novo branches in states where the laws of the state where thede novo branch to be opened would permit a bank chartered by that state to open ade 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 company’s 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 FDIC’s 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.
In June 2010, the federal bank regulatory agencies issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk taking. The guidance, which covers senior executives and other employees who have the ability to expose an institution to material amounts of risk (either individually or as part of a group), is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risks, (ii) be compatible with effective internal controls and risk management and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. The applicable federal regulator will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations,” based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. These supervisory findings will be included in reports of examination and will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. The applicable federal regulator can take enforcement action against an institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
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 currently in effect define a three-tier capital framework. Tier 1 capital is defined to include the sum of common shareholders’ equity, qualifying non-cumulative perpetual preferred stock (including any related surplus), a limited amount of trust preferred securities and qualifying minority interests in consolidated subsidiaries, minus goodwill, other 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 loanlosses. 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 current 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. The current 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 Bank’s Public Offering, which occurred in August 2010, the FDIC had required that the Bank maintain a minimum leverage capital ratio of not less than 10% for three years following the completion of the Public Offering. This commitment expired on August 18, 2013.
To assess a bank’s 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 bank’s capital due to changes in interest rates. Under such a risk assessment, examiners will evaluate a bank’s 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 bank’s 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 (the “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. The 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 the 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 the 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. Under current regulations, 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 Company and the Bank were considered “well capitalized” as of December 31, 2013.
In July 2013, the federal banking regulatory agencies approved final regulatory capital rules applicable to United States banking organizations (the “Final Rules”) which will replace the existing general risk-based capital and related rules, broadly revising the basic definitions and elements of regulatory capital and making substantial changes to the credit risk weightings for banking and trading book assets. The new regulatory capital rules establish the benchmark capital rules and capital floors that are generally applicable to United States banks under the Dodd-Frank Act and make the capital rules consistent with heightened international capital standards known as Basel III. These new capital standards will apply to all banks, regardless of size, and to all bank holding companies with consolidated assets greater than $500 million.
Under the Final Rules, Tier 1 capital will consist of two components: common equity Tier 1 capital and additional Tier 1 capital. Total Tier 1 capital, plus Tier 2 capital, will constitute total risk-based capital. The required minimum ratios will be (i) common equity Tier 1 risk-based capital ratio of 4.5%; (ii) Tier 1 risk-based capital ratio of 6%; (iii) total risk-based capital ratio of 8%; and (iv) Tier 1 leverage ratio of average consolidated assets of 4%. Advanced approaches banking organizations (those organizations with either total assets of $250 billion or more, or with foreign exposure of $10 billion or more) also will be subject to a supplementary leverage ratio that incorporates a broader set of exposures in the denominator. The Final Rules also incorporate these changes in regulatory capital into the prompt corrective action framework, under which the thresholds for “adequately capitalized” banking organizations will be equal to the new minimum capital requirements. Under this framework, in order to be considered “well capitalized”, insured depository institutions will be required to maintain a Tier 1 leverage ratio of 5%, a common equity Tier 1 risk-based capital measure of 6.5%, a Tier 1 risked-based capital ratio of 8% and a total risk-based capital ratio of 10%.
The Final Rules also provide that all covered banking organizations must maintain a new capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. Advanced approaches organizations also will be subject to a countercyclical capital buffer. Failure to satisfy the capital buffer requirements would result in increasingly stringent limitations on various types of capital distributions, including dividends, share buybacks and discretionary payments on Tier 1 instruments, and discretionary bonus payments.
The Final Rules reflect changes from the June 2012 proposals that minimize the impact of the revised capital regulations on community banks. In particular, banking organizations with less than $15 billion in total assets (including the Company and the Bank) will not be subject to the phase-out of non-qualifying Tier 1 capital instruments, such as trust preferred securities (“TruPS”), that were issued and outstanding prior to May 19, 2010. In addition, non-advanced approaches banking organizations will have a one-time option to exclude certain components of accumulated other comprehensive income from inclusion in regulatory capital, comparable to treatment under the current capital rules. The Final Rules also retain the existing treatment for residential mortgage exposures in the current risk-based capital rules, rather than adopt the proposed changes that would have required banking organizations to determine the risk weights based on a complex categorization and loan-to-value assessment.
Although the Final Rules alleviate some of the concerns of community banks with the capital standards as originally proposed, the new capital standards will impose significant changes on the definition of capital, including the inability to include instruments such as TruPS in Tier 1 capital going forward and new constraints on the inclusion of minority interests, mortgage servicing assets, deferred tax assets and certain investments in the capital of unconsolidated financial institutions. In addition, the Final Rules increase the risk-weights of various assets, including certain high volatility commercial real estate and past due asset exposures.
Non-advanced approaches banking organizations, including the Company and the Bank, must begin compliance with the new minimum capital ratios and the standardized approach for risk-weighted assets as of January 1, 2015, and the revised definitions of regulatory capital and the revised regulatory capital deductions and adjustments will be phased in over time for such organizations beginning as of that date. The capital conservation buffer will be phased in for all banking organizations beginning January 1, 2016.
Deposit Insurance and Assessments.The Bank’s 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 small banking institution (an institution with assets of less than $10 billion), 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. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act amended 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. In June 2009, the FDIC levied a special assessment on all insured depository institutions, and in November 2009, the FDIC adopted a ruling requiring all insured depository institutions to prepay three years worth of premiums to replenish the DIF. In addition, insured depository institutions have been required to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the Federal Reserve Board. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. We are not aware of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.
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, the Federal Reserve Board has issued a policy statement regarding payment of cash dividends by a bank holding company, indicating that a bank holding company generally should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover the cash dividends, the holding company’s prospective rate of earnings retention is consistent with the holding company’s capital needs and overall financial condition, and the holding company is not in danger of not meeting its minimum regulatory capital adequacy ratios. As a bank holding company, the Company also 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, as well as funds used to pay principal and interest on the Company’s indebtedness, 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 the 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 Board’s 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 bank’s 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 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 institution’s 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 institution’s 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 August 22, 2011.
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 Bank’s board of directors in advance, and must be on terms and conditions as favorable to the Bank as those available to an unrelated person.
Anti-Money Laundering.Financial institutions must maintain anti-money-laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Bank holding companies and banks are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money-laundering obligations have been substantially strengthened as a result of the USA PATRIOT Act, which was enacted in 2001 and renewed in 2006. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing cease-and-desist orders and money penalty sanctions against institutions found to be violating these obligations.
Bank Secrecy Act.We are subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act (the “BSA”). The BSA gives the federal government 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 institution’s 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 bank’s effectiveness in combating money laundering when ruling on certain applications.
Commercial Real Estate (“CRE”) and Construction and Development (“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 CRE and C&D loan concentrations. The guidance reinforces and enhances the FDIC’s 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 Fund 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.
During 2013, the Bureau issued a series of proposed and final rules related to mortgage loan origination and mortgage loan servicing. In particular, in January 2013, the Bureau issued its final rule, which was effective January 10, 2014, on ability to repay and qualified mortgage standards to implement various requirements of the Dodd-Frank Act amending the Truth in Lending Act. The final rule requires mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that a borrower will have the ability to repay a mortgage loan according to its terms before making the loan. The final rule also includes a definition of a “qualified mortgage,” which provides the lender with a presumption that the ability to repay requirements have been met. This presumption is conclusive (i.e. a safe harbor) if the loan is a “prime” loan and rebuttable if the loan is a higher-priced, or subprime, loan. The ability-to-repay rule has the potential to significantly affect our business, as a borrower can challenge a loan’s status as a qualified mortgage or that the lender otherwise established the borrower’s ability to repay in a direct cause of action for three years from the origination date, or as a defense to foreclosure at any time. In addition, the value and marketability of non-qualified mortgages may be adversely affected.
Anti-Tying Restrictions.Under amendments to the BHC Act and Federal Reserve Board regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers. In general, a bank may not extend credit, lease or sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer obtain or provide some additional credit, property or services from or to the bank, its bank holding company or any subsidiary of the bank holding company or (ii) the customer may not obtain some other credit, property or services from a competitor of the bank, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products; and certain foreign transactions are exempt from the general rule. A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.
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 Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, the Sarbanes-Oxley Act established: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) new certification responsibilities for the Chief Executive Officer and the Chief Financial Officer with respect to the Company’s financial statements; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for reporting companies and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the federal securities laws.
Website Access to the Company’s 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 Company’s 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.
Item 1A. Risk Factors
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 Company’s 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 Company’s business operations. The value or market price of the Company’s 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 selective acquisitions such as through the establishment or acquisition of banks and banking offices in our market areas and other markets. 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 can offer no assurance 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.
If we are unable to effectively implement our growth strategies, our business, results of operations and stock price may be materially and adversely affected.
Future expansion involves risks.
The acquisition by us of other financial institutions or parts of those institutions, or the establishment ofde novo branch offices and loan production offices, involves a number of risks, including the risk that:
| | ● | 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; |
| | ● | our estimates and judgments used to evaluate credit, operations, management and market risks relating to target institutions may not be accurate; |
| | ● | 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; |
| | ● | 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; |
| | ● | 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; |
| | ● | 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; |
| | ● | our management’s 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; |
| | ● | our announcement of another transaction prior to completion of a merger could result in a delay in obtaining regulatory or shareholder approval for a merger, which could have the effect of limiting our ability to fully realize the expected financial benefits from the transaction; |
| | ● | we may not be able to obtain regulatory approval for an acquisition; |
| | ● | we may enter new markets where we lack local experience or that introduce new risks to our operations, or that otherwise result in adverse effects on our results of operations; |
| | ● | we may introduce new products and services we are not equipped to manage or that introduce new risks to our operations, or that otherwise result in adverse effects on our results of operations; |
| | ● | 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; |
| | ● | 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, financial condition and stock price; or |
| | ● | we may lose key employees and customers. |
We cannot assure you that we will be able to successfully integrate any banking offices that we acquire into our operations or retain the customers 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 generate 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 continued growth, both organically and through acquisitions. We can provide no assurance that we will 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 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 growing, 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 grow, or an inability to effectively manage growth, could adversely affect our results of operations, financial condition and stock price.
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 and stock price may 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 United States generally accepted accounting principles (“GAAP”), we will record assets acquired and liabilities assumed at their fair value, and, as such, acquisitions may result in us 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, financial condition and stock price.
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 that 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, results of operations and stock price.
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 and our stock price negatively affected.
Risks Associated With Our Business
Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
The domestic and international capital and credit markets have been experiencing volatility and disruption for over five years, resulting in uncertainty in the financial markets in general. During this time, the financial markets and economic conditions generally have been materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. Global securities markets, and bank holding company stock prices in particular, have been negatively affected, as has in general the ability of banks and bank holding companies to raise capital or borrow in the debt markets.
Overall, during the past five years, the general business environment has had an adverse effect on our business. Although there has been recent improvement in general economic conditions in our market, with evidence of stabilizing home prices and a reduction in unemployment levels, there can be no assurance that the environment will continue to improve in the near term. Unemployment levels remain elevated, housing prices remain depressed, and demand for housing remains weak due to distressed sales and tightened lending standards. Consequently, there can be no assurance that the economic conditions will continue to improve in the near term. A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments and our ongoing operations, costs and profitability.
In addition, an extended deterioration in local economic conditions in our markets and target markets could drive losses beyond those that are or will be provided for in our allowance for loan losses and result in the following consequences:
| | ● | increases in loan delinquencies; |
| | ● | increases in nonperforming loans and foreclosures; |
| | ● | decreases in demand for our products and services, which could adversely affect our liquidity position; |
| | ● | decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers’ borrowing power; and |
| | ● | decreases in our ability to raise additional capital on terms acceptable to us, or at all. |
Until conditions improve, we expect our business, financial condition and results of operations to continue to be challenged, which could negatively impact our stock price.
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 management’s 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. At December 31, 2013, our allowance for loan losses totaled approximately $8.8 million, which represented 0.68% of total loans and 71.80% of total nonperforming loans. Management’s 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. In addition, we may be required to increase the allowance due to the conditions of loans acquired as result of the mergers with Community Capital and Citizens South, should the remaining acquisition accounting fair market value adjustments for such loans be judged inadequate relative to their estimated future performance. 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 management. The risks inherent in our loan portfolio were exacerbated by the negative developments in the financial markets and the economy in general in recent years, and additional loan losses could occur in the future and may occur at a rate greater than we have experienced to date. Our allowance for loan losses decreased as a percentage of total loans throughout 2013 as our asset quality continued to improve and previously recognized impairment on our purchased credit-impaired (“PCI”) loans was reversed in part. 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, which could impact our stock price.
If our nonperforming assets increase, our earnings will suffer.
At December 31, 2013, our nonperforming assets totaled approximately $26.8 million, or 1.37% 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 (“OREO”). 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 OREO 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 OREO. 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, which could impact our stock price.
Failure to comply with the terms of the FDIC loss-share agreements acquired from Citizens South may result in significant losses.
As a result of our merger with Citizens South, we assumed certain FDIC loss-share agreements. These loss-share agreements cover approximately $71.1 million (net of related fair value marks) in assets, and provide that the FDIC will reimburse us for between 80 and 95 percent of net losses on covered assets. We must comply with the specific, detailed and cumbersome compliance, servicing, notification and reporting requirements provided in the agreements. Our failure to comply with the terms of the agreements or to properly service the loans and OREO under the requirements of the loss-share agreements may cause individual loans or large pools of loans to lose eligibility for loss-share payments from the FDIC. This could result in material losses that are currently not anticipated.
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, declines in economic conditions in these market areas 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, 2013, approximately 90% of our loans had real estate as a primary or secondary component of collateral and included 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. Real estate values have declined significantly during the recent economic crisis. Although real estate prices in most of our markets have stabilized or are improving, a renewed decline in real estate values would 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 owner’s 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 the 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, which could negatively affect our stock price.
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, which in turn could negatively affect our stock price.
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 and stock price.
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.
Our ten largest lending relationships (including aggregate exposure to guarantors) at December 31, 2013, range from $7.3 million to $15.4 million and averaged $8.7 million. None of these lending relationships was included in nonperforming loans at December 31, 2013. 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.
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 to maintain the level of the FDIC deposit insurance reserve ratio. The recent failures of many financial institutions have significantly increased the loss provisions of the DIF, resulting in a decline in the reserve ratio. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC revised its assessment rates which raised deposit premiums for certain insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. The Company is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional bank or financial institution failures, the FDIC may increase the deposit insurance assessment rates. Any future assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect the Company’s earnings and could have a material adverse effect on the value of its Common Stock.
The downgrade of United States government securities by the credit rating agencies and Europe’s debt crisis could have a material adverse effect on our business, financial condition and results of operations.
The continuing debates in Congress regarding the national debt ceiling, federal budget deficit concerns, and overall weakness in the economy have resulted in actual and threatened downgrades of United States government securities by the various major credit ratings agencies. A further downgrade could create uncertainty in the United States and global financial markets and economies. Any such adverse impact could cause other events which, directly or indirectly, could adversely affect our business, financial condition and results of operations.
In addition, the possibility that certain European Union (“EU”) member states will default on their debt obligations has negatively impacted economic conditions and global markets. The continued uncertainty over the outcome of international and the EU’s financial support programs and the possibility that other EU member states may experience similar financial troubles could further disrupt global markets. The negative impact on economic conditions and global markets could also have a material adverse effect on our business, financial condition and results of operations.
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 Board’s 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 deterioration of the subprime, mortgage, credit and liquidity markets, in a series of actions of the past several years, the Federal Reserve Board has reduced interest rates to almost zero and the slope of the yield curve has generally flattened, which has negatively impacted our net interest margin, notwithstanding decreases in nonperforming loans and improvements in deposit mix. Any reduction in net interest income will negatively affect our business, financial condition, liquidity, results of operations, cash flows and/or the price of our securities.
The primary tool that management uses to measure short-term interest rate risk is a net interest income simulation model prepared by an independent correspondent bank.As of December 31, 2013, the Company is considered to be in a slight liability-sensitive position, meaning income and capital are generally expected to increase with a decrease in short-term interest rates and, conversely, to decrease with an increase in short-term interest rates. However, based on the results of this simulation model, if short-term interest rates immediately decreased by 200 basis points, we could expect net income and capital to decrease by approximately $2.6 million over a 12-month period. This result is primarily due to the current low interest rate environment, under which interest rates on the Company’s average interest-bearing liabilities cannot benefit fully from a 200 basis point rate reduction, without turning negative, while yields on our average interest-earning assets could decline by 200 basis points. Furthermore, if short-tem interest rates increase by 300 basis points, simulation modeling predicts net interest income will also decline by approximately $5.1 million over a 12-month period as a result of our liability-sensitive position.
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. 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 customer confidence, the ability to execute our business strategies, the ability to grow our assets or establish new branches, the ability to obtain or renew brokered deposits, our cost of funds and FDIC insurance, the ability to pay dividends on our Common Stock and the 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.
The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial-services industry, including new or revised regulation of such things as systemic risk, capital adequacy, deposit insurance assessments and consumer financial protection. The federal banking regulators have adopted new regulatory capital rules applicable to United States banking organizations. Complying with these and other new legislative or regulatory requirements, and any programs established thereunder, could have a material adverse impact on our business, financial condition and results of operations.
If we have to record an other-than-temporary-impairment in connection with our collateralized loan obligations (“CLOs”) as a result of the Volcker Rule, it could have a negative impact on our profitability.
The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and investing in and sponsoring a covered fund (such as a hedge fund and or private equity fund). At December 31, 2013, we held four investments in senior tranches of CLOs totaling $23.4 million, which could be impacted by the Volcker Rule. One of these tranches was amended during the fourth quarter of 2013 to comply with the applicable investment criteria under the Volcker Rule. Our investments in the remaining three CLOs, which had a net unrealized loss of $274,000 at December 31, 2013, currently would be prohibited under the Volcker Rule. Unless the CLO documentation is amended to avoid inclusion within the rule’s prohibitions, we would have to recognize write-downs of these securities, by recognizing an other-than-temporary impairment (“OTTI”) in conformity with GAAP rules. Any OTTI charges could significantly impact our earnings.
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, South Carolina and North Georgia. Even if our growth strategy is successful, we expect that our banking offices will remain primarily concentrated in North Carolina, South Carolina, North Georgia 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 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.
We rely heavily on the services of key executives and directors, a number of which are new additions to our management team following the Bank’s Public Offering.
Following our Public Offering, we changed our management team, 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 it seeks 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 that 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 in both attracting deposits and originating loans. We may not be able to attract customers away from our competition. We compete for loans and deposits with other commercial banks; savings banks; thrifts; trust companies; credit unions; securities brokerage firms; mortgage brokers; insurance companies; mutual funds; and 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 customer 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 that we are able to offer to our customers 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.
Our liquidity needs could adversely affect our results of operations and financial condition.
Our primary sources of funds 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, availability of, and/or access to, sources of refinancing, 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 customers 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, federal funds lines of credit from correspondent banks and borrowings from the Federal Reserve Discount Window, as well as additional out-of-market time deposits and brokered 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 customers and counterparties, which, if incorrect or incomplete, could harm our earnings.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers, 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 customers, we may assume that a customer’s audited financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. 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 customers 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 customers and communities, this risk will always be present given the nature of our business.
We are subject to security and operational risks including risks relating to our use of technology that, if not managed properly, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. Any such failure also could have a material adverse effect on our business, financial condition and results of operations.
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 customers’ needs by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. We have taken measures to implement backup systems and other safeguards with respect to the physical infrastructure and systems that support our operations, but our ability to conduct business may be adversely affected by any significant and widespread disruption to our infrastructure or systems. Our financial, accounting, data processing, check processing, electronic funds transfer, loan processing, online banking, mobile banking, automated teller machines (“ATMs”) backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our ability to process these transactions or provide these services. There could be sudden increases in customer transaction volume, electrical or telecommunications outages, natural disasters, events arising from local or larger scale political or social matters, including terrorist acts, and cyber attacks. We continuously update these systems to support our operations and growth. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones.
Information security risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers and other external parties. Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks. We rely on our digital technologies, computer and email systems, software, and networks to conduct our operations, as well as on the honesty and integrity of our employees and vendors with access to those elements. In addition, to access our products and services, our customers may use computers, personal smartphones, tablet PCs, and other mobile devices that are beyond our control systems. Our technologies, systems, networks, and our customers’ devices may be subject to, or the target of, cyber attacks, computer viruses, malicious code, phishing attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations.
We also face the risk of unauthorized activity, fraud or theft by our employees and/or vendors that could result in disclosure or misuse of our customers’ confidential, proprietary or other information. In addition, we face the risk ofoperational failure, termination or capacity constraints of any of the third parties with which we do business or that facilitate our business activities, including financial intermediaries that we use to facilitate transactions. Any such failure, termination or constraint could adversely affect our ability to effect transactions, service our customers, manage our exposure to risk or expand our business and could have a significant adverse impact on our liquidity, financial condition and results of operations.
There can be no assurance that we will not experience material losses related to cyber attacks or other information security breaches. Cyber security and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us and we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Risks Related to 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, which could result in the dilution of shareholders’ investment.
Our authorized capital includes 200,000,000 shares of Common Stock and 5,000,000 shares of preferred stock. As of December 31, 2013, we had 44,730,669 shares of Common Stock outstanding, including 770,399 shares which have voting rights but no economic interest related to unvested and performance-based restricted stock issued pursuant to our Long Term Incentive Plan (“LTIP”), and had reserved or otherwise set aside for issuance 2,225,551 shares underlying outstanding options and 196,346 shares that are available for future grants of stock options, restricted stock or other equity-based awards pursuant to our 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 anticipate that we will issue additional equity in connection with the acquisition of other strategic partners and that in the future we likely will seek additional equity capital as we develop our business and expand our operations, depending on the timing and magnitude of any particular future acquisition. These issuances would dilute the ownership interests of existing 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 existing shareholders.
In addition, the issuance of shares under our 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 nontraditional competitors, news reports of trends and 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 our 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 management’s attention and resources from our normal business, which could result in losses to investors.
Future sales of our Common Stock by 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 on NASDAQ, the trading volume in the 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 the Common Stockat 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 the Common Stock, significant sales of the 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 our 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 our 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.
Our ability to pay dividends is limited and we may be unable to pay future dividends.
Our board of directors initiated a cash dividend in 2013. However, any future declaration of dividends will be made at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our board of directors may deem relevant. We make no assurances that we will pay any dividends in the future. The holders of our common stock are entitled to receive dividends when and if declared by our board of directors out of funds legally available for that purpose. As part of our consideration to pay cash dividends, we intend to retain adequate funds from future earnings to support the development and growth of our business.
Moreover, we are 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 depends primarily upon 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 us and that we may pay to our shareholders. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. In addition, our right to participate in any distribution of assets of the Bank or any other subsidiary we may have from time to time upon the subsidiary’s 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 our Common Stock is junior to our existing and future indebtedness and to any other senior securities we may issue in the future.
Shares of our Common Stock are equity interests in the Company and do not constitute indebtedness. This means that shares of the Common Stock will rank junior to all of our indebtedness and to other nonequity claims against us and our assets available to satisfy claims against us, including in our liquidation. As of December 31, 2013, we had outstanding approximately $32.7 million (excluding acquisition accounting fair market value adjustments) aggregate principal amount of subordinated debt which, in addition to our other liabilities, would be senior in right of payment to our Common Stock. We may incur additional indebtedness from time to time without the approval of the holders of our Common Stock.
Our common shareholders also are subject to the prior dividend and liquidation rights of any preferred stock outstanding from time to time. 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 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.
Item 2. Properties
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. The Company also leases 7,965 square feet in a building adjacent to the Morehead Street location to accommodate the Company’s expanding operations. Both of the buildings are owned by an entity with respect to which a former director is president.
At December 31, 2013, the Bank operated 43 full service branches and one drive through facility located in North Carolina, South Carolina and North Georgia. The Bank owns 36 of these branches. The remaining properties are leased. Management believes the terms of the various leases are consistent with market standards and were arrived at through arm’s length bargaining. On December 20, 2013, the Company entered into an operating lease in Richmond, Virginia for a loan production office. Additional information relating to premise, equipment and lease commitments is set forth in Note 8 – Premises and Equipment or Note 15 – Leases to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” in this report.
Item 3. Legal Proceedings
In the ordinary course of business, the Company may be a party to various legal proceedings from time to time. There are no material pending legal proceedings to which the Company is a party or of which any of its property is subject. In addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on its business, operating results or financial condition.
As previously disclosed, on June 6, 2012, a putative stockholder class action lawsuit was filed against Citizens South, Citizens South's directors and the Company in the Delaware Court of Chancery in connection with the Citizens South merger agreement: Heath v. Kim S. Price, et al., C.A. No. 7601-VCP (Court of Chancery of the State of Delaware). The lawsuit asserted that the members of the Citizens South board of directors breached their fiduciary duties owed to Citizens South stockholders in connection with the approval of the proposed merger with the Company and that Citizens South and the Company aided and abetted the alleged breaches of fiduciary duty. On August 6, 2012, an amended complaint was filed adding an allegation that the members of the Citizens South board of directors breached their fiduciary duties of disclosure. On September 12, 2012, the Company entered into a memorandum of understanding (the “MOU”) with plaintiffs and other named defendants regarding the settlement of the lawsuit. Pursuant to the terms of the MOU, the parties agreed to enter into a Stipulation of Settlement whereby the plaintiffs agreed to the dismissal of the lawsuit with prejudice and to withdraw all motions filed in connection with the lawsuit in exchange for the Company and Citizens South making available additional information to Citizens South's stockholders in the Company's Current Report on Form 8-K filed September 14, 2012. On September 20, 2013, the parties filed the Stipulation of Settlement with the Court. On January 8, 2014, the Court issued an Order and Final Judgment certifying the class, approving the Stipulation of Settlement and dismissing the action with prejudice, which is now final and non-appealable. The financial terms of the settlement were not material.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Prices; Dividends
The Company’s Common Stock is traded publicly on NASDAQ under the symbol “PSTB”. The following table summarizes and sets forth the high and low closing sales prices of the Common Stock on NASDAQ and dividends declared per share for the periods indicated:
Year | Quarter | | High | | | Low | | | Dividend | |
2013 | Fourth | | $ | 7.28 | | | $ | 6.00 | | | $ | 0.02 | |
| | Third | | | 6.81 | | | | 5.74 | | | | 0.02 | |
| | Second | | | 6.02 | | | | 5.16 | | | n/a | |
| | First | | | 6.06 | | | | 5.20 | | | n/a | |
| | | | | | | | | | | | | | |
2012 | Fourth | | $ | 5.39 | | | $ | 4.71 | | | n/a | |
| | Third | | | 5.10 | | | | 4.33 | | | n/a | |
| | Second | | | 5.07 | | | | 3.89 | | | n/a | |
| | First | | | 5.01 | | | | 3.89 | | | n/a | |
As of February 28, 2014, there were 44,739,799 shares of our Common Stock outstanding held by approximately 2,125 shareholders of record.
Under North Carolina law, we are authorized to pay dividends as declared by our board of directors, provided that no such distribution results in our insolvency on a going concern or balance sheet basis. On July 26, 2013, our board of directors approved the initiation of a quarterly cash dividend to our common shareholders. Future dividends will be subject to board approval. As we are a legal entity separate and distinct from the Bank, our principal source of funds with which we can pay dividends to our shareholders is dividends we receive from the Bank. For that reason, our ability to pay dividends is subject to the limitations that apply to the Bank. For more information on applicable restrictions on the payment of dividends, see Note 13 – Regulatory Matters to the Company’s audited consolidated financial statements as of December 31, 2013 and 2012 and for the fiscal years ended December 31, 2013, 2012 and 2011 and the notes thereto included in Part II, Item 8 (the “Consolidated Financial Statements”).
Unregistered Sales of Equity Securities
We did not sell any of our equity securities during fiscal years 2010 through 2013 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”), other than as previously disclosed on the Bank’s Current Report on Form 8-K dated August 18, 2010 and filed with the FDIC.
Repurchase of Equity Securities
The following table presents the purchase of equity securities by the Company during the three months ended December 31, 2013:
Period | | (a) Total Number of Shares Purchased | | | (b) Average Price Paid per Share | | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |
| | | | | | | | | | | | | | | | | |
Repurchases from October 1, 2013through October 31, 2013 | | | - | | | $ | - | | | | - | | | | 2,197,000 | |
| | | | | | | | | | | | | | | | | |
Repurchases from November 1, 2013through November 30, 2013 | | | 9,700 | | | | 6.50 | | | | 9,700 | | | | 2,187,300 | |
| | | | | | | | | | | | | | | | | |
Repurchases from December 1, 2013through December 31, 2013 | | | 46,567 | | | | 6.46 | | | | 46,567 | | | | 2,140,733 | |
| | | | | | | | | | | | | | | | | |
Total | | | 56,267 | | | $ | 6.46 | | | | 56,267 | | | | 2,140,733 | |
| | (1) | On November 2, 2012, we announced a program which expires on December 31, 2014 to repurchase up to 2,200,000 of our common shares from time to time, depending on market conditions and other factors. |
Performance Graph
The following graph compares the cumulative total shareholder return (“CTSR”) of our Common Stock during the previous five years with the CTSR over the same measurement period of the S&P 500 Index, the Keefe Bruyette & Woods (“KBW”) Bank Index and the KBW Regional Bank Index. Each trend line assumes that $100 was invested on December 31, 2008 and that all dividends were reinvested. The information in the graph below for all periods prior to January 1, 2011 is that of the Bank on a stand-alone basis.
The foregoing performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act of the liabilities of Section 18 of the Exchange Act, nor shall it be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into any such filing.
Item 6. Selected Financial Data
The following selected consolidated financial data for the five years ended December 31, 2013 are derived from our consolidated financial statements and other data. The selected consolidated financial data should be read in conjunction with our consolidated financial statements, including the accompanying notes, included elsewhere herein. The information in the selected financial data for all periods prior to January 1, 2011 is that of the Bank on a stand-alone basis. Year-to-year financial information comparability is affected by the transaction expenses and the accounting treatment of our mergers with Community Capital in November 2011 and Citizens South in October 2012. See Note 3 - Business Combinations to the Consolidated Financial Statements.
| | | At or for the Year Ended December 31, | |
| | | 2013 | | | | 2012(1) | | | | 2011 | | | | 2010 | | | | 2009 | |
| | | (dollars in thousands, except per share data) | |
Income Statement Data | | | | | | | | | | | | | | | | | | | | |
Total interest income | | $ | 78,805 | | | $ | 57,946 | | | $ | 25,564 | | | $ | 22,642 | | | $ | 21,668 | |
Total interest expense | | | 6,382 | | | | 6,570 | | | | 6,169 | | | | 7,607 | | | | 9,290 | |
Net interest income | | | 72,423 | | | | 51,376 | | | | 19,395 | | | | 15,035 | | | | 12,378 | |
Provision for loan losses | | | 746 | | | | 2,023 | | | | 9,385 | | | | 17,005 | | | | 3,272 | |
Net interest income (loss) after provision | | | 71,677 | | | | 49,353 | | | | 10,010 | | | | (1,970 | ) | | | 9,106 | |
Noninterest income (loss) | | | 15,086 | | | | 11,372 | | | | 1,647 | | | | 126 | | | | (293 | ) |
Noninterest expense | | | 64,099 | | | | 54,076 | | | | 24,960 | | | | 11,053 | | | | 7,997 | |
Income (loss) before taxes | | | 22,664 | | | | 6,649 | | | | (13,303 | ) | | | (12,897 | ) | | | 816 | |
Income tax expense (benefit) | | | 7,359 | | | | 2,306 | | | | (4,944 | ) | | | (5,038 | ) | | | 239 | |
Net income (loss) | | | 15,305 | | | | 4,343 | | | | (8,359 | ) | | | (7,859 | ) | | | 577 | |
Preferred dividends | | | 353 | | | | 51 | | | | - | | | | - | | | | - | |
Net income (loss) to common shareholders | | $ | 14,952 | | | $ | 4,292 | | | $ | (8,359 | ) | | $ | (7,859 | ) | | $ | 577 | |
| | | | | | | | | | | | | | | | | | | | | |
Per Share Data | | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per common share | | $ | 0.34 | | | $ | 0.12 | | | $ | (0.29 | ) | | $ | (0.58 | ) | | $ | 0.12 | |
Diluted earnings (loss) per common share | | $ | 0.34 | | | $ | 0.12 | | | $ | (0.29 | ) | | $ | (0.58 | ) | | $ | 0.12 | |
Cash dividends (2) | | $ | 0.04 | | | n/a | | | n/a | | | n/a | | | n/a | |
Weighted-average common shares outstanding: | | | | | | | | | | | | | | | | | | | | |
Basic | | | 43,965,408 | | | | 35,101,407 | | | | 28,723,647 | | | | 13,558,221 | | | | 4,951,098 | |
Diluted | | | 44,053,253 | | | | 35,108,229 | | | | 28,723,647 | | | | 13,558,221 | | | | 4,951,098 | |
| | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 55,067 | | | $ | 184,142 | | | $ | 28,543 | | | $ | 65,378 | | | $ | 23,238 | |
Investment securities | | | 401,463 | | | | 245,571 | | | | 210,146 | | | | 140,590 | | | | 42,567 | |
Loans | | | 1,286,977 | | | | 1,346,116 | | | | 748,668 | | | | 399,829 | | | | 397,564 | |
Allowance for loan losses | | | (8,831 | ) | | | (10,591 | ) | | | (10,154 | ) | | | (12,424 | ) | | | (7,402 | ) |
Total assets | | | 1,960,790 | | | | 2,032,794 | | | | 1,113,222 | | | | 616,108 | | | | 473,855 | |
Deposits | | | 1,599,885 | | | | 1,632,004 | | | | 846,637 | | | | 407,820 | | | | 392,633 | |
Borrowings | | | 55,996 | | | | 80,143 | | | | 49,765 | | | | 20,874 | | | | 26,989 | |
Subordinated debt | | | 22,052 | | | | 21,573 | | | | 12,296 | | | | 6,895 | | | | 6,895 | |
Shareholders’ equity | | $ | 262,083 | | | $ | 275,702 | | | $ | 190,054 | | | $ | 177,101 | | | $ | 46,095 | |
| | | | | | | | | | | | | | | | | | | | | |
Profitability Ratios | | | | | | | | | | | | | | | | | | | | |
Return on average total assets | | | 0.76 | % | | | 0.32 | % | | | -1.20 | % | | | -1.46 | % | | | 0.13 | % |
Return on average stockholders’ equity | | | 5.42 | % | | | 1.99 | % | | | -4.69 | % | | | -8.00 | % | | | 1.26 | % |
Net interest margin (3) | | | 4.20 | % | | | 4.29 | % | | | 3.06 | % | | | 2.95 | % | | | 2.76 | % |
Efficiency ratio (4) | | | 73.33 | % | | | 88.29 | % | | | 119.76 | % | | | 71.39 | % | | | 64.19 | % |
| | | | | | | | | | | | | | | | | | | | | |
Asset Quality Ratios | | | | | | | | | | | | | | | | | | | | |
Net charge-offs to total loans | | | 0.23 | % | | | 0.12 | % | | | 1.54 | % | | | 3.00 | % | | | 0.36 | % |
Allowance for loan losses to total loans | | | 0.68 | % | | | 0.78 | % | | | 1.34 | % | | | 3.11 | % | | | 3.11 | % |
Nonperforming loans to total loans and OREO | | | 1.29 | % | | | 1.29 | % | | | 2.61 | % | | | 10.53 | % | | | 0.68 | % |
Nonperforming assets to total assets | | | 2.11 | % | | | 2.13 | % | | | 3.25 | % | | | 7.04 | % | | | 0.89 | % |
| | | | | | | | | | | | | | | | | | | | | |
Liquidity Ratios | | | | | | | | | | | | | | | | | | | | |
Net loans to total deposits | | | 80.44 | % | | | 82.49 | % | | | 82.49 | % | | | 94.99 | % | | | 99.37 | % |
Liquidity ratio (5) | | | 20.92 | % | | | 21.96 | % | | | 28.80 | % | | | 50.50 | % | | | 15.81 | % |
Equity to total assets | | | 13.37 | % | | | 13.56 | % | | | 17.07 | % | | | 28.75 | % | | | 9.73 | % |
| | | | | | | | | | | | | | | | | | | | | |
Capital Ratios | | | | | | | | | | | | | | | | | | | | |
Tangible common equity to tangible assets (6) | | | 11.79 | % | | | 12.14 | % | | | 16.73 | % | | | 28.75 | % | | | 9.73 | % |
Tier 1 leverage | | | 11.63 | % | | | 11.25 | % | | | 17.77 | % | | | 27.39 | % | | | 9.40 | % |
Tier 1 risk-based capital | | | 15.34 | % | | | 15.09 | % | | | 19.53 | % | | | 40.20 | % | | | 10.66 | % |
Total risk-based capital | | | 16.46 | % | | | 16.30 | % | | | 21.61 | % | | | 43.06 | % | | | 13.55 | % |
(1) | Revised to reflect measurement period adjustments to goodwill. |
(2) | On July 26, 2013, our board of directors approved the initiation of a quarterly cash dividend to our common shareholders. |
| | Future dividends are subject to board approval. |
(3) | Net interest margin is presented on a tax equivalent basis. |
(4) | 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. |
(5) | Calculated by dividing total liquid assets by net deposits and short-term liabilities. |
(6) | Non-GAAP Financial Measure. See "Non-GAAP Financial Measures" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure. |
Item 7. Management’s 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 the Consolidated Financial Statements.
Executive Overview
The Company experienced strong financial performance in 2013 as discussed below. In addition, we initiated several strategic moves in 2013 that came to fruition in early January 2014. First, we entered the Richmond, Virginia market by opening a loan production office and hiring three experienced bankers. Second, we strengthened our management team with leaders for operations and information technology, wealth management and mortgage banking. In addition, we completed our initial sales and credit training initiatives in the retail bank, rolled-out the second phase of our new mobile banking platform, and introduced our new workplace banking retail product package. Finally, we completed implementation of a new human resources information system as part of our continuing commitment to improve both operating efficiency and our employee experience.
We reported net income available to common shareholders of $15.3 million, or $0.34 per share, for the year ended December 31, 2013 compared to net income available to common shareholders of $4.3 million, or $0.12 per share, for the year ended December 31, 2012. Excluding merger-related expenses and gain on sale of securities, we reported adjusted net income available to common shareholders of $16.3 million, or $0.37 per share, for the year ended December 31, 2013 compared to adjusted net income available to common shareholders of $7.5 million, or $0.21 per share, for the year ended December 31, 2012. Expenses related to the mergers with Citizens South and Community Capital totaled $2.2 million in 2013 compared to $5.9 million in 2012. We incurred approximately $2.2 million in expenses related to the mergers resulting from core system conversion, employee benefit plans conversions, and other legal matters. Gain on sale of securities totaled $98 thousand in 2013 compared to $1.5 million in 2012. Results for 2013 include a full year of operating results from Citizens South and results for 2012 include three months of operations from the merger with Citizens South.
Net interest income increased $21.9 million, or 41%, for the year ended December 31, 2013 to $72.4 million, compared to $51.3 million for the year ended December 31, 2012. Provision expense decreased $1.3 million, or 63%, for the year ended December 31, 2013 to $746 thousand, compared to $2.0 million for the year ended December 31, 2012, reflecting improved asset quality. Noninterest income increased $3.5 million, or 30.0%, for the year ended December 31, 2013 to $15.1 million, compared to $11.6 million for the year ended December 31, 2012. Included in noninterest income for 2013 is a $1.1 million gain generated from settling, at a discount, the contingent underwriting fee liability remaining from the Public Offering. Noninterest expenses increased $9.8 million, or 18%, for the year ended December 31, 2013 to $64.1 million, compared to $54.3 million for the year ended December 31, 2012.
Asset quality continued to improve during 2013 and remains a point of strength for the Company. Nonperforming loans decreased $1.9 million, or 11%, from $17.8 million, or 1.31% of total loans, at December 31, 2012 to $15.9 million, or 1.23% of total loans, at December 31, 2013, due to the continued resolution of problem loans. Nonperforming assets decreased by $12.5 million, or 29%, from $42.9 million at December 31, 2012 to $26.8 million at December 31, 2013 due to successful disposition of numerous OREO properties and the continued resolution of problem assets. Nonperforming assets decreased to 1.37% of total assets at December 31, 2013 from 2.11% at December 31, 2012.
The allowance for loan losses was $8.8 million, or 0.68% of total loans, at December 31, 2013, compared to $10.6 million, or 0.78% of total loans, at December 31, 2012. Net charge-offs increased $1.4 million, or 90%, from $1.6 million, or 0.12% of total loans, for the year ended December 31, 2012 to $3.0 million, or 0.23% of total loans, for the year ended December 31, 2013.
Total assets increased $72.0 million, or 4%, to $2.0 billion at December 31, 2013. The investment securities portfolio, including nonmarketable equity securities, increased $154.4 million, or 61%, to $407.4 million. This increase was offset by decreases in (i) cash and cash equivalents of $129.1 million, or 70%, (ii) loans and loans held for sale of $70.9 million, or 5%, and (iii) all other asset categories of $26.4 million, or 11%. Included in the increase in investment securities is a $50 million investment strategy initiated in December 2013. Interest income from the strategy is intended to partially offset expenses associated with the new Richmond loan production office and other hiring initiatives. The strategy includes $25 million of agency collateralized mortgage obligations and $25 million of agency pass-through mortgage-backed securities, which were funded by a seven-year commitment of floating rate broker-dealer sweep accounts through a brokered money market deposit program. The future interest rate risk on these floating rate deposits is hedged through the combination of a $12.5 million five-year interest rate swap, a $12.5 million seven-year interest rate swap and a $25 million two-year forward starting five-year interest rate swap.
Total deposits decreased $32.1 million, or 2%, from December 31, 2012, to $1.6 billion at December 31, 2013 due higher yielding time deposits maturing and not being replaced and a decline in interest-bearing demand deposits. Total borrowings decreased $23.7 million, or 23%, to $78.0 million at December 31, 2013 compared to $101.7 million at December 31, 2012, due to the repayment of a $15.0 million FHLB daily credit rate borrowing and a change in a short-term borrowing product, for $9.1 million that was converted to an interest-bearing deposit product. Additionally, we entered into a $20 million three-year forward starting, five-year interest rate swap in October 2013 as a cash flow hedge against future interest rate risk in a portion of our floating rate FHLB borrowings.
Total shareholders’ equity decreased $13.6 million, or 5%, to $262.1 million at December 31, 2013 compared to $275.7 million at December 31, 2012, driven by the redemption of the $20.5 million Senior Non-Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”) and an $8.0 million decrease in accumulated other comprehensive income, partially offset by current year earnings.In the fourth quarter of 2013, we repurchased 56,267 shares of common stock at an average cost of $6.46 per share, for a total of $365 thousand. We remained well capitalized at December 31, 2013. Tangible common equity as a percentage of tangible assets remained strong at 12.14%. Tier 1 leverage ratio also remained strong at 11.79%.
Adjusted net income and related per share measures, as well as tangible common equity and tangible assets, and related ratios, are non-GAAP financial measures. For reconciliations to the most comparable GAAP measures, see “Non-GAAP Financial Measures” below.
Business Overview
The Company, a North Carolina corporation, was formed in October 2010 to serve as the holding company for the Bank and is a bank holding company registered with the Federal Reserve Board. The Bank was incorporated in September 2006 as a North Carolina-chartered commercial nonmember bank. On January 1, 2011, the Company acquired all of the outstanding common stock of the Bank in exchange for shares of the Company’s Common Stock, on a one-for-one basis, in a statutory share exchange transaction effected under North Carolina law pursuant to which the Company became the bank holding company for the Bank. Prior to January 1, 2011, the Company conducted no operations other than obtaining regulatory approval for the holding company reorganization. The Consolidated Financial Statements, the discussions of those financial statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as market data and all other operating information presented herein for periods prior to January 1, 2011, are those of the Bank on a stand-alone basis.
Consistent with our growth strategy, in January 2014, the Bank opened a loan production office in Richmond, Virginia. In prior years, the Bank opened full-service branches in Charleston and Greenville, South Carolina and Raleigh, North Carolina. The Bank currently anticipates that it will open additional branch offices and/or loan production offices in its target markets in the future.
As part of our growth strategy, the Company acquired Community Capital in November 2011. The aggregate merger consideration consisted of 4,024,269 shares of Common Stock and approximately $13.3 million in cash. The final transaction value was approximately $28.8 million based on the $3.85 per share closing price of the Common Stock on October 31, 2011.
In addition, in October 2012, the Company acquired Citizens South, the parent company of Citizens South Bank. The aggregate merger consideration consisted of 11,857,226 shares of Common Stock and $24.3 million in cash. The final transaction value was approximately $82.8 million based on the $4.94 per share closing price of the Common Stock on September 28, 2012.
The Company provides a full array of retail and commercial banking services, including wealth management, through its offices located in North Carolina, South Carolina, and Georgia. 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.
Recent Accounting Pronouncements
See Note 2 – Summary of Significant Accounting Policies to the Consolidated Financial Statements for a description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.
Critical Accounting Policies and Estimates
In the preparation of 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 2 – 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.
PCI Loans.Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered credit impaired. Evidence of credit quality deterioration as of the purchase date may include statistics such as internal risk grade, past due and nonaccrual status, recent borrower credit scores and recent loan-to-value (“LTV”) percentages. PCI loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the associated allowance for credit losses related to these loans is not carried over at the acquisition date. We estimate the cash flows expected to be collected at acquisition using specific credit review of certain loans, quantitative credit risk, interest rate risk and prepayment risk models, and qualitative economic and environmental assessments, each of which incorporate our best estimate of current key relevant factors, such as property values, default rates, loss severity and prepayment speeds.
Under the accounting guidance for PCI loans, the excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows to be collected. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference and is available to absorb future charge-offs.
In addition, subsequent to acquisition, we periodically evaluate our estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued usage of key assumptions and estimates, similar to the initial estimate of fair value. In the current economic environment, estimates of cash flows for PCI loans require significant judgment given the impact of home price and property value changes, changing loss severities, prepayment speeds and other relevant factors. Decreases in the expected cash flows will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses. Significant increases in the expected cash flows will generally result in an increase in interest income over the remaining life of the loan, or pool of loans. Disposals of loans, which may include sales of loans to third parties, receipt of payments in full or part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.
PCI loans currently represent loans acquired from Community Capital and Citizens South that were deemed credit impaired. PCI loans that were classified as nonperforming loans by Community Capital or Citizens South are no longer classified as nonperforming so long as, at acquisition and quarterly re-estimation periods, we believe we will fully collect the new carrying value of these loans. It is important to note that judgment regarding the timing and amount of cash flows to be collected is required to classify PCI loans as performing, even if the loan is contractually past due.
Allowance for Loan Losses.The allowance for loan losses is based upon management's ongoing evaluation of the loan portfolio and reflects an amount considered by management to be its best estimate of known and inherent losses in the portfolio as of the balance sheet date. The determination of the allowance for loan losses involves a high degree of judgment and complexity. In making the evaluation of the adequacy of the allowance for loan losses, management considers current economic and market conditions, independent loan reviews performed periodically by third parties, portfolio trends and concentrations, delinquency information, management's internal review of the loan portfolio, internal historical loss rates 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 us 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 management's assessment of their differing inherent loss characteristics, the entire allowance for losses on loans, other than the portion related to PCI loans and specific reserves on impaired loans, is available to absorb further loan losses in any segment.Further information regarding our policies and methodology used to estimate the allowance for possible loan losses is presented in Note 5 – Loans to the Consolidated Financial Statements.
OREO.OREO, consisting of real estate acquired through, or in lieu of, loan foreclosures is recorded at the lower of cost or fair value less estimated selling costs when acquired. Fair value is determined based on independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time of foreclosure or initial possession of collateral, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses.
Subsequent declines in the fair value of OREO below the new cost basis are recorded through valuation adjustments. Significant judgments and complex estimates are required in estimating the fair value of other real estate, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its problem asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate. Management reviews the value of other real estate periodically and adjusts the values as appropriate. Revenue and expenses from OREO operations as well as gains or losses on sales and any subsequent adjustments to the value are recorded as net cost (earnings) of operation of other real estate owned, a component of non-interest expense.
FDIC Indemnification Asset.In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, the FDIC indemnification asset was initially recorded at its fair value, and is measured separately from the related covered assets because the asset is not contractually embedded in them or transferrable with them in the event of disposal. The FDIC indemnification asset is measured at carrying value subsequent to initial measurement. Improved cash flows of the underlying covered assets will result in impairment of the FDIC indemnification asset and thus amortization through non-interest income. Impairment of the underlying covered assets will increase the cash flows of the FDIC indemnification asset and result in a credit to the provision for loan losses for acquired loans.
The purchase and assumption agreements between the Bank and the FDIC, as discussed in Note 6 – FDIC Loss Share Agreements to the Consolidated Financial Statements, each contain a provision that obligates us to make a "true-up" payment to the FDIC if the realized losses of each of the applicable acquired banks are less than expected. Any such "true-up" payment that is materially higher than current estimates could have a negative effect on our business, financial condition and results of operations. These amounts are recorded in other liabilities on the balance sheet. The actual payment will be determined at the end of the term of the loss sharing agreements and is based on the negative bid, expected losses, intrinsic loss estimate, and assets covered under the loss share agreements.
Income Taxes. Income taxes are provided based on the asset-liability method of accounting, which includes the recognition of deferred tax assets (“DTAs”) and liabilities for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. In general, we record a DTA when the event giving rise to the tax benefit has been recognized in the Consolidated Financial Statements.
As of December 31, 2013 and 2012, we had a net DTA in the amount of approximately $37.4 million and $40.9 million, respectively. We evaluate the carrying amount of our DTA quarterly in accordance with the guidance provided in FASB ASC Topic 740 (“ASC 740”), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e., a likelihood of more than 50%) that some portion, or all, of the DTA will not be realized within its life cycle, based on the weight of available evidence. In most cases, the realization of the DTA is dependent upon the Company generating a sufficient level of taxable income in future periods, which can be difficult to predict. If our forecast of taxable income within the carry forward periods available under applicable law is not sufficient to cover the amount of net deferred assets, such assets may be impaired. Based on the weight of available evidence, we have determined that it is more likely than not that we will be able to fully realize the existing DTA. Accordingly, we considered it appropriate not to establish a DTA valuation allowance at either December 31, 2013 or 2012.
Further information regarding our income taxes is presented in Note 12 —Income Taxes to the Consolidated Financial Statements.
Non-GAAP Financial Measures
In addition to traditional measures, management uses tangible assets, tangible common equity, tangible book value, adjusted allowance for loan losses to loans, adjusted net income (loss), adjusted noninterest income, adjusted noninterest expenses and adjusted net interest margin, and related ratios and per-share measures, each of which is a non-GAAP financial measure. Management uses (i) tangible assets, tangible common equity and tangible book value (which exclude goodwill and other intangibles from equity and assets) and related ratios to evaluate the adequacy of shareholders' equity and to facilitate comparisons with peers; (ii) adjusted allowance for loan losses (which includes net fair market value adjustments related to acquired loans) to evaluate both its asset quality and asset quality trends, and to facilitate comparisons with peers; and (iii) adjusted net income (loss), adjusted noninterest income and adjusted noninterest expense (which exclude merger-related expenses and gain on sale of securities, as applicable) and adjusted net interest margin (which excludes accelerated accretion of net acquisition accounting fair market value adjustments) to evaluate its core earnings and to facilitate comparisons with peers.
The following table presents these non-GAAP financial measures and provides a reconciliation of these non-GAAP measures to the most directly comparable GAAP measure reported in the Company’s Consolidated Financial Statements at December 31:
Reconciliation of Non-GAAP Financial Measures
| | | 2013 | | | 2012 | | | 2011 | |
| | (dollars in thousands, except share and per share data) | |
| Tangible assets: | | | |
Total assets | | $ | 1,960,790 | | | $ | 2,032,794 | | | | | |
Less: intangible assets | | | 35,049 | | | | 36,078 | | | | | |
Tangible assets | | $ | 1,925,741 | | | $ | 1,996,716 | | | | | |
| | | | | | | | | | | | | |
Tangible common equity: | | | | | | | | | | | | |
Total common equity | | $ | 262,083 | | | $ | 255,202 | | | | | |
Less: intangible assets | | | 35,049 | | | | 36,078 | | | | | |
Tangible common equity | | $ | 227,034 | | | $ | 219,124 | | | | | |
| | | | | | | | | | | | | |
Tangible common equity to tangible assets: | | | | | | | | | | | | |
Tangible common equity | | $ | 227,034 | | | $ | 219,124 | | | | | |
Divided by: tangible assets | | | 1,925,741 | | | | 1,996,716 | | | | | |
Tangible common equity to tangible assets | | | 11.79 | % | | | 10.97 | % | | | | |
Total equity to total assets | | | 13.37 | % | | | 12.55 | % | | | | |
| | | | | | | | | | | | | |
Tangible book value per share: | | | | | | | | | | | | |
Issued and outstanding shares | | | 44,730,669 | | | | 44,575,853 | | | | | |
Less: nondilutive restricted awards | | | (770,399 | ) | | | (646,260 | ) | | | | |
Period end dilutive shares | | | 43,960,270 | | | | 43,929,593 | | | | | |
| | | | | | | | | | | | | |
Tangible common equity | | $ | 227,034 | | | $ | 219,124 | | | | | |
Divided by: dilutive common shares outstanding (1) | | | 43,960,270 | | | | 43,929,593 | | | | | |
Tangible common book value per share | | $ | 5.16 | | | $ | 4.99 | | | | | |
Total common book value per share | | $ | 5.96 | | | $ | 5.81 | | | | | |
| | | | | | | | | | | | | |
Adjusted allowance for loan losses (2): | | | | | | | | | | | | |
Allowance for loan losses | | $ | 8,831 | | | $ | 10,591 | | | | | |
Plus: acquisition accounting net FMV adjustments to acquired loans | | | 37,783 | | | | 53,719 | | | | | |
Adjusted allowance for loan losses | | $ | 46,614 | | | $ | 64,310 | | | | | |
Divided by: total loans (excluding LHFS) | | | 1,295,808 | | | | 1,356,707 | | | | | |
Allowance for loan losses to total loans | | | 0.68 | % | | | 0.78 | % | | | | |
Adjusted allowance for loan losses to total loans | | | 3.60 | % | | | 4.74 | % | | | | |
| | | | | | | | | | | | | |
Adjusted net income (loss): | | | | | | | | | | | | |
Pretax income (loss) (as reported) | | $ | 22,664 | | | $ | 6,649 | | | $ | (13,303 | ) |
Plus: merger-related expenses | | | 2,211 | | | | 5,895 | | | | 3,812 | |
Less: gain on sale of securities | | | (98 | ) | | | (1,478 | ) | | | (20 | ) |
Pretax income (loss) | | | 24,777 | | | | 11,066 | | | | (9,511 | ) |
Tax expense (benefit) | | | 8,089 | | | | 3,558 | | | | (3,604 | ) |
Adjusted net income (loss) | | | 16,688 | | | | 7,508 | | | | (5,907 | ) |
Preferred dividends | | | 353 | | | | 51 | | | | - | |
Adjusted net income (loss) available to common shareholders | | $ | 16,335 | | | $ | 7,457 | | | $ | (5,907 | ) |
| | | | | | | | | | | | | |
Adjusted net income (loss) available to common shareholders per share | | $ | 0.37 | | | $ | 0.21 | | | $ | (0.21 | ) |
Divided by: weighted average diluted shares | | | 44,053,253 | | | | 35,108,229 | | | | 28,723,647 | |
| | | | | | | | | | | | | |
Adjusted net interest margin: | | | | | | | | | | | | |
Net interest income (as reported) | | $ | 72,423 | | | $ | 51,376 | | | $ | 19,395 | |
Less: accelerated mark accretion | | | (1,454 | ) | | | (2,650 | ) | | | - | |
Less: other accelerated accretion | | | - | | | | (121 | ) | | | - | |
Adjusted net interest income | | | 70,969 | | | | 48,605 | | | | 19,395 | |
Divided by: average earning assets | | | 1,736,276 | | | | 1,202,990 | | | | 648,418 | |
Adjusted net interest margin | | | 4.09 | % | | | 4.04 | % | | | 2.99 | % |
Net interest margin (fully tax-equivalent) | | | 4.20 | % | | | 4.28 | % | | | 3.06 | % |
| | | | | | | | | | | | | |
Adjusted noninterest income: | | | | | | | | | | | | |
Noninterest income (as reported) | | $ | 15,086 | | | $ | 11,372 | | | $ | 1,647 | |
Less: gain on sale of securities | | | (98 | ) | | | (1,478 | ) | | | (20 | ) |
Adjusted noninterest income | | $ | 14,988 | | | $ | 9,894 | | | $ | 1,627 | |
| | | | | | | | | | | | | |
Adjusted noninterest expense: | | | | | | | | | | | | |
Noninterest expense (as reported) | | $ | 64,099 | | | $ | 54,076 | | | $ | 24,960 | |
Less: merger-related expenses | | | (2,211 | ) | | | (5,895 | ) | | | (3,812 | ) |
Adjusted noninterest expense | | $ | 61,888 | | | $ | 48,181 | | | $ | 21,148 | |
| | (1) | As contemplated during the Public Offering, the Company awarded certain performance-based restricted shares to officers and directors following the holding company reorganization. These shares vest one-third each when the Company’s stock price per share reaches the following performance thresholds for 30 consecutive trading days: (i) 125% of offer price ($8.13); (ii) 140% of offer price ($9.10); and (iii) 160% of offer price ($10.40). These anti-dilutive restricted shares are issued (and thereby have voting rights), but are not included in earnings per share or tangible book value per share calculations until they vest (and thereby have economic rights). There were 554,400 shares outstanding at December 31, 2013 and 568,260 shares outstanding at December 31, 2012. |
| | (2) | Provided merely as supplemental information for comparing the combined allowance and fair market value adjustments to the combined acquired and non-acquired loan portfolios; fair market value adjustments are available only for losses on acquired loans. |
Results of Operations
Summary. The Company recorded net income of $15.0 million, or $0.34 per diluted share, for the year ended December 31, 2013, compared to a net income of $4.3 million, or $0.12 per diluted common share, for the year ended December 31, 2012 and a net loss of $8.4 million, or $(0.29) per diluted common share, for the year ended December 31, 2011. Excluding merger-related expenses and gain on sale of securities, the Company reported adjusted net income available to common shareholders of $16.3 million, or $0.37 per share, for the year ended December 31, 2013 compared to adjusted net income of $7.5 million, or $0.21 per share, for the year ended December 31, 2012 and adjusted net loss of $5.9 million, or $(0.21) per share, for the year ended December 31, 2011.
Merger-related expenses totaled $2.2 million in 2013 compared to $5.9 million in 2012, and $3.8 million in 2011. Gains on sale of securities totaled $98 thousand in 2013 compared to $1.5 million in 2012, and $20 thousand in 2011. Results for 2013 include a full year of operations from the merger with Citizens South. Results for 2012 included three months of operations from the merger with Citizens South and a full year of operations from the merger with Community Capital. Results for 2011 included two months of operations from the merger with Community Capital. Adjusted net income available to common shareholders is a non-GAAP financial measure. For a reconciliation to the most comparable GAAP measure, see “Non-GAAP Financial Measures” above.
As a result of the mergers with Citizens South in October 2012 and Community Capital in November 2011, diluted weighted average shares increased to 28,723,647 in 2011, 35,108,229 in 2012, and 44,053,253 in 2013.
The following table presents selected ratios for the Company for the years ended December 31:
| | | Year ended December 31, |
| | | 2013 | | 2012 | | 2011 |
Return on Average Assets | | | 0.76 | % | | | 0.32 | % | | | -1.20 | % |
| | | | | | | | | | | | | |
Return on Average Equity | | | 5.42 | % | | | 1.99 | % | | | -4.69 | % |
| | | | | | | | | | | | | |
Period End Equity to Total Assets | | | 13.37 | % | | | 13.56 | % | | | 17.07 | % |
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) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2013 | | | 2012 | | | 2011 | | | Change 2013 vs. 2012 | | | Change 2012 vs. 2011 | |
| | | (dollars in thousands) | |
Interest income | | $ | 78,805 | | | $ | 57,946 | | | $ | 25,564 | | | $ | 20,859 | | | | 36 | % | | $ | 32,382 | | | | 127 | % |
Interest expense | | | 6,382 | | | | 6,570 | | | | 6,169 | | | | (188 | ) | | | -3 | % | | | 401 | | | | 7 | % |
Net interest income | | | 72,423 | | | | 51,376 | | | | 19,395 | | | | 21,047 | | | | 41 | % | | | 31,981 | | | | 165 | % |
Provision for loan losses | | | 746 | | | | 2,023 | | | | 9,385 | | | | (1,277 | ) | | | -63 | % | | | (7,362 | ) | | | -78 | % |
Noninterest income | | | 15,086 | | | | 11,372 | | | | 1,647 | | | | 3,714 | | | | 33 | % | | | 9,725 | | | | 590 | % |
Noninterest expense | | | 64,099 | | | | 54,076 | | | | 24,960 | | | | 10,023 | | | | 19 | % | | | 29,116 | | | | 117 | % |
Net income (loss) before taxes | | | 22,664 | | | | 6,649 | | | | (13,303 | ) | | | 16,015 | | | | 241 | % | | | 19,952 | | | | -150 | % |
Income tax expense (benefit) | | | 7,359 | | | | 2,306 | | | | (4,944 | ) | | | 5,053 | | | | 219 | % | | | 7,250 | | | | -147 | % |
Net income (loss) | | | 15,305 | | | | 4,343 | | | | (8,359 | ) | | | 10,962 | | | | 252 | % | | | 12,702 | | | | -152 | % |
Preferred dividends | | | 353 | | | | 51 | | | | - | | | | 302 | | | | 592 | % | | | 51 | | | | 100 | % |
Net income (loss) to common shareholders | | $ | 14,952 | | | $ | 4,292 | | | $ | (8,359 | ) | | $ | 10,660 | | | | 248 | % | | $ | 12,651 | | | | -151 | % |
For the year ended December 31, 2013, we generated net income of $15.3 million, compared to net income of $4.3 million for the year ended December 31, 2012. The change in our results of operations in 2013 includes an increase of $21.0 million in net interest income, a decrease of $1.3 million in the provision for loan losses and a $3.7 million increase in noninterest income, offset by an increase of $10.0 million in noninterest expense. We also recorded tax expense of $7.4 million in 2013 compared to $2.3 million in 2012.
The Company generated net income of $4.3 million for the year ended December 31, 2012, compared to a net loss of $8.4 million for the year ended December 31, 2011. The change in our results of operations in 2012 from 2011 includes an increase of $32.0 million in net interest income, a decrease of $7.4 million in the provision for loan losses and a $9.7 million increase in non-interest income, offset by an increase of $29.1 million in noninterest expense. We also recorded tax expense of $2.3 million in 2012 compared to a tax benefit of $4.9 million in 2011.
Details of the changes in the various components of net income (loss) are further discussed below.
Net Interest Income.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 management’s responses to changes in interest rates through asset/liability management.
Net interest income increased $21.0 million, or 41%, to $72.4 million in 2013 compared to $51.4 million in 2012. Average earning assets increased during the year by having a full year of results from the Citizens South merger. Net interest income increased $32.0 million, or 165%, to $51.4 million in 2012 compared to $19.4 million in 2011. Average earning assets increased in 2012, which was primarily driven by the addition of Citizens South assets following the merger on October 1, 2012 and a full year of results from the Community Capital merger.
Net interest income for the year ended December 31, 2013 included $1.5 million of accelerated accretion of net acquisition accounting fair market value adjustments for purchased performing loans, as accounted for under the contractual cash flow method of accounting. Net interest income for the year ended December 31, 2012 included $2.8 million of accelerated accretion of net acquisition accounting fair market value adjustments for purchased performing loans, as accounted for under the contractual cash flow method of accounting. There was no accelerated accretion for the year ended December 31 2011. This accelerated accretion, which was not anticipated at the time of acquisition, resulted from a combination of (i) borrowers repaying performing acquired loans faster than required by their contractual terms; and / or (ii) 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 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 | |
| | | 2013 | | | 2012 | | | 2011 | |
| | | Average Balance | | | Income/ Expense | | | Yield/ Rate | | | Average Balance | | | Income/ Expense | | | Yield/ Rate | | | Average Balance | | | Income/ Expense | | | Yield/ Rate | |
| | (dollars in thousands) | |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans with fees (1)(3) | | $ | 1,328,210 | | | $ | 72,809 | | | | 5.48 | % | | $ | 896,769 | | | $ | 53,334 | | | | 5.95 | % | | $ | 443,629 | | | $ | 21,776 | | | | 4.91 | % |
Federal funds sold | | | 14,737 | | | | 24 | | | | 0.16 | % | | | 22,731 | | | | 49 | | | | 0.22 | % | | | 38,667 | | | | 90 | | | | 0.23 | % |
Investment securities - taxable | | | 299,641 | | | | 5,029 | | | | 1.68 | % | | | 216,055 | | | | 3,606 | | | | 1.67 | % | | | 129,136 | | | | 2,830 | | | | 2.19 | % |
Investment securities - tax-exempt (2)(3) | | | 17,166 | | | | 1,047 | | | | 6.10 | % | | | 18,044 | | | | 750 | | | | 4.16 | % | | | 15,974 | | | | 1,165 | | | | 7.29 | % |
Nonmarketable equity securities | | | 6,163 | | | | 150 | | | | 2.43 | % | | | 7,092 | | | | 194 | | | | 2.74 | % | | | 3,226 | | | | 53 | | | | 1.64 | % |
Other interest-earning assets | | | 70,359 | | | | 177 | | | | 0.25 | % | | | 42,299 | | | | 153 | | | | 0.36 | % | | | 17,786 | | | | 99 | | | | 0.56 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-earning assets | | | 1,736,276 | | | | 79,236 | | | | 4.56 | % | | | 1,202,990 | | | | 58,086 | | | | 4.83 | % | | | 648,418 | | | | 26,013 | | | | 4.01 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | (10,797 | ) | | | | | | | | | | | (9,788 | ) | | | | | | | | | | | (10,979 | ) | | | | | | | | |
Cash and due from banks | | | 17,392 | | | | | | | | | | | | 20,657 | | | | | | | | | | | | 17,293 | | | | | | | | | |
Premises and equipment | | | 57,015 | | | | | | | | | | | | 32,886 | | | | | | | | | | | | 8,157 | | | | | | | | | |
Other assets | | | 162,628 | | | | | | | | | | | | 102,445 | | | | | | | | | | | | 32,581 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,962,514 | | | | | | | | | | | $ | 1,349,190 | | | | | | | | | | | $ | 695,470 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing demand | | $ | 292,698 | | | $ | 272 | | | | 0.09 | % | | $ | 135,255 | | | $ | 313 | | | | 0.23 | % | | $ | 23,423 | | | $ | 36 | | | | 0.15 | % |
Savings and money market | | | 447,421 | | | | 1,293 | | | | 0.29 | % | | | 293,175 | | | | 1,175 | | | | 0.40 | % | | | 119,620 | | | | 707 | | | | 0.59 | % |
Time deposits - core | | | 481,435 | | | | 1,696 | | | | 0.35 | % | | | 298,144 | | | | 1,475 | | | | 0.49 | % | | | 175,929 | | | | 2,352 | | | | 1.34 | % |
Brokered deposits | | | 103,630 | | | | 847 | | | | 0.81 | % | | | 137,737 | | | | 1,476 | | | | 1.07 | % | | | 97,894 | | | | 1,659 | | | | 1.69 | % |
Total interest-bearing deposits | | | 1,325,184 | | | | 4,108 | | | | 0.31 | % | | | 864,311 | | | | 4,439 | | | | 0.51 | % | | | 416,866 | | | | 4,754 | | | | 1.14 | % |
Federal Home Loan Bank advances | | | 56,685 | | | | 550 | | | | 0.97 | % | | | 55,861 | | | | 600 | | | | 1.07 | % | | | 26,128 | | | | 557 | | | | 2.13 | % |
Subordinated debt and other borrowings | | | 25,606 | | | | 1,724 | | | | 6.73 | % | | | 17,666 | | | | 1,531 | | | | 8.67 | % | | | 9,292 | | | | 858 | | | | 9.23 | % |
Total borrowed funds | | | 82,291 | | | | 2,274 | | | | 2.76 | % | | | 73,527 | | | | 2,131 | | | | 2.90 | % | | | 35,420 | | | | 1,415 | | | | 3.99 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 1,407,475 | | | | 6,382 | | | | 0.45 | % | | | 937,838 | | | | 6,570 | | | | 0.70 | % | | | 452,286 | | | | 6,169 | | | | 1.36 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest rate spread | | | | | | | 72,854 | | | | 4.11 | % | | | | | | | 51,516 | | | | 4.13 | % | | | | | | | 19,844 | | | | 2.65 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing demand deposits | | | 255,149 | | | | | | | | | | | | 182,702 | | | | | | | | | | | | 58,664 | | | | | | | | | |
Other liabilities | | | 22,521 | | | | | | | | | | | | 13,383 | | | | | | | | | | | | 6,454 | | | | | | | | | |
Shareholders' equity | | | 275,742 | | | | | | | | | | | | 215,267 | | | | | | | | | | | | 178,066 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 1,960,887 | | | | | | | | | | | $ | 1,349,190 | | | | | | | | | | | $ | 695,470 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin | | | | | | | | | | | 4.20 | % | | | | | | | | | | | 4.28 | % | | | | | | | | | | | 3.06 | % |
(1) Nonaccrual loans are included in the average loan balances.
(2) Interest income and yields are presented on a fully tax-equivalent basis.
(3) Fully tax-equivalent basis at 38.55% tax rate for nontaxable securities and loans.
The following table details the calculation of fully tax-equivalent net interest income for the years ended December 31:
Tax Equivalent Adjustments
| | | 2013 | | | 2012 | | | 2011 | |
| | | (dollars in thousands) | |
Net interest income, as reported | | $ | 72,423 | | | $ | 51,376 | | | $ | 19,395 | |
Tax equivalent adjustments | | | 431 | | | | 338 | | | | 449 | |
Fully tax-equivalent net interest income | | $ | 72,854 | | | $ | 51,714 | | | $ | 19,844 | |
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 on such assets and liabilities:
Volume and Rate Variance Analysis
| | | Year Ended December 31, | |
| | | 2013 vs. 2012 | | | 2012 vs. 2011 | |
| | | Increase/(Decrease) Due to | |
| | | Volume | | | Rate | | | Total | | | Volume | | | Rate | | | Total | |
Interest-earning assets: | | (dollars in thousands) | |
Loans with fees (1) | | $ | 24,655 | | | $ | (5,180 | ) | | $ | 19,475 | | | $ | 24,596 | | | $ | 6,962 | | | $ | 31,558 | |
Federal funds sold | | | (15 | ) | | | (10 | ) | | | (25 | ) | | | (36 | ) | | | (5 | ) | | | (41 | ) |
Investment securities - taxable | | | 1,399 | | | | 24 | | | | 1,423 | | | | 1,678 | | | | (902 | ) | | | 776 | |
Investment securities - tax-exempt | | | (45 | ) | | | 342 | | | | 297 | | | | 119 | | | | (534 | ) | | | (415 | ) |
Nonmarketable equity securities | | | (24 | ) | | | (20 | ) | | | (44 | ) | | | 85 | | | | 56 | | | | 141 | |
Other interest-earning assets | | | 86 | | | | (62 | ) | | | 24 | | | | 113 | | | | (59 | ) | | | 54 | |
Total earning assets | | | 26,056 | | | | (4,907 | ) | | | 21,150 | | | | 26,554 | | | | 5,519 | | | | 32,073 | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing demand | | | 255 | | | | (296 | ) | | | (41 | ) | | | 215 | | | | 62 | | | | 277 | |
Savings and money market | | | 532 | | | | (414 | ) | | | 118 | | | | 861 | | | | (393 | ) | | | 468 | |
Time deposits - core | | | 776 | | | | (555 | ) | | | 221 | | | | 1,119 | | | | (1,996 | ) | | | (877 | ) |
Brokered deposits | | | (322 | ) | | | (307 | ) | | | (629 | ) | | | 551 | | | | (734 | ) | | | (183 | ) |
Total interest bearing deposits | | | 1,242 | | | | (1,573 | ) | | | (331 | ) | | | 2,746 | | | | (3,061 | ) | | | (315 | ) |
Federal Home Loan Bank advances | | | 8 | | | | (58 | ) | | | (50 | ) | | | 477 | | | | (434 | ) | | | 43 | |
Other borrowings | | | 611 | | | | (418 | ) | | | 193 | | | | 749 | | | | (76 | ) | | | 673 | |
Total borrowed funds | | | 620 | | | | (477 | ) | | | 143 | | | | 1,226 | | | | (510 | ) | | | 716 | |
Total interest-bearing liabilities | | | 1,862 | | | | (2,049 | ) | | | (188 | ) | | | 3,972 | | | | (3,571 | ) | | | 401 | |
Increase in net interest income | | $ | 24,194 | | | $ | (2,857 | ) | | $ | 21,338 | | | $ | 22,582 | | | $ | 9,090 | | | $ | 31,672 | |
(1) Nonaccrual loans are included in the average loan balances.
Net interest income on a tax-equivalent basis totaled $72.9 million in 2013 as compared to $51.7 million in 2012. The interest rate spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 4.11% in 2013 and represented a slight decrease from the 2012 net interest rate spread of 4.13%. The net interest margin decreased 8 basis points in 2013 to 4.20% from 4.28% in 2012. The decrease in net interest margin was primarily due to the expiration of amortization of fair market value adjustments on acquired deposits and decreased accelerated accretion of net acquisition accounting fair market value adjustments on purchased performing loans.
Adjusted net interest margin, which excludes accelerated accretion of net acquisition accounting fair market value adjustments, was 4.09% in 2013 and represented an increase from the 2012 adjusted net interest margin of 4.04%. This change is the result of the inclusion of a full year of results from the merger with Citizens South. Adjusted net interest margin is a non-GAAP financial measure. For a reconciliation to the most comparable GAAP measure, see “Non-GAAP Financial Measures” above.
Tax-equivalent interest income increased $21.1 million, or 36%, to $79.2 million in 2013 compared to $58.1 million in 2012 as a result of higher average earning assets. Average earning assets increased $533.3 million, or 44%, to $1.7 billion for 2013 from $1.2 billion in 2012. Average loans increased $431.4 million, or 48%, as a result of the inclusion of a full year of results from Citizens South. Average investments increased $82.7 million, or 35%, to $316.8 million. Average federal funds sold decreased $8.0 million, or 35%, to $14.7 million, and other interest-earning assets increased $28.1 million, or 66%, to $70.4 million. Other interest-earning assets include interest-earning balances at correspondent banks. The yield on earning assets decreased to 4.56% in 2013 from 4.83% in 2012. This decrease included a 47 basis point decrease in loan yields resulting from the decrease in accelerated accretion of net acquisition accounting fair market value adjustments on purchased performing loans.
Interest expense decreased nominally by $188 thousand, or 3%, to $6.4 million in 2013 compared to $6.6 million in 2012, primarily due to a decrease in the average rate paid on interest-bearing liabilities, which declined 25 basis points to 0.45% from 0.70% in 2012. The decrease in average rate paid resulted from management re-pricing actions on deposit rates. Averageinterest-bearing liabilities increased $469.6 million, or 50%, to $1.4 billion from $937.8 million in 2012, primarily as a result of the merger with Citizens South. Average interest-bearing demand deposits increased $157.4 million, or 116%, to $292.7 million in 2013 compared to $135.3 million in 2012. Average savings and money market accounts increased $154.2 million, or 53%, to $447.4 million in 2013, compared to $293.2 million in 2012. Average core time deposits increased $183.3 million, or 61%, to $481.4 million in 2013 from $298.1 million in 2012. Average brokered deposits, which consist of brokered interest-bearing deposits, brokered money market accounts, and brokered certificates of deposits, decreased $34.1 million during 2013, which is primarily a function of management electing not to renew maturing certificates of deposits. As a result of the brokered money market deposit program initiated in December 2013 in connection with our $50 million investment strategy, our brokered deposits now include money market and interest-bearing deposits.
Net interest income on a tax-equivalent basis totaled $51.7 million in 2012 as compared to $19.8 million in 2011. The interest rate spread was 4.13% in 2012 and represented a 148 basis point increase from the 2011 net interest spread of 2.65%. The net interest margin increased 122 basis points in 2012 to 4.28% from 3.06% in 2011. The increase in net interest margin was attributed to the increase in average loans and our decreased cost of interest-bearing liabilities, in part due to the impact from acquisition accounting related to fair market value adjustments and accelerated accretion of net acquisition accounting fair market value adjustments on purchased performing loans.
Adjusted net interest margin, which excludes accelerated accretion of net acquisition accounting fair market value adjustments, was 4.04% in 2012 and represented an increase from the 2011 adjusted net interest margin of 2.99%. This change is the result of the inclusion of a full year of results from the merger with Community Capital. Adjusted net interest margin is a non-GAAP financial measure. For a reconciliation to the most comparable GAAP measure, see “Non-GAAP Financial Measures” above.
Tax-equivalent interest income increased $32.3 million, or 124%, to $58.2 million in 2012 compared to $26.0 million in 2011 as a result of higher average earning assets and an increased yield on interest earning assets. Average earning assets increased $554.6 million, or 86%, to $1.2 billion for the year. Average loans increased $453.1 million, or 102%, from the inclusion of three months of results from Citizens South and a full year from Community Capital. Average investments increased $89.0 million, or 61%, reflecting the inclusion of a full year of results from the acquired portfolio from Community Capital. The yield on earning assets increased to 4.84% from 4.00% in 2011. This increase included a 102 basis point increase in loan yields resulting from a full year of accretion on the Community Capital acquired loan portfolio and three months of accretion on the Citizens South acquired loan portfolio. These trends are not expected to be sustained as the fair value mark on the acquired portfolio will decline over time.
Interest expense increased nominally by $401 thousand, or 7%, to $6.6 million in 2012 compared to $6.2 million in 2011, primarily due to an increase in interest-bearing liabilities. The average rate on interest bearing liabilities in 2012 declined 66 basis points to 0.70% from 1.36% in 2011. The decrease in average rate paid resulted from management re-pricing actions as well as improved funding mix resulting from the Citizens South and Community Capital mergers. In addition, management restructured our FHLB advances in late 2011, which extended the term. This action contributed a full year 105 basis point reduction in the average rate to 1.07% from 2.13% in 2011. Average interest-bearing liabilities increased $485.6 million, or 107%, to $937.8 million in 2012 from $452.3 million in 2011, primarily as a result of the merger with Citizens South.
The Company’s 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 17 – Derivative Financial Instruments and Hedging Activities to the Consolidated Financial Statements. Information regarding the impact of fluctuations in interest rates on the Company’s derivative financial instruments is set forth below in the section entitled “Market Risk and Interest Rate Sensitivity”.
Provision for Loan Losses. The provision for loan losses was $746 thousand, $2.0 million and $9.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. The decrease in provision for 2013 is a result of both a reduction in outstanding loans and improvement in the quality of our loans. We also recorded a $501 thousand benefit in 2013 attributable to the FDIC loss share agreements assumed from Citizens South caused by an increase in expected loss in those acquired loans. Generally, these additional expected losses are reflected as a provision for loan losses, and offset with an expected benefit through the FDIC indemnification asset for those acquired loans covered by FDIC loss share agreements. Also included in the provision expense for 2013 was net impairment reversal of $607 thousand associated with PCI loan pools, compared to a net impairment charge related to PCI pools of $967 thousand in 2012.
The decrease in the provision for 2012 compared to 2011 is primarily a result of improved asset quality. Included in the provision for loan losses for 2012 was a net impairment charge of $967 thousand associated with PCI pools. The provision in2011 reflected the negative impact on our loan portfolio of the continued economic uncertainty that persisted across our markets and a refinement to our allowance for loan loss methodology, which introduced a more comprehensive qualitative component. We had $3.0 million in net charge-offs during 2013, compared to $1.6 million and $11.7 million during 2012 and 2011, respectively.
Noninterest Income.Until 2011, noninterest income had not historically been a major component of our earnings. However, as a result of the mergers with Citizens South and Community Capital, noninterest income has become a key component of our earnings. Noninterest income increased $3.7 million, or 33%, to $15.1 million in 2013 from $11.4 million in 2012. Service charges on deposit accounts increased $832 thousand, or 46%, to $2.6 million in 2013 from $1.8 million in 2012. This increase is due to an increase in deposit accounts resulting from our expanded retail and commercial banking activities. Income from fiduciary activities associated with new asset management, investment brokerage, and trust services increased $447 thousand from 2012 to 2013. Following a review of wealth management activities, in 2013 we determined to exit the custody business, which is expected to be completed by mid-2014. Resources currently focused on the custody business are expected to be redirected to our core asset management business. We expect that this decision will have a negative impact on existing income from fiduciary activities of approximately $800 thousand on an annual basis. Commissions and fees from investment brokerage activity increased 45% to $419 thousand in 2013, from $287 thousand in 2012. We reported gains on the sale of securities of $98 thousand in 2013, compared to $1.5 million in 2012. Income from bankcard services increased $1.3 million, or 119%, to $2.4 million in 2013 from $1.1 million in 2012. Mortgage banking income increased $645 thousand, or 26%, to $3.1 million in 2013, from $2.5 million in 2012. Included in earnings for 2013 is $113 thousand pursuant to ASC 815-10-S99-1 (formerly Staff Accounting Bulletin 109), which represents the fair value measurement of our written loan commitments including the future cash flows related to the loan’s servicing rights. Income from bank-owned life insurance increased $599 thousand, or 47%, to $1.9 million in 2013 from $1.3 million in 2012, which is a result of $18.8 million of bank-owned life insurance acquired in connection with the Citizens South merger. Other noninterest income increased $1.2 million, or 182%, to $1.8 million in 2013 from $634 thousand in 2012. Included in the 2013 results is a nontaxable $1.1 million gain generated from settling, at a discount, the contingent underwriting fee liability remaining from the Public Offering. We had recorded the full $3.0 million amount of this fee as a liability on our balance sheet at the time of the Public Offering. Payment to the underwriters was contingent upon the Company’s stock trading at a market price of $8.125 per share for thirty consecutive days. We pursued this negotiated settlement in order to remove the liability from the balance sheet.
In 2012, noninterest income increased by $10.0 million from 2011, including a $2.2 million increase in mortgage banking income as a result of the attractive residential mortgage refinancing environment; a $1.9 million increase in income from wealth management activities associated with asset management, investment brokerage and trust services; a $1.5 million increase in service charges on deposit account associated with expanded retail and commercial banking activities; and a $1.1 million increase in ATM and card services. Also in 2012, we sold securities for a net gain of $1.5 million. In addition, the bank-owned life insurance acquired through the Citizens South merger, along with previously existing policies, resulted in an increase of $1.0 million in income compared to 2011.
Excluding gain on sale of securities of $98 thousand in 2013, $1.5 million in 2012 and $20 thousand in 2011, respectively, adjusted noninterest income increased $5.1 million in 2013, and $8.3 million in 2012 primarily as a result of the aforementioned mergers. Adjusted noninterest income is a non-GAAP financial measure. For a reconciliation to the most comparable GAAP measure, see “Non-GAAP Financial Measures” above.
The following table summarizes components of noninterest income for the years ended December 31:
Noninterest Income
| | | 2013 | | | 2012 | | | 2011 | | | Change 2013 vs. 2012 | | | Change 2012 vs. 2011 | |
| | | (dollars in thousands) | |
Service charges on deposit accounts | | $ | 2,646 | | | $ | 1,814 | | | $ | 315 | | | $ | 832 | | | | 46 | % | | $ | 1,499 | | | | 476 | % |
Income from fiduciary activities | | | 2,779 | | | | 2,332 | | | | 418 | | | | 447 | | | | 19 | % | | | 1,914 | | | | 458 | % |
Commissions and fees from investment brokerage | | | 419 | | | | 287 | | | | 29 | | | | 132 | | | | 46 | % | | | 258 | | | | 890 | % |
Gain on sale of securities available-for-sale | | | 98 | | | | 1,478 | | | | 20 | | | | (1,380 | ) | | | -93 | % | | | 1,458 | | | | 7290 | % |
Bankcard services income | | | 2,373 | | | | 1,085 | | | | 181 | | | | 1,288 | | | | 119 | % | | | 904 | | | | 499 | % |
Mortgage banking income | | | 3,123 | | | | 2,478 | | | | 297 | | | | 645 | | | | 26 | % | | | 2,181 | | | | 734 | % |
Income from bank-owned life insurance | | | 1,863 | | | | 1,264 | | | | 248 | | | | 599 | | | | 47 | % | | | 1,016 | | | | 410 | % |
Other noninterest income | | | 1,785 | | | | 634 | | | | 139 | | | | 1,151 | | | | 182 | % | | | 495 | | | | 356 | % |
Total noninterest income | | $ | 15,086 | | | $ | 11,372 | | | $ | 1,647 | | | $ | 3,714 | | | | 33 | % | | $ | 9,725 | | | | 590 | % |
Noninterest Expense. The level of noninterest expense substantially affects our profitability. Total noninterest expense was $64.1 million in 2013, an increase of $10.0 million, or 18%, from $54.1 million in 2012. The increase is primarily due to the inclusion of a full year of expense from the Citizens South merger. Total noninterest expense was $54.1 million for 2012, an increase of 117% from $25.0 in 2011 primarily a result of the merger with Citizens South and a full year of expense from the merger with Community Capital and organic growth initiatives.
In 2013, we incurred approximately $2.0 million in expenses related to the Citizens South merger resulting from core system conversion and employee benefit plans conversions. Excluding merger-related expenses of $2.2 million, $5.9 million and $3.8 million in 2013, 2012 and 2011, respectively, adjusted noninterest expense increased $13.7 million, or 28%, to $61.9 million in 2013 from $48.2 million in 2012 and $27.0 million, or 128%, to $48.2 million in 2012 from $21.1 million in 2011, primarily as a result of the aforementioned mergers and organic growth initiatives. Adjusted noninterest expense is a non-GAAP financial measure. For a reconciliation to the most comparable GAAP measure, see “Non-GAAP Financial Measures” above.
The following table summarizes components of noninterest expense for the years ended December 31:
Noninterest Expense
| | | 2013 | | | 2012 | | | 2011 | | | Change 2013 vs. 2012 | | | Change 2012 vs. 2011 | |
| | | (dollars in thousands) | |
Salaries and employee benefits | | $ | 34,570 | | | $ | 29,396 | | | $ | 14,778 | | | $ | 5,174 | | | | 18 | % | | $ | 14,618 | | | | 99 | % |
Occupancy and equipment | | | 7,691 | | | | 4,654 | | | | 1,588 | | | | 3,037 | | | | 65 | % | | | 3,066 | | | | 193 | % |
Advertising and promotion | | | 839 | | | | 781 | | | | 372 | | | | 58 | | | | 7 | % | | | 409 | | | | 110 | % |
Legal and professional fees | | | 3,142 | | | | 3,190 | | | | 2,738 | | | | (48 | ) | | | -2 | % | | | 452 | | | | 17 | % |
Deposit charges and FDIC insurance | | | 1,647 | | | | 1,250 | | | | 733 | | | | 397 | | | | 32 | % | | | 517 | | | | 71 | % |
Data processing and outside service fees | | | 5,950 | | | | 4,371 | | | | 794 | | | | 1,579 | | | | 36 | % | | | 3,577 | | | | 451 | % |
Communication fees | | | 1,737 | | | | 945 | | | | 232 | | | | 792 | | | | 84 | % | | | 713 | | | | 307 | % |
Core deposit intangible amortization | | | 1,029 | | | | 564 | | | | 68 | | | | 465 | | | | 82 | % | | | 496 | | | | 729 | % |
Net cost of operation of OREO | | | (371 | ) | | | 3,462 | | | | 829 | | | | (3,833 | ) | | | -111 | % | | | 2,633 | | | | 318 | % |
Loan and collection expense | | | 1,972 | | | | 1,221 | | | | 630 | | | | 751 | | | | 62 | % | | | 591 | | | | 94 | % |
Postage and supplies | | | 1,009 | | | | 791 | | | | 423 | | | | 218 | | | | 28 | % | | | 368 | | | | 87 | % |
Other tax expenses | | | 558 | | | | 300 | | | | 303 | | | | 258 | | | | 86 | % | | | (3 | ) | | | -1 | % |
Other noninterest expense | | | 4,326 | | | | 3,151 | | | | 1,472 | | | | 1,175 | | | | 37 | % | | | 1,679 | | | | 114 | % |
Total noninterest expense | | $ | 64,099 | | | $ | 54,076 | | | $ | 24,960 | | | $ | 10,023 | | | | 19 | % | | $ | 29,116 | | | | 117 | % |
The largest component of noninterest expense is salaries and employee benefits, which increased $5.2 million, or 18%, to $34.6 million in 2013 from $29.4 million in 2012. This increase is primarily due to the increase in the number of employees resulting from the Citizens South merger, as well as the continued expansion of our management team. Occupancy and equipment expense increased 65% from $4.7 million in 2012 to $7.7 million in 2013, primarily due to the acquisition of property with the Citizens South merger. Data processing and outside service fees increased $1.6 million or 36% to $6.0 million in 2013, from $4.4 million in 2012. The increase in these fees is due to one-time processing fees related both to exiting the custody business and to installation of a new allowance management system, as well as fees associated with merger integration and core processing integration from the mergers with Citizens South and Community Capital. Communication fees increased 84% to $1.7 million in 2013 from $945 thousand in 2012, which is due to the expanded branch network resulting from the merger with Citizens South. We realized a net gain on operation of other real estate during 2013 of $371 thousand, compared to a net cost of $3.5 million in 2012. During 2013, we sold 282 properties for a net gain of $2.1 million, compared to 144 properties sold during 2012 for a net gain of $253 thousand. Loan collection expense increased $751 thousand, or 62%, to $2.0 million in 2013 from $1.2 million in 2012. Other noninterest expense increased $1.2 million, or 37%, to $4.3 million in 2013 from $3.2 million in 2012. Included in the 2013 increase was a loss on disposal of fixed assets of $432 thousand, due primarily to the write-off of a former branch, which had contained a now-relocated ATM, that has been shuttered and moved into other real estate owned.
Salaries and employee benefits expenses increased $14.6 million, or 99%, in 2012 to $29.4 million, compared to $14.8 million in 2011. This increase is primarily due to an increase in compensation and related benefits for additional employees as we expanded our management team and additional employees retained through our mergers with Citizens South and Community Capital. Additionally, in 2012 and 2011, we incurred merger-related salary and employee benefit expenses primarily associated with certain contractual payments to executives of the acquired companies. These amounts were $2.0 million in 2012 and $2.1 million in 2011. Compensation expense for share-based compensation plans was $2.0 million and $1.9 million for the years ended December 31, 2012 and 2011, respectively.
Occupancy and equipment expenses increased $3.1 million, or 193%, to $4.7 million in 2012, compared to $1.6 million in 2011. This increase was primarily due to the inclusion of a full year of Community Capital, in addition to a full quarter of expense from Citizens South. Advertising and promotional fees increased $409 thousand, or 110%, to $781 thousand in 2012, compared to $372 thousand in 2011, primarily due to heightened advertising in the Citizens South markets resulting from the merger. Data processing and outside service fees was $4.4 million in 2012 compared to $794 thousand in 2011, an increase of $3.6 million, or 451%. Included in this increase is $1.0 million in expenses associated with the termination fee for the legacy Community Capital core system conversion. Also in 2012, there was $192 thousand in merger-related other data processing fees. Net cost of operation of other real estate increased $2.6 million, or 318%, to $3.5 million in 2012, compared to $829 thousand in 2011. As a result of the merger with Citizens South, we acquired $17.2 million in OREO, which contributed to the increase in 2012 over 2011. Additionally, we incurred a full year of expenses related to properties acquired through the Community Capital merger.
Income Taxes.We generate non-taxable income from tax-exempt investment securities and loans as well as bank-owned life insurance. Accordingly, the level of such income in relation to income before taxes affects our effective tax rate. We recognized income tax expense of $7.4 million for 2013 and $2.3 million for 2012 and an income tax benefit of $4.9 million for 2011. The impact on earnings from the mergers with Citizens South and Community Capital, along with a reduction in provision expense and an improvement in asset quality, resulted in higher levels of pretax income for 2013 and pre tax income for 2012, compared to a pretax loss for 2011. High levels of provision expense, resulting from the impact of the economic downturn on our asset quality, and the increase in noninterest expenses, as described above, resulted in the pretax loss and the related income tax benefit in 2011. The effective tax rate for the year ended December 31, 2013 was 32.5%, compared to 34.7% for the year ended December 31, 2012 and (37.2)% for the year ended December 31, 2011.
We reported net DTAs of $37.4 million and $40.9 million at December 31, 2013 and 2012, respectively. The decrease is primarily the result of earnings of $15.3 million during 2013. We evaluate the carrying amount of our DTA quarterly in accordance with the guidance provided in ASC 740, in particular applying the criteria set forth therein to determine whether it is more likely than not (i.e., a likelihood of more than 50%) that some portion, or all, of the DTA will not be realized within its life cycle, based on the weight of available evidence. In most cases, the realization of the DTA is dependent upon generating a sufficient level of taxable income in future periods, which can be difficult to predict. In addition to projected earnings, we also consider projected asset quality, liquidity, and our strong capital position, which could be leveraged to increase earning assets and generate taxable income, our growth plans and other relevant factors. Based on the weight of available evidence, we determined that as of December 31, 2013 and December 31, 2012 that it is more likely than not that we will be able to fully realize the existing DTA and therefore considered it appropriate not to establish a DTA valuation allowance at either December 31, 2013 or December 31, 2012. See Note 12 – Income Taxes to the Consolidated Financial Statements.
Financial Condition
Summary. Total assets at December 31, 2013 decreased $72.0 million, or 4%, to $2.0 billion. The primary decreases were in cash and interest bearing balances of $83.4 million, or 39%; loans held for sale of $11.7 million, or 83%; net loans of $59.1 million, or 4%; Federal funds sold of $45.7 million, or 99%; and OREO of $10.6 million, or 42%. Through the merger with Citizens South, we also established an FDIC indemnification asset, associated with the predecessor company’s acquisition of two failed banks. The FDIC indemnification asset decreased $8.7 million in 2013. Investment securities available-for-sale increased $103.9 million, or 42%, and we invested in investments held-to-maturity during 2013, which totaled $52.0 million at December 31, 2013.
Total liabilities at December 31, 2013 were $1.7 billion, a decrease of $58.4 million, or 3%, from total liabilities of $1.8 million at December 31, 2012. Total deposits decreased $32.1 million, or 2%, and total borrowings decreased $23.7 million, or 23%. Total borrowings included $6.9 million in Tier 2 eligible subordinated debt at both December 31, 2013 and 2012, and $15.2 million and $14.7 million of Tier 1 eligible junior subordinated debt, net of acquisition accounting fair market value adjustments, at December 31, 2013 and 2012, respectively. Total shareholders’ equity decreased $13.6 million, or 4%, during the year to $262.1 million at December 31, 2013.
Investment Securities and Other Earning Assets.We use investment securities to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral, where required. The composition of our investment portfolio, as presented in the table below, changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.
Securities available-for-sale are carried at fair market value, with unrealized holding gains and losses reported in accumulated other comprehensive income, net of tax. Securities held-to-maturity are carried at amortized cost. At December 31, 2013, the market value of investment securities totaled $400.8 million, compared to $245.6 million at December 31, 2012. The increase in investment securities during 2013 is due to the redeployment of funds into the securities portfolio and from the initiation of a $50.0 million investment strategy in December 2013. Included in our investment securities portfolio are four investments in senior tranches of CLOs totaling $23.4 million at December 31, 2013, which could be impacted by the Volcker Rule. The collateral eligibility language in one of the securities, totaling $5.0 million, was amended during the fourth quarter of 2013 to comply with the applicable investment criteria under the Volcker Rule. Our investments in the remaining three CLOs, which had a net unrealized loss of $274,000 at December 31, 2013, currently would be prohibited under the Volcker Rule. We are awaiting intended document amendment strategies, if any, from the managers on these securities before determining any disposition plans for those investments. Unless the documentation is amended to avoid inclusion within the rule’s prohibitions, we would have to recognize OTTI with respect to these securities in conformity with GAAP rules. We held no other security-types potentially affected by the Volcker Rule at December 31, 2013.The following table presents a summary of the fair value of investment securities at December 31:
Fair Value of Investment Portfolio
| | | | | | | % | | | | | | | % | | | | | | | % | |
| | | 2013 | | | of Total | | | 2012 | | | of Total | | | 2011 | | | of Total | |
Securities available-for-sale: | | (dollars in thousands) | |
U.S. Government agencies | | $ | 558 | | | | 0 | % | | $ | 583 | | | | 0 | % | | $ | 591 | | | | 0 | % |
Municipal securities | | | 16,506 | | | | 5 | % | | | 17,958 | | | | 7 | % | | | 17,517 | | | | 8 | % |
Residential agency pass-through securities | | | 90,248 | | | | 26 | % | | | 138,205 | | | | 56 | % | | | 138,193 | | | | 66 | % |
Residential collateralized mortgage obligations | | | 103,349 | | | | 30 | % | | | 56,752 | | | | 23 | % | | | 53,440 | | | | 26 | % |
Commercial mortgage-backed obligations | | | 61,402 | | | | 18 | % | | | 20,936 | | | | 9 | % | | | - | | | | 0 | % |
Asset-backed securities | | | 71,077 | | | | 20 | % | | | 10,722 | | | | 5 | % | | | - | | | | 0 | % |
Corporate and other securities | | | 4,445 | | | | 1 | % | | | 415 | | | | 0 | % | | | - | | | | 0 | % |
Equity securities | | | 1,906 | | | | 1 | % | | | - | | | | 0 | % | | | 405 | | | | 0 | % |
Total investment securities | | $ | 349,491 | | | | 100 | % | | $ | 245,571 | | | | 100 | % | | $ | 210,146 | | | | 100 | % |
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Securities held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential agency pass-through securities | | $ | 40,733 | | | | 79 | % | | $ | - | | | | 0 | % | | $ | - | | | | 0 | % |
Residential collateralized mortgage obligations | | | 4,908 | | | | 10 | % | | | - | | | | 0 | % | | | - | | | | 0 | % |
Asset-backed securities | | | 5,693 | | | | 11 | % | | | - | | | | 0 | % | | | - | | | | 0 | % |
Total investment securities | | $ | 51,334 | | | | 100 | % | | $ | - | | | | 0 | % | | $ | - | | | | 0 | % |
The following table summarizes the maturity distribution schedule of the amortized cost of securities available-for-sale and held-to-maturity with corresponding weighted-average yields at December 31, 2013. Weighted-average yields for securities exempt from both Federal and state income taxes and Federal income taxes only have been computed on a fully taxable-equivalent basis using a statutory tax rate of 38.55%. The amount of tax-equivalent adjustment is $291 thousand and relates exclusively to municipal securities for the periods presented. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities for a variety ofreasons, 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
| | | Less than 1 year | | | 1-5 years | | | 5-10 years | | | Over 10 years | | | Total | |
| December 31, 2013 | | Amount | | | Weighted Average Yield | | | Amount | | | Weighted Average Yield | | | Amount | | | Weighted Average Yield | | | Amount | | | Weighted Average Yield | | | Amount | | | Weighted Average Yield | |
| | | (dollars in thousands) | |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | - | | | | - | | | $ | 513 | | | | 4.05 | % | | $ | - | | | | - | | | $ | - | | | | - | | | $ | 513 | | | | 4.05 | % |
Municipal securities | | | 450 | | | | 4.37 | % | | | - | | | | - | | | | - | | | | - | | | | 15,376 | | | | 4.69 | % | | | 15,826 | | | | 4.68 | % |
Residential agency pass-through securities | | | - | | | | - | | | | 20,899 | | | | 1.80 | % | | | - | | | | - | | | | 69,144 | | | | 2.58 | % | | | 90,043 | | | | 2.40 | % |
Residential collateralized mortgage obligations | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 105,667 | | | | 2.16 | % | | | 105,667 | | | | 2.16 | % |
Commercial mortgage-backed obligations | | | - | | | | - | | | | 66,396 | | | | 2.17 | % | | | - | | | | - | | | | - | | | | - | | | | 66,396 | | | | 2.17 | % |
Asset-backed securities | | | - | | | | - | | | | - | | | | - | | | | 3,858 | | | | 0.68 | % | | | 69,511 | | | | 1.49 | % | | | 73,369 | | | | 1.45 | % |
Corporate and other securities | | | - | | | | - | | | | 500 | | | | 9.14 | % | | | 3,961 | | | | 1.25 | % | | | - | | | | - | | | | 4,461 | | | | 2.14 | % |
Equity securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,393 | | | | 12.82 | % | | | 1,393 | | | | 12.82 | % |
Total investment securities | | $ | 450 | | | | 4.37 | % | | $ | 88,308 | | | | 2.13 | % | | $ | 7,819 | | | | 0.97 | % | | $ | 261,091 | | | | 2.24 | % | | $ | 357,668 | | | | 2.19 | % |
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Securities held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential agency pass-through securities | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | 41,125 | | | | 2.98 | % | | $ | 41,125 | | | | 2.98 | % |
Residential collateralized mortgage obligations | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,982 | | | | 3.15 | % | | | 4,982 | | | | 3.15 | % |
Asset-backed securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,865 | | | | 3.10 | % | | | 5,865 | | | | 3.10 | % |
Total investment securities | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | 51,972 | | | | 3.01 | % | | $ | 51,972 | | | | 3.01 | % |
At December 31, 2013, there were no holdings of any one issuer, other than the United States government and its agencies, in an amount greater than 10% of our total consolidated shareholders’ equity.
At December 31, 2013, we had $300 thousand in Federal funds and $41.7 million in interest-bearing deposits with other FDIC-insured financial institutions. This compares with $101.4 million in interest-bearing deposits with other FDIC-insured financial institutions at December 31, 2012.
Loans.We consider asset quality to be of primary importance, and employ seasoned credit professionals and documented processes to ensure effective oversight of credit approvals and asset quality monitoring. Our internal loan policy is reviewed by our board of directors’ Loan and Risk Committee on an annual basis and our underwriting guidelines are reviewed and updated on a periodic basis. A formal loan review process is maintained both to ensure adherence to lending policies and to ensure accurate loan grading and is reviewed by our board of directors. Since inception, we have promoted the separation of loan underwriting from the loan production staff through our credit department. Currently, credit administration analysts are responsible for underwriting and assigning proper risk grades for all loans with an individual, or relationship, exposure in excess of $500 thousand. Underwriting is completed on standardized forms including a loan approval form and separate credit memorandum. The credit memorandum includes a summary of the loan's structure and a detailed analysis of loan purpose, borrower strength (including individual and global cash flow worksheets), repayment sources and, when applicable, collateral positions and guarantor strength. The credit memorandum further identifies exceptions to policy and/or regulatory limits, total exposure, internal risk grades and other relevant credit information. Loans are approved or denied by varying levels of signature authority based on total customer relationship exposure, with a minimum requirement of at least two authorized signatures. A management-level loan committee is responsible for approving all credits in excess of the chief credit officer’s lending authority, which was increased in March 2013 from $1 million to $3 million.
Our loan underwriting policy contains LTV limits that are at or below levels required under regulatory guidance, when such guidance is available, including limitations for non-real estate collateral, such as accounts receivable, inventory and marketable securities. When applicable, we compare LTV with loan-to-cost guidelines and ultimately limit loan amounts to the lower of the two ratios. We also consider FICO scores and strive to uphold a high standard when extending loans to individuals. We have not underwritten any subprime, hybrid, no-documentation or low-documentation products.
All acquisition, construction and development (“AC&D”) loans, whether related to commercial or consumer borrowers, are subject to policies, guidelines and procedures specifically designed to properly identify, monitor and mitigate the risk associated with these loans. Loan officers receive and review a cost budget from the borrower at the time an AC&Dloan is originated. Loan draws are monitored against the budgeted line items during the development period in order to identify potential cost overruns. Individual draw requests are verified through review of supporting invoices as well as site inspections performed by an external inspector. Additional periodic site inspections are performed by loan officers at times that do not coincide with draw requests in order to keep abreast of ongoing project conditions. Our exposure to AC&D loans has declined significantly since inception of the Bank and current loan origination is focused on 1 – 4 family residential construction for retail customers and 1-4 family residential home construction to selected well-qualified builders, as well as owner-occupied commercial and pre-leased commercial build-to-suit properties. Concentrations as a percent of capital are reported to the board of directors on a quarterly basis. Market conditions for AC&D loans continued to improve in 2013 due to increasing new home sales in our primary markets. As of December 31, 2013, approximately 4% of our AC&D loan portfolio, commercial and consumer, falls under the watch list.
Our second mortgage exposure is primarily attributable to our home equity lines of credit (“HELOC”) portfolio, which totaled approximately $144 million as of December 31, 2013, of which approximately 64% is secured by second mortgages and approximately 36% is secured by first mortgages.
All loans are assigned an internal risk grade and are reviewed continuously for payment performance and updated through annual portfolio reviews. Loans on the Bank’s watch list are monitored through quarterly watch meetings and monthly impairment meetings. Classified loans are generally managed by a dedicated special asset team who is experienced in various loan rehabilitation and work out practices. Special asset loans are generally managed with a least-loss strategy.
At December 31, 2013, total loans, net of deferred fees, decreased $60.9 million, or 5%, to $1.3 billion, compared to $1.4 billion at December 31, 2012, due to expected runoff of acquired loans and a reduction in special asset loans, including covered loans. The composition of the portfolio shifted modestly, with commercial loans representing 71% of the total loan portfolio at December 31, 2013, compared to 69% at December 31, 2012, and consumer loans representing 29% of the total loan portfolio at December 31, 2013, compared to 31% at December 31, 2012. The primary changes were in CRE – investor income producing properties which increased to 29% of the total portfolio from 27% at December 31, 2012 and residential mortgages and HELOCs which decreased to 13% and 11% of the total portfolio, respectively, from 14% and 12%, respectively, at December 31, 2012.
The following table presents a summary of the loan portfolio at December 31:
Summary of Loans By Segment and Class
| | | December 31, | |
| | | 2013 | | | % | | | 2012 | | | % | | | 2011 | | | % | | | 2010 | | | % | | | 2009 | | | % | |
| | | (dollars in thousands) | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 122,400 | | | | 9 | % | | $ | 119,132 | | | | 9 | % | | $ | 80,746 | | | | 11 | % | | $ | 48,401 | | | | 12 | % | | $ | 41,980 | | | | 11 | % |
Commercial real estate (CRE) -owner occupied | | | 267,581 | | | | 21 | % | | | 299,416 | | | | 22 | % | | | 169,663 | | | | 22 | % | | | 55,089 | | | | 14 | % | | | 50,693 | | | | 13 | % |
CRE - investor incomeproducing | | | 382,187 | | | | 29 | % | | | 371,957 | | | | 27 | % | | | 194,235 | | | | 26 | % | | | 110,407 | | | | 28 | % | | | 112,508 | | | | 28 | % |
Acquisition, constructionand development(AC&D) | | | - | | | | 0 | % | | | 140,661 | | | | 10 | % | | | 92,349 | | | | 12 | % | | | 87,846 | | | | 22 | % | | | 100,668 | | | | 25 | % |
AC&D - 1-4 family construction | | | 19,959 | | | | 2 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % |
AC&D - lots, land, & development | | | 65,589 | | | | 5 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % |
AC&D - CRE | | | 56,759 | | | | 4 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % |
Other commercial | | | 3,849 | | | | 0 | % | | | 5,628 | | | | 0 | % | | | 15,658 | | | | 2 | % | | | 3,225 | | | | 1 | % | | | 1,115 | | | | 0 | % |
Total commercial loans | | | 918,324 | | | | 71 | % | | | 936,794 | | | | 69 | % | | | 552,651 | | | | 73 | % | | | 304,968 | | | | 77 | % | | | 306,964 | | | | 77 | % |
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Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 173,376 | | | | 13 | % | | | 188,532 | | | | 14 | % | | | 79,512 | | | | 10 | % | | | 21,716 | | | | 5 | % | | | 20,577 | | | | 5 | % |
Home equity lines of credit(HELOC) | | | 143,754 | | | | 11 | % | | | 163,625 | | | | 12 | % | | | 90,408 | | | | 12 | % | | | 56,968 | | | | 14 | % | | | 52,026 | | | | 13 | % |
Residential construction | | | 40,821 | | | | 3 | % | | | 52,812 | | | | 4 | % | | | 25,126 | | | | 3 | % | | | 9,051 | | | | 2 | % | | | 11,639 | | | | 3 | % |
Other loans to individuals | | | 18,795 | | | | 1 | % | | | 15,553 | | | | 1 | % | | | 11,496 | | | | 2 | % | | | 7,245 | | | | 2 | % | | | 6,471 | | | | 2 | % |
Total consumer loans | | | 376,746 | | | | 29 | % | | | 420,522 | | | | 31 | % | | | 206,542 | | | | 27 | % | | | 94,980 | | | | 23 | % | | | 90,713 | | | | 23 | % |
Total loans | | | 1,295,070 | | | | 100 | % | | | 1,357,316 | | | | 100 | % | | | 759,193 | | | | 100 | % | | | 399,948 | | | | 100 | % | | | 397,677 | | | | 100 | % |
Deferred fees | | | 738 | | | | 0 | % | | | (609 | ) | | | 0 | % | | | (371 | ) | | | 0 | % | | | (119 | ) | | | 0 | % | | | (113 | ) | | | 0 | % |
Total loans, net ofdeferred fees | | $ | 1,295,808 | | | | 100 | % | | $ | 1,356,707 | | | | 100 | % | | $ | 758,822 | | | | 100 | % | | $ | 399,829 | | | | 100 | % | | $ | 397,564 | | | | 100 | % |
The following table details loan maturities by loan class and interest rate type at December 31, 2013:
Loan Portfolio Maturities by Loan Class and Rate Type
December 31, 2013 | | Within One Year | | | One Year to Five Years | | | After Five Years | | | Total | |
| | | (dollars in thousands) | |
Commercial and industrial | | $ | 46,058 | | | $ | 64,910 | | | $ | 11,432 | | | $ | 122,400 | |
CRE - owner-occupied | | | 30,858 | | | | 144,012 | | | | 92,711 | | | | 267,581 | |
CRE - investor income producing | | | 59,386 | | | | 253,671 | | | | 69,130 | | | | 382,187 | |
AC&D - 1-4 family construction | | | 18,231 | | | | 1,728 | | | | - | | | | 19,959 | |
AC&D - lots, land, & development | | | 26,489 | | | | 33,201 | | | | 5,899 | | | | 65,589 | |
AC&D - CRE | | | - | | | | 49,368 | | | | 7,391 | | | | 56,759 | |
Other commercial | | | 1,466 | | | | 1,566 | | | | 817 | | | | 3,849 | |
Residential mortgages | | | 13,200 | | | | 26,865 | | | | 133,311 | | | | 173,376 | |
HELOC | | | 7,329 | | | | 32,190 | | | | 104,235 | | | | 143,754 | |
Residential construction | | | 8,151 | | | | 11,025 | | | | 21,645 | | | | 40,821 | |
Other loans to individuals | | | 8,840 | | | | 7,585 | | | | 2,370 | | | | 18,795 | |
Total loans | | $ | 220,008 | | | $ | 626,121 | | | $ | 448,941 | | | $ | 1,295,070 | |
| | | | | | | | | | | | | | | | | |
Fixed interest rate | | $ | 118,217 | | | $ | 488,895 | | | $ | 193,892 | | | $ | 801,004 | |
Variable interest rate | | | 101,791 | | | | 137,226 | | | | 255,049 | | | | 494,066 | |
Total loans | | $ | 220,008 | | | $ | 626,121 | | | $ | 448,941 | | | $ | 1,295,070 | |
Variable interest rate loans are included in all of our loan types. We had a total of $494.1 million in variable rate loans as of December 31, 2013, of which $204.2 million included an interest rate floor. Variable rate loans are indexed to several indices, including (i) the prime rate as published inThe Wall Street Journal; (ii) the London InterBank Offered Rate (“LIBOR”); (iii) the 1-year Treasury rate; and (iv) our internal Main Street Prime rate. In addition, we inherited several variable rate indices through our mergers with Citizens South and Community Capital that are no longer used on originated or renewed loans. During the underwriting process, analysts perform their analysis at the fully-indexed rate as well as a “stressed” rate to identify payment capacity in a rising rate environment.
Allowance for Loan Losses.The allowance for loan losses is based upon management's ongoing evaluation of the loan portfolio and reflects an amount considered by management to be its best estimate of known and inherent losses in the portfolio as of the balance sheet date. The determination of the allowance for loan losses involves a high degree of judgment and complexity. In making the evaluation of the adequacy of the allowance for loan losses, management considers current economic and market conditions, independent loan reviews performed periodically by third parties, portfolio trends and concentrations, delinquency information, management's internal review of the loan portfolio, internal historical loss rates 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 us 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 management's assessment of their differing inherent loss characteristics, the entire allowance for losses on loans, other than the portions related to PCI loans and specific reserves on impaired loans, is available to absorb further loan losses in any segment.
Our Allowance for Loan Losses Committee is responsible for overseeing our allowance and works with our chief executive officer, senior financial officers, senior risk management officers and the Audit Committee of the board of directors in developing and achieving our allowance methodology and practices. Our allowance for loan loss methodology includes four components – specific reserves, quantitative reserves, qualitative reserves and reserves on PCI loans.
Since the fourth quarter of 2011, we have introduced certain enhancements to our allowance methodology that, in management’s opinion, provide a better estimate and an allowance for loan losses which better reflects the inherent loss within each loan product. Quantitatively, since the fourth quarter of 2011, we have shifted from historical loss experience of peers to our own actual loss experience and have segregated our loans by product. In the third quarter of 2013, we further segregated the AC&D portfolio by collateral type. These enhancements strengthen the granularity of the allowance methodology and better align with our present origination activities, which are focused on construction rather than development activities. Additionally, we regularly review the look back periods being used for each of our loan products to continue to present an estimated risk and loss consistent with expectations.
Qualitatively, during the second quarter of 2012, we eliminated the use of traditional risk grade factors as a single forward-looking qualitative indicator and instead focus directly on five specific environmental factors. These five factors include portfolio trends, portfolio concentrations, economic and market conditions, changes in lending practices and other factors. During the third quarter of 2013, we applied the qualitative other factors against CRE – investor income producing loans and residential mortgage loans to adjust for inherent risks that, in our judgment, are not adequately reflected in historical loss rates.
The changes and refinements discussed above, in aggregate, did not have a material impact on the estimated allowance at December 31, 2013. The further segregation of the AC&D portfolio, as noted above, resulted in a decrease in the quantitative factor of approximately $1.8 million from December 31, 2012. Offsetting this decrease were quantitative increases in the other loan portfolios as a result of extending look back periods which now contain sufficient build up in loss history. These increases were approximately $1.6 million from December 31, 2012. The growth in the loan portfolio coupled with the other qualitative factors referenced above resulted in an increase in the qualitative factor of $313 thousand from December 31, 2012. These changes, in our judgment, produce a non-PCI allowance for loan losses that best reflects the estimate of inherent losses in the loan portfolio at December 31, 2013.
The following table presents a breakdown of our allowance for loan losses, by component and by loan product type as of December 31, 2013 and 2012. Details of the five environmental factors for inclusion in the qualitative component of the allowance methodology as well as additional information about the four components and our policies and methodology used to estimate the allowance for loan losses are presented in Note 5 – Loans and Allowance for Loan Losses to the Consolidated Financial Statements.
| | | December 31, 2013 | |
| | | Specific Reserve | | | Quantitative Reserve | | | Qualitative Reserve | | | Reserve on PCI Loans | |
(dollars in thousands) | | | $ | | | % of Total Allowance | | | | $ | | | % of Total Allowance | | | | $ | | | % of Total Allowance | | | | $ | | | % of Total Allowance | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 14 | | | | 0.16 | % | | $ | 1,304 | | | | 14.77 | % | | $ | 173 | | | | 1.96 | % | | $ | - | | | | 0.00 | % |
CRE - owner-occupied | | | 14 | | | | 0.16 | % | | | 319 | | | | 3.61 | % | | | 66 | | | | 0.75 | % | | | - | | | | 0.00 | % |
CRE - investor income producing | | | 527 | | | | 5.97 | % | | | 1,111 | | | | 12.58 | % | | | 159 | | | | 1.80 | % | | | 360 | | | | 4.08 | % |
AC&D - 1-4 family construction | | | - | | | | 0.00 | % | | | 755 | | | | 8.55 | % | | | 84 | | | | 0.95 | % | | | - | | | | 0.00 | % |
AC&D - lots, land, & development | | | - | | | | 0.00 | % | | | 1,496 | | | | 16.94 | % | | | 255 | | | | 2.89 | % | | | - | | | | 0.00 | % |
AC&D - CRE | | | - | | | | 0.00 | % | | | 267 | | | | 3.02 | % | | | 32 | | | | 0.36 | % | | | - | | | | 0.00 | % |
Other commercial | | | 18 | | | | 0.20 | % | | | 5 | | | | 0.06 | % | | | 1 | | | | 0.01 | % | | | - | | | | 0.00 | % |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 167 | | | | 1.89 | % | | | 135 | | | | 1.53 | % | | | 56 | | | | 0.63 | % | | | - | | | | 0.00 | % |
HELOC | | | 137 | | | | 1.55 | % | | | 699 | | | | 7.92 | % | | | 214 | | | | 2.42 | % | | | - | | | | 0.00 | % |
Residential construction | | | 7 | | | | 0.08 | % | | | 336 | | | | 3.80 | % | | | 48 | | | | 0.54 | % | | | - | | | | 0.00 | % |
Other loans to individuals | | | - | | | | 0.00 | % | | | 64 | | | | 0.72 | % | | | 8 | | | | 0.09 | % | | | - | | | | 0.00 | % |
Total | | $ | 884 | | | | 10.01 | % | | $ | 6,491 | | | | 73.50 | % | | $ | 1,096 | | | | 12.41 | % | | $ | 360 | | | | 4.08 | % |
| | | December 31, 2012 | |
| | | Specific Reserve | | | Quantitative Reserve | | | Qualitative Reserve | | | Reserve on PCI Loans | |
(dollars in thousands) | | | $ | | | % of Total Allowance | | | | $ | | | % of Total Allowance | | | | $ | | | % of Total Allowance | | | | $ | | | % of Total Allowance | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 115 | | | | 1.09 | % | | $ | 626 | | | | 5.91 | % | | $ | 107 | | | | 1.01 | % | | $ | 225 | | | | 2.12 | % |
CRE - owner-occupied | | | - | | | | 0.00 | % | | | 278 | | | | 2.62 | % | | | 219 | | | | 2.07 | % | | | - | | | | 0.00 | % |
CRE - investor income producing | | | - | | | | 0.00 | % | | | 827 | | | | 7.81 | % | | | 275 | | | | 2.60 | % | | | - | | | | 0.00 | % |
AC&D | | | - | | | | 0.00 | % | | | 4,059 | | | | 38.32 | % | | | 99 | | | | 0.93 | % | | | 542 | | | | 5.12 | % |
Other commercial | | | - | | | | 0.00 | % | | | 4 | | | | 0.04 | % | | | 4 | | | | 0.04 | % | | | - | | | | 0.00 | % |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 249 | | | | 2.35 | % | | | 101 | | | | 0.95 | % | | | 105 | | | | 0.99 | % | | | 200 | | | | 1.89 | % |
HELOC | | | 351 | | | | 3.31 | % | | | 977 | | | | 9.22 | % | | | 134 | | | | 1.27 | % | | | - | | | | 0.00 | % |
Residential construction | | | - | | | | 0.00 | % | | | 1,008 | | | | 9.52 | % | | | 38 | | | | 0.36 | % | | | - | | | | 0.00 | % |
Other loans to individuals | | | - | | | | 0.00 | % | | | 34 | | | | 0.32 | % | | | 14 | | | | 0.13 | % | | | - | | | | 0.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 715 | | | | 6.75 | % | | $ | 7,914 | | | | 74.72 | % | | $ | 995 | | | | 9.39 | % | | $ | 967 | | | | 9.13 | % |
The allowance for loan losses was $8.8 million, or 0.68% of total loans, at December 31, 2013 compared to $10.6 million, or 0.78% of total loans, at December 31, 2012. The allowance for loan losses is increased by provisions charged to operations and reduced by loans charged off, net of recoveries. The decrease in the allowance for loan losses was a function of (i) a decrease of $1.4 million in the quantitative component of the allowance due to changes in look back periods and rates which better reflect the inherent loss in the portfolio, (ii) an increase of $101 thousand in the qualitative component of the allowance due to higher non-acquired loan balances resulting from acquired purchased performing loans fully amortizing their mark and moving out of the acquired pool, (iii) a decrease of $607 thousand in the reserve on PCI loans driven by the reversal of $967 thousand of previously recognized impairments offset by current year net recovery of impairments of $607 thousand and (iv) an increase of $169 thousand in specific reserves which change periodically as loans move through or out of the impairment process.
Net charge-offs increased $1.4 million, or 90%, from $1.6 million, or 0.12% of total loans, for the year ended December 31, 2012 to $3.0 million, or 0.23% of total loans, for the year ended December 31, 2013. The increase in net charge-offs is the result of prior year specific reserves becoming actual loan charge-offs. Although net charge-offs increased, our ratio of net charge-offs to total loans remains well below our peers.
In accordance with GAAP, loans acquired from both Community Capital and Citizens South were adjusted to reflect estimated fair market value at consummation and the associated allowance for loan losses was eliminated. At December 31, 2013, acquired loans comprised 44% of our total loans, compared to 63% at December 31, 2012. The ratio of the allowance for loan losses to total loans was 0.68% at December 31, 2013 and 0.78% at December 31, 2012. The ratio of the adjusted allowance for loan losses to total loans, which includes the remaining acquisition accounting fair market value adjustments for acquired loans, was 3.60% at December 31, 2013 and 4.74% at December 31, 2012. Adjusted allowance for loan losses to loans is a non-GAAP financial measure which is provided as supplemental information for comparing the combined allowance and fair market value adjustments to the combined acquired and non-acquired loan portfolios. Fair market value adjustments are available only for losses on acquired loans. For a reconciliation to the most comparable GAAP measure, see “Non-GAAP Financial Measures” above. See “Financial Condition –Allowance for Loan Losses” below for a more complete discussion of our policy for addressing potential loan losses.
While management believes that it uses the best information available to determine the allowance for loan losses, and that its allowance for loan losses is maintained at a level appropriate in light of the risk inherent in our loan portfolio based on an assessment of various factors affecting the loan portfolio, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. The allowance for loan losses to total loans may increase if our loan portfolio deteriorates due to economic conditions or other factors.
The following table presents a summary of changes in the allowance for loan losses, including the reserve for PCI loans, and includes information regarding charge-offs and selected coverage ratios, for the years ended December 31:
Allowance for Loan Losses
| | | December 31, | |
| | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
| | | (dollars in thousands) | |
Balance, beginning of period | | $ | 10,591 | | | $ | 10,154 | | | $ | 12,424 | | | $ | 7,402 | | | $ | 5,568 | |
Provision for loan losses charged to operations | | | 746 | | | | 2,023 | | | | 9,385 | | | | 17,005 | | | | 3,272 | |
Provision for loan losses recorded through FDIC loss share receivable | | | 501 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | (1,454 | ) | | $ | (565 | ) | | $ | (778 | ) | | $ | (1,338 | ) | | $ | (8 | ) |
CRE - owner-occupied | | | (52 | ) | | | (204 | ) | | | (194 | ) | | | (105 | ) | | | - | |
CRE - investor income producing | | | (734 | ) | | | (1,132 | ) | | | (136 | ) | | | (840 | ) | | | - | |
AC&D | | | (177 | ) | | | (652 | ) | | | (9,865 | ) | | | (7,752 | ) | | | (631 | ) |
AC&D - 1-4 family construction | | | (87 | ) | | | - | | | | - | | | | - | | | | - | |
AC&D - lots, land, & development | | | (6 | ) | | | - | | | | - | | | | - | | | | - | |
AC&D - CRE | | | - | | | | - | | | | - | | | | - | | | | - | |
Other commercial | | | (386 | ) | | | (94 | ) | | | - | | | | - | | | | - | |
Consumer: | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | (1,142 | ) | | | (129 | ) | | | (128 | ) | | | (154 | ) | | | (720 | ) |
HELOC | | | (838 | ) | | | (406 | ) | | | (1,762 | ) | | | (1,496 | ) | | | (33 | ) |
Residential construction | | | (277 | ) | | | (328 | ) | | | (222 | ) | | | (347 | ) | | | - | |
Other loans to individuals | | | (100 | ) | | | (12 | ) | | | - | | | | (10 | ) | | | (46 | ) |
Total Charge-offs | | | (5,253 | ) | | | (3,522 | ) | | | (13,085 | ) | | | (12,042 | ) | | | (1,438 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Recoveries: | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 187 | | | $ | 79 | | | $ | 236 | | | $ | 2 | | | $ | - | |
CRE - owner-occupied | | | 7 | | | | - | | | | 3 | | | | 16 | | | | - | |
CRE - investor income producing | | | 480 | | | | 57 | | | | 3 | | | | 1 | | | | - | |
AC&D | | | 25 | | | | 1,602 | | | | 1,157 | | | | 35 | | | | - | |
AC&D - 1-4 family construction | | | 221 | | | | - | | | | - | | | | - | | | | - | |
AC&D - lots, land, & development | | | 726 | | | | - | | | | - | | | | - | | | | - | |
AC&D - CRE | | | - | | | | - | | | | - | | | | - | | | | - | |
Other commercial | | | 1 | | | | - | | | | - | | | | - | | | | - | |
Consumer: | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 416 | | | | 12 | | | | - | | | | 4 | | | | - | |
HELOC | | | 66 | | | | 33 | | | | 17 | | | | 1 | | | | - | |
Residential construction | | | 61 | | | | 124 | | | | - | | | | - | | | | - | |
Other loans to individuals | | | 56 | | | | 29 | | | | 14 | | | | - | | | | - | |
Total Recoveries | | | 2,246 | | | | 1,936 | | | | 1,430 | | | | 59 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Net charge-offs | | | (3,007 | ) | | | (1,586 | ) | | | (11,655 | ) | | | (11,983 | ) | | | (1,438 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balance, end of period | | $ | 8,831 | | | $ | 10,591 | | | $ | 10,154 | | | $ | 12,424 | | | $ | 7,402 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net charge-offs to total loans | | | 0.23 | % | | | 0.12 | % | | | 1.54 | % | | | 3.00 | % | | | 0.36 | % |
| | | | | | | | | | | | . | | | | | | | | | |
Allowance for loan losses to total loans | | | 0.68 | % | | | 0.78 | % | | | 1.34 | % | | | 3.11 | % | | | 1.86 | % |
The following table presents the allocation of the allowance for loan losses, including the reserve for PCI loans, by category for the years ended December 31:
Allocation of the Allowance for Loan Losses
| | | December 31, | |
| | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
(dollars in thousands) | | Amount | | | % of Loans to Total Loans | | | Amount | | | % of Loans to Total Loans | | | Amount | | | % of Loans to Total Loans | | | Amount | | | % of Loans to Total Loans | | | Amount | | | % of Loans to Total Loans | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 1,491 | | | | 9 | % | | $ | 1,074 | | | | 9 | % | | $ | 703 | | | | 11 | % | | $ | 896 | | | | 12 | % | | $ | 529 | | | | 11 | % |
CRE - owner-occupied | | | 399 | | | | 21 | % | | | 496 | | | | 22 | % | | | 740 | | | | 22 | % | | | 1,061 | | | | 14 | % | | | 627 | | | | 13 | % |
CRE - investor income producing | | | 2,157 | | | | 29 | % | | | 1,102 | | | | 27 | % | | | 2,106 | | | | 26 | % | | | 2,105 | | | | 28 | % | | | 1,496 | | | | 28 | % |
AC&D | | | - | | | | 0 | % | | | 4,699 | | | | 10 | % | | | 3,883 | | | | 12 | % | | | 4,695 | | | | 22 | % | | | 3,149 | | | | 25 | % |
AC&D - 1-4 family construction | | | 839 | | | | 2 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % |
AC&D - lots, land, & development | | | 1,751 | | | | 5 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % |
AC&D - CRE | | | 299 | | | | 4 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % |
Other commercial | | | 25 | | | | 0 | % | | | 8 | | | | 0 | % | | | 17 | | | | 2 | % | | | 408 | | | | 1 | % | | | - | | | | 0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 358 | | | | 13 | % | | | 654 | | | | 14 | % | | | 309 | | | | 10 | % | | | 320 | | | | 5 | % | | | 547 | | | | 5 | % |
HELOC | | | 1,050 | | | | 11 | % | | | 1,463 | | | | 12 | % | | | 1,898 | | | | 12 | % | | | 871 | | | | 14 | % | | | 835 | | | | 13 | % |
Residential construction | | | 390 | | | | 3 | % | | | 1,046 | | | | 4 | % | | | 455 | | | | 3 | % | | | 98 | | | | 2 | % | | | 144 | | | | 3 | % |
Other loans to individuals | | | 72 | | | | 1 | % | | | 49 | | | | 1 | % | | | 43 | | | | 2 | % | | | 86 | | | | 2 | % | | | 75 | | | | 2 | % |
Unallocated | | | - | | | | 0 | % | | | - | | | | 0 | % | | | - | | | | 0 | % | | | 1,884 | | | | 0 | % | | | - | | | | 0 | % |
| | | $ | 8,831 | | | | 100 | % | | $ | 10,591 | | | | 100 | % | | $ | 10,154 | | | | 100 | % | | $ | 12,424 | | | | 100 | % | | $ | 7,402 | | | | 100 | % |
We evaluate and estimate off-balance sheet credit exposure at the same time we estimate credit losses for loans by a similar process, including an estimate of commitment usage levels. 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. At both December 31, 2013 and 2012, $125 thousand was recorded as an other liability for off-balance sheet credit exposure.
Nonperforming Assets.Nonperforming assets, which consist of nonaccrual loans, accruing troubled debt restructurings (“TDRs”), accruing loans for which payments are 90 days or more past due, nonaccrual loans held for sale and OREO, totaled $26.8 million at December 31, 2013 compared to $43.2 million at December 31, 2012. Nonperforming loans, which consist of nonaccrual loans, accruing TDRs and accruing loans for which payments are 90 days or more past due, decreased $5.5 million, or 31%, to $12.3 million, or 0.95% of total loans and OREO at December 31, 2013, compared to $17.8 million, or 1.29% of total loans and OREO at December 31, 2012. The decreases from 2012 are due to the successful disposition of numerous OREO properties and the continued resolution of problem loans.
It is our general policy to place a loan on nonaccrual status when it is over 90 days past due and there is reasonable doubt that all principal and interest will be collected.Nonaccrual loans decreased $1.9 million, or 19%, in 2013 from $10.4 million at December 31, 2012. Nonaccrual TDRs are included in the nonaccrual loan amounts noted. At December 31, 2013, nonaccrual TDR loans were $4.4 million and had no recorded allowance. At December 31, 2012, nonaccrual TDR loans were $2.8 million and had no recorded allowance. Accruing TDRs totaled $3.9 million at December 31, 2013 and $7.4 million at December 31, 2012.
Interest that would have been recorded on nonaccrual loans for the years ended December 31, 2013, 2012 and 2011, had they performed in accordance with their original terms, totaled $3.0 million, $540 thousand and $1.2 million, respectively. Interest income included in the results of operations for 2013, 2012 and 2011, with respect to loans that subsequently went to non-accrual, totaled $310 thousand, $157 thousand and $311 thousand, respectively.
We grade loans with an internal risk grade scale of 10 through 90, with grades 10 through 50 representing “pass” loans, grade 60 representing “special mention” and grades 70 and higher representing “classified” credit grades, respectively. Loans are reviewed on a regular basis internally, and at least annually by an external loan review group, to ensure loans are graded appropriately. Credits are reviewed for past due trends, declining cash flows, significant decline in collateral value, weakened guarantor financial strength, management concerns, market conditions and other factors that could jeopardize the repayment performance of the loan. Documentation deficiencies including collateral perfection and outdated or inadequate financial information are also considered in grading loans.
All loans graded 60 or worse are included on our list of “watch loans,” which represent potential problem loans, and are updated and reported to both management and the Loan and Risk Committee of the board of directors quarterly. Additionally, the watch list committee may review other loans with more favorable ratings if there are concerns that the loan may become a problem. Impairment analyses are performed on all loans graded “substandard” (risk grade of 70 or worse) and generally greater than $150 thousand as well as selected other loans as deemed appropriate.At December 31, 2013, we maintained “watch loans” totaling $35.2 million compared to $44.4 million at December 31, 2012. Approximately $7 million of the watch loans at December 31, 2013 were acquired loans. 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.
We employ one of three potential methods to determine the fair value of impaired loans:
1) Fair value of collateral method. This is the most common method and is used when the loan is collateral dependent. In most cases, we will obtain an “as is” appraisal from a third-party appraisal group. The fair value from that appraisal may be adjusted downward for liquidation discounts for foreclosure or quick sale scenarios, as well as any applicable selling costs.
2) Cash flow method. This method is used when we believe that we will collect the loan primarily from cash flows generated by the borrower.
3) Observable market value method. This is the method used least often by us. Fair value is based on the offering price from a note buyer, in either the local community or a national loan sale advisor.
With respect to nonaccrual commercial and nonaccrual consumer AC&D loans, we typically utilize an “as-is,” or “discounted,” value to determine an appropriate fair value. When appraising projects with an expected cash flow to be received over a period of time, such as acquisition and development/land development loans, fair value is determined using a discounted cash flow methodology. We also account for expected selling and holding costs when determining an appropriate property value.
As of December 31, 2013, there were $37.0 million of AC&D - CRE loans kept current with bank-funded reserves of approximately $1.6 million. As of December 31, 2012, there were $14.4 million of AC&D loans kept current with bank-funded reserves of approximately $1.3 million. In both periods, these loans were still in the construction period of their lending arrangement.
At December 31, 2013, OREO totaled $14.5 million all of which is recorded at values based on our most recent appraisals. Included in the total is $5.6 million of OREO covered under the FDIC loss share agreements as of December 31, 2013. At December 31, 2012, OREO totaled $25.1 million, all of which was recorded at values based on the most recent appraisals then available. Included in that total is $6.6 million of OREO covered under the FDIC loss share agreements. The decrease in OREO from 2012 is primarily due to successful dispositions.
The following table summarizes nonperforming assets at December 31:
Nonperforming Assets
| | | December 31, | |
| | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | (dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | |
Nonaccrual loans | | $ | 8,428 | | | $ | 10,374 | | | $ | 16,256 | | | $ | 40,911 | | | $ | 2,688 | |
Past due 90 days or more and accruing | | | 17 | | | | 77 | | | | - | | | | - | | | | - | |
Troubled debt restructuring | | | 3,854 | | | | 7,367 | | | | 3,972 | | | | 1,198 | | | | - | |
Total nonperforming loans | | | 12,299 | | | | 17,818 | | | | 20,228 | | | | 42,109 | | | | 2,688 | |
OREO | | | 14,492 | | | | 25,073 | | | | 14,403 | | | | 1,246 | | | | 1,550 | |
Loans held for sale | | | - | | | | - | | | | 1,560 | | | | - | | | | - | |
Total nonperforming assets | | $ | 26,791 | | | $ | 42,891 | | | $ | 36,191 | | | $ | 43,355 | | | $ | 4,238 | |
| | | | | | | | | | | | | | | | | | | | | |
PCI loans: | | | | | | | | | | | | | | | | | | | | |
Outstanding customer balance | | $ | 197,040 | | | $ | 278,200 | | | $ | 106,688 | | | $ | - | | | $ | - | |
Carrying amount | | | 163,787 | | | | 234,282 | | | | 63,818 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Nonperforming loans to total loans and OREO | | | 0.94 | % | | | 1.29 | % | | | 2.61 | % | | | 10.53 | % | | | 0.68 | % |
| | | | | | | | | | | | | | | | | | | | | |
Nonperforming assets to total assets | | | 1.37 | % | | | 2.11 | % | | | 3.25 | % | | | 7.04 | % | | | 0.89 | % |
Deposits.We offer 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. We regularly evaluate the internal cost of funds, survey rates offered by competing institutions, review cash flow requirements for lending and liquidity and execute rate changes when deemed appropriate.
Total deposits at December 31, 2013 were $1.6 billion, remaining flat from December 31, 2012, net of acquisition accounting fair market value adjustments. Average deposits for 2013 were $1.6 billion, an increase of $534.9 million, or 51.1%, from 2012. The majority of the increase in average deposits during 2013 is attributed to a full year of Citizens South deposits. Brokered deposits remain attractive given their relatively lower interest costs and flexible term structures, and will continue to be selectively utilized in our normal funding and interest rate risk management practices. Brokered deposits consist of brokered interest-bearing deposits, brokered money market accounts, and brokered certificates of deposits. Brokered money market and interest-bearing deposits are the result of the brokered money market deposit program initiated in December 2013 in connection with our $50 million investment strategy.
The following table sets forth our average balance of deposit accounts and the average cost for each category of deposit for the years ended December 31:
Average Deposits and Costs
| | | 2013 | | | 2012 | |
| | Average Balance | | | % of Total | | | Average Cost | | | Average Balance | | | % of Total | | | Average Cost | |
| (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | $ | 547,847 | | | | 35 | % | | | 0.05 | % | | $ | 317,957 | | | | 30 | % | | | 0.10 | % |
Savings and money market | | | 447,421 | | | | 28 | % | | | 0.29 | % | | | 293,175 | | | | 28 | % | | | 0.40 | % |
Time deposits - core | | | 481,435 | | | | 30 | % | | | 0.35 | % | | | 298,144 | | | | 28 | % | | | 0.49 | % |
Brokered deposits | | | 103,630 | | | | 7 | % | | | 0.81 | % | | | 137,737 | | | | 13 | % | | | 1.07 | % |
Total deposits | | $ | 1,580,333 | | | | 100 | % | | | 0.26 | % | | $ | 1,047,013 | | | | 100 | % | | | 0.42 | % |
The following table indicates the amount of our certificates of deposit by time remaining until maturity as of December 31, 2013:
Maturities of Time Deposits
December 31, 2013 | | Within 3 Months | | | 3-6 Months | | | 6-12 Months | | | 1-5 Years | | | >5 Years | | | Total | |
| | | (dollars in thousands) | |
Time deposits of $100,000 or more | | $ | 79,642 | | | $ | 59,031 | | | $ | 62,868 | | | $ | 83,193 | | | $ | - | | | $ | 284,734 | |
Other time deposits | | | 62,740 | | | | 58,194 | | | | 84,693 | | | | 54,067 | | | | - | | | | 259,694 | |
Total time deposits | | $ | 142,382 | | | $ | 117,225 | | | $ | 147,561 | | | $ | 137,260 | | | $ | - | | | $ | 544,428 | |
Borrowings.Borrowings totaled $78.0 million at December 31, 2013 compared to $101.7 million at December 31, 2012, net of acquisition accounting fair market value adjustments. During 2012, as a result of the merger with Citizens South, we acquired $8.8 million of junior subordinated debt ($15.5 million before fair value adjustments) and in 2011, in connection with the merger with Community Capital, we acquired $5.3 million of junior subordinated debt ($10.3 million before fair value adjustments). During 2013, we repaid $15 million in daily rate credit advances from the FHLB. Additionally, as a result of the merger with Citizens South, during 2013 we made changes to certain repurchase agreement products that are now reported as interest-bearing deposits. We borrowed an additional $30.0 million from the FHLB to purchase available-for-sale investment securities during 2012, which had the effect of partially re-leveraging the balance sheet for FHLB borrowings repaid at the time of the merger with Community Capital.
Subsequent to December 31, 2013, two FHLB Adjustable Rate Credit four-year borrowing agreements and one Adjustable Rate Credit two-year borrowing matured in the amounts of $10.0 million, $10.0 million, and $15.0 million, respectively. The matured FHLB four-year borrowing agreements were replaced with two FHLB Adjustable Rate Credit two-year borrowing agreements, each at $10.0 million, with a maturity of January 7, 2016 and an interest rate of 0.2721%. The matured FHLB two-year borrowing agreement was replaced with a FHLB Adjustable Rate Credit two-year borrowing agreement at $15.0 million, with a maturity of January 21, 2016 and an interest rate of 0.2766%.
The following table details short and long-term borrowings at December 31:
Schedule of Borrowed Funds
| | | 2013 | | | % Change From Prior Year | | | 2012 | | | % Change From Prior Year | | | 2011 | |
| | | (dollars in thousands) | |
Short-term: | | | |
Repurchase agreements | | $ | 996 | | | | -90.2 | % | | $ | 10,143 | | | | 683.2 | % | | $ | 1,295 | |
Federal funds purchased | | | - | | | | 0.0 | % | | | - | | | | -100.0 | % | | | 8,470 | |
FHLB advances | | | - | | | | -100.0 | % | | | 15,000 | | | | 100.0 | % | | | - | |
Total short-term | | | 996 | | | | -96.0 | % | | | 25,143 | | | | 157.5 | % | | | 9,765 | |
| | | | | | | | | | | | | | | | | | | | | |
Long-term: | | | | | | | | | | | | | | | | | | | | |
FHLB advances | | | 55,000 | | | | 0.0 | % | | | 55,000 | | | | 37.5 | % | | | 40,000 | |
Subordinated debt | | | 22,052 | | | | 2.2 | % | | | 21,573 | | | | 75.4 | % | | | 12,296 | |
Total long-term | | | 77,052 | | | | 0.6 | % | | | 76,573 | | | | 46.4 | % | | | 52,296 | |
Total borrowed funds | | $ | 78,048 | | | | -23.3 | % | | $ | 101,716 | | | | 63.9 | % | | $ | 62,061 | |
The following table details balances outstanding related to short-term borrowings at December 31 and annual information for the years presented:
Short-Term Borrowings
| | | Balance at Year End | | |
Weighted Average Interest Rate at Year End | | |
Maximum Amount Outstanding
During Year | | | Average Daily Balance Outstanding During Year | | | Average Annual Interest Rate Paid | |
| | (dollars in thousands) | |
| 2013 | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements | | $ | 996 | | | | 0.10 | % | | $ | 10,955 | | | $ | 3,805 | | | | 0.04 | % |
Federal funds purchased | | | - | | | | 0.00 | % | | | 435 | | | | 1 | | | | 0.61 | % |
Total | | $ | 996 | | | | 0.10 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
2012 | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements | | $ | 10,143 | | | | 0.10 | % | | $ | 12,963 | | | $ | 3,648 | | | | 0.05 | % |
Federal funds purchased | | | - | | | | 0.00 | % | | | 14,605 | | | | 464 | | | | 0.67 | % |
FHLB Advances | | | 15,000 | | | | 0.36 | % | | | 15,000 | | | | - | | | | 0.00 | % |
Total | | $ | 25,143 | | | | 0.46 | % | | | | | | | | | | | | |
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. We strive 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 an asset/liability policy approved by the board of directors and administered by an internal Senior Management Risk Committee (the “Senior Risk Committee”). The Senior Risk Committee reports monthly asset/liability-related matters to the Loan and Risk Committee of the board of directors.
Our internal liquidity ratio (total liquid assets, or cash and cash equivalents, divided by deposits and short-term liabilities) at December 31, 2013 was 20.92% compared to 22.0% at December 31, 2012. Both ratios exceeded our minimum internal target of 10%. In addition, at December 31, 2013, we had $254.6 million of credit available from the FHLB, $162.8 million of credit available from the Federal Reserve Discount Window, and available lines totaling $70.0 million from correspondent banks.
At December 31, 2013, we had $279.5 million of pre-approved but unused lines of credit, $3.6 million of standby letters of credit and $1.9 million of commercial letters of credit. In management's 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, 2013 was $262.1 million, compared to $275.5 million at December 31, 2012. The $13.6 million decrease was the result of the redemption of the $20.5 million of Series C Preferred Stock, in addition to an $8.0 million decrease in accumulated other comprehensive income from unrealized securities losses. In addition, we repurchased 56,267 shares of common stock at a total cost of $366 thousand during 2013, as part of our previously announced stock repurchase program, and in the third quarter of 2013, we initiated a quarterly cash dividend on common shares, resulting in $1.8 million in common dividends paid during 2013. These decreases were partially offset by net income before preferred dividends of $15.3 million for the year ended December 31, 2013, $1.8 million of net share based compensation expense, and $308 thousand in proceeds from the exercise of stock options.
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 currently in effect are designed to measure “Tier 1” capital (consisting generally of common shareholders’ equity, a limited amount of qualifying perpetual preferred stock and trust preferred securities, and minority interests in consolidated subsidiaries, net of goodwill and other intangible assets, 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, mandatorily 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 offour 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. Under current regulations, all banks must maintain a minimum total capital to total risk weighted assets ratio of 8.00%, at least half of which must be in the form of core, or Tier 1, capital. These guidelines also specify that banks that are experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels. At December 31, 2013, the Company and the Bank both satisfied their minimum regulatory capital requirements and each was “well capitalized” within the meaning of federal regulatory requirements.
Actual and required capital levels at December 31 for each of the past two years are presented below:
Capital Ratios
| | | | | | | | | | | Regulatory Minimums | |
| | | December 31 | | | For Capital Adequacy Purposes | | | To Be WellCapitalized UnderPrompt CorrectiveActions Provisions | |
(dollars in thousands) | | 2013 | | | 2012 | | | Ratio | | | Ratio | |
| | | | | | | | | | | | | | | | | |
Park Sterling Corporation | | | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 218,552 | | | $ | 219,060 | | | | | | | | | |
Tier 2 capital | | | 15,956 | | | | 17,611 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total capital | | $ | 234,508 | | | $ | 236,671 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Risk-adjusted average assets | | $ | 1,424,574 | | | $ | 1,451,532 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Average assets | | $ | 1,879,283 | | | $ | 1,947,156 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Risk-based capital ratios | | | | | | | | | | | | | | | | |
Tier 1 capital | | | 15.34 | % | | | 15.09 | % | | | 4.00 | % | | | 6.00 | % |
Total capital | | | 16.46 | % | | | 16.30 | % | | | 8.00 | % | | | 10.00 | % |
Tier 1 leverage ratio | | | 11.63 | % | | | 11.25 | % | | | 4.00 | % | | | 5.00 | % |
| | | | | | | | | | | | | | | | | |
Park Sterling Bank | | | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 193,830 | | | $ | 193,018 | | | | | | | | | |
Tier 2 capital | | | 15,956 | | | | 17,611 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total capital | | $ | 209,786 | | | $ | 210,629 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Risk-adjusted average assets | | $ | 1,420,331 | | | $ | 1,446,233 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Average assets | | $ | 1,861,925 | | | $ | 1,913,420 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Risk-based capital ratios | | | | | | | | | | | | | | | | |
Tier 1 capital | | | 13.65 | % | | | 13.35 | % | | | 4.00 | % | | | 6.00 | % |
Total capital | | | 14.77 | % | | | 14.56 | % | | | 8.00 | % | | | 10.00 | % |
Tier 1 leverage ratio | | | 10.41 | % | | | 10.09 | % | | | 4.00 | % | | | 5.00 | % |
In connection with the Bank’s Public Offering in August 2010, the Bank had 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 three years. This commitment expired on August 18, 2013.
In July 2013, the federal banking regulatory agencies approved the Final Rules that will replace the existing general risk-based capital and related rules, broadly revising the basic definitions and elements of regulatory capital and making substantial changes to the credit risk weightings for banking and trading book assets. The new regulatory capital rules establish the benchmark capital rules and capital floors that are generally applicable to United States banks under the Dodd-Frank Act and make the capital rules consistent with heightened international capital standards known as Basel III. These new capital standards will apply to all banks, regardless of size, and to all bank holding companies with consolidated assets greater than $500 million.
Under the Final Rules, Tier 1 capital will consist of two components: common equity Tier 1 capital and additional Tier 1 capital. Total Tier 1 capital, plus Tier 2 capital, will constitute total risk-based capital. The required minimum ratios will be (i) common equity Tier 1 risk-based capital ratio of 4.5%; (ii) Tier 1 risk-based capital ratio of 6%; (iii) total risk-based capital ratio of 8%; and (iv) Tier 1 leverage ratio of average consolidated assets of 4%. Advanced approaches banking organizations (those organizations with either total assets of $250 billion or more, or with foreign exposure of $10 billion or more) also will be subject to a supplementary leverage ratio that incorporates a broader set of exposures in the denominator. The Final Rules also incorporate these changes in regulatory capital into the prompt corrective action framework, under which the thresholds for “adequately capitalized” banking organizations will be equal to the new minimum capital requirements. Under this framework, in order to be considered “well capitalized”, insured depository institutions will be required to maintain a Tier 1 leverage ratio of 5%, a common equity Tier 1 risk-based capital measure of 6.5%, a Tier 1 risked-based capital ratio of 8% and a total risk-based capital ratio of 10%.
The Final Rules also provide that all covered banking organizations must maintain a new capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. Advanced approaches organizations also will be subject to a countercyclical capital buffer. Failure to satisfy the capital buffer requirements would result in increasingly stringent limitations on various types of capital distributions, including dividends, share buybacks and discretionary payments on Tier 1 instruments, and discretionary bonus payments.
The Final Rules reflect changes from the June 2012 proposals that minimize the impact of the revised capital regulations on community banks. In particular, banking organizations with less than $15 billion in total assets (including the Company and the Bank) will not be subject to the phase-out of non-qualifying Tier 1 capital instruments, such as TruPS, that were issued and outstanding prior to May 19, 2010. In addition, non-advanced approaches banking organizations will have a one-time option to exclude certain components of accumulated other comprehensive income from inclusion in regulatory capital, comparable to treatment under the current capital rules. The Final Rules also retain the existing treatment for residential mortgage exposures in the current risk-based capital rules, rather than adopt the proposed changes that would have required banking organizations to determine the risk weights based on a complex categorization and loan-to-value assessment.
Although the Final Rules alleviate some of the concerns of community banks with the capital standards as originally proposed, the new capital standards will impose significant changes on the definition of capital, including the inability to include instruments such as TruPS in Tier 1 capital going forward and new constraints on the inclusion of minority interests, mortgage servicing assets, deferred tax assets and certain investments in the capital of unconsolidated financial institutions. In addition, the Final Rules increase the risk-weights of various assets, including certain high volatility commercial real estate and past due asset exposures.
Non-advanced approaches banking organizations, including the Company and the Bank, must begin compliance with the new minimum capital ratios and the standardized approach for risk-weighted assets as of January 1, 2015, and the revised definitions of regulatory capital and the revised regulatory capital deductions and adjustments will be phased in over time for such organizations beginning as of that date. The capital conservation buffer will be phased in for all banking organizations beginning January 1, 2016.
Management is currently assessing the impact of the Final Rules to its regulatory capital ratios but does not expect these changes to result in a material difference.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
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, 2013:
Contractual Obligations
December 31, 2013 | | Less Than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More Than 5 Years | | | Total | |
| | | (dollars in thousands) | |
Time deposits | | $ | 407,168 | | | $ | 113,900 | | | $ | 23,360 | | | $ | - | | | $ | 544,428 | |
Deposits without a stated maturity | | | 991,616 | | | | - | | | | - | | | | - | | | | 991,616 | |
Repurchase agreements | | | 996 | | | | - | | | | - | | | | - | | | | 996 | |
FHLB advances | | | 35,000 | | | | 20,000 | | | | - | | | | - | | | | 55,000 | |
Subordinated debt | | | - | | | | - | | | | - | | | | 22,052 | | | | 22,052 | |
Operating lease obligations | | | 1,416 | | | | 2,644 | | | | 1,252 | | | | 2,620 | | | | 7,932 | |
FDIC loss share agreement - estimated true-up (1) | | | - | | | | - | | | | - | | �� | | 4,965 | | | | 4,965 | |
Total | | $ | 1,436,196 | | | $ | 136,544 | | | $ | 24,612 | | | $ | 29,637 | | | $ | 1,626,989 | |
(1) Amount is included in other liabilities on the balance sheet.
Information about our off-balance sheet risk exposure is presented in Note 16 – Off-Balance Sheet Risk to the Consolidated Financial Statements. At December 31, 2013, we had $279.5 million of pre-approved but unused lines of credit, $3.6 million of standby letters of credit and $1.9 million of commercial letters of credit. 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 2012, the Company established a reserve of $125 thousand, which is in other liabilities, for off-balance sheet credit exposure.
In connection with the Bank’s Public Offering in August 2010, it 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. The underwriting arrangement provided that additional underwriting fees equal to $3.0 million would be payable in the future if the common stock price closed at a price equal to or above 125% of the offering price, or $8.125 per share, for a period of 30 consecutive days. At December 31, 2012, the contingent underwriting fee of $3.0 million was included in other liabilities in the consolidated balance sheet. During the fourth quarter of 2013, management pursued a negotiated settlement in order to remove the $3.0 liability from the balance sheet, resulting in a $1.1 million gain from settling the contingent underwriting fee at a discount.
As part of Citizens South’s Plan of Conversion and Reorganization in May 2002, Citizens South established a memo liquidation account in an amount equal to its equity at the time of the conversion of approximately $44 million for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts at Citizens South Bank after the conversion. In accordance with the memo liquidation account, in the event of a complete liquidation of Citizens South Bank, each eligible account holder and supplemental eligible account holder would be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. In connection with the Citizens South merger and the subsequent merger of Citizens South Bank into the Bank, the Bank assumed this memo liquidation account. This liquidation account is reviewed and adjusted annually. At December 31, 2013 and 2012, the value of the liquidation account was approximately $7.6 million and $8.0 million, respectively.
Impact of Inflation and Changing Prices
As a financial institution, we have 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 bank’s assets are monetary in nature. As a result, our performance may be significantly influenced by changes in interest rates. Although we, 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.
Market Risk and Interest Rate Sensitivity
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign exchange rates, commodity prices and other relevant market rate or price risks, such as equity price risk. Due to the nature of our operations, we are primarily exposed to interest rate risk and liquidity risk. Interest rate risk results from timing differences in the repricing of assets and liabilities, changes in relationships between rate indices, and the potential exercise of explicit or embedded options.
The Senior Risk Committee actively evaluates and manages interest rate risk using a process developed by the Company. The Senior Risk 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; and (iii) economic value of equity at risk, which measures potential long-term risk in the balance sheet by valuing our assets and liabilities at “market” under different interest rate scenarios.
These measures have historically been calculated under a simulation model prepared by an independent correspondent bank assuming incremental 100 basis point shocks (or immediate shifts) in interest rates up to a total increase or decrease of 300 basis points. These simulations estimate the impact that various changes in the overall level of interest rates over a one- and two-year time horizon have on net interest income. 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 and interest rates. We believe 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, would affect net interest income by more than 22.5% over the next twelve months and for preventative measures to be put in place given a change in net interest income of more than 15% with a 200 basis point short-term interest rate shock. We currently operate well within these guidelines. As of December 31, 2013, based on the results of this simulation model, which assumed a static environment with no contemplated asset growth or changes in our balance sheet management strategies, we could expect net interest income to decrease by approximately 3.8% over twelve months if short-term interest rates immediately decreased by 200 basis points. This decrease results, in part, from our cost of interest-bearing liabilities, which was 0.45% for the year ended December 31, 2013, being unable to fully benefit from a 200 basis point decline in rates, while our yield on interest-earning assets could suffer materially from the decline. Conversely, if short-term interest rates increased by 300 basis points, net interest income could be expected to decrease by approximately 7.5% over twelve months given that we are currently in a liability-sensitive position. As of December 31, 2012, based on the results of this simulation model, which assumed a dynamic environment with contemplated asset growth, we expected net interest income to decrease by approximately 3% over twelve months if short-term interest rates immediately decreased by 300 basis points, which was unlikely based on the rate levels at that time. Conversely, if short term interest rates increased by 300 basis points, net interest income was expected to decrease by approximately 3% 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. In May 2011, our interest rate swap that was accounted for as a cash flow hedge terminated. The swap had a notional amount of $40 million that was purchased on May 16, 2008 to protect us from falling rates. We received a fixed rate of 6.22% for a period of three years, and paid the prime rate for the same period. During the year ended December 31, 2011, we recorded $441 thousand of income from this instrument.
At December 31, 2013, we maintained two loan swaps accounted for as fair value hedges in accordance with ASC 815. The aggregate original notional amount of these swaps was $6.2 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 $(258) thousand and $(453) thousand, at December 31, 2013 and December 31, 2012, respectively and are included in other liabilities. The loans being hedged are also recorded at fair value. These fair value hedges had no indications of ineffectiveness for any of the periods presented. The Company recorded interest expense on these loan swaps of $175 thousand, $353 thousand and $372 thousand for the years ended December 31, 2013, 2012 and 2011, respectively.
We entered into an interest rate swap agreement during October 2013 with a notional amount of $20.0 million. This derivative instrument is used to protect the Company from future interest rate risk on a portion of its floating rate FHLB borrowings. This derivative instrument is a $20.0 million three-year forward starting, five-year interest rate swap with an effective date of October 21, 2016. The instrument carries a fixed rate of 3.439% with quarterly payments commencing in January 2017. This derivative instrument is accounted for as a cash flow hedge with effective changes in fair market value recorded in other comprehensive income net of tax. This derivative instrument is carried at a fair market value of $298 thousand and is included in other assets at December 31, 2013.
We entered into three interest rate swap agreements during December 2013 with a total notional amount of $50.0 million. These derivative instruments are used to protect the Company from future interest rate risk caused by a seven-year commitment of floating rate broker-dealer sweep accounts through a brokered deposit program. These derivative instruments are a combination of a $12.5 million forward starting, five-year interest rate swap; a $12.5 million forward starting, seven-year interest rate swap; and a $25.0 million two-year forward starting swap. Effective dates for these derivative instruments are January 2, 2014, January 2, 2014 and January 4, 2016, respectively. These instruments carry a fixed rate of 1.688% with monthly payments commencing February 3, 2014, a fixed rate of 2.341% with monthly payments commencing February 3, 2014, and a fixed rate of 3.104% with monthly payments commencing February 1, 2016, respectively. These derivative instruments are accounted for as cash flow hedges with effective changes in fair market value recorded in other comprehensive income net of tax. These derivative instruments are carried at a fair market value of $247 thousand and are included in other assets at December 31, 2013.
For fair value hedges, ASC Topic 815 requires that the method selected for assessing hedge effectiveness must be reasonable, be defined at the inception of the hedging relationship and be applied consistently throughout the hedging relationship. 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 derivative’s fair value to the cumulative changes in the hedged exposure’s 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 17 – Derivative Financial Instruments and Hedging Activities to the Consolidated Financial Statements for further discussion of 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, 2013, our cumulative one year gap was $(178.2) million, or -9.1% of total assets, indicating net liability-sensitive position.
The following table reflects our rate sensitive assets and liabilities by maturity as of December 31, 2013. 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
At December 31, 2013 | | Within Three Months | | | Three Months to One Year | | | One Year to Five Years | | | After Five Years | | | Total | |
| | | (dollars in thousands) | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 41,680 | | | $ | - | | | $ | - | | | $ | - | | | $ | 41,680 | |
Federal funds sold | | | 300 | | | | - | | | | - | | | | - | | | | 300 | |
Securities | | | 63,024 | | | | 34,494 | | | | 135,245 | | | | 174,605 | | | | 407,368 | |
Loans | | | 474,119 | | | | 199,407 | | | | 579,458 | | | | 45,254 | | | | 1,298,238 | |
Total interest-earning assets | | | 579,123 | | | | 233,901 | | | | 714,703 | | | | 219,859 | | | | 1,747,586 | |
| | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 57,054 | | | | - | | | | 135,900 | | | | 101,924 | | | | 294,878 | |
MMDA and savings | | | 502,315 | | | | - | | | | - | | | | - | | | | 502,315 | |
Time deposits | | | 147,888 | | | | 263,674 | | | | 135,186 | | | | 83 | | | | 546,831 | |
Short term borrowings | | | 996 | | | | - | | | | - | | | | - | | | | 996 | |
Long term borrowings | | | 50,157 | | | | - | | | | 20,000 | | | | 6,895 | | | | 77,052 | |
Total interest-bearing liabilities | | | 758,410 | | | | 263,674 | | | | 291,086 | | | | 108,902 | | | | 1,422,072 | |
| | | | | | | | | | | | | | | | | | | | | |
Derivatives | | | 30,815 | | | | - | | | | 26,685 | | | | (57,500 | ) | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Interest sensitivity gap | | $ | (148,472 | ) | | $ | (29,773 | ) | | $ | 450,302 | | | $ | 53,457 | | | $ | 325,514 | |
Cumulative interest sensitivity gap | | $ | (148,472 | ) | | $ | (178,245 | ) | | $ | 272,057 | | | $ | 325,514 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Percentage of total assets | | | | | | | -9.09 | % | | | | | | | | | | | | |
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The section captioned “Market Risk and Interest Rate Sensitivity” under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report is incorporated herein by reference.
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 (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders’ equity, and cash flows, for each of the years in the three year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 as of December 31, 2013 and 2012 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 6, 2014, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ DIXON HUGHES GOODMAN LLP
Charlotte, North Carolina
March 6, 2014
PARK STERLING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2013 and 2012
| | | December 31, | |
| | | 2013 | | | 2012 | |
| | | (dollars in thousands, except per share data) | |
| | | | | | | | | |
ASSETS | | | | | | | | |
| | | | | | | | | |
Cash and due from banks | | $ | 13,087 | | | $ | 36,716 | |
Interest-earning balances at banks | | | 41,680 | | | | 101,431 | |
Federal funds sold | | | 300 | | | | 45,995 | |
Investment securities available-for-sale, at fair value | | | 349,491 | | | | 245,571 | |
Investment securities held-to-maturity(fair value of $51,334 and $0, respectively) | | | 51,972 | | | | - | |
Nonmarketable equity securities | | | 5,905 | | | | 7,422 | |
Loans held for sale | | | 2,430 | | | | 14,147 | |
Loans: | | | | | | | | |
Non-covered | | | 1,224,674 | | | | 1,254,954 | |
Covered | | | 71,134 | | | | 101,753 | |
Less allowance for loan losses | | | (8,831 | ) | | | (10,591 | ) |
Net loans | | | 1,286,977 | | | | 1,346,116 | |
| | | | | | | | | |
Premises and equipment, net | | | 55,923 | | | | 57,222 | |
Bank-owned life insurance | | | 47,832 | | | | 46,133 | |
Deferred tax asset | | | 36,318 | | | | 40,926 | |
Other real estate owned - noncovered | | | 9,404 | | | | 18,427 | |
Other real estate owned - covered | | | 5,088 | | | | 6,646 | |
Goodwill | | | 26,420 | | | | 26,420 | |
FDIC indemnification asset | | | 10,025 | | | | 18,697 | |
Core deposit intangible | | | 8,629 | | | | 9,658 | |
Accrued interest receivable | | | 4,222 | | | | 3,821 | |
Other assets | | | 5,087 | | | | 7,446 | |
Total assets | | $ | 1,960,790 | | | $ | 2,032,794 | |
| | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
Deposits: | | | | | | | | |
Noninterest-bearing | | $ | 255,861 | | | $ | 243,495 | |
Interest-bearing | | | 1,344,024 | | | | 1,388,509 | |
Total deposits | | | 1,599,885 | | | | 1,632,004 | |
| | | | | | | | | |
Short-term borrowings | | | 996 | | | | 10,143 | |
FHLB advances | | | 55,000 | | | | 70,000 | |
Subordinated debt | | | 22,052 | | | | 21,573 | |
Accrued interest payable | | | 412 | | | | 516 | |
Accrued expenses and other liabilities | | | 20,362 | | | | 22,856 | |
Total liabilities | | | 1,698,707 | | | | 1,757,092 | |
| | | | | | | | | |
Commitments (Notes 15 and 16) | | | | | | | | |
| | | | | | | | | |
Shareholders' equity: | | | | | | | | |
Preferred stock, no par value5,000,000 shares authorized; 0 and 20,500 issued and outstandingat December 31, 2013 and 2012, respectively | | | - | | | | 20,500 | |
Common stock, $1.00 par value200,000,000 shares authorized;44,730,669 and 44,575,853 shares issued and outstanding atDecember 31, 2013 and 2012, respectively | | | 44,731 | | | | 44,576 | |
Additional paid-in capital | | | 222,559 | | | | 220,996 | |
Accumulated earnings (deficit) | | | (405 | ) | | | (13,568 | ) |
Accumulated other comprehensive income (loss) | | | (4,802 | ) | | | 3,198 | |
Total shareholders' equity | | | 262,083 | | | | 275,702 | |
Total liabilities and shareholders' equity | | $ | 1,960,790 | | | $ | 2,032,794 | |
See Notes to Consolidated Financial Statements.
PARK STERLING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years Ended December 31, 2013, 2012 and 2011
| | | 2013 | | | 2012 | | | 2011 | |
| | | (dollars in thousands, except per share data) | |
| | | | | | | | | | | | | |
Interest income | | | | | | | | | | | | |
Loans, including fees | | $ | 72,669 | | | $ | 53,194 | | | $ | 21,776 | |
Federal funds sold | | | 24 | | | | 49 | | | | 90 | |
Taxable investment securities | | | 5,029 | | | | 3,606 | | | | 2,830 | |
Tax-exempt investment securities | | | 756 | | | | 750 | | | | 716 | |
Nonmarketable equity securities | | | 150 | | | | 194 | | | | 53 | |
Interest on deposits at banks | | | 177 | | | | 153 | | | | 99 | |
Total interest income | | | 78,805 | | | | 57,946 | | | | 25,564 | |
| | | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | |
Money market, NOW and savings deposits | | | 1,570 | | | | 1,488 | | | | 743 | |
Time deposits | | | 2,538 | | | | 2,951 | | | | 4,011 | |
Short-term borrowings | | | 7 | | | | 11 | | | | 3 | |
FHLB Advances | | | 550 | | | | 600 | | | | 557 | |
Subordinated debt | | | 1,717 | | | | 1,520 | | | | 855 | |
Total interest expense | | | 6,382 | | | | 6,570 | | | | 6,169 | |
Net interest income | | | 72,423 | | | | 51,376 | | | | 19,395 | |
| | | | | | | | | | | | | |
Provision for loan losses | | | 746 | | | | 2,023 | | | | 9,385 | |
Net interest income after provision for loan losses | | | 71,677 | | | | 49,353 | | | | 10,010 | |
| | | | | | | | | | | | | |
Noninterest income | | | | | | | | | | | | |
Service charges on deposit accounts | | | 2,646 | | | | 1,814 | | | | 315 | |
Income from fiduciary activities | | | 2,779 | | | | 2,332 | | | | 418 | |
Commissions and fees from investment brokerage | | | 419 | | | | 287 | | | | 29 | |
Gain on sale of securities available-for-sale | | | 98 | | | | 1,478 | | | | 20 | |
Bankcard services income | | | 2,373 | | | | 1,085 | | | | 181 | |
Mortgage banking income | | | 3,123 | | | | 2,478 | | | | 297 | |
Income from bank-owned life insurance | | | 1,863 | | | | 1,264 | | | | 248 | |
Other noninterest income | | | 1,785 | | | | 634 | | | | 139 | |
Total noninterest income | | | 15,086 | | | | 11,372 | | | | 1,647 | |
| | | | | | | | | | | | | |
Noninterest expense | | | | | | | | | | | | |
Salaries and employee benefits | | | 34,570 | | | | 29,396 | | | | 14,778 | |
Occupancy and equipment | | | 7,691 | | | | 4,654 | | | | 1,588 | |
Advertising and promotion | | | 839 | | | | 781 | | | | 372 | |
Legal and professional fees | | | 3,142 | | | | 3,190 | | | | 2,738 | |
Deposit charges and FDIC insurance | | | 1,647 | | | | 1,250 | | | | 733 | |
Data processing and outside service fees | | | 5,950 | | | | 4,371 | | | | 794 | |
Communication fees | | | 1,737 | | | | 945 | | | | 232 | |
Core deposit intangible amortization | | | 1,029 | | | | 564 | | | | 68 | |
Net cost (earnings) of operation of other real estate owned | | | (371 | ) | | | 3,462 | | | | 829 | |
Loan and collection expense | | | 1,972 | | | | 1,221 | | | | 630 | |
Postage and supplies | | | 1,009 | | | | 791 | | | | 423 | |
Other tax expenses | | | 558 | | | | 300 | | | | 303 | |
Other noninterest expense | | | 4,326 | | | | 3,151 | | | | 1,472 | |
Total noninterest expense | | | 64,099 | | | | 54,076 | | | | 24,960 | |
| | | | | | | | | | | | | |
Income (loss) before income taxes | | | 22,664 | | | | 6,649 | | | | (13,303 | ) |
| | | | | | | | | | | | | |
Income tax (benefit) expense | | | 7,359 | | | | 2,306 | | | | (4,944 | ) |
| | | | | | | | | | | | | |
Net income (loss) | | | 15,305 | | | | 4,343 | | | | (8,359 | ) |
| | | | | | | | | | | | | |
Preferred dividends | | | 353 | | | | 51 | | | | - | |
| | | | | | | | | | | | | |
Net income (loss) to common shareholders | | $ | 14,952 | | | $ | 4,292 | | | $ | (8,359 | ) |
| | | | | | | | | | | | | |
Basic earnings (loss) per common share | | $ | 0.34 | | | $ | 0.12 | | | $ | (0.29 | ) |
| | | | | | | | | | | | | |
Diluted earnings (loss) per common share | | $ | 0.34 | | | $ | 0.12 | | | $ | (0.29 | ) |
| | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | | | | | | | | | | |
Basic | | | 43,965,408 | | | | 35,101,407 | | | | 28,723,647 | |
Diluted | | | 44,053,253 | | | | 35,108,229 | | | | 28,723,647 | |
See Notes to Consolidated Financial Statements.
PARK STERLING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2013, 2012 and 2011
| | | 2013 | | | 2012 | | | 2011 | |
| | | (dollars in thousands) | |
| | | | | | | | | | | | | |
Net income (loss) | | $ | 15,305 | | | $ | 4,343 | | | $ | (8,359 | ) |
| | | | | | | | | | | | | |
Unrealized holding gains (losses) onavailable-for-sale securities | | | (13,200 | ) | | | 1,908 | | | | 5,550 | |
Income tax effect | | | 4,919 | | | | (630 | ) | | | (1,719 | ) |
| | | | | | | | | | | | | |
Reclassification of gains recognized in net income,reported as gain on sale of securities available for sale on the condensed consolidated statement of income | | | (98 | ) | | | (1,478 | ) | | | (20 | ) |
Income tax effect | | | 36 | | | | 518 | | | | 7 | |
| | | | (8,343 | ) | | | 318 | | | | 3,818 | |
Unrealized holding gains on swaps | | | 545 | | | | - | | | | - | |
Income tax effect | | | (202 | ) | | | - | | | | - | |
| | | | 343 | | | | - | | | | - | |
Total other comprehensive income (loss) | | | (8,000 | ) | | | 318 | | | | 3,818 | |
Total comprehensive income (loss) | | $ | 7,305 | | | $ | 4,661 | | | $ | (4,541 | ) |
See Notes to Consolidated Financial Statements.
PARK STERLING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2013, 2012 and 2011
| | | Preferred Stock | | | Common Stock | | | Additional
Paid-In | | | Accumulated | | | Accumulated Other Comprehensive | | | Total Shareholders' | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Income (Loss) | | | Equity | |
| | | (dollars in thousands, except share amounts) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2010 | | | - | | | $ | - | | | | 28,051,098 | | | $ | 28,051 | | | $ | 159,489 | | | $ | (9,501 | ) | | $ | (938 | ) | | $ | 177,101 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of restricted stockgrants | | | - | | | | - | | | | 568,260 | | | | 568 | | | | (568 | ) | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | - | | | | - | | | | - | | | | - | | | | 1,930 | | | | - | | | | - | | | | 1,930 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for Community | | | - | | | | - | | | | 4,024,269 | | | | 4,025 | | | | 11,539 | | | | - | | | | - | | | | 15,564 | |
Capital Corporation merger | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (8,359 | ) | | | - | | | | (8,359 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,818 | | | | 3,818 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2011 | | | - | | | | - | | | | 32,643,627 | | | | 32,644 | | | | 172,390 | | | | (17,860 | ) | | | 2,880 | | | | 190,054 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares of preferred stock issued | | | 20,500,000 | | | | 20,500 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 20,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of restricted stock grants | | | - | | | | - | | | | 78,000 | | | | 78 | | | | (78 | ) | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | - | | | | - | | | | - | | | | - | | | | 2,012 | | | | - | | | | - | | | | 2,012 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for Citizens South merger | | | - | | | | - | | | | 11,857,226 | | | | 11,857 | | | | 46,684 | | | | - | | | | - | | | | 58,541 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock repurchased | | | - | | | | - | | | | (3,000 | ) | | | (3 | ) | | | (12 | ) | | | | | | | | | | | (15 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends on preferred stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (51 | ) | | | - | | | | (51 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,343 | | | | - | | | | 4,343 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 318 | | | | 318 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 | | | 20,500,000 | | | | 20,500 | | | | 44,575,853 | | | | 44,576 | | | | 220,996 | | | | (13,568 | ) | | | 3,198 | | | | 275,702 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Redemption of preferred stock | | | (20,500,000 | ) | | | (20,500 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (20,500 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of restricted stock grants | | | - | | | | - | | | | 174,000 | | | | 174 | | | | (174 | ) | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Forfeitures of restricted stock grants | | | - | | | | - | | | | (23,860 | ) | | | (23 | ) | | | 23 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | - | | | | - | | | | 60,943 | | | | 60 | | | | 248 | | | | - | | | | - | | | | 308 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | - | | | | - | | | | - | | | | - | | | | 1,776 | | | | - | | | | - | | | | 1,776 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock repurchased | | | - | | | | - | | | | (56,267 | ) | | | (56 | ) | | | (310 | ) | | | - | | | | - | | | | (366 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends on preferred stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (353 | ) | | | - | | | | (353 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends on common stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,789 | ) | | | - | | | | (1,789 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 15,305 | | | | - | | | | 15,305 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | (8,000 | ) | | | (8,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2013 | | | - | | | $ | - | | | | 44,730,669 | | | $ | 44,731 | | | $ | 222,559 | | | $ | (405 | ) | | $ | (4,802 | ) | | $ | 262,083 | |
See Notes to Consolidated Financial Statements.
PARK STERLING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2013, 2012 and 2011
| | | 2013 | | | 2012 | | | 2011 | |
| | | (dollars in thousands) | |
Cash flows from operating activities | | | | | | | | | | | | |
Net income (loss) | | $ | 15,305 | | | $ | 4,343 | | | $ | (8,359 | ) |
Adjustments to reconcile net income (loss) to netcash provided (used) by operating activities: | | | | | | | | | | | | |
Accretion on acquired loans | | | (8,513 | ) | | | (7,462 | ) | | | (160 | ) |
Net amortization (accretion) on investments | | | 564 | | | | (2,425 | ) | | | 1,288 | |
Other depreciation and amortization, net | | | 4,928 | | | | 3,403 | | | | 792 | |
Provision for loan losses | | | 746 | | | | 2,023 | | | | 9,385 | |
Share-based compensation expense | | | 1,776 | | | | 2,012 | | | | 1,930 | |
Deferred income taxes | | | 8,482 | | | | 2,255 | | | | (4,944 | ) |
Amortization (accretion) of FDIC indemnification asset | | | 396 | | | | (73 | ) | | | - | |
Net gains on sales of investment securities available-for-sale | | | (98 | ) | | | (1,478 | ) | | | (20 | ) |
Net gains on sales of loans held for sale | | | (1,835 | ) | | | (1,182 | ) | | | (140 | ) |
Net (gains) losses on disposals of premises and equipment | | | 412 | | | | (94 | ) | | | 69 | |
Net gains on sales of other real estate owned | | | (2,061 | ) | | | (253 | ) | | | (181 | ) |
Writedowns of other real estate owned | | | 1,394 | | | | 2,421 | | | | 713 | |
Income from bank owned life insurance | | | (1,863 | ) | | | (1,264 | ) | | | (248 | ) |
Proceeds of loans held for sale | | | 110,118 | | | | 71,855 | | | | 9,705 | |
Disbursements for loans held for sale | | | (96,566 | ) | | | (78,053 | ) | | | (9,255 | ) |
Change in assets and liabilities: | | | | | | | | | | | | |
(Increase) decrease in FDIC indemnification asset | | | (1,444 | ) | | | (926 | ) | | | - | |
(Increase) decrease in accrued interest receivable | | | (401 | ) | | | 1,381 | | | | 167 | |
(Increase) decrease in other assets | | | 3,947 | | | | (5,185 | ) | | | 602 | |
Decrease in accrued interest payable | | | (104 | ) | | | (1,433 | ) | | | (611 | ) |
Increase (decrease) in accrued expenses and other liabilities | | | (2,424 | ) | | | 6,055 | | | | 970 | |
Net cash provided (used) by operating activities | | | 32,759 | | | | (4,080 | ) | | | 1,703 | |
| | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
Net (increase) decrease in loans | | | 53,294 | | | | 78,196 | | | | (363 | ) |
Purchases of premises and equipment | | | (2,625 | ) | | | (4,845 | ) | | | (1,478 | ) |
Proceeds from disposals of premises and equipment | | | 1,650 | | | | 221 | | | | 25 | |
Purchases of investment securities available-for-sale | | | (191,521 | ) | | | (31,115 | ) | | | (87,864 | ) |
Purchases of investment securities held-to-maturity | | | (52,178 | ) | | | | | | | | |
Proceeds from sales of investment securities available-for-sale | | | 28,128 | | | | 46,367 | | | | 24,326 | |
Proceeds from maturities and call of investment securities available-for-sale | | | 45,412 | | | | 43,998 | | | | 44,347 | |
Proceeds from maturities and call of investment securities held-to-maturity | | | 503 | | | | | | | | | |
FDIC reimbursement of recoverable covered asset losses | | | 9,720 | | | | 3,698 | | | | - | |
Proceeds from sale of other real estate owned | | | 21,455 | | | | 13,096 | | | | 5,122 | |
Net redemptions of nonmarketable equity securities | | | 1,517 | | | | 6,079 | | | | 1,800 | |
Purchase of bank owned life insurance | | | - | | | | - | | | | (8,000 | ) |
Acquisitions, net of cash paid | | | - | | | | 24,283 | | | | 83,898 | |
Net cash provided by (used for) investing activities | | | (84,645 | ) | | | 179,978 | | | | 61,813 | |
| | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
Net decrease in deposits | | | (30,342 | ) | | | (42,933 | ) | | | (28,208 | ) |
Net increase (decrease) in short-term borrowings | | | (9,147 | ) | | | (7,300 | ) | | | 8,891 | |
Advances (repayments) of long-term borrowings | | | (15,000 | ) | | | 30,000 | | | | (81,034 | ) |
Redemption of preferred stock | | | (20,500 | ) | | | - | | | | - | |
Exercise of stock options | | | 308 | | | | - | | | | - | |
Repurchase of common stock | | | (366 | ) | | | (15 | ) | | | - | |
Dividends on common stock | | | (1,789 | ) | | | - | | | | - | |
Dividends on preferred stock | | | (353 | ) | | | (51 | ) | | | - | |
Net cash used for financing activities | | | (77,189 | ) | | | (20,299 | ) | | | (100,351 | ) |
Net increase (decrease) in cash and cash equivalents | | | (129,075 | ) | | | 155,599 | | | | (36,835 | ) |
Cash and cash equivalents, beginning | | | 184,142 | | | | 28,543 | | | | 65,378 | |
Cash and cash equivalents, ending | | $ | 55,067 | | | $ | 184,142 | | | $ | 28,543 | |
| | | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid for interest | | $ | 6,486 | | | $ | 7,615 | | | $ | 4,898 | |
Cash paid for income taxes | | | 240 | | | | 94 | | | | - | |
| | | | | | | | | | | | | |
Supplemental disclosure of noncash investing and financing activities: | | | | | | | | | | | | |
Change in unrealized gain (loss) on available-for-sale securities, net of tax | | $ | (8,343 | ) | | $ | 318 | | | $ | 3,818 | |
Change in unrealized gain on cash flow hedge, net of tax | | | 343 | | | | - | | | | - | |
Transfer from other assets to investment securities available-for-sale | | | 1,393 | | | | - | | | | - | |
Loans transferred to other real estate owned | | | 10,207 | | | | 11,896 | | | | 11,059 | |
See Notes to Consolidated Financial Statements.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 1 – ORGANIZATION AND OPERATIONS
Park Sterling Corporation (the “Company”) was formed on October 6, 2010 to serve as the holding company for Park Sterling Bank (the “Bank”) and is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). At December 31, 2013, the Company’s primary operations and business were that of owning the Bank.
The Bank was incorporated in September 2006 as a North Carolina-chartered commercial nonmember bank and is a wholly owned subsidiary of the Company. The Bank opened for business on October 25, 2006 at 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina. In August 2010, the Bank conducted an equity offering (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 accelerated organic growth and to acquire regional and community banks in the Carolinas and Virginia.
On January 1, 2011, the Company acquired all of the outstanding common stock of the Bank in exchange for shares of the Company’s Common Stock, on a one-for-one basis, in a statutory share exchange transaction effected under North Carolina law pursuant to which the Company became the bank holding company for the Bank. Prior to January 1, 2011, the Company conducted no operations other than obtaining regulatory approval for the holding company reorganization.
On November 1, 2011, Community Capital Corporation (“Community Capital”) was merged with and into the Company, with the Company as the surviving legal entity, in accordance with an Agreement and Plan of Merger dated as of March 30, 2011. The aggregate merger consideration consisted of 4,024,269 shares of Common Stock and approximately $13.3 million in cash. The final transaction value was approximately $28.8 million based on the $3.85 per share closing price of the Common Stock on October 31, 2011.
On October 1, 2012, Citizens South Banking Corporation (“Citizens South”) was merged with and into the Company, with the Company as the surviving legal entity, in accordance with an Agreement and Plan of Merger dated as of May 13, 2012. The aggregate merger consideration consisted of 11,857,226 shares of Common Stock and $24.3 million in cash. Based on the $4.94 per share closing price of the Common Stock on September 28, 2012, the last trading date prior to consummation of the merger, the final transaction value was $82.9 million.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation-The accounting and reporting policies of the Company conform with United States 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. The Company evaluates subsequent events through the date of filing of the consolidated financial statements with the Securities and Exchange Commission (“SEC”).
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, nonaccretable discounts, purchase accounting accretion adjustments, realization of deferred tax assets and the fair value of financial instruments and other accounts.
Segments-The Company, through the Bank, provides a broad range of financial services to individuals and companies. These services include personal, business and non-profit checking accounts, IOLTA accounts, individual retirement accounts, business and personal money market accounts, certificates of deposit, overdraft protection, safe deposit boxes and online and mobile banking. Lending activities include a range of short-to medium-term commercial (including asset-based lending), real estate, construction, residential mortgage and home equity and consumer loans, as well as long-term residential mortgages. Wealth management activities include investment management, personal trust services, and investment brokerage services. Cash management activities include remote deposit capture, lockbox services, sweep accounts, purchasing cards, ACH and wire payments. While the Company's decision makers monitor the revenue streams of the various financial products and services, operations are managed and financial performance is evaluated on an organization-wide basis. Accordingly, the Company's banking and finance operations are not considered by management to constitute more than one reportable operating segment.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Reclassifications -Certain amounts in the prior years’ financial statements have been reclassified to conform to the 2013 presentation. The reclassification had no effect on net income (loss), comprehensive income (loss) or shareholders’ equity as previously reported.
Business Combinations, Method of Accounting for Loans Acquired, and Federal Deposit Insurance Corporation (the “FDIC”) Indemnification Asset–Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805,Business Combinations. A business combination occurs when the Company acquires net assets that constitute a business, or acquires equity interests in one or more other entities that are businesses and obtains control over those entities. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock. The assets and liabilities of the acquired entity are recorded at their respective fair values as of the closing date of the merger. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.Fair values are preliminary and subject to refinement for up to one year after the closing date of the merger as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in our consolidated results from the closing date of the merger, and prior periods are not restated. Business combinations are accounted for using the acquisition method. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding future credit losses. Loans acquired are recorded at fair value exclusive of any loss share agreements with the FDIC. The fair value estimates associated with the acquired loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.
The FDIC indemnification asset is measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets, without approval of the FDIC, should the Company choose to dispose of them. Fair value was estimated at the acquisition date using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These expected reimbursements do not include reimbursable amounts related to future covered expenditures. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. The Company will offset any recorded provision for loan losses related to acquired loans by recording an increase in the FDIC indemnification asset in an amount equal to the increase in expected cash flow, which is the result of a decrease in expected cash flow of acquired loans. An increase in cash flows on acquired loans results in a decrease in cash flows on the FDIC indemnification asset, which is recognized in the future as amortization through non-interest income over the lesser of the term of the loss share agreement or the life of the loan.
The Company incurs expenses related to the assets indemnified by the FDIC and pursuant to the loss share agreements certain costs are reimbursable by the FDIC and are included in quarterly claims made by the Company. The estimates of reimbursements are netted against these covered expenses in the income statement.
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. Investment securities held-to-maturity are reported at amortized cost. 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 and are recorded on a trade date basis. 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.
Nonmarketable Equity Securities –Nonmarketable equity securities include the costs of the Company’s investments in the stock of the Federal Home Loan Bank of Atlanta (“FHLB”). As a condition of membership, the Bank is required to hold stock in the 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 nonmarketable equity securities at cost and periodically evaluates them for impairment. Management considers these nonmarketable 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 thecommitment of the FHLB to perform its obligations, which includes providing credit and other services to the Bank. Upon request, the stock may be sold back to the FHLB, at cost.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
The Company has invested in the stock of several unrelated financial institutions. The Company owns less than five percent of the outstanding shares of each institution, and the stocks either have no quoted market value or are not readily marketable. Included in nonmarketable equity securities is the investment in CSBC Statutory Trust I and Community Capital Corporation Statutory Trust I. See Note 4 – Investments and Note 11 – Borrowings.
Loans Held for Sale –Loans intended for sale are carried at the lower of cost or estimated fair value in the aggregate. This includes, but may not be limited to, loans originated through the Company’s mortgage activities. Residential mortgage loans originated and intended for sale are comprised of accepting residential mortgage loan applications, qualifying borrowers to standards established by investors, funding residential mortgages and selling mortgages to investors under pre-existing commitments.
Loans –Loans originated by the Company and which 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. Interest on originated 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. See Note 5 – Loans.
Purchased Credit-Impaired (“PCI”) Loans - Purchased loans acquired in a business combination, which include loans purchased in the Community Capital and Citizens South acquisitions, are recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses. PCI loans are accounted for under the “Receivables” topic of the ASC when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the date of acquisition may include statistics such as internal risk grades and past due and nonaccrual status. Purchased impaired loans generally meet the Company’s definition for nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference, and is available to absorb credit losses on those loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the nonaccretable difference with a positive impact on future interest income. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. For acquired loans subject to a loss sharing agreement with the FDIC, the FDIC indemnification asset will be adjusted prospectively in a similar, consistent manner with increases and decreases in expected cash flows limited to the term of the loss share agreements.
Purchased Performing Loans – The Company accounts for performing loans acquired in business combinations using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the acquisition.
Nonperforming Loans – For all classes of loans, except PCI 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.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Impaired Loans – For all classes of loans, except PCI 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 nonaccrual 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 interest rate implicit in the original agreement 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 probable, 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 TDR - Loans are considered to be a TDR if, for economic or legal reasons related to the borrower's financial condition, the Company makes certain concessions to the original contract terms related to amount, interest rate, amortization or maturity that it would not otherwise consider. 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 borrower's 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 management's ongoing evaluation of the loan portfolio and reflects an amount considered by management to be its best estimate of known and inherent losses in the portfolio as of the balance sheet date. The determination of the allowance for loan losses involves a high degree of judgment and complexity. In making the evaluation of the adequacy of the allowance for loan losses, management considers current economic and market conditions, independent loan reviews performed periodically by third parties, portfolio trends and concentrations, delinquency information, management's internal review of the loan portfolio, internal historical loss rates 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 management's assessment of their differing inherent loss characteristics, the entire allowance for losses on loans, other than the portions related to PCI loans and specific reserves on impaired loans, is available to absorb further loan losses in any segment. Further information regarding the Company’s policies and methodology used to estimate the allowance for loan losses is presented in Note 5 – Loans.
Other Real Estate Owned (“OREO”) - 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.
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 generally 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.
Goodwill and Intangible Assets-Intangible assets consist primarily of goodwill and core deposit intangibles that result from the acquisition of other banks. Core deposit intangibles represent the value of long-term deposit relationships acquired in these transactions. Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing the reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment of goodwill assigned to that reporting unit.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of the goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis of goodwill.
In September 2011, the FASB issued ASU 2011-08, which gives entities the option of first performing a qualitative assessment to test goodwill for impairment on a reporting-unit-by-reporting-unit basis. If, after performing the qualitative assessment, an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would perform the two-step goodwill impairment test described in ASC 350. However, if, after applying the qualitative assessment, the entity concludes that it is not more likely than not that the fair value is less than the carrying amount, the two-step goodwill impairment test is not required.
The Company performed the qualitative assessment as outlined in ASU 2011-08 in assessing the carrying value of goodwill related to the mergers with Community Capital and Citizens South as of September 30, 2013, its annual test date, and determined that it was unlikely that the fair value was less than the carrying amount and that no further testing or impairment charge was necessary. Additionally, should the Company’s future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required. There have been no events subsequent to the September 30, 2013 evaluation that caused the Company to perform an interim review of the carrying value of goodwill related to either the merger with Community Capital or the merger with Citizens South.
Core deposit intangibles are amortized over the estimated useful lives of the deposit accounts acquired (generally ten years on a straight line basis).
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 remains in the asset accounts.
Advertising Costs- Advertising costs are expensed as incurred and advertising communication costs the first time the advertising takes place. The Company may establish accruals for anticipated advertising expenses within the course of a fiscal year.
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 common 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.
During 2011, the Company issued 568,260 restricted stock awards to certain officers and directors as contemplated in connection with the Bank’s Public Offering. Also in 2011, the Company issued 4,024,269 shares of Common Stock in connection with the merger with Community Capital. In 2012, the Company issued 78,000 restricted stock awards, and repurchased 3,000 of common stock in open market transactions pursuant to the stock repurchase program approved by the board of directors in November 2012. Also in 2012, the Company issued 11,857,226 shares of Common Stock in connection with the merger with Citizens South. In 2013, the Company issued 174,000 restricted stock awards, issued 60,943 shares pursuant to the exercise of stock options, and repurchased 56,267 shares in open market transactions.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
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:
| | | 2013 | | | 2012 | | | 2011 | |
| | | | | | | | | | | | | |
Weighted-average number of common shares outstanding | | | 43,965,408 | | | | 35,101,407 | | | | 28,723,647 | |
| | | | | | | | | | | | | |
Effect of dilutive stock options and restricted shares | | | 87,845 | | | | 6,822 | | | | - | |
| | | | | | | | | | | | | |
Weighted-average number of common shares and dilutive potential common shares outstanding | | | 44,053,253 | | | | 35,108,229 | | | | 28,723,647 | |
There were 2,177,592 outstanding options and 730,514 outstanding restricted shares that were anti-dilutive for the year ended December 31, 2013. There were 47,959 dilutive stock options and 39,885 dilutive restricted shares outstanding for the year ended December 31, 2013. There were 3,118,891 outstanding options and 640,239 outstanding restricted shares outstanding that were anti-dilutive for the year ended December 31, 2012. There were 801 dilutive stock options and 6,021 dilutive restricted shares outstanding for the year ended December 31, 2012. There were 2,145,189 outstanding options and 568,260 outstanding restricted shares that were anti-dilutive for the year ended December 31, 2011. There were no dilutive stock options or restricted shares for the year ended December 31, 2011 due to the Company’s net loss position. See Note 20 – Employee and Director Benefit Plans for more information.
Share-Based Compensation -The Company may grant share-based compensation to employees, non-employee directors and other eligible parties 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 is adjusted for actual forfeiture experience. The fair value of restricted stock awards, subject to share price performance vesting requirements, is estimated using a Monte Carlo simulation and related estimated assumptions for volatility and a risk free interest rate.
The compensation expense for share-based compensation plans was $1.8 million, $2.0 million and $1.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.
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 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 shareholders’ 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 hedge’s 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. See Note 17 – Derivative Financial Instruments and Hedging Activities.
Fair value hedges are accounted for under ASC Topic 815 which requires that the method selected for assessing hedge effectiveness must be reasonable, be defined at the inception of the hedging relationship and be applied consistently throughout the hedging relationship. The Company uses the dollar-offset method for assessing effectiveness using the cumulative approach. The dollar-offset method compares the fair value of the hedging derivative with the fair value of the hedged exposure. The cumulative approach involves comparing the cumulative changes in the hedging derivative’s fair value to the cumulative changes in the hedged exposure’s 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 London InterBank Offered Rate (“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.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
If a derivative instrument designated as a fair value hedge is terminated or the hedge designation removed, the difference between a hedged item’s 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 –The following is a summary of recent authoritative pronouncements:
In January 2014, the FASB amended the Investments—Equity Method and Joint Ventures topic of the ASC to address accounting for investments in qualified affordable housing projects. If certain conditions are met, the amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects by amortizing the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizing the net investment performance in the income statement as a component of income tax expense (benefit). If those conditions are not met, the investment should be accounted for as an equity method investment or a cost method investment in accordance with existing accounting guidance. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014, and should be applied retrospectively for all periods presented. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2014, the FASB amended the Receivables—Troubled Debt Restructurings by Creditors subtopic of the ASC to address the reclassification of consumer mortgage loans collateralized by residential real estate upon foreclosure. The amendments clarify the criteria for concluding that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments also outline interim and annual disclosure requirements. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014. Companies are allowed to use either a modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes” (a consensus of the FASB Emerging Issues Task Force). The ASU permits the Fed Funds Effective Swap Rate to be used as a United States benchmark interest rate for hedge accounting purposes, in addition to United States Treasury rates and the London InterBank Offered Rate (“LIBOR”). The amendments also remove the restriction on using different benchmark rates for similar hedges. The standard is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. This standard did not have a material impact on the Company’s consolidated financial statements.
In February 2013, the FASB issued Accounting Standards Update No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). This guidance is the culmination of the FASB's deliberation on reporting reclassification adjustments from accumulated other comprehensive income ("AOCI"). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The Company has adopted this standard and the required disclosures are presented in the consolidated financial statements.
In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") updated its Internal Control – Integrated Framework (the 1992 original framework) and issued its Internal Control – Integrated Framework (the 2013 framework). The update accounts for the dramatic changes in the business and operating environments over the past twenty years and accounts for the complex, technologically driven and global changes that have occurred. As of December 31, 2014, COSO will no longer support the 1992 original framework and the SEC has indicated it expects all registrants to adopt the 2013 framework by that date. Management is currently reviewing the 2013 framework and expects to adopt it by December 31, 2014.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 3 – BUSINESS COMBINATIONS
Citizens South
On October 1, 2012, Citizens South was merged with and into the Company, with the Company as the surviving legal entity, in accordance with an Agreement and Plan of Merger dated as of May 13, 2012. Under the terms of the Citizens South merger agreement, Citizens South stockholders received either $7.00 in cash or 1.4799 shares of the Company’s Common Stock for each Citizens South share they owned immediately prior to the merger, subject to the limitation that the total consideration paid in the merger would consist of 30% in cash and 70% in Common Stock. The Citizens South merger was structured to be tax-free to Citizens South stockholders with respect to the shares of Common Stock received in the merger and taxable with respect to the cash received in the merger. Cash was paid in lieu of fractional shares. The aggregate merger consideration consisted of 11,857,226 shares of Common Stock and $24.3 million in cash. Based on the $4.94 per share closing price of the Common Stock on September 28, 2012, the last trading date prior to consummation of the merger, the transaction value was $82.9 million. In addition, in connection with the merger, the preferred stock previously issued by Citizens South to the United States Department of the Treasury (the “Treasury”) in connection with Citizens South’s participation in the Small Business Lending Fund (the “SBLF”) program was converted to 20,500 shares of a substantially identical newly created series of the Company’s preferred stock. See Note 14 – Preferred Stock for further discussion. Also in connection with the merger, the Company assumed certain loss share agreements with the FDIC related to prior acquisitions by Citizens South. See Note 6 – FDIC Loss Share Agreements.
Citizens South operated 21 full service branches in North Carolina, South Carolina and Georgia at the date of acquisition. The acquisition of Citizens South was part of the Company’s business plan seeking accelerated organic growth and to acquire regional and community banks in the Carolinas and Virginia.
The assets and liabilities assumed from Citizens South were recorded at their fair value as of the closing date of the merger. Goodwill of $22.5 million was initially recorded at the time of acquisition. As a result of refinements to the fair value mark on loans, bank-owned life insurance, OREO, the FDIC indemnification asset, deferred tax assets (“DTAs”), and other assets, goodwill as indicated below is $3.3 million greater than the goodwill estimated in the Company’s 2012 Audited Financial Statements. Goodwill as of December 31, 2012 has been retrospectively adjusted. The following table summarizes the consideration paid by the Company in the merger with Citizens South and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date:
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
| | | As Recorded by Citizens South | | | Fair Value and OtherMerger RelatedAdjustments | | | As Recorded by the Company | |
| | | | | | | | | | | | | |
Consideration Paid | | | | | | | | | | | | |
Cash | | | | | | | | | | $ | 24,283 | |
Common shares issued (11,857,226 shares) | | | | | | | | | | | 58,575 | |
Fair value of noncontrolling interest | | | | | | | | | | | 20,500 | |
| | | | | | | | | | | | | |
Fair Value of Total Consideration Transferred | | | | | | | | | | $ | 103,358 | |
| | | | | | | | | | | | | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 48,661 | | | $ | - | | | $ | 48,661 | |
Securities | | | 88,068 | | | | 2,275 | | | | 90,343 | |
Nonmarketable equity securities | | | 5,390 | | | | - | | | | 5,390 | |
Loans held for sale | | | 1,695 | | | | - | | | | 1,695 | |
Loans, net of allowance | | | 694,016 | | | | (12,340 | ) | | | 681,676 | |
Premises and equipment | | | 25,443 | | | | 4,326 | | | | 29,769 | |
Core deposit intangibles | | | 1,032 | | | | 5,168 | | | | 6,200 | |
Other real estate owned | | | 18,957 | | | | (3,169 | ) | | | 15,788 | |
Bank owned life insurance | | | 18,879 | | | | (79 | ) | | | 18,800 | |
Deferred tax asset | | | 3,560 | | | | (828 | ) | | | 2,732 | |
FDIC indemnification asset | | | 20,652 | | | | 1,846 | | | | 22,498 | |
Other assets | | | 4,338 | | | | (238 | ) | | | 4,100 | |
| | | | | | | | | | | | | |
Total assets acquired | | $ | 930,691 | | | $ | (3,039 | ) | | $ | 927,652 | |
| | | | | | | | | | | | | |
Deposits | | $ | 826,134 | | | $ | 2,166 | | | $ | 828,300 | |
Short term borrowings | | | 7,678 | | | | - | | | | 7,678 | |
Junior subordinated debt | | | 15,464 | | | | (6,627 | ) | | | 8,837 | |
Other liabilities | | | 418 | | | | 4,859 | | | | 5,277 | |
| | | | | | | | | | | | | |
Total liabilities assumed | | $ | 849,694 | | | $ | 398 | | | $ | 850,092 | |
| | | | | | | �� | | | | | | |
Total identifiable assets | | $ | 80,997 | | | $ | (3,437 | ) | | $ | 77,560 | |
| | | | | | | | | | | | | |
Goodwill resulting from acquisition | | | | | | | | | | $ | 25,798 | |
Community Capital
On November 1, 2011, Community Capital was merged with and into the Company, with the Company as the surviving legal entity, in accordance with an Agreement and Plan of Merger dated as of March 30, 2011. Under the terms of the merger agreement, Community Capital shareholders received either $3.30 in cash or 0.6667 of a share of Common Stock, for each share of Community Capital common stock they owned immediately prior to the merger, subject to the limitation that the total consideration paid in the merger would consist of 40% in cash and 60% in Common Stock. The Community Capital merger was structured to be tax-free to Community Capital shareholders with respect to the shares of Common Stock received in the merger and taxable with respect to the cash received in the merger. Cash was paid in lieu of fractional shares. The aggregate merger consideration consisted of 4,024,269 shares of Common Stock and $13.3 million in cash. Based on the $3.85 per share closing price of the Common Stock on October 31, 2011, the last trading date prior to consummation of the merger, the transaction value $28.8 million.
Community Capital operated 17 full service branches and one drive through facility in South Carolina at the date of acquisition. The acquisition of Community Capital was part of the Company’s business plan seeking accelerated organic growth and to acquire regional and community banks in the Carolinas and Virginia.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 4 – INVESTMENTS
The amortized cost and fair value of investment securities available-for-sale and securities held-to-maturity, with gross unrealized gains and losses, at December 31 follows:
Amortized Cost and Fair Value of Investment Portfolio
| | | Amortized Cost | | | Gross UnrealizedGains | | | Gross Unrealized Losses | | | Fair Value | |
| | | | | | | | | | | | | | | | | |
2013 | | | | | | | | | | | | | | | | |
Securities available-for-sale: | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 513 | | | $ | 45 | | | $ | - | | | $ | 558 | |
Municipal securities | | | 15,826 | | | | 680 | | | | - | | | | 16,506 | |
Residential agency pass-through securities | | | 90,043 | | | | 741 | | | | (536 | ) | | | 90,248 | |
Residential collateralized mortgage obligations | | | 105,667 | | | | 51 | | | | (2,369 | ) | | | 103,349 | |
Commercial mortgage-backed obligations | | | 66,396 | | | | - | | | | (4,994 | ) | | | 61,402 | |
Asset-backed securities | | | 73,369 | | | | 1 | | | | (2,293 | ) | | | 71,077 | |
Corporate and other securities | | | 4,461 | | | | - | | | | (16 | ) | | | 4,445 | |
Equity securities | | | 1,393 | | | | 513 | | | | - | | | | 1,906 | |
| | | | | | | | | | | | | | | | | |
Total securities available-for-sale | | $ | 357,668 | | | $ | 2,031 | | | $ | (10,208 | ) | | $ | 349,491 | |
| | | | | | | | | | | | | | | | | |
Securities held-to-maturity: | | | | | | | | | | | | | | | | |
Residential agency pass-through securities | | $ | 41,125 | | | $ | - | | | $ | (392 | ) | | $ | 40,733 | |
Residential collateralized mortgage obligations | | | 4,982 | | | | - | | | | (74 | ) | | | 4,908 | |
Asset-backed securities | | | 5,865 | | | | - | | | | (172 | ) | | | 5,693 | |
| | | | | | | | | | | | | | | | | |
Total securities held-to-maturity | | $ | 51,972 | | | $ | - | | | $ | (638 | ) | | $ | 51,334 | |
| | | | | | | | | | | | | | | | | |
2012 | | | | | | | | | | | | | | | | |
Securities available-for-sale: | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 518 | | | $ | 65 | | | $ | - | | | $ | 583 | |
Municipal securities | | | 16,231 | | | | 1,727 | | | | - | | | | 17,958 | |
Residential agency pass-through securities | | | 135,223 | | | | 3,190 | | | | (208 | ) | | | 138,205 | |
Residential collateralized mortgage obligations | | | 55,882 | | | | 1,016 | | | | (146 | ) | | | 56,752 | |
Commercial mortgage-backed obligations | | | 21,295 | | | | - | | | | (359 | ) | | | 20,936 | |
Asset-backed securities | | | 10,800 | | | | - | | | | (78 | ) | | | 10,722 | |
Corporate and other securities | | | 500 | | | | - | | | | (85 | ) | | | 415 | |
| | | | | | | | | | | | | | | | | |
Total securities available-for-sale | | $ | 240,449 | | | $ | 5,998 | | | $ | (876 | ) | | $ | 245,571 | |
At December 31, 2013 and 2012, investment securities with a fair market value of $99.5 million and $102.5 million, respectively, were pledged to secure repurchase agreements, to secure public and trust deposits, to secure the two loan swaps, and for other purposes as required and permitted by law.
At December 31, 2013 and 2012, commercial mortgage-backed obligations include $55.7 million and $20.9 million, respectively, of delegated underwriting and servicing (“DUS”) bonds collateralized by multi-family properties and backed by an agency of the United States government, and at December 31, 2013, $5.7 million of private-label securities collateralized by commercial properties. The Company did not hold any private-label securities at December 31, 2012.
At December 31, 2013, asset-backed securities include a $5.7 million security which is equally collateralized by the Federal family education loan program and private student loan program. There were no private-label asset-backed securities at December 31, 2012.
The amortized cost and fair value of investment securities available-for-sale and held-to-maturity at December 31, 2013 and 2012 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of the Company’s residential agency-pass through securities and residential collateralized mortgage obligations are backed by an agency of the United States government. None of our residential agency-pass through securities and residential collateralized mortgage obligations are private-label securities.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Maturities of Investment Portfolio
| | | December 31, 2013 | |
| | | Amortized Cost | | | Fair Value | |
Securities available-for-sale: | | | | | | | | |
U.S. Government agencies | | | | | | | | |
Due after one year through five years | | $ | 513 | | | $ | 558 | |
Municipal securities | | | | | | | | |
Due under one year | | | 450 | | | | 454 | |
Due after one year through five years | | | - | | | | - | |
Due after ten years | | | 15,376 | | | | 16,052 | |
Residential agency pass-through securities | | | | | | | | |
Due after one year through five years | | | 20,899 | | | | 20,919 | |
Due after five years through ten years | | | - | | | | - | |
Due after ten years | | | 69,144 | | | | 69,329 | |
Residential collateralized mortgage obligations | | | | | | | | |
Due after ten years | | | 105,667 | | | | 103,349 | |
Commercial mortgage-backed obligations | | | | | | | | |
Due after one year through five years | | | 66,396 | | | | 61,402 | |
Due after five years through ten years | | | - | | | | - | |
Asset-backed securities | | | | | | | | |
Due after five years through ten years | | | 3,858 | | | | 3,787 | |
Due after ten years | | | 69,511 | | | | 67,290 | |
Corporate and other securities | | | | | | | | |
Due after one year through five years | | | 500 | | | | 500 | |
Due after five years through ten years | | | 3,961 | | | | 3,945 | |
Equity securities | | | | | | | | |
Due after ten years | | | 1,393 | | | | 1,906 | |
Total securities available-for-sale | | $ | 357,668 | | | $ | 349,491 | |
| | | | | | | | | |
Securities held-to-maturity: | | | | | | | | |
Residential agency pass-through securities | | | | | | | | |
Due after ten years | | $ | 41,125 | | | $ | 40,733 | |
Residential collateralized mortgage obligations | | | | | | | | |
Due after ten years | | | 4,982 | | | | 4,908 | |
Asset-backed securities | | | | | | | | |
Due after ten years | | | 5,865 | | | | 5,693 | |
Total securities held-to-maturity | | $ | 51,972 | | | $ | 51,334 | |
Sales of investment securities available-for-sale for the years ended December 31, 2013, 2012 and 2011 are as follows:
| | | December 31, | |
| | | 2013 | | | 2012 | | | 2011 | |
Proceeds from sales | | $ | 28,128 | | | $ | 46,367 | | | $ | 24,326 | |
Gross realized gains | | | 343 | | | | 1,478 | | | | 115 | |
Gross realized losses | | | (245 | ) | | | - | | | | (95 | ) |
Management evaluates its investments quarterly 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, 2013 and 2012. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, and it is more likely than not that the Company will not have to sell the investments before recovery of their amortized cost basis, none of the securities are deemed to be other than temporarily impaired. At December 31, 2013, there are five securities in a loss position for twelve months or more. At December 31, 2012, one corporate debt security was in an unrealized loss position for twelve months or more.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
The Dodd-Frank Act amended the Bank Holding Company Act (the “BHC Act”) to require the federal banking regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring a covered fund (such as a hedge fund and or private equity fund), commonly referred to as the “Volcker Rule.” At December 31, 2013, the Company held four investments in senior tranches of collateralized loan obligations with a fair value of $23.4 million which are included in asset-backed securities. The collateral eligibility language in one of the securities, with a fair value of $5.0 million, was amended during the fourth quarter of 2013 to comply with the new bank investment criteria under the Volcker Rule. The Company’s investments in the remaining securities, which had a net unrealized loss of $274,000 at December 31, 2013, are currently prohibited under the Volcker Rule. The Company is awaiting intended document amendment strategies, if any, from the managers on these securities before determining any disposition plans for those investments. Unless the documentation is amended to avoid inclusion within the rule’s prohibitions, the Company would have to recognize other-than-temporary-impairment with respect to these securities in conformity with GAAP rules. The Company held no other security-types potentially affected by the Volcker Rule at December 31, 2013.
Investment Portfolio Gross Unrealized Losses and Fair Value
| | | Less Than 12 Months | | | 12 Months or More | | | Total | |
| | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential agency mortgage-backed securities | | $ | 32,674 | | | $ | (536 | ) | | $ | - | | | $ | - | | | $ | 32,674 | | | $ | (536 | ) |
Residential collateralized mortgage obligations | | | 55,856 | | | | (1,687 | ) | | | 18,167 | | | | (682 | ) | | | 74,023 | | | | (2,369 | ) |
Commercial mortgage-backed obligations | | | 42,391 | | | | (3,247 | ) | | | 19,011 | | | | (1,747 | ) | | | 61,402 | | | | (4,994 | ) |
Asset-backed securities | | | 56,106 | | | | (2,236 | ) | | | 4,986 | | | | (57 | ) | | | 61,092 | | | | (2,293 | ) |
Corporate and other securities | | | 3,945 | | | | (16 | ) | | | - | | | | - | | | | 3,945 | | | | (16 | ) |
Total temporarily impairedsecurities | | $ | 190,972 | | | $ | (7,722 | ) | | $ | 42,164 | | | $ | (2,486 | ) | | $ | 233,136 | | | $ | (10,208 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Securities held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential agency mortgage-backed securities | | $ | 40,733 | | | $ | (392 | ) | | $ | - | | | $ | - | | | $ | 40,733 | | | $ | (392 | ) |
Residential collateralized mortgage obligations | | | 4,908 | | | | (74 | ) | | | - | | | | - | | | | 4,908 | | | | (74 | ) |
Asset-backed securities | | | 5,693 | | | | (172 | ) | | | - | | | | - | | | | 5,693 | | | | (172 | ) |
Total temporarily impairedsecurities | | $ | 51,334 | | | $ | (638 | ) | | $ | - | | | $ | - | | | $ | 51,334 | | | $ | (638 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential agency mortgage-backed securities | | $ | 19,105 | | | $ | (208 | ) | | $ | - | | | $ | - | | | $ | 19,105 | | | $ | (208 | ) |
Residential collateralized mortgage obligations | | | 20,209 | | | | (146 | ) | | | - | | | | - | | | | 20,209 | | | | (146 | ) |
Commercial mortgage-backed obligations | | | 20,936 | | | | (359 | ) | | | - | | | | - | | | | 20,936 | | | | (359 | ) |
Asset-backed securities | | | 10,722 | | | | (78 | ) | | | - | | | | - | | | | 10,722 | | | | (78 | ) |
Corporate and other securities | | | - | | | | - | | | | 415 | | | | (85 | ) | | | 415 | | | | (85 | ) |
Total temporarily impairedsecurities | | $ | 70,972 | | | $ | (791 | ) | | $ | 415 | | | $ | (85 | ) | | $ | 71,387 | | | $ | (876 | ) |
The Company has nonmarketable equity securities consisting of investments in several financial institutions and the investments in CSBC Statutory Trust I and Community Capital Corporation Statutory Trust I. These investments totaled $5.9 million and $7.4 million at December 31, 2013 and 2012, respectively. Included in these amounts was $4.9 million and $6.3 million of FHLB stock at December 31, 2013 and 2012, respectively. The following factors have been considered in determining the carrying amount of FHLB stock: (1) management’s current belief that the Company has sufficient liquidity to meet all operational needs in the foreseeable future and would not need to dispose of the stock below recorded amounts, (2) management’s belief that the FHLB has the ability to absorb economic losses given the expectation that the FHLB has a high degree of government support and (3) redemptions and purchases of the stock are at the discretion of the FHLB. At December 31, 2013 and 2012, the Company estimated that the fair values of nonmarketable equity securities equaled or exceeded the cost of each of these investments, and, therefore, the investments were not impaired.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company’s loan portfolio was comprised of the following at December 31:
| | | 2013 | | | 2012 | |
| | | PCI loans | | | All other loans | | | Total | | | PCI loans | | | All other loans | | | Total | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 5,737 | | | $ | 116,663 | | | $ | 122,400 | | | $ | 7,323 | | | $ | 111,809 | | | $ | 119,132 | |
Commercial real estate (CRE) - owner-occupied | | | 35,760 | | | | 231,821 | | | | 267,581 | | | | 44,925 | | | | 254,491 | | | | 299,416 | |
CRE - investor income producing | | | 56,996 | | | | 325,191 | | | | 382,187 | | | | 85,959 | | | | 285,998 | | | | 371,957 | |
Acqusition, construction & development ("AC&D") | | | - | | | | - | | | | - | | | | 39,541 | | | | 101,120 | | | | 140,661 | |
AC&D - 1-4 family construction | | | - | | | | 19,959 | | | | 19,959 | | | | - | | | | - | | | | - | |
AC&D - lots, land, & development | | | 22,699 | | | | 42,890 | | | | 65,589 | | | | - | | | | - | | | | - | |
AC&D - CRE | | | 121 | | | | 56,638 | | | | 56,759 | | | | - | | | | - | | | | - | |
Other commercial | | | 137 | | | | 3,712 | | | | 3,849 | | | | 742 | | | | 4,886 | | | | 5,628 | |
Total commercial loans | | | 121,450 | | | | 796,874 | | | | 918,324 | | | | 178,490 | | | | 758,304 | | | | 936,794 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 32,826 | | | | 140,550 | | | | 173,376 | | | | 40,483 | | | | 148,049 | | | | 188,532 | |
Home equity lines of credit (HELOC) | | | 1,402 | | | | 142,352 | | | | 143,754 | | | | 1,949 | | | | 161,676 | | | | 163,625 | |
Residential construction | | | 6,920 | | | | 33,901 | | | | 40,821 | | | | 11,265 | | | | 41,547 | | | | 52,812 | |
Other loans to individuals | | | 1,189 | | | | 17,606 | | | | 18,795 | | | | 2,095 | | | | 13,458 | | | | 15,553 | |
Total consumer loans | | | 42,337 | | | | 334,409 | | | | 376,746 | | | | 55,792 | | | | 364,730 | | | | 420,522 | |
Total loans | | | 163,787 | | | | 1,131,283 | | | | 1,295,070 | | | | 234,282 | | | | 1,123,034 | | | | 1,357,316 | |
Deferred fees | | | - | | | | 738 | | | | 738 | | | | - | | | | (609 | ) | | | (609 | ) |
Total loans, net of deferred fees | | $ | 163,787 | | | $ | 1,132,021 | | | $ | 1,295,808 | | | $ | 234,282 | | | $ | 1,122,425 | | | $ | 1,356,707 | |
Included in the loan totals at December 31, 2013 and 2012 is $71.1 million and $101.7 million, respectively, of covered loans pursuant to the FDIC loss share agreements. Of these amounts, at December 31, 2013 and 2012, $68.0 million and $96.9 million, respectively, is included in PCI loans and $3.2 million and $4.8 million, respectively, is included in all other loans.
At December 31, 2013 and 2012, the Company had sold participations in loans aggregating $3.3 million and $10.8 million, respectively, to other financial institutions on a nonrecourse basis. Collections on loan participations and remittances to participating institutions conform to customary banking practices.
The Bank accepts residential mortgage loan applications and funds loans of qualified borrowers. Funded loans are sold with limited recourse to investors under the terms of pre-existing commitments. The Bank executes all of its loan sales agreements under best efforts contracts with investors. From time to time, the Company may choose to hold certain mortgage loans on balance sheet. The Company does not service residential mortgage loans for the benefit of others.
Loans sold with limited recourse are 1-4 family residential mortgages originated by the Bank and sold to various other financial institutions. Various recourse agreements exist, ranging from thirty days to twelve months. The Company’s exposure to credit loss in the event of nonperformance by the other party to the loan is represented by the contractual notional amount of the loan. Since none of the loans have ever been returned to the Company, the amount of total loans sold with limited recourse does not necessarily represent future cash requirements. The Company uses the same credit policies in making loans held for sale as it does for on-balance-sheet instruments. Total loans sold with limited recourse in 2013 and 2012 was $110.1 million and $71.9 million, respectively.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
The outstanding principal balance and the carrying amount of acquired loans that were recorded at fair value at the acquisition date that is included in the consolidated balance sheet at December 31, 2013 and 2012 were as follows:
| | | 2013 | | | 2012 | |
| | | PCI loans | | | Purchased Performing loans | | | Total | | | PCI loans | | | Purchased Performing loans | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding principal balance | | $ | 197,040 | | | $ | 408,970 | | | $ | 606,010 | | | $ | 278,200 | | | $ | 624,319 | | | $ | 902,519 | |
Carrying amount: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | 5,737 | | | | 18,377 | | | | 24,114 | | | | 7,323 | | | | 47,276 | | | | 54,599 | |
CRE - owner-occupied | | | 35,760 | | | | 103,834 | | | | 139,594 | | | | 44,925 | | | | 154,699 | | | | 199,624 | |
CRE - investor income producing | | | 56,996 | | | | 69,368 | | | | 126,364 | | | | 85,959 | | | | 119,663 | | | | 205,622 | |
AC&D | | | - | | | | - | | | | | | | | 39,541 | | | | - | | | | 39,541 | |
AC&D - 1-4 family construction | | | - | | | | 97 | | | | 97 | | | | - | | | | 35,476 | | | | 35,476 | |
AC&D - lots, land, & development | | | 22,699 | | | | 13,509 | | | | 36,208 | | | | - | | | | - | | | | - | |
AC&D - CRE | | | 121 | | | | 3,218 | | | | 3,339 | | | | - | | | | - | | | | - | |
Other commercial | | | 137 | | | | 1,889 | | | | 2,026 | | | | 742 | | | | 3,242 | | | | 3,984 | |
Residential mortgage | | | 32,826 | | | | 98,104 | | | | 130,930 | | | | 40,483 | | | | 120,414 | | | | 160,897 | |
HELOC | | | 1,402 | | | | 86,512 | | | | 87,914 | | | | 1,949 | | | | 106,703 | | | | 108,652 | |
Residential construction | | | 6,920 | | | | 7,155 | | | | 14,075 | | | | 11,265 | | | | 22,702 | | | | 33,967 | |
Other loans to individuals | | | 1,189 | | | | 2,377 | | | | 3,566 | | | | 2,095 | | | | 4,399 | | | | 6,494 | |
| | | $ | 163,787 | | | $ | 404,440 | | | $ | 568,227 | | | $ | 234,282 | | | $ | 614,574 | | | $ | 848,856 | |
Concentrations of Credit-Loans are primarily made within the Company’s operating footprint of North Carolina, South Carolina and Georgia. Subsequent to December 31, 2013, the Company entered the Virginia market with a loan production office in Richmond, Virginia. 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 including construction loans and real estate development loans. Primary concentrations in the consumer loan portfolio include home equity lines of credit and residential mortgages. At December 31, 2013 and December 31, 2012, the Company had no loans outstanding with non-United States entities.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data 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 years ended December 31, 2013, 2012 and 2011.
| | | Commercial and industrial | | | CRE - owner-occupied | | | CRE - investor income producing | | | AC&D | | | AC&D-1-4 family construction | | | AC&D- lots, land, & development | | | AC&D- CRE | | | Other commercial | | | Residential mortgage | | | HELOC | | | Residential construction | | | Other loans to individuals | | | Unallocated | | | Total | |
For the year ended December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses, excluding PCI: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | 849 | | | $ | 496 | | | $ | 1,102 | | | $ | 4,157 | | �� | $ | - | | | $ | - | | | $ | - | | | $ | 8 | | | $ | 454 | | | $ | 1,463 | | | $ | 1,046 | | | $ | 49 | | | $ | - | | | $ | 9,624 | |
Provision for loan losses | | | 1,693 | | | | (52 | ) | | | 933 | | | | (4,157 | ) | | | 705 | | | | 1,031 | | | | 299 | | | | 16 | | | | 319 | | | | 359 | | | | (673 | ) | | | 31 | | | | - | | | | 504 | |
Charge-offs | | | (1,238 | ) | | | (52 | ) | | | (718 | ) | | | - | | | | (87 | ) | | | (6 | ) | | | - | | | | - | | | | (831 | ) | | | (838 | ) | | | (44 | ) | | | (64 | ) | | | - | | | | (3,878 | ) |
Recoveries | | | 187 | | | | 7 | | | | 480 | | | | - | | | | 221 | | | | 726 | | | | - | | | | 1 | | | | 416 | | | | 66 | | | | 61 | | | | 56 | | | | - | | | | 2,221 | |
Net charge-offs (recoveries) | | | (1,051 | ) | | | (45 | ) | | | (238 | ) | | | - | | | | 134 | | | | 720 | | | | - | | | | 1 | | | | (415 | ) | | | (772 | ) | | | 17 | | | | (8 | ) | | | - | | | | (1,657 | ) |
Ending balance | | $ | 1,491 | | | $ | 399 | | | $ | 1,797 | | | $ | - | | | $ | 839 | | | $ | 1,751 | | | $ | 299 | | | $ | 25 | | | $ | 358 | | | $ | 1,050 | | | $ | 390 | | | $ | 72 | | | $ | - | | | $ | 8,471 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PCI Impairment Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | 225 | | | $ | - | | | $ | - | | | $ | 542 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 200 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 967 | |
PCI impairment charge-offs | | | (216 | ) | | | - | | | | (16 | ) | | | (177 | ) | | | - | | | | - | | | | - | | | | (386 | ) | | | (311 | ) | | | - | | | | (233 | ) | | | (36 | ) | | | - | | | | (1,375 | ) |
PCI impairment recoveries | | | - | | | | - | | | | - | | | | 25 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 25 | |
Net PCI impairment charge-offs | | | (216 | ) | | | - | | | | (16 | ) | | | (152 | ) | | | - | | | | - | | | | - | | | | (386 | ) | | | (311 | ) | | | - | | | | (233 | ) | | | (36 | ) | | | - | | | | (1,350 | ) |
PCI provision for loan losses | | | (9 | ) | | | - | | | | 376 | | | | (390 | ) | | | - | | | | - | | | | - | | | | 386 | | | | 111 | | | | - | | | | 233 | | | | 36 | | | | - | | | | 743 | |
Benefit attributable to FDIC loss share agreements | | | (104 | ) | | | - | | | | (205 | ) | | | (192 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (501 | ) |
Total provision for loan losses charged to operations | | | (113 | ) | | | - | | | | 171 | | | | (582 | ) | | | - | | | | - | | | | - | | | | 386 | | | | 111 | | | | - | | | | 233 | | | | 36 | | | | - | | | | 242 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Provision for loan losses recorded through FDIC loss share receivable | | | 104 | | | | - | | | | 205 | | | | 192 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 501 | |
Ending balance | | $ | - | | | $ | - | | | $ | 360 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 360 | |
Total Allowance for Loan Losses | | $ | 1,491 | | | $ | 399 | | | $ | 2,157 | | | $ | - | | | $ | 839 | | | $ | 1,751 | | | $ | 299 | | | $ | 25 | | | $ | 358 | | | $ | 1,050 | | | $ | 390 | | | $ | 72 | | | $ | - | | | $ | 8,831 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
| | | Commercial and industrial | | | CRE - owner-occupied | | | CRE - investor income producing | | | AC&D | | | AC&D-1-4 family construction | | | AC&D- lots, land, & development | | | AC&D- CRE | | | Other commercial | | | Residential mortgage | | | HELOC | | | Residential construction | | | Other loans to individuals | | | Unallocated | | | Total | |
For the year ended December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | 703 | | | $ | 740 | | | $ | 2,106 | | | $ | 3,883 | | | $ | - | | | $ | - | | | $ | - | | | $ | 17 | | | $ | 309 | | | $ | 1,898 | | | $ | 455 | | | $ | 43 | | | $ | - | | | $ | 10,154 | |
Provision for loan losses | | | 632 | | | | (40 | ) | | | 71 | | | | (676 | ) | | | - | | | | - | | | | - | | | | 85 | | | | 262 | | | | (62 | ) | | | 795 | | | | (11 | ) | | | - | | | | 1,056 | |
PCI provision for loan losses | | | 225 | | | | - | | | | - | | | | 542 | | | | - | | | | - | | | | - | | | | - | | | | 200 | | | | - | | | | - | | | | - | | | | - | | | | 967 | |
Charge-offs | | | (565 | ) | | | (204 | ) | | | (1,132 | ) | | | (652 | ) | | | - | | | | - | | | | - | | | | (94 | ) | | | (129 | ) | | | (406 | ) | | | (328 | ) | | | (12 | ) | | | - | | | | (3,522 | ) |
Recoveries | | | 79 | | | | - | | | | 57 | | | | 1,602 | | | | - | | | | - | | | | - | | | | - | | | | 12 | | | | 33 | | | | 124 | | | | 29 | | | | - | | | | 1,936 | |
Net charge-offs (recoveries) | | | (486 | ) | | | (204 | ) | | | (1,075 | ) | | | 950 | | | | - | | | | - | | | | - | | | | (94 | ) | | | (117 | ) | | | (373 | ) | | | (204 | ) | | | 17 | | | | - | | | | (1,586 | ) |
Ending balance | | $ | 1,074 | | | $ | 496 | | | $ | 1,102 | | | $ | 4,699 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8 | | | $ | 654 | | | $ | 1,463 | | | $ | 1,046 | | | $ | 49 | | | $ | - | | | $ | 10,591 | |
| | | Commercial and industrial | | | CRE - owner-occupied | | | CRE - investor income producing | | | AC&D | | | AC&D-1-4 family construction | | | AC&D- lots, land, & development | | | AC&D- CRE | | | Other commercial | | | Residential mortgage | | | HELOC | | | Residential construction | | | Other loans to individuals | | | Unallocated | | | Total | |
For the year ended December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | 896 | | | $ | 1,061 | | | $ | 2,105 | | | $ | 4,695 | | | $ | - | | | $ | - | | | $ | - | | | $ | 408 | | | $ | 320 | | | $ | 871 | | | $ | 98 | | | $ | 86 | | | $ | 1,884 | | | $ | 12,424 | |
Provision for loan losses | | | 349 | | | | (130 | ) | | | 134 | | | | 7,895 | | | | - | | | | - | | | | - | | | | (391 | ) | | | 118 | | | | 2,772 | | | | 579 | | | | (57 | ) | | | (1,884 | ) | | | 9,385 | |
Charge-offs | | | (778 | ) | | | (194 | ) | | | (136 | ) | | | (9,865 | ) | | | - | | | | - | | | | - | | | | - | | | | (128 | ) | | | (1,762 | ) | | | (222 | ) | | | - | | | | - | | | | (13,085 | ) |
Recoveries | | | 236 | | | | 3 | | | | 3 | | | | 1,157 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17 | | | | - | | | | 14 | | | | - | | | | 1,430 | |
Net charge-offs (recoveries) | | | (542 | ) | | | (191 | ) | | | (133 | ) | | | (8,707 | ) | | | - | | | | - | | | | - | | | | - | | | | (128 | ) | | | (1,745 | ) | | | (222 | ) | | | 14 | | | | - | | | | (11,655 | ) |
Ending balance | | $ | 703 | | | $ | 740 | | | $ | 2,106 | | | $ | 3,883 | | | $ | - | | | $ | - | | | $ | - | | | $ | 17 | | | $ | 309 | | | $ | 1,898 | | | $ | 455 | | | $ | 43 | | | $ | - | | | $ | 10,154 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
The following table presents, by portfolio segment, the balance in the allowance for loan losses disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans at December 31, 2013 and 2012.
| | | Commercial and industrial | | | CRE - owner-occupied | | | CRE - investor income producing | | | AC&D | | | AC&D-1-4 family construction | | | AC&D- lots, land, & development | | | AC&D- CRE | | | Other commercial | | | Residential mortgage | | | HELOC | | | Residential construction | | | Other loans to individuals | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 14 | | | $ | 14 | | | $ | 527 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 18 | | | $ | 167 | | | $ | 137 | | | $ | 7 | | | $ | - | | | $ | - | | | $ | 884 | |
Collectively evaluated for impairment | | | 1,477 | | | | 385 | | | | 1,270 | | | | - | | | | 839 | | | | 1,751 | | | | 299 | | | | 7 | | | | 191 | | | | 913 | | | | 383 | | | | 72 | | | | - | | | | 7,587 | |
| | | | 1,491 | | | | 399 | | | | 1,797 | | | | | | | | 839 | | | | 1,751 | | | | 299 | | | | 25 | | | | 358 | | | | 1,050 | | | | 390 | | | | 72 | | | | - | | | | 8,471 | |
Purchased credit-impaired | | | - | | | | - | | | | 360 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 360 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,491 | | | $ | 399 | | | $ | 2,157 | | | $ | - | | | $ | 839 | | | $ | 1,751 | | | $ | 299 | | | $ | 25 | | | $ | 358 | | | $ | 1,050 | | | $ | 390 | | | $ | 72 | | | $ | - | | | $ | 8,831 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recorded Investment in Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 265 | | | $ | 1,902 | | | $ | 3,216 | | | $ | - | | | $ | - | | | $ | 1,888 | | | $ | - | | | $ | 262 | | | $ | 4,513 | | | $ | 3,014 | | | $ | 66 | | | $ | 60 | | | $ | - | | | $ | 15,186 | |
Collectively evaluated for impairment | | | 116,398 | | | | 229,919 | | | | 321,975 | | | | - | | | | 19,959 | | | | 41,002 | | | | 56,638 | | | | 3,450 | | | | 136,037 | | | | 139,338 | | | | 33,835 | | | | 17,546 | | | | - | | | | 1,116,097 | |
| | | | 116,663 | | | | 231,821 | | | | 325,191 | | | | - | | | | 19,959 | | | | 42,890 | | | | 56,638 | | | | 3,712 | | | | 140,550 | | | | 142,352 | | | | 33,901 | | | | 17,606 | | | | - | | | | 1,131,283 | |
Purchased credit-impaired | | | 5,737 | | | | 35,760 | | | | 56,996 | | | | - | | | | - | | | | 22,699 | | | | 121 | | | | 137 | | | | 32,826 | | | | 1,402 | | | | 6,920 | | | | 1,189 | | | | - | | | | 163,787 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 122,400 | | | $ | 267,581 | | | $ | 382,187 | | | $ | - | | | $ | 19,959 | | | $ | 65,589 | | | $ | 56,759 | | | $ | 3,849 | | | $ | 173,376 | | | $ | 143,754 | | | $ | 40,821 | | | $ | 18,795 | | | $ | - | | | $ | 1,295,070 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
| | | Commercial and industrial | | | CRE - owner-occupied | | | CRE - investor income producing | | | AC&D | | | AC&D-1-4 family construction | | | AC&D- lots, land, & development | | | AC&D- CRE | | | Other commercial | | | Residential mortgage | | | HELOC | | | Residential construction | | | Other loans to individuals | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 115 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 249 | | | $ | 351 | | | $ | - | | | $ | - | | | $ | - | | | $ | 715 | |
Collectively evaluated for impairment | | | 734 | | | | 496 | | | | 1,102 | | | | 4,157 | | | | - | | | | - | | | | - | | | | 8 | | | | 205 | | | | 1,112 | | | | 1,046 | | | | 49 | | | | - | | | | 8,909 | |
| | | | 849 | | | | 496 | | | | 1,102 | | | | 4,157 | | | | - | | | | - | | | | - | | | | 8 | | | | 454 | | | | 1,463 | | | | 1,046 | | | | 49 | | | | - | | | | 9,624 | |
Purchased credit-impaired | | | 225 | | | | - | | | | - | | | | 542 | | | | - | | | | - | | | | - | | | | - | | | | 200 | | | | - | | | | - | | | | - | | | | - | | | | 967 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,074 | | | $ | 496 | | | $ | 1,102 | | | $ | 4,699 | | | $ | - | | | $ | - | | | $ | - | | | $ | 8 | | | $ | 654 | | | $ | 1,463 | | | $ | 1,046 | | | $ | 49 | | | $ | - | | | $ | 10,591 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recorded Investment in Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 607 | | | $ | 2,337 | | | $ | 4,243 | | | $ | 4,855 | | | $ | - | | | $ | - | | | $ | - | | | $ | 168 | | | $ | 3,463 | | | $ | 1,925 | | | $ | 71 | | | $ | 73 | | | $ | - | | | $ | 17,742 | |
Collectively evaluated for impairment | | | 111,202 | | | | 252,154 | | | | 281,755 | | | | 96,265 | | | | - | | | | - | | | | - | | | | 4,718 | | | | 144,586 | | | | 159,751 | | | | 41,476 | | | | 13,385 | | | | - | | | | 1,105,292 | |
| | | | 111,809 | | | | 254,491 | | | | 285,998 | | | | 101,120 | | | | - | | | | - | | | | - | | | | 4,886 | | | | 148,049 | | | | 161,676 | | | | 41,547 | | | | 13,458 | | | | - | | | | 1,123,034 | |
Purchased credit-impaired | | | 7,323 | | | | 44,925 | | | | 85,959 | | | | 39,541 | | | | - | | | | - | | | | - | | | | 742 | | | | 40,483 | | | | 1,949 | | | | 11,265 | | | | 2,095 | | | | - | | | | 234,282 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 119,132 | | | $ | 299,416 | | | $ | 371,957 | | | $ | 140,661 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,628 | | | $ | 188,532 | | | $ | 163,625 | | | $ | 52,812 | | | $ | 15,553 | | | $ | - | | | $ | 1,357,316 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
The Company’s loan loss allowance methodology includes four components, as described below:
1) Specific Reserve Component. Specific reserves represent the current impairment estimate on specific loans, for which it is probable that the Company will be unable to collect all amounts due 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 loan’s interest rate implicit in the original document 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, which is utilized for both collateral dependent loans and for loans when foreclosure is probable.
Impaired loans with a balance less than or equal to $150 thousand are viewed in two groups: those which have experienced charge-offs and those recorded at legal balance. Those loans which have experienced charge-offs have no additional reserve applied unless specifically calculated at a point in time when the loan balance exceeded $150 thousand. Those loans recorded at their legal balance are reserved for based on a pooled probability of default and loss given default calculation.
2) Quantitative Reserve Component. Quantitative reserves represent the current loss contingency estimate on pools of loans, which is an estimate of the amount for which it is probable that the Company will be unable to collect all amounts due on homogeneous groups of loans according to contractual terms should one or more events occur, excluding those loans specifically identified above. During the fourth quarter of 2011, the Company introduced two enhancements to this component of the allowance. First, management completed its previously disclosed project to collect and evaluate internal loan loss data and now incorporates the Company’s historical loss experience in this component. Previously, given the Company’s limited operating history, this component of the allowance for loan losses was based on the historical loss experience of comparable institutions. Second, the methodology now segregates loans by product.
The historical loss experience of the Company is collected quarterly by evaluating internal loss data. The estimated historical loss rates are grouped by loan product type. The Company utilizes average historical losses to represent management’s estimate of losses inherent in a particular portfolio. The historical look back period is estimated by loan type, and the Company applies the appropriate historical loss period which best reflects the inherent loss in the applicable portfolio considering prevailing market conditions. A minimum reserve is utilized when the Company has insufficient internal loss history or when internal loss history falls below the minimum reserve percentage. Minimums are determined by analyzing Federal Reserve Bank charge-off data for all insured federal- and state-chartered commercial banks.
During the third quarter of 2013, the Company further segregated the AC&D portfolio into three collateral types: (i) 1-4 family construction, (ii) lots, land and development and (iii) CRE construction. These enhancements strengthen the granularity of the allowance methodology and are reflective of the distinctions in credit quality indicators for the three collateral types as well as the Company’s present origination activities.
The following look back periods were utilized by management in determining the quantitative reserve component at December 31, 2013 and 2012:
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
| | | December 31, | |
| | | 2013 | | | 2012 | |
Look back periods (in calendar quarters) | | | | | | | | |
Commercial: | | | | | | | | |
Commercial and industrial | | | 15 | | | | 8 | |
CRE - owner-occupied | | | Minimum | | | | 8 | |
CRE - investor income producing | | | 15 | | | | 8 | |
AC&D | | | n/a | | | | 12 | |
AC&D - 1-4 family construction | | | 15 | | | | n/a | |
AC&D - lots, land, & development | | | 15 | | | | n/a | |
AC&D - CRE | | | Minimum | | | | n/a | |
Other commercial | | | Minimum | | | | Minimum | |
Residential mortgage | | | 12 | | | | 12 | |
HELOC | | | 12 | | | | 8 | |
Residential construction | | | 12 | | | | 12 | |
Other loans to individuals | | | Minimum | | | | Minimum | |
The changes in the look back periods noted above were made to provide a better estimate of the loss inherent in the portfolio for each loan category and to reflect the availability of loss history.
The Company also performs a quantitative calculation on the acquired purchased performing loan portfolio. There is no allowance for loan losses established at the acquisition date for purchased performing loans. The historical loss experience discussed above is applied to the acquired purchased performing loan portfolio and the result is compared to the remaining fair value mark on this portfolio. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the acquisition. At December 31, 2013 and 2012, this analysis did not indicate a need for a provision for loan losses for the acquired purchased performing portfolio. The remaining mark on the acquired purchased performing loan portfolio was $4.5 million and $9.7 million at December 31, 2013 and 2012, respectively.
3) Qualitative Reserve Component. Qualitative reserves represent an estimate of the amount for which it is probable that environmental or other relevant factors will cause the aforementioned loss contingency estimate to differ from the Company’s historical loss experience or other assumptions. During the second quarter of 2012, the Company refined its allowance methodology to eliminate the use of traditional risk grade factors as a forward-looking qualitative indicator, which had been introduced during the fourth quarter of 2011, and instead focuses directly on five specific environmental factors. These five factors include portfolio trends, portfolio concentrations, economic and market conditions, changes in lending practices and other factors. Management believes these refinements simplify application of the qualitative component of the allowance methodology. Each of the factors, except other factors, can range from 0.00% (not applicable) to 0.15% (very high). Other factors are reviewed on a situational basis and are adjusted in 5 basis point increments, up or down, with a maximum of 0.50%. Details of the five environmental factors for inclusion in the allowance methodology are as follows:
| | 1) | Portfolio trends, which may relate to such factors as type or level of loan origination activity, changes in asset quality (i.e., past due, special mention, non-performing) and/or changes in collateral values; |
| | ii. | Portfolio concentrations, which may relate to individual borrowers and/or guarantors, geographic regions, industry sectors, loan types and/or other factors; |
| | iii. | Economic and market trends, which may relate to trends and/or levels of gross domestic production, unemployment, bankruptcies, foreclosures, housing starts, housing prices, equity prices, competitor activities and/or other factors; |
| | iv. | Changes in lending practices, which may relate to changes in credit policies, procedures, systems or staff; and |
| | v. | Other factors, which is intended to capture environmental factors not specifically identified above. |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
In addition, qualitative reserves on purchased performing loans are based on the Company’s judgment around the timing difference expected to occur between accretion of the fair market value credit adjustment and realization of actual loans losses.
4) Reserve on PCI Loans.In determining the acquisition date fair value of PCI loans, and in subsequent accounting, the Company generally aggregates purchased loans into pools of loans with common risk characteristics. Expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, significant increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses. In pools where impairment has already been recognized, an increase in cash flows will result in a reversal of prior impairment. Management analyzes these acquired loan pools using various assessments of risk to determine and calculate an expected loss. The expected loss is derived using an estimate of a loss given default based upon the collateral type and/or specific review by loan officers of loans generally greater than $1.0 million, and the probability of default that was determined based upon management’s review of the loan portfolio. Trends are reviewed in terms of traditional credit metrics such as accrual status, past due status, and weighted average risk grade of the loans within each of the accounting pools. In addition, the relationship between the change in the unpaid principal balance and change in the fair value mark is assessed to correlate the directional consistency of the expected loss for each pool.
This analysis resulted in net recovery of impairment for the year ended December 31, 2013 of $607 thousand. The net impairment of $967 thousand as of December 31, 2012 was fully reversed during 2013 as estimated cash flows in those impacted pools improved or projected losses were fully recognized. During 2013, new impairment of $743 thousand was recorded; approximately $501 thousand of this impairment is attributable to covered loans under the FDIC loss share agreements. These covered loan impairments were a function of an increase in expected losses and as a result, the FDIC indemnification asset was increased. See Note 6 – FDIC Loss Share Agreements for further discussion. These impairments are in a single covered PCI loan pool and are in the CRE – investor income producing loan segment.
The changes and refinements discussed above, in aggregate, did not have a material impact on the estimated allowance at December 31, 2013. The further segregation of the AC&D portfolio, as noted above, resulted in a quantitative decrease of approximately $1.8 million from December 31, 2012. Offsetting this decrease were quantitative increases in the other loan portfolios as a result of extending look back periods which now contain sufficient build up in loss history. These increases were approximately $1.6 million from December 31, 2012. The growth in the loan portfolio coupled with the other qualitative factors referenced above resulted in an increase in the qualitative factor of $313 thousand from December 31, 2012. These changes, in our judgment, produce a non-PCI allowance for loan losses that best reflects the estimate of inherent losses in the loan portfolio at December 31, 2013.
The Company evaluates and estimates off-balance sheet credit exposure at the same time it estimates credit losses for loans by a similar process. These estimated credit losses are not recorded as part of the allowance for loan losses, but are recorded to a separate liability account by a charge to income, if material. Loan commitments, unused lines of credit and standby letters of credit make up the off-balance sheet items reviewed for potential credit losses. At both December 31, 2013 and 2012, $125 thousand was recorded as an other liability for off-balance sheet credit exposure.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Credit Quality Indicators-The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicator is an internal credit risk rating system that categorizes loans into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes that comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes that comprise the consumer portfolio segment.
The following are the definitions of the Company's 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. PCI loans that were recorded at estimated fair value on the acquisition date are generally assigned a “pass” loan grade because their net financial statement value is based on the present value of expected cash flows. Management believes there is a low likelihood of loss related to those loans that are considered pass. |
| | | | |
| Special Mention: |
| Loans in classes that comprise the commercial and consumer portfolio segments that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. Management believes there is a moderate likelihood of some loss related to those loans that are considered special mention. |
| | | | |
| Classified: |
| Loans in the classes that comprise the commercial and consumer portfolio segments that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans are not corrected in a timely manner. |
The Company's credit quality indicators are periodically updated on a case-by-case basis. The following tables present the recorded investment in the Company's loans as of December 31, 2013 and 2012, by loan class and by credit quality indicator.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
| | | As of December 31, 2013 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Commercial and Industrial | | | CRE-Owner Occupied | | | CRE-Investor Income Producing | | | AC&D-1-4 family construction | | | AC&D- lots, land, & development | | | AC&D- CRE | | | Other Commercial | | | Total Commercial | |
Pass | | $ | 120,037 | | | $ | 260,472 | | | $ | 373,464 | | | $ | 19,959 | | | $ | 60,332 | | | $ | 56,759 | | | $ | 3,587 | | | $ | 894,610 | |
Special mention | | | 1,692 | | | | 6,126 | | | | 3,628 | | | | - | | | | 2,802 | | | | - | | | | 150 | | | | 14,398 | |
Classified | | | 671 | | | | 983 | | | | 5,095 | | | | - | | | | 2,455 | | | | - | | | | 112 | | | | 9,316 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 122,400 | | | $ | 267,581 | | | $ | 382,187 | | | $ | 19,959 | | | $ | 65,589 | | | $ | 56,759 | | | $ | 3,849 | | | $ | 918,324 | |
| | | Residential Mortgage | | | HELOC | | | Residential Construction | | | Other Loans to Individuals | | | | | | | | | | | | | | | Total Consumer | |
Pass | | $ | 169,519 | | | $ | 137,626 | | | $ | 39,824 | | | $ | 18,301 | | | | | | | | | | | | | | | $ | 365,270 | |
Special mention | | | 1,864 | | | | 2,893 | | | | 766 | | | | 488 | | | | | | | | | | | | | | | | 6,011 | |
Classified | | | 1,993 | | | | 3,235 | | | | 231 | | | | 6 | | | | | | | | | | | | | | | | 5,465 | |
Total | | $ | 173,376 | | | $ | 143,754 | | | $ | 40,821 | | | $ | 18,795 | | | | | | | | | | | | | | | $ | 376,746 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1,295,070 | |
| | | As of December 31, 2012 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Commercial and Industrial | | | CRE-Owner Occupied | | | CRE-Investor Income Producing | | | AC&D | | | Other Commercial | | | Total Commercial | |
Pass | | $ | 115,907 | | | $ | 292,418 | | | $ | 361,212 | | | $ | 126,167 | | | $ | 5,460 | | | $ | 901,164 | |
Special mention | | | 173 | | | | 3,804 | | | | 5,564 | | | | 9,252 | | | | - | | | | 18,793 | |
Classified | | | 3,052 | | | | 3,194 | | | | 5,181 | | | | 5,242 | | | | 168 | | | | 16,837 | |
Total | | $ | 119,132 | | | $ | 299,416 | | | $ | 371,957 | | | $ | 140,661 | | | $ | 5,628 | | | $ | 936,794 | |
| | | Residential Mortgage | | | HELOC | | | Residential Construction | | | Other Loans to Individuals | | | | | | | Total Consumer | |
Pass | | $ | 185,686 | | | $ | 158,335 | | | $ | 52,612 | | | $ | 15,444 | | | | | | | $ | 412,077 | |
Special mention | | | 1,115 | | | | 2,599 | | | | - | | | | 78 | | | | | | | | 3,792 | |
Classified | | | 1,731 | | | | 2,691 | | | | 200 | | | | 31 | | | | | | | | 4,653 | |
Total | | $ | 188,532 | | | $ | 163,625 | | | $ | 52,812 | | | $ | 15,553 | | | | | | | $ | 420,522 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total Loans | | | | | | | | | | | | | | | | | | | | | | $ | 1,357,316 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Aging Analysis of Accruing and Non-Accruing Loans -The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes, regardless of their age, there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of accruing status, the associated discount on these loan pools results in income recognition. The following presents by class, an aging analysis of the Company’s accruing and non-accruing loans as of December 31, 2013 and 2012.
| | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Past Due 90 Days orMore | | | PCI Loans | | | Current | | | Total Loans | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 96 | | | $ | 52 | | | $ | 149 | | | $ | 5,737 | | | $ | 116,366 | | | $ | 122,400 | |
CRE - owner-occupied | | | 418 | | | | - | | | | 209 | | | | 35,760 | | | | 231,194 | | | | 267,581 | |
CRE - investor income producing | | | 655 | | | | - | | | | 3,161 | | | | 56,996 | | | | 321,375 | | | | 382,187 | |
AC&D - 1-4 family construction | | | - | | | | - | | | | - | | | | - | | | | 19,959 | | | | 19,959 | |
AC&D - lots, land, & development | | | 48 | | | | - | | | | 292 | | | | 22,699 | | | | 42,550 | | | | 65,589 | |
AC&D - CRE | | | - | | | | - | | | | - | | | | 121 | | | | 56,638 | | | | 56,759 | |
Other commercial | | | - | | | | 112 | | | | - | | | | 137 | | | | 3,600 | | | | 3,849 | |
Total commercial loans | | | 1,217 | | | | 164 | | | | 3,811 | | | | 121,450 | | | | 791,682 | | | | 918,324 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | - | | | | 32 | | | | 1,340 | | | | 32,826 | | | | 139,178 | | | | 173,376 | |
HELOC | | | 248 | | | | 160 | | | | 698 | | | | 1,402 | | | | 141,246 | | | | 143,754 | |
Residential construction | | | 25 | | | | - | | | | 66 | | | | 6,920 | | | | 33,810 | | | | 40,821 | |
Other loans to individuals | | | 14 | | | | 11 | | | | - | | | | 1,189 | | | | 17,581 | | | | 18,795 | |
Total consumer loans | | | 287 | | | | 203 | | | | 2,104 | | | | 42,337 | | | | 331,815 | | | | 376,746 | |
Total loans | | $ | 1,504 | | | $ | 367 | | | $ | 5,915 | | | $ | 163,787 | | | $ | 1,123,497 | | | $ | 1,295,070 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 1,316 | | | $ | 83 | | | $ | 230 | | | $ | 7,323 | | | $ | 110,180 | | | $ | 119,132 | |
CRE - owner-occupied | | | 48 | | | | 1,903 | | | | 113 | | | | 44,925 | | | | 252,427 | | | | 299,416 | |
CRE - investor income producing | | | 224 | | | | 27 | | | | 366 | | | | 85,959 | | | | 285,381 | | | | 371,957 | |
AC&D | | | - | | | | 699 | | | | 1,428 | | | | 39,541 | | | | 98,993 | | | | 140,661 | |
Other commercial | | | - | | | | - | | | | 168 | | | | 742 | | | | 4,718 | | | | 5,628 | |
Total commercial loans | | | 1,588 | | | | 2,712 | | | | 2,305 | | | | 178,490 | | | | 751,699 | | | | 936,794 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 18 | | | | 196 | | | | 499 | | | | 40,483 | | | | 147,336 | | | | 188,532 | |
HELOC | | | 590 | | | | - | | | | 1,094 | | | | 1,949 | | | | 159,992 | | | | 163,625 | |
Residential construction | | | - | | | | - | | | | 71 | | | | 11,265 | | | | 41,476 | | | | 52,812 | |
Other loans to individuals | | | 36 | | | | 4 | | | | - | | | | 2,095 | | | | 13,418 | | | | 15,553 | |
Total consumer loans | | | 644 | | | | 200 | | | | 1,664 | | | | 55,792 | | | | 362,222 | | | | 420,522 | |
Total loans | | $ | 2,232 | | | $ | 2,912 | | | $ | 3,969 | | | $ | 234,282 | | | $ | 1,113,921 | | | $ | 1,357,316 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Impaired Loans - All classes of loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impaired loans may include all classes of nonaccrual 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 rate implicit in the original loan agreement or at the fair value of collateral if repayment is expected solely from the collateral. Additionally, a portion of the Company’s qualitative factors accounts for potential impairment on loans generally less than $150 thousand. 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.
During the year ended December 31, 2013, the Company’s quarterly cash flow analyses indicated net recovery of impairment of $607 thousand. These impairments are in a single covered PCI loan pool and are in the CRE – investor income producing loan segment. During 2012, the Company’s quarterly cash flow analyses indicated that three PCI loan pools were impaired. This analysis resulted in $225 thousand net impairment in a commercial pool, $542 thousand net impairment in an AC&D pool and $200 thousand net impairment of a residential mortgage pool at December 31, 2012. The net impairment of $967 thousand as of December 31, 2012 was fully reversed during 2013 as estimated cash flows in the impacted pools improved or the projected losses were fully recognized. These amounts are not included in the tables below.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
| | | December 31, 2013 | | | December 31, 2012 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance For Loan Losses | | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance For Loan Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired Loans with No Related Allowance Recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 183 | | | $ | 473 | | | $ | - | | | $ | 377 | | | $ | 1,170 | | | $ | - | |
CRE - owner-occupied | | | 1,815 | | | | 1,955 | | | | - | | | | 2,337 | | | | 2,675 | | | | - | |
CRE - investor income producing | | | 30 | | | | 47 | | | | - | | | | 4,243 | | | | 4,424 | | | | - | |
AC&D | | | - | | | | - | | | | - | | | | 4,855 | | | | 9,306 | | | | - | |
AC&D - 1-4 family construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
AC&D - lots, land, & development | | | 1,888 | | | | 4,475 | | | | - | | | | - | | | | - | | | | - | |
AC&D - CRE | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other commercial | | | 150 | | | | 167 | | | | - | | | | 168 | | | | 172 | | | | - | |
Total commercial loans | | | 4,066 | | | | 7,117 | | | | - | | | | 11,980 | | | | 17,747 | | | | - | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 3,080 | | | | 3,926 | | | | - | | | | 2,252 | | | | 2,363 | | | | - | |
HELOC | | | 2,478 | | | | 2,855 | | | | - | | | | 1,419 | | | | 2,439 | | | | - | |
Residential construction | | | 26 | | | | 39 | | | | - | | | | 71 | | | | 551 | | | | - | |
Other loans to individuals | | | 58 | | | | 62 | | | | - | | | | 73 | | | | 75 | | | | - | |
Total consumer loans | | | 5,642 | | | | 6,882 | | | | - | | | | 3,815 | | | | 5,428 | | | | - | |
Total impaired loans with no relatedallowance recorded | | $ | 9,708 | | | $ | 13,999 | | | $ | - | | | $ | 15,795 | | | $ | 23,175 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired Loans with an Allowance Recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 82 | | | $ | 90 | | | $ | 14 | | | $ | 230 | | | $ | 230 | | | $ | 115 | |
CRE - owner-occupied | | | 87 | | | | 88 | | | | 14 | | | | - | | | | - | | | | - | |
CRE - investor income producing | | | 3,186 | | | | 3,673 | | | | 527 | | | | - | | | | - | �� | | | - | |
AC&D | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
AC&D - 1-4 family construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
AC&D - lots, land, & development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
AC&D - CRE | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other commercial | | | 112 | | | | 112 | | | | 18 | | | | - | | | | - | | | | - | |
Total commercial loans | | | 3,467 | | | | 3,963 | | | | 573 | | | | 230 | | | | 230 | | | | 115 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 1,433 | | | | 1,485 | | | | 167 | | | | 1,211 | | | | 1,250 | | | | 249 | |
HELOC | | | 536 | | | | 587 | | | | 137 | | | | 506 | | | | 707 | | | | 351 | |
Residential construction | | | 40 | | | | 42 | | | | 7 | | | | - | | | | - | | | | - | |
Other loans to individuals | | | 2 | | | | 4 | | | | - | | | | - | | | | - | | | | - | |
Total consumer loans | | | 2,011 | | | | 2,118 | | | | 311 | | | | 1,717 | | | | 1,957 | | | | 600 | |
Total impaired loans with anallowance recorded | | $ | 5,478 | | | $ | 6,081 | | | $ | 884 | | | $ | 1,947 | | | $ | 2,187 | | | $ | 715 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired Loans: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 265 | | | $ | 563 | | | $ | 14 | | | $ | 607 | | | $ | 1,400 | | | $ | 115 | |
CRE - owner-occupied | | | 1,902 | | | | 2,043 | | | | 14 | | | | 2,337 | | | | 2,675 | | | | - | |
CRE - investor income producing | | | 3,216 | | | | 3,720 | | | | 527 | | | | 4,243 | | | | 4,424 | | | | - | |
AC&D | | | - | | | | - | | | | - | | | | 4,855 | | | | 9,306 | | | | - | |
AC&D - 1-4 family construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
AC&D - lots, land, & development | | | 1,888 | | | | 4,475 | | | | - | | | | - | | | | - | | | | - | |
AC&D - CRE | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other commercial | | | 262 | | | | 279 | | | | 18 | | | | 168 | | | | 172 | | | | - | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | | 4,513 | | | | 5,411 | | | | 167 | | | | 3,463 | | | | 3,613 | | | | 249 | |
HELOC | | | 3,014 | | | | 3,442 | | | | 137 | | | | 1,925 | | | | 3,146 | | | | 351 | |
Residential construction | | | 66 | | | | 81 | | | | 7 | | | | 71 | | | | 551 | | | | - | |
Other loans to individuals | | | 60 | | | | 66 | | | | - | | | | 73 | | | | 75 | | | | - | |
Total impaired loans | | $ | 15,186 | | | $ | 20,080 | | | $ | 884 | | | $ | 17,742 | | | $ | 25,362 | | | $ | 715 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
The average recorded investment and interest income recognized on impaired loans, by class, for the years ended December 31, 2013 and 2012 is shown in the table below.
| | | December 31, 2013 | | | December 31, 2012 | |
| | | Average
Recorded
Investment | | | Interest
Income
Recognized | | | Average
Recorded
Investment | | | Interest
Income
Recognized | |
| | | | | | | | | | | | | | | | | |
Impaired Loans with No RelatedAllowance Recorded: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 276 | | | $ | 5 | | | $ | 545 | | | $ | - | |
CRE - owner-occupied | | | 2,108 | | | | 106 | | | | 1,036 | | | | 22 | |
CRE - investor income producing | | | 980 | | | | - | | | | 2,739 | | | | 37 | |
AC&D | | | - | | | | - | | | | 8,582 | | | | 58 | |
AC&D - 1-4 family construction | | | - | | | | - | | | | - | | | | - | |
AC&D - lots, land, & development | | | 2,978 | | | | 202 | | | | - | | | | - | |
AC&D - CRE | | | - | | | | - | | | | - | | | | - | |
Other commercial | | | 158 | | | | 9 | | | | 98 | | | | - | |
Total commercial loans | | | 6,500 | | | | 322 | | | | 13,000 | | | | 117 | |
Consumer: | | | | | | | | | | | | | | | | |
Residential mortgage | | | 2,688 | | | | 57 | | | | 946 | | | | - | |
HELOC | | | 1,513 | | | | 20 | | | | 841 | | | | - | |
Residential construction | | | 20 | | | | - | | | | 96 | | | | - | |
Other loans to individuals | | | 64 | | | | 4 | | | | 48 | | | | 4 | |
Total consumer loans | | | 4,285 | | | | 81 | | | | 1,931 | | | | 4 | |
Total impaired loans with no relatedallowance recorded | | $ | 10,785 | | | $ | 403 | | | $ | 14,931 | | | $ | 121 | |
| | | | | | | | | | | | | | | | | |
Impaired Loans with anAllowance Recorded: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 487 | | | $ | 2 | | | $ | 270 | | | $ | - | |
CRE - owner-occupied | | | 47 | | | | 12 | | | | 12 | | | | - | |
CRE - investor income producing | | | 2,829 | | | | 2 | | | | 828 | | | | - | |
AC&D | | | - | | | | - | | | | 802 | | | | - | |
AC&D - 1-4 family construction | | | - | | | | - | | | | - | | | | - | |
AC&D - lots, land, & development | | | 50 | | | | - | | | | - | | | | - | |
AC&D - CRE | | | - | | | | - | | | | - | | | | - | |
Other commercial | | | 22 | | | | - | | | | - | | | | - | |
Total commercial loans | | | 3,435 | | | | 16 | | | | 1,912 | | | | - | |
Consumer: | | | | | | | | | | | | | | | | |
Residential mortgage | | | 1,282 | | | | 33 | | | | 1,055 | | | | 29 | |
HELOC | | | 920 | | | | 1 | | | | 355 | | | | - | |
Residential construction | | | 24 | | | | - | | | | - | | | | - | |
Other loans to individuals | | | 1 | | | | - | | | | - | | | | - | |
Total consumer loans | | | 2,227 | | | | 34 | | | | 1,410 | | | | 29 | |
Total impaired loans with anallowance recorded | | $ | 5,662 | | | $ | 50 | | | $ | 3,322 | | | $ | 29 | |
| | | | | | | | | | | | | | | | | |
Impaired Loans: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 763 | | | $ | 7 | | | $ | 815 | | | $ | - | |
CRE - owner-occupied | | | 2,155 | | | | 118 | | | | 1,048 | | | | 22 | |
CRE - investor income producing | | | 3,809 | | | | 2 | | | | 3,567 | | | | 37 | |
AC&D | | | - | | | | - | | | | 9,384 | | | | 58 | |
AC&D - 1-4 family construction | | | - | | | | - | | | | - | | | | - | |
AC&D - lots, land, & development | | | 3,028 | | | | 202 | | | | - | | | | - | |
AC&D - CRE | | | - | | | | - | | | | - | | | | - | |
Other commercial | | | 180 | | | | 9 | | | | 98 | | | | - | |
Consumer: | | | | | | | | | | | | | | | | |
Residential mortgage | | | 3,970 | | | | 90 | | | | 2,001 | | | | 29 | |
HELOC | | | 2,433 | | | | 21 | | | | 1,196 | | | | - | |
Residential construction | | | 44 | | | | - | | | | 96 | | | | - | |
Other loans to individuals | | | 65 | | | | 4 | | | | 48 | | | | 4 | |
Total impaired loans | | $ | 16,447 | | | $ | 453 | | | $ | 18,253 | | | $ | 150 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
During the year ended December 31, 2013, the Company recognized $453 thousand of interest income with respect to impaired loans, specifically accruing TDRs, within the period the loans were impaired. During the year ended December 31, 2012, the Company recognized $150 thousand of interest income with respect to impaired loans, specifically accruing TDRs, within the period the loans were impaired. During the year ended December 31, 2011, the Company recognized $114 thousand of interest income with respect to impaired loans, specifically accruing TDRs, within the period the loans were impaired.
Nonaccrual and Past Due Loans -It is the general policy of the Company to place a loan on nonaccrual status when there is probable loss or when there is reasonable doubt that all principal will be collected, or when it is over 90 days past due. At December 31, 2013 and 2012, there were $17 thousand, and $77 thousand, respectively, in loans past due 90 days or more and accruing interest. These loans are secured and considered fully collectible at December 31, 2013 and 2012. The recorded investment in nonaccrual loans at December 31, 2013 and 2012 follows:
| | | 2013 | | | 2012 | |
Commercial: | | | | | | | | |
Commercial and industrial | | $ | 200 | | | $ | 607 | |
CRE - owner-occupied | | | 209 | | | | 1,996 | |
CRE - investor income producing | | | 3,192 | | | | 633 | |
AC&D | | | - | | | | 3,872 | |
AC&D - 1-4 family construction | | | - | | | | - | |
AC&D - lots, land, & development | | | 292 | | | | - | |
AC&D - CRE | | | - | | | | - | |
Other commercial | | | 112 | | | | 168 | |
Total commercial loans | | | 4,005 | | | | 7,276 | |
Consumer: | | | | | | | | |
Residential mortgage | | | 2,007 | | | | 1,096 | |
HELOC | | | 2,348 | | | | 1,925 | |
Residential construction | | | 66 | | | | 71 | |
Other loans to individuals | | | 2 | | | | 6 | |
Total consumer loans | | | 4,423 | | | | 3,098 | |
Total nonaccrual loans | | $ | 8,428 | | | $ | 10,374 | |
Interest income included in the results of operations for 2013, 2012 and 2011, with respect to loans that subsequently went to nonaccrual, totaled $310 thousand, $157 thousand and $311 thousand, respectively. If interest on these loans had been accrued in accordance with their original terms, interest income would have increased by $3.0 million, $540 thousand and $1.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Purchased Credit-Impaired Loans–PCI loans had an unpaid principal balance of $197.0 million and a carrying value of $163.8 million at December 31, 2013. PCI loans had an unpaid principal balance of $278.2 million and a carrying value of $234.2 million at December 31, 2012. PCI loans represented 8.4% and 11.5% of total assets at December 31, 2013 and 2012, respectively. Determining the fair value of the PCI loans required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for loan losses from acquired companies.
In conjunction with the Citizens South acquisition, the PCI loan portfolio was accounted for at fair value as follows:
| | | October 1, 2012 | |
| | | | | |
Contractual principal and interest at acquisition | | $ | 294,283 | |
Nonaccretable difference | | | (47,941 | ) |
Expected cash flows at acquisition | | | 246,342 | |
Accretable yield | | | (37,724 | ) |
| | | | | |
Basis in PCI loans at acquisition - estimated fair value | | $ | 208,618 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
In conjunction with the Community Capital acquisition, the PCI loan portfolio was accounted for at fair value as follows:
| | | November 1, 2011 | |
| | | | | |
Contractual principal and interest at acquisition | | $ | 146,843 | |
Nonaccretable difference | | | (61,145 | ) |
Expected cash flows at acquisition | | | 85,698 | |
Accretable yield | | | (14,424 | ) |
| | | | | |
Basis in PCI loans at acquisition - estimated fair value | | $ | 71,274 | |
A summary of changes in the accretable yield for PCI loans for the years ended December 31, 2013, 2012 and 2011 follows.
| | | 2013 | | | 2012 | | | 2011 | |
| | | | | | | | | | | | | |
Accretable yield, beginning of year | | $ | 42,734 | | | $ | 14,264 | | | $ | - | |
Addition from the Community Capital acquisition | | | - | | | | - | | | | 14,424 | |
Addition from the Citizens South acquisition | | | - | | | | 37,724 | | | | - | |
Interest income | | | (14,903 | ) | | | (7,462 | ) | | | (160 | ) |
Reclassification of nonaccretable difference due toimprovement in expected cash flows | | | 12,143 | | | | 479 | | | | - | |
Other changes, net | | | (725 | ) | | | (2,271 | ) | | | - | |
Accretable yield, end of year | | $ | 39,249 | | | $ | 42,734 | | | $ | 14,264 | |
Troubled Debt Restructuring -In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. All loan modifications are made on a case-by-case basis.
The Company allocated $565 thousand and $54 thousand, respectively, of specific reserves to customers whose loan terms have been modified in a TDR as of December 31, 2013 and December 31, 2012. As of December 31, 2013, the Company had 11 TDR loans totaling $8.2 million, of which $4.4 million are nonaccrual loans. As of December 31, 2012, the Company had 18 TDR loans totaling $10.2 million, of which $2.8 million are nonaccrual loans.
The following table presents a breakdown of the types of concessions made by loan class during the twelve-month period ended December 31, 2013 and 2012:
| | | Year ended December 31, 2013 | | | Year ended December 31, 2012 | |
| | | Number of loans | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | | | Number of loans | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | |
Below market interest rate: | | | | | | | | | | | | | | | | | | | | | | | | |
CRE - investor income producing | | | - | | | $ | - | | | $ | - | | | | 1 | | | $ | 3,610 | | | $ | 3,610 | |
Residential mortgage | | | 1 | | | | 43 | | | | 43 | | | | - | | | | - | | | | - | |
Total | | | 1 | | | | 43 | | | | 43 | | | | 1 | | | | 3,610 | | | | 3,610 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Extended payment terms: | | | | | | | | | | | | | | | | | | | | | | | | |
AC&D - lots, land, & development | | | 1 | | | | 962 | | | | 962 | | | | - | | | | - | | | | - | |
| HELOC | | | 1 | | | | 1,250 | | | | 1,250 | | | | - | | | | - | | | | - | |
Total | | | 2 | | | | 2,212 | | | | 2,212 | | | | - | | | | - | | | | - | |
Total | | | 3 | | | $ | 2,255 | | | $ | 2,255 | | | | 1 | | | $ | 3,610 | | | $ | 3,610 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
The following table presents loans modified as TDRs within the twelve months ended December 31, 2013, and for which there was a payment default during the twelve months ended December 31, 2013. There were no such loans within the twelve months ended December 31, 2012.
| | | Twelve months ended December 31, 2013 | |
| | | Number of loans | | | Recorded Investment | |
Below market interest rate: | | | | | | | | |
CRE - investor income producing | | | 1 | | | $ | 3,610 | |
Total | | | 1 | | | $ | 3,610 | |
The Company does not deem a TDR to be successful until it has been re-established as an accruing loan. The following table presents the successes and failures of the types of modifications indicated within the 12 months ended December 31, 2013 and 2012:
| | | Twelve Months Ended December 31, 2013 | |
| | | Paid in full | | | Paying as restructured | | | Foreclosure/Default | |
| | | Number of loans | | | Recorded Investment | | | Number of loans | | | Recorded Investment | | | Number of loans | | | Recorded Investment | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Below market interest rate | | | 2 | | | $ | 164 | | | | 4 | | | $ | 2,108 | | | | 1 | | | $ | 3,116 | |
Extended payment terms | | | 2 | | | | 438 | | | | 6 | | | | 2,993 | | | | - | | | | - | |
Total | | | 4 | | | $ | 602 | | | | 10 | | | $ | 5,101 | | | | 1 | | | $ | 3,116 | |
| | | Twelve Months Ended December 31, 2012 | |
| | | Paid in full | | | Paying as restructured | | | Foreclosure/Default | |
| | | Number of loans | | | Recorded Investment | | | Number of loans | | | Recorded Investment | | | Number of loans | | | Recorded Investment | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Below market interest rate | | | - | | | $ | - | | | | 1 | | | $ | 3,610 | | | | - | | | $ | - | |
Total | | | - | | | $ | - | | | | 1 | | | $ | 3,610 | | | | - | | | $ | - | |
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:
Loans to Directors, Executive Officers and Their Related Interests
| | | 2013 | | | 2012 | |
Balance, beginning of year | | $ | 4,184 | | | $ | 3,998 | |
Disbursements | | | 16,037 | | | | 767 | |
Repayments | | | (2,974 | ) | | | (581 | ) |
Balance, end of year | | $ | 17,247 | | | $ | 4,184 | |
At December 31, 2013, the Company had pre-approved but unused lines of credit totaling $3.0 million to related parties.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 6 –FDIC LOSS SHARE AGREEMENTS
In connection with the Citizens South acquisition, the Bank assumed two purchase and assumption agreements with the FDIC that cover approximately $71.1 million and $101.7 million of covered loans as of December 31, 2013 and 2012, respectively, and $5.1 million and $6.7 million of covered OREO as of December 31, 2013 and 2012, respectively. Citizens South acquired these assets in prior transactions with the FDIC.
Within the first purchase and assumption agreement are two loss share agreements that originated in March 2010, related to Citizen South’s acquisition of Bank of Hiawassee, a Georgia state-chartered bank headquartered in Hiawassee, Georgia. Under these loss-share agreements, the FDIC will cover 80% of net loan losses up to $102 million and 95% of net loan losses that exceed $102 million. The term of the loss-share agreements is ten years for losses and recoveries on residential real estate loans, five years for losses on all other loans and eight years for recoveries on all other loans. At December 31, 2013 and 2012, the Bank recorded an estimated receivable from the FDIC in the amount of $6.6 million and $11.9 million, respectively, related to these loss share agreements.
Within the second purchase and assumption agreement are two loss share agreements that originated in April 2011, related to Citizens South’s acquisition of New Horizons Bank, a Georgia state-chartered bank headquartered in East Ellijay, Georgia. The first loss share agreement covers certain residential loans and OREO for a period of ten years. The other loss-share agreement covers all remaining covered assets for a period of five years. Pursuant to the terms of these loss-share agreements, the FDIC is obligated to reimburse the Bank for 80% of all eligible losses, which begins with the first dollar of loss occurred, and certain collection and disposition expenses with respect to covered assets. The Bank has a corresponding obligation to reimburse the FDIC for 80% of eligible recoveries with respect to covered assets for a period of ten years for residential properties and eight years for all other covered assets. At December 31, 2013 and 2012, the Bank recorded an estimated receivable from the FDIC in the amount of $3.4 million and $6.8 million, respectively, related to these loss share agreements.
The following table provides changes in the estimated receivable from the FDIC during 2013 and 2012:
FDIC Loss Share Receivable
| | | 2013 | | | 2012 | |
| | | | | | | | | |
Balance, beginning of period | | $ | 18,697 | | | $ | - | |
Acquisition of FDIC loss share receivable from Citizens South | | | - | | | | 22,498 | |
Increase in expected losses on loans | | | 501 | | | | - | |
Additional losses to OREO | | | 817 | | | | - | |
Reimbursable expenses (income) | | | (394 | ) | | | 176 | |
(Amortization) accretion discounts and premiums, net | | | (396 | ) | | | 73 | |
Reimbursements from the FDIC | | | (9,720 | ) | | | (3,698 | ) |
Other changes, net | | | 520 | | | | (352 | ) |
Balance, end of period | | $ | 10,025 | | | $ | 18,697 | |
The estimated receivable from the FDIC is measured separately from the related covered assets and is recorded at carrying value. At December 31, 2013 and 2012, the projected cash flows related to the FDIC receivable for losses on covered loans and assets were approximately $11.5 million and $19.6 million, respectively.
In relation to the FDIC indemnification asset is an expected "true-up" with the FDIC related to the loss share agreements described above. The loss share agreements between the Bank and the FDIC with respect to New Horizons Bank and Bank of Hiawassee each contain a provision that obligates the Company to make a "true-up" payment to the FDIC if the realized losses of each of these acquired banks are less than expected. An estimate of this amount is determined each reporting period. At both December 31, 2013 and 2012, the “true-up” amount was estimated to be approximately $5.0 million and $4.9 million, respectively, at the end of the loss share agreements. These amounts are recorded in other liabilities on the balance sheet. The actual payment will be determined at the end of the term of the loss sharing agreements and is based on the negative bid, expected losses, intrinsic loss estimate, and assets covered under the loss share agreements.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 7 - OTHER REAL ESTATE OWNED
The Company owned $14.5 million and $25.1 million in total OREO at December 31, 2013 and 2012, respectively. The portion of OREO covered under the loss share agreements with the FDIC at December 31, 2013 and 2012 totaled $5.1 million and $6.6 million, respectively. In 2012, the Company acquired $16.1 million in OREO through the merger with Citizens South. During the years ended December 31, 2013 and 2012, transfers into OREO (excluding OREO acquired through merger) totaled $10.2 million and $10.1 million, respectively.
Transactions in OREO for the years ended December 31, 2013 and 2012 are summarized below:
Non-Covered OREO | | 2013 | | | 2012 | |
| | | | | | | | | |
Beginning balance | | $ | 18,427 | | | $ | 14,403 | |
Additions | | | 3,945 | | | | 8,864 | |
Acquired through merger | | | - | | | | 7,012 | |
Sales | | | (12,324 | ) | | | (9,431 | ) |
Writedowns | | | (644 | ) | | | (2,421 | ) |
Ending balance | | $ | 9,404 | | | $ | 18,427 | |
Covered OREO | | 2013 | | | 2012 | |
| | | | | | | | | |
Beginning balance | | $ | 6,646 | | | $ | - | |
Additions | | | 6,262 | | | | 1,282 | |
Acquired through merger | | | - | | | | 8,776 | |
Sales | | | (7,070 | ) | | | (3,412 | ) |
Writedowns | | | (750 | ) | | | - | |
Ending balance | | $ | 5,088 | | | $ | 6,646 | |
The following is a summary of information relating to analysis of OREO at December 31, 2013 and 2012:
| | | 2013 | | | 2012 | |
Non-covered OREO: | | | | | | | | |
CRE - owner-occupied | | $ | 591 | | | $ | 1,077 | |
CRE - investor income producing | | | 2,933 | | | | 1,348 | |
AC&D | | | - | | | | 14,527 | |
AC&D - 1-4 family construction | | | 2,811 | | | | - | |
AC&D - lots, land, & development | | | 1,448 | | | | - | |
Other commercial | | | 195 | | | | - | |
Residential mortgage | | | 704 | | | | 1,062 | |
HELOC | | | 124 | | | | - | |
Residential construction | | | 598 | | | | 413 | |
OREO covered by FDIC loss share agreements | | | 5,088 | | | | 6,646 | |
| | | | | | | | | |
Total OREO | | $ | 14,492 | | | $ | 25,073 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 8 – PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31:
| | | 2013 | | | 2012 | |
Buildings | | $ | 34,871 | | | $ | 34,730 | |
Land | | | 16,431 | | | | 16,453 | |
Furniture and equipment | | | 8,568 | | | | 6,533 | |
Leasehold improvements | | | 1,057 | | | | 984 | |
Capitalized interest in buildings | | | 93 | | | | 93 | |
Autos | | | 16 | | | | 59 | |
Fixed assets in process | | | 389 | | | | 2,013 | |
Premises and equipment | | | 61,425 | | | | 60,865 | |
Accumulated depreciation | | | (5,502 | ) | | | (3,643 | ) |
Premises and equipment, net | | $ | 55,923 | | | $ | 57,222 | |
Depreciation and amortization expense for the years ended December 31, 2013, 2012 and 2011 amounted to $3.4 million, $1.8 million and $564 thousand, respectively. These amounts are included in the occupancy and equipment line item in the Consolidated Statements of Income (Loss).
NOTE 9 – GOODWILL AND INTANGIBLE ASSETS
In accordance with GAAP, the Company does not amortize goodwill. However, core deposit intangible assets are amortized over the estimated life of the asset. At December 31, 2013 and 2012, intangible assets consisted of core deposit premiums, net of accumulated amortization, and amounted to $8.6 million and $9.7 million, respectively. The amount of the core deposit premium recorded as a result of the merger with Citizens South was $6.2 million. The amount of the core deposit premium recorded as a result of the merger with Community Capital was $4.1 million. Amortization expense related to the core deposit premium was $1.0 million, $564 thousand, and $68 thousand for the years ended December 31, 2013, 2012 and 2011, respectively.
Amortization of core deposit intangible assets is computed using the straight-line method over an amortization period of ten years. Estimated amortization expense for the years ending December 31 is as follows (dollars in thousand):
2014 | | $ | 1,029 | |
2015 | | | 1,029 | |
2016 | | | 1,029 | |
2017 | | | 1,029 | |
2018 | | | 1,029 | |
2019 and thereafter | | | 3,484 | |
| | | $ | 8,629 | |
Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired. As a result of the mergers with Citizens South and Community Capital, the Company recorded $25.8 million and $622 thousand in 2012 and 2011, respectively, in goodwill. The Company evaluated the carrying value of goodwill as of September 30, 2013, its annual test date, and determined that no impairment charge was necessary. Should the Company’s future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required. There have been no events subsequent to the September 30, 2013 evaluation that caused the Company to perform an interim review of the carrying value of goodwill.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 10 – DEPOSITS
The following is a summary of deposits at December 31:
| | | 2013 | | | 2012 | |
Noninterest bearing demand deposits | | $ | 255,861 | | | $ | 243,495 | |
Interest-bearing demand deposits | | | 296,995 | | | | 323,037 | |
Money market deposits | | | 390,059 | | | | 388,809 | |
Savings | | | 48,701 | | | | 46,917 | |
Brokered deposits | | | 166,280 | | | | 111,112 | |
Certificates of deposit and other time deposits | | | 441,989 | | | | 518,634 | |
Total deposits | | $ | 1,599,885 | | | $ | 1,632,004 | |
At December 31, 2013, the scheduled maturities of time deposits, which include brokered certificates of deposits, certificates of deposit and other time deposits, are as follows:
| | | Less Than $100 Thousand | | | $100 Thousand or More | | | Total | |
| | | | | | | | | | | | | |
2014 | | $ | 205,627 | | | $ | 201,541 | | | $ | 407,168 | |
2015 | | | 35,329 | | | | 43,230 | | | | 78,559 | |
2016 | | | 7,510 | | | | 27,831 | | | | 35,341 | |
2017 | | | 10,282 | | | | 10,610 | | | | 20,892 | |
2018 and greater | | | 946 | | | | 1,522 | | | | 2,468 | |
Total time deposits | | $ | 259,694 | | | $ | 284,734 | | | $ | 544,428 | |
Interest expense on time deposits totaled $2.5 million, $3.0 million and $4.0 million in the years ended December 31, 2013, 2012 and 2011, respectively.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 11 – BORROWINGS
Borrowings outstanding at December 31, 2013 and 2012 consist of the following:
| | | | | | | | | | | 2013 | | | 2012 | |
| | | Maturity | | | Interest Rate | | | Balance | | | Weighted Average Interest Rate | | | Balance | | | Weighted Average Interest Rate | |
Short-term borrowings: | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements | | various | | | | 0.10 | % | | $ | 996 | | | | | | | $ | 10,143 | | | | | |
FHLB Daily Rate Credit | | 12/31/13 | | | | 0.00 | % | | | - | | | | | | | | 15,000 | | | | | |
Total short-term borrowings | | | | | | | | | | | 996 | | | | 0.01 | % | | | 25,143 | | | | 0.25 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term borrowings: | | | | | | | | | | | | | | | | | | | | | | | | |
FHLB Adjustable Rate Credit | | 01/06/14 | | | | 0.3529 | % | | | 10,000 | | | | | | | | 10,000 | | | | | |
FHLB Adjustable Rate Credit | | 01/06/14 | | | | 0.3529 | % | | | 10,000 | | | | | | | | 10,000 | | | | | |
FHLB Fixed Rate Hybrid | | 09/26/16 | | | | 1.9050 | % | | | 5,000 | | | | | | | | 5,000 | | | | | |
FHLB Fixed Rate Hybrid | | 09/26/16 | | | | 2.0675 | % | | | 5,000 | | | | | | | | 5,000 | | | | | |
FHLB Fixed Rate Hybrid | | 09/26/16 | | | | 2.2588 | % | | | 5,000 | | | | | | | | 5,000 | | | | | |
FHLB Fixed Rate Hybrid | | 09/26/16 | | | | 2.0250 | % | | | 5,000 | | | | | | | | 5,000 | | | | | |
FHLB Adjustable Rate Credit | | 01/21/14 | | | | 0.2945 | % | | | 15,000 | | | | | | | | 15,000 | | | | | |
Total Federal Home Loan Bank | | | | | | | | | | | 55,000 | | | | 0.96 | % | | | 55,000 | | | | 1.01 | % |
Subordinated debt | | 06/30/19 | | | | 11.00 | % | | | 6,895 | | | | | | | | 6,895 | | | | | |
Junior subordinated debt | | 06/15/36 | | | | 1.7929 | % | | | 5,986 | | | | | | | | 5,794 | | | | | |
Junior subordinated debt | | 12/15/35 | | | | 1.8129 | % | | | 9,171 | | | | | | | | 8,884 | | | | | |
Total long-term borrowings | | | | | | | | | | | 77,052 | | | | 2.02 | % | | | 76,573 | | | | 1.79 | % |
Total borrowings | | | | | | | | | | $ | 78,048 | | | | | | | $ | 101,716 | | | | | |
Subsequent to December 31, 2013, two FHLB Adjustable Rate Credit four year borrowing agreements and one Adjustable Rate Credit two year borrowing matured in the amounts of $10.0 million, $10.0 million, and $15.0 million, respectively. The matured FHLB four year borrowing agreements were replaced with two FHLB Adjustable Rate Credit two year borrowing agreements at $10.0 million each, with a maturity of January 7, 2016 and an interest rate of 0.2721%. The matured FHLB two year borrowing agreement was replaced with a FHLB Adjustable Rate Credit two year borrowing agreement at $15.0 million, with a maturity of January 21, 2016 and an interest rate of 0.2766%.
At December 31, 2013, the Company had an additional $254.6 million of credit available from the FHLB, $162.8 million of credit available from the Federal Reserve Discount Window, and $70.0 million of credit available from correspondent banks.
FHLB borrowing agreements provide for lines of credit up to 20% of the Bank’s assets. The FHLB borrowings are collateralized by a blanket pledge arrangement on all residential first mortgage loans, HELOCs and loans secured by multi-family real estate that the Bank owns. At December 31, 2013, the carrying value of loans pledged as collateral to the FHLB and the Federal Reserve totaled $472.4 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 maturity 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.
As a result of the mergers with Community Capital and Citizens South, the Company’s capital structure includes trust preferred securities previously issued by the predecessor companies through specially formed trusts. Community Capital previously had formed Community Capital Corporation Statutory Trust I, an unconsolidated statutory business trust, which issued $10.3 million of trust preferred securities that were sold to third parties. The rate on the trust preferred securities acquired through the Community Capital merger adjusts quarterly to the three-month LIBOR plus 1.55%. Citizens Southpreviously formed CSBC Statutory Trust I, an unconsolidated statutory business trust, which issued $15.5 million of trust preferred securities that were sold to third parties. The rate on the trust preferred securities acquired through the Citizens South merger adjusts quarterly to the three-month LIBOR plus 1.57%. The amounts presented are after related acquisition accounting fair market value adjustments. The proceeds of the sales of the trust preferred securities were used to purchase junior subordinated debentures from the predecessor companies, which are presented as long-term borrowings in the consolidated balance sheets of the Company and qualify for inclusion in Tier 1 Capital for regulatory capital purposes, subject to certain limitations.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 12 – INCOME TAXES
Income taxes are provided based on the asset-liability method of accounting, which includes the recognition of DTAs and liabilities for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. In general, the Company records a DTA when the event giving rise to the tax benefit has been recognized in the consolidated financial statements.
The significant components of the provision for income taxes for the years ended December 31 are as follows:
| | | 2013 | | | 2012 | | | 2011 | |
Current tax provision: | | | | | | | | | | | | |
Federal | | $ | (1,248 | ) | | $ | - | | | $ | - | |
State | | | 147 | | | | 51 | | | | - | |
Total current tax provision | | | (1,101 | ) | | | 51 | | | | - | |
Deferred tax provision: | | | | | | | | | | | | |
Federal | | | 7,468 | | | | 1,859 | | | | (4,128 | ) |
State | | | 992 | | | | 396 | | | | (816 | ) |
Total deferred tax provision | | | 8,460 | | | | 2,255 | | | | (4,944 | ) |
Net provision for income taxes | | $ | 7,359 | | | $ | 2,306 | | | $ | (4,944 | ) |
The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 35% to income before income taxes for the years ended December 31 are summarized below:
| | | 2013 | | | 2012 | | | 2011 | |
| | | | | | | | | | | | | |
Tax at the statutory federal rate | | $ | 7,706 | | | $ | 2,261 | | | $ | (4,522 | ) |
Increase (decrease) resulting from: | | | | | | | | | | | | |
State income taxes, net of federal tax effect | | | 751 | | | | 295 | | | | (539 | ) |
Nondeductible merger expenses | | | 6 | | | | 318 | | | | 374 | |
Tax exempt income | | | (1,008 | ) | | | (722 | ) | | | (327 | ) |
Other permanent differences | | | (96 | ) | | | 154 | | | | 70 | |
Provision for income taxes | | $ | 7,359 | | | $ | 2,306 | | | $ | (4,944 | ) |
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:
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
| | | 2013 | | | 2012 | |
| | | | | | | | | |
Deferred tax assets relating to: | | | | | | | | |
Allowance for loan losses | | $ | 3,089 | | | $ | 3,804 | |
Net unrealized securities losses | | | 2,830 | | | | - | |
Fair market value adjustments related to mergers | | | 12,018 | | | | 17,156 | |
Stock option expense | | | 2,524 | | | | 2,152 | |
Pre-opening costs and expenses | | | 276 | | | | 312 | |
Other real estate writedowns | | | 4,456 | | | | 7,674 | |
Deferred compensation | | | 3,560 | | | | 3,367 | |
AMT credit carry forward | | | 1,397 | | | | 1,572 | |
Net operating loss carry forwards | | | 12,032 | | | | 14,415 | |
Nonaccrual interest | | | 1,258 | | | | 2,523 | |
Accrued incentive compensation | | | 706 | | | | - | |
Other | | | 1,090 | | | | 2,988 | |
Total deferred tax assets | | | 45,236 | | | | 55,963 | |
Deferred tax liabilities relating to: | | | | | | | | |
Net unrealized securities gains | | | - | | | | (1,924 | ) |
Core deposit intangible | | | (3,206 | ) | | | (3,583 | ) |
Property and equipment | | | (3,381 | ) | | | (3,635 | ) |
FDIC acquisitions | | | (437 | ) | | | (4,931 | ) |
Deferred loan costs | | | (1,131 | ) | | | (253 | ) |
Prepaid expenses | | | (442 | ) | | | (328 | ) |
Other | | | (321 | ) | | | (383 | ) |
Total deferred tax liabilities | | | (8,918 | ) | | | (15,037 | ) |
Net recorded deferred tax asset | | $ | 36,318 | | | $ | 40,926 | |
As of December 31, 2013 and December 31, 2012, the Company had a net DTA in the amount of approximately $36.3 million and $40.9 million, respectively. The decrease is primarily the result of $15.3 million in earnings during 2013. The Company adjusted its net deferred tax asset as a result of reductions in the North Carolina corporate income tax rate that were enacted July 23, 2013, and will become effective January 1, 2014, and January 1, 2015. The lower corporate income tax rate resulted in a reduction in the deferred tax asset in 2013 and an increase in current period income tax expense for the year ended December 31, 2013.
The Company evaluates the carrying amount of the DTA quarterly in accordance with the guidance provided in ASC 740, in particular applying the criteria set forth therein to determine whether it is more likely than not (i.e., a likelihood of more than 50%) that some portion, or all, of the DTA will not be realized within its life cycle, based on the weight of available evidence. In most cases, the realization of the DTA is dependent upon generating a sufficient level of taxable income in future periods, which can be difficult to predict. In addition to projected earnings, the Company also considers projected asset quality, liquidity, its strong capital position, which could be leveraged to increase earning assets and generate taxable income, its growth plans and other relevant factors. Based on the weight of available evidence, the Company determined that as of December 31, 2013 and December 31, 2012 that it is more likely than not that it will be able to fully realize the existing DTA and therefore considered it appropriate not to establish a DTA valuation allowance at either December 31, 2013 or December 31, 2012.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 13 – REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
The Bank’s mortgage banking division qualifies as a HUD-approved Title II Supervised Mortgagee and issues mortgages insured by the US Department of Housing and Urban Development (“HUD”). A Title II supervised mortgagee must maintain an adjusted net worth equal to a minimum of $1 million, plus 1% of FHA originations in excess of $25 million, up to a maximum of $2.5 million. Possible penalties related to noncompliance with this minimum net worth requirement include the revocation of the Bank’s license to issue HUD-insured mortgages, which may have a material adverse affect on the Company’s financial condition and results of operations. For the years ended December 31, 2013 and 2012, the Bank satisfied the requirement of maintaining $1 million in adjusted net worth.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios, as prescribed by regulations, of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. The Company’s capital position is reflected in its shareholders’ equity, subject to certain adjustments for regulatory purposes. In particular, deferred tax assets that are dependent on future taxable income do not qualify for inclusion in Tier 1 capital based on the capital guidelines of the primary federal supervisory agencies for the Bank and the Company. The disallowed portion of deferred tax assets at December 31, 2013 was $27.7 million for the Company and $30.4 million for the Bank. The disallowed portion of deferred tax assets at December 31, 2012 was $34.9 million for the Company and $38.0 million for the Bank.
Risk-based capital regulations adopted by the Federal Reserve Board and the FDIC require bank holding companies and banks to achieve and maintain specified ratios of capital to risk-weighted assets. The risk-based capital rules are designed to measure “Tier 1” capital (consisting generally of common shareholders’ equity, a limited amount of qualifying non-cumulative perpetual preferred stock and trust preferred securities, and qualifying minority interests in consolidated subsidiaries, net of goodwill and other intangible assets and certain other items) and total capital (consisting of Tier 1 capital and Tier 2 capital, which generally includes certain qualifying preferred stock, mandatory convertible debt securities and term subordinated debt) in relation to the credit risk of both on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk weighting after conversion to balance sheet equivalent amounts. All banks must maintain a minimum total capital to total risk weighted assets ratio of 8.00%, at least half of which must be in the form of core, or Tier 1, capital. These guidelines also specify that banks that are experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels. At December 31, 2013, the Company and the Bank satisfied the respective minimum regulatory capital requirements, and were “well capitalized” within the meaning of Federal regulatory requirements. Management believes, as of December 31, 2013 and 2012, that the Company and the Bank meet all capital adequacy requirements to which they are subject, as set forth below:
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Capital Ratios
| | | Actual | | | For Capital Adequacy Purposes | | | To Be Well Capitalized Under Prompt Corrective Actions Provisions | |
| | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Park Sterling Corporation | | | | | | | | | | | | | | | | | | | | | | | | |
2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Total Risk-Based Capital Ratio | | $ | 234,508 | | | | 16.46 | % | | $ | 113,966 | | | | 8.00 | % | | $ | 142,457 | | | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital Ratio | | | 218,552 | | | | 15.34 | % | | | 56,983 | | | | 4.00 | % | | | 85,474 | | | | 6.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Leverage Ratio | | | 218,552 | | | | 11.63 | % | | | 75,171 | | | | 4.00 | % | | | 93,964 | | | | 5.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
2012 | | | | | | | | | | | | | | | | | | | | | | | | |
Total Risk-Based Capital Ratio | | $ | 236,671 | | | | 16.30 | % | | $ | 116,123 | | | | 8.00 | % | | $ | 145,153 | | | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital Ratio | | | 219,060 | | | | 15.09 | % | | | 58,061 | | | | 4.00 | % | | | 87,092 | | | | 6.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Leverage Ratio | | | 219,060 | | | | 11.25 | % | | | 77,886 | | | | 4.00 | % | | | 97,358 | | | | 5.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Park Sterling Bank | | | | | | | | | | | | | | | | | | | | | | | | |
2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Total Risk-Based Capital Ratio | | $ | 209,786 | | | | 14.77 | % | | $ | 113,626 | | | | 8.00 | % | | $ | 142,033 | | | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital Ratio | | | 193,830 | | | | 13.65 | % | | | 56,813 | | | | 4.00 | % | | | 85,220 | | | | 6.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Leverage Ratio | | | 193,830 | | | | 10.41 | % | | | 74,477 | | | | 4.00 | % | | | 93,096 | | | | 5.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
2012 | | | | | | | | | | | | | | | | | | | | | | | | |
Total Risk-Based Capital Ratio | | $ | 210,629 | | | | 14.56 | % | | $ | 115,699 | | | | 8.00 | % | | $ | 144,623 | | | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital Ratio | | | 193,018 | | | | 13.35 | % | | | 57,849 | | | | 4.00 | % | | | 86,774 | | | | 6.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 Leverage Ratio | | | 193,018 | | | | 10.09 | % | | | 76,537 | | | | 4.00 | % | | | 95,671 | | | | 5.00 | % |
Federal regulations require institutions to set aside specified amounts of cash as reserves against transaction and time deposits. At December 31, 2013 and 2012, the required cash reserves were satisfied by vault cash on hand and amounts due from correspondent banks.
On November 2, 2012, the Company announced a common stock repurchase program for up to 2.2 million shares. The repurchase plan is in effect for two years and permits the Company to effect the repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and other derivative transactions. The specific timing and amount of repurchases depend on general market conditions, the trading of sock, regulatory, legal, and contractual requirements and the Company’s financial performance. During 2013, the Company purchased 56,267 common shares at an average price of $6.46, and during 2012, the Company repurchased 3,000 common shares, at an average price of $4.84 per share.
The Company must obtain Federal Reserve Board approval prior to repurchasing its Common Stock in excess of 10% of its net worth during any twelve-month period unless the Company (i) both before and after the redemption satisfies capital requirements for "well capitalized" state member banks; (ii) received a one or two rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues. Although the payment of dividends and repurchase of stock by the Company are subject to certain requirements and limitations of North Carolina corporate law, except as set forth in this paragraph, neither the NC Commissioner nor the FDIC have promulgated any regulations specifically limiting the right of the Company to pay dividends or repurchase shares. However, the ability of the Company to pay dividends or repurchase shares may be dependent upon the Company's receipt of dividends from the Bank.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Under the laws of the State of North Carolina, provided the Bank does not make distributions that reduce its capital below its applicable required capital, the board of directors of the Bank may declare such distributions as the directors deem proper.As noted above, the Bank would also be prohibited from declaring any dividend the payment of which would result in the Bank becoming undercapitalized. Finally, an undercapitalized institution is generally prohibited from paying dividends to its shareholders.
As part of Citizens South’s Plan of Conversion and Reorganization in May 2002, it established a memo liquidation account in an amount equal to its equity at the time of the conversion of approximately $44 million for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts at Citizens South Bank after the conversion. In accordance with the memo liquidation account, in the event of a complete liquidation of Citizens South Bank, each eligible account holder and supplemental eligible account holder would be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. In connection with the Citizens South merger and the subsequent merger of Citizens South Bank into the Bank, the Bank assumed this memo liquidation account. This liquidation account is reviewed and adjusted annually. At December 31, 2013 and 2012, the value of the liquidation account was approximately $7.6 million and $8.0 million, respectively.
NOTE 14 – PREFERRED STOCK
In connection with the Citizens South acquisition, the Company issued 20,500 shares of its Non-Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”) upon conversion of Citizens South’s preferred stock that previously was issued to the Treasury pursuant to a Securities Purchase Agreement between Citizens South and the Treasury in connection with Citizens South’s participation in the SBLF program. On September 30, 2013, the Company fully redeemed the 20,500 shares of the Series C Preferred Stock and exited the SBLF program. The Series C Preferred Stock, which had a liquidation value of $1,000 per share, was entitled to receive non-cumulative dividends, payable quarterly, at a rate determined by reference to the level of “Qualified Small Business Lending”.
NOTE 15 – LEASES
The Company has noncancelable operating leases extending to the year 2024 pertaining to bank premises. Some of these leases provide for the payment of property taxes and insurance and contain various renewal options. These renewal options are at substantially the same basis as current rental terms. The exercise of these options is dependent on future events. Accordingly, the following summary does not reflect possible additional payments due if renewal options are not exercised.
Future minimum lease payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms in excess of one year are as follows:
2014 | | $ | 1,416 | |
2015 | | | 1,438 | |
2016 | | | 1,206 | |
2017 | | | 613 | |
2018 | | | 639 | |
2019 and thereafter | | | 2,620 | |
Total | | $ | 7,932 | |
Rent expense for the years ended December 31, 2013, 2012 and 2011 was $1.3 million, $1.1 million and $625 thousand, respectively.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 16 – 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 customers. 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 customer 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 customer 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 customers. The fair value of these commitments is immaterial at December 31, 2013 and 2012.
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 customer’s 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 management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit. In management’s 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 Company’s exposure to off-balance sheet risk as of December 31, 2013 is as follows:
| | | Contractual Amount | |
Financial instruments whose contract amounts represent credit risk: | | | | |
Undisbursed lines of credit | | $ | 279,476 | |
Standby letters of credit | | | 3,583 | |
Commercial letters of credit | | | 1,869 | |
NOTE 17 – DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
At December 31, 2013, the Company had two loan swaps accounted for as fair value hedges in accordance with ASC 815. The aggregate original notional amount of these loan swaps was $6.2 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. These derivative instruments are carried at a fair market value of $(258) thousand and $(453) thousand at December 31, 2013 and December 31, 2012, respectively, and are included in other liabilities. The loans being hedged are also recorded at fair value. These fair value hedges had no indications of ineffectiveness for any of the periods presented. The Company recorded interest expense on these loan swaps of $175 thousand, $353 thousand, and $372 thousand for the years ended December 31, 2013, 2012 and 2011, respectively.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Information on the individual loan swaps at December 31, 2013 is as follows:
| | Original Notional Amount | | | Current Notional Amount | | Termination Date | | Fixed Rate | | Floating Rate | | Floating Rate Payer Spread | |
| | $ | 2,555 | | | $ | 2,403 | | 10/10/15 | | | 5.50 | % | | USD-LIBOR-BBA | | | 2.88 | % | |
| | | 3,595 | | | | 3,223 | | 04/27/17 | | | 5.25 | % | | USD-LIBOR-BBA | | | 2.73 | % | |
| | $ | 6,150 | | | $ | 5,626 | | | | | | | | | | | | | |
The Company entered into an interest rate swap agreement during May 2008 with a notional amount of $40.0 million that matured on May 16, 2011. The derivative instrument was used to protect certain designated variable rate loans from the downward effects of their repricing in the event of a decreasing rate environment. It had been accounted for as a cash flow hedge and the Company recognized no additional gain as a result of this maturity. Changes in fair value of the hedge that were deemed effective were recorded in other comprehensive income net of tax while the ineffective portion of the hedge was recorded in interest income. The Company recorded interest income on the swap of $441 thousand for the year ended December 31, 2011.
The Company entered into an interest rate swap agreement during October 2013 with a notional amount of $20.0 million. This derivative instrument is used to protect the Company from future interest rate risk on a portion of its floating rate FHLB borrowings. This derivative instrument is a $20.0 million three-year forward starting, five-year interest rate swap with an effective date of October 21, 2016. The instrument carries a fixed rate of 3.439% with quarterly payments commencing in January 2017. This derivative instrument is accounted for as a cash flow hedge with effective changes in fair market value recorded in other comprehensive income net of tax. This derivative instrument is carried at a fair market value of $298 thousand and is included in other assets at December 31, 2013.
The Company entered into three interest rate swap agreements during December 2013 with a total notional amount of $50.0 million. These derivative instruments are used to protect the Company from future interest rate risk caused by a seven-year commitment of floating rate broker-dealer sweep accounts through a brokered deposit program. These derivative instruments are a combination of a $12.5 million forward starting, five-year interest rate swap; a $12.5 million forward starting, seven-year interest rate swap; and a $25.0 million two-year forward starting swap. Effective dates for these derivative instruments are January 2, 2014, January 2, 2014 and January 4, 2016, respectively. These instruments carry a fixed rate of 1.688% with monthly payments commencing February 3, 2014, a fixed rate of 2.341% with monthly payments commencing February 3, 2014, and a fixed rate of 3.104% with monthly payments commencing February 1, 2016, respectively. These derivative instruments are accounted for as cash flow hedges with effective changes in fair market value recorded in other comprehensive income net of tax. These derivative instruments are carried at a fair market value of $247 thousand and are included in other assets at December 31, 2013.
Information on the individual interest rate swaps at December 31, 2013 is as follows:
Individual Interest Rate Swap Information
| | Original Notional Amount | | | Current Notional Amount | | Termination Date | | Fixed Rate | | Floating Rate | | Floating Rate Payer Spread | |
| | $ | 20,000 | | | $ | 20,000 | | 10/21/21 | | | 3.439 | % | | USD-LIBOR-BBA | | | 0.00 | % | |
| | | 12,500 | | | | 12,500 | | 12/31/18 | | | 1.688 | % | | USD-Federal Funds-H15 | | | 0.25 | % | |
| | | 12,500 | | | | 12,500 | | 12/31/20 | | | 2.341 | % | | USD-Federal Funds-H15 | | | 0.25 | % | |
| | | 25,000 | | | | 25,000 | | 12/31/20 | | | 3.104 | % | | USD-Federal Funds-H15 | | | 0.25 | % | |
| | $ | 70,000 | | | $ | 70,000 | | | | | | | | | | | | | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 18 – ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income included the following as of December 31, 2013 and 2012:
| | | December 31, 2013 | | | December 31, 2012 | |
| | | Accumulated other comprehensive income (loss) | | | Deferred tax expense (benefit) | | | Accumulated other comprehensive income (loss), net of tax | | | Accumulated other comprehensive income | | | Deferred tax (benefit) | | | Accumulated other comprehensive income, net of tax | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) on investmentsecurities available for sale | | $ | (8,177 | ) | | $ | 3,032 | | | $ | (5,145 | ) | | $ | 5,122 | | | $ | (1,924 | ) | | $ | 3,198 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) on cash flow hedge | | | 545 | | | | (202 | ) | | | 343 | | | | - | | | | - | | | | - | |
Total | | $ | (7,632 | ) | | $ | 2,830 | | | $ | (4,802 | ) | | $ | 5,122 | | | $ | (1,924 | ) | | $ | 3,198 | |
The following table highlights changes in accumulated other comprehensive income by component for the year ended December 31, 2013 and 2012:
December 31, 2013 | | Gains (losses) on
cash flow hedges | | | Unrealized gains and
losses on available-for-
sale securities (1) | | | Total | |
| | | | | | | | | | | | | |
Beginning balance | | $ | - | | | $ | 3,198 | | | $ | 3,198 | |
| | | | | | | | | | | | | |
Other comprehensive income (loss) beforereclassifications | | | 343 | | | | (8,281 | ) | | | (7,938 | ) |
| | | | | | | | | | | | | |
Amounts reclassified from accumulatedother comprehensive income (loss) | | | - | | | | (62 | ) | | | (62 | ) |
| | | | | | | | | | | | | |
Net current period other comprehensiveincome (loss) | | | 343 | | | | (8,343 | ) | | | (8,000 | ) |
| | | | | | | | | | | | | |
Ending balance | | $ | 343 | | | $ | (5,145 | ) | | $ | (4,802 | ) |
(1) All amounts are net of tax.
December 31, 2012 | | Unrealized gains on available-for-sale securities (1) | |
| | | | | |
Beginning balance | | $ | 2,880 | |
| | | | | |
Other comprehensive income (loss) beforereclassifications | | | 1,278 | |
| | | | | |
Amounts reclassified from accumulatedother comprehensive income (loss) | | | (960 | ) |
| | | | | |
Net current period other comprehensiveincome (loss) | | | 318 | |
| | | | | |
Ending balance | | $ | 3,198 | |
(1) All amounts are net of tax.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
December 31, 2013 | | | | | |
Details about accumulated other comprehensive income (loss) | | Amount reclassified from accumulated other comprehensive income (loss) | | Affected line item in the statement where net income is presented |
| | | | | | |
Unrealized gains on available for sale securities | | $ | (98 | ) | Gain on sale of securities available-for-sale |
| | | | | | |
| | | | 36 | | Income taxes |
| | | | | | |
| | | $ | (62 | ) | Net income |
December 31, 2012 | | | | | |
Details about accumulated other comprehensive income (loss) | | Amount reclassified from accumulated other comprehensive income (loss) | | Affected line item in the statement where net income is presented |
| | | | | | |
Unrealized gains on available for sale securities | | $ | (1,478 | ) | Gain on sale of securities available-for-sale |
| | | | | | |
| | | | 518 | | Income taxes |
| | | | | | |
| | | $ | (960 | ) | Net income |
NOTE 19 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at each balance sheet date, based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or the price for which a liability could be settled in an orderly transaction between market participants at the measurement date. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The methodologies used for estimating the fair value of financial assets and financial liabilities are discussed below:
Cash and Cash Equivalents–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 Available-for-sale and Investment Securities Held-to-Maturity-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.
Nonmarketable Equity Securities–Cost is a reasonable estimate of fair value for nonmarketable equity securities because no quoted market prices are available and the securities are not readily marketable. The carrying amount is adjusted for any other than temporary declines in value.
Loans Held for Sale-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.
Loans, net of allowance -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.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
FDIC Indemnification Asset –The fair values for the FDIC indemnification asset are estimated based on discounted future cash flows using current discount rates.
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.
Subordinated Debentures –The fair value of fixed rate subordinated debentures is estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can reprice frequently.
Contingent Payable–The carrying amount is a reasonable estimate of fair value.
Accrued Interest Payable-The carrying amount is a reasonable estimate of fair value.
Derivative Instruments – Derivative instruments, including interest rate swaps and swap fair value hedges, are recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash flow models. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.
Financial Instruments with Off-Balance Sheet Risk-With regard to financial instruments with off-balance sheet risk discussed in Note 16 – Off-Balance Sheet Risk, it is not practicable to estimate the fair value of future financing commitments.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include the use of option pricing models, discounted cash flow models and similar techniques.
The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at December 31:
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
| | | | | | | | | | | Fair Value Measurements | |
| | | Carrying Amount | | | Estimated Fair Value | | | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2013: | | | | | | | | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 55,067 | | | $ | 55,067 | | | $ | 55,067 | | | $ | - | | | $ | - | |
Investment securities available-for-sale | | | 349,491 | | | | 349,491 | | | | 1,906 | | | | 347,585 | | | | - | |
Investment securities held-to-maturity | | | 51,972 | | | | 51,334 | | | | - | | | | 51,334 | | | | - | |
Nonmarketable equity securities | | | 5,905 | | | | 5,905 | | | | - | | | | 5,905 | | | | - | |
Loans held for sale | | | 2,430 | | | | 2,430 | | | | - | | | | 2,430 | | | | - | |
Loans, net of allowance | | | 1,286,977 | | | | 1,267,349 | | | | - | | | | 5,884 | | | | 1,261,465 | |
FDIC indemnification asset | | | 10,025 | | | | 10,025 | | | | - | | | | - | | | | 10,025 | |
Interest rate swaps | | | 545 | | | | 545 | | | | - | | | | 545 | | | | - | |
Accrued interest receivable | | | 4,222 | | | | 4,222 | | | | - | | | | 4,222 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits with no stated maturity | | | 1,055,457 | | | | 1,055,457 | | | | - | | | | 1,055,457 | | | | - | |
Deposits with stated maturities | | | 544,428 | | | | 545,111 | | | | - | | | | 545,111 | | | | - | |
Swap fair value hedge | | | 258 | | | | 258 | | | | - | | | | 258 | | | | - | |
Borrowings | | | 78,048 | | | | 77,899 | | | | - | | | | 77,899 | | | | - | |
Accrued interest payable | | | 412 | | | | 412 | | | | - | | | | 412 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2012: | | | | | | | | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 184,142 | | | $ | 184,142 | | | $ | 184,142 | | | $ | - | | | $ | - | |
Investment securities | | | 245,571 | | | | 245,571 | | | | - | | | | 245,156 | | | | 415 | |
Nonmarketable equity securities | | | 7,422 | | | | 7,422 | | | | - | | | | 7,422 | | | | - | |
Loans held for sale | | | 14,147 | | | | 14,147 | | | | - | | | | 14,147 | | | | - | |
Loans, net of allowance | | | 1,346,116 | | | | 1,332,683 | | | | - | | | | 11,390 | | | | 1,321,293 | |
FDIC indemnification asset | | | 18,697 | | | | 18,697 | | | | - | | | | - | | | | 18,697 | |
Accrued interest receivable | | | 3,821 | | | | 3,821 | | | | - | | | | - | | | | 3,821 | |
| | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits with no stated maturity | | | 1,002,258 | | | | 1,002,258 | | | | - | | | | 1,002,258 | | | | - | |
Deposits with stated maturities | | | 629,746 | | | | 631,289 | | | | - | | | | 631,289 | | | | - | |
Swap fair value hedge | | | 453 | | | | 453 | | | | - | | | | 453 | | | | - | |
Borrowings | | | 101,716 | | | | 101,307 | | | | - | | | | 101,307 | | | | - | |
Contingent payable | | | 3,003 | | | | 3,003 | | | | - | | | | 3,003 | | | | - | |
Accrued interest payable | | | 516 | | | | 516 | | | | - | | | | 516 | | | | - | |
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Investment Securities-Investment securities available-for-sale are recorded at fair value on a recurring basis. Investment securities held-to-maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. 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 security’s 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, United States 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 (“MBS”) issued by government-sponsored entities or private label 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 acorporate 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.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
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 on a recurring basis. The Company classifies derivative instruments held or issued for risk management purposes as Level 2. As of December 31, 2013, the Company’s derivative instruments consist of interest rate swaps and swap fair value hedges, and as of December 31, 2012, the Company’s derivative instruments consist of swap fair value hedges.
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, discounted cash flows or a pooled probability of default and loss given default calculation. 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. The Company records such impaired loans as nonrecurring Level 3.
At December 31, 2013 and 2012, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. The Company recorded the two loans involved in fair value hedges at fair market value on a recurring basis. The Company does not record other loans at fair value on a recurring basis.
Loans held for sale –Loans held for sale are adjusted to lower of cost or market upon transfer from the loan portfolio to loans held for sale. Subsequently, loans held for sale are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, management’s estimation of the value of the collateral or commitments on hand from investors within the secondary market for loans with similar characteristics. The fair value adjustments for loans held for sale are recorded as nonrecurring Level 2.
Other real estate owned -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 less costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is measured due to further deterioration in the value of the OREO since initial recognition, the Company records the foreclosed asset as nonrecurring Level 3.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value on a recurring basis at December 31, 2013 and 2012:
Description | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Assets/ Liabilities at Fair Value | |
| | | | | | | | | | | | | | | | | |
2013 recurring | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | - | | | $ | 558 | | | $ | - | | | $ | 558 | |
Municipal securities | | | - | | | | 16,506 | | | | - | | | | 16,506 | |
Residential agency pass-through securities | | | - | | | | 90,248 | | | | - | | | | 90,248 | |
Residential collateralized mortgage obligations | | | - | | | | 103,349 | | | | - | | | | 103,349 | |
Commercial mortgage-backed obligations | | | - | | | | 61,402 | | | | - | | | | 61,402 | |
Asset-backed securities | | | - | | | | 71,077 | | | | - | | | | 71,077 | |
Corporate and other securities | | | - | | | | 4,445 | | | | - | | | | 4,445 | |
All other equity securities | | | 1,906 | | | | - | | | | - | | | | 1,906 | |
Interest rate swaps | | | - | | | | 545 | | | | - | | | | 545 | |
Fair value loans | | | - | | | | 5,884 | | | | - | | | | 5,884 | |
Swap fair value hedge | | | - | | | | (258 | ) | | | - | | | | (258 | ) |
| | | | | | | | | | | | | | | | | |
2012 recurring | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | - | | | $ | 583 | | | $ | - | | | $ | 583 | |
Municipal securities | | | - | | | | 17,958 | | | | - | | | | 17,958 | |
Residential agency pass-through securities | | | - | | | | 138,205 | | | | - | | | | 138,205 | |
Residential collateralized mortgage obligations | | | - | | | | 56,752 | | | | - | | | | 56,752 | |
Commercial mortgage-backed obligations | | | - | | | | 20,936 | | | | - | | | | 20,936 | |
Asset-backed securities | | | - | | | | 10,722 | | | | - | | | | 10,722 | |
Corporate and other securities | | | - | | | | - | | | | 415 | | | | 415 | |
Fair value loans | | | - | | | | 11,390 | | | | - | | | | 11,390 | |
Swap fair value hedge | | | - | | | | (453 | ) | | | - | | | | (453 | ) |
At December 31, 2013, the Company transferred its corporate debt security investment from Level 3 to Level 2. In December 2013, the Company received notice that this corporate debt security would be satisfied at its book value in January 2014. The full book value of this security was received on January 31, 2014. At December 31, 2012, the valuation of the corporate debt security was performed using a discounted cash flow method at a rate of 10.25%. Valuation techniques are consistent with techniques used in prior periods. The following is a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2013 and 2012.
| | | Debt Securities | |
| | | | | |
Fair value, January 1, 2012 | | $ | 405 | |
Change in unrealized loss recognized in other comprehensive income | | | 10 | |
Fair value, December 31, 2012 | | $ | 415 | |
Transfer out of level 3 | | | (415 | ) |
Fair value, December 31, 2013 | | $ | - | |
The Company may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or market accounting or impairment charges of individual assets. Processes are in place for overseeing the valuation procedures for Level 3 measurements of OREO and impaired loans. The assets are reviewed on a quarterly basis to determine the accuracy of the observable inputs, generally third party appraisals, auction values, values derived from trade publications and data submitted by the borrower, and the appropriateness of the unobservable inputs, generally discounts due to current market conditions and collection issues. Discounts are based on asset type and valuation source; deviations from the standard are documented. The discounts are periodically reviewed to determine whether they remain appropriate. Consideration is given to current trends in market values for the asset categories and gain and losses on sales of similar assets.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Discounts range from 0% to 100% depending on the nature of the assets and source of value. Real estate is valued based on appraisals or evaluations, discounted by 8% at a minimum with higher discounts for property in poor condition or property with characteristics that may make it more difficult to market. Commercial loans secured by receivables or non-real estate collateral are generally valued using the discounted cash flow method. Inputs are determined on a borrower-by-borrower basis.
Impaired loans and related write-downs are based on the fair value of the underlying collateral if repayment is expected solely from the collateral or using a pooled probability of default and loss given default calculation. Collateral values are reviewed quarterly and estimated using customized discounting criteria and appraisals.
Other real estate owned is based on the lower of the cost or fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach. Fair values are reviewed quarterly and new appraisals are generally obtained annually.
The following table sets forth by level, within the fair value hierarchy, the Company’s assets at fair value on a nonrecurring basis at December 31, 2013 and 2012:
Fair Value on a Nonrecurring Basis
Description | | Quoted Prices in Active Marketsfor Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Assets/ (Liabilities) at Fair Value | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | | | |
OREO | | $ | - | | | $ | - | | | $ | 9,085 | | | $ | 9,085 | |
Impaired loans: | | | | | | | | | | | | | | | | |
Commercial and industrial | | | - | | | | - | | | | 69 | | | | 69 | |
CRE - owner-occupied | | | - | | | | - | | | | 73 | | | | 73 | |
CRE - investor income producing | | | - | | | | - | | | | 2,659 | | | | 2,659 | |
Other commercial | | | - | | | | - | | | | 93 | | | | 93 | |
Residential mortgage | | | - | | | | - | | | | 510 | | | | 510 | |
HELOC | | | - | | | | - | | | | 184 | | | | 184 | |
Residential construction | | | - | | | | - | | | | 34 | | | | 34 | |
Other loans to individuals | | | - | | | | - | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | | | | | | |
OREO | | $ | - | | | $ | - | | | $ | 25,073 | | | $ | 25,073 | |
Impaired loans: | | | | | | | | | | | | | | | | |
Commercial and industrial | | | - | | | | - | | | | 115 | | | | 115 | |
Residential mortgage | | | - | | | | - | | | | 962 | | | | 962 | |
Home equity lines of credit | | | - | | | | - | | | | 155 | | | | 155 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
The following table presents the decrease in value of OREO, which is measured at fair value on a nonrecurring basis, for which a fair value adjustment has been included in the income statement. These items represent write-downs of OREO based on the appraised value of collateral.
| | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | | | |
OREO | | $ | (1,394 | ) | | $ | (2,421 | ) |
The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at December 31, 2013.
| | | Fair Value | | Valuation Methodology | | Unobservable Inputs | | Range of Inputs | | | Weighted Average Discount | |
| | | | | | | | | | | | | | | | | |
OREO | | $ | 9,085 | | Appraisals | | Discount to reflect currentmarket conditions | | 0% | - | 55% | | | | 24.21 | % |
| | | | | | | | | | | | | | | | | |
Impaired loans | | | 38 | | Discounted cash flows | | Percent of total contractualcash flows not expected to be collected | | 0% | - | 50% | | | | 9.77 | % |
| | | | | | | | | | | | | | | | | |
| | | | 778 | | Probability of defaultmodel | | Discount to reflect probabilityand loss given default | | 0% | - | 100% | | | | 15.11 | % |
| | | | | | | | | | | | | | | | | |
| | | | 2,807 | | Collateral basedmeasurements | | Discount to reflect currentmarket conditions and ultimate collectability | | 0% | - | 60% | | | | 18.58 | % |
| | | | | | | | | | | | | | | | | |
| | | $ | 12,708 | | | | | | | | | | | | | |
In accordance with accounting for foreclosed property, the carrying value of OREO is periodically reviewed and written down to fair value and any loss is incurred in earnings. During the year ended December 31, 2013, OREO with a carrying value of $5.6 million was written down by $1.4 million to $4.2 million. During the year ended December 31, 2012, OREO with a carrying value of $10.2 million was written down by $2.4 million to $7.8 million.
Other than the corporate debt security discussed above, there were no transfers between valuation levels for any accounts for the years ended December 31, 2013 and 2012. If different valuation techniques are deemed necessary, the transfers will be considered to occur at the end of the period that the accounts are valued.
NOTE 20 – EMPLOYEE AND DIRECTOR BENEFIT PLANS
Employment Contracts-Employment agreements are used to ensure a stable and competent management base. The Company’s Chief Executive Officer, Chief Financial Officer, President, and Chief Risk Officer are each subject to an employment agreement. Each executive’s agreement is for an initial term of three years and is subject to automatic one-year renewals on the third anniversary of its initial effective date and each successive anniversary unless either party provides timely notice of non-renewal.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.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
During 2011, the Company purchased Bank-Owned Life Insurance (“BOLI”) policies on certain key officers of the Company, including the executive officers at that time. Earnings on such policies will be used to offset employee benefit expenses. The Company is the sole owner of the policies and has the right to exercise all incidents of ownership. Under separate agreements with each insured party, the insured party has the right to designate a beneficiary for up to a $100,000 death benefit. The full death benefit for each policy reverts to the Company should the insured party cease to be employed by the Company. The insured party has no right to sell, surrender or transfer ownership of the policy at any time, and has no right to designate a beneficiary upon termination of employment, whether by voluntary or involuntary means, and including retirement.The Company acquired $18.8 million in BOLI through the merger with Citizens South in 2012, and $12.9 million in BOLI through the merger with Community Capital in 2011. Cash values at December 31, 2013, 2012 and 2011 were $42.2 million, $40.7 million and $21.0 million, respectively. Subsequent to December 31, 2013, the Company received approximately $650 thousand in death benefit proceeds from two policies.
The Company has several nonqualified deferred compensation and supplemental retirement plans that were acquired through the Community Capital and Citizens South mergers that provide certain employees, former employees and former directors who were previously officers or directors of Community Capital or Citizens South with salary continuation benefits upon retirement. These plans also provide for benefits in the event of early retirement, death or substantial change in control of the Company. The expense associated with these plans was $460 thousand and $175 thousand for the years ended December 31, 2013 and 2012, respectively. In connection with, but not directly related to, the deferred compensation and supplemental retirement plan acquired from Community Capital, life insurance contracts were purchased on the employees covered in the plan. The Company is the sole owner of the policies and has the right to exercise all incidents of ownership. The Company is the direct beneficiary of an amount of death proceeds equal to the greater of (a) the cash surrender value of the policy, (b) the aggregate premiums paid on the policy by the Company less any outstanding indebtedness to the insurer, or (c) the total death proceeds less the split dollar amount. The split dollar amount is 50 percent of the difference between the total policy death proceeds and the policy cash surrender value at the date of the employee’s death. Cash values at December 31, 2013 and 2012 totaled $5.7 million and $5.4 million, respectively.
During 2013, the Company implemented a deferred compensation plan whereby certain employees were given the option to defer compensation until retirement or separation of employment. Interest is accrued on the balances at a rate of 3.25%. The expense associated with this plan was $5 thousand for the year ended December 31, 2013.The total liability accrued for all deferred compensation and supplemental retirement plans was $10.4 million and $9.8 million at December 31, 2013 and 2012, respectively.
Retirement Savings -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 Service’s compensation threshold in effect from time to time. At December 31, 2013 and 2012, the Company’s profit sharing and 401(k) plan owned 141,760, and 182,219 shares, respectively, of the Company’s Common Stock as a result of an investment election allowed under the Community Capital 401(k) savings plan, which has been merged into the Company’s plan. The Company no longer offers the Company’s Common Stock as an investment option in its 401(k) plan. The estimated value of the shares held at December 31, 2013 and 2012 was $1.0 million and $953 thousand, respectively.
The Company’s contribution expense under the profit sharing and 401(k) plan was $912 thousand, $685 thousand and $258 thousand for the years ended December 31, 2013, 2012 and 2011, respectively.
Share Based Plans-The Company maintains share-based plans for directors and employees. During 2010, the Board of Directors of the Bank adopted and shareholders approved, the Park Sterling Bank 2010 Stock Option Plan for Directors and the Park Sterling Bank 2010 Employee Stock Option Plan (the “2010 Plans”), which provided for an aggregate of 1,859,550 shares of Common Stock reserved for the granting of options. The 2010 Plans were substantially similar to the 2006 option plans for directors and employees, which provided for an aggregate of 990,000 of shares of Common Stock reserved for options. Upon effectiveness of the holding company reorganization, the Company assumed all outstanding options under the 2010 Plans and the 2006 plans, and the Company’s Common Stock was substituted as the stock issuable upon the exercise of options under these plans. As a result, there will be no further awards under the 2010 Plans.
Also during 2010, the Board of Directors of the Company adopted and shareholders approved the Park Sterling Corporation 2010 Long-Term Incentive Plan for directors and employees ( the “LTIP”), which was effective upon the holding company reorganization and replaced the 2010 Plans. The LTIP provides for an aggregate of 1,016,400 of shares of Common Stock reserved for issuance to employees and directors in connection with stock options, restricted stock awards, and other stock-based awards. At December 31, 2013, there were options to purchase 1,974,596 shares of Common Stock outstanding and 84,993 shares remaining available for future grants under the LTIP.
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
As a result of the Citizens South merger, the Company assumed the Citizens South Bank 1999 Stock Option Plan (the “1999 Citizens South Plan”), the Citizens South Banking Corporation 2003 Stock Option Plan (the “2003 Citizens South Plan”) and the Citizens South Banking Corporation 2008 Equity Incentive Plan ( the “2008 Citizens South Plan”), each of which has been renamed as a Park Sterling Corporation plan, and the obligations of awards outstanding under the plans at the effective date of the merger.
Under the 2008 Citizens South Plan, the Company may grant future non-qualified stock options and stock appreciation rights (“SARs”) to eligible employees and directors of, or service providers to, the Company or the Bank who were not employees or directors of or service providers to the Company or the Bank at the effective time of the merger. Stock options and SARS are evidenced by an award agreement that specifies, as applicable, the number of shares, date of grant, exercise price, vesting period and expiration date, and other information. Awards under the 2008 Citizens South Plan have an exercise price at least equal to the fair market value of the Common Stock on the grant date, cannot be exercised more than 10 years after the grant date and generally expire or are forfeited upon termination of employment prior to the end of the award term, except in limited circumstances such as death, disability, retirement or change in control. No awards may be granted under the 2008 Citizens South Plan after May 2018. At December 31, 2013, there were options to purchase 250,955 shares of Common Stock outstanding and 111,353 shares remaining available for future grants under the 2008 Citizens South Plan.
The 2003 Citizens South Plan and the 1999 Citizens South Plan are no longer active plans and no future awards can be granted thereunder. At December 31, 2013, there were options to purchase 737,133 shares of Common Stock outstanding under the 2003 Citizens South Plan, and there were options to purchase 2,190 shares of Common Stock outstanding under the 1999 Citizens South Plan.
The exercise price of each option under these plans is not less than the market price of the Company’s Common Stock on the date of the grant. The exercise price of all options outstanding at December 31, 2013 under these plans ranges from $3.04 to $15.45 and the average exercise price was $7.35. 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. All unexercised options expire ten years after the date of the grant.
As contemplated during the Public Offering, in 2011 the Company awarded certain stock price performance-based restricted shares to officers and directors following the holding company reorganization. During 2013, 13,860 stock price performance-based restricted shares forfeited, and there were 554,400 stock price performance-based restricted shares outstanding at December 31, 2013. These 554,400 shares vest one-third each when the Company’s stock price per share reaches the following performance thresholds for 30 consecutive trading days: (i) 125% of offer price ($8.13); (ii) 140% of offer price ($9.10); and (iii) 160% of offer price ($10.40). These anti-dilutive restricted shares are issued (and thereby have voting rights), but are not included in earnings per share calculations until they vest (and thereby have economic rights).
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Activity in the Company’s share-based plans is summarized in the following table:
| | | Outstanding Options | | | Nonvested Restricted Shares | |
| | | Number Outstanding | | | Weighted Average Exercise Price | | | Weighted Average Contractual Term (Years) | | | Intrinsic Value | | | Number Outstanding | | | Weighted Average Grant Date Fair Value | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2010 | | | 2,323,632 | | | $ | 7.83 | | | | 8.50 | | | $ | - | | | | - | | | $ | - | | | $ | - | |
Options Granted | | | 131,840 | | | | 5.29 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Restricted Shares Granted | | | - | | | | - | | | | - | | | | - | | | | 568,260 | | | | 3.91 | | | | 2,318,501 | |
Expired and forfeited | | | (310,283 | ) | | | 8.22 | | | | - | | | | - | | | | - | | | | - | | �� | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2011 | | | 2,145,189 | | | $ | 7.62 | | | | 7.67 | | | $ | - | | | | 568,260 | | | $ | 3.91 | | | $ | 2,318,501 | |
Options acquired through merger | | | 990,278 | | | | 8.33 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Options Granted | | | 15,000 | | | | 4.65 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Restricted Shares Granted | | | - | | | | - | | | | - | | | | - | | | | 78,000 | | | | 4.75 | | | | 407,940 | |
Expired and forfeited | | | (30,775 | ) | | | 7.94 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Change in intrinsic value ofperformance grants | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 653,499 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2012 | | | 3,119,692 | | | $ | 7.84 | | | | 5.27 | | | $ | - | | | | 646,260 | | | $ | 4.01 | | | | 3,379,940 | |
Options Granted | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Restricted Shares Granted | | | - | | | | - | | | | - | | | | | | | | 174,000 | | | | 5.70 | | | | 1,242,360 | |
Options Exercised | | | (60,942 | ) | | | 5.09 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Expired and forfeited | | | (833,199 | ) | | | 9.34 | | | | | | | | | | | | (23,860 | ) | | | 4.59 | | | | 170,360 | |
Change in intrinsic value ofperformance grants | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 522,348 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2013 | | | 2,225,551 | | | $ | 7.35 | | | | 5.65 | | | $ | 1,471,095 | | | | 796,400 | | | $ | 4.35 | | | | 5,315,008 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable at December 31, 2013 | | | 2,175,004 | | | $ | 7.40 | | | | 5.60 | | | | | | | | | | | | | | | | | |
A summary of non-vested stock option and restricted share activity is as follows:
| | | Stock Options | | | Restricted Shares | |
| | | Non-vested Options | | | Weighted Average Grant Date Fair Value | | | Non-vested Restricted Shares | | | Weighted Average Grant Date Fair Value | |
| | | | | | | | | | | | | | | | | |
At December 31, 2010 | | | 1,537,730 | | | $ | 2.63 | | | | - | | | $ | - | |
Granted | | | 131,840 | | | | 2.37 | | | | 568,260 | | | | 3.91 | |
Vested | | | (321,516 | ) | | | 2.62 | | | | - | | | | - | |
Forfeited | | | (310,283 | ) | | | 3.13 | | | | - | | | | - | |
At December 31, 2011 | | | 1,037,771 | | | $ | 2.59 | | | | 568,260 | | | $ | 3.91 | |
Granted | | | 1,005,278 | | | | 0.31 | | | | 78,000 | | | | 4.75 | |
Vested | | | (1,462,082 | ) | | | 1.03 | | | | - | | | | - | |
Forfeited | | | (30,775 | ) | | | 2.98 | | | | - | | | | - | |
At December 31, 2012 | | | 550,192 | | | $ | 2.56 | | | | 646,260 | | | $ | 4.01 | |
Granted | | | - | | | | - | | | | 174,000 | | | | 5.70 | |
Exercised | | | (60,942 | ) | | | 5.09 | | | | - | | | | - | |
Vested | | | 393,396 | | | | 7.82 | | | | (26,001 | ) | | | 4.75 | |
Forfeited | | | (833,199 | ) | | | 9.34 | | | | (23,860 | ) | | | 4.59 | |
At December 31, 2013 | | | 49,447 | | | $ | 5.19 | | | | 770,399 | | | $ | 4.35 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
There were no stock options granted during 2013. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The average fair value per share of options granted in 2012 and 2011 was $1.60 and $2.37, respectively. Assumptions used for grants were as follows:
Assumptions in Estimating Option Values
| | | 2012 | | | 2011 | |
Weighted-average volatility | | | 35.58% | | | | | 38.60 | % |
Expected dividend yield | | | 0% | | | | | 0 | % |
Risk-free interest rate | | | 0.63% | | | | | 2.61 | % |
Expected life (years) | | 0 | - | 7 | | | | 7 | |
The fair value of options vested was $1.3 million, $1.6 million and $ 1.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company recognized compensation expense for share based compensation plans of $1.8 million, $2.0 million and $1.9 million for the years ended December 31, 2013, 2012 and 2011, respectively. At December 31, 2013, unrecognized compensation expense related to non-vested stock options of $35 thousand was expected to be recognized over a weighted-average period of 0.46 years and unrecognized compensation expense related to restricted shares of $1.2 million was expected to be recognized over a weighted-average period of 0.87 years. At December 31, 2012, unrecognized compensation expense related to non-vested stock options of $881 thousand was expected to be recognized over a weighted-average period of 0.70 years and unrecognized compensation expense related to restricted shares of $1.3 million was expected to be recognized over a weighted average period of 1.68 years.
NOTE 21 – SUMMARIZED QUARTERLY INFORMATION (UNAUDITED)
A summary of selected quarterly financial information for 2013 and 2012 follows:
| | | 2013 Quarter Ended (unaudited) | | | 2012 Quarter Ended (unaudited) | |
| | | 4th Quarter | | | 3rd Quarter | | | 2nd Quarter | | | 1st Quarter | | | 4th Quarter | | | 3rd Quarter | | | 2nd Quarter | | | 1st Quarter | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total interest income | | $ | 19,602 | | | $ | 19,736 | | | $ | 20,144 | | | $ | 19,323 | | | $ | 21,477 | | | $ | 11,431 | | | $ | 11,641 | | | $ | 13,397 | |
Total interest expense | | | 1,900 | | | | 1,422 | | | | 1,473 | | | | 1,587 | | | | 1,890 | | | | 1,460 | | | | 1,542 | | | | 1,678 | |
Net interest income | | | 17,702 | | | | 18,314 | | | | 18,671 | | | | 17,736 | | | | 19,587 | | | | 9,971 | | | | 10,099 | | | | 11,719 | |
Provision for loan losses | | | 781 | | | | (419 | ) | | | 75 | | | | 309 | | | | 994 | | | | 7 | | | | 899 | | | | 123 | |
Net interest income after provision | | | 16,921 | | | | 18,733 | | | | 18,596 | | | | 17,427 | | | | 18,593 | | | | 9,964 | | | | 9,200 | | | | 11,596 | |
Noninterest income | | | 4,155 | | | | 3,257 | | | | 4,106 | | | | 3,568 | | | | 3,507 | | | | 3,318 | | | | 2,592 | | | | 1,955 | |
Noninterest expense | | | 15,476 | | | | 15,670 | | | | 16,922 | | | | 16,031 | | | | 20,007 | | | | 12,203 | | | | 10,863 | | | | 11,003 | |
Income before taxes | | | 5,600 | | | | 6,320 | | | | 5,780 | | | | 4,964 | | | | 2,093 | | | | 1,079 | | | | 929 | | | | 2,548 | |
Income tax expense | | | 1,561 | | | | 2,106 | | | | 1,968 | | | | 1,724 | | | | 771 | | | | 459 | | | | 251 | | | | 825 | |
Preferred dividends | | | - | | | | - | | | | 302 | | | | 51 | | | | 51 | | | | - | | | | - | | | | - | |
Net income | | $ | 4,039 | | | $ | 4,214 | | | $ | 3,510 | | | $ | 3,189 | | | $ | 1,271 | | | $ | 620 | | | $ | 678 | | | $ | 1,723 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per common share | | $ | 0.09 | | | $ | 0.10 | | | $ | 0.08 | | | $ | 0.07 | | | $ | 0.03 | | | $ | 0.02 | | | $ | 0.02 | | | $ | 0.05 | |
Diluted earnings per common share | | $ | 0.09 | | | $ | 0.10 | | | $ | 0.08 | | | $ | 0.07 | | | $ | 0.03 | | | $ | 0.02 | | | $ | 0.02 | | | $ | 0.05 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
NOTE 22 – PARK STERLING CORPORATION (PARENT COMPANY ONLY)
Condensed financial statements for Park Sterling Corporation (Parent Company Only) follow:
Condensed Balance Sheets
| | | December 31, 2013 | | | December 31, 2012 | |
| | | | | | | | | |
ASSETS | | | | | | | | |
| | | | | | | | | |
Cash and due from banks | | $ | 8,417 | | | $ | 8,978 | |
Investment securities available-for-sale, at fair value | | | 16,354 | | | | 17,413 | |
Investment in banking subsidiary | | | 254,036 | | | | 266,034 | |
Nonmarketable equity securities | | | 774 | | | | 823 | |
Premises and equipment, net | | | 13 | | | | 16 | |
Other assets | | | 454 | | | | 300 | |
Total assets | | $ | 280,048 | | | $ | 293,564 | |
| | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
Subordinated debt | | $ | 15,157 | | | $ | 14,678 | |
Accrued interest payable | | | 39 | | | | 39 | |
Accrued expenses and other liabilities | | | 2,769 | | | | 3,145 | |
Total liabilities | | | 17,965 | | | | 17,862 | |
| | | | | | | | | |
Shareholders' equity: | | | | | | | | |
Preferred Stock | | | - | | | | 20,500 | |
Common Stock | | | 44,731 | | | | 44,576 | |
Additional paid-in capital | | | 222,559 | | | | 220,996 | |
Accumulated deficit | | | (405 | ) | | | (13,568 | ) |
Accumulated other comprehensive income (loss) | | | (4,802 | ) | | | 3,198 | |
Total shareholders' equity | | | 262,083 | | | | 275,702 | |
Total liabilities and shareholders' equity | | $ | 280,048 | | | $ | 293,564 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Condensed Statements of Income (Loss)
| | | December 31, 2013 | | | December 31, 2012 | |
| | | | | | | | | |
Income | | | | | | | | |
Other interest income | | $ | 756 | | | $ | 1,432 | |
Gain (loss) on sale of securities available-for-sale | | | (41 | ) | | | 989 | |
Other income | | | - | | | | 100 | |
Total income | | | 715 | | | | 2,521 | |
| | | | | | | | | |
Expense | | | | | | | | |
Interest expense | | | 958 | | | | 761 | |
Other operating expense | | | 557 | | | | 1,030 | |
Total noninterest expense | | | 1,515 | | | | 1,791 | |
| | | | | | | | | |
Income (loss) before income taxes and equity in undistributed(earnings) losses of subsidiary | | | (800 | ) | | | 730 | |
Income tax expense (benefit) | | | - | | | | - | |
| | | | | | | | | |
Net income (loss) before equity in undistributed earnings of subsidiary | | | (800 | ) | | | 730 | |
| | | | | | | | | |
Preferred dividends | | | 353 | | | | 51 | |
| | | | | | | | | |
Equity in undistributed earnings of subsidiary | | | 16,105 | | | | 3,613 | |
Net income to common shareholders | | $ | 14,952 | | | $ | 4,292 | |
PARK STERLING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table amounts in thousands, except share data and per share amounts)
Condensed Statements of Cash Flow
| | | December 31, 2013 | | | December 31, 2012 | |
| | | | | | | | | |
Cash flows from operating activities | | | | | | | | |
Net income | | $ | 15,305 | | | $ | 4,343 | |
Adjustments to reconcile net income (loss) to netcash provided (used for) by operating activities: | | | | | | | | |
Equity in undistributed (earnings) loss in banking subsidiary | | | (16,105 | ) | | | (3,613 | ) |
Amortization of investment securities available-for-sale | | | 14 | | | | 499 | |
Other depreciation and amortization, net | | | 482 | | | | 444 | |
Net (gains) losses on sales of investment securities available-for-sale | | | 41 | | | | (989 | ) |
Change in assets and liabilities: | | | | | | | | |
(Increase) decrease in other assets | | | (118 | ) | | | 669 | |
Decrease in accrued interest payable | | | - | | | | (1,272 | ) |
Decrease in other liabilities | | | (22 | ) | | | (19 | ) |
Net cash provided by (used for) operating activities | | | (403 | ) | | | 62 | |
| | | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Proceeds from maturities and call of investment securities available-for-sale | | | - | | | | 30,607 | |
Proceeds from sales of nonmarketable equity securities | | | 8 | | | | 17 | |
Acquisition of Community Capital and Citizens South | | | - | | | | (24,283 | ) |
Net cash provided by investing activities | | | 8 | | | | 6,341 | |
| | | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Purchase of common stock | | | (366 | ) | | | (15 | ) |
Proceeds from exercise of stock options | | | 308 | | | | - | |
Investment in banking subsidiary | | | 245 | | | | (5,000 | ) |
Dividends on preferred stock | | | (353 | ) | | | (51 | ) |
Dividends on common stock | | | (1,789 | ) | | | - | |
Redemption of preferred stock | | | (20,500 | ) | | | - | |
Dividend from banking subsidiary | | | 22,289 | | | | - | |
Net cash used for financing activities | | | (166 | ) | | | (5,066 | ) |
| | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (561 | ) | | | 1,337 | |
| | | | | | | | | |
Cash and cash equivalents, beginning | | | 8,978 | | | | 7,641 | |
Cash and cash equivalents, ending | | $ | 8,417 | | | $ | 8,978 | |
| | | | | | | | | |
Supplemental disclosure of noncash investing and financing activities: | | | | | | | | |
Change in unrealized gain (loss) on available-for-sale securities, net of tax | | $ | (8,343 | ) | | $ | 318 | |
Change in unrealized gain on cash flow hedge, het of tax | | | 343 | | | | - | |
Transfer from investment securities to investment in subsidiary | | | - | | | | 6,541 | |
NOTE 23 – SUBSEQUENT EVENTS
On March 4, 2014, the Company entered into an Agreement and Plan of Merger (the "Agreement") with Provident Community Bancshares, Inc. ("Provident Community"), a bank holding company headquartered in Rock Hill, South Carolina. Provident Community Bank, N.A. is the wholly-owned bank subsidiary of Provident Community. Provident Community reported $323 million in total assets, $117 million in loans and $263 million in deposits, based on December 31, 2013 unaudited balances. Provident Community has a total of nine branches that serve individuals and businesses throughout Rock Hill, Greenville, Spartanburg and Columbia, South Carolina. Pursuant to the terms of the Agreement, Provident Community will merge with and into the Company, with the Company as the surviving entity in the merger. In addition, Provident Community Bank, N.A. is expected to merge with and into the Bank, with the Bank as the surviving entity.
Under the terms of Agreement, the merger consideration will consist of approximately $1.4 million in cash to Provident Community common stockholders and approximately $5.1 million in cash to the Treasury, which holds all of Provident Community’s Series A Preferred Stock. The transaction is subject to regulatory approvals and the affirmative vote of Provident Community’s shareholders. The transaction is expected to close during the second quarter of 2014.
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, the management of the Company, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act.
Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to management and the board of directors regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with United States generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Integrated Framework (1992). Based on its assessment, management believes that, as of December 31, 2013, the Company’s internal control over financial reporting is effective based on those criteria.
The Company’s internal control over financial reporting has been audited by Dixon Hughes Goodman LLP, an independent registered public accounting firm. Their report, which appears below, expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the fourth fiscal quarter of 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Park Sterling Corporation
We have audited Park Sterling Corporation’s (the “Company”) internal control overfinancial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control overfinancial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Park Sterling Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control—Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Park Sterling Corporation as of and for the year ended December 31, 2013, and our report dated March 6, 2014, expressed an unqualified opinion on those consolidated financial statements.
/s/ DIXON HUGHES GOODMAN LLP
Charlotte, North Carolina
March 6, 2014
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 Company’s Board of Directors:
Walter C. Ayers, Sr.
Retired President and Chief Executive Officer, Virginia Bankers Association.
Leslie M. 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.
Patricia C. Hartung
Executive Director, Upper Savannah Council of Governments.
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.
Kim S. Price
Vice-Chairman of the Board, Park Sterling Corporation and Park Sterling Bank.
Former President and CEO of Citizens South Banking Corporation.
Ben R. Rudisill, II
President, Rudisill Enterprises, Inc.
Biographical information for each member of the Board of Directors can be found in the Company’s Proxy Statement for its 2014 Annual Meeting of Shareholders scheduled to be held on May 22, 2014 (the “2014 Proxy Statement”) under the caption “Election of Directors,” which section is incorporated herein by reference.
Executive Officers
The following persons have been designated as the Company’s executive officers:
James C. Cherry. Mr. Cherry, age 63, has served as Chief Executive Officer of the Company since its formation and of the Bank since its Public Offering. He retired as the Chief Executive Officer for the Mid-Atlantic Banking Region at Wachovia Corporation in 2006, and previously served as President of Virginia Banking, Head of Trust and Investment Management, and in various positions in North Carolina banking including Regional Executive, Area Executive, City Executive, Corporation Banking and Loan Administration Manager, and Retail Banking Branch Manager for Wachovia. Mr. Cherry was formerly Chairman of the Virginia Bankers Association. He is currently a director of Armada Hoffler Properties, Inc., a Virginia-based real estate company, a trustee of the Virginia Museum of Fine Arts and a director of Sigma Nu Educational Foundation, Inc. Mr. Cherry’s extensive experience in commercial and retail banking operations, credit administration, product management and merger integration at Wachovia, which was focused in the Carolinas and Virginia, provides the Board of Directors with significant expertise important to the oversight of the Company and expansion into its target markets. Mr. Cherry has over 30 years of banking experience.
Bryan F. Kennedy III.Mr. Kennedy, age 56, has been President of the Company since its formation and President of the Bank since its Public Offering. Prior to the Bank’s 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 30 years of banking experience.
David L. Gaines. Mr. Gaines, age 54, 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 United States Corporate Banking and various geographically-based relationship management positions. Mr. Gaines has over 25 years of banking experience.
Nancy J. Foster. Ms. Foster, age 52, 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 25 years of banking experience.
Mark S. Ladnier. Mr. Ladnier, age 55, has been Group Senior Vice President and Head of Operations and Information Technology since January 2014. Prior to joining the Bank, he was Senior Vice President and Southeast Market Leader for Premier Alliance, a professional services practice, from November 2012 to December 2013. Mr. Ladnier previously served as Executive Vice President and Chief Information Officer for Real Estate Lending at Wells Fargo Bank, N.A., from January 2009 to September 2011 and in a number of leadership roles at its predecessor company, Wachovia Bank, N.A., including Senior Vice President and Chief Information Officer for Lending Technology, Senior Vice President and Basel Program Director, and Senior Vice President and eCommerce Program Director, from January 1987 to December 2008. Mr. Ladnier has over 25 years of banking experience.
Code of Ethics
The Company has adopted a written Code of Ethics for Senior Financial Officers (the “Senior Code of Ethics”) that applies to the Company’s Chief Executive Officer (the principal executive officer), Chief Financial Officer (the principal financial officer), Chief Accounting Officer (the principal accounting officer), and Controller. The Company has also adopted a Code of Ethics (the “Code of Ethics”) that applies to all employees, officers and directors of the Company as well as any subsidiary company officers that are executive officers of the Company. The Senior Code of Ethics and Code of Ethics are available on the Company’s website atwww.parksterlingbank.com and print copies are available to any shareholder that requests a copy. Any amendments to the Senior Code of Ethics or Code of Ethics, or waivers of these policies, to the extent applicable to the Chief Executive Officer, the Chief Financial Officer and the Chief Accounting Officer, will be disclosed on the Company’s website promptly following the date of such amendment or waiver, as applicable.
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”, “—Process for Nominating Potential Director Candidates” and “—Code of Ethics,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2014 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”, “Compensation Discussion and Analysis”, “Compensation of Executive Officers”, “Compensation and Development Committee Interlocks and Insider Participation” and “Compensation and Development Committee Report on Executive Compensation” in the 2014 Proxy Statement, which sections are incorporated herein by reference.
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 2014 Proxy Statement, which section is incorporated herein by reference. The following table sets forth summary information regarding the Company’s equity compensation plans as of December 31, 2013:
| | | (a) | | | (b) | | | (c) | |
Plan category (1) | | Number of securities to be issued upon exercise of outstanding options | | | Weighted -average exercise price of outstanding options | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
Equity compensation plans approved by our shareholders | | | 2,034,556 | | | $ | 7.56 | | | | 84,993 | |
| | | | | | | | | | | | | |
Equity compensation plans not approved by our shareholders (2) | | | 189,731 | | | | 5.19 | | | | 111,353 | |
Total | | | 2,224,287 | | | $ | 7.84 | | | | 196,346 | |
(1) This table does not include outstanding options to purchase 2,190 shares of the Company’s common stock that were assumed by the Company in connection with the Citizens South acquisition, which were originally issued under the Citizens South Bank 1999 Stock Option Plan (renamed the Park Sterling Bank 1999 Stock Option Plan). The weighted-average option price of these assumed options was $3.22 at December 31, 2012. No additional awards may be granted under this plan.
(2) In connection with the Citizens South acquisition, the Company assumed and retained the ability to issue awards in accordance with applicable NASDAQ listing standards under the following plans, which were not approved by the Company’s shareholders but were previously approved by Citizens South’s stockholders prior to the acquisition: the Citizens South Banking Corporation 2003 Stock Option Plan (renamed the Park Sterling Corporation 2003 Stock Option Plan (“2003 Citizens South Plan”)) and the Citizens South Banking Corporation 2008 Equity Incentive Plan (renamed the Park Sterling Corporation 2008 Equity Incentive Plan (“2008 Citizens South Plan”)). The 2003 Citizens South Plan expired by its terms in May 2013.
A description of the Company’s equity compensation plans, including the material features of the 2008 Citizens South Plan, is presented in Note 20 – Employee and Director Benefit Plans 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 “Election of Directors – Committees of the Board of Directors”, “Corporate Governance – Director Independence” and “Transactions with Related Persons and Certain Control Persons” in the 2014 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 2014 Proxy Statement, which sections are incorporated herein by reference.
With the exception of the information expressly incorporated herein by reference, the 2014 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 Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
| | (b) | Schedules : None |
| | (c) | 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. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARK STERLING CORPORATION
March 6, 2014 | 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 indicated on March 6, 2014.
| /S/ JAMES C. CHERRY | March 6, 2014 | |
| James C. Cherry Chief Executive Officer and Director (Principal Executive Officer) | | |
| | | |
| /S/ DAVID L. GAINES | March 6, 2014 | |
| David L. Gaines Chief Financial Officer (Principal Financial Officer) | | |
| | | |
| /S/ SUSAN D. SABO | March 6, 2014 | |
| Susan D. Sabo Chief Accounting Officer (Principal Accounting Officer) | | |
| | | |
| /S/ WALTER C. AYERS | March 6, 2014 | |
| Walter C. Ayers Director | | |
| | | |
| /S/ LESLIE M. BAKER JR. | March 6, 2014 | |
| Leslie M. Baker Jr. Chairman of the Board | | |
| | | |
| /S / LARRY W. CARROLL | March 6, 2014 | |
| Larry W. Carroll Director | | |
| | | |
| /S / JEAN E. DAVIS | March 6, 2014 | |
| Jean E. Davis Director | | |
| | | |
| /S / PATRICIA C. HARTUNG | March 6, 2014 | |
| Patricia C. Hartung Director | | |
| | | |
| /S/ THOMAS B. HENSON | March 6, 2014 | |
| Thomas B. Henson Director | | |
| | | | |
| /S / JEFFREY S. KANE | March 6, 2014 | |
| Jeffrey S. Kane Director | | |
| | /S / KIM S. PRICE | March 6, 2014 | |
| | Kim S. Price Director | | |
| | | | |
| | /S / BEN R. RUDISILL, II | March 6, 2014 | |
| | Ben R. Rudisill, II Director | | |
Exhibit Index
Exhibit Number | Description of Exhibits |
| | | |
2.1 | | Agreement and Plan of Merger dated March 31, 2011 by and between Park Sterling Corporation and Community Capital Corporation, incorporated by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K (File No. 001-35032) filed April 5, 2011 |
| | |
2.2 | | Agreement and Plan of Merger dated May 13, 2012 by and between Park Sterling Corporation and Citizens South Banking Corporation, incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K (File No. 001-35032) filed May 17, 2012 |
| | |
3.1 | | Articles of Incorporation of the Company, as amended, incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q (File No. 001-35032) filed November 9, 2012 |
| | |
3.2 | | Bylaws of the Company, incorporated by reference to Exhibit 3.2 of the Company’s 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 Company’s Current Report on Form 8-K (File No. 001-35032) filed January 13, 2011 |
| | |
| | The Company has certain long-term debt but has not filed the instruments evidencing such debt as part of Exhibit 4 as none of such instruments authorize the issuance of debt exceeding 10 percent of the total consolidated assets of the Company. The Company agrees to furnish a copy of each such agreement to the Securities and Exchange Commission upon request. |
| | |
10.1 | | Employment Agreement by and between James C. Cherry and the Bank effective August 18, 2010, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (File No. 001-35032) filed January 13, 2011* |
| | |
10.2 | | 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 Company’s Current Report on Form 8-K (File No. 001-35032) filed January 13, 2011* |
| | |
10.3 | | Employment Agreement by and between David L. Gaines and the Bank effective August 18, 2010, incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K (File No. 001-35032) filed January 13, 2011* |
| | |
10.4 | | Employment Agreement by and between Nancy J. Foster and the Bank effective November 15, 2010, incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K (File No. 001-35032) filed March 31, 2011.* |
| | |
10.5 | | Park Sterling Bank 2006 Employee Stock Option Plan and related form of award agreement, incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K (File No. 001-35032) filed January 13, 2011* |
| | |
10.6 | | Park Sterling Bank 2006 Stock Option Plan for Directors and related form of award agreement, incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K (File No. 001-35032) filed January 13, 2011* |
| | |
10.7 | | Park Sterling Bank 2010 Employee Stock Option Plan and related form of award agreement, incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 (Registration No. 333-172016) filed February 2, 2011* |
| | |
10.8 | | Park Sterling Bank 2010 Stock Option Plan for Directors and related form of award agreement, incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (Registration No. 333-172016) filed February 2, 2011* |
| | |
10.9 | | Park Sterling Corporation Long-Term Incentive Plan and related form of award agreements incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K (File No. 001-35032) filed January 13, 2011* |
10.10 | | Form of Non-Employee Director Nonqualified Stock Option Award pursuant to the Park Sterling Corporation Long-Term Incentive Plan, incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K (File No. 001-35032) filed March 31, 2011* |
| | |
10.11 | | Form of Employee Restricted Stock Award Agreement pursuant to the Park Sterling Corporation Long-Term Incentive Plan, incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K (File No. 001-35032) filed March 31, 2011* |
| | |
10.12 | | Form of Non-Employee Director Nonqualified Stock Option Award pursuant to the Park Sterling Corporation Long-Term Incentive Plan, incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K (File No. 001-35032) filed March 31, 2011* |
| | |
10.13 | | Consulting Agreement between Kim S. Price and the Company, effective October 1, 2012, incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K (File No. 001-35032) filed March 15, 2013.* |
| | |
10.14 | | Noncompetition Agreement by and between Kim S. Price and the Company, dated as of May 13, 2012, incorporated by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K (File No. 001-35032) filed March 15, 2013.* |
| | |
10.15 | | Waiver and Settlement Agreement by and between Kim S. Price and the Company, dated as of May 13, 2012, incorporated by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K (File No. 001-35032) filed March 15, 2013.* |
| | |
10.16 | | Amended Deferred Compensation and Income Continuation Agreement between Citizens South Bank and Ben R. Rudisill, II dated March 15, 2004, incorporated by reference to Exhibit 10.23 of Citizen South Banking Corporation’s (“Citizens South”) Annual Report on Form 10-K (File No. 0-23971) filed March 16, 2005, as amended by the First Amendment thereto, incorporated by reference to Exhibit 10.7 of Citizens South’s Current Report on Form 8-K (File No. 0-23971) filed on November 8, 2008* |
| | |
10.17 | | Amended Director Retirement Agreement between Citizens South Bank and Ben R. Rudisill, II dated March 15, 2004, incorporated by reference to Exhibit 10.27 of Citizens South’s Annual Report on Form 10-K (File No. 0-23971) filed March 16, 2005, as amended by the First Amendment thereto, incorporated by reference to Exhibit 10.6 of Citizens South’s Current Report on Form 8-K (File No. 0-23971) filed on November 8, 2008* |
| | |
10.18 | | Purchase and Assumption Agreement – Whole Bank – All Deposits, dated as of April 15, 2011 among Citizens South Bank, the Federal Deposit Insurance Corporation as receiver of New Horizons Bank, East Ellijay, Georgia, and the Federal Deposit Insurance Corporation, incorporated by reference to Exhibit 2.1 of Citizens South’s Current Report on Form 8-K (File no. 0-23971) filed on April 19, 2011 |
| | |
10.19 | | Purchase and Assumption Agreement – Whole Bank – All Deposits, dated as of March 19, 2010 among Citizens South Bank, the Federal Deposit Insurance Corporation as receiver of Bank of Hiawassee, Hiawassee, Georgia, and the Federal Deposit Insurance Corporation, incorporated by reference to Exhibit 2.1 of Citizens South’s Current Report on Form 8-K (File no. 0-23971) filed on March 23, 2010 |
| | |
10.20 | | Park Sterling Bank Deferred Compensation Plan, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (File No. 001-35032) filed May 10, 2013* |
| | |
10.21 | | Form of Non-Employee Director Restricted Stock Award Agreement (Time-Vesting) pursuant to the Park Sterling Corporation 2010 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (File No. 001-35032) filed May 10, 2013* |
| | |
10.22 | | Form of Employee Restricted Stock Award Agreement (Time-Vesting) pursuant to the Park Sterling Corporation 2010 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.3 of theCompany’s Quarterly Report on Form 10-Q (File No. 001-35032) filed May 10, 2013* |
21.1 | | Subsidiaries of the Company |
| | |
23.1 | | Consent of Dixon Hughes Goodman LLP |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
101 | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012; (ii) Consolidated Statements of Income (Loss) for the fiscal years ended December 31, 2013, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 31, 2013, 2012 and 2011; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended December 31, 2013, 2012 and 2011; (v) Condensed Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2013, 2012 and 2011; and (vi) Notes to Consolidated Financial Statements |
| | | |
| | | * Management contract or compensatory plan or arrangement |
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