Park Sterling Corporation Announces Results for Fourth Quarter 2016

CHARLOTTE, NC--(Marketwired - January 26, 2017) - Park Sterling Corporation (NASDAQ: PSTB), the holding company for Park Sterling Bank, today released unaudited results of operations and other financial information for the fourth quarter of 2016. Highlights at and for the three and twelve months ended December 31, 2016 include:

Three Month Highlights

• Net income of $5.3 million, or $0.10 per share, compared to $6.3 million, or $0.12 per share, in the quarter ended September 30, 2016
• Adjusted net income, which excludes merger-related expenses and gain on sale of securities, was $7.3 million, or $0.14 per share, and was equal to the third quarter
• Merger-related costs were $3.0 million, an increase of $1.5 million from the third quarter, due to final First Capital Bancorp, Inc. ("First Capital") merger costs associated with the consolidation of our operations center and a Richmond branch
• Noninterest income increased $398 thousand from a strong third quarter; with continued growth in deposit service charges, exceptional capital markets income and a decline in mortgage banking income
• Noninterest expenses totaled $25.0 million, an increase of $3.9 million from the prior quarter
• Adjusted noninterest expenses, which excludes merger-related costs, increased $2.4 million from the prior quarter reflecting in part a $1.5 million loss on an interest rate hedge on variable rate debt repaid during the quarter
• Income tax expense declined to an effective rate of 22% due a $798 thousand benefit associated with the early adoption of ASU 2016-09, Stock-based Compensation
• Average loans, excluding loans held for sale, showed steady growth at an 10% annualized growth rate from the prior quarter
• Total average deposits increased $30 million or 5% annualized from the prior quarter
• Credit quality remained strong
• Capital levels remained strong with Tier 1 leverage ratio of 9.98%
• The Board of Directors declared a quarterly cash dividend on common shares of $0.04 per share (January 2017)

Twelve Month Highlights

• Net income increased $3.3 million from 2015 to a record $19.9 million, or $0.38 per share
• Adjusted net income, which excludes merger-related expenses and gain or loss on sale of securities, was $27.2 million compared to $17.8 million in 2015, an increase of $9.4 million or 53%, and adjusted earnings per share increased to $0.52 from $0.40 in 2015, an increase of 29%
• These results include the acquisition of First Capital which was completed on January 1, 2016

"We are very pleased with Park Sterling's results for the 2016 fourth quarter and full year which continue to confirm the attractiveness of a regional community bank that delivers high quality products and services through exceptionally talented and experienced in-market banking professionals," said Jim Cherry, Chief Executive Officer. "Our distinctive value proposition is clearly resonating with customers. They are embracing our capabilities and rewarding us with strong growth in loans, deposits and revenue, which enables us to deliver increasing earnings and returns for our shareholders, while offering an engaging work environment for our employees."

Financial Results

Income Statement -- Three Months Ended December 31, 2016

Park Sterling reported net income of $5.3 million, or $0.10 per share, for the three months ended December 31, 2016 ("2016Q4"). This compares to net income of $6.3 million, or $0.12 per share, for the three months ended September 30, 2016 ("2016Q3") and net income of $3.8 million, or $0.09 per share, for the three months ended December 31, 2015 ("2015Q4"). The decrease in net income from 2016Q3 resulted from increases in net interest income and noninterest income, a decrease in income tax expense, offset by increases in noninterest expense. The increase in net income from 2015Q4 resulted from an increase in net interest income, offset by an increase in noninterest expenses, reflecting the inclusion of First Capital, which was completed on January 1, 2016.

Park Sterling reported adjusted net income, which excludes merger-related expenses and gain or loss on sale of securities, of $7.3 million, or $0.14 per share, in 2016Q4. This compares to adjusted net income of $7.3 million, or $0.14 per share, in 2016Q3 and adjusted net income of $4.8 million, or $0.11 per share, in 2015Q4. Compared to 2016Q3, the level of adjusted net income reflects higher levels of both net interest income and noninterest income partially offset by an increase in noninterest expense and a reduction in income tax expense associated with the adoption of ASU 2016-09. Compared to 2015Q3, the increase in adjusted net income reflects higher net interest income and noninterest income, partially offset by increased noninterest expense, reflecting the inclusion of First Capital.

Net interest income totaled $26.6 million in 2016Q4, which represents a $768 thousand, or 3%, increase from $25.8 million in 2016Q3 and a $6.6 million, or 33%, increase from $20 million in 2015Q4. Average total earning assets increased $49.1 million in 2016Q4 to $2.95 billion, compared to $2.90 billion in 2016Q3 and increased $696.1 million, or 31%, compared to $2.25 billion in 2015Q4. The increase in average total earning assets in 2016Q4 from 2016Q3 included an increase in average loans (including loans held for sale) of $57.8 million, or 9.8% annualized, a decrease in average marketable securities of $15.7 million, and an increase in average other interest-earning assets of $7.0 million. The increase in average total earning assets in 2016Q4 from 2015Q4 resulted primarily from a $700.2 million, or 41%, increase in average loans (including loans held for sale) as a result of both organic growth and the merger with First Capital, a $19.8 million, or 4%, decrease in average marketable securities and a $16.5 million, or 37%, increase in average other earning assets.

Net interest margin was 3.58% in 2016Q4, representing a 4 basis point increase from 3.54% in 2016Q3 and a 6 basis point increase from 3.52% in 2015Q4. The increase in net interest margin from 2016Q3 resulted primarily from a 2 basis point increase in yield on investment securities resulting from a bond called at a premium to book value, a 1 basis point increase from accretion on acquired loans, a 2 basis point increase caused by the collection of interest on non accruing loans, and a 1 basis point decrease in net margin compression. The increase in net interest margin from 2015Q4 was significantly impacted by the merger with First Capital which was completed on January 1, 2016. The change was primarily driven by a 16 basis point increase in the yield on interest-earning assets, offset by a 7 basis point increase in the cost of interest-bearing deposits and an increase in the cost of borrowed funds. In addition, the net interest margin in 2016Q4 benefitted from a $157.9 million increase in noninterest-bearing deposits from 2015Q4.

The Company reported $550 thousand of provision expense in 2016Q4, compared to $642 thousand of provision recorded in 2016Q3, and $409 thousand of provision recorded in 2015Q4. Allowance for loan loss levels increased to 0.50% of total loans at 2016Q4 compared to 0.49% at 2016Q3.

Noninterest income totaled $5.8 million in 2016Q4, compared to $5.4 million in 2016Q3 and increased $1.3 million, or 29%, compared to $4.5 million in 2015Q4. Compared to 2016Q3, service charges on deposit accounts and income from capital markets activities increased by $90 thousand and $390 thousand, respectively. In addition, increased BOLI income and the absence of FDIC loss share indemnification asset activity increased noninterest income by $131 thousand and $139 thousand respectively. Offsetting these increases was a $250 thousand decrease in mortgage banking income caused by a decline in the year-end pipeline from record levels in 2016Q3. The increase in noninterest income from 2015Q3 reflects the impact of the First Capital merger, higher service charges on deposit accounts and increases in capital markets income and income from bank owned-life insurance, partially offset by lower wealth management income.

Noninterest expense increased $3.9 million, or 19%, to $25.0 million in 2016Q4 compared to $21.3 million in 2016Q3, and compared to $18.4 million in 2015Q4. Adjusted noninterest expenses, which exclude merger-related expenses ($3.0 million in 2016Q4, $1.5 million in 2016Q3 and $1.4 million in 2015Q4), increased $2.4 million, or 12%, to $22.0 million in 2016Q4 compared to $19.6 million in 2016Q3, and increased $5.1 million, or 30%, compared to $17.0 million in 2015Q4. The increase in adjusted noninterest expenses from 2016Q3 was due primarily to a $1.5 million loss on an interest rate hedge related to variable rate debt repaid during the quarter as well as to increases of $323 thousand in salaries and employee benefits, $152 thousand in legal and professional fees and $154 thousand in advertising and promotion. Offsetting these increases was a $372 thousand reduction in loan and collection expense. The increase in adjusted noninterest expenses from 2015Q3 is primarily a function of the merger with First Capital.

The Company's effective tax rate was 22.07% in 2016Q4, compared to 33.5% in 2016Q3 and 34.1% in 2015Q4. The decline in the effective tax rate experienced in 2016Q4 was the result of the early adoption of ASU 2016-09, which requires that excess tax benefits on stock-based compensation be recognized as a reduction of tax expense rather than as a component of other comprehensive income. Excluding the effect of the $798 thousand reduction in tax expense caused by the adoption of this standard, the effective tax rate was 33.74%.

Income Statement -- Twelve Months Ended December 31, 2016

Park Sterling reported a $3.3 million, or 20%, increase in net income for the twelve months ended December 31, 2016 ("FY2016") to $19.9 million, or $0.38 per share, compared to net income for the twelve months ended December 31, 2015 ("FY2015") of $16.6 million, or $0.37 per share. The increase in net income from FY2015 was significantly impacted by the First Capital merger. Net interest income and non interest income increased by a total of $26.8 million, while increased provision for loan losses and noninterest expense increased by $1.9 million and $20.1 million, respectively.

Net interest income totaled $105.0 million in FY2016, which represents a $23.7 million, or 29%, increase from $81.4 million in FY2015. This increase is primarily attributable to having higher average earning assets in 2016 as a result of the merger with First Capital as well as organic loan growth. Net interest margin was 3.64% in FY2016, representing a 4 basis point decrease from 3.68% in FY2015. The reduction in net interest margin resulted primarily from a 9 basis point increase in yield on interest-earning assets, offset by a 19 basis point increase in the cost of interest-bearing liabilities.

The Company reported $2.6 million in provision for loan losses in FY2016, compared to $723 thousand in provision for loan losses in FY2015. The increase in provision expense is primarily a factor of continued organic loan growth.

Noninterest income increased $3.2 million, or 17%, to $21.4 million in FY2016, compared to $18.2 million in FY2015. The increase from FY2015 reflects higher levels of service charges on deposit accounts, income from capital markets activities, and ATM and card income as well as lower amortization on the FDIC loss share indemnification asset and true-up liability expense. Offsetting these increases are decreases in income from wealth management activities and a decrease in the gain (loss) on sale of securities available for sale.

Noninterest expense increased $20.8 million, or 27%, in FY2016 to $94.2 million compared to $74.2 million in FY2015. The increase in noninterest expense from FY2015 resulted primarily from increased expenses as a result of organic growth and the merger with First Capital, including an increase in merger related expense of $9.2 million.

The company's effective tax rate decreased to 32.5% in FY2016 compared to 32.9% in FY2015. The early adoption of ASU 2016-09 resulted in a decrease in income tax expense of $798 thousand; excluding the impact of this new standard, the effective rate was 35.24%.

Balance Sheet

Total assets increased $28.5 million, or 4% annualized, to $3.3 billion at 2016Q4, as compared to total assets of $3.2 billion at 2016Q3. Total securities, including non-marketable securities, decreased $9.0 million, to $511.8 million. Total loans, excluding loans held for sale, increased $43.2 million, or 7% annualized, to $2.4 billion at 2016Q4.

The mix of commercial and consumer loans remained consistent with 2016Q3. Total commercial loans increased $51.4 million and represent 79% of the loan portfolio. Acquisition, construction and development loans increased $35.8 million and represent 15% of the portfolio. Total consumer loans decreased $8.2 million and remain flat as a percentage of total loans at 21% of the portfolio.

Total deposits increased $29.5 million, or 5% annualized, to $2.5 billion at 2016Q4. Noninterest bearing demand deposits increased $15.7 million, or 12% annualized, to $521.3 million (21% of total deposits). Money market, NOW and savings deposits were up $22.7 million from 2016Q3 and represent 50% of total deposits. Time deposits decreased $8.9 million to $741.1 million at 2016Q4.

Total borrowings increased $5.2 million, or 6% annualized, to $348.2 million at 2016Q4 compared to $343.1 million at 2016Q3. At 2016Q4, FHLB borrowings totaled $285 million, the senior unsecured term loan at the holding company totaled $29.7 million, and acquired trust preferred securities, net of acquisition accounting fair value marks, totaled $33.5 million.

Total shareholders' equity decreased $2.9 million to $355.8 million at 2016Q4 compared to $358.7 million at 2016Q3, driven by a $3.2 million increase in retained earnings and offset by a reduction of $3.9 million in accumulated other comprehensive income and by a reduction in common stock and additional paid in capital totaling $2.1 million. The change in accumulated other comprehensive income was caused by the effect of market interest rate increases on the fair value of available for sale investment securities. During 2016Q4, there were 476,900 shares of common stock repurchased at a cost of $4.7 million to neutralize the effect of stock compensation vestings and exercises.

The Company's capital ratios remain strong at December 31, 2016 with Common Equity Tier 1 ("CET1") at 11.05% and Tier 1 leverage ratio at 9.98%.

Asset Quality

Asset quality remains strong. Nonperforming assets were $15.4 million at 2016Q4, or 0.47% of total assets, compared to $14.2 million at 2016Q3, or 0.44% of total assets. Nonperforming loans were $12.9 million at 2016Q4, and represented 0.54% of total loans, compared to $11.5 million at 2016Q3, or 0.48% of total loans. The Company reported net charge offs of $37 thousand, or 0.01% of average loans (annualized) in 2016Q4, compared to net recoveries of $97 thousand, or (0.02%) of average loans (annualized), in 2016Q3.

The allowance for loan losses increased $513 thousand, or 2%, to $12.1 million, or 0.50% of total loans, at 2016Q4, compared to $11.6 million, or 0.49%, of total loans at 2016Q3. The increase in allowance is primarily attributable to the increase in outstanding loans at period end.

Conference Call

A conference call will be held at 8:30 a.m., Eastern Time this morning (January 26, 2017). The conference call can be accessed by dialing (877) 512-1104 and requesting the Park Sterling Corporation earnings call. Listeners should dial in 10 minutes prior to the start of the call. The live webcast and presentation slides will be available on www.parksterlingbank.com under Investor Relations, "Investor Presentations."

A replay of the webcast will be available on www.parksterlingbank.com under Investor Relations, "Investor Presentations" shortly following the call. A replay of the conference call can be accessed approximately one hour after the call by dialing (877) 344-7529 and requesting conference number 10099223.

About Park Sterling Corporation

Park Sterling Corporation, the holding company for Park Sterling Bank, is headquartered in Charlotte, North Carolina. Park Sterling, a regional community-focused financial services company with $3.3 billion in assets, is the largest community bank headquartered in the Charlotte area and has 55 banking offices stretching across the Carolinas and into North Georgia, as well as in Richmond, Virginia. The bank serves professionals, individuals, and small and mid-sized businesses by offering a full array of financial services, including deposit, mortgage banking, cash management, consumer and business finance, capital markets and wealth management services with a commitment to "Answers You Can Bank On℠." Park Sterling prides itself on being large enough to help customers achieve their financial aspirations, yet small enough to care that they do. Park Sterling is focused on building a banking franchise that is noted for sound risk management, strong community focus and exceptional customer service. For more information, visit www.parksterlingbank.com. Park Sterling Corporation shares are traded on NASDAQ under the symbol PSTB.

Non-GAAP Financial Measures

Tangible assets, tangible common equity, tangible book value, average tangible common equity, adjusted net income, adjusted operating revenues, adjusted noninterest income, adjusted noninterest expenses, adjusted operating expense, adjusted allowance for loan losses, and related ratios and per share measures, including adjusted return on average assets and adjusted return on average equity, as used throughout this release, are non-GAAP financial measures. For additional information, see "Reconciliation of Non-GAAP Financial Measures" in the accompanying tables.

Cautionary Statement Regarding Forward Looking Statements

This news release contains, and Park Sterling and its management may make, certain statements that 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. These forward-looking statements express management's current expectations or forecasts of future events, results and conditions and, by their nature, are subject to risks and uncertainties and there are a number of factors that could cause actual results to differ materially from those in such statements. Factors that might cause such a difference include, but are not limited to: changes in loan mix, deposit mix, capital and liquidity levels, emerging regulatory expectations and measures, net interest income, noninterest income, noninterest expense, credit trends and conditions, including loan losses, allowance for loan loss, charge-offs, delinquency trends and nonperforming asset levels, deterioration in the credit quality of the loan portfolio or the value of collateral securing loans, deterioration in the value of securities held for investment, the impacts of an increasing rate environment, and other similar matters; inability to identify and successfully negotiate and complete additional combinations with other potential merger partners or to successfully integrate such businesses into Park Sterling, 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 combinations; failure to generate an adequate return on investment related to new branches or other hiring initiatives; inability to generate future organic growth in loan balances, retail banking, wealth management, mortgage banking or capital markets results through the hiring of new personnel, development of new products, including new online and mobile banking platforms for treasury services, opening of de novo branches or otherwise; inability to capitalize on identified revenue enhancements or expense management opportunities, including the inability to achieve or maintain adjusted operating expense to adjusted operating revenue targets; inability to generate future ATM and card income from marketing expenses; the effects of negative or soft economic conditions, including stress in the commercial real estate markets or failure of continued recovery in the residential real estate markets; changes in consumer and investor confidence and the related impact on financial markets and institutions; the potential impacts of any government shutdown or debt ceiling impasse, including the risk of a U.S. credit rating downgrade or default, or continued global economic instability, which could 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, 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 Park Sterling's financial statements; and management's ability to effectively manage credit risk, market risk, operational risk, legal risk, and regulatory and compliance risk.

You should not place undue reliance on any forward-looking statement and should consider all of the preceding uncertainties and risks, as well as those more fully discussed in any of Park Sterling's filings with the SEC. Forward-looking statements speak only as of the date they are made, and Park Sterling 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.

Non-GAAP Financial Measures

Tangible assets, tangible common equity, tangible book value, adjusted average tangible common equity, adjusted net income, adjusted noninterest income, adjusted operating revenues, adjusted noninterest expense, adjusted operating expenses, adjusted allowance for loan losses, and related ratios and per share measures, including adjusted return on average assets and adjusted return on average equity, as used throughout this release, are non-GAAP financial measures. 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 FMV adjustments related to acquired loans) 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); and (iii) adjusted net income and adjusted noninterest income (which exclude merger-related expenses and gain or loss on sale of securities, as applicable), adjusted noninterest expense (which excludes merger-related expenses), adjusted operating expense (which excludes merger-related expenses and amortization of intangibles) and adjusted operating revenues (which includes net interest income and noninterest income and excludes gain or loss on sale of securities, as applicable) to evaluate core earnings and to facilitate comparisons with peers.