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 ~~March~~June 3130, 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)

(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, a 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 ~~May~~August 83, 2017, the registrant had outstanding 53,~~200~~287,~~509~~270 shares of common stock, $1.00 par value per share.

PARK STERLING CORPORATION

Table of Contents

		~~Page No.~~	Page No.
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets March 31, 2017 and December 31, 2016	2
		Condensed Consolidated Balance Sheets June 30, 2017 and December 31, 2016	2
	Condensed Consolidated Statements of Income Three Months Ended March 31, 2017 and 2016	3
		Condensed Consolidated Statements of Income Three and Six Months Ended June 30, 2017 and 2016	3
	Condensed Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2017 and 2016	4
		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 Three Months Ended March 31, 2017 and 2016	5
		Condensed Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2017 and 2016	5
	Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2017 and 2016	6
		Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2017 and 2016	6
	~~Notes to Condensed Consolidated Financial Statements~~	7Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42	42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60	62
Item 4.	Controls and Procedures	60	62
Part II.	Other Information
Item 1.	Legal Proceedings	60	62
Item 1A.	Risk Factors	60	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62	63
Item 3.	Defaults Upon Senior Securities	62	63
Item 4.	Mine Safety Disclosures	62	63
Item 5.	Other Information	62	63
Item 6.	Exhibits	63	64

PARK STERLING CORPORATION

Part I. Financial Information

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

	March 31,			December 31,
	June 30,			December 31,
	2017			2016 *
ASSETS
Cash and due from banks	$	4035,~~081~~508		$	34,162
Interest-earning balances at banks		3255,~~997~~862			48,882
Federal funds sold		~~765~~260			570
Investment securities available-for-sale, at fair value		~~423~~403,~~345~~602			402,501
Investment securities held-to-maturity (fair value of $91,012 and $92,828 at March 31, 2017 and December 31, 2016, respectively)		89,579			91,752
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		1920,~~967~~179			17,501
Loans held for sale		63,~~181~~102			7,996
Loans		2,~~460~~502,~~595~~120			2,412,186
Less allowance for loan losses		(12,~~833~~702	)		(12,125	)
Net loans		2,~~447~~489,~~762~~418			2,400,061
Premises and equipment, net		62,~~392~~779			63,080
Bank-owned life insurance		71,~~337~~831			70,785
Deferred tax asset		2120,~~250~~790			25,721
Other real estate owned		3,~~167~~175			2,438
Goodwill		63,317			63,317
Core deposit intangible		10,~~984~~530			11,438
Accrued interest receivable		6,~~436~~801			6,799
Other assets		96,~~196~~155			8,~~393~~392
Total assets	$	3,~~308~~340,~~756~~999		$	3,255,~~396~~395
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	~~524~~554,~~380~~399		$	521,295
Interest-bearing		1,~~984~~982,~~815~~783			1,992,457
Total deposits		2,~~509~~537,~~195~~182			2,513,752
Short-term borrowings		~~340~~345,000			285,000
Long-term borrowings		29,~~747~~758			29,736
Subordinated debt		33,~~671~~832			33,501
Accrued interest payable		~~912~~627			541
Accrued expenses and other liabilities		3325,~~511~~336			37,021
Total liabilities		2,~~947~~971,~~036~~735			2,899,551
Shareholders' equity:
Common stock, $1.00 par value 200,000,000 shares authorized; 53,112,726 and 53,116,519 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		53,113			53,117
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,~~291~~409			273,400
Retained earnings		3744,~~977~~375			32,~~608~~609
Accumulated other comprehensive loss		(2,661	)		(3,280	)
Accumulated other comprehensive (loss)		(1,800	)		(3,282	)
Total shareholders' equity		~~361~~369,~~720~~264			355,~~845~~844
Total liabilities and shareholders' equity	$	3,~~308~~340,~~756~~999		$	3,255,~~396~~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
	March 31,
	June 30,					June 30,
	2017		2016			2017		2016
Interest Income
Interest income
Loans, including fees	$	2729,~~462~~518	$	2726,~~124~~729		$	56,980	$	53,853
Federal funds sold		2		85			4		13
Taxable investment securities		2,~~935~~985		2,~~687~~640			5,920		5,327
Tax-exempt investment securities		135		~~147~~137			270		284
Nonmarketable equity securities		~~198~~219		~~154~~153			417		307
Interest on deposits at banks		89109		4234			198		76
Total interest income		3032,~~821~~968		3029,~~162~~698			63,789		59,860
Interest Expense
Interest expense
Money market, NOW and savings deposits		~~967~~1,031		1,~~017~~014			1,998		2,032
Time deposits		1,~~425~~482		1,~~398~~449			2,907		2,847
Short-term borrowings		~~501~~922		~~294~~251			1,423		545
Long-term borrowings		371		~~410~~440			742		850
Subordinated debt		~~499~~552		~~446~~494			1,051		940
Total interest expense		34,~~763~~358		3,~~565~~648			8,121		7,214
Net interest income		2728,~~058~~610		26,~~597~~050			55,668		52,646
Provision for loan losses		~~678~~-		~~556~~882			678		1,438
Net interest income after provision for loan losses		2628,~~380~~610		2625,~~041~~168			54,990		51,208
Noninterest income
Service charges on deposit accounts		1,~~682~~725		1,~~489~~528			3,407		3,017
Income from fiduciary activities		~~527~~528		~~664~~580			1,055		1,244
Commissions and fees from investment brokerage		~~122~~161		~~139~~283			283		422
Income from capital markets		~~609~~645		68767			1,254		835
Gain (Loss) on sale of securities available for sale		58		(6	)
Gain (loss) on sale of securities available for sale		-		(87	)		58		(93	)
ATM and card income		~~714~~751		~~573~~776			1,465		1,349
Mortgage banking income		~~961~~775		~~775~~873			1,736		1,648
Income from bank-owned life insurance		578		~~988~~526			1,156		1,514
Amortization of indemnification asset and true-up
Amortization of indemnification asset and true-up liability expense		-		(25	)		-		(172	)
Loss share true-up liability expense liability expense		-		(147	)
Other noninterest income		255		154			472		338
Other noninterest income		217		184
Total noninterest income		5,418		5,375			10,886		10,102
Total noninterest income		5,468		4,727
Noninterest expense
Noninterest expense
Salaries and employee benefits		11,388		11,774			22,871		24,792
Salaries and employee benefits		11,483		13,018
Occupancy and equipment		2,924		3,041			5,831		6,166
Occupancy and equipment		2,907		3,125
Advertising and promotion		140		367			286		788
Advertising and promotion		146		421
Legal and professional fees		1,650		950			2,433		1,675
Legal and professional fees		783		725
Deposit charges and FDIC insurance		442		478			927		910
Deposit charges and FDIC insurance		485		432
Data processing and outside service fees		1,907		2,224			3,832		7,747
Data processing and outside service fees		1,925		5,523
Communication fees		460		505			923		988
Communication fees		463		483
Core deposit intangible amortization		454		458			908		916
Core deposit intangible amortization		454		458
Net cost of operation of other real estate owned		240		70			415		336
Net cost of operation of other real estate owned		175		266
Loan and collection expense		210		273			327		310
Loan and collection expense		117		37
Postage and supplies		107		191			249		364
Postage and supplies		142		173
Other noninterest expense		1,527		1,615			3,089		3,107
Other noninterest expense		1,562		1,492
Total noninterest expense		21,449		21,946			42,091		48,099
Total noninterest expense		20,642		26,153
Income before income taxes		12,579		8,597			23,785		13,211
Income before income taxes		11,206		4,615
Income tax expense		4,052		3,045			7,769		4,919
Income tax expense		3,717		1,874
Net income	$	8,527	$	5,552		$	16,016	$	8,292
Net income	$	7,489	$	2,741
Basic and diluted earnings per common share	$	0.16	$	0.11		$	0.30	$	0.16
Basic earnings per common share
Dividends per common share	$	0.04	$	0.03		$	0.08	$	0.06
	$	0.14	$	0.05
Weighted-average common shares outstanding
Diluted earnings per common share
Basic		52,821,415		52,394,397			52,761,766		52,340,772
	$	0.14	$	0.05
Diluted		53,481,846		52,704,537			53,458,705		52,650,886
Dividends per common share
	$	0.04	$	0.03
Weighted-average commons shares outstanding
Basic		52,702,610		52,243,461
Diluted		53,462,857		52,599,584

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 March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net income	$	78,~~489~~527		$	25,~~741~~552		$	16,016		$	8,292
Securities available for sale and transferred securities:
Change in net unrealized gains during the period		~~768~~1,171			42,~~691~~118			1,937			6,809
Change in net unrealized loss on securities transferred to held to maturity		61			26
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		~~(58~~-	)		687			(58	)		93
Total securities available for sale and transferred securities		~~771~~1,236			42,~~723~~231			2,006			6,954
Derivatives:
Change in the accumulated gain (loss) on effective cash flow hedge derivatives		~~(337~~21	)		~~587~~(475	)		150			(1,700	)
Change in the accumulated loss on terminated cash flow hedge derivatives		(154	)		-
Change in the accumulated gain (loss) on terminated cash flow hedge derivatives		(52	)		93			(128	)		186
Reclassification adjustment for interest payments		~~713~~145			7388			313			177
Total derivatives		~~222~~114			~~660~~(294	)		335			(1,337	)
Other comprehensive income, before tax		~~993~~1,350			51,~~383~~937			2,341			5,617
Deferred tax expense related to other comprehensive income		~~372~~491			~~2,016~~729			861			2,101
Other comprehensive income, net of tax		~~621~~859			31,~~367~~208			1,480			3,516
Total comprehensive income	$	89,~~110~~386		$	6,~~108~~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)

~~Three~~Six Months Ended ~~March~~June 3130, 2017 and 2016

													Accumulated
							Additional						Other			Total
	Common Stock						Paid-In			~~Retained~~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
Shares issued		1,300			1			(1	)		-			-			-
Issuance of restricted stock grants		236,534			236			(236	)		-			-			-
Issuance of restricted stock grants		24,100			24			(24	)		-			-			-
Forfeitures of restricted stock grants		(38,783	)		(39	)		39			-			-			-
Forfeitures of restricted stock grants		(27,015	)		(27	)		27			-			-			-
Exercise of stock options		274,890			275			1,512			-			-			1,787
Share-based compensation expense		-1,300			-1			~~294~~682			-			-			~~294~~683
Common stock repurchased or reacquired		(~~190~~372,~~968~~175	)		(~~190~~371	)		(12,~~123~~284	)		-			-			(12,~~313~~655	)
Dividends on common stock		-			-			-			(13,~~595~~190	)		-			(13,~~595~~190	)
Net income		-			-			-			28,~~741~~292			-			28,~~741~~292
Other comprehensive income		-			-			-			-			3,~~367~~516			3,~~367~~516
Balance at March 31, 2016		53,038,020		$	53,038		$	274,706		$	21,263		$	504		$	349,511
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
Shares issued		1,400			1			(1	)		-			-			-
Issuance of restricted stock grants		164,994			164			(164	)		-			-			-
Issuance of restricted stock grants		10,000			10			(10	)		-			-			-
Forfeitures of restricted stock grants		(11,567	)		(11	)		11			-			-			-
Forfeitures of restricted stock grants		(3,000	)		(3	)		3			-			-			-
Exercise of stock options		136,056			136			623			-			-			759
Exercise of stock options		77,494			78			403			-			-			481
Share-based compensation expense		1,400			1			819			-			-			820
Share-based compensation expense		-			-			370			-			-			370
Common stock repurchased or reacquired		(127,406	)		(127	)		(1,280	)		-			-			(1,407	)
Common stock repurchased or reacquired		(89,687	)		(90	)		(874	)		-			-			(964	)
Dividends on common stock		-			-			-			(4,250	)		-			(4,250	)
Dividends on common stock		-			-			-			(2,121	)		-			(2,121	)
Net income		-			-			-			16,016			-			16,016
Net income		-			-			-			7,489			-			7,489
Other comprehensive income		-			-			-			-			1,480			1,480
Other comprehensive income		-			-			-			-			621			621
Balance at June 30, 2017		53,279,996		$	53,280		$	273,409		$	44,375		$	(1,800	)	$	369,264
Balance at March 31, 2017		53,112,726		$	53,113		$	273,291		$	37,977		$	(2,661	)	$	361,720

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)

	Three Months Ended
	March 31,
	2017			2016
Cash flows from operating activities
Net income	$	7,489		$	2,741
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion on acquired loans		(3,427	)		(2,550	)
Net amortization on investments		547			587
Other depreciation and amortization		3,421			2,514
Provision for loan losses		678			556
Share-based compensation expense		370			294
Deferred income taxes		(1,869	)		62
Amortization of FDIC indemnification asset		-			142
Net gains on sales of investment securities available-for-sale		(58	)		6
Net gains on sales of loans held for sale		(354	)		(443	)
Net losses on sales and disposals of fixed assets		24			44
Net losses on sales of other real estate owned		(17	)		(56	)
Writedowns on other real estate owned		158			205
Income from bank-owned life insurance		(578	)		(988	)
Proceeds from loans held for sale		32,642			18,044
Disbursements for loans held for sale		(30,403	)		(20,251	)
Change in assets and liabilities:
Decrease in FDIC indemnification asset		-			66
Decrease in accrued interest receivable		363			327
Increase in other assets		(6,748	)		(4,000	)
Increase in accrued interest payable		393			356
Increase (decrease) in accrued expenses and other liabilities		7,965			(5,868	)
Net cash provided by (used by) operating activities		10,596			(8,212	)
Cash flows from investing activities
Net increase in loans		(47,701	)		(35,334	)
Purchases of premises and equipment		(1,006	)		(853	)
Proceeds from sales of premises and equipment		1,315			-
Purchases of investment securities available-for-sale		(89,527	)		(43,229	)
Proceeds from sales of investment securities available-for-sale		51,629			100,124
Proceeds from maturities, calls and paydowns of investment securities available-for-sale		17,336			12,867
Proceeds from maturities, calls and paydowns of investment securities held-to-maturity		2,162			1,982
Proceeds from life insurance death benefit		-			534
FDIC payment (receipt) of recoverable covered asset losses		-			(742	)
Proceeds from sale of other real estate owned		270			2,449
Net (purchases) redemptions of nonmarketable equity securities		(2,466	)		2,564
Acquisitions, net of cash acquired		-			(12,067	)
Net cash provided by (used by) investing activities		(67,988	)		28,295
Cash flows from financing activities
Net increase (decrease) in deposits		(4,390	)		37,899
Advances of long-term borrowings		-			35,000
Repayments of long-term borrowings		-			(45,503	)
Net advances in short-term borrowings		55,000			(22,621	)
Repayments of junior subordinated debt		(385	)		(24	)
Exercise of stock options		481			-
Repurchase of common stock		(964	)		(1,313	)
Dividends on common stock		(2,121	)		(1,595	)
Net cash provided by financing activities		47,621			1,843
Net (decrease) increase in cash and cash equivalents		(9,771	)		21,926
Cash and cash equivalents, beginning		83,614			70,526
Cash and cash equivalents, ending	$	73,843		$	92,452
Supplemental disclosures of cash flow information:
Cash paid for interest	$	3,392		$	2,964
Cash paid for income taxes		4,143			403
Supplemental disclosure of noncash investing and financing activities:
Change in unrealized gain on available-for-sale securities, net of tax	$	480		$	2,964
Change in unrealized loss on cash flow hedge, net of tax		141			403
Loans transferred to other real estate owned		242			103

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 ~~March~~June 3130, 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 ~~March~~June 3130, 2017 and December 31, 2016, the results of its operations for the three and six months ended ~~March~~June 3130, 2017 and 2016, and cash flows for the ~~three~~six months ended ~~March~~June 3130, 2017 and 2016. Operating results for the ~~three~~six-month period ended ~~March~~June 3130, 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.

~~Note~~Merger 2with -South ~~Recent~~State ~~Accounting Pronouncements~~Corporation

~~During~~On ~~the~~April ~~fourth~~26, ~~quarter of 2016~~2017, the Company ~~early~~and ~~adopted,~~South ~~with~~State anCorporation ~~effective date of January 1, 2016, Accounting Standards Update~~ (~~ASU) 2016-09,~~ “~~Compensation-~~South ~~Stock~~State”) ~~Compensation~~entered ~~(Topic~~into ~~718):~~an ~~Improvements~~Agreement toand ~~Employee~~Plan ~~Share-Based~~of ~~Payment~~Merger ~~Accounting”~~ (the “~~ASU~~Merger ~~2016-09~~Agreement”), ~~which~~pursuant ~~is intended~~ to ~~improve~~which ~~accounting~~the ~~for~~Company ~~share-based~~will ~~payment~~merge ~~award~~with ~~transactions.~~and ~~ASU~~into ~~2016-09~~South ~~simplifies~~State ~~share-based transactions including~~ (the ~~income tax consequences~~“Merger”), ~~classification~~with ofSouth ~~awards~~State continuing as ~~either~~the ~~equity~~surviving orentity ~~liabilities~~in ~~and classification on~~ the ~~statement~~Merger. ofImmediately ~~cash~~following ~~flows.~~the ~~During~~Merger, the ~~fourth~~Bank ~~quarter,~~will ~~the~~merge ~~Company~~with ~~recognized~~and aninto ~~income~~South ~~tax~~State’s ~~benefit~~wholly ofowned ~~$798~~bank ~~thousand~~subsidiary, ~~representing~~South ~~excess~~State ~~tax~~Bank ~~benefits~~(the ~~that~~“Bank ~~previously~~Merger”), ~~would~~with ~~have~~South ~~been~~State ~~recognized,~~Bank ~~under~~as the ~~former~~surviving ~~standard,~~entity in ~~additional~~the ~~paid~~Bank ~~in capital~~Merger.

InSubject 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~~terms ~~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~~conditions ~~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~~Merger ~~price~~Agreement, ~~and~~at ~~allocating~~ the ~~transaction~~effective ~~price~~time ~~to each separate performance obligation. In August~~ of ~~2015,~~ the ~~FASB~~Merger ~~issued ASU 2015-14, Revenue from Contracts with Customers, Topic 606: Deferral of~~ (the “Effective ~~Date~~Time”), ~~deferring~~ the ~~effective~~Company’s ~~date~~shareholders ofwill ~~ASU~~have ~~2014-09~~the ~~until~~right ~~annual~~to ~~reporting~~receive ~~periods beginning after December 15, 2017, including interim periods within that reporting period~~0.14 ~~The~~shares ~~standard can be applied retrospectively to each prior reporting period or retrospectively with~~ (the ~~cumulative~~“Exchange ~~effect~~Ratio”) of ~~initially~~common ~~applying~~stock, ~~this~~par ~~new~~value ~~guidance recognized at the date of initial application~~$2.50 ~~Our~~per ~~revenue~~share, ~~is comprised~~ of ~~net~~South ~~interest~~State ~~income~~for oneach ~~financial~~share ~~assets and financial liabilities, which is explicitly excluded from the scope~~ of ~~ASU~~common ~~2014-09~~stock, ~~and~~par ~~non-interest~~value ~~income~~$1.00 Weper ~~are~~share, ~~currently analyzing our noninterest income to determine the impact~~ of ~~this new standard; but we do not expect~~ the ~~changes will have a significant impact on our financial statements~~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)

OnThe ~~January~~Merger 5,is ~~2016,~~subject ~~the~~to ~~FASB~~regulatory ~~issued ASU 2016-01~~approvals, ~~“Financial~~approval ~~Instruments–Overall: Recognition and Measurement~~ of ~~Financial Assets and Financial Liabilities” (“ASU 2016-01”). Changes to~~ the ~~current~~shareholders ~~GAAP~~of ~~model~~both ~~primarily affects~~ the ~~accounting~~Company ~~for~~and ~~equity~~South ~~investments~~State, ~~financial~~and ~~liabilities~~other ~~under~~customary ~~the~~closing ~~fair~~conditions ~~value option,~~ and ~~the~~is ~~presentation~~currently ~~and~~expected ~~disclosure requirements for financial instruments. In addition, the FASB clarified guidance related~~ to ~~the~~close ~~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~~the ~~years~~fourth ~~beginning~~quarter ~~after~~of ~~December 15,~~ 2017~~, including interim periods within those fiscal years~~. ~~The Company is evaluating the impact of this update on its financial statements.~~

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.

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 Codification 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 SAB 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 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 our financial statements.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

In ~~March~~August ~~2017~~2016, the FASB issued ASU ~~2017~~2016-0815, “~~Receivables~~Statement -of ~~Nonrefundable~~Cash ~~Fees~~Flows ~~and Other Costs~~ (~~Subtopic~~Topic ~~310-20~~230): -Classification ~~Premium~~of ~~Amortization~~Certain onCash ~~Purchased~~Receipts ~~Callable~~and ~~Debt~~Cash ~~Securities.~~Payments” (“ASU ~~2017~~ 2016-0815”). ~~shortens~~ASU ~~the~~2016-15 ~~amortization~~addresses ~~period~~eight ~~for~~classification ~~certain~~issues ~~callable~~related ~~debt securities held at a premium~~ to ~~require such premiums to be amortized to~~ the ~~earliest~~statement ~~call date unless applicable guidance related to certain pools~~ of ~~securities~~cash ~~is applied to consider estimated prepayments~~flows. ~~Under~~The ~~prior~~updated guidance, ~~entities~~is ~~were~~effective ~~generally~~for ~~required~~interim toand ~~amortize~~annual ~~premiums~~reporting onperiods ~~individual,~~beginning ~~non-pooled~~after ~~callable~~December ~~debt~~15, ~~securities~~2017, asincluding ainterim ~~yield~~periods ~~adjustment~~within ~~over~~those ~~the~~fiscal ~~contractual~~years. ~~life~~Early ofadoption ~~the~~is ~~security~~permitted. ~~ASU 2017-08~~Entities ~~does~~will ~~not~~apply ~~change~~ the ~~accounting~~standard's ~~for~~provisions ~~callable~~using ~~debt securities held at~~ a ~~discount.~~retrospective ~~ASU 2017-08~~transition ismethod ~~effective~~to ~~for~~each ~~annual~~period ~~periods~~presented. ~~beginning~~The ~~after~~Company ~~December~~does ~~15,~~not ~~2018,~~believe ~~including~~this ~~interim~~guidance ~~periods~~will ~~within~~have ~~those~~a ~~annual~~material ~~periods.~~impact Weon ~~are currently evaluating~~ the ~~potential~~Company’s ~~impact~~consolidated ~~of ASU 2017-08 on our~~ 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 ~~Accounting Standards Codification (“~~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 ~~first~~six ~~quarter~~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 ~~March~~June 3130, 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
March 31, 2017
June 30, 2017
Securities available-for-sale:
Municipal securities	$	12,~~734~~736	$	~~557~~498	$	-		$	13,~~291~~234
Residential agency pass-through securities		~~147~~142,~~438~~558		~~729~~791		(1,~~902~~353	)	$	~~146~~141,~~265~~996
Residential collateralized mortgage obligations		~~166~~161,~~926~~168		~~622~~984		(~~212~~107	)	$	~~167~~162,~~336~~045
Commercial mortgage-backed securities		15,~~842~~771		-		(~~452~~261	)	$	15,~~390~~510
Asset-backed securities		7868,~~943~~733		~~303~~349		(~~879~~834	)	$	7868,~~367~~248
Corporate and other securities		1,~~483~~487		-		(~~163~~157	)	$	1,~~320~~330
Equity securities		1,250		~~126~~-		-(11	)	$	1,~~376~~239
Total securities available-for-sale	$	~~424~~403,~~616~~703	$	2,~~337~~622	$	(32,~~608~~723	)	$	~~423~~403,~~345~~602
Securities held-to-maturity:
Residential agency pass-through securities	$	3231,~~589~~380	$	~~674~~678	$	(4930	)	$	3332,~~214~~028
Residential collateralized mortgage obligations		6,~~559~~419		88110		-			6,~~647~~529
Commercial mortgage-backed obligations		46,~~629~~410		~~746~~957		-			47,~~375~~367
Asset-backed securities		3,~~802~~481		-41		~~(26~~-	)		3,~~776~~522
Total securities held-to-maturity	$	8987,~~579~~690	$	1,~~508~~786	$	(7530	)	$	9189,~~012~~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 obligations		15,912		-		(415	)		15,497
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 ~~both~~ December 31, 2016 and ~~March~~June 3130, 2017 totaled $1.73 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 $4754.80 million is higher than the $46.64 million carrying value of the securities as of ~~March~~June 3130, 2017. There were no transfers of securities from available-for-sale to held-to-maturity during the quarter ended ~~March~~June 3130, 2017.

At ~~March~~June 3130, 2017 and December 31, 2016, investment securities with a fair market value of $~~136~~139.32 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 ~~March~~June 3130, 2017 and December 31, 2016, available-for-sale and held-to-maturity commercial MBS include $56.42 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 $2818.9 million at ~~March~~June 3130, 2017 and $33.9 million at December 31, 2016. Included in these amounts are $3.85 million and $4.1 million of a security equally collateralized by the Federal Family Education ~~loan~~Loan Program and Private Student Loan ~~Programs~~Program as of ~~March~~June 3130, 2017 and December 31, 2016, respectively.

The amortized cost and fair value of investment securities available-for-sale and held-to-maturity at March 31, 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.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Maturities of Investment Portfolio
	March 31, 2017
	Amortized		Fair
	Cost		Value
Securities available-for-sale:
Municipal securities
Due after five years through ten years	$	5,821	$	6,017
Due after ten years		6,913		7,273
Residential agency pass-through securities
Due after five years through ten years		6,189		6,443
Due after ten years		141,249		139,823
Residential collateralized mortgage obligations
Due after five years through ten years		14,305		14,341
Due after ten years		152,621		152,995
Commercial mortgage-backed obligations
Due after five years through ten years		7,434		7,234
Due after ten years		8,408		8,156
Asset-backed securities
Due after five years through ten years		61,493		61,399
Due after ten years		17,450		16,968
Corporate and other securities
Due after ten years		1,483		1,320
Equity securities
No maturity		1,250		1,376
Total securities available-for-sale	$	424,616	$	423,345
Securities held-to-maturity:
Residential agency pass-through securities
Due after ten years	$	32,589	$	33,214
Residential collateralized mortgage obligations
Due after ten years		6,559		6,647
Commercial mortgage-backed obligations
Due after five years through ten years		46,629		47,375
Asset-backed securities
Due after ten years		3,802		3,776
Total securities held-to-maturity	$	89,579	$	91,012

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.

Securities available-for-sale of $51.6 million and $100.1 million were sold in the three months ended March 31, 2017 March 31, 2016, respectively. Gross realized gains on the sale of securities were $58 thousand for the three months ended March 31, 2017 and $94 thousand for the three months ended March 31, 2016. There were no gross realized losses on the sale of securities for the three months ended March 31, 2017. Gross realized losses for the three months ended March 31, 2016 were $100 thousand.

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

~~Management~~Securities ~~evaluates its investments quarterly~~ available-for-sale ~~other than temporary impairment, relying primarily on industry analyst reports, observation~~ of ~~market~~$0 ~~conditions~~ and ~~interest rate fluctuations~~$51.6 ~~The~~million ~~following~~were ~~table~~sold ~~shows~~in ~~gross~~the ~~unrealized~~three ~~losses~~months and ~~fair~~six ~~value,~~months ~~aggregated~~ended byJune ~~investment~~30, ~~category~~2017, ~~and~~respectively. ~~length~~Gross ofrealized ~~time~~gains ~~that~~on the ~~individual~~sale of securities ~~have been in a continuous unrealized loss position~~ for ~~securities~~the ~~with~~six ~~unrealized~~months ~~losses~~ended atJune ~~March 31~~30, 2017 ~~and~~were ~~December~~$58 ~~31, 2016~~thousand. ~~None~~Securities ofavailable-for-sale ~~the securities are deemed to be other than temporarily impaired since none~~ of ~~the~~$24.3 ~~unrealized~~million ~~losses~~and ~~relate~~$124.4 tomillion ~~the~~were ~~marketability~~sold ofin the ~~securities~~three ormonths ~~the~~and ~~issuer’s~~six ~~ability~~months toended ~~honor~~June ~~redemption~~30, ~~obligations~~2016, asrespectively. ~~all~~Gross ~~but~~realized ~~one~~losses ofon the ~~bonds~~sale ~~are~~of ~~issued~~securities byfor ~~United States government agencies with~~ the ~~remaining~~three ~~bond~~and ~~being~~six ~~partially~~months ~~guaranteed~~ended byJune ~~a government agency~~30, ~~and~~2016 itwere is$87 ~~more~~thousand ~~likely~~and ~~than~~$187 ~~not~~thousand, ~~that~~respectively. ~~the~~Gross ~~Company~~realized ~~will~~gains ~~not~~on ~~have to sell~~ the ~~investments~~sale ~~before recovery~~ of ~~their~~securities ~~amortized~~for ~~cost~~six ~~basis.~~months Atended ~~both~~June ~~March 31~~30, ~~2017 and December 31,~~ 2016, ~~there~~ were ~~six~~$94 ~~securities in a loss position for twelve months or more~~thousand.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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
March 31, 2017
Securities available-for-sale:
Municipal securities	$	-	$	-		$	-	$	-		$	-	$	-
Residential agency pass-through securities		104,222		(1,902	)		-		-			104,222		(1,902	)
Residential collateralized mortgage obligations		50,396		(212	)		-		-			50,396		(212	)
Commercial mortgage-backed securities		15,390		(452	)		-		-			15,390		(452	)
Asset-backed securities		34,917		(628	)		20,712		(251	)		55,629		(879	)
Corporate and other securities		-		-			1,320		(163	)		1,320		(163	)
Equity securities		-		-			-		-			-		-
Total temporarily impaired available-for-sale securities	$	204,925	$	(3,194	)	$	22,032	$	(414	)	$	226,957	$	(3,608	)
Securities held-to-maturity:
Asset-backed securities	$	-	$	-		$	3,776	$	(26	)	$	3,776	$	(26	)
Residential agency pass-through securities		3,648		(49	)		-		-			3,648		(49	)
Total temporarily impaired held-to-maturity securities	$	3,648	$	(49	)	$	3,776	$	(26	)	$	7,424	$	(75	)
December 31, 2016
Securities available-for-sale:
Residential agency mortgage-backed securities	$	-	$	-		$	138,759	$	(2,355	)	$	138,759	$	(2,355	)
Residential collateralized mortgage obligations		-		-			30,650		(185	)		30,650		(185	)
Commercial mortgage-backed obligations		-		-			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 obligations		-		-			-		-			-		-
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	)

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.

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 $20.0 million at March 31, 2017 and $17.5 million at December 31, 2016. Included in these amounts at March 31, 2017 and December 31, 2016 was $17.4 million and $14.9 million, respectively, of Federal Home Loan Bank (“FHLB”) stock. All nonmarketable equity securities were evaluated for impairment as of March 31, 2017 and December 31, 2016. At March 31, 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.

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:

	March 31, 2017						December 31, 2016
	June 30, 2017						December 31, 2016
	PCI loans		All other loans		Total		PCI loans		All other loans		Total
Commercial:
Commercial and industrial	$	42,~~103~~688	$	~~426~~452,~~144~~264	$	~~430~~454,~~247~~952	$	3,920	$	383,481	$	387,401
Commercial real estate (CRE) - owner-occupied		1412,~~317~~166		~~346~~349,~~001~~047		~~360~~361,~~318~~213		15,401		352,152		367,553
CRE - investor income producing		3029,~~267~~022		~~740~~772,~~137~~676		~~770~~801,~~404~~698		30,700		712,407		743,107
AC&D - 1-4 family construction		-		8595,~~025~~236		8595,~~025~~236		-		82,707		82,707
AC&D - lots, land & development		7,~~417~~443		9085,~~922~~318		9892,~~339~~761		8,074		97,288		105,362
AC&D - CRE		-		~~186~~150,~~325~~170		~~186~~150,~~325~~170		-		194,732		194,732
Other commercial		1,~~692~~934		1113,~~051~~778		1215,~~743~~712		1,962		10,938		12,900
Total commercial loans		5753,~~796~~253		1,~~885~~918,~~605~~489		1,~~943~~971,~~401~~742		60,057		1,833,705		1,893,762
Consumer:
Residential mortgage		2018,~~833~~765		~~252~~265,~~791~~146		~~273~~283,~~624~~911		21,472		239,049		260,521
Home equity lines of credit (HELOC)		1,~~063~~066		~~169~~172,~~646~~774		~~170~~173,~~709~~840		1,088		175,711		176,799
Residential construction		1,~~836~~655		50,~~795~~567		52,~~631~~222		2,470		56,590		59,060
Other loans to individuals		~~341~~335		16,~~595~~798		1617,~~936~~133		368		18,537		18,905
Total consumer loans		2421,~~073~~821		~~489~~505,~~827~~285		~~513~~527,~~900~~106		25,398		489,887		515,285
Total loans		8175,~~869~~074		2,~~375~~423,~~432~~774		2,~~457~~498,~~301~~848		85,455		2,323,592		2,409,047
Deferred costs		-		3,~~294~~272		3,~~294~~272		-		3,139		3,139
Total loans, net of deferred costs	$	8175,~~869~~074	$	2,~~378~~427,~~726~~046	$	2,~~460~~502,~~595~~120	$	85,455	$	2,326,731	$	2,412,186

At ~~March~~June 3130, 2017 and December 31, 2016, the Company had sold participations in loans aggregating $2427.05 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 ~~March~~June 3130, 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 ~~March~~June 3130, 2017 were $21.6 million and ~~March~~$53.0 31million, respectively. Total loans sold in the three and six months ended June 30, 2016 were $3126.40 million and $1743.6 million, respectively.

At ~~both~~June ~~March 31~~30, 2017 ~~and December 31, 2016,~~ 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 ~~March~~June 3130, 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 ~~March~~June 3130, 2017 and 2016.

	Commercial and industrial			~~CRE~~Shared -National ~~owner-occupied~~Credits			CRE - ~~investor~~owner- ~~income producing~~occupied			~~AC&D~~CRE - ~~1-4~~investor ~~family~~income ~~construction~~producing			AC&D - ~~lots,~~1-4 ~~land~~family ~~& development~~construction			AC&D - ~~CRE~~lots, land & development			~~Other~~AC&D ~~commercial~~- CRE			~~Residential~~Other ~~mortgage~~commercial			~~HELOC~~Residential mortgage			~~Residential~~HELOC ~~construction~~Jr. Lien*			~~Other~~HELOC ~~loans~~Sr. ~~to individuals~~Lien			~~Total~~Residential construction			Other loans to individuals			Total
For the three months ended March 31, 2017
For the three months ended June 30, 2017
Allowance for Loan Losses, excluding PCI:
Allowance for Loan Losses:
Balance, beginning of period	$	23,~~720~~093		$	~~1,286~~-		$	21,~~583~~348		$	~~567~~2,844		$	~~526~~595		$	~~1,484~~513		$	~~126~~1,353		$	~~841~~77		$	~~1,391~~984		$	~~435~~1,513		$	~~166~~-		$	~~12,125~~358		$	155		$	12,833
Provision for loan losses		~~431~~(435	)		~~(31~~556	)		~~267~~6			333			~~(52~~82	)		(~~131~~56	)		(51186	)		~~133~~15			~~203~~124			(78730	)		~~(16~~577	)		~~678~~6			8			-
Charge-offs		(6296	)		39-			~~(13~~-	)		-(23	)		-			-			-			-			(~~101~~130	)		-(31	)		~~(10~~-	)		(~~147~~20	)		(28	)		(328	)
Recoveries		411			54-			7-			2594			392			-23			1-			8-			2133			214			15-			~~176~~2			18			198
Net (charge-offs) recoveries		(5885	)		93-			(6-	)		2571			392			-23			1-			8-			(8197	)		2(17	)		5-			29(18	)		(10	)		(131	)
Balance, end of period	$	3,093		$	1,348		$	2,844		$	595		$	513		$	1,353		$	77		$	983		$	1,513		$	358		$	155		$	12,833
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
PCI Impairment Allowance for Loan Losses:
For the six months ended June 30, 2017
Balance, beginning of period		-			-			-			-			-			-			-			-			-			-			-			-
Allowance for Loan Losses:
PCI Impairment charge-offs		-			-			-			-			-			-			-			-			-			-			-			-
Balance, beginning of period	$	2,720		$	-		$	1,286		$	2,583		$	567		$	526		$	1,484		$	126		$	841		$	-		$	1,391		$	435		$	166		$	12,125
PCI impairment recoveries		-			-			-			-			-			-			-			-			-			-			-			-
Provision for loan losses		(4	)		556			(26	)		300			85			(108	)		(317	)		(36	)		258			864			(814	)		(73	)		(7	)		678
Net PCI impairment charge-offs		-			-			-			-			-			-			-			-			-			-			-			-
Charge-offs		(158	)		-			39			(36	)		-			-			-			-			(130	)		(133	)		-			(20	)		(38	)		(476	)
PCI provision for loan losses		-			-			-			-			-			-			-			-			-			-			-			-
Recoveries		15			-			55			101			27			62			-			2			42			35			-			4			32			375
Benefit attributable to FDIC loss share agreements		-			-			-			-			-			-			-			-			-			-			-			-
Net (charge-offs) recoveries		(143	)		-			93			65			27			62			-			2			(88	)		(98	)		-			(16	)		(6	)		(102	)
Total provision for loan losses charged to operations		-			-			-			-			-			-			-			-			-			-			-			-
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
Provision for loan losses recorded through FDIC loss		-			-			-			-			-			-			-			-			-			-			-			-
share receivable		-			-			-			-			-			-			-			-			-			-			-			-
Balance, end of period	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Total Allowance for Loan Losses	$	3,093		$	1,348		$	2,844		$	595		$	513		$	1,353		$	77		$	983		$	1,513		$	358		$	155		$	12,833

*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			~~CRE~~Shared -National ~~owner-occupied~~Credits			CRE - ~~investor~~owner- ~~income producing~~occupied		~~AC&D~~CRE - ~~1-4~~investor ~~family~~income ~~construction~~producing		AC&D - ~~lots,~~1-4 ~~land~~family ~~& development~~construction		AC&D - ~~CRE~~lots, land & development			~~Other~~AC&D ~~commercial~~- CRE			~~Residential~~Other ~~mortgage~~commercial			~~HELOC~~Residential mortgage			~~Residential~~HELOC ~~construction~~Jr. Lien*			~~Other~~HELOC ~~loans~~Sr. ~~to individuals~~Lien			~~Total~~Residential construction			Other loans to individuals			Total
For the three months ended March 31, 2016
For the three months ended June 30, 2016
Allowance for Loan Losses, excluding PCI:
Allowance for Loan Losses:
Balance, beginning of period	$	12,~~821~~047		$	~~1,135~~-		$	21,~~099~~108	$	~~247~~2,217	$	~~278~~381	$	~~679~~398		$	69808		$	~~672~~67		$	~~1,337~~724		$	~~461~~-		$	~~266~~1,393		$	~~9,064~~449		$	240		$	9,832
Provision for loan losses		~~217~~66			~~(27~~-	)		~~103~~123		~~130~~348		8691		~~129~~(70	)		~~(40~~28	)		253			~~(35~~104	)		~~(27~~-	)		(5130	)		~~556~~(12	)		71			882
Charge-offs		(141	)		-			-		-		-		-			-			~~(17~~-	)		-(15	)		~~(11~~-	)		(4056	)		~~(82~~-	)		(21	)		(94	)
Recoveries		2315			-			15-		47		3413		-121			38-			44-			918			26-			1966			~~294~~2			19			252
Net (charge-offs) recoveries		914			-			15-		47		3413		-121			38-			27-			91(7	)		15-			~~(21~~10	)		~~212~~2			(2	)		158
Balance, end of period	$	2,047		$	1,108		$	2,217	$	381	$	398	$	808		$	67		$	724		$	1,393		$	449		$	240		$	9,832
Total Allowance for Loan Losses	$	2,127		$	-		$	1,231	$	2,572	$	485	$	449		$	836		$	70		$	821		$	-		$	1,533		$	439		$	309		$	10,872
PCI Impairment Allowance for Loan Losses:
For the six months ended June 30, 2016
Balance, beginning of period	$	-		$	-		$	-	$	-	$	-	$	-		$	-		$	-		$	-		$	-		$	-		$	-
Allowance for Loan Losses:
PCI Impairment charge-offs		-			-			-		-		-		-			-			-			-			-			-			-
Balance, beginning of period	$	1,821		$	-		$	1,135	$	2,099	$	247	$	278		$	679		$	69		$	672		$	-		$	1,337		$	461		$	266		$	9,064
PCI impairment recoveries		-			-			-		-		-		-			-			-			-			-			-			-
Provision for loan losses		283			-			96		451		221		16			157			(37	)		129			-			95			(39	)		66			1,438
Net PCI impairment charge-offs		-			-			-		-		-		-			-			-			-			-			-			-
Charge-offs		(16	)		-			-		-		-		-			-			-			(32	)		-			(56	)		(11	)		(61	)		(176	)
PCI provision for loan losses		-			-			-		-		-		-			-			-			-			-			-			-
Recoveries		39			-			-		22		17		155			-			38			52			-			157			28			38			546
Benefit attributable to FDIC loss share agreements		-			-			-		-		-		-			-			-			-			-			-			-
Net (charge-offs) recoveries		23			-			-		22		17		155			-			38			20			-			101			17			(23	)		370
Total provision for loan losses charged to operations		-			-			-		-		-		-			-			-			-			-			-			-
Total Allowance for Loan Losses	$	2,127		$	-		$	1,231	$	2,572	$	485	$	449		$	836		$	70		$	821		$	-		$	1,533		$	439		$	309		$	10,872
Provision for loan losses recorded through FDIC loss share receivable		-			-			-		-		-		-			-			-			-			-			-			-
Balance, end of period	$	-		$	-		$	-	$	-	$	-	$	-		$	-		$	-		$	-		$	-		$	-		$	-
Total Allowance for Loan Losses	$	2,047		$	1,108		$	2,217	$	381	$	398	$	808		$	67		$	724		$	1,393		$	449		$	240		$	9,832

*Prior to Q2 2017, HELOCs were evalauted collectively for purposes of the allowance for loan and lease losses. Beginning in Q2 2017, HELOCs were evaluated for purposes of the allowance calculation based on the sequence of lien associated with the underlying collateral of the loan.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The following table presents, by portfolio segment, the balance in the allowance for loan losses disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans at ~~March~~June 3130, 2017 and December 31, 2016.

	Commercial and industrial		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		Residential construction		Other loans to individuals		Total
At March 31, 2017
Allowance for Loan Losses:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	201	$	20	$	-	$	221
Collectively evaluated for impairment		3,093		1,348		2,844		595		513		1,353		77		983		1,312		338		155		12,612
		3,093		1,348		2,844		595		513		1,353		77		983		1,513		358		155		12,833
Purchased credit-impaired		-		-		-		-		-		-		-		-		-		-		-		-
Total	$	3,093	$	1,348	$	2,844	$	595	$	513	$	1,353	$	77	$	983	$	1,513	$	358	$	155	$	12,833
Recorded Investment in Loans:
Individually evaluated for impairment	$	478	$	812	$	2,186	$	-	$	614	$	-	$	218	$	2,117	$	2,668	$	250	$	-	$	9,343
Collectively evaluated for impairment		425,666		345,189		737,951		85,025		90,308		186,325		10,833		250,674		166,978		50,545		16,595		2,366,089
		426,144		346,001		740,137		85,025		90,922		186,325		11,051		252,791		169,646		50,795		16,595		2,375,432
Purchased credit-impaired		4,103		14,317		30,267		-		7,417		-		1,692		20,833		1,063		1,836		341		81,869
Total	$	430,247	$	360,318	$	770,404	$	85,025	$	98,339	$	186,325	$	12,743	$	273,624	$	170,709	$	52,631	$	16,936	$	2,457,301
At December 31, 2016
Allowance for Loan Losses:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	178	$	20	$	-	$	198
Collectively evaluated for impairment		2,720		1,286		2,583		567		526		1,484		126		841		1,213		415		166		11,927
		2,720		1,286		2,583		567		526		1,484		126		841		1,391		435		166		12,125
Purchased credit-impaired		-		-		-		-		-		-		-		-		-		-		-		-
Total	$	2,720	$	1,286	$	2,583	$	567	$	526	$	1,484	$	126	$	841	$	1,391	$	435	$	166	$	12,125
Recorded Investment in Loans:
Individually evaluated for impairment	$	-	$	1,006	$	1,951	$	-	$	622	$	-	$	211	$	2,014	$	2,392	$	243	$	-	$	8,439
Collectively evaluated for impairment		383,481		351,146		710,456		82,707		96,666		194,732		10,727		237,035		173,319		56,347		18,537		2,315,153
		383,481		352,152		712,407		82,707		97,288		194,732		10,938		239,049		175,711		56,590		18,537		2,323,592
Purchased credit-impaired		3,920		15,401		30,700		-		8,074		-		1,962		21,472		1,088		2,470		368		85,455
Total	$	387,401	$	367,553	$	743,107	$	82,707	$	105,362	$	194,732	$	12,900	$	260,521	$	176,799	$	59,060	$	18,905	$	2,409,047

	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

At June 30, 2017
Allowance for Loan Losses:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	222	$	-	$	20	$	-	$	242
Collectively evaluated for impairment		2,573		556		1,354		2,948		679		480		1,167		92		1,011		544		577		326		153		12,460
		2,573		556		1,354		2,948		679		480		1,167		92		1,011		766		577		346		153		12,702
Purchased credit-impaired		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total	$	2,573	$	556	$	1,354	$	2,948	$	679	$	480	$	1,167	$	92	$	1,011	$	766	$	577	$	346	$	153	$	12,702

Recorded Investment in Loans:
Individually evaluated for impairment	$	460	$	-	$	434	$	1,874	$	-	$	564	$	-	$	210	$	2,161	$	2,473	$	-	$	221	$	-	$	8,398
Collectively evaluated for impairment		451,708		96		348,613		770,802		95,236		84,754		150,170		13,568		262,985		86,681		83,620		50,346		16,798		2,415,376
		452,168		96		349,047		772,676		95,236		85,318		150,170		13,778		265,146		89,154		83,620		50,567		16,798		2,423,774
Purchased credit-impaired		2,688		-		12,166		29,022		-		7,443		-		1,934		18,765		1,066		-		1,655		335		75,074
Total	$	454,856	$	96	$	361,213	$	801,698	$	95,236	$	92,761	$	150,170	$	15,712	$	283,911	$	90,220	$	83,620	$	52,222	$	17,133	$	2,498,848

At December 31, 2016
Allowance for Loan Losses:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	178	$	20	$	-	$	198
Collectively evaluated for impairment		2,720		-		1,286		2,583		567		526		1,484		126		841		-		1,213		415		166		11,927
		2,720		-		1,286		2,583		567		526		1,484		126		841		-		1,391		435		166		12,125
Purchased credit-impaired		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total	$	2,720	$	-	$	1,286	$	2,583	$	567	$	526	$	1,484	$	126	$	841	$	-	$	1,391	$	435	$	166	$	12,125
Recorded Investment in Loans:
Individually evaluated for impairment	$	-	$	-	$	1,006	$	1,951	$	-	$	622	$	-	$	211	$	2,014	$	-	$	2,392	$	243	$	-	$	8,439
Collectively evaluated for impairment		383,481		-		351,146		710,456		82,707		96,666		194,732		10,727		237,035		-		173,319		56,347		18,537		2,315,153
		383,481		-		352,152		712,407		82,707		97,288		194,732		10,938		239,049		-		175,711		56,590		18,537		2,323,592
Purchased credit-impaired		3,920		-		15,401		30,700		-		8,074		-		1,962		21,472		-		1,088		2,470		368		85,455
Total	$	387,401	$	-	$	367,553	$	743,107	$	82,707	$	105,362	$	194,732	$	12,900	$	260,521	$	-	$	176,799	$	59,060	$	18,905	$	2,409,047

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The Company’s loan loss allowance methodology includes four components, as described below:

Specific Reserve Component. Specific reserves represent the current impairment estimate on specific loans, for which it is probable that the Company will be unable to collect all amounts due according to contractual terms based on current information and events. Impairment measurement reflects only a deterioration of credit quality and not changes in market rates that may cause a change in the fair value of the impaired loan. The amount of impairment may be measured in one of three ways, including (i) calculating the present value of expected future cash flows, discounted at the loan’s interest rate implicit in the original document and deducting estimated selling costs, if any; (ii) observing quoted market prices for identical or similar instruments traded in active markets, or employing model-based valuation techniques for which all significant assumptions are observable in the market; and (iii) determining the fair value of collateral, which is utilized for both collateral-dependent loans and for loans when foreclosure is probable.

Quantitative Reserve Component. Quantitative reserves represent the current loss contingency estimate on pools of loans, which is an estimate of the amount for which it is probable that the Company will be unable to collect all amounts due on homogeneous groups of loans according to contractual terms should one or more events occur, excluding those loans specifically identified above.

The historical loss experience of the Company is collected quarterly by evaluating internal loss data. The estimated historical loss rates are grouped by loan product type. The Company utilizes average historical losses to represent management’s estimate of losses inherent in a particular portfolio. The historical look back period is estimated by loan type, and the Company applies the appropriate historical loss period which best reflects the inherent loss in the applicable portfolio considering prevailing market conditions. The historic look back periods utilized by management for all loan types was 15 quarters at both ~~March~~June 3130, 2017 and December 31, 2016. On a semi -annual basis, the Company establishes a minimum historical loss rate based on historic loss data published by the Federal Reserve. As noted in paragraph 3 vii below, a qualitative reserve is established when the actual quantitative historical loss rate is less than the established minimum reserve.

The Company also performs a quantitative calculation on the acquired purchased performing loan portfolio. There is no allowance for loan losses established at the acquisition date for purchased performing loans. The historical loss experience discussed above is applied to the purchased performing loan portfolio and the result is compared to the remaining fair value mark on this portfolio. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the acquisition. This analysis indicated the need for an allowance for loan losses of $~~226~~272 thousand and $257 thousand for the purchased performing portfolio at ~~March~~June 3130, 2017 and December 31, 2016, respectively. The remaining mark on the purchased performing loan portfolio was $32.16 million and $3.4 million at ~~March~~June 3130, 2017 and December 31, 2016, respectively. Approximately $2.1.7 million of the remaining mark at ~~March~~June 3130, 2017 on the purchased performing loan portfolio was associated with the First Capital merger.

3) Qualitative Reserve Component. Qualitative reserves represent an estimate of the amount for which it is probable that environmental or other relevant factors will cause the aforementioned loss contingency estimate to differ from the Company’s historical loss experience or other assumptions. These factors include portfolio trends, portfolio concentrations, economic and market conditions, changes in lending practices, changes in loan review systems, geographical considerations, minimum loss factor and other factors. Each of the factors, except other factors, can range from 0.00% (not applicable) to 0.15% (very high). Other factors are reviewed on a situational basis and are adjusted in 5five basis point increments, up or down, with a maximum positive factor of 1.00% and a negative factor of 1.00%. Details of the ~~seven~~eight environmental factors for inclusion in the allowance methodology are as follows:

i. Portfolio trends, which may relate to such factors as type or level of loan origination activity, changes in asset quality (i.e., past due, special mention, non- performing) and/or changes in collateral values;

ii.

Portfolio concentrations, which may relate to individual borrowers and/or guarantors, geographic regions, industry sectors, loan types and/or other factors;

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

iii.

Economic and market trends, which may relate to trends and/or levels of gross domestic production, unemployment, bankruptcies, foreclosures, housing starts, housing prices, equity prices, competitor activities and/or other factors;

iv.

Changes in lending practices, which may relate to changes in credit policies, procedures, systems or staff;

Changes in loan review system, which may introduce variation in loan grading, collateral adequacy and valuation and impairment classification;

vi. Geographical considerations, which may relate to economic and/or environmental issues unique to a geographical area including but not limited to elimination of a major employer, natural disaster, or long-term states of emergency; ~~and~~

vii. ~~Other~~Minimum ~~factors~~loss factor, pursuant to which, isbased ~~intended~~on tothe ~~capture~~review of historic loss rates as reported by the ~~incremental~~Federal ~~adjustment~~Reserve (the “Net Charge-Off Rates on Loans and Leases for Banks Not Among Top 100 in Size-Not Seasonally Adjusted), bya minimum loss rate is established and reviewed semi-annually for each loan type, toand ~~internally~~an incremental factor, as calculated by taking the difference of the established minimum ~~reserves~~loss ~~(as~~and ~~discussed~~the ~~above)~~calculated ashistorical ~~well~~loss asfor ~~environmental~~the ~~factors~~trailing ~~not~~15 ~~specifically~~quarters, ~~identified~~is ~~above.~~applied; and

viii.

Other factors, which is intended to capture uncertainty into portfolio loss estimates, including situations of a rapidly improving or declining economic environment, significant recovery or loss periods, as well as environmental factors not specifically identified above.

In addition, qualitative reserves on purchased performing loans are based on the Company’s judgment around the timing difference expected to occur between accretion of the fair market value credit adjustment and realization of actual loan losses.

4) Reserve on PCI loans. In determining the acquisition date fair value of PCI loans, and in subsequent accounting, the Company generally aggregates ~~purchased~~PCI loans into pools of loans with common risk characteristics. Expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, significant increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording a provision (an allowance for loan losses). In pools where impairment has already been recognized, an increase in cash flows will result in a reversal of prior impairment. Management analyzes these acquired loan pools using various assessments of risk to determine and calculate an expected loss. The expected loss is derived using an estimate of a loss given default based upon the collateral type and/or specific review by loan officers of loans generally greater than $1.0 million, and the probability of default that was determined based upon management’s review of the loan portfolio. Trends are reviewed in terms of traditional credit metrics such as accrual status, past due status, and weighted-average risk grade of the loans within each of the accounting pools. In addition, the relationship between the change in the unpaid principal balance and change in the fair value mark is assessed to correlate the directional consistency of the expected loss for each pool.

There were no outstanding reserves on PCI loans as of ~~March~~June 3130, 2017 and December 31, 2016.

The Company evaluates and estimates off-balance sheet credit exposure at the same time it estimates credit losses for loans by a similar process. These estimated credit losses are not recorded as part of the allowance for loan losses, but are recorded to a separate liability account by a charge to income, if material. Loan commitments, unused lines of credit and standby letters of credit make up the off-balance sheet items reviewed for potential credit losses. At both ~~March~~June 3130, 2017 and December 31, 2016, $125 thousand was recorded as an other liability for off-balance sheet credit exposure.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Credit Quality Indicators - The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicator is an internal credit risk rating system that categorizes loans into pass, special mention, or classified categories. Credit risk ratings are applied individually to ~~those classes of~~ loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes that comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes that comprise the consumer portfolio segment.

The following are the definitions of the Company's credit quality indicators:

Pass:	Loans in classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. PCI loans that were recorded at estimated fair value on the acquisition date are generally assigned a “pass” loan grade because their net financial statement value is based on the present value of expected cash flows. Management believes there is a low likelihood of loss related to those loans that are considered pass.

Special Mention:	Loans in classes that comprise the commercial and consumer portfolio segments that have potential weaknesses that deserve management's close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. Management believes there is a moderate likelihood of some loss related to those loans that are considered special mention.

Classified:	Loans in the classes that comprise the commercial and consumer portfolio segments that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans are not corrected in a timely manner.

The Company's credit quality indicators are periodically updated on a case-by-case basis. The following tables present the recorded investment in the Company's loans as of March 31, 2017 and December 31, 2016, by loan class and by credit quality indicator.

~~PARK~~The ~~STERLING~~Company's ~~CORPORATION~~credit quality indicators are periodically updated on a case-by-case basis. The following tables present the recorded investment in the Company's loans as of June 30, 2017 and December 31, 2016, by loan class and by credit quality indicator.

Notes to Condensed Consolidated Financial Statements (Unaudited)

	As of June 30, 2017
	Commercial and industrial		CRE - owner- occupied		CRE - investor income producing		AC&D - 1-4 family construction		AC&D - lots, land & development		AC&D - CRE		Other commercial		Total Commercial
Pass	$	447,136	$	351,049	$	794,561	$	95,236	$	91,415	$	150,170	$	13,655	$	1,943,222
Special mention		7,094		6,533		3,878		-		938		-		1,731		20,174
Classified		722		3,631		3,259		-		408		-		326		8,346
Total	$	454,952	$	361,213	$	801,698	$	95,236	$	92,761	$	150,170	$	15,712	$	1,971,742

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

	Residential mortgage		HELOC		Residential construction		Other loans to individuals		Total Consumer
Pass	$	275,473	$	165,280	$	51,887	$	16,954	$	509,594
Special mention		5,012		6,247		31		33		11,323
Classified		3,426		2,313		304		146		6,189
Total	$	283,911	$	173,840	$	52,222	$	17,133	$	527,106

Total Loans									$	2,498,848

As of March 31, 2017

As of December 31, 2016

Commercial and industrial

CRE - owner- occupied

CRE - investor income producing

AC&D - 1-4 family construction

AC&D - lots, land & development

AC&D - CRE

Other commercial

Total Commercial

Pass

~~420~~378,~~595~~592

~~348~~356,~~962~~214

~~763~~735,~~217~~698

8582,~~025~~707

95102,~~828~~146

~~186~~194,~~325~~732

12,~~416~~569

1,~~912~~862,~~368~~658

Special mention

7,~~934~~229

7,~~768~~779

3,~~549~~276

2,~~050~~727

21,~~301~~011

Classified

1,~~718~~580

3,~~588~~560

34,~~638~~133

~~461~~489

~~327~~331

910,~~732~~093

Total

~~430~~387,~~247~~401

~~360~~367,~~318~~553

~~770~~743,~~404~~107

8582,~~025~~707

98105,~~339~~362

~~186~~194,~~325~~732

12,~~743~~900

1,~~943~~893,~~401~~762

	Residential mortgage		HELOC		Residential construction		Other loans to individuals		~~AC&D - lots, land & development~~		~~AC&D - CRE~~		~~Other commercial~~		Total Consumer
Pass	$	~~265~~252,~~657~~934	$	~~162~~168,~~135~~460	$	5258,~~247~~486	$	1618,~~736~~711		-		-		-	$	~~496~~498,~~775~~591
Special mention		54,~~389~~707		5,~~935~~732		~~123~~312		2614		-		-		-		1110,~~473~~765
Classified		2,~~577~~880		2,~~640~~607		~~261~~262		~~174~~180		-		-		-		5,~~652~~929
Total	$	~~273~~260,~~623~~521	$	~~170~~176,~~710~~799	$	5259,~~631~~060	$	1618,~~936~~905		-		-		-	$	~~513~~515,~~900~~285
Total Loans															$	2,~~457~~409,~~301~~047

	As of December 31, 2016
	Commercial and industrial		CRE - owner-occupied		CRE - investor income producing		AC&D - 1-4 family construction		AC&D - lots, land & development		AC&D - CRE		Other commercial		Total Commercial
Pass	$	378,592	$	356,215	$	735,698	$	82,708	$	102,147	$	194,733	$	12,568	$	1,862,661
Special mention		7,229		7,779		3,276		-		2,727		-		-		21,011
Classified		1,580		3,560		4,133		-		489		-		331		10,093
Total	$	387,401	$	367,554	$	743,107	$	82,708	$	105,363	$	194,733	$	12,899	$	1,893,765

	Residential mortgage		HELOC		Residential construction		Other loans to individuals		AC&D - lots, land & development		AC&D - CRE		Other commercial		Total Consumer
Pass	$	252,934	$	168,461	$	58,487	$	18,712		-		-		-	$	498,594
Special mention		4,707		5,732		312		14		-		-		-		10,765
Classified		2,880		2,607		262		180		-		-		-		5,929
Total	$	260,521	$	176,800	$	59,061	$	18,906		-		-		-	$	515,288
Total Loans															$	2,409,053

Aging Analysis of Accruing and Non-Accruing Loans – The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes, regardless of their age, there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of payment status, the associated discount on these loan pools results in income recognition. The following presents, by class, an aging analysis of the Company’s accruing and non-accruing loans as of March 31, 2017 and December 31, 2016.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

	30-59		60-89		Past Due
	Days		Days		90 Days		PCI
	Past Due		Past Due		or More		Loans		Current		Total Loans
As of March 31, 2017
Commercial:
Commercial and industrial	$	45	$	-	$	463	$	4,103	$	425,636	$	430,247
CRE - owner-occupied		-		458		344		14,317		345,199		360,318
CRE - investor income producing		-		19		198		30,267		739,920		770,404
AC&D - 1-4 family construction		-		-		-		-		85,025		85,025
AC&D - lots, land & development		32		-		-		7,417		90,890		98,339
AC&D - CRE		-		-		-		-		186,325		186,325
Other commercial		-		-		211		1,692		10,840		12,743
Total commercial loans		77		477		1,216		57,796		1,883,835		1,943,401
Consumer:
Residential mortgage		375		153		1,405		20,833		250,858		273,624
HELOC		159		345		609		1,063		168,533		170,709
Residential construction		33		24		243		1,836		50,495		52,631
Other loans to individuals		41		-		24		341		16,530		16,936
Total consumer loans		608		522		2,281		24,073		486,416		513,900
Total loans	$	685	$	999	$	3,497	$	81,869	$	2,370,251	$	2,457,301
As of December 31, 2016
Commercial:
Commercial and industrial	$	587	$	7	$	167	$	3,920	$	382,720	$	387,401
CRE - owner-occupied		-		-		385		15,401		351,767		367,553
CRE - investor income producing		169		1,391		1,826		30,700		709,021		743,107
AC&D - 1-4 family construction		-		-		-		-		82,707		82,707
AC&D - lots, land & development		-		-		-		8,074		97,288		105,362
AC&D - CRE		-		-		-		-		194,732		194,732
Other commercial		-		-		211		1,962		10,727		12,900
Total commercial loans		756		1,398		2,589		60,057		1,828,962		1,893,762
Consumer:
Residential mortgage		328		69		2,940		21,472		235,712		260,521
HELOC		80		1,176		886		1,088		173,569		176,799
Residential construction		8		335		509		2,470		55,738		59,060
Other loans to individuals		46		3		24		368		18,464		18,905
Total consumer loans		462		1,583		4,359		25,398		483,483		515,285
Total loans	$	1,218	$	2,981	$	6,948	$	85,455	$	2,312,445	$	2,409,047

Aging Analysis of Accruing and Non-Accruing Loans – The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes, regardless of their age, there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of payment status, the associated discount on these loan pools results in income recognition. The following presents, by class, an aging analysis of the Company’s accruing and non-accruing loans as of June 30, 2017 and December 31, 2016.

Impaired Loans - For all classes of loans, except PCI loans, loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impaired loans may include all classes of nonaccrual loans and loans modified in a TDR. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the rate implicit in the original loan agreement or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

	30-59		60-89		Past Due
	Days		Days		90 Days		PCI
	Past Due		Past Due		or More		Loans		Current		Total Loans

As of June 30, 2017
Commercial:
Commercial and industrial	$	10	$	-	$	463	$	2,688	$	451,791	$	454,952
CRE - owner-occupied		-		373		463		12,166		348,211		361,213
CRE - investor income producing		239		172		408		29,022		771,857		801,698
AC&D - 1-4 family construction		-		-		-		-		95,236		95,236
AC&D - lots, land & development		-		-		-		7,443		85,318		92,761
AC&D - CRE		-		-		-		-		150,170		150,170
Other commercial		-		-		211		1,934		13,567		15,712
Total commercial loans		249		545		1,545		53,253		1,916,150		1,971,742

Consumer:
Residential mortgage		1		440		2,218		18,765		262,487		283,911
HELOC		442		191		463		1,066		171,678		173,840
Residential construction		23		-		222		1,655		50,322		52,222
Other loans to individuals		25		88		59		335		16,626		17,133
Total consumer loans		491		719		2,962		21,821		501,113		527,106
Total loans	$	740	$	1,264	$	4,507	$	75,074	$	2,417,263	$	2,498,848

As of December 31, 2016
Commercial:
Commercial and industrial	$	587	$	7	$	167	$	3,920	$	382,720	$	387,401
CRE - owner-occupied		-		-		385		15,401		351,767		367,553
CRE - investor income producing		169		1,391		1,826		30,700		709,021		743,107
AC&D - 1-4 family construction		-		-		-		-		82,707		82,707
AC&D - lots, land & development		-		-		-		8,074		97,288		105,362
AC&D - CRE		-		-		-		-		194,732		194,732
Other commercial		-		-		211		1,962		10,727		12,900
Total commercial loans		756		1,398		2,589		60,057		1,828,962		1,893,762

Consumer:
Residential mortgage		328		69		2,940		21,472		235,712		260,521
HELOC		80		1,176		886		1,088		173,569		176,799
Residential construction		8		335		509		2,470		55,738		59,060
Other loans to individuals		46		3		24		368		18,464		18,905
Total consumer loans		462		1,583		4,359		25,398		483,483		515,285
Total loans	$	1,218	$	2,981	$	6,948	$	85,455	$	2,312,445	$	2,409,047

Impaired Loans - For all classes of loans, except PCI loans, loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impaired loans may include all classes of nonaccrual loans and loans modified in a troubled debt restructuring (“TDR”). If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the rate implicit in the original loan agreement or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The table below presents impaired loans, by class, and the corresponding allowance for loan losses at ~~March~~June 3130, 2017 and December 31, 2016:

	March 31, 2017						December 31, 2016
	June 30, 2017						December 31, 2016
			Unpaid		Related				Unpaid		Related
	Recorded		Principal		Allowance For		Recorded		Principal		Allowance For
	Investment		Balance		Loan Losses		Investment		Balance		Loan Losses
Impaired Loans with No Related Allowance Recorded:
Commercial:
Commercial and industrial	$	~~463~~461	$	~~465~~463	$	-	$	-	$	-	$	-
CRE - owner-occupied		~~797~~434		~~920~~436		-		995		1,078		-
CRE - investor income producing		21,~~125~~874		21,~~125~~883		-		1,481		1,489		-
AC&D - 1-4 family construction		-		-		-		-		-		-
AC&D - lots, land & development		~~595~~564		~~722~~567		-		622		748		-
AC&D - CRE		-		-		-		-		-		-
Other commercial		~~211~~210		211		-		211		211		-
Total commercial loans		43,~~191~~543		43,~~443~~560		-		3,309		3,526		-
Consumer:
Residential mortgage		2,~~217~~161		2,~~287~~171		-		2,052		2,077		-
HELOC		-1,071		-1,075		-		1,183		1,190		-
Residential construction		-		-		-		-		-		-
Other loans to individuals		-		-		-		-		-		-
Total consumer loans		23,~~217~~232		23,~~287~~246		-		3,235		3,267		-
Total impaired loans with no related allowance recorded	$	6,~~408~~775	$	6,~~730~~806	$	-	$	6,544	$	6,793	$	-
Impaired Loans with an Allowance Recorded:
Commercial:
Commercial and industrial	$	-	$	-	$	-	$	-	$	-	$	-
CRE - owner-occupied		-		-		-		-		-		-
CRE - investor income producing		-		-		-		463		463		2
AC&D - 1-4 family construction		-		-		-		-		-		-
AC&D - lots, land & development		-		-		-		-		-		-
AC&D - CRE		-		-		-		-		-		-
Other commercial		-		-		-		-		-		-
Total commercial loans		-		-		-		463		463		2
Consumer:
Residential mortgage		-		-		-		-		-		-
HELOC		21,~~693~~402		21,~~807~~409		~~201~~222		1,224		1,248		176
Residential construction		~~243~~221		~~243~~222		20		243		243		20
Other loans to individuals		-		-		-		-		-		-
Total consumer loans		21,~~936~~623		31,~~050~~631		~~221~~242		1,467		1,491		196
Total impaired loans with an allowance recorded	$	21,~~936~~623	$	31,~~050~~631	$	~~221~~242	$	1,930	$	1,954	$	198
Total Impaired Loans Individually Reviewed for Impairment
Commercial:
Commercial and industrial	$	~~463~~461	$	~~465~~463	$	-	$	-	$	-	$	-
CRE - owner-occupied		~~797~~434		~~920~~436		-		995		1,078		-
CRE - investor income producing		21,~~125~~874		21,~~125~~883		-		1,944		1,952		2
AC&D - 1-4 family construction		-		-		-		-		-		-
AC&D - lots, land & development		~~595~~564		~~722~~567		-		622		748		-
AC&D - CRE		-		-		-		-		-		-
Other commercial		~~211~~210		211		-		211		211		-
Total commercial loans		43,~~191~~543		43,~~443~~560		-		3,772		3,989		2
Consumer:
Residential mortgage	$	2,~~217~~161		2,~~287~~171		-		2,052		2,077		-
HELOC		2,~~693~~473		2,~~807~~484		~~201~~222		2,407		2,438		176
Residential construction		~~243~~221		~~243~~222		20		243		243		20
Other loans to individuals		-		-		-		-		-		-
Total consumer loans		54,~~153~~855		54,~~337~~877		~~221~~242		4,702		4,758		196
Total Impaired Loans Individually Reviewed for Impairment	$	98,~~344~~398	$	98,~~780~~437	$	~~221~~242	$	8,474	$	8,747	$	198

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

During the three and six months ended ~~March~~June 3130, 2017 ~~and 2016~~, the Company recognized $7326 thousand and $3652 thousand, respectively, of interest income with respect to impaired loans, specifically accruing TDRs, within the period the loans were impaired. During the three and six months ended June 30, 2016, the Company recognized $33 thousand and $76 thousand, respectively, of interest income with respect to impaired loans, specifically accruing TDRs. The average recorded investment and interest income recognized on impaired loans, by class, for the three and six months ended ~~March~~June 3130, 2017 and ~~March 31,~~ 2016 are shown in the table below.

	Three Months Ended March 31,
	Three Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2017				2016
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Impaired Loans with No Related Allowance Recorded:
Commercial:
Commercial and industrial	$	~~232~~463	$	21	$	449	$	-	$	232	$	42	$	299	$	-
CRE - owner-occupied		~~1,059~~616		2		1,~~456~~256		-		805		4		1,259		-
CRE - investor income producing		12,~~882~~000		-		~~666~~888		76		1,741		-		738		13
AC&D - 1-4 family construction		-

Filing Compare · Park Sterling Corp