Park Sterling 10Q 2017 Q3 Quarterly report

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 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)

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

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

(704) 716-2134

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	☐		Accelerated filer	☒
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☐
			Emerging growth company	☐

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

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

As of November 3, 2017, the registrant had outstanding 53,181,377 shares of common stock, $1.00 par value per share.

PARK STERLING CORPORATION

Table of Contents

		Page No.

Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	2

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

	Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2017 and 2016	3

	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 Nine Months Ended September 30, 2017 and 2016	5

	Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2017 and 2016	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	64

Item 4.	Controls and Procedures	64

Part II.	Other Information	64

Item 1.	Legal Proceedings	64

Item 1A.	Risk Factors	64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65

Item 3.	Defaults Upon Senior Securities	65

Item 4.	Mine Safety Disclosures	65

Item 5.	Other Information	65

Item 6.	Exhibits	66

PARK STERLING CORPORATION

Part I. Financial Information

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

	September 30,			December 31,
	2017				2016 *

ASSETS

Cash and due from banks	$	44,874		$	34,162
Interest-earning balances at banks		53,102			48,882
Federal funds sold		240			570
Investment securities available-for-sale, at fair value		384,275			402,501
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		18,692			17,501
Loans held for sale		1,814			7,996
Loans		2,429,585			2,412,186
Less allowance for loan losses		(12,423	)		(12,125	)
Net loans		2,417,162			2,400,061

Premises and equipment, net		61,823			63,080
Bank-owned life insurance		72,354			70,785
Deferred tax asset		18,729			25,721
Other real estate owned		2,603			2,438
Goodwill		63,317			63,317
Core deposit intangible		10,075			11,438
Accrued interest receivable		6,424			6,799
Other assets		6,065			8,392

Total assets	$	3,247,253		$	3,255,395


LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	550,196		$	521,295
Interest-bearing		1,918,727			1,992,457
Total deposits		2,468,923			2,513,752

Short-term borrowings		310,000			285,000
Long-term borrowings		29,769			29,736
Subordinated debt		33,996			33,501
Accrued interest payable		942			541
Accrued expenses and other liabilities		26,934			37,021
Total liabilities		2,870,564			2,899,551


Shareholders' equity:
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		273,893			273,400
Retained earnings		50,937			32,609
Accumulated other comprehensive loss		(1,506	)		(3,282	)
Total shareholders' equity		376,689			355,844

Total liabilities and shareholders' equity	$	3,247,253		$	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						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017		2016
Interest income
Loans, including fees	$	28,924		$	26,521		$	85,904	$	80,374
Federal funds sold		2			1			6		14
Taxable investment securities		2,809			2,583			8,729		7,910
Tax-exempt investment securities		133			137			403		421
Nonmarketable equity securities		223			151			640		458
Interest on deposits at banks		200			51			398		127
Total interest income		32,291			29,444			96,080		89,304

Interest expense
Money market, NOW and savings deposits		1,076			953			3,074		2,984
Time deposits		1,469			1,447			4,376		4,294
Short-term borrowings		986			345			2,409		890
Long-term borrowings		371			379			1,113		1,229
Subordinated debt		555			497			1,606		1,437
Total interest expense		4,457			3,621			12,578		10,834
Net interest income		27,834			25,823			83,502		78,470

Provision for (recovery of) loan losses		(353	)		642			325		2,080
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		1,737			1,671			5,144		4,688
Income from fiduciary activities		476			582			1,526		1,961
Commissions and fees from investment brokerage		147			157			430		444
Income from capital markets		927			680			2,181		1,515
Gain (loss) on sale of securities available for sale		-			-			58		(93	)
ATM and card income		741			730			2,206		2,079
Mortgage banking income		471			1,015			2,207		2,663
Income from bank-owned life insurance		578			532			1,732		2,046
Amortization of indemnification asset and true-up liability expense		-			(139	)		-		(311	)
Other noninterest income		303			219			782		557
Total noninterest income		5,380			5,447			16,266		15,549

Noninterest expense
Salaries and employee benefits		11,058			11,755			33,929		36,547
Occupancy and equipment		3,007			3,111			8,838		9,277
Advertising and promotion		179			44			465		832
Legal and professional fees		954			978			3,387		2,653
Deposit charges and FDIC insurance		378			405			1,305		1,315
Data processing and outside service fees		2,049			2,331			5,881		10,078
Communication fees		345			532			1,268		1,520
Core deposit intangible amortization		454			458			1,362		1,374
Net cost of operation of other real estate owned		20			(92	)		435		244
Loan and collection expense		175			425			502		735
Postage and supplies		106			115			355		479
Other noninterest expense		1,417			1,050			4,506		4,157
Total noninterest expense		20,142			21,112			62,233		69,211

Income before income taxes		13,425			9,516			37,210		22,728

Income tax expense		4,731			3,192			12,500		8,111

Net income	$	8,694		$	6,324		$	24,710	$	14,617

Basic and diluted earnings per common share	$	0.16		$	0.12		$	0.47	$	0.28

Dividends per common share	$	0.04		$	0.04		$	0.12	$	0.10

Weighted-average common shares outstanding
Basic		52,943,273			52,361,305			52,823,594		52,333,157
Diluted		53,527,283			52,743,928			53,481,351		52,674,315

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016


Net income	$	8,694		$	6,324		$	24,710		$	14,617

Securities available for sale and transferred securities:
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			191			78
Reclassification adjustment for net (gains) losses recognized in net income		-			-			(58	)		93
Total securities available for sale and transferred securities		316			(527	)		2,322			6,427

Derivatives:
Change in the accumulated gain (loss) on effective cash flow hedge derivatives		54			355			204			(1,344	)
Change in the accumulated gain (loss) on terminated cash flow hedge derivatives		(52	)		93			(180	)		278
Reclassification adjustment for interest payments		146			86			459			263
Total derivatives		148			534			483			(803	)

Other comprehensive income, before tax		464			7			2,805			5,624

Deferred tax expense related to other comprehensive income		168			2			1,029			2,103

Other comprehensive income, net of tax		296			5			1,776			3,521

Total comprehensive income	$	8,990		$	6,329		$	26,486		$	18,138

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)

Nine Months Ended 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		265,284			265			(265	)		-			-			-

Forfeitures of restricted stock grants		(54,433	)		(54	)		54			-			-			-

Exercise of stock options		285,721			285			1,559			-			-			1,844

Share-based compensation expense		1,300			2			911			-			-			913

Common stock repurchased or reacquired		(422,641	)		(422	)		(2,469	)		-			-			(2,891	)

Dividends on common stock		-			-			-			(5,325	)		-			(5,325	)

Net income		-			-			-			14,617			-			14,617

Other comprehensive income		-			-			-			-			3,521			3,521

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			165			(165	)		-			-			-

Forfeitures of restricted stock grants		(12,067	)		(12	)		12			-			-			-

Exercise of stock options		306,394			225			660			-			-			885

Share-based compensation expense		1,400			1			1,302			-			-			1,303

Common stock repurchased or reacquired		(212,442	)		(131	)		(1,316	)		-			-			(1,447	)

Dividends on common stock		-			-			-			(6,382	)		-			(6,382	)

Net income		-			-			-			24,710			-			24,710

Other comprehensive income		-			-			-			-			1,776			1,776

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)

	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

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 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 September 30, 2017 and December 31, 2016, the results of its operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016. Operating results for the nine-month period ended 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.

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 in their respective special meetings held on October 25, 2017. Closing of the Merger, however, remains subject to regulatory 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. 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 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 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.

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.

In May 2017, 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 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.

In August 2017, the FASB issued ASU 2017-12 “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). ASU 2017-12 amends ASC 815 to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This ASU is intended to improve the transparency of information about an entity’s risk management activities and simplify the application of hedge accounting. The guidance is effective for annual periods beginning on or after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. All transition requirements and elections should be applied to hedging relationships existing on the date of adoption. The Company is assessing the impact of the new guidance, but currently does not believe it will have a material impact on the Company’s 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 3– Business Combinations and Goodwill

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

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

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Note 4 – Investment Securities

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

			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

In 2014, commercial mortgage-backed securities (“MBS”) with a fair market value of $58.5 million were transferred from available-for-sale to held-to-maturity. These securities had an aggregate unrealized loss of $2.2 million ($1.5 million, net of tax) on the date of transfer. The net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive pre-tax income in the accompanying balance sheet at December 31, 2016 and September 30, 2017 totaled $1.3 and $1.1 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 $46.2 million carrying value of the securities as of September 30, 2017. There were no transfers of securities from available-for-sale to held-to-maturity during the quarter ended September 30, 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)

At September 30, 2017 and December 31, 2016, available-for-sale and held-to-maturity commercial MBS include $55.9 million and $56.7 million, respectively, of delegated underwriting and servicing (“DUS”) bonds collateralized by multi-family properties and backed by an agency of the U.S. government, and $6.0 million of private-label securities collateralized by commercial properties.

Included within the asset-backed securities balance are collateralized loan obligations totaling $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.

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

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Maturities of Investment Portfolio

	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

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.

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 September 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 September 30, 2017 there were three securities that have been in a loss position for twelve months or more compared to six at December 31, 2016.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Investment Portfolio Gross Unrealized Losses and Fair Value

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
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 has nonmarketable equity securities consisting of investments in several unaffiliated financial institutions, as well as investments in five statutory trusts related to trust preferred securities issued by predecessor companies. These investments totaled $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 $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 Company estimated that the fair values of nonmarketable equity securities equaled or exceeded the cost of each of these investments, and, therefore, the investments were not impaired.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Note 5 – Loans and Allowance for Loan Losses

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

	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.

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)

	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

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 September 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

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 September 30, 2017 and December 31, 2016.

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 $197 thousand and $257 thousand for the purchased performing portfolio at September 30, 2017 and December 31, 2016, respectively. The remaining mark on the purchased performing loan portfolio was $2.5 million and $3.4 million at September 30, 2017 and December 31, 2016, respectively.

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 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:

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;

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;

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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 September 30, 2017 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 September 30, 2017 and December 31, 2016, $125 thousand was recorded as an other liability for off-balance sheet credit exposure.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Credit Quality Indicators - The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company's primary credit quality indicator is an internal credit risk rating system that categorizes loans into pass, special mention, or classified categories. Credit risk ratings are applied individually to 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 classes that comprise the commercial and consumer portfolio segments that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans are not corrected in a timely manner.

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

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

	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

	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

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 September 30, 2017 and December 31, 2016.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

	30-59		60-89		Past Due
	Days		Days		90 Days		PCI
	Past Due		Past Due		or More		Loans		Current		Total Loans
As of September 30, 2017
Commercial:
Commercial and industrial	$	28	$	17	$	478	$	3,060	$	407,650	$	411,233
CRE - owner-occupied		760		206		463		10,205		352,711		364,345
CRE - investor income producing		208		280		470		24,361		744,086		769,405
AC&D - 1-4 family construction		-		-		-		-		84,971		84,971
AC&D - lots, land & development		-		-		-		7,164		84,512		91,676
AC&D - CRE		-		-		-		-		161,810		161,810
Other commercial		-		-		211		1,871		13,184		15,266
Total commercial loans		996		503		1,622		46,661		1,848,924		1,898,706

Consumer:
Residential mortgage		1,054		40		1,204		17,287		268,011		287,596
HELOC		12		375		301		1,005		170,547		172,240
Residential construction		-		-		60		1,522		48,902		50,484
Other loans to individuals		63		59		76		346		16,517		17,061
Total consumer loans		1,129		474		1,641		20,160		503,977		527,381
Total loans	$	2,125	$	977	$	3,263	$	66,821	$	2,352,901	$	2,426,087

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

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

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

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The table below presents impaired loans, by class, and the corresponding allowance for loan losses at September 30, 2017 and December 31, 2016:

	September 30, 2017						December 31, 2016

			Unpaid		Related				Unpaid		Related
	Recorded		Principal		Allowance For		Recorded		Principal		Allowance For
	Investment		Balance		Loan Losses		Investment		Balance		Loan Losses
Impaired Loans with No Related Allowance Recorded:
Commercial:
Commercial and industrial	$	463	$	465	$	-	$	-	$	-	$	-
CRE - owner-occupied		463		468		-		995		1,078		-
CRE - investor income producing		435		436		-		1,481		1,489		-
AC&D - 1-4 family construction		-		-		-		-		-		-
AC&D - lots, land & development		538		668		-		622		748		-
AC&D - CRE		-		-		-		-		-		-
Other commercial		211		211		-		211		211		-
Total commercial loans		2,110		2,248		-		3,309		3,526		-
Consumer:
Residential mortgage		1,161		1,218		-		2,052		2,077		-
HELOC		1,122		1,189		-		1,183		1,190		-
Residential construction		221		242		-		-		-		-
Other loans to individuals		-		-		-		-		-		-
Total consumer loans		2,504		2,649		-		3,235		3,267		-
Total impaired loans with no related allowance recorded	$	4,614	$	4,897	$	-	$	6,544	$	6,793	$	-

Impaired Loans with an Allowance Recorded:
Commercial:
Commercial and industrial	$	-	$	-	$	-	$	-	$	-	$	-
CRE - owner-occupied		-		-		-		-		-		-
CRE - investor income producing		-		-		-		463		463		2
AC&D - 1-4 family construction		-		-		-		-		-		-
AC&D - lots, land & development		-		-		-		-		-		-
AC&D - CRE		-		-		-		-		-		-
Other commercial		-		-		-		-		-		-
Total commercial loans		-		-		-		463		463		2
Consumer:
Residential mortgage		-		-		-		-		-		-
HELOC		1,231		1,254		169		1,224		1,248		176
Residential construction		-		-		-		243		243		20
Other loans to individuals		-		-		-		-		-		-
Total consumer loans		1,231		1,254		169		1,467		1,491		196
Total impaired loans with an allowance recorded	$	1,231	$	1,254	$	169	$	1,930	$	1,954	$	198

Total Impaired Loans Individually Reviewed for Impairment
Commercial:
Commercial and industrial	$	463	$	465	$	-	$	-	$	-	$	-
CRE - owner-occupied		463		468		-		995		1,078		-
CRE - investor income producing		435		436		-		1,944		1,952		2
AC&D - 1-4 family construction		-		-		-		-		-		-
AC&D - lots, land & development		538		668		-		622		748		-
AC&D - CRE		-		-		-		-		-		-
Other commercial		211		211		-		211		211		-
Total commercial loans		2,110		2,248		-		3,772		3,989		2
Consumer:
Residential mortgage		1,161		1,218		-		2,052		2,077		-
HELOC		2,353		2,443		169		2,407		2,438		176
Residential construction		221		242		-		243		243		20
Other loans to individuals		-		-		-		-		-		-
Total consumer loans		3,735		3,903		169		4,702		4,758		196

Total Impaired Loans Individually Reviewed for Impairment	$	5,845	$	6,151	$	169	$	8,474	$	8,747	$	198

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

During the three and nine months ended September 30, 2017, the Company recognized $26 thousand and $78 thousand, respectively, of interest income with respect to impaired loans, specifically accruing TDRs, within the period the loans were impaired. During the three and nine months ended September 30, 2016, the Company recognized $51 thousand and $121 thousand, respectively, of interest income with respect to impaired loans, specifically accruing TDRs. The average recorded investment and interest income recognized on impaired loans, by class, for the three and nine months ended September 30, 2017 and 2016 are shown in the table below.

	Three Months Ended September 30,								Nine Months Ended September 30,

	2017				2016				2017				2016

	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Impaired Loans with No Related Allowance Recorded:
Commercial:
Commercial and industrial	$	463	$	22	$	-	$	-	$	231	$	64	$	180	$	-
CRE - owner-occupied		449		2		860		-		722		6		1,339		-
CRE - investor income producing		1,154		3		1,406		-		1,251		3		918		13
AC&D - 1-4 family construction		-		-		-		-		-		-		-		-
AC&D - lots, land & development		551		20		664		9		587		62		750		29
AC&D - CRE		-		-		-		-		-		-		-		-
Other commercial		211		-		211		-		211		-		127		-
Total commercial loans		2,828		47		3,141		9		3,002		135		3,313		42
Consumer:
Residential mortgage		1,661		6		2,065		4		1,862		19		1,571		14
Home equity lines of credit		1,097		1		558		-		1,140		2		354		-
Residential construction		111		-		24		-		-		-		155		4
Other loans to individuals		-		-		-		-		-		-		-		-
Total consumer loans		2,869		7		2,647		4		3,002		21		2,079		18
Total impaired loans with no related allowance recorded	$	5,697	$	54	$	5,787	$	13	$	6,004	$	156	$	5,393	$	60

Impaired Loans with an Allowance Recorded:
Commercial:
Commercial and industrial	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
CRE - owner-occupied		-		-		-		-		-		-		-		-
CRE - investor income producing		-		-		237		18		298		6		95		18
AC&D - 1-4 family construction		-		-		-		-		-		-		-		-
AC&D - lots, land & development		-		-		-		-		-		1		-		-
AC&D - CRE		-		-		-		-		-		-		-		-
Other commercial		-		-		-		-		-		-		-		-
Total commercial loans		-		-		237		18		298		7		95		18
Consumer:
Residential mortgage		-		-		-		-		-		-		183		-
Home equity lines of credit		1,317		12		1,224		9		1,270		37		1,224		28
Residential construction		111		-		242		-		177		7		97		-
Other loans to individuals		-		-		-		-		-		-		-		-
Total consumer loans		1,428		12		1,466		9		1,447		44		1,504		28
Total impaired loans with an allowance recorded	$	1,428	$	12	$	1,703	$	27	$	1,745	$	51	$	1,598	$	46

Total Impaired Loans Individually Reviewed for Impairment
Commercial:
Commercial and industrial	$	463	$	22	$	-	$	-	$	231	$	64	$	180	$	-
CRE - owner-occupied		449		2		860		-		722		6		1,339		-
CRE - investor income producing		1,155		3		1,642		18		1,549		9		1,012		31
AC&D - 1-4 family construction		-		-		-		-		-		-		-		-
AC&D - lots, land & development		551		20		664		9		587		63		750		29
AC&D - CRE		-		-		-		-		-		-		-		-
Other commercial		211		-		211		-		211		-		127		-
Total commercial loans		2,829		47		3,377		27		3,300		142		3,408		60
Consumer:
Residential mortgage		1,661		6		2,065		4		1,862		19		1,754		14
Home equity lines of credit		2,413		13		1,782		9		2,410		39		1,578		28
Residential construction		221		-		266		-		177		7		252		4
Other loans to individuals		-		-		-		-		-		-		-		-
Total consumer loans		4,295		19		4,113		13		4,449		65		3,583		46

Total Impaired Loans Individually Reviewed for Impairment	$	7,125	$	66	$	7,490	$	40	$	7,749	$	207	$	6,991	$	106
Total Impaired Loans Collectively Reviewed for Impairment	$	-	$	-	$	2,651	$	11	$	-	$	-	$	2,478	$	14

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Nonaccrual and Past Due Loans - It is the general policy of the Company to place a loan on nonaccrual status when there is a probable loss or when there is reasonable doubt that all principal and interest will be collected, or when it is over 90 days past due. At September 30, 2017, there was $206 thousand in loans past due 90 days or more and accruing interest. At December 31, 2016, there was $1.2 million in loans past due 90 days or more and accruing interest. These loans were considered fully collectible at September 30, 2017 and December 31, 2016, respectively. The recorded investment in nonaccrual loans at September 30, 2017 and December 31, 2016 was as follows:

	September 30,		December 31,
	2017		2016
Commercial:
Commercial and industrial	$	616	$	167
CRE - owner-occupied		1,155		1,085
CRE - investor income producing		1,141		2,193
AC&D - lots, land & development		2		33
Other commercial		211		210
Total commercial loans		3,125		3,688
Consumer:
Residential mortgage		1,751		2,458
HELOC		2,034		2,312
Residential construction		60		242
Other loans to individuals		102		119
Total consumer loans		3,947		5,131
Total nonaccrual loans	$	7,072	$	8,819

Purchased Credit-Impaired Loans – PCI loans had an unpaid principal balance of $86.8 million and $109.8 million and a carrying value of $66.8 million and $85.5 million at September 30, 2017 and December 31, 2016, respectively. PCI loans represented 2.1% and 2.6% of total assets at September 30, 2017 and December 31, 2016, respectively. Determining the fair value of the PCI loans at the time of acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest and taking into account prepayment assumptions. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carryover of previously established allowance for loan losses from acquired companies.

A summary of changes in the accretable yield for PCI loans for the nine months ended September 30, 2017 and 2016 follows:

	Nine Months Ended September 30,

	2017			2016

Accretable yield, beginning of period	$	29,608		$	32,509
Addition from the First Capital acquisition		-			1,663
Servicing income		(4,647	)		(4,517	)
Accretion to interest income		(5,648	)		(4,055	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		7,541			4,206
Other changes, net		1,953			1,318
Accretable yield, end of period	$	28,807		$	31,124

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Troubled Debt Restructuring - In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. All loan modifications are made on a case-by-case basis.

As of September 30, 2017, the Company had 9 TDR loans totaling $2.4 million, of which $81 thousand are nonaccrual loans. As of December 31, 2016, the Company had 11 TDR loans totaling $2.9 million, of which $374 thousand are nonaccrual loans. The Company had allocated $169 thousand and $198 thousand of specific reserves to customers whose loan terms have been modified in a TDR as of September 30, 2017 and December 31, 2016, respectively.

There were no concessions made during the nine months ended September 30, 2017 or during the nine months ended September 30, 2016.

Commercial TDRs - Commercial TDRs (including commercial and industrial, commercial real estate, AC&D and other commercial loans) often result from a workout where an existing commercial loan is restructured and a concession is given. These workouts may involve lengthening the amortization period of the amortized principal beyond market terms, or reducing the interest rate below market terms for the original remaining life of the loan. In the case of extended amortization, this concession reduces the minimum monthly payment and increases the balloon payment at the end of the term of the loan. Other concessions can potentially involve forgiveness of principal, collateral concessions, or reduction of accrued interest. The impact of the TDR on the allowance for loan losses is based on the changes in borrower payment performance rather than just the TDR classification. All TDRs are designated as impaired loans. TDRs, like other impaired loans, are measured based on discounted cash flows, comparing the modified loan to pre-modified terms or, if the loan is deemed to be collateral dependent, collateral value less anticipated selling costs. TDRs may remain in accruing status if the borrower remains less than 90 days past due per the restructured loan terms and no loss is expected. A borrower may be considered for removal from TDR status if it is no longer experiencing financial difficulties and can qualify for new loan terms, which do not represent a concession, subject to the normal underwriting standards and processes for similar extensions of credit. As of September 30, 2017, the Company has outstanding one commercial TDR with a reduced interest rate and five commercial TDRs where an extension of maturity was granted. All commercial TDRs are paying according to the terms of the modification as of September 30, 2017.

Consumer TDRs - Consumer TDRs (including residential mortgage, HELOC, residential construction and other consumer loans) often result from a workout where an existing loan is modified and a concession is given. These workouts typically lengthen the amortization period of the amortized principal beyond market terms or reduce the interest rate below market terms. The impact of the TDR on the allowance for loan losses is based on the changes in borrower payment performance rather than the TDR classification. TDRs, like other impaired loans, are measured based on the discounted cash flows or collateral value, less anticipated selling costs of the modified loan using pre-modified interest rates. As of September 30, 2017, the Company has three outstanding consumer TDRs where an extension of maturity was granted. All consumer TDRs are paying according to the terms of the modification as of September 30, 2017.

There were no loans modified as TDRs within the 12 months ended September 30, 2017 and September 30, 2016 for which there was a payment default during the nine months ended September 30, 2017 or September 30, 2016, respectively.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The Company does not deem a TDR successful until it has been re-established as an accruing loan. The following table presents TDRs by types of modifications indicated within the three, nine and twelve months ended September 30, 2017 and 2016:

Three months ended
September 30, 2017

Nine months ended
September 30, 2017

Number of

loans

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Number of

loans

Pre-Modification

Outstanding

Recorded

Investment

Post-Modification

Outstanding

Recorded

Investment

Extended payment terms

Total

	Three months ended September 30, 2016						Nine months ended September 30, 2016
	Number of loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Extended payment terms
CRE - investor income producing		-	$	-	$	-		1		91		91
Total		-	$	-	$	-		1	$	91	$	91

Twelve Months Ended September 30, 2017
	Paid in full				Paying as restructured				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment

Extended payment terms		-	$	-		6	$	2,431		-	$	-
Total		-	$	-		6	$	2,431		-	$	-

Twelve Months Ended September 30, 2016
	Paid in full				Paying as restructured				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment

Extended payment terms		-		-		1		91		-		-
Total		-	$	-		1	$	91		-	$	-

Related Party Loans – From time to time, the Company engages in loan transactions with its directors, executive officers and their related interests (collectively referred to as “related parties”). Such loans are made in the ordinary course of business and on substantially the same terms and collateral as those for comparable arms length transactions prevailing at the time and do not involve more than the normal risk of collectability or present other unfavorable features. A summary of activity in loans to related parties is as follows:

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Loans to Directors, Executive Officers and Their Related Interests

	Nine Months Ended			Twelve Months Ended
	September 30,			December 31,
	2017			2016

Beginning balance	$	15,433		$	14,404
Disbursements		1,275			2,806
Repayments		(424	)		(1,777	)
Ending balance	$	16,284		$	15,433

At September 30, 2017 and December 31, 2016, the Company had pre-approved but unused lines of credit totaling $2.0 million and $716 thousand, respectively, to related parties.

In addition to related party loans, the Company engages in deposit transactions with its directors, executive officers and their related interests. Such deposits are made in the ordinary course of business and on substantially the same terms as those for comparable transactions prevailing at the time and do not present other unfavorable features. The total amount of related party deposits at September 30, 2017 and December 31, 2016 was $12.2 million and $9.6 million, respectively.

Note 6 – Other Real Estate Owned

The Company owned $2.6 million and $2.4 million in OREO at September 30, 2017 and December 31, 2016, respectively. Transactions in OREO for the three and nine months ended September 30, 2017 and 2016 are summarized below:

	Three months ended						Nine months ended
	September 30,						September 30,
Non-Covered OREO	2017			2016			2017			2016

Beginning balance	$	3,175		$	2,866		$	2,438		$	4,211
Additions		115			311			1,548			449
Transfers from covered to non-covered		-			380			-			380
Sales		(25	)		(778	)		(1,044	)		(1,965	)
Writedowns		(662	)		(49	)		(339	)		(345	)
Ending balance	$	2,603		$	2,730		$	2,603		$	2,730

Covered OREO	2017		2016			2017		2016

Beginning balance	$	-	$	380		$	-	$	1,240
Additions		-		-			-		-
Transfers from covered to non-covered		-		-			-		(380	)
Sales		-		(380	)		-		(782	)
Writedowns		-		-			-		(78	)
Ending balance	$	-	$	-		$	-	$	-

As of September 30, 2017 and December 31, 2016, the Company had $1.4 million and $2.1 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process.

As of September 30, 2017 and December 31, 2016, the Company had $386 thousand and $12 thousand, respectively, of residential real estate properties in OREO.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Note 7 – Income Taxes

Income taxes are provided based on the asset-liability method of accounting, which includes the recognition of a deferred tax asset (“DTAs”) or a liability for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. In general, the Company records a DTA when the event giving rise to the tax benefit has been recognized in the consolidated financial statements.

As of September 30, 2017 and December 31, 2016, the Company had a net DTA in the amount of approximately $18.7 million and $25.7 million, respectively. The decrease is a function of year to date 2017 earnings as well as increases in the fair value of available-for-sale securities. The Company evaluates the carrying amount of the DTA on a quarterly basis in accordance with the guidance provided in FASB ASC Topic 740, in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e., a likelihood of more than 50%) that some portion, or all, of the DTA will not be realized within its life cycle, based on the weight of available evidence. In most cases, the realization of the DTA is dependent upon generating a sufficient level of taxable income in future periods, which can be difficult to predict. In addition to projected earnings, the Company also considers projected asset quality, liquidity, its strong capital position, which could be leveraged to increase earning assets and generate taxable income, its growth plans and other relevant factors. Based on the weight of available evidence, the Company determined as of September 30, 2017 and December 31, 2016 that it is more likely than not that it will be able to fully realize the existing DTA and therefore considered it appropriate not to establish a DTA valuation allowance at either September 30, 2017 or December 31, 2016.

Note 8 - Per Share Results

Basic earnings per share represent income available to shareholders divided by the weighted-average number of shares outstanding during the relevant period. Diluted earnings per share reflect additional shares that would have been outstanding if dilutive potential shares had been issued. Potential shares that may be issued by the Company relate solely to outstanding stock options and restricted shares (non-vested shares), and are determined using the treasury stock method.

Basic and diluted earnings per common share have been computed based upon net income as presented in the accompanying condensed consolidated statements of income divided by the weighted-average number of common shares outstanding or assumed to be outstanding as summarized below:

Weighted-Average Shares for Earnings Per Share Calculation

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

Weighted-average number of common shares outstanding excluding unvested restricted shares		52,943,273		52,361,305		52,823,594		52,333,157

Effect of dilutive stock options and unvested restricted shares		584,010		382,623		657,757		341,158

Weighted-average number of common shares and dilutive potential common Tax effect shares outstanding		53,527,283		52,743,928		53,481,351		52,674,315

At September 30, 2017, there were 1,099,121 stock options and 364,560 restricted shares outstanding. For the three months and nine months ended September 30, 2017, dilutive stock options and restricted shares totaled 458,645 and 125,365 and 499,050 and 158,107, respectively.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

At September 30, 2016, there were 1,541,416 stock options and 881,497 restricted shares outstanding. For the three months and nine months ended September 30, 2016, dilutive stock options and restricted shares totaled 298,455 and 84,168 and 255,856 and 85,302, respectively.

Note 9 - Commitments and Contingencies

In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit, which are not reflected in the accompanying unaudited condensed consolidated financial statements. At September 30, 2017, the Company had $698.5 million of pre-approved but unused lines of credit, $6.7 million of standby letters of credit and $4.2 million of commercial letters of credit. At December 31, 2016, the Company had $758.3 million of pre-approved but unused lines of credit, $8.2 million of standby letters of credit and $9.7 million of commercial letters of credit. In management’s opinion, these commitments represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

Note 10 - Derivative Financial Instruments and Hedging Activities

The Company uses certain derivative instruments, including interest rate floors, swaps, and foreign exchange contracts, to meet the needs of its customers as well as to manage the interest rate risk associated with certain transactions. The following table summarizes the derivative financial instruments utilized by the Company:

		September 30, 2017						December 31, 2016

				Estimated Fair Value						Estimated Fair Value
	Balance Sheet Location	National Amount		Gain		Loss		National Amount		Gain		Loss

Cash flow hedges:
Interest rate contracts:	Other assets and other liabilities
Pay fixed swaps with counterparty		$	25,000	$	-	$	223	$	25,000	$	-	$	427

Fair value hedges:
Interest rate contracts:
Pay fixed rate swaps with counterparty	Other liabilities		39,041		-		448		25,151		-		155

Not designated as hedges:
Customer-related interest rate contracts:
Matched interest rate swaps with borrower	Other assets and other liabilities		264,989		3,365		1,930		203,758		2,283		2,247
Matched interest rate swaps with counterparty	Other liabilities		264,989		-		1,820		203,758		-		313
Matched foreign exchange contract with borrower	Other assets		514		44		-		1,857		7		-
Matched foreign exchange contract with counterparty	Other liabilities		514		-		44		1,857		-		7
			531,006		3,409		3,794		411,230		2,290		2,567

Total derivatives		$	595,047	$	3,409	$	4,465	$	461,381	$	2,290	$	3,149

The Company entered into three interest rate swap agreements during December 2013 with an aggregate notional amount of $50.0 million. These derivative instruments are used to protect the Company from future interest rate risk related to a seven-year commitment of floating rate broker-dealer sweep accounts through a brokered deposit program. These derivative instruments are a combination of a $12.5 million forward starting, five-year interest rate swap; a $12.5 million forward starting, seven-year interest rate swap; and a $25.0 million two-year forward starting swap. Effective dates for these derivative instruments were January 2, 2014, January 2, 2014 and January 4, 2016, respectively. These instruments carry a fixed rate of 1.688% with monthly payments commencing February 3, 2014, a fixed rate of 2.341% with monthly payments commencing February 3, 2014, and a fixed rate of 3.104% with monthly payments commencing February 1, 2016, respectively. These derivative instruments are accounted for as cash flow hedges with effective changes in fair market value recorded in other comprehensive income net of tax. In January 2016, the $25.0 million two-year forward starting swap was terminated, resulting in a $1.9 million termination fee. The termination fee is being amortized into interest expense over the remaining life of the underlying instruments of approximately 60 months. These derivative instruments are carried at a fair market value of ($223) thousand and $(427) thousand at September 30, 2017 and December 31, 2016, respectively, and are included in other liabilities.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

At September 30, 2017 and December 31, 2016, the Company had loan swaps, with an aggregate notional amount of $39.0 million and $25.2 million, respectively, accounted for as fair value hedges in accordance with ASC 815, Derivatives and Hedging. These derivative instruments are used to protect the Company from interest rate risk caused by changes in the LIBOR curve in relation to certain designated fixed rate loans. The derivative instruments are used to convert these fixed rate loans to an effective floating rate. If the variable rate is below the stated fixed rate of the loan for a given period, the Company will owe the counterparty the notional amount times the difference between the variable rate and the stated fixed rate. If the variable rate is above the stated rate for any given period during the term of the contract, the Company will receive payments based on the notional amount times the difference between the variable rate and the stated fixed rate.

To meet the needs of its customers, the Company enters into interest rate swap agreements to convert customers’ variable rate loans with the Company to a fixed rate. To offset this interest rate risk, the Company has entered into substantially identical agreements with an unrelated market counterparty to swap these fixed rate agreements into variable rates. The interest rate swaps are used to provide the customer fixed rate financing while managing interest rate risk and were not designated as hedges. The interest rate swaps pay and receive interest based on a floating rate based on one month LIBOR plus credit spread, with payments being calculated on the notional amount. The interest rate swaps are settled monthly, with varying maturities. The interest rate swaps had an aggregate notional amount of $265.0 million at September 30, 2017 representing the amount of fixed rate receivables outstanding and variable rate liabilities outstanding, and are included in other assets and other liabilities at their fair values of $3.4 million and $3.8 million, respectively. All changes in fair value are recorded as other income within non-interest income. Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts.

The Company also enters into foreign exchange contracts with customers to accommodate their need to convert certain foreign currencies into U.S. Dollars. To offset the foreign exchange risk, the Company has entered into substantially identical agreements with an unrelated market counterparty to hedge these foreign exchange contracts. The foreign exchange contracts had a notional amount of $514 thousand and $1.9 million at September 30, 2017 and December 31, 2016, respectively, representing the amount of contracts outstanding in U.S. dollars. The fair value of these contracts are included in other assets and other liabilities in the accompanying balance sheet. All changes in fair value are recorded as other noninterest income.

The following table details the location and amounts recognized in the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income:

	Effective Portion
	Pre-tax gain (loss)										Pre-tax gain (loss) reclassified
	recognized in OCI										from AOCI into income
	For the three months ended Sept 30,				For the nine months ended Sept 30,					Location of amounts reclassified	For the three months ended Sept 30,				For the nine months ended Sept 30,
	2017		2016		2017		2016			from AOCI into Income	2017		2016		2017		2016

Cash flow hedges:
Interest rate contracts	$	54	$	355	$	204	$	(1,344	)	Total interest expense	$	146	$	86	$	459	$	263

		Pre-tax gain (loss)
		recognized in income
		For the three months ended						For the nine months ended
	Location of amounts	Sept 30,						Sept 30,
	recognized in income	2017			2016			2017			2016
Fair value hedges:
Interest rate contracts
Pay fixed rate swaps with counterparty	Total interest income	$	(49	)	$	(73	)	$	(179	)	$	(226	)

Not designated as hedges:
Client-related interest rate contracts	Other income		927			(32	)		2,181		$	(320	)
		$	878		$	(105	)	$	2,002		$	(546	)

Because of the unfavorable position of outstanding swap instruments at September 30, 2017 and December 31, 2016, the Company posted collateral of approximately $8.1 million and $1.2 million, respectively, with the related counterparties.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Note 11 – Accumulated Other Comprehensive Income (Loss)

The before and after tax amounts allocated to each component of other comprehensive income are presented in the following table. Reclassification adjustments related to securities available for sale are included in gain on sale of securities available-for-sale in the accompanying Condensed Consolidated Statements of Income. Amortization of net unrealized losses on securities transferred to held-to-maturity is included in interest income on taxable investment securities in the accompanying Condensed Consolidated Statements of Income.

	For the Three Months Ended								For the Three Months Ended
	September 30, 2017								September 30, 2016
	Before Tax Amount			Tax Expense (Benefit)		Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Securities available for sale and transferred securities:
Change in net unrealized gains during the period	$	251		$	24	$	227		$	(553	)	$	(198	)	$	(355	)
Change in net unrealized gain (loss) on securities transferred to held to maturity		65			26		39			26			26			-
Reclassification adjustment for net gains recognized in net income		-			-		-			-			-			-
Total securities available for sale and transferred securities		316			50		266			(527	)		(172	)		(355	)

Derivatives:
Change in the accumulated loss on effective cash flow hedge derivatives		54			52		2			355			171			184
Change in the accumulated loss on terminated cash flow hedge derivatives		(52	)		-		(52	)		93			34			59
Reclassification adjustment for interest payments		146			66		80			86			(31	)		117
Total derivatives		148			118		30			534			174			360

Total other comprehensive income	$	464		$	168	$	296		$	7		$	2		$	5

	For the Nine Months Ended								For the Nine Months Ended
	September 30, 2017								September 30, 2016
	Before Tax Amount			Tax Expense (Benefit)		Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Securities available for sale and transferred securities:
Change in net unrealized gains during the period	$	2,189		$	64	$	2,125		$	6,256		$	2,339		$	3,917
Change in net unrealized gain (loss) on securities transferred to held to maturity		191			225		(34	)		78			90			(12	)
Reclassification adjustment for net gains recognized in net income		(58	)		-		(58	)		93			-			93
Total securities available for sale and transferred securities		2,322			289		2,033			6,427			2,429			3,998

Derivatives:
Change in the accumulated loss on effective cash flow hedge derivatives		204			168		36			(1,344	)		155			(1,499	)
Change in the accumulated loss on terminated cash flow hedge derivatives		(180	)		294		(474	)		278			(577	)		855
Reclassification adjustment for interest payments		459			278		181			263			96			167
Total derivatives		483			740		(257	)		(803	)		(326	)		(477	)

Total other comprehensive income	$	2,805		$	1,029	$	1,776		$	5,624		$	2,103		$	3,521

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 activity in accumulated other comprehensive income (loss), net of tax, by component for the periods indicated.

	Securities Available for Sale			Securities Transferred from Available for Sale to Held to Maturity			Derivatives			Accumulated Other Comprehensive Income (Loss)
Balance, January 1, 2017	$	3,672		$	(751	)	$	(6,203	)	$	(3,282	)
Other comprehensive income (loss) before reclassifications		2,095			-			36			2,131
Amounts reclassified from accumulated other comprehensive loss		(58	)		-			179			121
Transfer of securities from available for sale to held to maturity		26			(28	)		(474	)		(476	)
Net other comprehensive income (loss) during the period		2,063			(28	)		(259	)		1,776
Balance, September 30, 2017	$	5,735		$	(779	)	$	(6,462	)	$	(1,506	)

Balance, January 1, 2016	$	564		$	(1,065	)	$	(2,362	)	$	(2,863	)
Other comprehensive income (loss) before reclassifications		3,905			-			(1,499	)		2,406
Amounts reclassified from accumulated other comprehensive loss		93			-			167			260
Transfer of securities from available for sale to held to maturity		12			(12	)		-			-
Terminated cash flow hedge derivatives		-			-			855			855
Net other comprehensive income (loss) during the period		4,010			(12	)		(477	)		3,521
Balance, September 30, 2016	$	4,574		$	(1,077	)	$	(2,839	)	$	658

Note 12 - Fair Value Measurements

The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at each balance sheet date, based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or the price for which a liability could be settled in an orderly transaction between market participants at the measurement date. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The methodologies used for estimating the fair value of financial assets and financial liabilities are discussed below:

Cash and Cash Equivalents – Cash and cash equivalents, which are comprised of cash and due from banks, interest-earning balances at banks and Federal funds sold, approximate their fair value.

Investment Securities Available-for-sale and Investment Securities Held-to-Maturity - Fair value for investment securities is based on the quoted market price if such information is available. If a quoted market price is not available, fair values are based on independent pricing models or other model valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, pre-payment assumptions, and other factors such as credit loss assumptions.

Nonmarketable Equity Securities – Cost is a reasonable estimate of fair value for nonmarketable equity securities because no quoted market prices are available and the securities are not readily marketable. The carrying amount is adjusted for any other than temporary declines in value.

Loans Held for Sale -For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using independent market prices, appraised values of the underlying collateral, management’s estimation of the value of the collateral, or commitments on hand from investors within the secondary market for loans with similar characteristics.

Loans, net of allowance - The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Further adjustments are made to reflect current market conditions. There is no discount for liquidity included in the expected cash flow assumptions.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Accrued Interest Receivable - The carrying amount is a reasonable estimate of fair value.

Deposits - The fair value of deposits with no stated maturities, including demand deposits, savings, money market and NOW accounts, is the amount payable on demand at the reporting date. The fair value of deposits that have stated maturities, primarily time deposits, is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities.

Borrowings - The fair values of short-term and long-term borrowings are based on discounting expected cash flows at the interest rate currently offered for debt with the same or similar remaining maturities and collateral requirements.

Subordinated Loans and Junior Subordinated Debentures – The fair value of fixed rate junior subordinated debentures is estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate. The carrying amounts of variable rate junior subordinated debentures are reasonable estimates of fair value because they can reprice frequently.

Accrued Interest Payable - The carrying amount is a reasonable estimate of fair value.

Derivative Instruments – The fair value of derivative instruments, including interest rate swaps and swap fair value hedges, is based on discounted cash flow models. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.

Financial Instruments with Off-Balance Sheet Risk - With regard to financial instruments with off-balance sheet risk, it is not practicable to estimate the fair value of future financing commitments.

The Company utilizes fair value measurements to determine fair value disclosures. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1

Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2

Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3

Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include the use of option pricing models, discounted cash flow models and similar techniques.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, at September 30, 2017 and December 31, 2016 are as follows:

					Fair Value Measurements
	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2017
Financial assets:
Cash and cash equivalents	$	98,216	$	98,216	$	98,216	$	-	$	-
Investment securities available-for-sale		384,275		384,275		913		382,042		1,320
Investment securities held-to-maturity		85,704		87,402		-		87,402
Nonmarketable equity securities		18,692		18,692		-		18,692		-
Loans held for sale		1,814		1,814		-		1,814		-
Loans, net of allowance		2,417,162		2,346,310		-		39,041		2,307,269
Accrued interest receivable		6,424		6,424		-		6,424		-
Derivative instruments		3,409		3,409		-		3,409		-

Financial liabilities:
Deposits with no stated maturity		1,810,530		1,810,530		-		1,810,530		-
Deposits with stated maturities		658,393		657,702		-		657,702		-
Short-term borrowings		310,000		310,000		-		310,000		-
Long-term borrowings		29,769		29,769		-		29,769		-
Subordinated loan and junior subordinated debt		33,996		33,996		-		33,996		-
Accrued interest payable		942		942		-		942		-
Derivative instruments		4,465		4,465		-		4,465		-

December 31, 2016
Financial assets:
Cash and cash equivalents	$	83,614	$	83,614	$	83,614	$	-	$	-
Investment securities available-for-sale		402,501		402,501		-		401,181		1,320
Investment securities held-to-maturity		91,752		92,828		-		92,828		-
Nonmarketable equity securities		17,501		17,501		-		17,501		-
Loans held for sale		7,996		7,996		-		7,996		-
Loans, net of allowance		2,400,061		2,321,390		-		27,941		2,293,449
Accrued interest receivable		6,799		6,799		-		6,799		-
Derivative instruments		2,290		2,290		-		2,290		-

Financial liabilities:
Deposits with no stated maturity		1,772,680		1,772,680		-		1,772,680		-
Deposits with stated maturities		741,072		744,062		-		744,062		-
Short-term borrowings		285,000		285,000				285,000		-
Long-term borrowings		29,736		29,736		-		29,736		-
Subordinated loan and junior subordinated debt		33,501		33,501				33,501		-
Accrued interest payable		541		541		-		541		-
Derivative instruments		3,149		3,149		-		3,149		-

The Company also utilizes fair value measurements to record fair value adjustments to certain assets and liabilities. Securities available-for-sale and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investment Securities - Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, United States Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include MBS issued by government-sponsored entities or private label entities, municipal bonds and corporate debt securities that are valued using quoted prices for similar instruments in active markets. Securities classified as Level 3 include a corporate debt security in a less liquid market whose value is determined by reference to the going rate of a similar debt security if it were to enter the market at period end. The derived market value requires significant management judgment and is further substantiated by discounted cash flow methodologies.

Derivative Instruments – Derivative instruments are recorded at fair value on a recurring basis. Derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the fair value is determined based on discounted cash flow models. All future floating cash flows are projected and both floating and fixed cash flows are discounted to valuation date. The Company classifies derivative instruments held or issued for risk management purposes as Level 2. At both September 30, 2017 and December 31, 2016, the Company’s derivative instruments consist of interest rate swaps and foreign exchange contacts.

Impaired Loans - Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures it for the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, discounted cash flows or a pooled probability of default and loss given default calculation. Those impaired loans not requiring a specific allowance represent loans for which the fair value exceeds the recorded investments in such loans. Impaired loans where a specific allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records such impaired loans as nonrecurring Level 3.

At September 30, 2017 and December 31, 2016, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. The Company records loans involved in fair value hedges at fair market value on a recurring basis. The Company does not record other loans at fair value on a recurring basis.

Loans held for sale – Loans held for sale are adjusted to lower of cost or market upon transfer from the loan portfolio to loans held for sale. Subsequently, loans held for sale are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, management’s estimation of the value of the collateral or commitments on hand from investors within the secondary market for loans with similar characteristics. The fair value adjustments for loans held for sale are recorded as nonrecurring Level 2.

Other real estate owned - OREO is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value less costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is measured due to further deterioration in the value of the OREO since initial recognition, the Company records the foreclosed asset as nonrecurring Level 3.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents, by level within the fair value hierarchy, the recorded amount of assets and liabilities at September 30, 2017 and December 31, 2016 measured at fair value on a recurring basis:

Fair Value on a Recurring Basis

	Quoted Prices in		Significant
	Active Markets for		Other			Significant
	Identical Assets		Observable Inputs			Unobservable Inputs		Assets/Liabilities
Description	(Level 1)		(Level 2)			(Level 3)		at Fair Value
September 30, 2017
Municipal securities	$	-	$	12,888		$	-	$	12,888
Residential agency pass-through securities		-		137,230			-		137,230
Residential collateralized mortgage obligations		-		154,903			-		154,903
Commercial mortgage-backed obligations		-		15,493			-		15,493
Asset-backed securities		-		61,523			-		61,523
Corporate and other securities		-		5			1,320		1,325
All other equity securities		913		-			-		913
Fair value loans		-		39,041			-		39,041
Derivative assets		-		3,409			-		3,409
Derivative liabilities		-		(4,465	)		-		(4,465	)

December 31, 2016
Municipal securities		-		13,319			-		13,319
Residential agency pass-through securities		-		192,765			-		192,765
Residential collateralized mortgage obligations		-		94,410			-		94,410
Commercial mortgage-backed obligations		-		15,497			-		15,497
Asset-backed securities		-		83,951			-		83,951
Corporate and other securities		-		-			1,320		1,320
All other equity securities		1,239		-			-		1,239
Fair value loans		-		27,941			-		27,941
Derivative assets		-		2,290					2,290
Derivative liabilities		-		(3,149	)		-		(3,149	)

Securities measured on a Level 3 recurring basis at September 30, 2017 and December 31, 2016 include a corporate debt security whose value is determined by the going rate of a similar debt security if it were to enter the market at period end with additional liquidity discounts applied due to a smaller available market. There were no transfers between valuation levels for any accounts for the nine months ended September 30, 2017 and September 30, 2016. If different valuation techniques were deemed necessary, we would consider those transfers to occur at the end of the period that the accounts are valued.

The following is a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017 and September 30, 2016.

	Securities Available for Sale
	(in thousands)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016

Fair value, beginning of the period	$	1,320	$	1,360	$	1,320	$	1,500
Change in unrealized gain recognized in other comprehensive income		-		-		-		(140	)
Fair value, end of the period	$	1,320	$	1,360	$	1,320	$	1,360

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or market accounting or impairment charges of individual assets. Processes are in place for overseeing the valuation procedures for Level 3 measurements of OREO and impaired loans. The assets are reviewed on a quarterly basis to determine the accuracy of the observable inputs, generally third party appraisals, auction values, values derived from trade publications and data submitted by the borrower, and the appropriateness of the unobservable inputs, generally discounts due to current market conditions and collection issues. Discounts are based on asset type and valuation source; deviations from the standard are documented. The discounts are periodically reviewed to determine whether they remain appropriate. Consideration is given to current trends in market values for the asset categories and gain and losses on sales of similar assets.

Discounts range from 0% to 100% depending on the nature of the assets and source of value. Real estate is valued based on appraisals or evaluations, discounted by 8% at a minimum with higher discounts for property in poor condition or property with characteristics that may make it more difficult to market. Commercial loans secured by receivables or non-real estate collateral are generally valued using the discounted cash flow method. Inputs are determined on a borrower-by-borrower basis.

Impaired loans and related write-downs are based on the fair value of the underlying collateral if repayment is expected solely from the collateral or using a pooled probability of default and loss given default calculation. Collateral values are reviewed quarterly and estimated using customized discounting criteria and appraisals.

Other real estate owned is based on the lower of the cost or fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and reflect a market value approach. Fair values are reviewed quarterly and new appraisals are generally obtained annually.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The following table sets forth by level, within the fair value hierarchy, the Company’s assets recorded at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016:

Fair Value on a Nonrecurring Basis
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable		Assets/
	Assets		Inputs		Inputs		(Liabilities)
Description	(Level 1)		(Level 2)		(Level 3)		at Fair Value
September 30, 2017
OREO	$	-	$	-	$	2,603	$	2,603
Impaired loans:
Commercial and industrial		-		-		463		463
CRE - owner-occupied		-		-		463		463
CRE - investor income producing		-		-		435		435
AC&D - lots, land & development		-		-		538		538
Other commercial		-		-		211		211
Residential mortgage		-		-		1,161		1,161
HELOC		-		-		2,353		2,353
Residential construction		-		-		221		221

December 31, 2016
OREO	$	-	$	-	$	2,438	$	2,438
Impaired loans:
CRE - owner-occupied		-		-		1,078		1,078
CRE - investor income producing		-		-		353		353
AC&D - lots, land, & development		-		-		748		748
Other commercial		-		-		211		211
Residential mortgage		-		-		2,077		2,077
HELOC		-		-		2,438		2,438
Residential construction		-		-		243		243

In accordance with accounting for foreclosed property, the carrying value of OREO is periodically reviewed and written down to fair value and any loss is included in earnings. During the three months ended September 30, 2017, OREO with a carrying value of $3.2 million was written down by $0.7 million to $2.6 million. During the nine months ended September 30, 2017, OREO with a carrying value of $2.4 million was written down by $0.3 million, offset by net additions of $0.5 million to $2.6 million. During the three months ended September 30, 2016, OREO with a carrying value of $2.9 million was written down by $0.1 million to $2.7 million. During the nine months ended September 30, 2016, there were $2.4 in net sales of OREO and write downs of $0.4 million.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at September 30, 2017.

									Weighted
	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs				Average Discount

OREO	$	2,603	Appraisals	Discount to reflect current		0%	-	30%		7.47	%
				market conditions


Impaired loans		5,845	Collateral based	Discount to reflect current		0%	-	60%		4.99	%
			measurements	market conditions and
				ultimate collectability
	$	8,448

Note 13 – Shareholders’ Equity

For the nine months ended September 30, 2017, the Company issued 164,994 restricted stock awards and 1,400 shares of common stock to employees under the 2014 Long-term Incentive Plan, repurchased 82,600 shares in open market transactions and acquired 48,108 shares in connection with satisfaction of tax withholding obligations on vested restricted stock. For the nine months ended September 30, 2016, the Company issued 265,284 restricted stock awards and 1,300 shares of common stock to employees under the 2014 Long-term Incentive Plan, repurchased 248,349 shares in open market transactions and acquired 174,292 shares in connection with satisfaction of tax withholding obligations on vested restricted stock.

The Company maintains share-based plans for directors and employees to attract, retain and provide incentives for key employees and directors in the form of incentive and non-qualified stock options and restricted stock. The total number of shares available for issuance under all outstanding share-based plans is 448,974 as of September 30, 2017.

Activity in the Company’s share-based plans is summarized in the following table:

	For the Nine Months Ended
	September 30, 2017
	Outstanding Options									Nonvested Restricted Shares
				Weighted		Weighted							Weighted
				Average		Average							Average		Aggregate
	Number			Exercise		Contractual		Intrinsic		Number			Grant Date		Intrinsic
	Outstanding			Price		Term (Years)		Value		Outstanding			Fair Value		Value

At December 31, 2016		1,405,515		$	7.25		3.18	$	5,412,428		405,732		$	5.02	$	4,377,846
Restricted shares granted		-			-		-				164,994			12.01
Options exercised		(306,394	)		6.00		-				-			-
Restricted shares vested		-			-		-				(194,099	)		6.95
Expired and forfeited		-			-		-				(12,067	)		8.24

At September 30, 2017		1,099,121		$	7.59		2.51	$	5,459,604		364,560		$	9.29	$	4,540,249

Exercisable at September 30, 2017		1,099,121

At September 30, 2017, there is no unrecognized compensation cost related to nonvested stock options. There was no total compensation expense for stock options for either the three months ended September 30, 2017 or September 30, 2016. Total compensation expense for stock options was $23 thousand and $6 thousand for the nine months ended September 30, 2017 and 2016, respectively.

At September 30, 2017, unrecognized compensation cost related to nonvested restricted shares of $2.6 million is expected to be recognized over a weighted-average period of 1.08 years. Total compensation expense for restricted shares was $484 thousand and $335 thousand for the three months ended September 30, 2017 and 2016, respectively. Total compensation expense for restricted shares was $1.3 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively.

PARK STERLING CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Note 14 – Subsequent Events

Dividend Declaration

On October 25, 2017, the Company announced that its Board of Directors declared a quarterly dividend of $0.04 per common share, payable on November 24, 2017 to all common shareholders of record as of the close of business on November 8, 2017.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information set forth in this Quarterly Report on Form 10-Q, including information incorporated by reference in this report, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts and often use words such as “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” “goal,” “target” and similar expressions. The forward-looking statements express management’s current expectations or forecasts of future events, results and conditions, including timing and expectations regarding the proposed merger between the Company and South State Corporation (“South State”); the Company’s general business strategy of organic growth, expansion in new markets, hiring of additional personnel and expansion or addition of product capabilities; anticipated loan growth; changes in loan mix and deposit mix; capital and liquidity levels; net interest income; provision expense; noninterest income and noninterest expenses; realization of deferred tax asset; credit trends and conditions, including loan losses, allowance for loan loss, charge-offs, delinquency trends and nonperforming asset levels; the amount, timing and prices of any share repurchases; the payment of common stock dividends; and other similar matters. These forward-looking statements reflect management’s beliefs and assumptions based on the information available to management at the time these disclosures are prepared. The matters discussed in these forward-looking statements are not guarantees of future results or performance and by their nature involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict and are often beyond the Company’s control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements.

You should not place undue reliance on any forward-looking statement and should consider all of the following uncertainties and risks: the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the definitive merger agreement between South State and the Company; the outcome of any legal proceedings that may be instituted against South State or the Company with respect to the proposed merger; the failure to obtain necessary regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction), or to satisfy any of the other conditions to the proposed merger on a timely basis or at all; the possibility that the anticipated benefits of the merger are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where South State and the Company do business; the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management’s attention from ongoing business operations and opportunities; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the merger; South State’s ability to complete the acquisition and integrate the Company successfully; inability to generate future organic growth in loan balances, retail banking, wealth management, mortgage banking or capital markets results through the hiring of new personnel, development of new products, opening of de novo branches or otherwise in a timely, cost-effective manner; inability to capitalize on identified revenue enhancements or expense management opportunities; failure of assumptions underlying noninterest expense levels; failure of assumptions underlying the establishment of allowances for loan losses; deterioration in the value of securities held in the investment securities portfolio; our ability to fully realize the value of our net deferred tax asset, including the impact of lower federal income tax rates on the carrying amount or the risk that we may be required to establish a valuation allowance; uncertainties about the financial stability and growth rates of non-U.S. jurisdictions, the risk that those jurisdictions may face difficulties servicing their sovereign debt, and related stresses on the financial, credit and real estate markets generally, which could negatively impact revenues and the value of our assets and liabilities; changes in general economic or business conditions, customer behavior and other uncertainties that could lead to reduced revenues and deterioration in the credit quality of the loan portfolio or the value of the collateral securing those loans and result in higher credit losses than currently expected; sensitivity to the interest rate environment, include continued low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve, and the impact on net interest margin; cyber-security concerns; failure to anticipate or inability to adapt to rapid technological developments and changes; fluctuations in the market price of the common stock, regulatory, legal and contractual requirements, other uses of capital, the Company’s financial performance, market conditions generally, and future actions by the board of directors, in each case impacting repurchases of common stock or declaration of dividends; the impact of implementation and compliance with legal and regulatory developments including changes in the federal risk-based capital rules; increased competition from both banks and nonbanks; changes in accounting standards, rules and interpretations, inaccurate estimates or assumptions in accounting, including acquisition accounting fair market value assumptions and accounting for purchased credit-impaired loans, and the impact on the Company’s financial statements; management’s ability to effectively manage credit risk, market risk, operational risk, legal risk, and regulatory and compliance risk; and other factors that may affect future results of South State and the Company. Additional factors that could cause results to differ materially from those described above can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2017 (the “2016 Form 10-K”), the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and in other documents the Company files with the SEC, and in South State’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC and in other documents South State files with the SEC.

Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

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

The purpose of this discussion and analysis is to focus on significant changes in our financial condition as of and results of operations during the three and nine month periods ended September 30, 2017. This discussion and analysis highlights and supplements information contained elsewhere in this Quarterly Report on Form 10-Q, particularly the preceding unaudited condensed consolidated financial statements and accompanying notes (the “Unaudited Financial Statements”).

Executive Overview

The Company reported net income of $24.7 million, or $0.47 per share, for the nine months ended September 30, 2017 compared to $14.6 million, or $0.28 per share, for the nine months ended September 30, 2016. Changes in net income for the first nine months of 2017 as compared to the first nine months of 2016 include a $5.0 million, or 6.41%, increase in net interest income and a $0.7 million, or 4.61%, increase in noninterest income, a $7.0 million, or 10.08%, decrease in noninterest expense and a decrease of $1.8 million in provision for loan losses.

The Company reported adjusted net income (non-GAAP), which excludes merger-related expenses and gain or loss on sale of securities, of $25.9 million, or $0.48 per share, for the nine months ended September 30, 2017, compared to $19.8 million, or $0. 38 per share, for the nine months ended September 30, 2016. The increase in adjusted net income (non-GAAP) resulted from higher net interest and noninterest income, a decrease in noninterest expenses driven primarily by cost savings from the acquisition of First Capital Bancorp, Inc. (“First Capital”), lower merger-related costs, and a decrease in provision for loan losses.

Net interest margin (non-FTE) was 3.70% for the nine months ended September 30, 2017, representing a three basis point increase from 3.67% for the nine months ended September 30, 2016. This increase resulted primarily from the increases in market interest rates.

Total assets decreased $8.1 million, or 0.3%, to $3.25 billion at September 30, 2017, compared to total assets of $3.26 billion at December 31, 2016. Cash and equivalents increased 18%, and total loans increased 0.7%, to $2.4 billion due to continued success in origination efforts.

Asset quality remains a point of strength for the Company with nonperforming loans to total loans of 0.40% and nonperforming assets to total assets of 0.38% at September 30, 2017. Nonperforming loans decreased 25.6%, to $9.6 million at September 30, 2017, compared to $12.9 million, or 0.54% of total loans, at December 31, 2016. Nonperforming assets decreased 20.8%, to $12.2 million, or 0.38% of total assets, at September 30, 2017, compared to $15.4 million, or 0.47% of total assets, at December 31, 2016.

Total deposits decreased 1.8%, to $2.47 billion at September 30, 2017, compared to $2.51 billion at December 31, 2016, due to a growth in demand deposits and savings balances of $54.8 million offset by a decline in certificate of deposits, money market deposits and brokered deposits. Growth in demand and savings balances was caused by continued organic growth. Total shareholders’ equity increased $20.9 million, or 5.9% to $376.7 million at September 30, 2017 compared to $355.8 million at December 31, 2016, driven by an increase in retained earnings and an increase in unrealized gains in the marketable securities portfolio from December 31, 2016. The Company’s ratio of total common equity to total assets increased to 11.60% from 10.93% at December 31, 2016. The Company’s ratio of tangible common equity to tangible assets (non-GAAP) increased to 9.56% at September 30, 2017 from 8.84% at December 31, 2016. The Company’s Tier 1 leverage ratio increased to 10.36% at September 30, 2017 from 9.92% at December 31, 2016, primarily due to solid growth in retained earnings.

As noted in the South State Transaction section below, on April 27, 2017 the Company announced the signing on April 26, 2017 of a definitive merger agreement with South State Corporation (“South State”) to combine the two companies and create a $14.5 billion in assets franchise operating throughout the Carolinas, Virginia and Georgia. Under the terms of the agreement, the Company will merge into South State, and the Company’s shareholders will receive 0.14 shares of South State common stock for each share of the Company’s common stock. The aggregate consideration is estimated to total approximately $690.8 million, based on 53,112,726 shares of Park Sterling common stock outstanding as of March 31, 2017 and on South State’s April 26, 2017 closing stock price per share of $91.90.

Adjusted net income and related per share measures, as well as tangible common equity and tangible assets, and related ratios, are non-GAAP financial measures. For reconciliations to the most comparable GAAP measure, see “Non-GAAP Financial Measures” below.

Business Overview

The Company, a North Carolina corporation, was formed in October 2010 to serve as the holding company for Park Sterling (the “Bank”) pursuant to a bank holding company reorganization effective January 1, 2011 and is a bank holding company registered with the Federal Reserve Board. The Bank was incorporated in September 2006 as a North Carolina-chartered commercial nonmember bank.

As part of our growth strategy, the Company has consummated several acquisitions since the bank holding company reorganization, including the acquisitions of Community Capital Corporation (“Community Capital”) in November 2011, Citizens South Banking Corporation (“Citizens South”) in October 2012, Provident Community BancShares, Inc. (“Provident Community”) in May 2014 and First Capital in January 2016. Additionally, from an organic standpoint, over the past several years the Company has opened additional branches in North and South Carolina, and two full service branches in Richmond, Virginia.

On January 1, 2016, the Company acquired 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 Company provides a full array of retail and commercial banking services, including wealth management and capital market activities, through its offices located in North Carolina, South Carolina, Georgia and Virginia. Our objective since inception has been to provide the strength and product diversity of a larger bank and the service and relationship attention that characterizes a community bank.

South State Transaction

On April 26, 2017, the Company and 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.

Non-GAAP Financial Measures

In addition to traditional financial measures, management provides information it considers useful to investors in understanding the Company’s operating performance and trends, and to facilitate comparisons with the performance of its peers. Management also uses these measures internally to assess and better understand the Company’s underlying business performance and trends related to core business activities. The non-GAAP financial measures and key performance indicators used by the Company may differ from the non-GAAP financial measures and performance indicators used by other financial institutions to assess their performance and trends.

Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. Non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures frequently are used by shareholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP. We encourage readers to consider the Unaudited Financial Statements in their entirety and not to rely on any single financial measure.

In particular, management uses tangible assets, tangible common equity, adjusted allowance for loan losses, adjusted net income and adjusted noninterest expenses, and related ratios and per-share measures, including adjusted return on average assets and adjusted return on average equity, each of which is a non-GAAP financial measure. Management uses (i) tangible assets and tangible common equity (which exclude goodwill and other intangibles from equity and assets) and related ratios to evaluate the adequacy of shareholders' equity and to facilitate comparisons with peers; (ii) adjusted allowance for loan losses (which includes net fair market value adjustments related to acquired loans) as supplemental information for comparing the combined allowance and fair market value adjustments to the combined acquired and non-acquired portfolios (fair market value adjustments are available only for losses on acquired loans), to evaluate both asset quality and asset quality trends, and to facilitate comparisons with peers; and (iii) adjusted net income and adjusted noninterest expense (which exclude merger-related expenses and gain or loss on sale of securities, as applicable), in each case to evaluate core earnings and to facilitate comparisons with peers.

The following table presents these non-GAAP financial measures and provides a reconciliation of these non-GAAP measures to the most directly comparable GAAP measure reported in the Company’s Unaudited Financial Statements:

Reconciliation of Non-GAAP Financial Measures


	September 30,			December 31,
	2017			2016
	(Unaudited)			(Unaudited)
	(dollars in thousands, except per share amounts)
Tangible common equity to tangible assets
Total assets	$	3,247,253		$	3,255,396
Less: intangible assets		(73,392	)		(74,755	)
Tangible assets	$	3,173,861		$	3,180,641

Total common equity	$	376,689		$	355,845
Less: intangible assets		(73,392	)		(74,755	)
Tangible common equity	$	303,297		$	281,090

Tangible common equity		303,297			281,090
Divided by: tangible assets		3,173,861			3,180,641
Tangible common equity to tangible assets		9.56	%		8.84	%
Common equity to assets		11.60	%		10.93	%

Adjusted allowance for loan losses (1)
Allowance for loan losses	$	12,423		$	12,125
Plus: acquisition accounting net FMV adjustments to acquired loans		22,456			27,773
Adjusted allowance for loan losses	$	34,879		$	39,898
Divided by: total loans (excluding LHFS before FMV adjustments)		2,452,041			2,439,959
Adjusted allowance for loan losses to total loans		1.42	%		1.64	%
Allowance for loan losses to total loans		0.51	%		0.50	%

	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2017			2016			2017			2016
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Adjusted net income
Net Income (as reported)	$	8,694		$	6,324		$	24,710		$	14,617
Plus: merger-related expenses		592			1,487			1,515			7,948
Less: (gain) loss on sale of securities		-			-			(58	)		93
Less: tax impact of merger-related expenses and gain on sale of securities		(84	)		(499	)		(300	)		(2,870	)
Adjusted net income	$	9,202		$	7,312		$	25,867		$	19,788

Divided by: weighted average diluted shares		53,527,283			52,743,928			53,481,351			52,674,315
Adjusted basic and diluted earnings per share	$	0.17		$	0.14		$	0.48		$	0.38
Estimated tax rate		14.19	%		33.56	%		20.59	%		35.69	%

Adjusted noninterest expense
Noninterest expense	$	20,142		$	21,112		$	62,233		$	69,211
Less: merger-related expenses		(592	)		(1,487	)		(1,515	)		(7,948	)
Adjusted noninterest expense	$	19,550		$	19,625		$	60,718		$	61,263


Adjusted return on average assets
Adjusted net income	$	9,202		$	7,312		$	25,867		$	19,788
Divided by: average assets		3,292,629			3,186,799			3,289,419			3,151,614
Multiplied by: annualization factor		3.97			3.98			1.34			1.34
Adjusted return on average assets		1.11	%		0.91	%		1.05	%		0.84	%
Return on average assets		1.05	%		0.79	%		1.00	%		0.62	%


Adjusted return on average equity
Adjusted net income	$	9,202		$	7,312		$	25,867		$	19,788
Divided by: average common equity		374,463			357,577			366,748			352,897
Multiplied by: annualization factor		3.97			3.98			1.34			1.34
Adjusted return on average assets		9.75	%		8.14	%		9.43	%		7.49	%
Return on average assets		9.21	%		7.04	%		9.01	%		5.53	%

(1)

Provided merely as supplemental information for comparing the combined allowance and fair market value adjustments to the combined acquired and non-acquired loan portfolios; fair market adjustments are available only for losses on acquired loans.

Recent Accounting Pronouncements

See Note 2 to the Unaudited Financial Statements for a description of recent accounting pronouncements including the respective expected dates of adoption and anticipated effects on results of operations and financial condition.

Critical Accounting Policies and Estimates

In the preparation of our financial statements, we have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States (“GAAP”) and in accordance with general practices within the banking industry. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to the Company’s audited consolidated financial statements and accompanying notes (the “2016 Audited Financial Statements”) included in the 2016 Form 10-K. While all of these policies are important to understanding the Unaudited Financial Statements, certain accounting policies described below involve significant judgment and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and assumptions that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

PCI Loans. Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered credit impaired. Evidence of credit quality deterioration as of the purchase date may include statistics such as internal risk grade, past due and nonaccrual status, recent borrower credit scores and recent loan-to-value (“LTV”) percentages. Purchased credit-impaired (“PCI”) loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the associated allowance for credit losses related to these loans is not carried over at the acquisition date. We estimate the cash flows expected to be collected at acquisition using specific credit review of certain loans, quantitative credit risk, interest rate risk and prepayment risk models, and qualitative economic and environmental assessments, each of which incorporate our best estimate of current key relevant factors, such as property values, default rates, loss severity and prepayment speeds.

Under the accounting guidance for PCI loans, the excess of the present value of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows to be collected. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference and is available to absorb future charge-offs.

In addition, subsequent to acquisition, we periodically evaluate our estimate of cash flows expected to be collected. These evaluations, performed quarterly, require the continued usage of key assumptions and estimates, similar to the initial estimate of fair value. In the current economic environment, estimates of cash flows for PCI loans require significant judgment given the impact of home price and property value changes, changing loss severities, prepayment speeds and other relevant factors. Decreases in the expected cash flows will generally result in a charge to the provision for credit losses resulting in an increase to the allowance for loan losses. Significant increases in the expected cash flows will generally result in an increase in interest income over the remaining life of the loan, or pool of loans. Disposals of loans, which may include sales of loans to third parties, receipt of payments in full or part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount. Trends are reviewed in terms of traditional credit metrics such as accrual status, past due status, and weighted-average 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.

PCI loans represent loans acquired in connection with the acquisitions of Community Capital, Citizens South, Provident Community and First Capital, that were deemed credit impaired at the time of acquisition. PCI loans that were classified as nonperforming loans by these institutions are no longer classified as nonperforming so long as, at acquisition and quarterly re-estimation periods, we believe we will fully collect the new carrying value of these loans. It is important to note that judgment regarding the timing and amount of cash flows to be collected is required to classify PCI loans as performing, even if the loan is contractually past due.

Allowance for Loan Losses. The allowance for loan losses is based upon management's ongoing evaluation of the loan portfolio and reflects an amount considered by management to be its best estimate of known and inherent losses in the portfolio as of the balance sheet date. The determination of the allowance for loan losses involves a high degree of judgment and complexity. In making the evaluation of the adequacy of the allowance for loan losses, management considers current economic and market conditions, independent loan reviews performed periodically by third parties, portfolio trends and concentrations, delinquency information, management's internal review of the loan portfolio, internal historical loss rates and other relevant factors. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, regulatory examiners may require us to recognize changes to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Although provisions have been established by loan segments based upon management's assessment of their differing inherent loss characteristics, the entire allowance for losses on loans, other than the portion related to PCI loans and specific reserves on impaired loans, is available to absorb further loan losses in any segment. Further information regarding our policies and methodology used to estimate the allowance for possible loan losses is presented in Note 5 – Loans and Allowance for Loan Losses to the 2016 Audited Financial Statements included in the 2016 Form 10-K, and Note 5 – Loans and Allowance for Loan Losses to the Unaudited Financial Statements included in this Form 10-Q.

Income Taxes. Income taxes are provided based on the asset-liability method of accounting, which includes the recognition of deferred tax assets (“DTAs”) and liabilities for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. In general, we record a DTA when the event giving rise to the tax benefit has been recognized in the consolidated financial statements.

Additional information regarding our income taxes is presented in Note 12 —Income Taxes to the 2016 Audited Financial Statements and Note 7- Income Taxes to the Unaudited Financial Statements included in this Form 10-Q.

Financial Condition at September 30, 2017 and December 31, 2016

Total assets decreased $8.1 million to $3.25 billion at September 30, 2017 compared to total assets of $3.26 billion at December 31, 2016. During the nine months, cash and interest-earning balances increased $14.9 million, or 18.0%, to $98.0 million at September 30, 2017 from $83.0 million at December 31, 2016; total loans increased $17.4 million, or 0.7%, to $2.43 billion at September 30, 2017 from $2.41 billion at December 31, 2016; and investment securities, which include available-for-sale and held-to-maturity securities, decreased to $470.0 million at September 30, 2017 from $494.3 million at December 31, 2016.

Total liabilities of $2.87 billion at September 30, 2017 decreased $29.0 million, or 1.0%, compared to total liabilities of $2.90 billion at December 31, 2016. Total deposits decreased $44.8 million, or 1.8 %, to $2.47 billion at September 30, 2017 from $2.51 billion at December 31, 2016. Total borrowings increased $26 million, or 7.3%, to $373.8 million at September 30, 2017 from $348.2 million at December 31, 2016, including $25.0 million of additional short-term FHLB borrowings.

The decline in assets and liabilities at September 30, 2017 from December 31, 2016 is primarily driven by decreases in earning assets and interest-bearing liabilities which reflect actions in preparation for the South State merger to use cash flows from maturing investments and loans that are not closely tied to customer relationships to reduce brokered deposits and short-term borrowings.

Total shareholders’ equity increased $20.8 million, or 5.9%, during the first nine months of 2017 to $376.7 million at September 30, 2017. The $20.9 million increase was primarily due to an $18.3 million increase in retained earnings for the nine months ended September 30, 2017. These increases were partially offset by the repurchase of 82,600 shares of Common Stock in open market transactions pursuant to our previously announced share repurchase program and the payment of $6.4 million of dividends on common stock.

The following table presents selected ratios for the Company for the three and nine months ended September 30, 2017 and 2016 and for the year ended December 31, 2016:

Selected Ratios

	Three months ended						Nine months ended						Twelve months
	September 30,						September 30,						ended
	(annualized)						(annualized)						December 31,
	2017			2016			2017			2016			2016
Return on Average Assets		1.05	%		0.79	%		1.00	%		0.62	%		0.63	%

Return on Average Equity		9.21	%		7.04	%		9.01	%		5.53	%		5.62	%

Period End Equity to Total Assets		11.60	%		11.12	%		11.60	%		11.12	%		11.17	%

Investment Securities and Other Earning Assets

We use investment securities to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral, where required. The composition of our investment portfolio changes from time to time as we consider our liquidity needs, interest rate expectations, asset/liability management strategies, and capital requirements.

Securities available-for-sale are carried at fair market value, with unrealized holding gains and losses reported in accumulated other comprehensive income, net of tax. Securities held-to-maturity are carried at amortized cost. At September 30, 2017, investment securities totaled $470.0 million compared to $494.3 million at December 31, 2016.

Securities available-for-sale of $51.6 million were sold in the nine months ended September 30, 2017 resulting in gross gains of $58 thousand. Securities available-for-sale of $124.4 million were sold during the nine months ended September 30, 2016 resulting in gross gains of $94 thousand and gross losses of $187 thousand.

At September 30, 2017, our available-for-sale investment portfolio had a net unrealized loss of $150 thousand compared to a $2.0 million net unrealized loss at December 31, 2016. The improvement in the unrealized loss is a result of the increase in market rates at period end. There were no securities with an unrealized loss deemed to be other than temporary at September 30, 2017 or December 31, 2016.

At September 30, 2017, we had $53.1 million in interest-bearing deposits at correspondent banks, all of which was on deposit with the Federal Reserve Bank, compared to $48.9 million in interest-bearing deposits at correspondent banks at December 31, 2016.

Loans

We consider asset quality to be of primary importance, and employ seasoned credit professionals and documented processes to ensure effective oversight of credit approvals and asset quality monitoring. Our internal loan policy is reviewed by our board of directors’ Loan and Risk Committee on an annual basis and our underwriting guidelines are reviewed and updated on a periodic basis. A formal loan review process is maintained both to ensure adherence to lending policies and to ensure accurate loan grading and is reviewed by our board of directors. Since inception, we have promoted the separation of loan underwriting from the loan production staff through our credit department. Currently, credit administration analysts or portfolio managers are responsible for underwriting and assigning proper risk grades for all commercial loans with exposure in excess of $500 thousand. Underwriting is completed on standardized forms including a loan approval form and supporting documents which outline the loan's structure and a detailed analysis of loan purpose, borrower strength (including individual and global cash flow worksheets), repayment sources and, when applicable, collateral positions and guarantor strength. The credit memorandum further identifies exceptions to policy and/or regulatory limits, total exposure, internal risk grades and other relevant credit information. Loans are approved or denied by varying levels of signature authority based on total customer relationship exposure. A management-level loan committee reviews all loans greater than $5 million and is responsible for approving all credits in excess of the chief credit officer and senior credit officers’ lending authority, which was $5 million at September 30, 2017.

Our loan underwriting policy contains LTV limits that are at or below levels required under regulatory guidance, when such guidance is available, including limitations for non-real estate collateral, such as accounts receivable, inventory and marketable securities. When applicable, we compare LTV with loan-to-cost guidelines and usually limit loan amounts to the lower of the two ratios. We also consider FICO scores and strive to uphold a high standard when extending loans to individuals. We have not underwritten any subprime, hybrid, no-documentation or low-documentation products.

All acquisition, construction and development (“AC&D”) loans, whether related to commercial or consumer borrowers, are subject to policies, guidelines and procedures specifically designed to properly identify, monitor and mitigate the risk associated with these loans. Loan officers receive and review a cost budget from the borrower at the time an AC&D loan is originated. Loan draws are monitored against the budgeted line items during the development period in order to identify potential cost overruns. Individual draw requests are verified through review of supporting invoices as well as site inspections performed by an external inspector. Additional periodic site inspections are performed by loan officers at times that do not coincide with draw requests in order to keep abreast of ongoing project conditions. Current AC&D loan origination is focused on 1 – 4 family residential construction for retail customers and 1-4 family residential home construction to selected well-qualified builders, as well as owner-occupied commercial and pre-leased commercial build-to-suit properties. Concentrations as a percent of capital are reported to the board of directors on a quarterly basis. Market conditions for AC&D loans has continued to improve due to increasing new home sales in our primary markets. At both September 30, 2017 and December 31, 2016, approximately 1% of our AC&D loan portfolio, commercial and consumer, falls under the watch list. Beginning with the First Capital acquisition and at September 30, 2017 the Bank’s concentration in commercial real estate (CRE) and construction and development (C&D) loans exceeded the thresholds specified in the federal banking agencies’ guidance emphasizing the need for enhanced risk management activities over the CRE and C&D concentrations. As a result, the Bank has instituted the enhanced risk management activities and reviews concentrations periodically with our board of directors’ Loan and Risk Committee.

Our home equity line of credit (“HELOC”) portfolio totaled approximately $172.2 million and $176.8 million at September 30, 2017 and December 31, 2016, respectively. HELOCs typically have a maturity of 10 years and are interest only or have a 1% repayment requirement. At maturity, the full balance is due or is underwritten for renewal. A review of the HELOC portfolio is performed on at least a semi-annual basis.

All loans are assigned an internal risk grade and are reviewed continuously for payment performance and updated through annual portfolio reviews. Loans on the Bank’s watch list are monitored through quarterly watch meetings and monthly impairment meetings. Classified loans are generally managed by a dedicated special asset team who is experienced in various loan rehabilitation and work out practices. Special asset loans are generally managed with a least-loss strategy.

At September 30, 2017, total loans, net of deferred fees and excluding loans held for sale, increased $17.4 million compared to December 31, 2016, due primarily to an increase in consumer loans. The composition of the portfolio remained steady, with commercial loans representing 78% of the total loan portfolio, and consumer loans representing 22% of the total loan portfolio at both September 30, 2017 and December 31, 2016. Our metropolitan markets, which include Charlotte, Raleigh and Wilmington, North Carolina, Greenville and Charleston, South Carolina and Richmond, Virginia, reported a $38.3 million, or 2.2%, decrease in total loans from December 31, 2016 to $1.67 billion at September 30, 2017. The community markets reported a $131.2 million, or 41.6% increase and central business units, which primarily include mortgage, builder finance, private banking and special assets, reported a $33.2 million, or 10.1% decrease.

Total commercial loans increased $4.9 million during the nine months ended September 30, 2017 and represent 78% of the loan portfolio at September 30, 2017. Commercial and industrial and CRE –Investor Income Producing increased $23.8 million and $26.3 million from December 31, 2016 and represents 16.9% and 31.7%, respectively. The increase reflects an increased focus on commercial and industrial and commercial real estate owner occupied lending. Acquisition, construction and development loans decreased $44.3 million and represent 13.9% of the portfolio, down from 15.9% at December 31, 2016. Total Consumer loans increased $12.1 million from December 31, 2016 to September 30, 2017. Residential mortgage increased $27.1 million and represented 7.1% of the loan portfolio. Residential construction decreased $8.6 million and represented 2.1% of the loan portfolio.

Asset Quality and Allowance for Loan Losses

Our Allowance for Loan Losses Committee is responsible for overseeing our allowance and works with our chief executive officer, senior financial officers, senior risk management officers and the Audit Committee of the board of directors in developing and achieving our allowance methodology and practices. Our allowance for loan loss methodology includes four components – specific reserves, quantitative reserves, qualitative reserves and reserves on PCI loans. Information about the four components and our policy and methodology used to estimate the allowance for loan losses, including details of the various environmental factors considered in the qualitative component, is presented in Note 5 – Loans and Allowance for Loan Losses to the 2016 Audited Financial Statements included in the 2016 Form 10-K and Note 5 – Loans and Allowance for Loan Losses to the Unaudited Financial Statements included in this Form 10-Q.

The following table presents a breakdown of our allowance for loan losses, by component and by loan product type, as of September 30, 2017 and December 31, 2016.

Allowance Allocation by Component

	September 30, 2017
	Specific Reserve					Quantitative Reserve					Qualitative Reserve					PCI Reserve
	$		% of Total Allowance			$		% of Total Allowance			$		% of Total Allowance			$		% of Total Allowance

Commercial:
Commercial and industrial	$	-		0.00	%	$	-		0.00	%	$	2,363		19.02	%	$	-		0.00	%
Shared National Credits		-		0.00	%		-		0.00	%		477		3.84	%		-		0.00	%
CRE - owner-occupied		-		0.00	%		45		0.36	%		1,345		10.83	%		-		0.00	%
CRE - investor income producing		-		0.00	%		-		0.00	%		2,888		23.25	%		-		0.00	%
AC&D - 1-4 family construction		-		0.00	%		-		0.00	%		613		4.93	%		-		0.00	%
AC&D - lots, land & development		-		0.00	%		-		0.00	%		510		4.11	%		-		0.00	%
AC&D - CRE		-		0.00	%		-		0.00	%		1,251		10.07	%		-		0.00	%
Other commercial		-		0.00	%		-		0.00	%		89		0.72	%		-		0.00	%
Consumer:
Residential mortgage		-		0.00	%		13		0.10	%		1,025		8.25	%		-		0.00	%
Home equity lines of credit:
Junior Lien HELOCS		169		1.36	%		74		0.60	%		488		3.93	%		-		0.00	%
Senior Lien HELOCS		-		0.00	%		88		0.71	%		516		4.15	%		-		0.00	%
Residential construction		-		0.00	%		130		1.05	%		186		1.50	%		-		0.00	%
Other loans to individuals		-		0.00	%		14		0.11	%		139		1.12	%		-		0.00	%
Total	$	169		1.36	%	$	364		2.93	%	$	11,890		95.71	%	$	-		0.00	%

	December 31, 2016
	Specific Reserve					Quantitative Reserve					Qualitative Reserve					Reserve on PCI Loans
	$		% of Total Allowance			$		% of Total Allowance			$		% of Total Allowance			$		% of Total Allowance
	(dollars in thousands)
Commercial:
Commercial and industrial	$	-		0.00	%	$	634		5.23	%	$	2,086		17.20	%	$	-		0.00	%
Shared National Credits		-		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%
CRE - owner-occupied		-		0.00	%		54		0.45	%		1,233		10.17	%		-		0.00	%
CRE - investor income producing		-		0.00	%		78		0.64	%		2,505		20.66	%		-		0.00	%
AC&D - 1-4 family construction		-		0.00	%		-		0.00	%		567		4.68	%		-		0.00	%
AC&D - lots, land, & development		-		0.00	%		-		0.00	%		526		4.34	%		-		0.00	%
AC&D - CRE		-		0.00	%		75		0.62	%		1,410		11.63	%		-		0.00	%
Other commercial		-		0.00	%		-		0.00	%		126		1.04	%		-		0.00	%
Consumer:
Residential mortgage		-		0.00	%		153		1.26	%		687		5.67	%		-		0.00	%
HELOC		178		1.47	%		273		2.25	%		940		7.75	%		-		0.00	%
Residential construction		20		0.16	%		128		1.06	%		287		2.37	%		-		0.00	%
Other loans to individuals		-		0.00	%		-		0.00	%		165		1.36	%		-		0.00	%

Total	$	198		1.63	%	$	1,395		11.51	%	$	10,532		86.86	%	$	-		0.00	%

The allowance for loan losses was $12.4 million, or 0.51% of total loans, at September 30, 2017 compared to $12.1 million, or 0.50% of total loans, at December 31, 2016. The allowance for loan losses is increased for (reduced by) provision for (recovery of) loan losses and reduced by loans charged off, net of recoveries. The increase in the allowance for loan losses from December 31, 2016 was caused by a $1.4 million increase in the qualitative component of the allowance primarily due to loan growth of $17.4 million from December 31, 2016 and an increase in the minimum loss rate component of the qualitative reserve. The increase was partially offset by a decrease in the quantitative factor due to a decrease in historical loss rates applied to the portfolio as older periods with higher rates of net charge-offs are replaced with more recent periods with higher rates of recoveries.

In accordance with GAAP, loans acquired from Community Capital, Citizens South, Provident Community and First Capital were adjusted to reflect estimated fair market value at acquisition and the associated allowance for loan losses was eliminated. At September 30, 2017, acquired loans comprised 18% of our total loans, compared to 26% at December 31, 2016. The ratio of the adjusted allowance for loan losses to total loans (non-GAAP), which includes the remaining acquisition accounting fair market value adjustments for acquired loans, was 1.42% at September 30, 2017 and 1.64% at December 31, 2016. Adjusted allowance for loan losses to loans is a non-GAAP financial measure, which is provided as supplemental information for comparing the combined allowance and fair market value adjustments to the combined acquired and non-acquired loan portfolios. Fair market value adjustments are available only for losses on acquired loans. For a reconciliation to the most comparable GAAP measure, see “Non-GAAP Financial Measures” above.

While management believes that it uses the best information available to determine the allowance for loan losses, and that the Company’s allowance for loan losses is maintained at a level appropriate in light of the risk inherent in our loan portfolio based on an assessment of various factors affecting the loan portfolio, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. The allowance for loan losses to total loans may increase if our loan portfolio deteriorates due to economic conditions or other factors.

We evaluate and estimate off-balance sheet credit exposure at the same time we estimate credit losses for loans by a similar process, including an estimate of commitment usage levels. 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 September 30, 2017 and December 31, 2016, $125 thousand was recorded as an other liability for off-balance sheet credit exposure.

Nonperforming Assets

Nonperforming assets, which consist of nonaccrual loans, accruing troubled debt restructurings (“TDRs”), accruing loans for which payments are 90 days or more past due, and OREO, totaled $12.2 million, or 0.38% of total assets, at September 30, 2017 compared to $15.4 million, or 0.47% of total assets, at December 31, 2016. Nonperforming loans, which consist of nonaccrual loans, accruing TDRs and accruing loans for which payments are 90 days or more past due, decreased $3.3 million, or 25.6%, to $9.6 million, or 0.40% of total loans at September 30, 2017, compared to $12.9 million, or 0.54% of total loans, at December 31, 2016. The decrease in nonperforming loans was due primarily to improved payment history for Park Sterling legacy borrowers.

It is our general policy to place a loan on nonaccrual status when it is over 90 days past due and there is reasonable doubt that all principal and interest will be collected. Nonaccrual loans decreased $1.7 million, or 19.8%, to $7.1 million at September 30, 2017 from $8.8 million at December 31, 2016. Nonaccrual TDRs are included in the nonaccrual loan amounts noted. At September 30, 2017, nonaccrual TDR loans were $81 thousand and had no related allowance recorded. At December 31, 2016, nonaccrual TDR loans were $374 thousand and had no related allowances recorded. Accruing TDRs totaled $2.4 million at September 30, 2017 and $2.5 million at December 31, 2016 and had related allowances of $170 thousand and $192 thousand recorded at September 30, 2017 and December 31, 2016, respectively.

We grade loans with an internal risk grade scale of 10 through 90, with grades 10 through 50 representing “pass” loans, grade 60 representing “special mention” and grades 70 and higher representing “classified” credit grades, respectively. Loans are reviewed on a regular basis internally, and at least annually by an external loan review group, to ensure loans are graded appropriately. Credits are reviewed for past due trends, declining cash flows, significant decline in collateral value, weakened guarantor financial strength, management concerns, market conditions and other factors that could jeopardize the repayment performance of the loan. Documentation deficiencies including collateral perfection and outdated or inadequate financial information are also considered in grading loans.

All loans graded 60 or worse (criticized or classified) are included on our list of “watch loans,” which represent potential problem loans, and are updated periodically and reported to both management and the Loan and Risk Committee of the board of directors quarterly. Impairment analyses are performed on all classified loans (risk grade of 70 or worse) generally greater than $150 thousand as well as selected other loans as deemed appropriate. At September 30, 2017, we maintained “watch loans” totaling $46.3 million compared to $31.9 million at December 31, 2016. Approximately $12.8 million and $8.4 million of the watch loans at September 30, 2017 and December 31, 2016, respectively, were acquired loans. The future level of watch loans cannot be predicted, but rather will be determined by several factors, including overall economic conditions in the markets served.

We employ one of three potential methods to determine the fair value of impaired loans:

1) Fair value of collateral method. This is the most common method and is used when the loan is collateral dependent. In most cases, we will obtain an “as is” appraisal from a third-party appraisal group. The fair value from that appraisal may be adjusted downward for liquidation discounts for foreclosure or quick sale scenarios, as well as any applicable selling costs.

2) Cash flow method. This method is used when we believe that we will collect the loan primarily from cash flows generated by the borrower.

3) Observable market value method. This is the method used least often by us. Fair value is based on the offering price from a note buyer, in either the local community or a national loan sale advisor.

With respect to nonaccrual commercial and nonaccrual consumer AC&D loans, we typically utilize an “as-is,” or “discounted,” value to determine an appropriate fair value. When appraising projects with an expected cash flow to be received over a period of time, such as acquisition and development/land development loans, fair value is determined using a discounted cash flow methodology. We also account for expected selling and holding costs when determining an appropriate property value.

At September 30, 2017, OREO totaled $2.6 million, all of which is recorded at values based on our most recent appraisals. At December 31, 2016, OREO totaled $2.4 million, all of which was recorded at values based on the most recent appraisals then available. This increase in OREO from December 31, 2016 was due to additions of $1.5 million during the first nine months of the year offset by sales of $1.0 million and writedowns of $0.3 million..

Deposits and Other Borrowings

We offer a broad range of deposit instruments, including personal and business checking accounts, individual retirement accounts, business and personal money market accounts and certificates of deposit, at competitive interest rates. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit, and the interest rate, among other factors. We regularly evaluate the internal cost of funds, survey rates offered by competing institutions, review cash flow requirements for lending and liquidity and execute rate changes when deemed appropriate.

Total deposits at September 30, 2017 were $2.47 billion, a decrease of $44.8 million, or 1.8%, from December 31, 2016. Money market deposits decreased $15.4 million, or 2.4%, and represented 25% of total deposits at September 30, 2017. Non-interest bearing demand deposits, interest-bearing demand deposits and savings deposits increased $28.9 million, or 5.5%. Brokered money market accounts decreased $20.0 million, or 13.4%. Certificates of deposit and other time deposits decreased $64.2 million or 9.8%, and represented 23.9% of total deposits at September 30, 2017. The following is a summary of deposits at September 30, 2017 and December 31, 2016:

	September 30,		December 31,
	2017		2016
	(dollars in thousands)
Noninterest bearing demand deposits	$	550,196	$	521,295
Interest-bearing demand deposits		477,288		459,238
Money market deposits		615,998		631,414
Savings		106,117		98,295
Brokered deposits		129,588		149,602
Certificates of deposit and other time deposits		589,736		653,908
Total deposits	$	2,468,923	$	2,513,752

Total borrowings, net of acquisition fair market value adjustments, increased $25.5 million to $373.8 million at September 30, 2017 compared to $348.3 million at December 31, 2016. Borrowings at September 30, 2017 include $34.4 million (after acquisition accounting fair market value adjustments) of Tier 1-eligible junior subordinated debt.

The following table details short and long-term borrowings at September 30, 2017 and December 31, 2016:

					September 30, 2017					December 31, 2016
							Weighted					Weighted
		Interest					Average					Average
	Maturity	Rate			Balance		Interest Rate			Balance		Interest Rate
Short-term borrowings:
FHLB Daily Rate Credit	5/18/2018		1.3200	%	$	-				$	80,000
FHLB Fixed Rate Credit	1/12/2017		0.6400	%		-					55,000
FHLB Fixed Rate Credit	1/12/2017		0.6400	%		-					75,000
FHLB Adjustable Rate Credit	1/26/2017		0.6300	%		-					75,000
FHLB Fixed Rate Credit	11/6/2017		1.1500	%		60,000					-
FHLB Fixed Rate Credit	11/9/2017		1.1900	%		105,000					-
FHLB Fixed Rate Credit	11/20/2017		1.1700	%		20,000					-
FHLB Fixed Rate Credit	10/26/2017		1.1300	%		125,000					-
Total short-term borrowings						310,000		1.16	%		285,000		0.60	%

Long-term borrowings:
Junior subordinated debt	6/15/2036		2.8700	%		6,708				$	6,564
Junior subordinated debt	12/15/2035		2.8900	%		10,243					10,029
Junior subordinated debt	10/01/36		3.0750	%		1,533					2,789
Junior subordinated debt	03/01/37		3.0561	%		6,965					5,558
Junior subordinated debt	09/21/36		3.0200	%		3,898					3,849
Subordinated loan	12/01/25		4.8012	%		4,648					4,712
Senior unsecured term loan	12/18/22		4.7500	%		29,770					29,736
Total long-term borrowings						63,765		3.93	%		63,237		3.73	%
	Total borrowings				$	373,765				$	348,237

Results of Operations

The following table summarizes components of net income and the changes in those components for the three and nine months ended September 30, 2017 and 2016:

Condensed Consolidated Statements of Income


	Three Months Ended											Nine Months Ended
	September 30,											September 30,
	2017			2016		Change						2017		2016		Change
	(Unaudited)					$			%			(Unaudited)				$			%
	(Dollars in thousands)											(Dollars in thousands)
Gross interest income	$	32,291		$	29,444	$	2,847			9.7	%	$	96,080	$	89,304	$	6,776			7.6	%
Gross interest expense		4,457			3,621		836			23.1	%		12,578		10,834		1,744			16.1	%
Net interest income		27,834			25,823		2,011			7.8	%		83,502		78,470		5,032			6.4	%

Provision for (recovery of) loan losses		(353	)		642		(995	)		-155.0	%		325		2,080		(1,755	)		-84.4	%

Noninterest income		5,380			5,447		(67	)		-1.2	%		16,266		15,549		717			4.6	%
Noninterest expense		20,142			21,112		(970	)		-4.6	%		62,233		69,211		(6,978	)		-10.1	%
Net income before taxes		13,425			9,516		3,909			41.1	%		37,210		22,728		14,482			63.7	%

Income tax expense		4,731			3,192		1,539			48.2	%		12,500		8,111		4,389			54.1	%

Net income	$	8,694		$	6,324	$	2,370			37.5	%	$	24,710	$	14,617	$	10,093			69.0	%

Net Income. Net income for the three months ended September 30, 2017 was $8.7 million, compared to $6.3 million for the three months ended September 30, 2016. Changes in net income from the third quarter of 2017 include a 7.8% increase in net interest income, a 1.2% decrease in noninterest income and a 4.6% decrease in noninterest expense levels. Annualized return on average assets increased during the three-month period ended June 30, 2017 to 1.05% from 0.79% for the same period in 2016 due primarily to overall improved financial performance through organic growth, leveraging acquisitions, and achieving operating efficiency. Annualized return on average equity increased to 9.21% for the three-month period ended September 30, 2017 from 7.04% for the three-month period ended September 30, 2016 due to improved performance associated with organic growth.

Net income for the nine months ended September 30, 2017, was $24.7 million compared to $14.6 million for the same period in 2016. This increase in net income is due to increases in net interest income and noninterest income, as well as decreases in noninterest expenses and provision for loan losses. Annualized return on average assets for the nine-month periods ended September 30, 2017 and 2016 was 1.00% and 0.62%, respectively. Adjusted annualized return on average assets (non-GAAP) for the nine-month periods ended September 30, 2017 and 2016 was 1.05% and 0.84%, respectively. Annualized return on average equity increased to 9.01% for the nine-month period ended September 30, 2017 from 5.53% for the nine-month period ended September 30, 2016. Adjusted annualized return on average equity (non-GAAP) increased to 9.43% for the nine-month period ended September 30, 2017 from 7.49% for the nine-month period ended September 30, 2016. Adjusted return on average assets and adjusted return on average equity are non-GAAP financial measures. For a reconciliation to the most comparable GAAP measure see “Non-GAAP Financial Measures” above.

Net Interest Income. Our largest source of earnings is net interest income, which is the difference between interest income on interest-earning assets and interest expense paid on deposits and other interest-bearing liabilities. The primary factors that affect net interest income are changes in volume and yields of earning assets and interest-bearing liabilities, which are affected in part by management’s responses to changes in interest rates through asset/liability management. Net interest income increased to $27.8 million for the three-month period ended September 30, 2017 from $25.8 million for the three months ended September 30, 2016. The increase is primarily due to a higher yield on interest-earning assets and an increase in average interest earning assets, which result primarily from organic loan growth. Net interest income increased to $83.5 million for the nine-month period ended September 30, 2017 from $78.5 million for the nine months ended September 30, 2016. The increase is again due to a higher yield on interest-earning assets and an increase in average interest earning assets, which represented organic loan growth.

Total average interest-earning assets increased to $3 billion for both the three and nine months ended September 30, 2017 respectively, compared to $2.9 billion in the three and nine months ended September 30, 2016. Average balances of total interest-bearing liabilities increased to $2.4 billion in the three and nine-month periods ended September 30, 2017, compared to $2.3 billion in the same periods in 2016. Our net interest margin increased in the three-month period ended September 30, 2017 to 3.65% from 3.54% in the corresponding period in 2016. Our net interest margin increased to 3.70% in the nine-month period ended September 30, 2017 from 3.67% in the corresponding period in 2016.

The following table summarizes net interest income and average yields and rates paid for the periods indicated:

Average Balance Sheets and Net Interest Analysis

	For the Three Months Ended September 30,
	2017								2016
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate (3)			Balance			Expense		Rate (3)
Assets	(dollars in thousands)
Interest-earning assets:
Loans, including fees (1)(2)	$	2,463,157		$	28,924		4.66	%	$	2,348,297		$	26,521		4.49	%
Federal funds sold		697			2		1.14	%		971			1		0.41	%
Taxable investment securities		468,621			2,809		2.40	%		483,815			2,583		2.14	%
Tax-exempt investment securities		13,049			132		4.05	%		14,013			137		3.91	%
Other interest-earning assets		81,181			424		2.07	%		53,088			202		1.51	%

Total interest-earning assets	$	3,026,705			32,291		4.22	%		2,900,184			29,444		4.04	%

Allowance for loan losses		(13,216	)							(11,054	)
Cash and due from banks		36,802								34,703
Premises and equipment		62,500								65,332
Goodwill		63,317								63,076
Intangible assets		10,281								12,120
Other assets		106,240								122,438
Total assets	$	3,292,629							$	3,186,799

Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand	$	480,574		$	90		0.07	%	$	426,755		$	68		0.06	%
Savings and money market		739,704			626		0.34	%		744,930			777		0.41	%
Time deposits - core		598,652			1,251		0.83	%		653,937			1,179		0.72	%
Brokered deposits		134,596			578		1.70	%		156,867			376		0.95	%
Total interest-bearing deposits		1,953,526			2,545		0.52	%		1,982,489			2,400		0.48	%
Short-term borrowings		329,293			986		1.19	%		235,870			345		0.58	%
Long-term FHLB borrowings		29,764			371		4.95	%		29,718			379		5.07	%
Subordinated debt		33,914			555		6.49	%		33,262			497		5.94	%
Total borrowed funds		392,971			1,912		1.93	%		298,850			1,221		1.63	%

Total interest-bearing liabilities		2,346,497			4,457		0.75	%		2,281,339			3,621		0.63	%

Net interest rate spread					27,834		3.47	%					25,823		3.41	%

Noninterest-bearing demand deposits		544,402								502,158
Other liabilities		27,267								45,725
Shareholders' equity		374,463								357,577

Total liabilities and shareholders' equity	$	3,292,629							$	3,186,799

Net interest margin							3.65	%							3.54	%

(1) Average loan balances include nonaccrual loans.

(2) Interest income and yields include accretion from acquisition accounting adjustments associated with acquired loans.

(3) Yield/rate calculated on Actual/Actual day count basis, except for yield on investments which is calculated on a 30/360 day count basis.

	For the Nine Months Ended September 30,
	2017								2016
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate (3)			Balance			Expense		Rate (3)
Assets	(dollars in thousands)
Interest-earning assets:
Loans, including fees (1)(2)	$	2,455,429		$	85,904		4.68	%	$	2,307,380		$	80,374		4.65	%
Federal funds sold		812			6		0.99	%		3,894			14		0.48	%
Taxable investment securities		481,299			8,729		2.42	%		485,004			7,910		2.18	%
Tax-exempt investment securities		13,221			402		4.05	%		14,728			421		3.81	%
Other interest-earning assets		69,102			1,039		2.01	%		48,158			585		1.62	%

Total interest-earning assets		3,019,863			96,080		4.25	%		2,859,164			89,304		4.17	%

Allowance for loan losses		(12,788	)							(10,296	)
Cash and due from banks		36,825								35,488
Premises and equipment		62,759								65,956
Goodwill		63,317								62,881
Intangible assets		10,730								12,470
Other assets		108,713								125,951

Total assets	$	3,289,419							$	3,151,614

Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand	$	476,079		$	263		0.07	%	$	426,659		$	235		0.07	%
Savings and money market		737,203			1,796		0.33	%		741,074			2,447		0.44	%
Time deposits - core		617,908			3,653		0.79	%		683,302			3,670		0.72	%
Brokered deposits		142,390			1,738		1.63	%		141,009			926		0.88	%
Total interest-bearing deposits	$	1,973,580			7,450		0.50	%		1,992,044			7,278		0.49	%
Short-term borrowings		323,077			2,409		1.00	%		197,043			890		0.60	%
Long-term FHLB borrowings		29,753			1,113		5.00	%		53,364			1,229		3.08	%
Subordinated debt		33,753			1,606		6.36	%		33,098			1,437		5.78	%
Total borrowed funds		386,583			5,128		1.77	%		283,505			3,556		1.68	%

Total interest-bearing liabilities		2,360,163			12,578		0.71	%		2,275,549			10,834		0.64	%

Net interest rate spread					83,502		3.54	%					78,470		3.54	%

Noninterest-bearing demand deposits		531,162								480,772
Other liabilities		31,346								42,396
Shareholders' equity		366,748								352,897

Total liabilities and shareholders' equity	$	3,289,419							$	3,151,614

Net interest margin							3.70	%							3.67	%

(1) Average loan balances include nonaccrual loans.

(2) Interest income and yields include accretion from acquisition accounting adjustments associated with acquired loans.

(3) Yield/rate calculated on Actual/Actual day count basis, except for yield on investments which is calculated on a 30/360 day count basis.

Provision for (Recovery of) Loan Losses. Our provision for loan losses decreased $995 thousand to a recovery of loan losses of $353 thousand during the three months ended September 30, 2017, compared to $642 thousand provision for loan losses recorded during the corresponding period in 2016. Our provision for loan losses decreased $1.8 million, or 84.4%, to a provision of $325 thousand during the nine months ended September 30, 2017, from a $2.0 million provision during the corresponding period in 2016. Included in the loan loss provision for nine months ended September 30, 2017 was a decrease in allowance for loan losses of $1.0 million for the quantitative component primarily due to decreased historical loss rates as older periods with higher rates of net charge-offs are replaced with more recent periods with higher rates of net recoveries from December 31, 2016. The decrease in the quantitative component for the nine months ended September 30, 2017 was offset by an increase in the provision for purchased performing loans of $197 thousand and a $1.4 million increase in the qualitative component of the allowance.

We had $74 thousand in net recoveries during the three months ended September 30, 2017 compared to net recoveries of $97 thousand during the corresponding period in 2016. We had $27 thousand in net charge-offs during the nine months ended September 30, 2017 compared to net recoveries of $467 thousand during the corresponding period in 2016. The low level of net charge-off and net recoveries during the periods is indicative of very low level of nonperforming loans. There were no charge-offs in excess of fair market value adjustments on PCI loans during the three and nine months ended September 30, 2017.

Noninterest Income. The following table presents components of noninterest income for the three and nine months ended September 30, 2017 and 2016:

Noninterest Income

	Three months ended											Nine months ended
	September 30,											September 30,
	2017		2016			Change						2017		2016			Change
	(Unaudited)					$			%			(Unaudited)					$			%
	(dollars in thousands)
Service charges on deposit accounts	$	1,737	$	1,671		$	66			3.9	%	$	5,144	$	4,688		$	456			9.7	%
Income from fiduciary activities		476		582			(106	)		-18.2	%		1,526		1,961			(435	)		-22.2	%
Commissions and fees from investment brokerage		147		157			(10	)		-6.4	%		430		444			(14	)		-3.2	%
Income from capital markets		927		680			247			36.3	%		2,181		1,515			666			44.0	%
Gain (loss) on sale of securities available for sale		-		-			-			100.0	%		58		(93	)		151			100.0	%
ATM and card income		741		730			11			1.5	%		2,206		2,079			127			6.1	%
Mortgage banking income		471		1,015			(544	)		-53.6	%		2,207		2,663			(456	)		-17.1	%
Income from bank-owned life insurance		578		532			46			8.6	%		1,732		2,046			(314	)		-15.3	%
Amortization of indemnification asset and true-up liability expense		-		(139	)		139			-100.0	%		-		(311	)		311			-100.0	%
Other noninterest income		303		219			84			38.4	%		782		557			225			40.4	%

Total noninterest income	$	5,380	$	5,447		$	(67	)		-1.2	%	$	16,266	$	15,549		$	717			4.6	%

Noninterest income decreased $67 thousand, or 1.2%, for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. Noteworthy changes among categories include (i) a $544 thousand decrease in mortgage banking income due to lower volume; (ii) a $106 thousand decrease in income from fiduciary activities; (iii) a $247 thousand increase in income from capital markets due to increased volume; (iv) a $139 thousand decrease in the amortization of indemnification asset and true-up liability expense due to the termination of the FDIC loss sharing agreement in 2016; and (v) a $66 thousand increase in the service charges on deposit accounts.

Noninterest income increased $717 thousand, or 4.6%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Noteworthy changes among categories include (i) a $666 thousand increase in income from capital markets due to increased loan swap activity; (ii) a $456 thousand increase in service charges on deposit accounts, as a result of increased volume, especially in the first quarter of 2017; (iii) a $311 thousand decrease in amortization of indemnification asset and true-up liability expense due to the termination of the FDIC loss sharing agreement in 2016; (iv) a $430 thousand decrease in income from fiduciary activities due to declines in assets under management; (v) a $456 thousand decrease in the mortgage banking income due to a decrease in volume; and (vi) a $312 decrease in income from bank-owned life insurance due to income due to the absence of death benefits received in the first quarter of 2016.

Noninterest Expense. The following table presents components of noninterest expense for the three and nine months ended September 30, 2017 and 2016:

Noninterest Expense

	Three months ended											Nine months ended
	September 30,											September 30,
	2017		2016			Change						2017		2016		Change
	(Unaudited)					$			%			(Unaudited)				$			%
	(dollars in thousands)
Salaries and employee benefits	$	11,058	$	11,755		$	(697	)		-5.9	%	$	33,929	$	36,547	$	(2,618	)		-7.2	%
Occupancy and equipment		3,007		3,111			(104	)		-3.3	%		8,838		9,277		(439	)		-4.7	%
Advertising and promotion		179		44			135			306.8	%		465		832		(367	)		-44.1	%
Legal and professional fees		954		978			(24	)		-2.5	%		3,387		2,653		734			27.7	%
Deposit charges and FDIC insurance		378		405			(27	)		-6.7	%		1,305		1,315		(10	)		-0.8	%
Data processing and outside service fees		2,049		2,331			(282	)		-12.1	%		5,881		10,078		(4,197	)		-41.6	%
Communication fees		345		532			(187	)		-35.2	%		1,268		1,520		(252	)		-16.6	%
Core deposit intangible amortization		454		458			(4	)		-0.9	%		1,362		1,374		(12	)		-0.9	%
Net cost of operation of other real estate owned		20		(92	)		112			-121.7	%		435		244		191			78.3	%
Loan and collection expense		175		425			(250	)		-58.8	%		502		735		(233	)		-31.7	%
Postage and supplies		106		115			(9	)		-7.8	%		355		479		(124	)		-25.9	%
Other noninterest expense		1,417		1,050			367			35.0	%		4,506		4,157		349			8.4	%

Total noninterest expense	$	20,142	$	21,112		$	(970	)		-4.6	%	$	62,233	$	69,211	$	(6,978	)		-10.1	%

Noninterest expense was $20.1 million for the three months ended September 30, 2017, a decrease of $970 thousand, or 4.6%, from $21.1 million for the corresponding period in 2016. Adjusted noninterest expense (non-GAAP), which excludes merger-related costs of $592 thousand and $1.5 million for the three-month periods ended September 30, 2017 and September 30, 2016, respectively, decreased $75 thousand for the three months ended September 30, 2017, compared to the corresponding period in the prior year reflecting savings from the completion of the First Capital systems conversion in May 2016. Adjusted noninterest expense is a non-GAAP measure. For reconciliation to the most comparable GAAP measure, see “Non-GAAP Financial Measures” above.

Noteworthy changes among categories include (i) salaries and employee benefits decreased $697 thousand, or 5.9%, from the third quarter of 2016, as a result of a decreased headcount; (ii) data processing and outside service fees decreased $282 thousand, or 12.1%, due to the cost savings related to the First Capital acquisition; (iii) other noninterest expense increased $367 thousand in the third quarter of 2017 due primarily to a franchise tax expense accrual reduction recorded in 2016; (iv) advertising and promotion increased $135 thousand due to a one time reduction to expense in 2016 for an accrual true up; and (v) loan and collection expense decreased $250 thousand as a result of improved asset quality.

Total noninterest expense was $62.2 million for the nine months ended September 30, 2017, a decrease of $6.9 million, or 10.1%, from $69.2 million for the corresponding period in 2016. Excluding merger-related expenses of $1.5 million and $7.9 million for the nine-month periods ended September 30, 2017 and 2016, respectively, adjusted noninterest expense (non-GAAP) decreased $545 thousand, or 0.89%, for the nine months ended September 30, 2017, compared to the corresponding period in the prior year. The decrease is primarily due to savings from the completion of the First Capital systems conversion in May 2016.

Noteworthy changes among categories include: (i) data processing and outside service fees decreased $4.1 million, or 41.6%, to $5.9 million for the nine-month period ended September 30, 2017, compared to $10.1 million in the comparable period of 2016, due primarily to the absence of system conversion costs incurred in 2016 related to the First Capital merger; (ii) salaries and employee benefits expenses decreased $2.6 million, or 7.2%, to $33.9 million for the nine months ended September 30, 2017, compared to $36.6 million in the comparable period of 2016, due to the absence of merger-related severance costs of $1.4 million incurred in 2016 and improved operating efficiency following the First Capital systems conversion; (iii) legal and professional fees increased $734 thousand compared to the nine months ended September 30, 2016 due primarily to merger-related professional fees associated with the South State merger; (iv) occupancy and equipment decreased $439 thousand due to office consolidations; (v) advertising and promotion decreased $367 thousand due to decreased advertising spending; and (vi) other noninterest expense costs increased $349 thousand from the nine months ended September 30, 2016, due to a one time reduction to expense in 2016 for an accrual true up.

Income Taxes. We generate non-taxable income from tax-exempt investment securities and loans as well as from bank-owned life insurance. Accordingly, the level of such income in relation to income before taxes affects our effective tax rate. For the three months ended September 30, 2017, we recognized income tax expense of $4.7 million compared to income tax expense of $3.1 million for the same period in 2016. The effective tax rate for the three months ended September 30, 2017 is 35.24% compared to 33.54% for the same period in 2016. The increase in the effective tax rate during the third quarter of 2017 was due to higher nondeductible expenses associated with the South State merger.

For the nine months ended September 30, 2017, we recognized income tax expense of $12.5 million compared to income tax expense of $8.1 million for the same period in 2016. The effective tax rate for the nine months ended September 30, 2017 is 33.59% compared to 35.69% for the same period in 2016. The decrease in the effective tax rate from 2016 is due to the recognition of excess tax benefits on stock-based compensation during 2017.

Liquidity and Capital Resources

Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and to fund operations. We strive to maintain sufficient liquidity to fund future loan demand and to satisfy fluctuations in deposit levels. This is achieved primarily in the form of available lines of credit from various correspondent banks, the FHLB, the Federal Reserve Discount Window and through our investment portfolio. In addition, we may have short-term investments at our primary correspondent bank in the form of Federal funds sold. Liquidity is managed by an asset/liability policy approved by the board of directors and administered by an internal Asset-Liability Management Committee (the “ALCO”). The ALCO reports monthly asset/liability-related matters to the Loan and Risk Committee of the board of directors.

Our internal liquidity ratio (total liquid assets, or cash and cash equivalents, divided by deposits and short-term liabilities) at September 30, 2017 was 13.84% compared to 12.89% at December 31, 2016. Both ratios exceeded our minimum internal target of 10%. In addition, at September 30, 2017, we had $341.8 million of credit available from the FHLB, $310.9 million of credit available from the Federal Reserve Discount Window, and available lines totaling $70.0 million from correspondent banks.

At September 30, 2017, the Company had $698.5 million of pre-approved but unused lines of credit, $6.7 million of standby letters of credit and $4.2 million of commercial letters of credit.

Our capital position is reflected in our shareholders’ equity, subject to certain adjustments for regulatory purposes. Shareholders’ equity, or capital, is a measure of our net worth, soundness and viability. We continue to remain in a well-capitalized position. Shareholders’ equity at September 30, 2017 was $376.7 million, compared to $355.8 million at December 31, 2016. The $20.9 million increase was due to an $18.3 million increase in retained earnings for the nine months ended September 30, 2017 and a $1.8 million improvement in accumulated other comprehensive income caused by the effect of market interest rate increases on the fair value of available for sale investment securities. These increases were partially offset by the repurchase of 82,600 shares of Common Stock in open market transactions pursuant to our previously announced share repurchase program and a payment of $6.4 million of dividends on common stock.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by bank regulators that, if taken could have a direct material effect on our financial statements. Prompt corrective action provisions are not applicable to bank holding companies. For additional information about regulatory capital requirements, see Part I, Item 1 – Business of the 2016 Form 10-K and Note 13 – Regulatory Matters to the 2016 Audited Financial Statements included in the 2016 Form 10-K.

At September 30, 2017 and December 31, 2016, both the Company and the Bank were “well capitalized”. Actual and required capital levels at September 30, 2017 and December 31, 2016 are presented below:

	Capital Ratios at September 30, 2017
	Actual					Minimum Basel III Phase In Requirement					Minimum Basel III Fully Phased In Requirements					Well Capitalized Requirement
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
The Bank
Total capital (to risk-weighted assets)	$	369,311		13.89	%	$	212,733		8.00	%	$	279,211		10.50	%	$	265,916		10.00	%
Tier 1 capital (to risk-weighted assets)		356,888		13.42	%		159,549		6.00	%		226,028		8.50	%		212,733		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)		356,888		13.42	%		119,662		4.50	%		186,141		7.00	%		172,845		6.50	%
Tier 1 capital (to average assets)		356,888		11.10	%		128,602		4.00	%		128,602		4.00	%		160,752		5.00	%
Risk Weighted Assets		2,659,157
Average Assets for Tier 1		3,215,042

The Company
Total capital (to risk-weighted assets)	$	346,429		13.03	%	$	212,650		8.00	%	$	279,103		10.50	%		N/A		N/A
Tier 1 capital (to risk-weighted assets)		334,006		12.57	%		159,487		6.00	%		225,940		8.50	%		N/A		N/A
Common equity Tier 1 capital (to risk-weighted assets)		308,102		11.59	%		119,615		4.50	%		186,069		7.00	%		N/A		N/A
Tier 1 capital (to average assets)		334,006		10.36	%		128,942		4.00	%		128,942		4.00	%		N/A		N/A
Risk Weighted Assets		2,658,122
Average Assets for Tier 1		3,223,539

	Capital Ratios at December 31, 2016
	Actual					Minimum Basel III Phase In Requirement					Minimum Basel III Fully Phased In Requirements					Well Capitalized Requirement
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
The Bank
Total capital (to risk-weighted assets)	$	351,007		13.44	%	$	208,926		8.00	%	$	274,215		10.50	%	$	261,158		10.00	%
Tier 1 capital (to risk-weighted assets)		338,882		12.98	%		156,695		6.00	%		221,984		8.50	%		208,926		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)		338,882		12.98	%		117,521		4.50	%		182,810		7.00	%		169,752		6.50	%
Tier 1 capital (to average assets)		338,882		10.77	%		125,918		4.00	%		125,918		4.00	%		157,397		5.00	%
Risk Weighted Assets		2,611,576
Average Assets for Tier 1		3,147,940

The Company
Total capital (to risk-weighted assets)	$	326,168		12.48	%	$	209,040		8.00	%	$	274,365		10.50	%		N/A		N/A
Tier 1 capital (to risk-weighted assets)		314,043		12.02	%		156,780		6.00	%		222,105		8.50	%		N/A		N/A
Common equity Tier 1 capital (to risk-weighted assets)		288,594		11.04	%		117,585		4.50	%		182,910		7.00	%		N/A		N/A
Tier 1 capital (to average assets)		314,043		9.92	%		126,627		4.00	%		126,627		4.00	%		N/A		N/A
Risk Weighted Assets		2,613,003
Average Assets for Tier 1		3,165,665

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

In the ordinary course of operations, we may enter into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises and equipment.

Information about our off-balance sheet risk exposure is presented in Note 15 - Off-Balance Sheet Risk of the 2016 Audited Financial Statements included in the 2016 Form 10-K. As part of ongoing business, we have not participated in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (“SPE”s), which generally are established for facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2017, we were not involved in any unconsolidated SPE transactions.

Impact of Inflation and Changing Prices

As a financial institution, we have an asset and liability make-up that is distinctly different from that of an entity with substantial investments in plant and inventory because the major portions of a commercial bank’s assets are monetary in nature. As a result, our performance may be significantly influenced by changes in interest rates. Although we, and the banking industry, are more affected by changes in interest rates than by inflation in the prices of goods and services, inflation is a factor that may influence interest rates. However, the frequency and magnitude of interest rate fluctuations do not necessarily coincide with changes in the general inflation rate. Inflation does affect operating expenses in that personnel expenses and the cost of supplies and outside services tend to increase more during periods of high inflation.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in our quantitative and qualitative disclosures about market risk as of September 30, 2017 from those disclosed or incorporated in Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk.” in our 2016 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, the management of the Company, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the third fiscal quarter of 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, the Company may be a party to various legal proceedings from time to time. There are no material pending legal proceedings to which the Company is a party or of which any of its property is subject. In addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on its business, operating results or financial condition.

As previously disclosed, on August 14, 2017, a putative stockholder class action lawsuit captioned Roskopf v. Park Sterling Corp., C.A. No. 3:17-cv-00483 (the “Roskopf Action”), was filed in the U.S. District Court for the Western District of North Carolina in connection with the South State Merger and on August 15, 2017, a similar putative stockholder class action lawsuit captioned Parshall v. Park Sterling Corp., C.A. No. 3:17-cv-00490 was filed in the same court (the “Parshall Action” and together with the Roskopf Action, the “Actions”). Both Actions named as defendants the Company and the Company’s board of directors, and the Parshall Action also named South State as a defendant. The complaints in the Actions assert that the Company, the Company’s board of directors and, in the Parshall Action, South State, omitted and/or provided misleading information in the registration statement on Form S-4 filed with the SEC in connection with the Merger in violation of the Securities Exchange Act of 1934, as amended, and related SEC regulations. The Company believes the Actions are without merit and specifically denies that any further supplemental disclosure is required under applicable law; however, to avoid the burden and expense of further litigation and to avoid the risk that the Actions may delay or otherwise adversely affect the consummation of the merger, on October12, 2017, the Company entered into a memorandum of understanding (the “MOU”) with the plaintiffs in the Actions and the other named defendants regarding the settlement of the Actions. Pursuant to the terms of the MOU, the Company made available additional information regarding the Merger in the Company’s Current Report on Form 8-K filed with the SEC on October 13, 2017. In return, the plaintiffs agreed to the dismissal of their individual claims asserted in the Actions with prejudice and to the dismissal without prejudice of the claims asserted in the Actions on behalf of a purported class of the Company’s shareholders pursuant to stipulations of dismissal to be filed within three business days after the consummation of the Merger.

Item 1A. Risk Factors

There have been no material changes in risk factors previously disclosed in the 2016 Form 10-K and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

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

The following table provides information regarding the Company’s purchases of common stock during the three months ended September 30, 2017:

Period	(a) Total Number of Shares Purchased (1)		(b) Average Price Paid per Share (1)		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)

Repurchases from July 1, 2017 through July 31, 2017		2,343	$	11.87		-		2,090,500

Repurchases from August 1, 2017 through August 31, 2017		383		11.60		-		2,090,500

Repurchases from September 1, 2017 through September 30, 2017		575		12.29		-		2,090,500

Total		3,301		11.95		-		2,090,500

(1)

Included in the total number of shares purchased are 2,343, 383, and 575 shares of the Company’s Common Stock acquired by the Company in connection with satisfaction of tax withholding obligations on vested restricted stock in July, August and September, respectively.

(2)

On October 27, 2016, the board of directors approved a new share repurchase program, effective November 1, 2016, to replace the expiring program. Under the new share repurchase program, which expires November 1, 2018, the Company may repurchase up to 2,650,000 shares from time to time, depending on market conditions and other factors.

During the nine months ended September 30, 2017, the Company did not have any unregistered sales of equity securities.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following documents are filed or furnished as exhibits to this report:

Exhibit Number	Description of Exhibits

3.1	Articles of Incorporation of the Company, as amended, incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q (File No. 001-35032) filed August 9, 2016

3.2	Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-35032) filed on May 8, 2017.

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pu1rsuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2017 and 2016; (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (vi) Notes to Condensed Consolidated Financial Statements

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PARK STERLING CORPORATION

Date: November 3, 2017	By:	/s/ James C. Cherry
		James C. Cherry
		Chief Executive Officer (authorized officer)

Date: November 3, 2017	By:	/s/ Donald K. Truslow
		Donald K. Truslow
		Chief Financial Officer

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Park Sterling (PSTB) Inactive 10-Q2017 Q3 Quarterly report

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