UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

[x]

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

For the quarterly period ended ~~June~~September 30, 2017

[ ]

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

For the transition period from ________ to _________

Commission File Number 001-35032

PARK STERLING CORPORATION ~~(Exact name of registrant as specified in its charter)~~

(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, 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 November ~~August~~ 3, 2017, the registrant had outstanding 53,~~287~~181,~~270~~ 377 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	2
		Condensed Consolidated Balance Sheets June 30, 2017 and December 31, 2016	2
	Condensed Consolidated Balance Sheets September 30, 2017 and December 31, 2016	2
		Condensed Consolidated Statements of Income Three and Six Months Ended June 30, 2017 and 2016	3
	Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2017 and 2016	3
		Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30, 2017 and 2016	4
	Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended September 30, 2017 and 2016	4
		Condensed Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2017 and 2016	5
	Condensed Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2017 and 2016	5
		Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2017 and 2016	6
	Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2017 and 2016	6
	Notes to Condensed Consolidated Financial Statements	~~Notes to Condensed Consolidated Financial Statements~~7	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44	42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	64	62
Item 4.	Controls and Procedures	64	62
Part II.	Other Information	64
Item 1.	Legal Proceedings	64	62
Item 1A.	Risk Factors	64	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65	63
Item 3.	Defaults Upon Senior Securities	65	63
Item 4.	Mine Safety Disclosures	65	63
Item 5.	Other Information	65	63
Item 6.	Exhibits	66	64

PARK STERLING CORPORATION

Part I. Financial Information

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

	June 30,			December 31,
	September 30,			December 31,
	2017			2016 *	2016 *
ASSETS
Cash and due from banks	$	3544,~~508~~874		$	34,162
Interest-earning balances at banks		5553,~~862~~102			48,882
Federal funds sold		~~260~~240			570
Investment securities available-for-sale, at fair value		~~403~~384,~~602~~275			402,501
Investment securities held-to-maturity (fair value of $89,446 and $92,828 at June 30, 2017 and December 31, 2016, respectively)		87,690			91,752
Investment securities held-to-maturity (fair value of $87,402 and $92,828 at September 30, 2017 and December 31, 2016, respectively)		85,704			91,752
Nonmarketable equity securities		2018,~~179~~692			17,501
Loans held for sale		31,~~102~~814			7,996
Loans		2,~~502~~429,~~120~~585			2,412,186
Less allowance for loan losses		(12,~~702~~423	)		(12,125	)
Net loans		2,~~489~~417,~~418~~162			2,400,061
Premises and equipment, net		6261,~~779~~823			63,080
Bank-owned life insurance		7172,~~831~~354			70,785
Deferred tax asset		2018,~~790~~729			25,721
Other real estate owned		32,~~175~~603			2,438
Goodwill		63,317			63,317
Core deposit intangible		10,~~530~~075			11,438
Accrued interest receivable		6,~~801~~424			6,799
Other assets		6,~~155~~065			8,392
Total assets	$	3,~~340~~247,~~999~~253		$	3,255,395
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	~~554~~550,~~399~~196		$	521,295
Interest-bearing		1,~~982~~918,~~783~~727			1,992,457
Total deposits		2,~~537~~468,~~182~~923			2,513,752
Short-term borrowings		~~345~~310,000			285,000
Long-term borrowings		29,~~758~~769			29,736
Subordinated debt		33,~~832~~996			33,501
Accrued interest payable		~~627~~942			541
Accrued expenses and other liabilities		2526,~~336~~934			37,021
Total liabilities		2,~~971~~870,~~735~~564			2,899,551
Shareholders' equity:
Common stock, $1.00 par value 200,000,000 shares authorized; 53,279,996 and 53,116,519 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively		53,280			53,117
Common stock, $1.00 par value 200,000,000 shares authorized; 53,364,798 and 53,116,519 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		53,365			53,117
Additional paid-in capital		273,~~409~~893			273,400
Retained earnings		4450,~~375~~937			32,609
Accumulated other comprehensive (loss)		(1,800	)		(3,282	)
Accumulated other comprehensive loss		(1,506	)		(3,282	)
Total shareholders' equity		~~369~~376,~~264~~689			355,844
Total liabilities and shareholders' equity	$	3,~~340~~247,~~999~~253		$	3,255,395

* Derived from audited financial statements.

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

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

Three Months Ended

~~Six~~Nine Months Ended

June 30,

September 30,

2017

2016

2017

2016

Interest income

Loans, including fees

2928,~~518~~924

26,~~729~~521

5685,~~980~~904

5380,~~853~~374

Federal funds sold

1314

Taxable investment securities

2,~~985~~809

2,~~640~~583

58,~~920~~729

57,~~327~~910

Tax-exempt investment securities

~~135~~133

137

~~270~~403

~~284~~421

Nonmarketable equity securities

~~219~~223

~~153~~151

~~417~~640

~~307~~458

Interest on deposits at banks

~~109~~200

3451

~~198~~398

76127

Total interest income

32,~~968~~291

29,~~698~~444

6396,~~789~~080

5989,~~860~~304

Interest expense

Money market, NOW and savings deposits

1,~~031~~076

~~1,014~~953

13,~~998~~074

2,~~032~~984

Time deposits

1,~~482~~469

1,~~449~~447

24,~~907~~376

24,~~847~~294

Short-term borrowings

~~922~~986

~~251~~345

12,~~423~~409

~~545~~890

Long-term borrowings

371

~~440~~379

~~742~~1,113

~~850~~1,229

Subordinated debt

~~552~~555

~~494~~497

1,~~051~~606

~~940~~1,437

Total interest expense

4,~~358~~457

3,~~648~~621

812,~~121~~578

710,~~214~~834

Net interest income

2827,~~610~~834

2625,~~050~~823

5583,~~668~~502

5278,~~646~~470

Provision for loan losses

882

678

1,438

Provision for (recovery of) loan losses

(353

)

642

325

2,080

Net interest income after provision for loan losses

28,610

25,168

54,990

51,208

Net interest income after provision for (recovery of) loan losses

28,187

25,181

83,177

76,390

Noninterest income

Service charges on deposit accounts

1,~~725~~737

1,~~528~~671

35,~~407~~144

34,~~017~~688

Income from fiduciary activities

~~528~~476

~~580~~582

1,~~055~~526

1,~~244~~961

Commissions and fees from investment brokerage

~~161~~147

~~283~~157

~~283~~430

~~422~~444

Income from capital markets

~~645~~927

~~767~~680

12,~~254~~181

~~835~~1,515

Gain (loss) on sale of securities available for sale

~~(87~~-

)

(93

)

ATM and card income

~~751~~741

~~776~~730

12,~~465~~206

12,~~349~~079

Mortgage banking income

~~775~~471

~~873~~1,015

12,~~736~~207

12,~~648~~663

Income from bank-owned life insurance

578

~~526~~532

1,~~156~~732

12,~~514~~046

Amortization of indemnification asset and true-up liability expense

(25139

)

(~~172~~311

)

Other noninterest income

~~255~~303

~~154~~219

~~472~~782

~~338~~557

Total noninterest income

5,~~418~~380

5,~~375~~447

1016,~~886~~266

1015,~~102~~549

Noninterest expense

Salaries and employee benefits

11,~~388~~058

11,~~774~~755

2233,~~871~~929

2436,~~792~~547

Occupancy and equipment

23,~~924~~007

3,~~041~~111

58,~~831~~838

69,~~166~~277

Advertising and promotion

~~140~~179

~~367~~44

~~286~~465

~~788~~832

Legal and professional fees

~~1,650~~954

~~950~~978

23,~~433~~387

12,~~675~~653

Deposit charges and FDIC insurance

~~442~~378

~~478~~405

~~927~~1,305

~~910~~1,315

Data processing and outside service fees

12,~~907~~049

2,~~224~~331

35,~~832~~881

710,~~747~~078

Communication fees

~~460~~345

~~505~~532

~~923~~1,268

~~988~~1,520

Core deposit intangible amortization

454

458

~~908~~1,362

~~916~~1,374

Net cost of operation of other real estate owned

~~240~~20

70(92

)

~~415~~435

~~336~~244

Loan and collection expense

~~210~~175

~~273~~425

~~327~~502

~~310~~735

Postage and supplies

~~107~~106

~~191~~115

~~249~~355

~~364~~479

Other noninterest expense

1,~~527~~417

1,~~615~~050

34,~~089~~506

34,~~107~~157

Total noninterest expense

2120,~~449~~142

21,~~946~~112

4262,~~091~~233

4869,~~099~~211

Income before income taxes

1213,~~579~~425

89,~~597~~516

2337,~~785~~210

1322,~~211~~728

Income tax expense

4,~~052~~731

3,~~045~~192

712,~~769~~500

48,~~919~~111

Net income

8,~~527~~694

56,~~552~~324

1624,~~016~~710

814,~~292~~617

Basic and diluted earnings per common share

0.16

0.1112

0.3047

0.1628

Dividends per common share

0.04

0.0304

0.0812

0.0610

Weighted-average common shares outstanding

Basic

52,~~821~~943,~~415~~273

52,~~394~~361,~~397~~305

52,~~761~~823,~~766~~594

52,~~340~~333,~~772~~157

Diluted

53,~~481~~527,~~846~~283

52,~~704~~743,~~537~~928

53,~~458~~481,~~705~~351

52,~~650~~674,~~886~~315

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

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	8,~~527~~694		$	56,~~552~~324		$	1624,~~016~~710		$	814,~~292~~617
Securities available for sale and transferred securities:
Change in net unrealized gains during the period		1,171			2,118			1,937			6,809
Change in net unrealized gains (losses) during the period		251			(553	)		2,189			6,256
Change in net unrealized gain on securities transferred to held-to-maturity		65			26			~~127~~191			5278
Reclassification adjustment for net (gains) losses recognized in net income		-			87-			(58	)		93
Total securities available for sale and transferred securities		~~1,236~~316			~~2,231~~(527	)		2,~~006~~322			6,~~954~~427
Derivatives:
Change in the accumulated gain (loss) on effective cash flow hedge derivatives		2154			~~(475~~355	)		~~150~~204			(1,~~700~~344	)
Change in the accumulated gain (loss) on terminated cash flow hedge derivatives		(52	)		93			(~~128~~180	)		~~186~~278
Reclassification adjustment for interest payments		~~145~~146			8886			~~313~~459			~~177~~263
Total derivatives		~~114~~148			~~(294~~534	)		~~335~~483			(~~1,337~~803	)
Other comprehensive income, before tax		~~1,350~~464			~~1,937~~7			2,~~341~~805			5,~~617~~624
Deferred tax expense related to other comprehensive income		~~491~~168			~~729~~2			~~861~~1,029			2,~~101~~103
Other comprehensive income, net of tax		~~859~~296			~~1,208~~5			1,~~480~~776			3,~~516~~521
Total comprehensive income	$	98,~~386~~990		$	6,~~760~~329		$	1726,~~496~~486		$	1118,~~808~~138

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

PARK STERLING CORPORATION

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

(Dollars in thousands)

~~Six~~ Nine Months Ended ~~June~~September 30, 2017 and 2016

													Accumulated
							Additional						Other			Total
	Common Stock						Paid-In			Accumulated			Comprehensive			Shareholders'
	Shares			Amount			Capital			Earnings			Income (Loss)			Equity
Balance at December 31, 2015		44,854,509		$	44,854		$	222,596		$	20,117		$	(2,863	)	$	284,704
Shares issued for First Capital merger		8,376,094			8,376			52,937			-			-		$	61,313
Issuance of restricted stock grants		~~236~~265,~~534~~284			~~236~~265			(~~236~~265	)		-			-			-
Forfeitures of restricted stock grants		(3854,~~783~~433	)		(3954	)		3954			-			-			-
Exercise of stock options		~~274~~285,~~890~~721			~~275~~285			1,~~512~~559			-			-			1,~~787~~844
Share-based compensation expense		1,300			12			~~682~~911			-			-			~~683~~913
Common stock repurchased or reacquired		(~~372~~422,~~175~~641	)		(~~371~~422	)		(2,~~284~~469	)		-			-			(2,~~655~~891	)
Dividends on common stock		-			-			-			(35,~~190~~325	)		-			(35,~~190~~325	)
Net income		-			-			-			814,~~292~~617			-			814,~~292~~617
Other comprehensive income		-			-			-			-			3,~~516~~521			3,~~516~~521
Balance at June 30, 2016		53,332,369		$	53,332		$	275,246		$	25,219		$	653		$	354,450
Balance at September 30, 2016		53,305,834		$	53,306		$	275,323		$	29,409		$	658		$	358,696
Balance at December 31, 2016		53,116,519		$	53,117		$	273,400		$	32,609		$	(3,282	)	$	355,844
Issuance of restricted stock grants		164,994			~~164~~165			(~~164~~165	)		-			-			-
Forfeitures of restricted stock grants		(1112,~~567~~067	)		(1112	)		1112			-			-			-
Exercise of stock options		~~136~~306,~~056~~394			~~136~~225			~~623~~660			-			-			~~759~~885
Share-based compensation expense		1,400			1			~~819~~1,302			-			-			~~820~~1,303
Common stock repurchased or reacquired		(~~127~~212,~~406~~442	)		(~~127~~131	)		(1,~~280~~316	)		-			-			(1,~~407~~447	)
Dividends on common stock		-			-			-			(46,~~250~~382	)		-			(46,~~250~~382	)
Net income		-			-			-			1624,~~016~~710			-			1624,~~016~~710
Other comprehensive income		-			-			-			-			1,~~480~~776			1,~~480~~776
Balance at June 30, 2017		53,279,996		$	53,280		$	273,409		$	44,375		$	(1,800	)	$	369,264
Balance at September 30, 2017		53,364,798		$	53,365		$	273,893		$	50,937		$	(1,506	)	$	376,689

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

PARK STERLING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

June 30, 2017 and June 30, 2016

	Nine Months Ended
	September 30,
	2017			2016
Cash flows from operating activities
Net income	$	24,710		$	14,617
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion on acquired loans		(10,295	)		(8,572	)
Net amortization on investments		1,892			2,022
Other depreciation and amortization		10,549			7,812
Provision for loan losses		325			2,080
Share-based compensation expense		1,303			913
Deferred income taxes		6,893			(171	)
Amortization of FDIC indemnification asset		-			142
Gains (losses) on sales of investment securities available-for-sale		(58	)		93
Net gains on sales of loans held for sale		(915	)		(1,251	)
Net losses (gains) on sales of fixed assets		(43	)		418
Net gains on sales of other real estate owned		(95	)		(411	)
Writedowns on other real estate owned		339			294
Income from bank-owned life insurance		(1,732	)		(2,046	)
Proceeds from loans held for sale		68,081			75,304
Disbursements for loans held for sale		(61,531	)		(85,307	)
Change in assets and liabilities:
Decrease in FDIC indemnification asset		-			(3,843	)
Decrease in accrued interest receivable		375			893
Increase in other assets		(2,328	)		(4,449	)
Increase in accrued interest payable		401			345
Increase (decreases) in accrued expenses and other liabilities		(9,774	)		6,210
Net cash provided by operating activities		28,097			5,093

Cash flows from investing activities
Net increase in loans		(9,935	)		(123,112	)
Purchases of premises and equipment		(4,723	)		(3,038	)
Proceeds from sales of premises and equipment		1,939			-
Purchases of investment securities available-for-sale		(89,527	)		(106,636	)
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		56,611			44,237
Proceeds from maturities, calls and paydowns of investment securities held-to-maturity		6,014			6,970
Proceeds from life insurance death benefit		-			534
FDIC reimbursement of recoverable covered asset losses		-			4,644
Proceeds from sale of other real estate owned		547			4,681
Net (purchases) redemptions of nonmarketable equity securities		(191	)		(623	)
Termination of cash flow hedge		-			(1,855	)
Acquisitions, net of cash acquired		-			(12,067	)
Net cash provided by (used in) investing activities		12,364			(61,884	)

Cash flows from financing activities
Net increase (decrease) in deposits		(44,474	)		24,712
Repayments of long-term borrowings		-			(45,503	)
Net advances in short-term borrowings		25,000			87,379
Repayments of junior subordinated debt		559			-
Exercise of stock options		885			1,844
Repurchase of common stock		(1,447	)		(2,891	)
Dividends on common stock		(6,382	)		(5,325	)
Net cash provided by (used in) financing activities		(25,859	)		60,216

Net increase in cash and cash equivalents		14,602			3,425

Cash and cash equivalents, beginning		83,614			70,526
Cash and cash equivalents, ending	$	98,216		$	73,951

Supplemental disclosures of cash flow information:
Cash paid for interest	$	12,177		$	10,448
Cash paid for income taxes		12,501			760

Supplemental disclosure of noncash investing and financing activities:
Change in unrealized gain on available-for-sale securities, net of tax	$	2,031		$	6,408
Change in unrealized gain (loss) on cash flow hedge, net of tax		(255	)		105
Loans transferred to other real estate owned		1,548			449

	Six Months Ended
	June 30,
	2017			2016
Cash flows from operating activities
Net income	$	16,016		$	8,292
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion on acquired loans		(6,788	)		(4,902	)
Net amortization on investments		1,198			1,258
Other depreciation and amortization		5,213			5,045
Provision for loan losses		678			1,438
Share-based compensation expense		820			683
Deferred income taxes		4,070			(171	)
Amortization of FDIC indemnification asset		-			142
Net gains (losses) on sales of investment securities available-for-sale		(58	)		93
Net gains on sales of loans held for sale		(721	)		(846	)
Net losses (gains) on sales of fixed assets		(42	)		274
Net gains on sales of other real estate owned		(414	)		(171	)
Writedowns on other real estate owned		315			216
Income from bank-owned life insurance		(1,156	)		(1,514	)
Proceeds from loans held for sale		52,969			44,460
Disbursements for loans held for sale		(47,717	)		(50,638	)
Change in assets and liabilities:
Decrease in FDIC indemnification asset		-			333
Decrease (increase) in accrued interest receivable		(2	)		96
Increase in other assets		(287	)		(1,460	)
Increase in accrued interest payable		385			12
Increase in accrued expenses and other liabilities		22,411			4,452
Net cash provided by operating activities		46,890			7,092
Cash flows from investing activities
Net increase in loans		(84,459	)		(81,816	)
Purchases of premises and equipment		(2,891	)		(2,558	)
Proceeds from sales of premises and equipment		1,876			-
Purchases of investment securities available-for-sale		(89,527	)		(76,247	)
Proceeds from sales of investment securities available-for-sale		51,629			124,381
Proceeds from maturities, calls and paydowns of investment securities available-for-sale		37,664			26,929
Proceeds from maturities, calls and paydowns of investment securities held-to-maturity		4,042			4,292
Proceeds from life insurance death benefit		-			534
FDIC reimbursement of recoverable covered asset losses		-			(697	)
Proceeds from sale of other real estate owned		381			2,666
Net (purchases) redemptions of nonmarketable equity securities		(2,678	)		1,289
Termination of cash flow hedge		-			(1,855	)
Acquisitions, net of cash acquired		-			(12,067	)
Net cash used in investing activities		(83,963	)		(15,149	)
Cash flows from financing activities
Net increase in deposits		23,712			13,627
Advances of long-term borrowings		-			35,000
Repayments of long-term borrowings		(34,097	)		(45,503	)
Net advances in short-term borrowings		60,000			7,379
Repayments of junior subordinated debt		372			(49	)
Exercise of stock options		759			1,787
Repurchase of common stock		(1,407	)		(2,655	)
Dividends on common stock		(4,250	)		(3,190	)
Net cash provided by financing activities		45,089			6,396
Net increase (decrease) in cash and cash equivalents		8,016			(1,661	)
Cash and cash equivalents, beginning		83,614			70,526
Cash and cash equivalents, ending	$	91,630		$	68,865
Supplemental disclosures of cash flow information:
Cash paid for interest	$	8,035		$	7,161
Cash paid for income taxes		7,769			760
Supplemental disclosure of noncash investing and financing activities:
Change in unrealized gain on available-for-sale securities, net of tax	$	1,288		$	4,365
Change in unrealized gain (loss) on cash flow hedge, net of tax		216			(837	)
Loans transferred to other real estate owned		1,433			1,593

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

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Note 1 – Basis of Presentation

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

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

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

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

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

Merger with South State Corporation

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

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

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

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The shareholders of each of the Company and South State approved the Merger isin ~~subject~~their torespective ~~regulatory~~special ~~approvals~~meetings held on October 25, ~~approval~~2017. Closing of the ~~shareholders~~Merger, ofhowever, ~~both~~remains ~~the~~subject ~~Company~~to ~~and~~regulatory ~~South State~~approvals, and other customary closing conditions and is currently expected to close in the fourth quarter of 2017. For more information about the proposed Merger and the Merger Agreement, see the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on May 1, 2017 and the Company’s Definitive Proxy Statement filed with the SEC on September 12, 2017.

Note 2 - Recent Accounting Pronouncements

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

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, Topic 606 (“ASU 2014-09”). The new standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Topic 606: Deferral of the Effective Date, deferring the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company’s revenue primarily 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~~its 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~~affects 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 the expected impact on its financial statements.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

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

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

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

~~Note~~In 3–May ~~Business~~2017, ~~Combinations~~the FASB issued ASU 2017-09 “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides guidance on the scope of modification of share-based payment awards and ~~Goodwill~~direction on which changes in terms or conditions of share-based payment awards require an entity to apply modification accounting. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for annual periods beginning on or after December 15, 2017, with early adoption permitted. The Company has determined the guidance will not have a material impact on the Company’s consolidated financial statements.

~~Generally~~In August 2017, ~~acquisitions~~the ~~are~~FASB ~~accounted~~issued ~~for~~ASU ~~under~~2017-12 ~~the~~“Derivatives ~~acquisition~~and ~~method~~Hedging of(Topic ~~accounting~~815): inTargeted ~~accordance~~Improvements ~~with~~to ~~ASC~~Accounting ~~805,~~for ~~Business~~Hedging ~~Combinations~~Activities” (“ASU 2017-12”). ~~Both~~ASU ~~the~~2017-12 ~~purchased~~amends ~~assets~~ASC 815 to better align an entity’s risk management activities and ~~liabilities~~financial ~~assumed~~reporting ~~are~~for ~~recorded~~hedging atrelationships ~~their~~through ~~respective~~changes ~~acquisition~~to ~~date~~both ~~fair~~the ~~values.~~designation ~~Determining~~and measurement guidance for qualifying hedging relationships and the ~~fair~~presentation ~~value~~of hedge results. This ASU is intended to improve the transparency of ~~assets~~information ~~and~~about ~~liabilities,~~an ~~especially~~entity’s risk management activities and simplify the ~~loan~~application ~~portfolio,~~of hedge accounting. The guidance is aeffective ~~complicated~~for ~~process~~annual ~~involving~~periods ~~significant~~beginning ~~judgment~~on ~~regarding~~or ~~methods~~after December 15, 2018 and ~~assumptions~~interim ~~used~~periods towithin ~~calculate~~those ~~estimated~~fiscal ~~fair~~years, ~~values.~~with ~~Fair~~early ~~values~~adoption ~~are~~permitted. ~~preliminary~~All ~~and~~transition ~~subject~~requirements toand ~~refinement~~elections ~~for~~should upbe applied to ~~one~~hedging ~~year~~relationships ~~after~~existing on the ~~closing~~ date of ~~the~~adoption. ~~acquisition~~The asCompany ~~additional~~is ~~information~~assessing ~~regarding~~the impact of the ~~closing~~new ~~date~~guidance, ~~fair~~but ~~values~~currently ~~becomes~~does ~~available.~~not ~~There~~believe ~~were~~it nowill ~~acquisitions~~have ora ~~mergers~~material ~~conducted~~impact ~~during~~on the ~~six~~Company’s ~~months~~consolidated offinancial ~~2017~~statements.

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 3– ~~Investment~~Business ~~Securities~~Combinations and Goodwill

~~The~~Generally, ~~amortized~~acquisitions ~~cost,~~are ~~unrealized~~accounted ~~gains~~for ~~and~~under ~~losses~~the acquisition method of accounting in accordance with ASC 805, Business Combinations. Both the purchased assets and ~~estimated~~liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of ~~securities~~assets ~~available-for-sale~~and atliabilities, ~~June~~especially 30the loan portfolio, ~~2017~~is a complicated process involving significant judgment regarding methods and ~~December~~assumptions ~~31,~~used ~~2016~~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 ~~follows:~~additional information regarding the closing date fair values becomes available. There were no acquisitions or mergers conducted during the first nine months of 2017.

Amortized Cost and Fair Value of Investment Portfolio
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2017
Securities available-for-sale:
Municipal securities	$	12,736	$	498	$	-		$	13,234
Residential agency pass-through securities		142,558		791		(1,353	)		141,996
Residential collateralized mortgage obligations		161,168		984		(107	)		162,045
Commercial mortgage-backed securities		15,771		-		(261	)		15,510
Asset-backed securities		68,733		349		(834	)		68,248
Corporate and other securities		1,487		-		(157	)		1,330
Equity securities		1,250		-		(11	)		1,239
Total securities available-for-sale	$	403,703	$	2,622	$	(2,723	)	$	403,602
Securities held-to-maturity:
Residential agency pass-through securities	$	31,380	$	678	$	(30	)	$	32,028
Residential collateralized mortgage obligations		6,419		110		-			6,529
Commercial mortgage-backed obligations		46,410		957		-			47,367
Asset-backed securities		3,481		41		-			3,522
Total securities held-to-maturity	$	87,690	$	1,786	$	(30	)	$	89,446
December 31, 2016
Securities available-for-sale:
Municipal securities	$	12,731	$	588	$	-		$	13,319
Residential agency pass-through securities		194,175		945		(2,355	)		192,765
Residential collateralized mortgage obligations		93,980		615		(185	)		94,410
Commercial mortgage-backed securities		15,912		-		(415	)		15,497
Asset-backed securities		84,955		211		(1,215	)		83,951
Corporate and other securities		1,479		-		(159	)		1,320
Equity securities		1,250		-		(11	)		1,239
Total securities available-for-sale	$	404,482	$	2,359	$	(4,340	)	$	402,501
Securities held-to-maturity:
Residential agency pass-through securities	$	34,063	$	537	$	(47	)	$	34,553
Residential collateralized mortgage obligations		6,730		87		-			6,817
Commercial mortgage-backed obligations		46,851		526		-			47,377
Asset-backed securities		4,108		-		(27	)		4,081
Total securities held-to-maturity	$	91,752	$	1,150	$	(74	)	$	92,828

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

AtThe ~~June~~amortized 30cost, ~~2017~~unrealized gains and ~~December 31~~losses, ~~2016,~~and ~~investment~~estimated ~~securities with a~~ fair ~~market~~ value of ~~$139.2~~securities ~~million~~available-for-sale and ~~$152.2 million, respectively, were pledged~~ held-to-maturity ~~secure~~at ~~public~~September ~~and trust deposits~~30, to2017 ~~secure~~and ~~interest~~December ~~rate swaps~~31, ~~and~~2016 ~~for~~are ~~other purposes~~ as ~~required and permitted by law.~~ follows:

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2017
Securities available-for-sale:
Municipal securities	$	12,463	$	423		-		$	12,888
Residential agency pass-through securities		137,190		1,011		(971	)		137,230
Residential collateralized mortgage obligations		154,168		839		(103	)		154,903
Commercial mortgage-backed securities		15,697		-		(204	)		15,493
Asset-backed securities		61,866		375		(718	)		61,523
Corporate and other securities		1,491		-		(166	)		1,325
Equity securities		1,250		-		(336	)		913
Total securities available-for-sale	$	384,125	$	2,648	$	(2,498	)	$	384,275

Securities held-to-maturity:
Residential agency pass-through securities	$	30,184	$	691	$	(11	)	$	30,864
Residential collateralized mortgage obligations		6,133		101		-			6,234
Commercial mortgage-backed obligations		46,189		879		-			47,068
Asset-backed securities		3,198		38		-			3,236
Total securities held-to-maturity	$	85,704	$	1,709	$	(11	)	$	87,402


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

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

~~Included~~In ~~within~~2014, ~~the~~commercial ~~asset~~mortgage-backed securities ~~balance~~(“MBS”) ~~are~~with ~~collateralized~~a ~~loan~~fair ~~obligations~~market ~~totaling~~value of $1858.95 million atwere ~~June~~transferred ~~30,~~from ~~2017~~available-for-sale ~~and~~to held-to-maturity. These securities had an aggregate unrealized loss of $332.92 million ($1.5 million, net of tax) on the date of transfer. The net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive pre-tax income in the accompanying balance sheet at December 31, 2016. ~~Included~~and inSeptember ~~these~~30, ~~amounts~~2017 ~~are~~totaled $31.53 ~~million~~ and $41.1 million respectively. This amount is amortized out of aaccumulated ~~security~~other ~~equally~~comprehensive ~~collateralized~~income byover the ~~Federal~~remaining ~~Family~~life ~~Education~~of ~~Loan~~the ~~Program~~underlying ~~and~~securities ~~Private~~as ~~Student~~an ~~Loan~~adjustment ~~Program~~of the yield on those securities. As a result, the amortized cost of these investments of $54.0 million is higher than the $46.2 million carrying value of the securities as of ~~June~~September 30, 2017. ~~and~~There ~~December~~were ~~31,~~no ~~2016~~transfers of securities from available-for-sale to held-to-maturity during the quarter ended September 30, ~~respectively~~2017.

At September 30, 2017 and December 31, 2016, investment securities with a fair market value of $137.4 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.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

~~The~~At ~~amortized~~September ~~cost~~30, 2017 and ~~fair~~December ~~value~~31, of2016, ~~investment securities~~ available-for-sale and held-to-maturity atcommercial ~~June~~MBS ~~30,~~include ~~2017~~$55.9 bymillion ~~contractual~~and ~~maturity are shown below~~$56.7 ~~Expected~~million, ~~maturities~~respectively, ~~will~~of ~~differ~~delegated ~~from~~underwriting ~~contractual~~and ~~maturities~~servicing ~~because~~(“DUS”) ~~borrowers~~bonds ~~may~~collateralized ~~have~~by ~~the right to call or prepay obligations with or without call or prepayment penalties. All of the Company’s residential agency pass~~multi-~~through~~family ~~securities~~properties and ~~residential collateralized mortgage obligations are~~ backed by an agency of the ~~United~~U.S. ~~States~~ government, and $6.0 ~~None~~million of ~~our residential agency pass~~private-~~through~~label securities ~~or residential~~ collateralized ~~mortgage~~by ~~obligations~~commercial ~~are private-label securities~~properties.

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

Included within the asset-backed securities balance are collateralized loan obligations totaling $13.8 million at September 30, 2017 and $33.9 million at December 31, 2016. Included in these amounts are $3.2 million and $4.1 million of a security equally collateralized by the Federal Family Education Loan Program and Private Student Loan Program as of September 30, 2017 and December 31, 2016, respectively.

~~Securities~~The ~~available-for-sale~~amortized ofcost $0 and ~~$51.6~~fair ~~million~~value ~~were~~of ~~sold~~investment insecurities ~~the~~available-for-sale ~~three months~~ and ~~six~~held-to-maturity ~~months~~at ~~ended~~September ~~June~~ 30, 2017, ~~respectively.~~by ~~Gross~~contractual ~~realized~~maturity ~~gains~~are onshown ~~the~~below. ~~sale~~Expected ofmaturities ~~securities~~will ~~for~~differ ~~the~~from ~~six~~contractual ~~months~~maturities ~~ended~~because ~~June~~borrowers ~~30,~~may ~~2017~~have ~~were~~the ~~$58~~right ~~thousand.~~to ~~Securities~~call ~~available-for-sale~~or ofprepay ~~$24.3~~obligations ~~million~~with ~~and~~or ~~$124.4~~without ~~million~~call ~~were~~or ~~sold~~prepayment ~~in the three months and six months ended June 30, 2016, respectively~~penalties. ~~Gross~~All ~~realized~~of ~~losses~~the onCompany’s ~~the~~residential ~~sale~~agency ofpass-through securities ~~for the three~~ and ~~six~~residential ~~months~~collateralized ~~ended~~mortgage ~~June~~obligations ~~30,~~are ~~2016~~backed ~~were~~by ~~$87~~an ~~thousand~~agency ~~and~~of ~~$187~~the ~~thousand,~~United ~~respectively~~States government. ~~Gross~~None ~~realized~~of ~~gains~~our onresidential ~~the~~agency ~~sale~~pass-through of securities ~~for~~or ~~six~~residential ~~months~~collateralized ~~ended~~mortgage ~~June~~obligations ~~30,~~are ~~2016~~private-label ~~were $94 thousand~~securities.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

Maturities of Investment Portfolio

	September 30, 2017
	Amortized		Fair
	Cost		Value

Securities available-for-sale:
Municipal securities
Due after one year through five years		3,312		3,367
Due after five years through ten years		3,459		3,636
Due after ten years		5,692		5,885
Residential agency pass-through securities
Due after five years through ten years		5,263		5,487
Due after ten years		131,927		131,743
Residential collateralized mortgage obligations
Due after five years through ten years		16,149		16,219
Due after ten years		138,019		138,684
Commercial mortgage-backed obligations
Due after one year through five years		15,697		15,493
Asset-backed securities
Due after five years through ten years		45,629		45,580
Due after ten years		16,237		15,943
Corporate and other securities
Due after ten years		1,491		1,325
Equity securities
No maturity		1,250		913
Total securities available-for-sale	$	384,125	$	384,275

Securities held-to-maturity:
Residential agency pass-through securities
Due after ten years	$	30,184	$	30,864
Residential collateralized mortgage obligations
Due after ten years		6,133		6,234
Commercial mortgage-backed obligations
Due after one year through five years		21,199		21,557
Due after five years through ten years		24,990		25,511
Asset-backed securities
Due after ten years		3,198		3,236
Total securities held-to-maturity	$	85,704	$	87,402

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	)

There were no sales of securities available-for-sale during the three months ended September 30, 2017 and September 30, 2016. Securities available-for-sale of $51.6 million were sold in the nine months ended September 30, 2017. Gross realized gains on the sale of securities for the nine months ended September 30, 2017 were $58 thousand. Securities available-for-sale of $124.4 million were sold in the nine months ended September 30, 2016. Gross realized losses on the sale of securities for the nine months ended September 30, 2016 were $187 thousand.

~~The~~Management ~~Company~~evaluates ~~has~~its ~~nonmarketable~~investments ~~equity~~quarterly ~~securities~~for ~~consisting~~other ofthan ~~investments~~temporary inimpairment, ~~several~~relying ~~unaffiliated~~primarily ~~financial~~on ~~institutions~~industry analyst reports, asobservation ~~well~~of asmarket ~~investments~~conditions inand ~~five~~interest ~~statutory~~rate ~~trusts~~fluctuations. ~~related~~The tofollowing ~~trust~~table ~~preferred~~shows ~~securities~~gross ~~issued~~unrealized losses and fair value, aggregated by ~~predecessor~~investment ~~companies.~~category ~~These~~and ~~investments~~length ~~totaled~~of ~~$20.2~~time ~~million~~that atthe ~~June~~individual ~~30,~~securities ~~2017~~have ~~and~~been ~~$17.5~~in ~~million~~a atcontinuous ~~December~~unrealized ~~31,~~loss ~~2016.~~position ~~Included~~for insecurities ~~these~~with ~~amounts~~unrealized losses at ~~June~~September 30, 2017 and December 31, 2016. ~~was~~None ~~$17.6~~of ~~million~~the ~~and~~securities ~~$14.9~~are ~~million,~~deemed ~~respectively,~~to be other than temporarily impaired since none of ~~Federal~~the ~~Home~~unrealized ~~Loan~~losses ~~Bank~~relate ~~(“FHLB”)~~to ~~stock.~~the ~~All~~marketability ~~nonmarketable~~of ~~equity~~the securities ~~were~~or ~~evaluated~~the ~~for~~issuer’s ~~impairment~~ability to honor redemption obligations, as all but one of ~~June~~the ~~30,~~bonds ~~2017~~are ~~and~~issued ~~December~~by ~~31,~~United ~~2016.~~States Atgovernment ~~June~~agencies ~~30,~~with ~~2017~~the ~~and~~remaining ~~December~~bond ~~31,~~being ~~2016~~partially guaranteed by a government agency, and it is more likely than not that the Company ~~estimated~~will ~~that~~not have to sell the ~~fair~~investments ~~values~~before recovery of ~~nonmarketable~~their ~~equity~~amortized cost basis. At September 30, 2017 there were three securities ~~equaled~~that orhave ~~exceeded~~been ~~the~~in ~~cost~~a ofloss ~~each~~position offor ~~these~~twelve ~~investments,~~months ~~and,~~or ~~therefore,~~more ~~the~~compared ~~investments~~to ~~were~~six ~~not~~at ~~impaired~~December 31, 2016.

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

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
September 30, 2017
Securities available-for-sale:
Residential agency pass-through securities	$	-	$	-		$	12,888	$	(971	)	$	12,888	$	(971	)
Residential collateralized mortgage obligations		-		-			23,786		(103	)		23,786		(103	)
Commercial mortgage-backed securities		-		-			79,059		(204	)		79,059		(204	)
Asset-backed securities		25,768		(718	)		-		-			25,768		(718	)
Corporate and other securities		-		-			1,325		(166	)		-		(166	)
Equity securities		-		-			913		(336	)		913		(336	)
Total temporarily impaired available-for-sale securities	$	25,768	$	(718	)	$	117,971	$	(1,780	)	$	142,414	$	(2,498	)

Securities held-to-maturity:
Commercial mortgage-backed securities	$	3,639	$	(11	)	$	-	$	-		$	3,639	$	(11	)

Total temporarily impaired held-to-maturity securities	$	3,639	$	(11	)	$	-	$	-		$	3,639	$	(11	)

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 and Corporate 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’s ~~loan~~has ~~portfolio~~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 $18.6 million at September 30, 2017 and $17.5 million at December 31, 2016. Included in these amounts at September 30, 2017 and December 31, 2016 was ~~comprised~~$16.1 million and $14.9 million, respectively, of Federal Home Loan Bank (“FHLB”) stock. All nonmarketable equity securities were evaluated for impairment as of September 30, 2017 and December 31, 2016. At September 30, 2017 and December 31, 2016, the ~~following~~Company ~~at:~~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.

	June 30, 2017						December 31, 2016
	PCI loans		All other loans		Total		PCI loans		All other loans		Total
Commercial:
Commercial and industrial	$	2,688	$	452,264	$	454,952	$	3,920	$	383,481	$	387,401
Commercial real estate (CRE) - owner-occupied		12,166		349,047		361,213		15,401		352,152		367,553
CRE - investor income producing		29,022		772,676		801,698		30,700		712,407		743,107
AC&D - 1-4 family construction		-		95,236		95,236		-		82,707		82,707
AC&D - lots, land & development		7,443		85,318		92,761		8,074		97,288		105,362
AC&D - CRE		-		150,170		150,170		-		194,732		194,732
Other commercial		1,934		13,778		15,712		1,962		10,938		12,900
Total commercial loans		53,253		1,918,489		1,971,742		60,057		1,833,705		1,893,762
Consumer:
Residential mortgage		18,765		265,146		283,911		21,472		239,049		260,521
Home equity lines of credit (HELOC)		1,066		172,774		173,840		1,088		175,711		176,799
Residential construction		1,655		50,567		52,222		2,470		56,590		59,060
Other loans to individuals		335		16,798		17,133		368		18,537		18,905
Total consumer loans		21,821		505,285		527,106		25,398		489,887		515,285
Total loans		75,074		2,423,774		2,498,848		85,455		2,323,592		2,409,047
Deferred costs		-		3,272		3,272		-		3,139		3,139
Total loans, net of deferred costs	$	75,074	$	2,427,046	$	2,502,120	$	85,455	$	2,326,731	$	2,412,186

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

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

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

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

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

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

~~Allowance~~Note ~~for~~5 ~~Loan~~– ~~Losses~~Loans -and ~~The~~Allowance ~~following table presents, by portfolio segment, the activity in the allowance~~ for ~~loan~~Loan ~~losses for the three and six months ended June 30, 2017 and 2016.~~ Losses

	Commercial and industrial			Shared National Credits		CRE - owner- occupied			CRE - investor income producing			AC&D - 1-4 family construction		AC&D - lots, land & development			AC&D - CRE			Other commercial			Residential mortgage			HELOC Jr. Lien*			HELOC Sr. Lien			Residential construction			Other loans to individuals			Total
For the three months ended June 30, 2017
Allowance for Loan Losses:
Balance, beginning of period	$	3,093		$	-	$	1,348		$	2,844		$	595	$	513		$	1,353		$	77		$	984		$	1,513		$	-		$	358		$	155		$	12,833
Provision for loan losses		(435	)		556		6			33			82		(56	)		(186	)		15			124			(730	)		577			6			8			-
Charge-offs		(96	)		-		-			(23	)		-		-			-			-			(130	)		(31	)		-			(20	)		(28	)		(328	)
Recoveries		11			-		-			94			2		23			-			-			33			14			-			2			18			198
Net (charge-offs) recoveries		(85	)		-		-			71			2		23			-			-			(97	)		(17	)		-			(18	)		(10	)		(131	)
Total Allowance for Loan Losses	$	2,573		$	556	$	1,354		$	2,948		$	679	$	480		$	1,167		$	92		$	1,011		$	766		$	577		$	346		$	153		$	12,702
For the six months ended June 30, 2017
Allowance for Loan Losses:
Balance, beginning of period	$	2,720		$	-	$	1,286		$	2,583		$	567	$	526		$	1,484		$	126		$	841		$	-		$	1,391		$	435		$	166		$	12,125
Provision for loan losses		(4	)		556		(26	)		300			85		(108	)		(317	)		(36	)		258			864			(814	)		(73	)		(7	)		678
Charge-offs		(158	)		-		39			(36	)		-		-			-			-			(130	)		(133	)		-			(20	)		(38	)		(476	)
Recoveries		15			-		55			101			27		62			-			2			42			35			-			4			32			375
Net (charge-offs) recoveries		(143	)		-		93			65			27		62			-			2			(88	)		(98	)		-			(16	)		(6	)		(102	)
Total Allowance for Loan Losses	$	2,573		$	556	$	1,354		$	2,948		$	679	$	480		$	1,167		$	92		$	1,011		$	766		$	577		$	346		$	153		$	12,702

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

*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.

	September 30, 2017						December 31, 2016
	PCI loans		All other loans		Total		PCI loans		All other loans		Total
Commercial:
Commercial and industrial	$	3,060	$	408,173	$	411,233	$	3,920	$	383,481	$	387,401
Commercial real estate (CRE) - owner-occupied		10,205		354,140		364,345		15,401		352,152		367,553
CRE - investor income producing		24,361		745,044		769,405		30,700		712,407		743,107
AC&D - 1-4 family construction		-		84,971		84,971		-		82,707		82,707
AC&D - lots, land & development		7,164		84,512		91,676		8,074		97,288		105,362
AC&D - CRE		-		161,810		161,810		-		194,732		194,732
Other commercial		1,871		13,395		15,266		1,962		10,938		12,900
Total commercial loans		46,661		1,852,045		1,898,706		60,057		1,833,705		1,893,762

Consumer:
Residential mortgage		17,287		270,309		287,596		21,472		239,049		260,521
Home equity lines of credit (HELOC)		1,005		171,235		172,240		1,088		175,711		176,799
Residential construction		1,522		48,962		50,484		2,470		56,590		59,060
Other loans to individuals		346		16,715		17,061		368		18,537		18,905
Total consumer loans		20,160		507,221		527,381		25,398		489,887		515,285
Total loans		66,821		2,359,266		2,426,087		85,455		2,323,592		2,409,047
Deferred costs		-		3,498		3,498		-		3,139		3,139
Total loans, net of deferred costs	$	66,821	$	2,362,764	$	2,429,585	$	85,455	$	2,326,731	$	2,412,186

At September 30, 2017 and December 31, 2016, the Company had sold participations in loans aggregating $20.6 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 $2.1 million and $2.3 million as of September 30, 2017 and December 31, 2016, respectively.

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. No loans were sold in the three months ended September 30, 2017. Total loans sold in the nine months ended September 30, 2017 were $68.1 million. Total loans sold in the three and nine months ended September 30, 2016 were $26.0 million and $75.3 million, respectively.

At September 30, 2017 the carrying value of loans pledged as collateral to the FHLB on borrowings and to the Federal Reserve totaled $962.7 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 September 30, 2017 and December 31, 2016, the Company had no loans outstanding with foreign entities.

	Commercial and industrial			Shared National Credits		CRE - owner- occupied		CRE - investor income producing		AC&D - 1-4 family construction		AC&D - lots, land & development			AC&D - CRE		Other commercial			Residential mortgage			HELOC Jr. Lien*		HELOC Sr. Lien			Residential construction			Other loans to individuals			Total
For the three months ended June 30, 2016
Allowance for Loan Losses:
Balance, beginning of period	$	2,047		$	-	$	1,108	$	2,217	$	381	$	398		$	808	$	67		$	724		$	-	$	1,393		$	449		$	240		$	9,832
Provision for loan losses		66			-		123		348		91		(70	)		28		3			104			-		130			(12	)		71			882
Charge-offs		(1	)		-		-		-		-		-			-		-			(15	)		-		(56	)		-			(21	)		(94	)
Recoveries		15			-		-		7		13		121			-		-			8			-		66			2			19			252
Net (charge-offs) recoveries		14			-		-		7		13		121			-		-			(7	)		-		10			2			(2	)		158
Total Allowance for Loan Losses	$	2,127		$	-	$	1,231	$	2,572	$	485	$	449		$	836	$	70		$	821		$	-	$	1,533		$	439		$	309		$	10,872
For the six months ended June 30, 2016
Allowance for Loan Losses:
Balance, beginning of period	$	1,821		$	-	$	1,135	$	2,099	$	247	$	278		$	679	$	69		$	672		$	-	$	1,337		$	461		$	266		$	9,064
Provision for loan losses		283			-		96		451		221		16			157		(37	)		129			-		95			(39	)		66			1,438
Charge-offs		(16	)		-		-		-		-		-			-		-			(32	)		-		(56	)		(11	)		(61	)		(176	)
Recoveries		39			-		-		22		17		155			-		38			52			-		157			28			38			546
Net (charge-offs) recoveries		23			-		-		22		17		155			-		38			20			-		101			17			(23	)		370
Total Allowance for Loan Losses	$	2,127		$	-	$	1,231	$	2,572	$	485	$	449		$	836	$	70		$	821		$	-	$	1,533		$	439		$	309		$	10,872

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 nine months ended September 30, 2017 and 2016.

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

For the three months ended Sept 30, 2017
Allowance for Loan Losses:
Balance, beginning of period	$	2,574		$	556		$	1,352		$	2,948		$	679		$	480		$	1,167		$	92		$	1,011		$	767		$	578		$	346		$	152		$	12,702
Provision for (recovery of) loan losses		(253	)		(79	)		(7	)		(60	)		(66	)		6			84			(3	)		(116	)		(28	)		25			94			50			(353	)
Charge-offs		-			-			-			-			-			-			-			-			44			(56	)		-			(162	)		(63	)		(237	)
Recoveries		43			-			45			-			-			24			-			-			100			49			-			37			13			311
Net (charge-offs) recoveries		43			-			45			-			-			24			-			-			144			(7	)		-			(125	)		(50	)		74
Total Allowance for Loan Losses	$	2,364		$	477		$	1,390		$	2,888		$	613		$	510		$	1,251		$	89		$	1,039		$	732		$	603		$	315		$	152		$	12,423


For the nine months ended Sept 30, 2017
Allowance for Loan Losses:
Balance, beginning of period	$	2,720		$	-		$	1,286		$	2,583		$	567		$	526		$	1,484		$	126		$	841		$	-		$	1,391		$	435		$	166		$	12,125
Provision for loan losses		(256	)		477			(34	)		240			19			(102	)		(233	)		(39	)		142			836			(788	)		22			41			325
Charge-offs		(158	)		-			39			(36	)		-			-			-			-			(86	)		(188	)		-			(182	)		(101	)		(712	)
Recoveries		58			-			99			101			27			86			-			2			142			84			-			40			46			685
Net (charge-offs) recoveries		(100	)		-			138			65			27			86			-			2			56			(104	)		-			(142	)		(55	)		(27	)
Total Allowance for Loan Losses	$	2,364		$	477		$	1,390		$	2,888		$	613		$	510		$	1,251		$	89		$	1,039		$	732		$	603		$	315		$	152		$	12,423

*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 June 30, 2017 and December 31, 2016.

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

For the three months ended September 30, 2016
Allowance for Loan Losses:
Balance, beginning of period	$	2,128		$	-	$	1,231	$	2,572		$	485	$	449		$	836	$	70	$	821		$	-	$	1,533		$	439		$	309		$	10,873
Provision for (recovery of) loan losses		68			-		69		102			102		(29	)		337		129		24			-		(35	)		103			(270	)		600
Charge-offs		-			-		-		(15	)		-		-			-		-		(43	)		-		(67	)		(106	)		(10	)		(241	)
Recoveries		8			-		1		-			1		133			-		-		-			-		3			12			180			338
Net (charge-offs) recoveries		8			-		1		(15	)		1		133			-		-		(43	)		-		(64	)		(94	)		170			97
Balance, end of period	$	2,204		$	-	$	1,301	$	2,659		$	588	$	553		$	1,173	$	199	$	802		$	-	$	1,434		$	448		$	209		$	11,570

PCI Impairment Allowance for Loan Losses:
Balance, beginning of period	$	-		$	-	$	-	$	-		$	-	$	-		$	-	$	-	$	-		$	-	$	-		$	-		$	-		$	-
PCI Impairment charge-offs		-			-		-		-			-		-			-		-		-			-		-			-			-			-
PCI impairment recoveries		-			-		-		-			-		-			-		-		-			-		-			-			-			-
Net PCI impairment charge-offs		-			-		-		-			-		-			-		-		-			-		-			-			-			-
PCI provision for loan losses		3			-		-		15			-		-			-		-		14			-		10			-			-			42
Benefit attributable to FDIC loss share agreements		-			-		-		-			-		-			-		-		-			-		-			-			-			-
Total provision for loan losses charged to operations		3			-		-		15			-		-			-		-		14			-		10			-			-			42
Provision for loan losses recorded through FDIC loss share receivable		-			-		-		-			-		-			-		-		-			-		-			-			-			-
Balance, end of period	$	3		$	-	$	-	$	15		$	-	$	-		$	-	$	-	$	14		$	-	$	10		$	-		$	-		$	42

Total Allowance for Loan Losses	$	2,207		$	-	$	1,301	$	2,674		$	588	$	553		$	1,173	$	199	$	816		$	-	$	1,444		$	448		$	209		$	11,612


For the nine months ended September 30, 2016
Allowance for Loan Losses:
Balance, beginning of period	$	1,821		$	-	$	1,135	$	2,099		$	247	$	278		$	679	$	69	$	672		$	-	$	1,337		$	461		$	266		$	9,064
Provision for loan losses		351			-		164		553			323		(13	)		494		91		152			-		61			65			(202	)		2,039
Charge-offs		(15	)		-		-		(15	)		-		-			-				(65	)		-		(123	)		(117	)		(72	)		(407	)
Recoveries		47			-		2		22			18		288			-		39		43			-		159			39			217			874
Net (charge-offs) recoveries		32			-		2		7			18		288			-		39		(22	)		-		36			(78	)		145			467
Balance, end of period	$	2,204		$	-	$	1,301	$	2,659		$	588	$	553		$	1,173	$	199	$	802		$	-	$	1,434		$	448		$	209		$	11,570

PCI Impairment Allowance for Loan Losses:
Balance, beginning of period	$	-		$	-	$	-	$	-		$	-	$	-		$	-	$	-	$	-		$	-	$	-		$	-		$	-		$	-
PCI Impairment charge-offs		-			-		-		-			-		-			-		-		-			-		-			-			-			-
PCI impairment recoveries		-			-		-		-			-		-			-		-		-			-		-			-			-			-
Net PCI impairment charge-offs		-			-		-		-			-		-			-		-		-			-		-			-			-			-
PCI provision for loan losses		3			-		-		15			-		-			-		-		14			-		10			-			-			42
Benefit attributable to FDIC loss share agreements		-			-		-		-			-		-			-		-		-			-		-			-			-			-
Total provision for loan losses charged to operations		3			-		-		15			-		-			-		-		14			-		10			-			-			42
Provision for loan losses recorded through FDIC loss share receivable		-			-		-		-										-		-			-		-			-			-			-
Balance, end of period	$	3		$	-	$	-	$	15		$	-	$	-		$	-	$	-	$	14		$	-	$	10		$	-		$	-		$	42

Total Allowance for Loan Losses	$	2,207		$	-	$	1,301	$	2,674		$	588	$	553		$	1,173	$	199	$	816		$	-	$	1,444		$	448		$	209		$	11,612

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)

	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 September 30, 2017
Allowance for Loan Losses:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	169	$	-	$	-	$	-	$	169
Collectively evaluated for impairment		2,364		477		1,390		2,888		613		510		1,251		89		1,039		563		603		315		152		12,254
		2,364		477		1,390		2,888		613		510		1,251		89		1,039		732		603		315		152		12,423
Purchased credit-impaired		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total	$	2,364	$	477	$	1,390	$	2,888	$	613	$	510	$	1,251	$	89	$	1,039	$	732	$	603	$	315	$	152	$	12,423

Recorded Investment in Loans:
Individually evaluated for impairment	$	463	$	-	$	468	$	434	$	-	$	538	$	-	$	211	$	1,170	$	2,338	$	-	$	222	$	-	$	5,845
Collectively evaluated for impairment		407,627		83		353,672		744,610		84,971		83,974		161,810		13,184		269,139		114,135		54,762		48,740		16,715		2,353,421
		408,090		83		354,140		745,044		84,971		84,512		161,810		13,395		270,309		116,473		54,762		48,962		16,715		2,359,266
Purchased credit-impaired		3,060		-		10,205		24,361		-		7,164		-		1,871		17,287		1,005		-		1,522		346		66,821
Total	$	411,150	$	83	$	364,345	$	769,405	$	84,971	$	91,676	$	161,810	$	15,266	$	287,596	$	117,478	$	54,762	$	50,484	$	17,061	$	2,426,087

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:

1) 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.

2) 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 ~~June~~September 30, 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 $~~272~~197 thousand and $257 thousand for the purchased performing portfolio at ~~June~~September 30, 2017 and December 31, 2016, respectively. The remaining mark on the purchased performing loan portfolio was $2.65 million and $3.4 million at ~~June~~September 30, 2017 and December 31, 2016, respectively. ~~Approximately $1.7 million of the remaining mark at June 30, 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 ~~five~~5 basis point increments, up or down, with a maximum positive factor of 1.00% and a negative factor of 1.00%. Details of the 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;

18iii. 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;

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;

vii.

Minimum loss factor, pursuant to which, based on the review of historic loss rates as reported by the Federal Reserve (the “Net Charge-Off Rates on Loans and Leases for Banks Not Among Top 100 in Size-Not Seasonally Adjusted), a minimum loss rate is established and reviewed semi-annually for each loan type and an incremental factor, as calculated by taking the difference of the established minimum loss and the calculated historical loss for the trailing 15 quarters, is 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 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. 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 ~~June~~September 30, 2017 ~~and~~or 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 ~~June~~September 30, 2017 and December 31, 2016, $125 thousand was recorded as an other liability for off-balance sheet credit exposure.

1920

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 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.

20The 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 September 30, 2017 and December 31, 2016, by loan class and by credit quality indicator.

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 June 30, 2017 and December 31, 2016, by loan class and by credit quality indicator.

	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

	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 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	$	356,214	$	735,698	$	82,707	$	102,146	$	194,732	$	12,569	$	1,862,658
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	$	367,553	$	743,107	$	82,707	$	105,362	$	194,732	$	12,900	$	1,893,762

	Residential mortgage		HELOC		Residential construction		Other loans to individuals		Total Consumer
Pass	$	252,934	$	168,460	$	58,486	$	18,711	$	498,591
Special mention		4,707		5,732		312		14		10,765
Classified		2,880		2,607		262		180		5,929
Total	$	260,521	$	176,799	$	59,060	$	18,905	$	515,285
Total Loans									$	2,409,047

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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.

	As of September 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	$	402,913	$	352,896	$	763,916	$	84,971	$	88,620	$	161,810	$	13,227	$	1,868,353
Special mention		7,479		7,760		3,405		-		3,054		-		1,716		23,414
Classified		841		3,689		2,084		-		2		-		323		6,939
Total	$	411,233	$	364,345	$	769,405	$	84,971	$	91,676	$	161,810	$	15,266	$	1,898,706

	Residential mortgage		HELOC		Residential construction		Other loans to individuals								Total Consumer
Pass	$	280,400	$	163,853	$	50,330	$	16,851							$	511,434
Special mention		5,163		5,949		30		19								11,161
Classified		2,033		2,438		124		191								4,786
Total	$	287,596	$	172,240	$	50,484	$	17,061							$	527,381

Total Loans															$	2,426,087

	30-59		60-89		Past Due
	As of December 31, 2016
	Days		Days		90 Days		PCI
	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
	Past Due		Past Due		or More		Loans		Current		Total Loans
Pass	$	378,592	$	356,214	$	735,698	$	82,707	$	102,146	$	194,732	$	12,569	$	1,862,658
As of June 30, 2017
Special mention		7,229		7,779		3,276		-		2,727		-		-		21,011
Commercial:
Classified		1,580		3,560		4,133		-		489		-		331		10,093
Commercial and industrial	$	10	$	-	$	463	$	2,688	$	451,791	$	454,952
Total	$	387,401	$	367,553	$	743,107	$	82,707	$	105,362	$	194,732	$	12,900	$	1,893,762
CRE - owner-occupied		-		373		463		12,166		348,211		361,213
	Residential mortgage		HELOC		Residential construction		Other loans to individuals								Total Consumer
CRE - investor income producing		239		172		408		29,022		771,857		801,698
Pass	$	252,934	$	168,460	$	58,486	$	18,711							$	498,591
AC&D - 1-4 family construction		-		-		-		-		95,236

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