PSTB Park Sterling Corp. (MM)

Compensation of Directors

The table below summarizes the total compensation paid to or earned by directors of the Company during the fiscal year ended December 31, 2016.

The table below sets forth the number of unexercised stock options and the number of unvested shares of restricted stock held by our non-employee directors as of December 31, 2016.

Cash Retainer and Meeting Fees for Independent Directors . Under the Company’s director compensation policy effective for 2016, (i) the Chairman of the Board of Directors is paid an annual $50,000 fee, payable monthly, for service as Chairman; (ii) the chairman of the Audit Committee and the chairman of the Loan and Risk Committee of the Board of Directors are each paid an annual $35,000 fee, payable monthly, for service as chairmen of their respective committees; and (iii) each other independent director is paid an annual $30,000 fee, payable monthly, for service as a director of the Company. In addition, each of the Chairman and each independent director is paid a meeting fee of $750 for each Board of Directors meeting attended, whether in person or by telephone, and a meeting fee of $250 for each committee meeting attended, whether in person or by telephone, when such committee meetings are not scheduled concurrent to a full meeting of the Board of Directors.   

In January 2017, following consideration of a market analysis of director compensation practices prepared by an independent consultant, the Nominating and Governance Committee, recommended, and the Board of Directors approved, changes to Board’s retainer and meeting fee schedule for 2017. With the changes, independent directors will receive an annual cash retainer of $40,000 paid quarterly in cash. In addition, a meeting attendance fee of $1,000 per meeting will be paid to independent directors for each Board meeting attended in excess of eight meetings per year. Under the revised cash retainer, the Board Chairman will receive an additional annual retainer of $25,000, the chairpersons of both the Audit and the Board Loan and Risk Committees will each receive an additional $10,000 annual retainer, the chairpersons of both the Compensation and Development and Trust and Investment Committees will each receive an additional $5,000 annual retainer, the Chairperson of the Nominating and Governance Committee will receive an additional $1,000 annual retainer, and any independent directors who are members of the Executive Committee, but not serving in the role as a chairperson of any other committee, will receive an additional annual retainer of $3,000.

Long-Term Incentive Plan Compensation. Directors are eligible for awards under the Park Sterling Corporation 2014 Long-Term Incentive Plan (the “2014 LTIP”), pursuant to which nonstatutory stock options, stock appreciation rights and other stock-based awards (including, without limitation, restricted stock awards) can be awarded to directors from time to time, in the discretion of the Board of Directors and the Nominating and Governance Committee. Equity awards granted to directors during the fiscal year ended December 31, 2016 are disclosed in the table above.

In connection with the market analysis described above, the Nominating and Governance recommended, and the Board of Directors approved, the annual granting of stock awards totaling $40,000 in value to independent directors. These awards will have a one year vesting period, and will begin during 2017

Nonqualified Deferred Compensation . Directors are eligible to participate in the Park Sterling Bank Deferred Compensation Plan (the “Deferred Compensation Plan”), which provides directors the ability to defer Board fees, with deferred amounts credited with interest at the Wall Street Journal prime rate, with a floor of at least 0.50%. For more information, see “Compensation of Executive Officers – Nonqualified Deferred Compensation.”

Predecessor Company Benefits. Prior to the merger of Citizens South with the Company, Citizens South Bank entered into nonqualified deferred compensation and income continuation agreements for the benefit of certain of its directors, including Ben R. Rudisill, II. Mr. Rudisill’s agreement provides him with an annual benefit of $78,816, payable in monthly installments for a period of 10 years to Mr. Rudisill upon his retirement from service on or after attaining age 70 or to Mr. Rudisill’s beneficiaries upon his death. Benefits under the agreement are forfeited if Mr. Rudisill’s service is terminated for cause.

Also prior to the merger, Citizens South Bank entered into nonqualified director retirement agreements for certain of its directors, including Mr. Rudisill. Mr. Rudisill’s agreement provides for an annual benefit of $8,000, payable to Mr. Rudisill in monthly installments for a period of 15 years upon his termination of service on or after attaining age 70. In the event of Mr. Rudisill’s pre-retirement death or death before all payments under the agreement have been made to him, monthly benefits are provided for his designated beneficiary or beneficiaries. If Mr. Rudisill dies without a valid beneficiary designation, his surviving spouse will be his beneficiary, or if none, then the benefits will be paid to his personal representative. Benefits under the agreement are forfeited if Mr. Rudisill’s service is terminated for cause.

Also prior to the merger, Citizens South entered into Endorsement Split Dollar Agreements with certain executives, including Kim S. Price, which Park Sterling assumed in connection with, and agreed to continue to maintain after, the merger. Mr. Price is 100% vested in his life insurance benefit under the policy. Under the Endorsement Split Dollar Agreement, upon Mr. Price’s death, Mr. Price’s designated beneficiaries will be paid a death benefit equal to the death proceeds under the policy minus the cash surrender value of the policy. The cash surrender value of the policy will be paid to Park Sterling. No premiums were paid by or on behalf of Park Sterling with respect to this policy during 2016.

Non-Competition Agreement and Consulting Agreement. Effective at the time of the merger of Citizens South with the Company in 2012, Kim S. Price entered into a Consulting Agreement and a Non-Competition Agreement with the Company and the Bank. Pursuant to the Consulting Agreement, Mr. Price performs consulting services as the Company and Bank may reasonably request, including supporting merger activities, government relations, community relations, industry group association and business development efforts for a period of five years following the merger. Pursuant to the Non-Competition Agreement, Mr. Price has agreed not to compete with the Company and the Bank for a period of the longer of three years or the consulting period following the merger for the benefit of any business within 25 miles of any office of Citizens South or the Company as of the closing date of the merger. During such three- to five-year period, Mr. Price has also agreed not to solicit any customers of the Company or the Bank, disparage the Company or the Bank or offer employment to any employee of the Company or Bank or any of their subsidiaries or affiliates that would cause such person(s) to terminate employment and accept employment with or provide services to any business that competes with the Company or Bank. In exchange for the consulting services, the Company and the Bank have agreed to pay Mr. Price $250,000 per year payable in equal monthly installments. In exchange for the non-competition agreement, the Company and the Bank agreed to pay Mr. Price $1,500,000, with $775,000 paid by lump sum at the closing date of the merger and $725,000 paid on the first anniversary of the closing date of the merger. Mr. Price has been determined by the Nominating and Governance Committee to be a non-independent director in accordance with the independence standards of NASDAQ in light of these payments.

Board Meetings; Attendance

The Board of Directors held seven meetings during 2016. Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and all committees of the Board of Directors on which he or she served during 2016.

Committees of the Board of Directors

The Board of Directors has a standing Executive Committee, Audit Committee, Compensation and Development Committee, Nominating and Governance Committee, Loan and Risk Committee, and Trust and Investment Management Committee, each of which operates under a charter that is included on the Company’s website at www.parksterlingbank.com. Information on the Company’s website does not form a part of this Proxy Statement. Current membership of the committees and number of meetings for these committees during 2016 are as follows:

The following is a brief description of each committee of the Board of Directors.

Audit Committee : The Audit Committee discharges the Board of Directors’ responsibility relating to the oversight of (i) the integrity of the financial statements and internal controls of the Company; (ii) the independent auditor’s qualifications and independence; (iii) the performance of the Company’s internal audit function and independent auditors; and (iv) compliance by the Company with legal and regulatory requirements. The Audit Committee, among other things, is responsible for the appointment, compensation and oversight of the independent auditors and review of the Company’s financial statements, audit reports, internal controls and internal audit procedures. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. Each member of the Audit Committee has been determined to be an independent director, in accordance with the independence standards of the SEC and NASDAQ applicable to audit committees.

Compensation and Development Committee : The Compensation and Development Committee (the “Compensation Committee”) is appointed by the Board of Directors to (i) review and approve the Company’s compensation and benefit programs; (ii) ensure the competitiveness of those programs; (iii) discharge the responsibilities of the Board of Directors relating to compensation of the Company’s Chief Executive Officer and other officers, as appropriate; and (iv) advise the Board of Directors on the development of and succession for key executives. The Chief Executive Officer works closely with the Compensation Committee to evaluate and recommend compensation for the other executive officers and other key employees. Each member of the Compensation Committee has been determined to be an independent director, in accordance with the independence standards of NASDAQ applicable to compensation committees.

The Compensation Committee may from time to time, in its sole discretion, engage a compensation consultant to conduct a review, on either a comprehensive or selected basis, of the competitiveness and effectiveness of the Company’s executive compensation program relative to market practices and business goals or engage legal counsel or other advisors to assist it in the performance of its duties, but only after taking into consideration factors relevant to such compensation consultant’s or other adviser’s independence as specified in the NASDAQ listing standards. Such compensation consultants or other advisors, when engaged, serve at the request of, and report directly to, the Compensation Committee. The Compensation Committee has the sole authority to approve such adviser’s fees and other terms and conditions of engagement, and the Company must pay the reasonable compensation of any compensation consultant or other advisor retained by the Compensation Committee.

The Compensation Committee previously engaged Pearl Meyer & Partners (“Pearl Meyer”) to, among other things, conduct a market-competitiveness analysis of the existing employment agreements with the Company’s executive officers in January 2015. In 2016, the Compensation Committee utilized this analysis in connection with the preparation of new employment agreements as described in “Compensation Discussion and Analysis” below. As part of this engagement, Pearl Meyer also conducted a review of the Company’s compensation program for its executive officer. In addition, in September 2016, the Compensation Committee again engaged Pearl Meyer, in this case (i) to review the Company’s proposed annual incentive plan, which the Company adopted in November 2016, and (ii) in anticipation of the committee’s compensation determinations for 2017, to conduct a review of the Company’s compensation program for its executive officers, including development of a custom peer group of institutions with a similar asset size to the Company in light of the Company’s growth, and compensation benchmarking for executives based on published survey sources and the peer group, focusing on base salary, annual incentives, long-term incentives, benefits/perquisites and supplemental retirement arrangements. In retaining Pearl Meyer as its consultant, in each case the Compensation Committee considered that Pearl Meyer has not provided any other services to the Company other than specific engagements by the Compensation Committee from time to time regarding executive compensation, the fees paid to Pearl Meyer by the Company as a percentage of Pearl Meyer’s total revenues, Pearl Meyer’s policies and procedures to prevent conflicts of interest, that the individual advisors assigned to the Company have no business or personal relationship with any member of the Compensation Committee and do not own any Company stock, and that Pearl Meyer and such individual advisors have no business or personal relationship with any executive officer of the Company. In each case, the Compensation Committee concluded that Pearl Meyer was independent and had no conflicts of interest in its performance of services to the Compensation Committee.

Additional information on the process and procedures for executive compensation determinations, including the role of management and compensation consultants, is contained under the heading “Compensation Discussion and Analysis” below.

Nominating and Governance Committee : The Nominating and Governance Committee (i) reviews and recommends to the Board of Directors the appropriate size, functions and needs of the Board of Directors; (ii) reviews the qualifications of proposed director nominees and recommends such nominees to the Board of Directors; (iii) evaluates and recommends to the Board of Directors corporate governance practices applicable to the Company; (iv) reviews and makes recommendations to the Board of Directors regarding independent director compensation; (v) periodically reviews the duties and composition of the committees of the Board of Directors; (vi) oversees the annual evaluation of the Board of Directors and its committees; and (vii) reviews and makes recommendations to the Board of Directors regarding Board compensation. The Nominating and Governance Committee also periodically reviews the functions of senior officers and reviews shareholder proposals and proposed responses, including consideration of director nominations from shareholders. A more detailed discussion regarding the process for nominating potential director candidates is included under the heading “Corporate Governance Matters – Process for Nominating Potential Director Candidates.” Each member of the Nominating and Governance Committee has been determined to be an independent director, in accordance with the independence standards of NASDAQ.

Loan and Risk Committee : The Loan and Risk Committee provides oversight of management’s responsibilities to assess and manage the Company’s risks including, but not limited to, risks related to the Company’s credit and lending activities and asset-liability management. This includes the Company’s credit, market, funding and liquidity, interest rate, operational, compliance, reputational, legal, and cyber security risks .

Executive Committee : The Executive Committee generally exercises all of the powers and authority of the Board of Directors in the management of the affairs of the Company in the interim between meetings of the Board of Directors. The Executive Committee is established with the expectation that it will not take material actions absent special circumstances. The Executive Committee has no power to authorize distributions, authorize issuance or acquisition of shares, approve shareholder actions, amend the Company’s articles of incorporation or bylaws or approve a merger.

Trust and Investment Management Committee : The Trust and Investment Management Committee is appointed by the Board of Directors to oversee senior management’s responsibilities to assess and manage the Company’s Investment Management and Trust Services Group Services. The Trust and Investment Management Committee provides oversight of the Company’s trust and investment management activities, including providing for (i) sound banking practices in the operation of a trust department; and (ii) safeguards for the protection of depositors , fiduciary beneficiaries, creditors , shareholders, and the public .

CORPORATE GOVERNANCE MATTERS

Director Independence

The Board of Directors determines which of our directors is independent. For a director to be considered independent under NASDAQ listing standards, the Board of Directors must affirmatively determine that the director meets the criteria for independence set forth from time to time in the NASDAQ listing standards.

The Board of Directors has evaluated the relationships between each current director (and his or her immediate family members and related interests) and the Company or the Bank and has determined that each of the following directors is independent under the applicable NASDAQ listing standards: Walter C. Ayers, Leslie M. Baker, Jr. (Chairman of the Board), Larry W. Carroll, Jean E. Davis, Grant S. Grayson, Patricia C. Hartung, Thomas B. Henson, Jeffrey S. Kane, Ben R. Rudisill, II and Robert G. Whitten.

The Board of Directors has determined that James C. Cherry, Chief Executive Officer of the Company, is not independent because he is an executive officer of the Company. The Board of Directors has also determined that Kim S. Price, Vice Chairman of the Company, is not independent because of the Non-Competition Agreement and Consulting Agreement between Mr. Price, the Company and the Bank entered into at the time of the merger of Citizens South with the Company.

Majority Voting and Director Resignation Policy

The Company amended its Articles of Incorporation following the 2016 annual meeting of shareholders to require that a director must be elected by a majority of the votes cast in an uncontested election (that is, an election where the number of nominees is not greater than the number of directors to be elected). This means that the number of votes cast “for” a director must exceed the number of shares cast “against” that director in order to elect the director to the Board of Directors. In a contested election, where the number of director nominees exceeds the number of directors to be elected, directors will be elected by a plurality vote. Under the Board of Directors’ Director Resignation Policy, if a director nominee in an uncontested election receives more votes “against” than votes “for” his or her election, the director nominee must offer to resign from the Board. The Nominating and Corporate Governance Committee will make a recommendation to the full Board whether or not to accept the resignation, or to take other action, and the Board will act on the tendered resignation, taking into account the Nominating and Corporation Governance Committee’s recommendation, and promptly publicly disclose its decision and the basis for the decision. The Nominating and Corporate Governance Committee and the Board, in making their decisions, may consider any factors or other information that they deem relevant. Any director who offers to resign pursuant to this policy may not participate in the Nominating and Corporate Governance Committee recommendation or the Board action regarding whether to accept the resignation offer.

Audit Committee Financial Expert

The Board of Directors has determined that one member of the Audit Committee, Larry W. Carroll, qualifies as an “audit committee financial expert.” Mr. Carroll is “independent” as that term is defined in the NASDAQ listing standards and the SEC rules.

Executive Sessions of Independent Directors

Independent directors meet at regularly scheduled executive sessions, generally at the end of each regularly scheduled meeting of the Board of Directors, without the directors who are not independent. The independent Chairman of the Board of Directors presides over meetings of the non-management or independent directors.

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), Controller (the principal accounting officer) and Treasurer. 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 at www.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, the Controller and Treasurer, will be disclosed on the Company’s website promptly following the date of such amendment or waiver, as applicable. Information on the Company’s website does not form a part of this Proxy Statement.

Shareholder and Interested Party Communications with Directors

Shareholders and other interested parties may communicate directly with the entire Board of Directors, any committee of the Board of Directors, the chairman of any committee, any individual director, the independent directors, as a group, or any other group of directors by writing to: Park Sterling Corporation, 1043 East Morehead Street, Suite 201, North Carolina 28204, Attention: Secretary. Each such communication should specify the applicable addressee(s). The Company’s Board of Directors has instructed the Secretary to forward these communications to the addressee, and if no specific addressee is listed, to the Chairman of the Board of Directors.

Director Attendance at Annual Meeting

The Company believes that the Annual Meeting is an opportunity for shareholders to communicate directly with the Company’s directors. Consequently, each director is encouraged to attend the Annual Meeting of Shareholders. All of the persons who were members of the Board of Directors at the time of the Company’s 2016 Annual Meeting of Shareholders attended such meeting.

Process for Nominating Potential Director Candidates

The Nominating and Governance Committee is responsible for identifying and screening potential director candidates and recommending qualified candidates to the full Board of Directors for nomination. Director nominees are recommended to the Board of Directors from time to time, but at least annually, by the Nominating and Governance Committee for election by the shareholders. Nominees for director are selected on the basis of outstanding achievement in their personal careers, wisdom, broad experience, integrity, ability to make independent analytical inquiries, understanding of the business environment, forthrightness and willingness to devote adequate time to Board of Directors’ duties. Knowledge of the financial services industry, and banking in particular, is also considered. Nominees must also possess a willingness to challenge and stimulate management and the ability to work as part of a team in an environment of trust.

The Nominating and Governance Committee reviews the background and qualifications of each nominee to determine such nominee’s experience, competence and character and assesses such nominee’s potential contribution to the Board of Directors, taking into account the then-existing composition of the Board of Directors and such other factors as the Nominating and Governance Committee deems appropriate. The Board of Directors believes that the business experience of its directors has been, and continues to be, critical to our success.

While the Company does not have a formal diversity policy with respect to the Board of Directors, the Board of Directors is committed to diversified membership and believes its membership should broadly reflect the communities served by the Company and the Bank as well as the strategic priorities of the Company, which include diversity of gender, race, ethnicity and experience. The Nominating and Governance Committee actively considers diversity in recruitment and nominations of directors. The current composition of our Board of Directors reflects those efforts. Going forward, the Nominating and Governance Committee will periodically review the composition of the Board of Directors to ensure it continues to meet the diversity goals, especially in line with the Company’s growth strategy into its target markets and subsequent accomplishments. The Nominating and Governance Committee uses its network of contacts when compiling a list of potential director candidates and may in the future engage outside consultants, such as professional search firms.

The Nominating and Governance Committee also will consider qualified nominees that are recommended by shareholders when such recommendations are submitted in accordance with Article II, Section 13 of the Company’s Bylaws, which the Board of Directors amended in March 2016. Shareholders may submit, in writing, the names and qualifications of potential director nominees to the Secretary, Park Sterling Corporation, 1043 East Morehead Street, Suite 201, Charlotte, NC 28204, for delivery to the Chair of the Nominating and Governance Committee for consideration. The written notice must include certain information about the proposed nominee and the shareholder submitting the nomination, including (i) with respect to the proposed nominee, the nominee’s name and address, the number of shares of stock owned of record and beneficially by such nominee, any derivative positions held of record or beneficially by such nominee related to, or the value of which is derived in whole or in part from, the value of the Company’s shares and whether and the extent to which any hedging, derivative or other transaction has been entered into by or on behalf of, or any other agreement, arrangement or understanding has been made, the effect or intent of which is to mitigate loss to, or to manage the risk or benefit from share price changes for, or to increase or decrease the voting power of, such nominee with respect to the Company’s shares, and all other information relating to such nominee that would be required to be disclosed in a proxy statement or other filings for a contested election (including the nominee’s written consent to being named as a nominee and to serving as a director if elected); and (ii) with respect to the shareholder submitting the nomination, the name and address of such shareholder as they appear on Company’s books, of any beneficial owner on whose behalf the nomination is being submitted, and of their respective affiliates and associates, the number of shares of stock owned of record or beneficially by any such person, any derivative positions held of record or beneficially by any such person related to, or the value of which is derived in whole or in part from, the value of the Company’s shares and whether and the extent to which any hedging, derivative or other transaction has been entered into by or on behalf of, or any other agreement, arrangement or understanding has been made, the effect or intent of which is to mitigate loss to, or to manage the risk or benefit from share price changes for, or to increase or decrease the voting power of, any such person with respect to the Company’s shares, a description of all agreements, arrangements or understandings with respect to the nomination between or among any such person, the proposed nominee and any other persons, any other information regarding any such person that would be required to be disclosed in a proxy statement or other filings for a contested election, and a representation that such shareholder is a record holder of the Company’s Common Stock entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to make such nomination. Article II, Section 13 of the Company’s Bylaws also requires that any such shareholder recommendation be received by the Company in accordance with the time frame described under the heading “Shareholder Proposals” below. A copy of the Company’s Bylaws is available upon written request to: Park Sterling Corporation, 1043 East Morehead Street, Suite 201, North Carolina 28204, Attention: Secretary.

Pursuant to its charter, the Nominating and Governance Committee (i) periodically reviews the Company’s corporate governance matters, including criteria for the selection of Board of Directors members to ensure that the criteria, including diversity, are being addressed appropriately and (ii) conducts an annual assessment of its performance and of the charter and recommends changes to the Board of Directors when necessary.

All nominees for election to the Board of Directors at the Annual Meeting have been recommended by the Nominating and Governance Committee. All such nominees are current directors of the Company.

Board Leadership Structure

The Board of Directors is committed to strong, independent leadership and believes that objective oversight of management performance is a critical aspect of effective corporate governance. All but two of the members of the Board of Directors are independent directors. In addition, our key governance committees of the Board of Directors – Audit, Compensation and Development, and Nominating and Governance – are comprised solely of, and chaired by, independent directors.

Currently, the positions of Chairman of the Board and Chief Executive Officer of the Company are held by separate individuals, with James C. Cherry serving as Chief Executive Officer and Leslie M. Baker, Jr. serving as independent Chairman of the Board. The Board of Directors believes that at the current time this structure is appropriate for the Company, as it allows Mr. Cherry to focus on the Company’s strategy, business and operations, while enabling Mr. Baker to assist with Board-level matters and serve as a liaison between the Board of Directors and the Company’s management. The Board of Directors regularly deliberates and discusses its appropriate leadership structure and the role and responsibilities of the Chairman of the Board of Directors based upon the needs of the Company from time to time to provide effective, independent oversight of management.

Role in Risk Oversight

As the Company’s principal governing body, the Board of Directors has the ultimate responsibility for overseeing the Company’s risk management practices. On an ongoing basis, the Board of Directors identifies areas of risk that particularly affect the Company and assigns senior members of management to report to the Board of Directors on those areas of risk at regularly scheduled meetings of the Board of Directors. The areas of risk identified by the Board of Directors change from time to time based on business conditions and competitive considerations. The Board of Directors has also delegated certain risk management functions to its committees.

The primary roles and responsibilities of the Audit Committee are to assist the Board of Directors with the oversight of (i) the integrity of the financial statements and internal controls of the Company; (ii) the independent auditor’s qualifications and independence; (iii) the performance of the Company’s internal audit function and independent auditors; and (iv) compliance by the Company with legal and regulatory requirements. Under its charter, the Audit Committee, among other responsibilities and duties:

Additionally, the Loan and Risk Committee of the Board of Directors provides oversight of management’s responsibilities to assess and manage the Company’s risks, including, but not limited to, risks related to the credit and lending activities of the Company and the Bank and asset-liability management. This includes the Company’s credit, market, funding and liquidity, interest rate, operational, compliance, reputational, legal and cyber security risks. In addition, the full Board of Directors is invited to meetings of the Loan and Risk Committee. The Loan and Risk Committee, among other responsibilities and duties:

The Trust and Investment Management Committee provides oversight of the Company’s Investment Management and Trust Services Group Services , including associated fiduciary risks.

Stock Ownership of Directors

The Board of Directors has adopted a governance guideline pursuant to which each non-employee director is expected to beneficially own shares of Common Stock throughout the full term of the director’s service that have a market value of at least three times the director’s annual cash retainer. In order to satisfy the guideline, the policy states that each director should refrain from certain dispositions of Common Stock until the director has satisfied the minimum ownership requirement. Currently, each of the eleven non-employee directors meets or exceeds the guidelines for Common Stock ownership. As discussed below in “Compensation Discussion and Analysis – Stock Ownership,” executive officers also are expected to own a minimum amount of Common Stock. See ”Beneficial Ownership of Common Stock” above for a specific listing of the amount of Common Stock beneficially owned by each member of the Board of Directors and each executive officer of the Company named in the Summary Compensation Table in this Proxy Statement. Directors and executive officers of the Company may not engage in speculative trading or hedging strategies with respect to Common Stock.

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

The Company’s practice is to provide total compensation that attracts, retains and incentivizes the management talent needed to execute our business strategies, and that promotes both our short-term and long-term objectives. Achievement of short-term objectives is rewarded through annual cash incentives, while equity incentive awards encourage employees to focus on the Company’s long-term goals. These incentives are based on business and financial objectives considered by the Compensation Committee to be important to the Company and its shareholders, including execution of growth strategies, maintenance of asset quality, and generation of earnings growth, return on assets and return on equity, along with the Compensation Committee’s assessment of individual performance and contributions to the Company.

The Company’s compensation practices reflect our pay-for-performance philosophy, whereby a significant component of the total compensation paid to our Chief Executive Officer and other named executive officers (together, the “NEOs;” see “—Named Executive Officers” below) is variable and tied to corporate and individual performance. The Company advanced its stated business objectives in 2016 by achieving meaningful improvements in its profitability and return measures while maintaining a sound credit position and a strong financial condition.

Based on the Company’s performance in 2016 and in furtherance of its compensation philosophy, the Company took the following material actions with respect to compensating its NEOs:

General Compensation Philosophy and Guiding Principles

The Company operates in the highly competitive financial services industry where attracting and retaining talented executives is critical to future success. For this reason, the Company has designed a competitive total compensation program that provides a mix of base pay, and when the Compensation Committee determines appropriate, annual cash incentive opportunities and equity-based compensation. Additionally, the Company provides certain retirement and other health and welfare programs. Together, these components create a pay-for-performance philosophy which is manifested in our compensation practices.

The Compensation Committee carefully considers how the individual elements of executive compensation and the executive compensation program as a whole could potentially encourage executives, either individually or as a group, to make excessively risky business decisions at the expense of long-term shareholder value. The Compensation Committee considers the following characteristics of the Company’s executive compensation program as factors that help mitigate risk:

The Board of Directors and Compensation Committee pay careful attention to communications received from shareholders on executive compensation, including the non-binding advisory “say on pay” vote. At the Company’s 2016 Annual Meeting, our shareholders approved, by 95% of the votes cast, the non-binding advisory resolution on the 2015 compensation of NEOs submitted to shareholders. The favorable advisory vote was considered and reflected in the decision to maintain the overarching framework and balance for NEO compensation for 2016, but not for specific pay-level decisions. Based on the preference expressed by shareholders at the Company’s 2012 Annual Meeting, the Board of Directors currently has determined to have an annual advisory vote on NEO compensation until the next required nonbinding shareholder advisory vote on the frequency of our advisory “say on pay” vote is held.

Employment Agreements . In connection with the Bank’s Public Offering in 2010, the Bank entered into employment agreements with Messrs. Cherry, Kennedy and Gaines and Ms. Foster (the “2010 Agreements”), in order to secure the services of these employees within the highly competitive financial services industry. These 2010 Agreements were designed to provide the executives with a measure of predictability for the future that, in turn, supported the Bank’s efforts to attract and retain the necessary management talent to execute our business strategies. Such agreements also include non-compete and non-solicitation provisions that help protect the Company from the loss of revenues and/or employees in the event an executive is terminated. In March 2016, the Company entered into new employment agreements with Messrs. Cherry, and Kennedy and entered into an employment agreement with Mr. Truslow, who was hired as Executive Vice President and Chief Financial Officer of the Company and the Bank effective February 8, 2016. As discussed in greater detail below under “2016 Compensation Events”, the Company believes the new employment agreements better align the Company’s executive compensation practices with current market norms and provide a powerful tool for the Company to retain the executives’ employment going forward.

From time to time, we may consider the use of additional employment agreements with high performing and long-term senior employees as the Company deems necessary in order to balance individual financial goals of employees relative to the needs of the Company and its shareholders. For more information regarding the executive officers’ employment agreements generally, see “Compensation of Executive Officers – Employment Agreements”.

Benefits and Perquisites . The Company currently provides NEOs with limited perquisites and other personal benefits. While others in the financial services industry, including community banks, provide executives with perquisites such as personal or financial tax advice; personal travel using vehicles owned or leased by the company; personal use of other property owned or leased by the company; security provided at a personal residence or during personal travel; personal club memberships; and discounts on company services not generally available to employees, the Company does not currently provide any of these listed benefits to NEOs, as the Compensation Committee believes structuring the Company’s compensation around base salary, annual cash incentives and equity awards is more transparent to shareholders and promotes a more accurate assessment of NEO compensation levels.

The Company maintains various broad-based employee benefit plans that constitute a portion of the total compensation package available to all eligible employees, including our NEOs. These other employee benefits include:

The benefits our NEOs receive under the broad-based plans described above are determined by the same criteria applicable to all Company employees. In general, these benefits are designed to provide a safety net of protection against the financial catastrophes that can result from illness, disability or death. These benefits help keep the Company competitive in attracting and retaining employees. Benefits also help the Company attract and retain employees and allow them to focus on their roles at the Company by helping to reduce their concerns related to obtaining health care, maintaining adequate savings for retirement and similar issues.

Executive Life Insurance . In 2011, the Company, acting through the Bank, purchased bank-owned life insurance that included, among certain other salaried employees, policies on the individual lives of Messrs. Cherry and Kennedy and Ms. Foster. Under separate agreements with each insured party, including these executives, 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 believes that the executive life insurance policies provide protection for the Company should an executive pass away during his or her employment, while also providing these executives with additional life insurance that helps them protect their families. The Company currently does not provide any post-retirement split dollar benefits to the NEOs. The purchase of bank-owned life insurance was only for persons employed at that time and no additional purchases have been made since 2011.

Executive Retirement Plan. The Company, acting through the Bank, maintains the Deferred Compensation Plan, which is designed to provide executives, including the NEOs, a greater ability to plan for their retirement. Accordingly, the Deferred Compensation Plan provides certain executives, officers and directors, including the NEOs, the ability to defer base salary and bonus compensation (or, in the case of directors, Board fees). For more information, see “Compensation of Executive Officers – Nonqualified Deferred Compensation.”

201 6 Compensation Events

Entry into New Employment Agreements . As discussed earlier, in March 2016 the Company entered into new employment agreements with Messrs. Cherry, Kennedy and Truslow (the “2016 Employment Agreements”). In the case of Messrs. Cherry and Kennedy, the 2016 Agreements replace their respective 2010 Agreement. In the case of Mr. Truslow, the Company entered into the 2016 Employment Agreement with him in connection with his employment as Chief Financial Officer of the Company. Ms. Foster declined to enter into a new employment agreement, and her 2010 employment agreement remains in effect.

As the 2010 Agreements had been in place for many years and dated back to the Bank’s Public Offering, the Compensation Committee had previously engaged Pearl Meyer to undertake a market-competitiveness analysis in January 2015 to assist the committee’s analysis of whether the terms of those agreements were still appropriate in light of the Company now being an established public company, its continued growth and expansion, current market trends and compensation best-practices. Based on the information provided by Pearl Meyer and in consultation with the executives, the 2016 Employment Agreements differ from the 2010 Agreements in the following material respects:

In approving the 2016 Employment Agreements, the Compensation Committee recognized that certain of the terms were more favorable to the Company than the 2010 Agreements and other terms were more favorable to the executives. The Compensation Committee believes that, taken holistically, the 2016 Employment Agreements provide appropriate protections for the Company and the executives and are in the interest of the Company’s shareholders to ensure the Company’s long-term retention of its management team.

Base Salary Increases. The Compensation Committee increased the base salaries of Mr. Cherry, Mr. Kennedy, Ms. Foster and Mr. Ladnier in 2016, as follows:

Adoption of Executive Incentive Program . In November 2016 and in consultation with Pearl Meyer regarding executive compensation best practices, the Compensation Committee adopted the Park Sterling Corporation Executive Incentive Program (the “EIP”), as part of a total compensation package which includes base salary, annual cash bonus compensation, and long-term equity compensation, as well as traditional employee benefits to attract, retain and incentivize management of the Company. The EIP replaced the Company’s previous discretionary annual bonus program and is generally structured pursuant to the cash performance award provisions of the 2014 LTIP. Participants in the EIP are limited to the Company’s CEO and those executives or other employees of the Company and its affiliates recommended by the CEO and approved by the Compensation Committee, at its discretion, for each program year (each calendar year). The Compensation Committee will establish the target opportunity amount of each participant’s potential award as well as the applicable performance goals, as set forth in the 2014 LTIP, for a program year at the start of the performance period, including any performance thresholds or maximum payouts.

If the Compensation Committee establishes a performance threshold and/or maximum payment and the performance achievement falls between such threshold, target and/or maximum, the applicable award will be calculated using linear interpolation. The Compensation Committee can exercise negative discretion to decrease (but not increase) the amount of a participant’s award otherwise payable pursuant to the EIP. In the event of a participant’s termination of employment during the program year or prior to payment, no award will be paid. However, if the participant’s termination is due to death, disability (as defined in the 2014 LTIP) or retirement (voluntary termination of employment upon reaching age 55 with 10 years of service, or age 65, in each case with the Compensation Committee’s consent), or if a participant transfers out of an eligible position, the participant will remain eligible to receive a prorated bonus under the EIP for that program year, based on actual performance measured against the applicable performance goal(s).

All awards under the EIP are subject to any clawback or compensation recoupment policy or program adopted by the Company or its affiliates, as well as any limitation under any regulatory policy or rule applicable to the Company or its affiliates. In addition, a participant’s right to payment under the EIP also shall be forfeited in circumstances related to issuance of a regulatory enforcement action, memorandum of understanding or other negative directive action or in the case of unsatisfactory credit quality measures, in each case upon determination by the Compensation Committee that payment of bonuses is imprudent, or in certain circumstances related to a particular participant, including unsatisfactory performance evaluations or material violation of Company policies, including its code of ethics.

Establishment of 2016 EIP Target Awards and Bonus Payments . As part of the Company’s implementation of the EIP and in lieu of the Company’s previous discretionary bonus program, the Compensation Committee formalized the bonus performance targets and potential payouts applicable to the Company’s executive officers for fiscal year 2016, with all the Company’s NEOs, other than Mr. Gaines, participating. Accordingly, at the time the EIP was adopted, the Compensation Committee confirmed that potential payments under the EIP for 2016 would be based upon the Company’s achievement of certain Adjusted Earnings Per Share (“Adjusted EPS”) performance goals and approved target payment amounts for the executive officers (expressed as a percentage of base salary) as follows: (i) Mr. Cherry – 75%; (ii) Mr. Kennedy, Ms. Foster and Mr. Truslow – 55%; and (iii) Mr. Ladnier – 30% (“Target Awards”). Actual bonus payments under the EIP for the 2016 program year could range from 50% to 150% of such Target Award bonus amounts, based on the achievement of the following threshold, target and maximum 2016 earnings per share objectives that were established earlier in the year as part of the Company’s discretionary bonus program. Furthermore, the Compensation Committee could adjust an actual award paid to an NEO based on the NEO’s personal performance.

The Compensation Committee believes that Adjusted EPS is an appropriate metric on which to determine annual bonus payments based on the wide acceptance in the banking industry of earnings per share as an important indicator of financial performance. The Compensation Committee also determined that in the calculation of Adjusted EPS for purposes of the performance goals for 2016 awards, the Company’s reported earnings per share should be adjusted to exclude the effect of merger-related expenses, gains or losses on the sale of securities, the loss on the termination of an interest rate hedge, and the tax benefit associated with the early adoption of a new accounting standard, as shown in the table below, to better reflect core earnings and facilitate comparisons of the Company’s financial performance compared to it peers.

* Non-GAAP financial measure; reconciliation to the most comparable GAAP measure is presented in the table above.

The Company achieved an Adjusted EPS of $0.520, or approximately 105% of its Target Adjusted EPS. Based on the Company’s performance, the Compensation Committee awarded the participating NEOs the following amounts under the EIP:

(1) As noted earlier, the Compensation Committee determined to award Mr. Truslow an additional discretionary bonus of $29,275 for a total of $206,808, reflecting his extraordinary efforts in taking over the role of Chief Financial Officer during 2016 and to set his annual bonus compensation at a level commensurate with the Company’s other Executive Vice Presidents.

(2) The Compensation Committee exercised discretion under the EIP in awarding Mr. Ladnier’s 2016 annual bonus, in order to be commensurate with bonuses awarded to other senior, non-executive officers.

The Compensation Committee also considered the following Company performance indicators in determining whether to exercise negative discretion under the EIP to reduce bonus payments, and concluded that the Company’s strong performance did not merit any such downward adjustments in 2016:

Moreover, in considering whether to apply negative discretion, the Committee also reviewed and analyzed the individual performance of the NEOs and their overall performance and their contributions towards achieving the Company-wide performance measures described above. Generally, bonuses were paid to our NEOs in January of 2017, except in the case of Mr. Cherry who received approximately 90% of his bonus in December of 2016 in recognition of the Company’s strong year-to-date performance with the remainder paid in January of 2017.

Equity Awards. The Compensation Committee granted equity awards in the form of restricted stock in the amounts shown below to the NEOs in May 2016, except for Mr. Truslow, whose grant was made in March 2016 in connection with his joining the Company as Executive Vice President and Chief Financial Officer:

These shares of restricted stock, which were awarded under the 2014 LTIP, vest in approximately equal one-third increments annually, over a period of three years, subject to the executive’s continued service with the Company or its affiliates and to accelerated vesting upon the executive’s termination by the Company without “cause” or resignation for “good reason.” For more information see “Compensation of Executive Officers - Potential Payments Upon Termination or Change of Control” below. Dividends are accrued with respect to the shares of restricted stock but are paid to the NEO only if and when the shares to which the dividends are attributable are vested. These awards, which vest over a multi-year period, are designed as long-term retention tools and are intended to help align the NEOs’ long-term interests with those of our shareholders, based on meaningful levels of equity ownership.

Vesting of Previously Granted Performance-Based Restricted Stock Awards . As previously disclosed, following the Bank’s Public Offering in 2010 and the holding company reorganization effective January 1, 2011, the Company awarded certain stock price performance-based restricted shares to certain of the NEOs as contemplated during the Public Offering. These stock price performance-based restricted shares were designed to vest one-third each when the Company’s stock price per share reached the following performance thresholds for 30 consecutive trading days: (i) 125% of Public Offering price ($8.13); (ii) 140% of Public Offering price ($9.10); and (iii) 160% of Public Offering price ($10.40). The first two performance goals were met as of September 28, 2016 and December 22, 2016, respectively, and accordingly one-third of these restricted shares that remained outstanding vested as of each such date. In December 2016, following consideration of the recent stock price performance and the original purpose of the awards, the Compensation Committee approved the early vesting of the final third of these restricted shares as of December 22, 2016. Based on the Company’s actual stock price performance, these shares would have vested in accordance with their terms upon achievement of the final performance threshold of $10.40 as of January 31, 2017. The number of shares subject to early vesting for the NEOs are as follows: Mr. Cherry – 51,975 shares; Mr. Kennedy – 32,340 shares; and Ms. Foster – 32,340 shares.

Agreement with David L. Gaines . In connection with Mr. Gaines’ stepping down from his role as Chief Financial Officer, the Company believed it was important to memorialize the terms of his departure to provide a smooth and orderly transitioning of his employment. As a result, the Bank and Mr. Gaines entered into an Agreement and Release dated February 5, 2016 (the “Gaines Agreement”), which replaced Mr. Gaines’ existing 2010 Agreement with the Bank and provided for Mr. Gaines to remain employed through March 31, 2016. Pursuant to the Gaines Agreement, Mr. Gaines received (i) severance pay equivalent to the base salary he would have earned from March 31, 2016 through and including August 15, 2016, plus (ii) bonus compensation for 2015 in an amount equal to $124,640. The Gaines Agreement also provided for the immediate vesting on February 5, 2016 of 132,270 restricted stock awards, of which 117,810 had previously been fully expensed by the Company. The Gaines Agreement also contained a release of claims, as well as, customary confidentiality, non-disparagement and non-solicitation of employees provisions. For more information regarding the Gaines Agreement, see “Compensation of Executive Officers – Potential Payments Upon Termination or Change of Control” below.

Peer Group Analysis

Annually, the Compensation Committee reviews both internally or externally prepared reports to assist it in determining the market for executive compensation, and utilizes this information while setting compensation for the upcoming year. The Compensation Committee does not currently believe it is appropriate to tie executive compensation directly to the compensation awarded by other companies or to a particular survey or group of surveys. Instead, the purpose of the reports, and the manner in which they are used by the Compensation Committee, is to provide a general understanding of current compensation practices and trends of similarly situated companies. No specific 2016 compensation decision for any individual was based on or justified by these reports. The reports utilized in 2016 contain information compiled from publicly available documents from the following peer financial institutions:

There were no changes to this peer group from the peer financial institutions considered by the Company in 2015.

Decision-Making Practices

Role of Compensation and Development Committee . The Compensation Committee is responsible for oversight, review and administration of the Company’s compensation programs for all employees, including each of the NEOs. The Compensation Committee is composed entirely of non-management directors who are independent under the independence standards of NASDAQ applicable to compensation committees. It reviews all aspects of the compensation program for NEOs, including base salaries, annual cash bonuses, equity awards, perquisites, severance arrangements and other health and welfare benefits. It also approves the performance goals for any NEO compensation programs that use performance metrics and evaluates performance at the end of each performance period. The Compensation Committee approves base salary increases, annual bonuses, stock option awards, restricted stock awards and other long-term incentive award opportunities for the NEOs and the principal accounting officer. An important duty of the Compensation Committee is to set the level and components of the compensation for the Chief Executive Officer and to review and approve the compensation for the remaining NEOs.

The Compensation Committee’s practice has been to make any annual long-term equity-based awards to the NEOs on a regular award date in connection with annual grants of equity-based awards to all employees, typically during the first or second quarter. In addition, the Company occasionally may make equity-based awards other than on the annual award date, usually in connection with hiring a new key employee or in connection with a corporate transaction. We do not coordinate the timing of equity awards with the release of material non-public information.

In making its decisions, the Compensation Committee may use several resources and tools, including the use of a compensation consultant or other advisor, peer financial institution evaluation and other analyses. The Chief Executive Officer also is involved in compensation determinations, including review of the compensation consultant’s recommendations, if any, and discussion of executive management compensation (including compensation for each NEO other than the Chief Executive Officer). The Company believes that the Chief Executive Officer is in the best possible position to assess the performance of the other NEOs, and he accordingly plays an important role in the compensation setting process. From time to time, the Chief Executive Officer also discusses his compensation package with the Compensation Committee. However, the Chief Executive Officer cannot be present during any voting or deliberation by the Compensation Committee on his compensation. Decisions about individual compensation components and total compensation for the NEOs, including those related to the Chief Executive Officer, are ultimately made by the Compensation Committee using its discretion and judgment, focusing primarily on the NEO’s performance and the Company’s overall performance. The Compensation Committee also considers the business environment in which the results were achieved and general comparisons to the overall performance of peer banks.

In addition, the Compensation Committee also reviews the total compensation of the NEOs relative to one another. The Compensation Committee believes that Mr. Cherry’s relatively higher compensation is appropriate in light of his expanded responsibilities as the Chief Executive Officer and the leadership, vision and strategy he has provided to the Company during his tenure. In addition, the Compensation Committee believes that the relatively similar compensation levels of Messrs. Kennedy and Truslow and Ms. Foster are appropriate in light of their shared responsibilities in managing the day-to-day activities of the Company, and that the lower compensation level for Mr. Ladnier is appropriate in light of his assigned responsibilities relative to the other NEOs

Compensation Consultant and Other Advisors . As described above, the Compensation Committee previously retained Pearl Meyer to conduct a review of the existing 2010 Agreements for the Company’s executive officers. Their review compared the existing agreements to governance best practices and market norms. The Compensation Committee used this analysis in preparing the 2016 Agreements. Pearl Meyer also conducted an executive compensation study that was completed in early 2015 by analyzing market data from peer institutions and nationally recognized survey sources. The study included comparisons of base salary levels, annual incentives, long-term incentives and other benefits and perquisites and supplemental retirement arrangements. In order for Pearl Meyer to provide effective advice to the Compensation Committee, it worked with Company management, obtaining compensation benefits data from management. The Compensation Committee did not use the market analysis for 2016 compensation adjustments, rather the study provided context of pay levels with the industry.

In the fourth quarter of 2016, Pearl Meyer reviewed the Company’s proposed annual incentive plan and provided input to the Compensation Committee regarding the final plan design. Additionally, Pearl Meyer conducted a review of the Company’s executive compensation program that was presented to the Compensation Committee in the fourth quarter of 2016 in anticipation of 2017 compensation determinations described briefly below under –“-Compensation Events After 2016.”

Stock Ownership

The Board of Directors generally believes that the executive officers should accumulate meaningful equity stakes over time to further align their economic interests with the interests of shareholders, thereby promoting the Company’s objective of increasing shareholder value. The equity awards used by the Company also facilitate the acquisition of shares of the Company’s Common Stock by the executive officers. The Compensation Committee has adopted a policy requiring the chief executive officer to beneficially own Common Stock with a market value of at least 2 times his annual base salary, and for all of the other executive officers to each beneficially own Common Stock with a market value of at least 1 times their respective annual base salaries. Compliance with the policy is determined annually at the end of each year (or, with respect to any newly designated executive officer, at the end of the year following the year such person is first designated as an executive officer), based on existing base salaries and the market price of the Common Stock at that time. In order to facilitate compliance with the policy, any executive officer not in compliance as of the applicable determination date must refrain from certain dispositions of Common Stock received pursuant to an equity award until the executive officer has satisfied the minimum ownership requirement. Currently, each of the NEOs beneficially owns the requisite number of shares.

Consistent with the Company’s compensation philosophy of rewarding the NEOs based on the long-term success of the Company, the Company’s Code of Ethics and Insider Trading Policy prohibit all employees, including the NEOs, from speculative trading in the Company’s Common Stock and place limitations on a NEO’s ability to conduct short-term trading, thus encouraging long-term ownership of the Company’s Common Stock. Additionally, pursuant to internal guidelines, NEOs are prohibited from entering into hedging strategies that protect against downside risk in the Company’s Common Stock.

Compensation Events After 201 6

As noted above, the Compensation Committee used the 2016 analysis of overall compensation prepared by Pearl Meyer for determining the compensation for NEOs in 2017. The Compensation Committee determined to increase Mr. Cherry’s base salary from $465,000 to $540,000 to bring Mr. Cherry’s compensation more in line with the peer data presented in the Pearl Meyer review and the Compensation Committee’s assessment of Mr. Cherry’s performance. The Compensation Committee also determined to increase Mr. Truslow’s base salary from $350,000 to $360,000 to equal the base salaries of Mr. Kennedy and Ms. Foster given the similar scope of the responsibilities of all three executives. Furthermore, the Compensation Committee determined that the base salaries of the other two executive officers continued to be appropriate based on the role and responsibilities of each such executive. In addition, the Compensation Committee set annual bonus targets under the EIP for the 2017 performance year, granting these executives threshold, target and maximum bonus opportunities based on a percentage of base salary, consistent with the percentage of base salary and potential payout percentages utilized in 2016, dependent upon achievement of pre-determined Adjusted EPS targets. Additionally, for 2017, the Compensation Committee added a return on average assets calculation that could modestly decrease or increase the award opportunity otherwise determined by the achievement of the pre-determined Adjusted EPS targets. In addition, the Compensation Committee granted the following restricted stock awards: Mr. Cherry – 24,150; Mr. Truslow – 9,150, Mr. Kennedy – 9,150 and Ms. Foster – 9,150. Like the 2016 restricted stock awards, these grants vest in equal annual installments over the three years following the grant date, contingent on the executives remaining continuously employed with the Company during that period.

Tax and Accounting Considerations

Tax Considerations . Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and related regulations generally impose a $1 million cap on the deductibility of compensation paid to certain executive officers by a public corporation, unless an exception applies. One important exception is for qualified “performance-based compensation.” To the extent the Company determines it is in its interests, the Company’s compensation programs may be designed to meet the performance-based compensation exception under Section 162(m). However, the Company retains the flexibility to pay compensation that is not eligible for such exception if it is in the interest of the Company to do so.

Accounting Considerations . As previously described, for the purposes of certifying the Company’s performance for incentive compensation purposes, the Compensation Committee may adjust the Company’s net income to ensure that the employees are fairly compensated for the actual growth of the Company and not as a result of extraordinary items and events.

Conclusion

The Compensation Committee reviews all components of the Company’s compensation practices for the NEOs. In designing the various components of the total compensation program, the Company intends to take care to select elements that are performance-based and to use a variety of performance metrics that, on the whole, will encourage the achievement of short and long-term shareholder value without motivating excessive risk-taking and while enabling the Company to retain its talented executives. The Company believes the total compensation for each NEO is reasonable and that the components of the Company’s compensation program for NEOs are consistent with market standards and with comparable programs of peer financial institutions. The compensation program for NEOs is based on the financial performance of the Company compared to both business and financial objectives. The Company believes this practice links NEO performance to the annual financial and operational results of the Company and the long-term financial interests of its shareholders. The Company further believes that the foregoing compensation philosophy is consistent with the Company’s corporate culture and objectives and has served and will continue to serve as a reasonable basis for administering the total compensation program of the Company.