UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission File Number 001-35032

PARK STERLING CORPORATION

(Exact name of registrant as specified in its charter)

North Carolina	27-4107242
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1043 E. Morehead Street, Suite 201
Charlotte, North Carolina	28204
(Address of principal executive offices)	(Zip Code)

(704) 716-2134

(Registrant’s telephone number, including area code)

___________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐		Accelerated filer	☒

Non-accelerated filer	☐	 (Do not check if a smaller reporting company)	Smaller reporting company	☐

			Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 3, 2017, the registrant had outstanding 53,287,270 shares of common stock, $1.00 par value per share.

PARK STERLING CORPORATION

Table of Contents

			Page No.

Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets June 30, 2017 and December 31, 2016	2

		Condensed Consolidated Statements of Income Three and Six Months Ended June 30, 2017 and 2016	3

		Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30, 2017 and 2016	4

		Condensed Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2017 and 2016	5

		Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2017 and 2016	6

		Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		62

Item 4.	Controls and Procedures		62

Part II.	Other Information

Item 1.	Legal Proceedings		62

Item 1A.	Risk Factors		62

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		63

Item 3.	Defaults Upon Senior Securities		63

Item 4.	Mine Safety Disclosures		63

Item 5.	Other Information		63

Item 6.	Exhibits		64

PARK STERLING CORPORATION

Part I. Financial Information

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

	June 30,			December 31,
	2017			2016 *

ASSETS

Cash and due from banks	$	35,508		$	34,162
Interest-earning balances at banks		55,862			48,882
Federal funds sold		260			570
Investment securities available-for-sale, at fair value		403,602			402,501
Investment securities held-to-maturity (fair value of $89,446 and $92,828 at June 30, 2017 and December 31, 2016, respectively)		87,690			91,752
Nonmarketable equity securities		20,179			17,501
Loans held for sale		3,102			7,996
Loans		2,502,120			2,412,186
Less allowance for loan losses		(12,702	)		(12,125	)
Net loans		2,489,418			2,400,061

Premises and equipment, net		62,779			63,080
Bank-owned life insurance		71,831			70,785
Deferred tax asset		20,790			25,721
Other real estate owned		3,175			2,438
Goodwill		63,317			63,317
Core deposit intangible		10,530			11,438
Accrued interest receivable		6,801			6,799
Other assets		6,155			8,392

Total assets	$	3,340,999		$	3,255,395


LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	554,399		$	521,295
Interest-bearing		1,982,783			1,992,457
Total deposits		2,537,182			2,513,752

Short-term borrowings		345,000			285,000
Long-term borrowings		29,758			29,736
Subordinated debt		33,832			33,501
Accrued interest payable		627			541
Accrued expenses and other liabilities		25,336			37,021
Total liabilities		2,971,735			2,899,551


Shareholders' equity:
Common stock, $1.00 par value 200,000,000 shares authorized; 53,279,996 and 53,116,519 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively		53,280			53,117
Additional paid-in capital		273,409			273,400
Retained earnings		44,375			32,609
Accumulated other comprehensive (loss)		(1,800	)		(3,282	)
Total shareholders' equity		369,264			355,844

Total liabilities and shareholders' equity	$	3,340,999		$	3,255,395

* Derived from audited financial statements.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2017		2016			2017		2016
Interest income
Loans, including fees	$	29,518	$	26,729		$	56,980	$	53,853
Federal funds sold		2		5			4		13
Taxable investment securities		2,985		2,640			5,920		5,327
Tax-exempt investment securities		135		137			270		284
Nonmarketable equity securities		219		153			417		307
Interest on deposits at banks		109		34			198		76
Total interest income		32,968		29,698			63,789		59,860

Interest expense
Money market, NOW and savings deposits		1,031		1,014			1,998		2,032
Time deposits		1,482		1,449			2,907		2,847
Short-term borrowings		922		251			1,423		545
Long-term borrowings		371		440			742		850
Subordinated debt		552		494			1,051		940
Total interest expense		4,358		3,648			8,121		7,214
Net interest income		28,610		26,050			55,668		52,646

Provision for loan losses		-		882			678		1,438
Net interest income after provision for loan losses		28,610		25,168			54,990		51,208

Noninterest income
Service charges on deposit accounts		1,725		1,528			3,407		3,017
Income from fiduciary activities		528		580			1,055		1,244
Commissions and fees from investment brokerage		161		283			283		422
Income from capital markets		645		767			1,254		835
Gain (loss) on sale of securities available for sale		-		(87	)		58		(93	)
ATM and card income		751		776			1,465		1,349
Mortgage banking income		775		873			1,736		1,648
Income from bank-owned life insurance		578		526			1,156		1,514
Amortization of indemnification asset and true-up liability expense		-		(25	)		-		(172	)
Other noninterest income		255		154			472		338
Total noninterest income		5,418		5,375			10,886		10,102

Noninterest expense
Salaries and employee benefits		11,388		11,774			22,871		24,792
Occupancy and equipment		2,924		3,041			5,831		6,166
Advertising and promotion		140		367			286		788
Legal and professional fees		1,650		950			2,433		1,675
Deposit charges and FDIC insurance		442		478			927		910
Data processing and outside service fees		1,907		2,224			3,832		7,747
Communication fees		460		505			923		988
Core deposit intangible amortization		454		458			908		916
Net cost of operation of other real estate owned		240		70			415		336
Loan and collection expense		210		273			327		310
Postage and supplies		107		191			249		364
Other noninterest expense		1,527		1,615			3,089		3,107
Total noninterest expense		21,449		21,946			42,091		48,099

Income before income taxes		12,579		8,597			23,785		13,211

Income tax expense		4,052		3,045			7,769		4,919

Net income	$	8,527	$	5,552		$	16,016	$	8,292

Basic and diluted earnings per common share	$	0.16	$	0.11		$	0.30	$	0.16

Dividends per common share	$	0.04	$	0.03		$	0.08	$	0.06

Weighted-average common shares outstanding
Basic		52,821,415		52,394,397			52,761,766		52,340,772
Diluted		53,481,846		52,704,537			53,458,705		52,650,886

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016


Net income	$	8,527		$	5,552		$	16,016		$	8,292

Securities available for sale and transferred securities:
Change in net unrealized gains during the period		1,171			2,118			1,937			6,809
Change in net unrealized gain on securities transferred to held-to-maturity		65			26			127			52
Reclassification adjustment for net (gains) losses recognized in net income		-			87			(58	)		93
Total securities available for sale and transferred securities		1,236			2,231			2,006			6,954

Derivatives:
Change in the accumulated gain (loss) on effective cash flow hedge derivatives		21			(475	)		150			(1,700	)
Change in the accumulated gain (loss) on terminated cash flow hedge derivatives		(52	)		93			(128	)		186
Reclassification adjustment for interest payments		145			88			313			177
Total derivatives		114			(294	)		335			(1,337	)

Other comprehensive income, before tax		1,350			1,937			2,341			5,617

Deferred tax expense related to other comprehensive income		491			729			861			2,101

Other comprehensive income, net of tax		859			1,208			1,480			3,516

Total comprehensive income	$	9,386		$	6,760		$	17,496		$	11,808

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands)

Six Months Ended June 30, 2017 and 2016

													Accumulated
							Additional						Other			Total
	Common Stock						Paid-In			Accumulated			Comprehensive			Shareholders'
	Shares			Amount			Capital			Earnings			Income (Loss)			Equity


Balance at December 31, 2015		44,854,509		$	44,854		$	222,596		$	20,117		$	(2,863	)	$	284,704

Shares issued for First Capital merger		8,376,094			8,376			52,937			-			-		$	61,313

Issuance of restricted stock grants		236,534			236			(236	)		-			-			-

Forfeitures of restricted stock grants		(38,783	)		(39	)		39			-			-			-

Exercise of stock options		274,890			275			1,512			-			-			1,787

Share-based compensation expense		1,300			1			682			-			-			683

Common stock repurchased or reacquired		(372,175	)		(371	)		(2,284	)		-			-			(2,655	)

Dividends on common stock		-			-			-			(3,190	)		-			(3,190	)

Net income		-			-			-			8,292			-			8,292

Other comprehensive income		-			-			-			-			3,516			3,516

Balance at June 30, 2016		53,332,369		$	53,332		$	275,246		$	25,219		$	653		$	354,450

Balance at December 31, 2016		53,116,519		$	53,117		$	273,400		$	32,609		$	(3,282	)	$	355,844

Issuance of restricted stock grants		164,994			164			(164	)		-			-			-

Forfeitures of restricted stock grants		(11,567	)		(11	)		11			-			-			-

Exercise of stock options		136,056			136			623			-			-			759

Share-based compensation expense		1,400			1			819			-			-			820

Common stock repurchased or reacquired		(127,406	)		(127	)		(1,280	)		-			-			(1,407	)

Dividends on common stock		-			-			-			(4,250	)		-			(4,250	)

Net income		-			-			-			16,016			-			16,016

Other comprehensive income		-			-			-			-			1,480			1,480

Balance at June 30, 2017		53,279,996		$	53,280		$	273,409		$	44,375		$	(1,800	)	$	369,264

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

June 30, 2017 and June 30, 2016

	Six Months Ended
	June 30,
	2017			2016
Cash flows from operating activities
Net income	$	16,016		$	8,292
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion on acquired loans		(6,788	)		(4,902	)
Net amortization on investments		1,198			1,258
Other depreciation and amortization		5,213			5,045
Provision for loan losses		678			1,438
Share-based compensation expense		820			683
Deferred income taxes		4,070			(171	)
Amortization of FDIC indemnification asset		-			142
Net gains (losses) on sales of investment securities available-for-sale		(58	)		93
Net gains on sales of loans held for sale		(721	)		(846	)
Net losses (gains) on sales of fixed assets		(42	)		274
Net gains on sales of other real estate owned		(414	)		(171	)
Writedowns on other real estate owned		315			216
Income from bank-owned life insurance		(1,156	)		(1,514	)
Proceeds from loans held for sale		52,969			44,460
Disbursements for loans held for sale		(47,717	)		(50,638	)
Change in assets and liabilities:
Decrease in FDIC indemnification asset		-			333
Decrease (increase) in accrued interest receivable		(2	)		96
Increase in other assets		(287	)		(1,460	)
Increase in accrued interest payable		385			12
Increase in accrued expenses and other liabilities		22,411			4,452
Net cash provided by operating activities		46,890			7,092

Cash flows from investing activities
Net increase in loans		(84,459	)		(81,816	)
Purchases of premises and equipment		(2,891	)		(2,558	)
Proceeds from sales of premises and equipment		1,876			-
Purchases of investment securities available-for-sale		(89,527	)		(76,247	)
Proceeds from sales of investment securities available-for-sale		51,629			124,381
Proceeds from maturities, calls and paydowns of investment securities available-for-sale		37,664			26,929
Proceeds from maturities, calls and paydowns of investment securities held-to-maturity		4,042			4,292
Proceeds from life insurance death benefit		-			534
FDIC reimbursement of recoverable covered asset losses		-			(697	)
Proceeds from sale of other real estate owned		381			2,666
Net (purchases) redemptions of nonmarketable equity securities		(2,678	)		1,289
Termination of cash flow hedge		-			(1,855	)
Acquisitions, net of cash acquired		-			(12,067	)
Net cash used in investing activities		(83,963	)		(15,149	)

Cash flows from financing activities
Net increase in deposits		23,712			13,627
Advances of long-term borrowings		-			35,000
Repayments of long-term borrowings		(34,097	)		(45,503	)
Net advances in short-term borrowings		60,000			7,379
Repayments of junior subordinated debt		372			(49	)
Exercise of stock options		759			1,787
Repurchase of common stock		(1,407	)		(2,655	)
Dividends on common stock		(4,250	)		(3,190	)
Net cash provided by financing activities		45,089			6,396

Net increase (decrease) in cash and cash equivalents		8,016			(1,661	)

Cash and cash equivalents, beginning		83,614			70,526

Cash and cash equivalents, ending	$	91,630		$	68,865

Supplemental disclosures of cash flow information:
Cash paid for interest	$	8,035		$	7,161
Cash paid for income taxes		7,769			760

Supplemental disclosure of noncash investing and financing activities:
Change in unrealized gain on available-for-sale securities, net of tax	$	1,288		$	4,365
Change in unrealized gain (loss) on cash flow hedge, net of tax		216			(837	)
Loans transferred to other real estate owned		1,433			1,593

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(table amounts in thousands, except share data and per share amounts)

Note 1 – Basis of Presentation

Park Sterling Corporation (the “Company”) was formed on October 6, 2010 to serve as the holding company for Park Sterling Bank (the “Bank”) and is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). At June 30, 2017 and December 31, 2016, the Company’s primary operations and business were that of owning the Bank.

The accompanying unaudited condensed consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Because the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the Company’s audited consolidated financial statements and accompanying footnotes (the “2016 Audited Financial Statements”) included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”) on March 10, 2017 (the “2016 Form 10-K”).

In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which consist of normal, recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2017 and December 31, 2016, the results of its operations for the three and six months ended June 30, 2017 and 2016, and cash flows for the six months ended June 30, 2017 and 2016. Operating results for the six-month period ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year or for other interim periods.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are susceptible to significant change in the near term are the valuation of purchased credit-impaired (“PCI”) loans, the valuation of the allowance for loan losses and the fair value of financial instruments and other accounts.

Tabular information, other than share and per share data, is presented in thousands of dollars. Certain amounts reported in prior periods have been reclassified to conform to the current period presentation.

Merger with South State Corporation

On April 26, 2017, the Company and South State Corporation (“South State”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Company will merge with and into South State (the “Merger”), with South State continuing as the surviving entity in the Merger. Immediately following the Merger, the Bank will merge with and into South State’s wholly owned bank subsidiary, South State Bank (the “Bank Merger”), with South State Bank as the surviving entity in the Bank Merger.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), the Company’s shareholders will have the right to receive 0.14 shares (the “Exchange Ratio”) of common stock, par value $2.50 per share, of South State for each share of common stock, par value $1.00 per share, of the Company.

In addition, each stock option granted by the Company, whether vested or unvested, will be cancelled and converted into the right to receive a cash amount equal to the product of (a) the number of shares of the Company’s Common Stock subject to such stock option immediately prior to the Effective Time and (b) the excess, if any, of (i) the product of (A) the average closing price per share for South State Common Stock for the ten full trading days ending on the day immediately preceding the closing date and (B) the Exchange Ratio (the “Cash Consideration Value”), over (ii) the exercise price of such option. Any stock options granted by the Company with an exercise price equal to or greater than the Cash Consideration Value will be cancelled for no consideration. Additionally, at the Effective Time, each award of restricted shares of the Company’s Common Stock will vest in full, the restrictions thereon will lapse and each such award will be converted into the right to receive the Merger Consideration in respect of each share of the Company’s Common Stock underlying such award.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(table amounts in thousands, except share data and per share amounts)

The Merger is subject to regulatory approvals, approval of the shareholders of both the Company and South State, and other customary closing conditions and is currently expected to close in the fourth quarter of 2017.

Note 2 - Recent Accounting Pronouncements

During the fourth quarter of 2016, the Company early adopted, with an effective date of January 1, 2016, Accounting Standards Update (ASU) 2016-09, “Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which is intended to improve accounting for share-based payment award transactions. ASU 2016-09 simplifies share-based transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. During the fourth quarter, the Company recognized an income tax benefit of $798 thousand, representing excess tax benefits that previously would have been recognized, under the former standard, in additional paid in capital.

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, Topic 606 (“ASU 2014-09”). The new standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Topic 606: Deferral of the Effective Date, deferring the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and noninterest income. The Company is currently analyzing its noninterest income to determine the impact of this new standard, but does not expect that the adoption of the standard will have a significant impact on our financial statements.

On January 5, 2016, the FASB issued ASU 2016-01, “Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact of this update on its financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which is intended to improve financial reporting about leasing transactions. ASU 2016-02 will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Financial reporting for organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP. In addition, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The effective date of this ASU is for fiscal years beginning after December 31, 2018 and interim periods within that year. The Company has reviewed its outstanding lease agreements and has centrally documented the terms of its leases. The Company is currently evaluating the provisions of ASU 2016-02 in relation to its outstanding leases to determine the potential impact on its financial statements.

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) as part of its project on financial instruments. ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The effective date of this ASU is for reporting periods beginning after December 15, 2019. The implementation of ASU 2016-13 will have a significant impact on both the method of estimating credit losses as well as the amount of credit losses reflected in the Company’s financial statements. The Company is currently in a planning phase for implementation of the new standard and is evaluating expected impact on its financial statements.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(table amounts in thousands, except share data and per share amounts)

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 addresses eight classification issues related to the statement of cash flows. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities will apply the standard's provisions using a retrospective transition method to each period presented. The Company does not believe this guidance will have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323)”. ASU 2017-03 amends the Accounting Standards Codification (“ASC”) for SEC staff announcements made at two Emerging Issues Task Force (EITF) meetings. At the September 2016 meeting, the SEC staff expressed its expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance (including any amendments issued prior to adoption) on revenue (ASU 2014-09), leases (ASU 2016-02) and credit losses on financial instruments (ASU 2016-13) in accordance with Staff Accounting Bulletin Topic 11.M. That Topic requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. ASU 2017-03 incorporates these SEC staff views into ASC 250 and adds references to that guidance in the transition paragraphs of each of the three new standards. The Company has adopted this new standard and it did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under the new standard, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for any interim or annual period beginning after December 15, 2019, with early adoption permitted. The new standard is not expected to have a significant impact on the Company’s financial statements.

In March 2017, the FASB issued ASU 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. The Company is currently evaluating the potential impact of ASU 2017-08 on its financial statements.

Note 3– Business Combinations and Goodwill

Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. There were no acquisitions or mergers conducted during the six months of 2017.

On January 1, 2016, the Company acquired First Capital Bancorp, Inc. (“First Capital”), based in Glen Allen, Virginia and the parent company of First Capital Bank. As a result of the merger of First Capital into the Company, First Capital Bank, which operated eight branches in the Richmond, Virginia area, became a wholly-owned subsidiary of the Company and thereafter was merged into the Bank. The aggregate merger consideration consisted of approximately 8.4 million shares of Common Stock and approximately $25.7 million in cash. Based on the $7.32 per share closing price of the Company’s common stock on December 31, 2015, the transaction value was approximately $87.1 million. The assets acquired and liabilities assumed from First Capital were recorded at their fair value as of the closing date of the merger. Goodwill of $34.1 million resulted from the First Capital transaction.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(table amounts in thousands, except share data and per share amounts)

Note 4 – Investment Securities

The amortized cost, unrealized gains and losses, and estimated fair value of securities available-for-sale at June 30, 2017 and December 31, 2016 are as follows:

Amortized Cost and Fair Value of Investment Portfolio

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2017
Securities available-for-sale:
Municipal securities	$	12,736	$	498	$	-		$	13,234
Residential agency pass-through securities		142,558		791		(1,353	)		141,996
Residential collateralized mortgage obligations		161,168		984		(107	)		162,045
Commercial mortgage-backed securities		15,771		-		(261	)		15,510
Asset-backed securities		68,733		349		(834	)		68,248
Corporate and other securities		1,487		-		(157	)		1,330
Equity securities		1,250		-		(11	)		1,239
Total securities available-for-sale	$	403,703	$	2,622	$	(2,723	)	$	403,602

Securities held-to-maturity:
Residential agency pass-through securities	$	31,380	$	678	$	(30	)	$	32,028
Residential collateralized mortgage obligations		6,419		110		-			6,529
Commercial mortgage-backed obligations		46,410		957		-			47,367
Asset-backed securities		3,481		41		-			3,522
Total securities held-to-maturity	$	87,690	$	1,786	$	(30	)	$	89,446


December 31, 2016
Securities available-for-sale:
Municipal securities	$	12,731	$	588	$	-		$	13,319
Residential agency pass-through securities		194,175		945		(2,355	)		192,765
Residential collateralized mortgage obligations		93,980		615		(185	)		94,410
Commercial mortgage-backed securities		15,912		-		(415	)		15,497
Asset-backed securities		84,955		211		(1,215	)		83,951
Corporate and other securities		1,479		-		(159	)		1,320
Equity securities		1,250		-		(11	)		1,239
Total securities available-for-sale	$	404,482	$	2,359	$	(4,340	)	$	402,501

Securities held-to-maturity:
Residential agency pass-through securities	$	34,063	$	537	$	(47	)	$	34,553
Residential collateralized mortgage obligations		6,730		87		-			6,817
Commercial mortgage-backed obligations		46,851		526		-			47,377
Asset-backed securities		4,108		-		(27	)		4,081
Total securities held-to-maturity	$	91,752	$	1,150	$	(74	)	$	92,828

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(table amounts in thousands, except share data and per share amounts)

In 2014, commercial mortgage-backed securities (“MBS”) with a fair market value of $58.5 million were transferred from available-for-sale to held-to-maturity. These securities had an aggregate unrealized loss of $2.2 million ($1.5 million, net of tax) on the date of transfer. The net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive pre-tax income in the accompanying balance sheet at December 31, 2016 and June 30, 2017 totaled $1.3 and $1.2 million respectively. This amount is amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities. As a result, the amortized cost of these investments of $54.0 million is higher than the $46.4 million carrying value of the securities as of June 30, 2017. There were no transfers of securities from available-for-sale to held-to-maturity during the quarter ended June 30, 2017.

At June 30, 2017 and December 31, 2016, investment securities with a fair market value of $139.2 million and $152.2 million, respectively, were pledged to secure public and trust deposits, to secure interest rate swaps, and for other purposes as required and permitted by law.

At June 30, 2017 and December 31, 2016, available-for-sale and held-to-maturity commercial MBS include $56.2 million and $56.7 million, respectively, of delegated underwriting and servicing (“DUS”) bonds collateralized by multi-family properties and backed by an agency of the U.S. government, and $6.0 million of private-label securities collateralized by commercial properties.

Included within the asset-backed securities balance are collateralized loan obligations totaling $18.9 million at June 30, 2017 and $33.9 million at December 31, 2016. Included in these amounts are $3.5 million and $4.1 million of a security equally collateralized by the Federal Family Education Loan Program and Private Student Loan Program as of June 30, 2017 and December 31, 2016, respectively.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(table amounts in thousands, except share data and per share amounts)

The amortized cost and fair value of investment securities available-for-sale and held-to-maturity at June 30, 2017 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of the Company’s residential agency pass-through securities and residential collateralized mortgage obligations are backed by an agency of the United States government. None of our residential agency pass-through securities or residential collateralized mortgage obligations are private-label securities.

Maturities of Investment Portfolio

	June 30, 2017
	Amortized		Fair
	Cost		Value

Securities available-for-sale:
Municipal securities
Due after one year through five years		3,311		3,371
Due after five years through ten years		2,508		2,635
Due after ten years		6,917		7,228
Residential agency pass-through securities
Due after five years through ten years		5,802		6,051
Due after ten years		136,756		135,945
Residential collateralized mortgage obligations
Due after five years through ten years		13,886		13,945
Due after ten years		147,282		148,100
Commercial mortgage-backed obligations
Due after one year through five years		15,771		15,510
Asset-backed securities
Due after five years through ten years		51,489		51,359
Due after ten years		17,244		16,889
Corporate and other securities
Due after ten years		1,487		1,330
Equity securities
No maturity		1,250		1,239
Total securities available-for-sale	$	403,703	$	403,602

Securities held-to-maturity:
Residential agency pass-through securities
Due after ten years	$	31,380	$	32,028
Residential collateralized mortgage obligations
Due after ten years		6,419		6,529
Commercial mortgage-backed obligations
Due after one year through five years		18,275		18,631
Due after five years through ten years		28,135		28,736
Asset-backed securities
Due after ten years		3,481		3,522
Total securities held-to-maturity	$	87,690	$	89,446

Securities available-for-sale of $0 and $51.6 million were sold in the three months and six months ended June 30, 2017, respectively. Gross realized gains on the sale of securities for the six months ended June 30, 2017 were $58 thousand. Securities available-for-sale of $24.3 million and $124.4 million were sold in the three months and six months ended June 30, 2016, respectively. Gross realized losses on the sale of securities for the three and six months ended June 30, 2016 were $87 thousand and $187 thousand, respectively. Gross realized gains on the sale of securities for six months ended June 30, 2016 were $94 thousand.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(table amounts in thousands, except share data and per share amounts)

Management evaluates its investments quarterly for other than temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position for securities with unrealized losses at June 30, 2017 and December 31, 2016. None of the securities are deemed to be other than temporarily impaired since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, as all but one of the bonds are issued by United States government agencies with the remaining bond being partially guaranteed by a government agency, and it is more likely than not that the Company will not have to sell the investments before recovery of their amortized cost basis. At June 30, 2017 there were two securities in a loss position for twelve months or more compared to six at December 31, 2016.

Investment Portfolio Gross Unrealized Losses and Fair Value

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2017
Securities available-for-sale:
Municipal securities	$	-	$	-		$	-	$	-		$	-	$	-
Residential agency pass-through securities		-		-			-		-			-		-
Residential collateralized mortgage obligations	$	34,479	$	(107	)	$	2,760	$	(205	)	$	37,239	$	(312	)
Commercial mortgage-backed securities		105,180		(1,614	)		-		-			105,180		(1,614	)
Asset-backed securities		26,675		(629	)		-		-			26,675		(629	)
Equity securities		-		-			1,330		(168	)		1,330		(168	)
Total temporarily impaired available-for-sale securities	$	166,334	$	(2,350	)	$	4,090	$	(373	)	$	170,424	$	(2,723	)

Securities held-to-maturity:
Commercial mortgage-backed securities	$	3,463	$	(30	)	$	-	$	-		$	3,463	$	(30	)

Total temporarily impaired held-to-maturity securities	$	3,463	$	(30	)	$	-	$	-		$	3,463	$	(30	)

December 31, 2016
Securities available-for-sale:
Residential agency pass-through securities	$	-	$	-		$	138,759	$	(2,355	)	$	138,759	$	(2,355	)
Residential collateralized mortgage obligations		-		-			30,650		(185	)		30,650		(185	)
Commercial mortgage-backed securities		-		-			15,497		(415	)		15,497		(415	)
Asset-backed securities		23,539		(385	)		37,580		(830	)		61,119		(1,215	)
Equity Securities		-		-			1,320		(170	)		1,320		(170	)
Total temporarily impaired available-for-sale securities	$	23,539	$	(385	)	$	223,806	$	(3,955	)	$	247,345	$	(4,340	)

Securities held-to-maturity:
Residential collateralized mortgage obligations	$	-	$	-		$	3,830	$	(47	)	$	3,830	$	(47	)
Commercial mortgage-backed securities		-		-			-		-			-		-
Asset-backed securities		4,081		(27	)		-		-			4,081		(27	)

Total temporarily impaired held-to-maturity securities	$	4,081	$	(27	)	$	3,830	$	(47	)	$	7,911	$	(74	)

The Company has nonmarketable equity securities consisting of investments in several unaffiliated financial institutions, as well as investments in five statutory trusts related to trust preferred securities issued by predecessor companies. These investments totaled $20.2 million at June 30, 2017 and $17.5 million at December 31, 2016. Included in these amounts at June 30, 2017 and December 31, 2016 was $17.6 million and $14.9 million, respectively, of Federal Home Loan Bank (“FHLB”) stock. All nonmarketable equity securities were evaluated for impairment as of June 30, 2017 and December 31, 2016. At June 30, 2017 and December 31, 2016, the Company estimated that the fair values of nonmarketable equity securities equaled or exceeded the cost of each of these investments, and, therefore, the investments were not impaired.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(table amounts in thousands, except share data and per share amounts)

Note 5 – Loans and Allowance for Loan Losses

The Company’s loan portfolio was comprised of the following at:

	June 30, 2017						December 31, 2016
	PCI loans		All other loans		Total		PCI loans		All other loans		Total
Commercial:
Commercial and industrial	$	2,688	$	452,264	$	454,952	$	3,920	$	383,481	$	387,401
Commercial real estate (CRE) - owner-occupied		12,166		349,047		361,213		15,401		352,152		367,553
CRE - investor income producing		29,022		772,676		801,698		30,700		712,407		743,107
AC&D - 1-4 family construction		-		95,236		95,236		-		82,707		82,707
AC&D - lots, land & development		7,443		85,318		92,761		8,074		97,288		105,362
AC&D - CRE		-		150,170		150,170		-		194,732		194,732
Other commercial		1,934		13,778		15,712		1,962		10,938		12,900
Total commercial loans		53,253		1,918,489		1,971,742		60,057		1,833,705		1,893,762

Consumer:
Residential mortgage		18,765		265,146		283,911		21,472		239,049		260,521
Home equity lines of credit (HELOC)		1,066		172,774		173,840		1,088		175,711		176,799
Residential construction		1,655		50,567		52,222		2,470		56,590		59,060
Other loans to individuals		335		16,798		17,133		368		18,537		18,905
Total consumer loans		21,821		505,285		527,106		25,398		489,887		515,285
Total loans		75,074		2,423,774		2,498,848		85,455		2,323,592		2,409,047
Deferred costs		-		3,272		3,272		-		3,139		3,139
Total loans, net of deferred costs	$	75,074	$	2,427,046	$	2,502,120	$	85,455	$	2,326,731	$	2,412,186

At June 30, 2017 and December 31, 2016, the Company had sold participations in loans aggregating $27.5 million and $20.2 million, respectively, to other financial institutions on a nonrecourse basis. Collections on loan participations and remittances to participating institutions conform to customary banking practices.

The Bank accepts residential mortgage loan applications and funds loans of qualified borrowers. Funded loans are sold with limited recourse to investors under the terms of pre-existing commitments. The Bank executes all of its loan sales agreements under best efforts contracts with investors. From time to time, the Company may choose to hold certain mortgage loans on balance sheet. The Company serviced residential mortgage loans for the benefit of others totaling $2.3 million as of both June 30, 2017 and December 31, 2016.

Loans sold are 1-4 family residential mortgages originated by the Company and sold to various other financial institutions. The Company’s exposure to credit loss in the event of nonperformance by the other party to the loan is represented by the contractual notional amount of the loan. Since only a few of the loans have ever been returned to the Company, the amount of total loans sold does not necessarily represent future cash requirements. Total loans sold in the three and six months ended June 30, 2017 were $21.6 million and $53.0 million, respectively. Total loans sold in the three and six months ended June 30, 2016 were $26.0 million and $43.6 million, respectively

At June 30, 2017 the carrying value of loans pledged as collateral to the FHLB on borrowings and to the Federal Reserve totaled $979 million compared to $1.0 billion at December 31, 2016.

Concentrations of Credit - Loans are primarily made within the Company’s operating footprint of North Carolina, South Carolina, Virginia and Georgia. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions. The commercial loan portfolio has concentrations in business loans secured by real estate and real estate development loans. Primary concentrations in the consumer loan portfolio include home equity lines of credit and residential mortgages. At June 30, 2017 and December 31, 2016, the Company had no loans outstanding with foreign entities.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

(table amounts in thousands, except share data and per share amounts)

Allowance for Loan Losses - The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three and six months ended June 30, 2017 and 2016.

	Commercial and industrial			Shared National Credits		CRE - owner- occupied			CRE - investor income producing			AC&D - 1-4 family construction		AC&D - lots, land & development			AC&D - CRE			Other commercial			Residential mortgage			HELOC Jr. Lien*			HELOC Sr. Lien			Residential construction			Other loans to individuals			Total

For the three months ended June 30, 2017
Allowance for Loan Losses:
Balance, beginning of period	$	3,093		$	-	$	1,348		$	2,844		$	595	$	513		$	1,353		$	77		$	984		$	1,513		$	-		$	358		$	155		$	12,833
Provision for loan losses		(435	)		556		6			33			82		(56	)		(186	)		15			124			(730	)		577			6			8			-
Charge-offs		(96	)		-		-			(23	)		-		-			-			-			(130	)		(31	)		-			(20	)		(28	)		(328	)
Recoveries		11			-		-			94			2		23			-			-			33			14			-			2			18			198
Net (charge-offs) recoveries		(85	)		-		-			71			2		23			-			-			(97	)		(17	)		-			(18	)		(10	)		(131	)
Total Allowance for Loan Losses	$	2,573		$	556	$	1,354		$	2,948		$	679	$	480		$	1,167		$	92		$	1,011		$	766		$	577		$	346		$	153		$	12,702


For the six months ended June 30, 2017
Allowance for Loan Losses:
Balance, beginning of period	$	2,720		$	-	$	1,286		$	2,583		$	567	$	526		$	1,484		$	126		$	841		$	-		$	1,391		$	435		$	166		$	12,125
Provision for loan losses		(4	)		556		(26	)		300			85		(108	)		(317	)		(36	)		258			864			(814	)		(73	)		(7	)		678
Charge-offs		(158	)		-		39			(36	)		-		-			-			-			(130	)		(133	)		-			(20	)		(38	)		(476	)
Recoveries		15			-		55			101			27		62			-			2			42			35			-			4			32			375
Net (charge-offs) recoveries		(143	)		-		93			65			27		62			-			2			(88	)		(98	)		-			(16	)		(6	)		(102	)
Total Allowance for Loan Losses	$	2,573		$	556	$	1,354		$	2,948		$	679	$	480		$	1,167		$	92		$	1,011		$	766		$	577		$	346		$	153		$	12,702

*Prior to the quarter ended June 30, 2017, HELOCs were evalauted collectively for purposes of the allowance for loan and lease losses. Beginning in second quarter of 2017, HELOCs were evaluated for purposes of the allowance calculation based on the sequence of lien associated with the underlying collateral of the loan.

	Commercial and industrial		Shared National Credits		CRE - owner- occupied		CRE - investor income producing		AC&D - 1-4 family construction		AC&D - lots, land & development		AC&D - CRE		Other commercial		Residential mortgage		HELOC Jr. Lien*	HELOC Sr. Lien	Residential construction	Other loans to individuals	Total

For the three months ended June 30, 2016
Allowance for Loan Losses:
Balance, beginning of period	$	2,047	$	-	$	1,108	$	2,217	$	381	$	398	$	808	$	67	$	724

Park Sterling Corp 10-Q