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Executives

Susan Sabo – Senior Vice President and Chief Accounting Officer

James C. Cherry – Chief Executive Officer

David L. Gaines – Executive Vice President and Chief Financial Officer

Nancy J. Foster – Executive Vice President and Chief Risk officer

Analysts

Christopher Marinac – FIG Partners, LLC

William J. Wallace – Raymond James

Park Sterling Bank (PSTB) Q1 2013 Earnings Call April 25, 2013 8:30 AM ET

Operator

Good morning and welcome to the Park Sterling Corporation First Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Susan Sabo. Please go ahead ma’am.

Susan Sabo

Thank you, operator. During this call forward-looking statements will be made regarding Park Sterling’s future operational and financial performance. The forward-looking statements should be considered within the meaning of the applicable securities laws and regulations regarding the use of such statement. Many factors could cause results to differ materially from those in the forward-looking statement. We encourage participants to carefully read the section on forward-looking statements incorporated in our press release issued this morning and in all documents, Park Sterling has filed with the SEC.

I would now like to turn the meeting over to Mr. Jim Cherry, Park Sterling’s Chief Executive Officer.

James C. Cherry

Thank you, Susan and good morning to our listeners and thank you for joining us. We’re pleased to have this opportunity to discuss Park Sterling’s first quarter 2013 results, which we announced earlier today. In addition to our earnings release, you can also find an Investor Presentation on our website that gives detailed information about these results and which we want to follow during this call.

Joining me this morning are David Gaines, our Chief financial officer; and Nancy Foster, our Chief Risk Officer. I will start by giving a brief highlight of our quarter, beginning on slide three, before turning over to David and Nancy for greater detail. On this slide, you can see that the quarter was marked by very strong financial performance. We exhibited for the second quarter, consecutive quarter now, record earnings that we think of both solid and of high quality, complement by a strong and still strengthening asset quality in capitalization levels. Virtually every important measure of strength, quality and performance showed improvement and we believe continue to position us well within peer group comparisons.

You will also see that we completed our network conversion and just after the end of quarter, we also completed the conversion of our core operating systems. So that now not only as our entire franchise consolidated under one brand, but we’re operating on common systems and platforms, which created all kinds of efficiencies and effectiveness benefits. Naturally, we feel very good about these results, especially because we believe they continue to validate the merits of our vision and strategy and positioned us well for future organic growth and new M&A partnerships and at time when this opportunity appears to be gaining momentum, more about this later, but now I’d like to turn our presentation over to David Gaines. David?

David L. Gaines

Thank you Jim and good morning everyone. If you turn to slide four, as Jim mentioned, you can see a consecutive quarter of record operating results, really as improved credit quality and good expense management led to 7% increase in adjusted net income, available to common shareholders, which excludes the merger related expenses to $3.8 million, or $0.09 of share that equates to about a 77 basis points adjusted return on assets.

We are very pleased in particular that our adjusted net interest margin, which excludes the accelerated accretion held up in the phase of continued competitive pricing pressures in our markets and that we were able to post continued organic loan growth in our metro markets, as well as continued organic revenue growth in both our mortgage and wealth groups.

And I’ll walk you through the details of that on subsequent slides. If you will turn to slide five, you’ll see a breakdown of net interest income. Earning asset decreased by about 3% in the quarter and that was driven both by an expected decline and acquired loans, as we manage that with some select exposures and by some continue deleveraging among certain consumer and commercial customers, which we’ve seen happened for several quarter now.

As we stated in the past, we’re just not going to pursue what we call a natural X in an attempt to forcing loan production, it will remains a soft economy, particularly, when we have other available levers to drive earnings growth. We’re fortunate to have strong loan origination capabilities in several of our higher growth metro markets including Charlotte, Raleigh and Wilmington in North Carolina, and Greenville and Charleston in South Carolina, which has helped us to offset the pullback that we’ve seen in certain community markets.

We’ve also continue to selectively add experienced bankers, product specialists, and supporting mid office personnel in those markets are made very happy with both the quality and the momentum of new business being produced. You can see that our adjusted net interest margin, which excludes that accelerated accretion we’ve had some in the past, actually increased by 2 basis points to 4.15% for the quarter.

This success resulted from several factors including continued discipline and pricing new loans, continued discipline in managing our deposit base, leveraging our credit expertise to improve some investment returns and importantly establishing initial discount rates on our PCI loans that are pretty conservative and that allows the natural cash flows to improve those returns over time. The net result was a $1.8 million, or 9% decline in net interest income for the period, but if you adjust out last quarters accelerated accretion, which is about a $1 million, you got an $800,000 decline was really driven by those manage declined in the acquired loans.

If you turn to slide six, you’ll see noninterest income. You can see that we posted continued growth in our mortgage group, even if you take out, we try to highlight some positive impact from some accounting issues there, even take that out, we had positive revenue growth in the mortgage book, continue to post good growth in the wealth group. And I would particularly note, if you look at the growth in assets at the bottom of the slide, most of that came in the wealth group toward the end of the quarter, and so we would expect to see some of that showing up in revenues a little bit better as the year progresses.

We did experience a decline in basic service charges and that was driven entirely in the NSF line item. We think there is some seasonal factors in there, but we’ll also tell you that we did have an overdraft product that we inherited in one of the acquisitions that we decided to discontinue. Not that it was a bad product, in fact, it’s a product that probably serves some customers very well, but in this kind of compliance environment, it’s just not worth offering those products, it’s too much hindsight and how we look at it. So that did cost us some fees.

We also believe we had a couple of timing issues, frankly around our ATM card income and our BOLI income that should come back to us to some extent in the second quarter. And finally, if you look at the other income line, you get a little bit of noise there just from the accounting around the FDIC loss share agreement as accretion and other factors. We’ll kind of bounce up and down at any given quarter. But overall, we feel very good about the diversity of our noninterest income and continue to expect to invest in these areas.

If you go to slide seven, you got a breakdown of noninterest expenses, which if you exclude the merger related, decreased by that 11% to $15.2 million for the quarter and that decline was driven primarily by two items. First, again excluding the impact from merger related items, our personnel cost fell by about $623,000 or about 7%, as we continued to reengineer activities coming out of the merger with Citizens South.

Second, we reported a net $428,000 gain on the operation of OREO, compared to an expenses of $1.2 million in the prior quarter, which we believe is an example of the long-term benefits from prudently addressing and marking problem assets, and I think Nancy will talk a little bit more about that in a moment.

We detailed for you last quarter that we had reached approximately $2.5 million in quarterly run rate savings associated with the Citizens South merger. If you exclude the benefit of that OREO swing that we just talked about, we would now tell you that we believe that quarterly run rate savings has reached about $2.7 million, which if you annualized to $10.8 million would comfortably exceed the original target we gave you for the Citizens South merger, which is a $10.2 million number and we thought we’d get that in over the course of the year and we’re well ahead of that schedule. And that’s very important because we think those expense savings that are accounted in the bank positions us very well to invest in potential growth opportunities down the road.

If you turn to slide eight, you’ll see the slide we always put in here in terms of our comparison to peer group. And just as a remainder, the peer group is the same as we’ve used for several quarters now at 17 banks that are between 1 and 10 billion that operate in our markets where we operate today and there detailed in the back of our deck in the appendix for you to review. But clearly what you see is what we sort of thought would happen and talked about last quarter, the increased operating scale from the Citizens South merger is clearly positioned us more favorably in terms of adjusted ROAA, which excludes merger related and gains on sale. We didn’t have any gain on sale this quarter, but exclude those items and positions us pretty well there. Return on average equity is still a little bit soft given how much capital we’re carrying around, but it also continues to improve.

If you look at the balance sheet profile on slide nine, only note that I would really make on this page is just make sure you all see that we did have a measurement period adjustment to goodwill associated with the Citizens South merger, related to a reestimation of the initial expected cash flows, underlying the loss share agreements. So you’ve got a slight increase about a $1.6 million and goodwill in both the fourth quarter and the first quarter for what was originally forecast and that’s just the functions of the loans, it looks like they’re going to perform better.

If you move to slide 10, it shows our loan mix, really didn’t change significantly during the quarter. As mentioned in the earnings release, our metro markets did generate about $8 million in net loan growth for the quarter which is about a 7% annualized rate, a little down from what we’ve seen in the prior quarters. But we feel pretty good about it because most of that momentum came toward the end of the quarter. We saw some pretty soft activity in our markets to kick off the year and that seems to be abating in coming back now.

And as I said before, we think we’ve got a couple of community markets that had pretty good performance towards the end of the market. So we feel very, very good about what the bankers are doing in the momentum of the activity out there. As you see at the bottom of slide, we’ve got roughly 58% of our portfolio, officially designated as acquired in an accounting sense meaning they still carry some fair market value adjustments. Continue to believe that those marks will help off for estimating future credit losses.

If you move to slide 11, get a little more detail around the acquired loan accounting. We’ve highlighted a couple of items for you. First, the aggregate fair market value adjustment continues to sit against 6.43% of acquired loans at the end of the quarter, which we believe remains more than adequate. We also highlighted the period end accretable yield, which increased about 7% to $45.6 million for the period. As you know this increase suggest that the cash flow, the expected cash flows and those PCI loans continues to improve and look better.

For those of you so inclined, if you tax effect that number, it’s about a $0.68 increase in tangible book value that it would imply. So our stated 5.09 would go to an adjusted 5.77 per share tangible book. But more importantly, we really think the continued increase in that number is a good indicator of the long-term value were being prudent about how you deal with these acquired loans and how you treat them and just what the actual cash flows drive the performance.

If you move to slide 12, you’ll see our deposit mix would also remains fairly constant for the quarter. Core deposits continue to sit around 90% of total. We did have some good growth in demand deposit that something that the bankers do a great job focusing on. We saw some reduction in the MMDA and the time deposits. Frankly we think that’s driven mostly by the repricing activity. We’re very consciously tried to get some of the higher price deposits out of here. And I think you could see that in the decline in our cost of interest bearing deposit, which dropped from 36 basis points last quarter to 30 basis points from the first quarter.

And my final slide, if you turn to 13, you’ll see again the peer group comparisons we put in every quarter around capital and liquidity; both remain comfortably at or above the top quartile, and our reliance and wholesale funding continues to improve. So we feel very, very good overall about our financial position and the earnings for the quarter.

And with that I will turn it over to Nancy to talk about asset quality.

Nancy J. Foster

Thank you, Dave. Good morning everyone. I’m happy to report that asset quality trends continue to be positive and expect it to remain stable. Beginning on slide 14, you can see our pass grade loans increased to nicely, representing just over 97% of total loans at quarter end. Non-accrual loans were down 6% for the quarter, ending at $9.7 million, compared to $17.7 million a year ago. Nonperforming assets dropped more than 10% for the quarter, reflecting the decrease in non-accruals, as well as a $3.8 million or 15% decrease in OREO. As noted in the comments of the $21.3 million OREO balance remaining at quarter end, 36% or $7.7 million is covered by the FDIC loss share agreement.

You may recall that last year we took pretty aggressive write downs in the OREO portfolio and position it for sale, Dave mentioned this. We estimated that those actions will be largely behind us in 2013 and we’re encouraged this quarter that even with strong sales level, we were able to generate a net gain of $428 million on those sales while I don’t expect those results every quarter, we do view it as a positive indicator for lower credit cost this year. Net charge-offs also remained low for the quarter coming in at $151,000, quite frankly do the PCI accounting adjustments on the acquired loans. Otherwise, we would have reported a second consecutive quarter of net recovery.

Turning to page or slide 15, the allowance for loan and lease losses increase was very modest $158,000, driven primarily by higher non-acquired loan balances moving into the allowance calculation, as asset quality improved. As a percent of total loans, the allowance increased from 0.78% to 0.81%. And as a remainder, this ratio includes the loans balances which are marked rather than reserved for in the allowance. When taking into account the $50 million and remaining mark, the adjusted allowance increase just to 4.5% of total loans, which is down from last quarter that remains at a very comfortable level given our experience with the portfolio so far.

Turning now to slide 16, the strength of asset quality relative to our peers is demonstrated on the following page where you can see we rank in the top quartile of our peers based on last quarter’s peer reports in each of the four measures. And although I know I stated last quarter that I could not see asset quality improving much further, I will repeat that comment, but add that we are well positioned to maintain low credit cost for the remainder of the year. Although the underlying fundamentals in our market are not improving dramatically, we remain stable and most importantly the housing market continues to show good improvement.

Jim, back to you.

James C. Cherry

All right, great, thanks Nancy. We’re now on slide 17. But before turning to see if you have any questions, let me make a couple of, take a moment to reiterate how good we feel about both the level and the quality of our financial performance to this quarter. And when I say quality, I think it’s important to note that what you do not see driving our results. You do not see unusual revenues from acquired loan accounting, you do not see earning assets bolstered by loan participations or purchases, you do not see our release of provision expense, you do not see one-time gains from sale of loans or securities and you do not see one-time bargain purchase gains and I could go on.

But what you do see is very important because it’s the type of continued financial progress that we think you should expect from a management team that’s focused on building long-term shareholder value in the right way. You see continued growth and investment in our metropolitan markets. You see continued growth in investments in key product areas. You see continued evidence of our ability to deliver merger cost related cost savings.

You see continued evidence of our ability to build a fortress balance sheet in terms of liquidity and capital. And you see continued evidence of our ability to prudently manage risk, both on our balance sheet and in our merger activities. And if you look beyond that numbers, you see the continued demonstration of our ability to attract talent and merger partners to our vision and our ability to successfully execute on that strategy.

In the short, you see that we’re absolutely delivering on our vision and strategy. And you see us examining the management discipline to stay focused on our strategy and to achieve merger, benefit, expectations. A one example of this that I’d like to highlight will be to go back to the merger cost savings that Dave mentioned. As he noted when we announced our merger of Citizens South, a partnership, we stated that we expected to be able to achieve $10.2 million in our annualized cost savings.

And we expected to realize 70% of those cost savings in the first year with 30% to be realized in the following year, after merger. What we in fact did was not only that we realize the $10.2 million in savings, but we realize that in the first quarter of our combination which was the fourth quarter of last year and we actually added to that or exceeded that, as Dave mentioned, during the first quarter of this year. So what we expected to do over two year period of time, we did over a one quarter period of time.

We think all of these things and combination mean that we’re very well positioned to capitalize on future growth opportunities. So when do we spending our time focused on that. Well first and foremost, we continue to be focused on building our franchise particularly in the higher growth markets and in those lines of business like our mortgage brokerage and wealth management and cash management lines of business. We are very fortunate to continue to be a preferred employer and that is evidenced at all levels of the company where we continue in virtually every market and every line of business to attract the top talent in the market. They are excited about our vision and strategy and about being part of the Park Sterling’s story, and as I’ve mentioned on previous calls, talent begets talent, and so it is one of the strengths of our company.

Second, we are now returning if you will our focus toward M&A partnerships. We also mentioned when we announced the Citizens South merger and partnership that we expected it for the next year, which is now virtually passed, that we would be focused primarily on bringing our companies together and making sure that we have the right infrastructure and are well positioned to go forward, and we imposed called the self-imposed moratorium, if you will, on partnerships. We continued to have during that period of time, the call to date relationships, and we now feel that we are ready to move forward in potential discussions.

This is a good time to be doing that with Citizens South. If you remember again, the Citizens South partnership was the first combination of two better FDIC bid-eligible institutions in the Southeast in the current credit cycle and probably one of the first, if not one of the first few in the country at that time. Well, since then, we’ve seen (struggle more) both from the Southeast and the number in the company of what I would say are good quality financial institutions that are recognizing the benefits of partnership to achieve their vision and growth objectives. And one of the very nice things about that is we believe that we are a preferred partner in our preferred markets of the Carolina’s and Virginia.

So with that, it’s kind of a, the end. We’ll glad to pause here and see if we have any questions from my listeners.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Christopher Marinac from FIG Partners. Please go ahead.

Christopher Marinac – FIG Partners, LLC

Thanks, good morning, Dave and Jim, and Nancy. I just want to drill down on first on the expenses and the [$10.8 million] annual number that you mentioned on savings from the acquisition, to what extent would this bounce around quarter-to-quarter, or that number kind of be locked in here and then if you are fortunate to be even better, it could grow from here?

David L. Gaines

Yeah, I think the numbers locked – Chris, it’s Dave. Good morning by the way. Yeah, I think the numbers locked in. I think if you see bouncing, what’s really going to cause the bouncing is going to be to your point, there are probably some more we think we can get over time, thoughtfully and doing it through engineering, and we’re going to reinvest some money, right? I mean, we think we’ve got opportunities to add bankers and specialists and product areas and these are marginal markets. So the net number, a lot of what we’ve been trying to grab is to make sure we can reinvest without hurting our earnings run rate has led the big part of what we’re trying to do.

Christopher Marinac – FIG Partners, LLC

Okay. And then, does the experience that you are having give you better insight to potential savings as you look at other opportunities down the road, even if you don’t advertise any differently to us, just sort of what you’re thinking internally you could get?

James C. Cherry

Yeah, I’d say we were highly confident in our ability to exceed what we told everyone, a year ago with Citizens South and we will proudly continue to take that path, Chris.

David L. Gaines

Yeah, maybe just to say, it’s an old action that we would much prefer to under promise and over deliver than to do the reverse.

Christopher Marinac – FIG Partners, LLC

Okay. I understand. Okay, then my last question before I yielded forward is just that, what is the best way for us to judge loan growth forward? Should we be looking at the total amount, the breakout is great in the press release, so just curious kind of how you’re managing it internally?

James C. Cherry

Yeah, and I’ll tell you, it’s a great question, because we’ve really struggled with it and we transitioned a bit over time, as to how we try to communicate, because the way the acquired loan accounting works, as you have these performing acquired loans renewed or restructured and they move out of that acquired bucket into your “kind of normal loans”, we think it can be very distortive and look like you are posting a lot more loan growth than you really are. And so that’s why we’ve been trying to pull out is – I think it’s very difficult unfortunately, Chris, to look at anything on the balance sheet or even anything in our detailed breakout of loan mix and get a good sense for what’s really being driven organically, which is why we resorted the last couple of quarters to really talking about those metro markets where we see the majority of the growth happening, and by the way, there are a couple of community markets that have done great for us.

And so, I don’t want to leave them out of this, but we resorted to kind of talking about those metro markets, because I do think it’s fair to think about them as being what we would expect to be the primary net driver of loan growth. Now, the other thing we said last quarter, Community Capital, we kind of looked at that as a different type of portfolio, new – it’s going to have a lot of remediation effort and Nancy’s team is still, and the team down there are still working on some of those things.

We expected it to be, frankly, a drag on earnings growth for the better part of the year and it was. And it is sort of stabilized last quarter and we’re kind of – if you took Citizens South out, we would have had net true reported loan growth this quarter to the legacy Park Sterling part of the portfolio. Citizens South, we sort of said our expectation is, it’s not going to have a much better portfolio, it’s not going to have as long-term a drag, so we would expect mid-yearish, you’re going to see net loan growth start coming back, because we’ll be done with the remediation or substantially done with the remediation to the point where it won’t override the growth we’re putting on. And I do feel good about the momentum in the metro markets honestly. I mean, the bankers are doing a really good job with quality loans in a tough market.

David L. Gaines

And what gives us (inaudible) I would like to add, Chris, would be what gives us the confidence in making the comments we do because of all the movements in the accounting that make it difficult to look at from an accounting standpoint, is we do see the pipelines, reports, which are building, we do see the loan approval activity that goes through committees and through their approval process, growing, and we also see the actual production reports of our bankers. So we can look at all of that on top of the other and use that to judge whether or not we’re really getting loan growth or whether it is some other phenomena in the accounting that affects that.

Christopher Marinac – FIG Partners, LLC

Sounds great, guys. Thanks for all the color here.

David L. Gaines

Fine. Thanks, Chris.

Operator

Our next question is from William Wallace from Raymond James. Please go ahead, sir.

William J. Wallace – Raymond James

Good morning, all.

David L. Gaines

Hi, good morning.

William J. Wallace – Raymond James

Maybe kind of following on to Chris’s question as – and just kind of thinking about the margin. So, David, maybe if we could slide 11…

David L. Gaines

Sure.

William J. Wallace – Raymond James

… as a talking point. So if I look at the remaining fair market value adjustments that are on the second line there…

David L. Gaines

Right.

William J. Wallace – Raymond James

…that change from the fourth quarter to the first quarter should represent kind of a normally scheduled accretion of the acquired loans. Is that correct?

David L. Gaines

That’s a great question. I mean, really, if you think about this like a securitization, right, because the PCI loans are effectively coming into pools and kind of dealt with on an expected cash basis. And what we’re trying to pull out here, Willie, now that you asked the question, I know we put the actual accretion on here in a prior period. I totally forgot to do that this period. And if I had the number in my head, I’d share it right now, but I don’t, I have to chase that down.

William J. Wallace – Raymond James

Sure. Okay.

David L. Gaines

But in essence that $49.6 million represents the cushion for potential losses sitting in those pools. So if you took that $49.6 million and you said the pools performed exactly as we expect, the $45.6 million sitting below it is the earnings that would come off of that pool. So if nothing changes from expectations, which of course will never happen, we would assume we’ll recognize another $49.6 million of losses, you guys won’t feel any financial impact from that as a shareholder, because it’s in the market. It just happens with the new accounting and you’d see $45.6 million of earnings come off that pool and it’d be like a little captive cash flow machine sitting there that would do that.

The fact that the accretion continues to increase on a quarter-to-quarter basis, actually is telling you that the expected losses are going down. So it’s almost more like you can think about and it’s not totally true, because we do have charge-offs that roll through every quarter. [The economist] think of this if I do better in my losses that fair market value adjustments are going go down, and some portion of it’s just going to end up in the accretiable yield, which is going to move from a loss expectation to a cash flow expectation. And similarly, if the pool performed poorly, you’d go the other way, right. You’d say, now, my earnings outlook is getting worse, but it’s going to pop up, and so, I’ve got to move it up into my mark. And those things are almost going move together and I apologize for not putting the accretion on there. That’s just a gash on my part.

William J. Wallace – Raymond James

No, I think you did. Isn’t that the [3575]?

David L. Gaines

I did. You’re right. Yep – yep, I did. Thank you.

William J. Wallace – Raymond James

That’s total accretion. That’s the accretion of the purchase credit, prepared loans and the performing acquired loans. Is that correct?

David L. Gaines

That is actually the just the PCI piece.

William J. Wallace – Raymond James

Okay. So there’s additional accretion that’s going to be the difference between the $7.9 million, remaining fair market value and the $9.5 million in the fourth quarter?

David L. Gaines

Right.

William J. Wallace – Raymond James

That’s additional $1.6 million.

David L. Gaines

Yeah, and the only other thing I’d remind you about the $3.6 million that’s sitting there, don’t think of that as all marked accretion, because those loan…

William J. Wallace – Raymond James

They are yield.

David L. Gaines

Yeah, it’s yield, because you still got true cash coming in on those loans. In fact, more than half of it’s really just coming in as true cash, people paying us.

William J. Wallace – Raymond James

So, that’s a great segway than to the next, kind of the – back end of this question is, as these loans are, I believe you use the term restructuring, I’m assuming you may be refinancing from the performing pool and then you’re having to move them into your non-acquired pool?

David L. Gaines

Yeah. If you look at the performing piece now, that’s not true for the PCI.

William J. Wallace – Raymond James

Right.

David L. Gaines

But for the performing, that’s exactly right. If you are just – the way the GAAP accounting requires it is if we had a restructuring or we had an extension or something that turned it into a different loan, then what we really need to do is accelerate through the accretion, any remaining accretion on that performing loan. We got to accelerate that into income and then those loans end up looking as, like they are not acquired, which is, you know, the Chris’s question, where you can get into distortion if you just looked at the non-acquired loans. You could really fool yourself on how much net loan growth we’re producing. We’re trying to not mislead anybody about what’s going on out there. We’re producing growth, but it’s not that much.

William J. Wallace – Raymond James

Is it a fair assumption that the loans that are coming out of that performing acquired pool because they are being refinanced or restructured, whatever term you want to use, that the difference in the yields is going to be fairly significant?

David L. Gaines

No. Honestly, not, because the mark – you’ve got a fairly thin mark against any given loan in there, right. I mean one of the [additives] to the accounting is that that fair market value adjustment for the performing acquired loans is kind of peanut butter across every loan individually. We did see early on, particularly with community capital as we move some of those loans out pretty quickly. We saw some of the large accretion, which is what we turned that accelerated accretion and try to pull that out for you guys each quarter. We don’t really see that anymore.

As you keep going more and more into the portfolio, number one the accretions amortized in, you’ve moved a lot of the large loans that have been dealt with already. I wouldn’t say it’s a significant influence. Now if you want to get back and say what do you think your core margin is, and it’s something we tried to spend a lot of time on and frankly it is a lot more challenging with its accounting than it’s ever been in our careers before. I still think, as rough order, is the overall accretion, on all these acquired loans, adding 15 basis points or 20 basis points to our yield, yeah, I would say, probably. What I can’t far enough to tell you (inaudible) is at 27 or is it 18, I can’t get that fine on them unfortunately.

William J. Wallace – Raymond James

Right. But you feel comfortable that give or take maybe 10 basis points that a 4% target is achievable or a NIM, once you get some of the accretion noise out of the way.

David L. Gaines

Yeah, I think you are continuing to see pricing pressure in the market. I would say the weighted average yields in fact what Nancy and I talked yesterday about trying to do some calculations to get the weighted average yield of the origination. So, we can track it better. We have got loans that clearly come in still in the high force.

Nancy J. Foster

Yeah, I think our bankers have done a remarkable job of maintaining margins on loans that are coming up for renewals. So, they are not just kind of defaulting to where they would price a new loan coming in, they are really looking at quality of that loan and trying to sustain the margin that we had. And I’ve really been surprised at what a good job they are doing. It’s not unusual for us to see even 5% or 6% on loans that are coming up for renewal. They tend to be the lower balances, but we have a lot of low balance loans. So, they are doing very well.

James C. Cherry

Yeah. I still think we will see margin pressure. We talked about that consistently every quarter. I know it hasn’t necessarily showed up as much as maybe we thought, but I still think there’s going to be margin pressure just because of what’s happening in the market, and we’ve been able to do a great job. Steve Arnold and the retail team, our treasurer and the retail team have done a great job at the repricing, repositioning of the deposits.

And they work at it every day. At some point that trough is going to run out and we’re going to get it as tight as we can get it. So, I do think you’ll see some erosion, but partly because of the point we made, discipline on the pricing side on both the loans and deposits, prudence in terms of how we set up the initial accounting on the acquired loans. We’re probably sustaining a little better margin, a little more consistency than you might typically expect from a heavy acquired loan book, but that was absolutely our intent.

William J. Wallace – Raymond James

Okay. Good. I think if you could – if you would be willing to collect and share the average yield on new loan production on a quarterly basis or monthly basis, I think that might be very helpful, because what you’re saying is different in a good way from what we are hearing from a lot of the other banks, which is that the more metro markets are experiencing the most pricing pressure on new loans, because there’s more…

James C. Cherry

And that is true and they are. What we’ve been saying consistently is kind of – we affectionately call it in internally, these are natural acts. We could drive a lot more loan growth. There is no question. We could drive a lot more loan growth, but it’s the question of do you even like it two years. And our answer has consistently been no.

William J. Wallace – Raymond James

Right.

James C. Cherry

And so, these very little price, the very long-term loans, I mean in two years, we have done less than a handful of them, and we are perfectly happy to let our poster child this quarter, we share poster child every quarter. So, our poster child this quarter for really an interesting pricing is a Church loan, which of course we all know drives incredibly in some of the business from Church loans, we are just sarcastic.

So a church loan that we had on our books in the Charlotte Metro area, good sized loan, good church, very high quality, refinance out at a ten-year final, 20-year amortization, 270 rate fixed no kind of make a whole language in it over time. That’s not an asset it’s going to help you long-term create shareholder value, we’d rather let it go and keep our capital dry and pursue other sources of revenue and frankly, even if it’s (inaudible) revenues for some period of time, we think over the long periods of time, it’s built consistent earnings, have less volatility and do things that make rational economic sense, don’t just manage to a quarter.

David L. Gaines

Well, I’ll give an anecdotal follow-up to that poster child. I actually shared that at a kind of gathering of a number of banks CEOs recently where I just gave as an illustration something that we didn’t think was smart and wise to be pursuing and I shared that very illustration and one of the bank CEOs in there spoke up, and said well we can’t survive if we don’t make those loans and continue to do that. And so, we think that’s’ smart lending and would do that.

And I said, well tell me, what is your net interest margin? 335. So, yeah, then you can do that and you’re going to see your net interest margins and I would argue that long-term you are not surviving, you’re misleading yourself in that, but we are seeing some of that in the market and there is that kind of reaction and this is a bank that frankly has been a pretty good performer over time and I think has well recognized management and I was shocked as well as some other folks in that room with that response.

William J. Wallace – Raymond James

I think I’ve taken too much of everybody’s time guys. So I appreciate it, I’ll let somebody else have one.

David L. Gaines

Okay. well, thank you. good to talk to you.

Operator

(Operator Instructions) As there are no further questions at this time, so I would like to go ahead and turn the call back over to management for closing remarks.

David L. Gaines

Good quality questions from Chris and Riley and I’m sure that answered many that others may have had. But once again, we thank you for your interest in Park Sterling and for continuing to follow our story, and we look forward to sharing our future performance with you. Thank you again and we are adjourned.

Operator

The conference has now concluded. Thank you for attending today’s presentation, you may now disconnect.

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