Park Sterling Corporation Announces Results for Third Quarter 2017

CHARLOTTE, NC--(Marketwired - October 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 third quarter of 2017. Financial results for the third quarter of 2017 include:

• Net income of $8.7 million, or $0.16 per share, compared to $8.5 million, or $0.16 per share, in the quarter ended June 30, 2017, and $6.3 million, or $0.12 per share, in the quarter ended September 30, 2016
• Adjusted net income (non-GAAP), which excludes merger-related expenses and gain on sale of securities, was $9.2 million, or $0.17 per share, compared to $9.2 million, or $0.17 per share in the prior quarter, and $7.3 million, or $0.14 per share, in the quarter ended September 30, 2016
• Reported annualized returns on average assets and equity for the third quarter 2017 were 1.05% and 9.21%, respectively, while adjusted annualized returns on average assets and average equity (non-GAAP) were 1.11% and 9.75%, respectively
• Noninterest income decreased $39 thousand from the prior quarter, with a decrease in mortgage banking income mostly offset by growth in capital markets income
• Noninterest expenses totaled $20.1 million, a decrease of $1.3 million from the prior quarter; adjusted noninterest expenses (non-GAAP), which excludes merger-related expenses, decreased $1.0 million from the prior quarter
• Nonperforming loans declined to a very low level of 0.40% of total loans
• Capital levels remained strong with a Tier 1 leverage ratio of 10.36%
• The Board of Directors declared a quarterly cash dividend on common shares of $0.04 per share (October 2017)

"We are pleased with our financial results for the third quarter, during which time we focused on several projects in preparation for our pending combination with South State Corporation," said Jim Cherry, Chief Executive Officer. "We look forward to completing the merger, and we are very excited about the opportunity to create a premier regional banking franchise in the southeast."

Financial Results

Income Statement - Three Months Ended September 30, 2017

Park Sterling reported net income of $8.7 million, or $0.16 per share, for the three months ended September 30, 2017 ("2017Q3"). This compares to net income of $8.5 million, or $0.16 per share, for the three months ended June 30, 2017 ("2017Q2") and net income of $6.3 million, or $0.12 per share, for the three months ended September 30, 2016 ("2016Q3"). The increase in net income from 2017Q2 resulted primarily from decreases in operating expenses, merger-related expenses and provision for loan losses, partially offset by a decrease in interest income on earning assets and an increase in income tax expense. The increase in net income from 2016Q3 was primarily a result of an increase in net interest income, a decrease in provision for loan losses and a decrease in merger-related expenses, partially offset by an increase in income taxes.

Net interest income totaled $27.8 million in 2017Q3, which represents a $0.8 million, or 3%, decrease from $28.6 million in 2017Q2 and a $2.0 million, or 8%, increase from $25.8 million in 2016Q3. Average total earning assets decreased $21 million in 2017Q3 to $3.03 billion, compared to $3.05 billion in 2017Q2 and increased $127 million, or 4%, compared to $2.90 billion in 2016Q3. The decrease in average total earning assets in 2017Q3 from 2017Q2 included a decrease in average loans (including loans held for sale) of $16 million, or 2.6% annualized, a decrease in average marketable securities of $21 million, and an increase in average other interest-earning assets of $16 million. The reduction in average total earning assets reflects actions in preparation for the merger to use cash flows from maturing investments and loans that are not closely tied to customer relationships to reduce brokered deposits and borrowed funds. Additionally, the reduction reflects a lower level of new business activity in light of the pending merger and our focus on maintaining our existing customers. The increase in average total earning assets in 2017Q3 from 2016Q3 resulted primarily from a $115 million, or 5%, increase in average loans (including loans held for sale), a $16 million, or 3%, decrease in average marketable securities and a $28 million, or 53%, increase in average other interest-earning assets.

Net interest margin was 3.65% in 2017Q3, representing a 12 basis point decrease from 3.77% in 2017Q2 and an 11 basis point increase from 3.54% in 2016Q3. The decrease in net interest margin from 2017Q2 resulted primarily from a 12 basis point decrease in loan yields resulting from a reduction in the interest income accretion on acquired loans, as well as a 10 basis point increase in the cost of borrowed funds, which reflected the increase in market interest rates. The increase in net interest margin from 2016Q3 was primarily the result of a 17 basis point increase in loan yields and an improved yield on investment securities, partially offset by an increase in the cost of interest-bearing liabilities.

The Company reported a recovery of loan losses of $353 thousand in 2017Q3, compared to no provision recorded in 2017Q2, and $642 thousand of provision for loan losses recorded in 2016Q3. Allowance for loan loss levels remained at 0.51% of total loans at 2017Q3, unchanged from 2017Q2.

Noninterest income totaled $5.4 million in 2017Q3, which was essentially unchanged compared to both 2017Q2 and 2016Q3. The $39 thousand decrease from 2017Q2 is primarily the result of a $305 thousand decrease in mortgage banking income partially offset by a $282 thousand increase in capital markets income. The $68 thousand decrease in noninterest income from 2016Q3 reflects a decrease in mortgage banking and wealth management income of $545 thousand and $121 thousand, respectively, offset by a $247 thousand increase in capital markets income, as well as the absence of $139 thousand in amortization of FDIC indemnification asset recorded in 2016Q3.

Noninterest expense decreased $1.3 million, or 6%, to $20.1 million in 2017Q3 from $21.4 million in 2017Q2, and decreased $1.0 million, or 5%, compared to $21.1 million in 2016Q3. The decrease in noninterest expense from 2017Q2 resulted primarily from a $331 thousand decrease in merger-related expenses incurred in the third quarter as compared to the second quarter, as well as a decrease in salary and employee benefits of $330 thousand, a decrease in the net cost of OREO of $221 thousand, and a decrease in legal and professional fees of $219 thousand. The decrease in noninterest expenses from 2016Q3 was due primarily to a decrease in merger-related expenses of $895 thousand.

The Company's effective tax rate was 35.2% in 2017Q3, compared to 32.2% in 2017Q2 and 33.5% in 2016Q3. The increase in the effective tax rate was primarily a result of non-deductible merger-related expenses.

Balance Sheet

Total assets decreased $93.7 million, or 11% annualized, to $3.25 billion at 2017Q3, compared to total assets of $3.34 billion at 2017Q2. Total securities, including non-marketable securities, decreased $22.8 million, to $488.7 million. Total loans, excluding loans held for sale, decreased $72.5 million, or 12% annualized, to $2.43 billion at 2017Q3.

The mix of commercial and consumer loans remained largely consistent with 2017Q2. Total commercial loans decreased $73.0 million and represent 78% of the loan portfolio. Acquisition, construction and development loans increased $0.3 million and represent 13.9% of the portfolio, up from 13.5% at 2017Q2. Total consumer loans increased $0.3 million and increased as a percentage of total loans to 22% of the portfolio compared to 21% at 2017Q2.

Total deposits decreased $68.3 million, or 11% annualized, to $2.47 billion at 2017Q3. Noninterest bearing demand deposits decreased $4.2 million, or 3% annualized, to $550.2 million from 2017Q2. Money market, NOW and savings deposits were down $30.8 million from 2017Q2 and represent 51% of total deposits. Time deposits decreased $33.3 million to $658.4 million at 2017Q3.

Total borrowings decreased $34.8 million, or 35% annualized, to $373.8 million at 2017Q3 compared to $408.6 million at 2017Q2. At 2017Q3, FHLB borrowings totaled $310 million, the senior unsecured term loan at the holding company totaled $29.8 million, and acquired subordinated debt, net of acquisition accounting fair value marks, totaled $34.0 million.

Total shareholders' equity increased $7.4 million to $376.7 million at 2017Q3 compared to $369.3 million at 2017Q2, driven by a $6.6 million increase in retained earnings and an increase of $0.3 million in accumulated other comprehensive income. The change in accumulated other comprehensive income was caused by the effect of market interest rates on the fair value of available for sale investment securities.

The Company's capital ratios remain strong at September 30, 2017 with the Common Equity Tier 1 ("CET1") ratio at 11.59% and the Tier 1 leverage ratio at 10.36%.

Asset Quality

Asset quality remains strong. Nonperforming assets were $12.2 million at 2017Q3, or 0.38% of total assets, compared to $15.1 million at 2017Q2, or 0.45% of total assets. Nonperforming loans were $9.6 million at 2017Q3, and represented 0.40% of total loans, compared to $12.0 million at 2017Q2, or 0.48% of total loans. The Company reported net recoveries of $74 thousand, or 0.01% of average loans (annualized), in 2017Q3, compared to net charge-offs of $131 thousand, or 0.02% of average loans (annualized), in 2017Q2.

The allowance for loan losses decreased $279 thousand, or 2%, to $12.4 million, or 0.51% of total loans, at 2017Q3, compared to $12.7 million, or 0.51% of total loans, at 2017Q2. The decrease in the allowance from 2017Q2 is primarily attributable to the decrease in the loan balances at the end of the period.

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 $3.2 billion in assets, is the largest community bank headquartered in the Charlotte area and has 54 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
Statements included in this communication which are not historical in nature or do not relate to current facts are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "may," "will," "anticipate," "could," "should," "would," "believe," "contemplate," "expect," "estimate," "continue," "plan," "project" and "intend," as well as other similar words and expressions of the future, are intended to identify forward-looking statements. South State Corporation ("South State") and Park Sterling Corporation ("Park Sterling" or the "Company") caution readers that forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from anticipated results. Such risks and uncertainties, include, among others, the following possibilities: the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the definitive merger agreement between South State and Park Sterling; the outcome of any legal proceedings that may be instituted against South State or Park Sterling; the failure to obtain necessary regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction) or to satisfy any of the other conditions to the transaction on a timely basis or at all; the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where South State and Park Sterling do business; the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management's attention from ongoing business operations and opportunities; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; South State's ability to complete the acquisition and integrate Park Sterling successfully; 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 in a timely, cost-efficient manner; 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; failure of assumptions underlying noninterest expense levels; failure of assumptions underlying the establishment of the allowance for loan losses; deterioration in the value of securities held in the investment securities portfolio; the Company's ability to fully realize the value of its net deferred tax asset, including the impact of lower federal income tax rates on the carrying amount or the risk that the Company may be required to establish a valuation allowance; uncertainties about the financial stability and growth rates of non-U.S. jurisdictions, the risk that those jurisdictions may face difficulties servicing their sovereign debt, and related stresses on the financial, credit and real estate markets generally, which could negatively impact the Company's revenues and the value of its assets and liabilities; changes in general economic or business conditions, customer behavior and other uncertainties that could lead to reduced revenues and deterioration in the credit quality of the loan portfolio or the value of the collateral securing those loans and result in higher credit losses than currently expected; sensitivity to the interest rate environment, including continued low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve, and the impact on net interest margins; cyber-security events; failure to anticipate or inability to adapt to rapid technological developments and changes; 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; the impact of implementation of 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; and other factors that may affect future results of South State and Park Sterling. Additional factors that could cause results to differ materially from those described above can be found in South State's Annual Report on Form 10-K for the year ended December 31, 2016, which is on file with the Securities and Exchange Commission (the "SEC") and available in the "Investor Relations" section of South State's website, http://www.southstatebank.com, under the heading "SEC Filings" and in other documents South State files with the SEC, and in Park Sterling's Annual Report on Form 10-K for the year ended December 31, 2016, which is on file with the SEC and available on the "Investor Relations" page linked to Park Sterling's website, http://www.parksterlingbank.com, under the heading "Regulatory Filings" and in other documents Park Sterling files with the SEC.

All forward-looking statements speak only as of the date they are made and are based on information available at that time. Neither South State nor Park Sterling assumes any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

IMPORTANT ADDITIONAL INFORMATION
In connection with the proposed transaction between South State and Park Sterling, South State has filed with the SEC a Registration Statement on Form S-4 that includes a Joint Proxy Statement of South State and Park Sterling and a Prospectus of South State, as well as other relevant documents concerning the proposed transaction. The Registration Statement was declared effective by the SEC on September 6, 2017, and Park Sterling and South State subsequently mailed a definitive Joint Proxy Statement/Prospectus to their respective shareholders. The proposed transaction involving South State and Park Sterling was approved by Park Sterling's shareholders and South State's shareholders at a special meeting of shareholders of Park Sterling and a special meeting of shareholders of South State, each of which was held on October 25, 2017. This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Shareholders of South State and shareholders of Park Sterling are urged to read the registration statement and the joint proxy statement/prospectus regarding the transaction and any other relevant documents filed with the SEC, as well as any amendments or supplements to those documents, because they will contain important information.

Shareholders can obtain a free copy of the definitive joint proxy statement/prospectus, as well as other filings containing information about South State and Park Sterling, without charge, at the SEC's website (http://www.sec.gov). Copies of the joint proxy statement/prospectus and the filings with the SEC that are incorporated by reference in the joint proxy statement/prospectus can also be obtained, without charge, by directing a request to South State Corporation, 520 Gervais Street, Columbia, South Carolina 29201, Attention: John C. Pollok, Senior Executive Vice President, CFO and COO, (800) 277-2175 or to Park Sterling Corporation, 1043 E. Morehead Street, Suite 201, Charlotte, North Carolina 28204, Attention: Donald K. Truslow, (704) 323-4292.